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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE PERIOD ENDED JANUARY 31, 1998
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.)
251 INDUSTRIAL PARKWAY
BRANCHBURG TOWNSHIP
SOMERVILLE, NEW JERSEY 08876
(Address of principal executive offices)
(908) 722-8700
(Registrants' telephone number, including area code)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has 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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
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COMMUNITY DISTRIBUTORS, INC.
CDI GROUP, INC.
INDEX
ITEM PAGE
NUMBER NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Community Distributors, Inc.
Condensed Statements of Operations - For the Quarter
and Six Months Ended January 31, 1998 and January 25, 1997.......... 3
Condensed Balance Sheets - As of January 31, 1998 and July 26, 1997.. 4
Condensed Statements of Cash Flows - For the Quarter
and Six Months Ended January 31, 1998 and January 25, 1997.......... 5
Notes to Condensed Financial Statements of
Community Distributors, Inc......................................... 6
CDI Group, Inc. and Subsidiary
Condensed Consolidated Statements of Operations - For the Quarter
and Six Months Ended January 31, 1998 and January 25, 1997.......... 8
Condensed Consolidated Balance Sheets - As of January 31, 1998
and July 26, 1997................................................... 9
Condensed Consolidated Statements of Cash Flows - For the Quarter
and Six Months Ended January 31, 1998 and January 25, 1997.......... 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
PART II. OTHER INFORMATION
Item 5. Other Information.................................................... 19
Item 6. Exhibits and Reports on Form 8-K..................................... 19
SIGNATURES........................................................... 20
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
COMMUNITY DISTRIBUTORS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
----------------------- ------------------------
January 31, January 25, January 31, January 25,
1998 1997 1998 1997
--------- --------- --------- ----------
(Dollars in thousands)
Net sales $ 74,463 $ 66,165 $ 129,185 $ 118,238
Cost of sales 52,783 45,657 92,454 83,729
--------- -------- --------- ----------
Gross profit 21,680 20,508 36,731 34,509
Selling, general and administrative expenses 14,760 13,686 27,438 25,436
Administrative fees 63 62 126 125
Depreciation and amortization 1,258 1,038 2,725 2,154
Other income, net 147 87 252 182
--------- -------- --------- ----------
Operating income 5,746 5,809 6,694 6,976
Interest expense, net 2,241 762 2,959 1,589
--------- -------- --------- ----------
Income before income taxes 3,505 5,047 3,735 5,387
Provision for income taxes 1,687 2,692 2,036 2,873
--------- -------- --------- ----------
Net income $ 1,818 $ 2,355 $ 1,699 $ 2,514
========= ======== ========= ==========
See accompanying notes to condensed financial statements.
COMMUNITY DISTRIBUTORS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
As of As of
January 31, July 26,
1998 1997
--------- --------
(Dollars in thousands)
ASSETS:
Cash and cash equivalents $ 5,334 $ 1,870
Accounts receivable 1,133 2,614
Inventory 35,631 30,233
Prepaid expenses and other current assets 1,134 1,085
--------- ---------
TOTAL CURRENT ASSETS 43,232 35,802
Property and equipment, net 9,561 8,649
Deferred charges and other assets 6,422 3,286
Goodwill, net 32,561 33,519
========= =========
TOTAL ASSETS $ 91,776 $ 81,256
========= =========
LIABILITIES:
Revolver borrowings $ - $ -
Current portion of long-term debt - 4,750
Accounts payable 15,698 14,796
Accrued expenses and other current liabilities 6,123 4,118
Current portion of supplier advances 1,900 1,900
--------- ---------
TOTAL CURRENT LIABILITIES 23,721 25,564
Long-term debt 80,000 24,519
Supplier advances, net of current portion 467 1,353
Other long-term liabilities 3,311 2,122
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, $.01 par value, 1,000 shares
authorized, issued and outstanding - -
Additional paid-in capital 18,242 18,000
Retained earnings/(accumulated deficit) (33,965) 9,698
--------- ---------
TOTAL STOCKHOLDER'S EQUITY (DEFICIT) (15,723) 27,698
========= =========
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) $ 91,776 $ 81,256
========= =========
See accompanying notes to condensed financial statements.
COMMUNITY DISTRIBUTORS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended Six Months Ended
-------------------------- ------------------------
January 31, January 25, January 31, January 25,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,818 $ 2,355 $ 1,699 $ 2,514
Depreciation and amortization 1,294 1,038 2,793 2,154
Non-cash rent expense 102 100 221 186
LIFO provision 300 300 600 600
Changes in operating assets and liabilities 2,517 (272) (2,238) (2,409)
-------- --------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES: 6,031 3,521 3,075 3,045
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (1,288) (393) (1,950) (899)
-------- --------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES: (1,288) (393) (1,950) (899)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Revolver Borrowings 900 0 900 0
Payments made on Revolver Borrowings (900) 0 (900) 0
Payments made on long-term debt 0 (3,972) (29,269) (3,972)
Proceeds from issuance of 10 1/4% Senior Notes 0 0 80,000 0
Transaction fees paid (548) 0 (3,634) 0
Dividend paid to parent 0 0 (45,000) 0
Additional capital received from parent 0 0 242 0
-------- --------- --------- ---------
NET CASH USED IN (PROVIDED BY) FINANCING ACTIVITIES (548) (3,972) 2,339 (3,972)
Net increase (decrease) in cash and cash equivalents 4,195 (844) 3,464 (1,826)
Cash and cash equivalents at beginning of period 1,139 2,641 1,870 3,623
======== ========= ========= =========
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,334 $ 1,797 $ 5,334 $ 1,797
======== ========= ========= =========
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 Prospectus
dated February 13, 1998. The Company, a wholly owned subsidiary of CDI
Group, Inc. (the "Holding Company"), is engaged in the operation of retail
stores throughout New Jersey. These interim financial statements are
unaudited but, in the opinion of the management, include all adjustments,
consisting only of normal recurring items, necessary to fairly present the
financial position and operating results 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) 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.
(3) DEBT OFFERING:
On October 16, 1997, the Company issued $80.0 million of 10 1/4% Senior
Notes due 2004 which are guaranteed by the Holding Company (the "Senior
Notes"). The net proceeds of such debt issuance was approximately $77.0
million. The Company used $29.0 million of such net proceeds to repay
substantially all of its then existing indebtedness at its carrying value,
exclusive of deferred financing charges of $400,000 associated with the
repaid debt, which was written off at that time. Approximately $45.0
million of the net proceeds was used to pay a dividend to the Holding
Company which was then distributed in the same amount to the stockholders
of the Holding Company. 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.
On October 16, 1997, the Company also replaced its then existing credit
facility with a $20.0 million five year revolving credit facility (the
"Facility") concurrent with the issuance of the Senior Notes. At January
31, 1998, there were no borrowings under the Facility. This Facility bears
interest at either prime rate or LIBOR plus 1.75% and is collateralized by
the Company's eligible accounts receivable and inventory balances, as
defined. 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.
(4) INVENTORY COSTING METHOD:
Inventory at interim periods is valued on a last-in, first-out (LIFO) basis
which is determined based on estimates of gross profit rate, inflation
rates and inventory levels, and is adjusted for the results of physical
inventories which are taken twice a year. The results of the last physical
inventory that was taken on January 31, 1998 did not have a material impact
on the results of operations.
(5) 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.
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
-------------------------- --------------------------
January 31, January 25, January 31, January 25,
1998 1997 1998 1997
------------ ----------- ------------ -----------
(Dollars in thousands)
Net sales $ 74,463 $ 66,165 $ 129,185 $ 118,238
Cost of sales 52,783 45,657 92,454 83,729
------------ ----------- ----------- -----------
Gross profit 21,680 20,508 36,731 34,509
Selling, general and administrative expenses 14,760 13,686 27,438 25,436
Administrative fees 63 62 126 125
Depreciation and amortization 1,258 1,038 2,725 2,154
Other income, net 147 87 252 182
----------- ----------- ----------- -----------
Operating income 5,746 5,809 6,694 6,976
Interest expense, net 2,766 1,089 4,007 2,240
----------- ----------- ----------- -----------
Income before income taxes 2,980 4,720 2,687 4,736
Provision for income taxes 1,503 2,577 1,669 2,645
----------- ----------- ----------- -----------
Net income $ 1,477 $ 2,143 $ 1,018 $ 2,091
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of As of
January 31, July 26,
1998 1997
--------- ---------
(Dollars in thousands)
ASSETS:
Cash and cash equivalents $ 5,334 $ 1,870
Accounts receivable 1,149 2,614
Inventory 35,631 30,233
Prepaid expenses and other current assets 1,134 1,131
--------- ---------
TOTAL CURRENT ASSETS 43,248 35,878
Property and equipment, net 9,561 8,649
Deferred charges and other assets 6,422 3,286
Goodwill, net 32,561 33,519
========= =========
TOTAL ASSETS $ 91,792 $ 81,332
========= =========
LIABILITIES:
Revolver borrowings $ - $ -
Current portion of long-term debt - 4,836
Accounts payable 15,698 14,796
Accrued expenses and other current liabilities 5,756 3,983
Current portion of supplier advances 1,900 1,900
--------- ---------
TOTAL CURRENT LIABILITIES 23,354 25,515
Long-term debt 80,000 24,519
Subordinated debt 17,887 16,834
Supplier advances, net of current portion 467 1,353
Other long-term liabilities 1,931 1,402
COMMITMENTS AND CONTINGENCIES:
Redeemable preferred stock, $1.00 par value, 7,862 authorized, 786 726
issued and outstanding, redemption value $100 per share
Redeemable shares of Class A voting common stock, 57,963 and
33,726 shares issued and outstanding at net redemption value at 493 128
January 31, 1998 and July 26, 1997, respectively
STOCKHOLDERS' EQUITY (DEFICIT):
Class A voting common stock, $.00001 par value, authorized
600,000 shares, 196,632 issued and outstanding at - -
January 31, 1998 and July 26, 1997
Class B non-voting common stock, $.00001 par value, authorized
600,000 shares, 187,922 issued and outstanding at - -
January 31, 1998 and July 26, 1997
Additional paid-in capital 3,846 3,846
Retained earnings/(accumulated deficit) (36,972) 7,009
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (33,126) 10,855
========= =========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 91,792 $ 81,332
========= =========
See accompanying notes to condensed consolidated financial statements.
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended Six Months Ended
------------------------ ------------------------
January 31, January 25, January 31, January 25,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,477 $ 2,143 $ 1,018 $ 2,091
Depreciation and amortization 1,294 1,038 2,793 2,154
Non-cash rent expense 102 100 221 186
Non-cash interest expense 527 330 1,055 662
LIFO provision 300 300 600 600
Changes in operating assets and liabilities 2,331 (390) (2,707) (2,648)
-------- -------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES: 6,031 3,521 2,980 3,045
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (1,288) (393) (1,950) (899)
-------- -------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES: (1,288) (393) (1,950) (899)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Revolver Borrowings 900 0 900 0
Payments made on Revolver Borrowings (900) 0 (900) 0
Payments made on long-term debt 0 (3,972) (29,269) (3,972)
Proceeds from issuance of 10 1/4% Senior Notes 0 0 80,000 0
Transaction fees paid (548) 0 (3,634) 0
Dividend paid to stockholders 0 0 (45,000) 0
Proceeds from exercise of stock options 0 0 242 0
Proceeds from loans to officers and directors 0 87 182 87
Payments of subordinated debt 0 (87) (87) (87)
-------- -------- -------- --------
NET CASH USED IN (PROVIDED BY) FINANCING ACTIVITIES (548) (3,972) 2,434 (3,972)
Net increase (decrease) in cash and cash equivalents 4,195 (844) 3,464 (1,826)
Cash and cash equivalents at beginning of period 1,139 2,641 1,870 3,623
======== ======== ======== ========
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,334 $ 1,797 $ 5,334 $ 1,797
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION:
The accompanying consolidated financial statements should be read in
conjunction with the audited financial statements of CDI Group, Inc. and
Subsidiary, and the notes thereto contained in the Company's Prospectus
dated February 13, 1998. The Company consists of an operating entity,
Community Distributors, Inc. (the "Subsidiary"), which is engaged in the
operation of retail stores throughout New Jersey, and a holding company,
CDI Group, Inc. (the "Holding Company"), which principally owns all of the
outstanding shares of the Subsidiary. These interim consolidated financial
statements are unaudited but, in the opinion of the management, include
all adjustments, consisting only of normal recurring items, necessary to
fairly present the consolidated financial position and operating results
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) 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.
(3) DEBT OFFERING:
On October 16, 1997, the Company issued $80.0 million of 10 1/4% Senior
Notes due 2004 which are guaranteed by the Holding Company (the "Senior
Notes"). The net proceeds of such debt issuance was approximately $77.0
million. The Subsidiary used approximately $29.0 million of such net
proceeds to repay substantially all of its then existing indebtedness at
its carrying value, exclusive of deferred financing charges of $400,000
associated with the repaid debt, which was written off at that time.
Approximately $45.0 million of the net proceeds was used to pay a dividend
to the Holding Company which was then distributed in the same amount to
the stockholders of the Holding Company. 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.
On October 16, 1997, the Subsidiary also replaced its then existing credit
facility with a $20.0 million five year revolving credit facility (the
"Facility") concurrent with the issuance of the Senior Notes. At January
31, 1998, there were no borrowings under the Facility. This Facility bears
interest at either prime rate or LIBOR plus 1.75% and is collateralized by
the Company's eligible accounts receivable and inventory balances, as
defined. 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.
(4) INVENTORY COSTING METHOD:
Inventory at interim periods is valued on a last-in, first-out (LIFO)
basis which is determined based on estimates of gross profit rate,
inflation rates and inventory levels, and is adjusted for the results of
physical inventories which are taken twice a year. The results of the last
physical inventory that was taken on January 31, 1998 did not have a
material impact on the results of operations.
(5) 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for the historical information contained herein, this quarterly
report on Form 10-Q may contain "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, but not limited to, (i) statements about
possible changes in the rate of increase of pharmacy sales to Third Party Plans
as a percentage of total pharmacy sales, and its impact on profitability and
(ii) certain 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. 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 "Risk Factors" in the Prospectus dated
February 13, 1998 of Community Distributors, Inc. (the "Company") and CDI
Group, Inc., the holder of all of the outstanding capital stock of the Company
(the "Holding Company" and, together with the Company the "Registrants"). The
forward-looking statements contained herein represent the Registrants' judgment
as of the date of this quarterly report on Form 10-Q, and the Company cautions
readers not to place undue reliance on such statements.
GENERAL
The Company was founded in 1954 and until 1990 was managed primarily by
its founders. The Holding Company is the owner of all of the outstanding
capital stock of the Company. Since 1990, the Company has experienced
significant growth led by Frank Marfino, the Company's current Chief Executive
Officer. The Company currently operates a chain of 46 drug and general
merchandise stores, with 29 drugstores operating under the "Drug Fair" name and
17 general merchandise stores operating under the "Cost Cutters" name.
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 31, 1998 (the "1998 Three Month
Period") with the Three Months Ended January 25, 1997 (the "1997 Three Month
Period").
Net sales for the 1998 Three Month Period were $74.5 million as compared
to $66.2 million for the 1997 Three Month Period, an increase of 12.5%. This
increase was primarily due to the 1998 Three Month Period including 14 weeks of
results of operations as compared to 13 weeks included in the 1997 Three Month
Period, a 10.2% increase in sales of non-pharmacy products from $52.0 million
for the 1997 Three Month Period to $57.3 million for the 1998 Three Month
Period, and a 4.4% increase in same-store sales on a comparable 13 week basis
which was driven by a 20.4% increase in pharmacy sales from $14.2 million to
$17.1 million, including a 30.3% increase in pharmacy sales to Third Party
Plans from $9.9 million to $12.9 million. The Company attributes the increase
in net sales of non-pharmacy products to the opening of two new store locations
and the acquisition of certain assets of an independent pharmacy during the
1998 Three Month Period as compared to no new store openings during the 1997
Three Month Period, as well as increased customer traffic in the Company's
stores associated with an increase in total pharmacy sales The number of
prescriptions filled for Third Party Plan customers increased to approximately
341,000 prescriptions for the 1998 Three Month Period, as compared to 283,000
prescriptions for the 1997 Three Month Period, an increase of 20.5%, as
compared to the 30.3% increase in pharmacy sales to Third Party Plans over the
same period. Pharmacy sales to non-Third Party Plan customers were $4.2 million
in each of the 1998 Three Month Period and the 1997 Three Month Period, as the
additional week of sales in the 1998 Three Month Period was offset by a
decrease in the volume of pharmacy products sold to non-Third Party Plan
customers as prescriptions filled for such customers decreased from
approximately 130,000 in the 1997 Three Month Period to approximately 114,000
in the 1998 Three Month Period, primarily as a result of increased
participation of the Company's customers in Third Party Plans during the 1998
Three Month Period.
Gross profit was $21.7 million for the 1998 Three Month Period, as
compared to $20.5 million for the 1997 Three Month Period, an increase of 5.8%.
Gross profit as a percentage of net sales was 29.1% for the 1998 Three Month
Period as compared to 31.0% for the 1997 Three Month Period. This 0.9% decrease
was due primarily to a decline in the gross margin on general merchandise sales
as well as a decline in the gross margin on pharmacy sales caused by an
increase in Third Party Plan prescription sales as a percentage of total
pharmacy sales. Although management expects that Third Party Plan sales as a
percentage of total pharmacy sales will continue to increase, management
believes that as this rate of increase slows, gross margins will stabilize,
resulting in pharmacy gross profit growth more closely approximating pharmacy
sales growth rates. Management believes that the rate of increase in Third
Party Plan prescription sales as a percentage of total pharmacy sales will slow
because the current growth rate, if continued, would quickly 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, although management believes there
will always be some pharmacy customers who do not enroll in Third Party Plans.
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 profitability, although this may be partly or wholly offset by the
increases in pharmacy sales that have accompanied the increase in Third Party
Plan prescription sales as a percentage of total 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 total pharmacy sales (including sales to Third Party
Plans) was $4.8 million in the 1998 Three Month Period, as compared to $3.1
million in the 1997 Three Month Period, primarily as a result of the additional
week of sales included in the current year as well as the increase in sales on
a same store basis. Gross profit on pharmacy sales to Third Party Plan
customers increased by $1.0 million from $1.8 million in the 1997 Three Month
Period to $2.8 million in the 1998 Three Month Period, primarily as a result of
the increase in volume of pharmacy sales to Third Party Plan customers in the
1998 Three Month Period. Gross profit on sales of pharmacy products to
non-Third Party Plan customers increased from approximately $1.3 million in the
1997 Three Month Period to approximately $2.0 million in the 1998 Three Month
Period, primarily as a result of the additional week of operations included in
the current year and an improved gross margin on sales to non-Third Party Plan
customers.
Gross profit on non-pharmacy sales was $16.8 million for the 1998 Three
Month Period, as compared to $17.4 million for the 1997 Three Month Period, a
decrease of 3.4%. This decrease was the result of increased competition with
the Company's stores and increased sales of convenience foods (which generally
offer lower gross margins than other non-pharmacy products) resulting from the
addition of convenience foods departments in new and existing stores.
Selling, general and administrative expenses as a percentage of net sales
were 19.8% for the 1998 Three Month Period as compared to 20.7% for the 1997
Three Month Period. This decrease was primarily the result of the additional
week of sales included in the 1998 Three Month Period as well as maturing of
stores opened during the current and previous fiscal years as selling, general
and administrative expenses have historically declined as a percent of new
store sales during the first three years after a new store is opened. Many of
the Company's expenses are fixed on a quarterly or annual basis and,
accordingly, would not be affected by including an extra week of sales in a
particular quarterly period.
Depreciation and amortization was $1.3 million during the 1998 Three
Month Period as compared to $1.0 million during the 1997 Three Month Period, an
increase of 30.0%. This increase is primarily due to the higher level of
amortization of deferred financing costs which were incurred in connection with
the issuance of the Company's 10 1/4% Senior Notes due 2004 (the "Senior
Notes") as compared to the amortization of deferred financing costs incurred in
connection with the Company's previous credit facility, as well as a higher
level of depreciation expense primarily related to the new stores.
Interest expense for the Company was $2.3 million during the 1998 Three
Month Period as compared to $0.8 million during the 1997 Three Month Period, an
increase of $1.5 million. This increase was the result of interest incurred
under the Senior Notes as compared to interest incurred on the Company's
outstanding debt balance under its previous credit facility which had a much
lower outstanding principal balance. Interest expense for the Holding Company
was $0.5 million during the 1998 Three Month Period as compared to $0.3 million
during the 1997 Three Month Period, an increase of $0.2 million. This increase
was the result of the compounding of the interest on the Holding Company's
outstanding Subordinated Notes due 2005.
The Company achieved net income of $1.8 million during the 1998 Three
Month Period as compared to $2.4 million during the 1997 Three Month Period, a
decrease of $0.6 million. The decrease in the net income was the result of
higher amortization and interest costs incurred as a result of the issuance of
the Senior Notes. The net income of the Holding Company for the 1998 Three
Month Period was $1.5 million as compared to $2.1 million for the 1997 Three
Month Period, a decrease of $0.6 million. The decrease in the net income of the
Holding Company was the result of the factors described above in addition to a
higher level of interest accruing during the 1998 Three Month Period on the
Holding Company's outstanding Senior Subordinated Notes due 2005, as interest
on such notes is compounding.
Comparison of the Six Months Ended January 31, 1998 (the "1998 Six Month
Period") with the Six Months Ended January 25, 1997 (the "1997 Six Month
Period").
Net sales for the 1998 Six Month Period were $129.2 million, as compared
to $118.2 million for the 1997 Six Month Period, an increase of 9.3%. This
increase was primarily due to the 1998 Six Month Period including 27 weeks of
results of operation as compared to 26 weeks included in the 1997 Six Month
Period, a 7.1% increase in sales of non-pharmacy products from $91.2 million
for the 1997 Six Month Period to $97.7 million for the 1998 Six Month Period,
and a 4.5% increase in same-store sales on a comparable 26 week basis, which
was driven by a 17.0% increase in pharmacy sales from $27.0 million to $31.6
million, including a 27.6% increase in pharmacy sales to Third Party Plans from
$18.5 million to $23.6 million. The Company attributes the increase in net
sales of non-pharmacy products to the opening of two new store locations and
the acquisition of certain assets of an independent pharmacy during the 1998
Six Month Period as compared to one new store opening during the 1997 Six Month
Period, as well as increased customer traffic in the Company's stores
associated with an increase in total pharmacy sales. The number of
prescriptions filled for Third Party Plan customers increased to approximately
619,000 prescriptions for the 1998 Six Month Period, as compared to 522,000
prescriptions for the 1997 Six Month Period, an increase of 18.6%, as compared
to the 27.6% increase in Pharmacy sales to Third Party Plans over the same
period. Pharmacy sales to non-Third Party Plan customers were $8.5 million in
the 1998 Six Month Period as compared to $7.9 million in the 1997 Six Month
Period, a decrease of $0.6 million, primarily as a result of the increased
participation of the Company's customers in Third Party Plans offset by the
additional week of sales in the 1998 Six Month Period and a decrease in the
volume of pharmacy products sold to non-Third Party Plan customers as
prescriptions filled for such customers decreased from approximately 255,000 in
the 1997 Six Month Period to approximately 215,000 in the 1998 Six Month
Period.
Gross profit was $36.7 million for the 1998 Six Month Period, as compared
to $34.5 million for the 1997 Six Month Period, an increase of 6.4%. Gross
profit as a percentage of net sales was 28.4% for the 1998 Six Month Period as
compared to 29.2% for the 1997 Six Month Period. This 0.8% decrease was due
primarily to a decline in the gross margin on general merchandise sales as well
as a decline in the gross margin on pharmacy sales caused by an increase in
Third Party Plan prescription sales as a percentage of total pharmacy sales.
Although management expects that Third Party Plan sales as a percentage of
total pharmacy sales will continue to increase, management believes that as
this rate of increase slows, gross margins will stabilize, resulting in
pharmacy gross profit growth more closely approximating pharmacy sales growth
rates. Management believes that the rate of increase in Third Party Plan
prescription sales as a percentage of total pharmacy sales will slow because
the current growth rate, if continued, would quickly 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, although management believes there will
always be some pharmacy customers who do not enroll in Third Party Plans.
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 profitability, although this may be partly or wholly offset by the
increases in pharmacy sales that have accompanied the increase in Third Party
Plan prescription sales as a percentage of total 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 total pharmacy sales (including sales to Third Party
Plans) was $7.8 million in the 1998 Six Month Period as compared to $6.1
million in the 1997 Six Month Period, primarily as a result of the additional
week of sales in the current year as well as the increase in sales on a same
store basis. Gross profit on pharmacy sales to Third Party Plan customers
increased from $3.4 million in the 1997 Six Month Period to $4.5 million in the
1998 Six Month Period, primarily as a result of the increase in volume of
pharmacy sales to Third Party Plan customers in the 1998 Six Month Period.
Gross profit on sales of pharmacy products to non-Third Party Plan customers
increased from approximately $2.7 million in the 1997 Six Month Period to
approximately $3.3 million in the 1998 Six Month Period, primarily as a result
of the additional week of operations included in the current year and an
improved gross margin on sales to non-Third Party Plan customers.
Gross profit on non-pharmacy sales was $28.9 million for the 1998 Six
Month Period, as compared to $28.4 million for the 1997 Six Month Period, a
decrease of 1.7%. Gross profit on non-pharmacy sales increased at a lower rate
than the increase in sales of non-pharmacy products as a result of increased
competition with the Company's stores and increased sales of convenience foods
(which generally offer lower gross margins than other non-pharmacy products)
resulting from the addition of convenience foods departments in new and
existing stores.
Selling, general and administrative expenses as a percentage of net sales
were 21.2% for the 1998 Six Month Period as compared to 21.5% for the 1997 Six
Month Period. This decrease was primarily the result of the additional week of
sales included in the 1998 Six Month Period as well as maturing of stores
opened during the current and previous fiscal years as selling, general and
administrative expenses have historically declined as a percent of new store
sales during the first three years after a new store is opened. Many of the
Company's expenses are fixed on a quarterly or annual basis and, accordingly,
would not be affected by including an extra week of sales in a particular
quarterly period or periods.
Depreciation and amortization was $2.7 million during the 1998 Six Month
Period as compared to $2.1 million during the 1997 Six Month Period, an
increase of 28.6%. This increase is primarily due to the higher level of
amortization of deferred financing costs which were incurred in connection with
the issuance of the Senior Notes as compared to the amortization of deferred
financing costs incurred in connection with the Company's previous credit
facility, the higher level of depreciation expense primarily related to the new
stores, and the write-off of $0.4 million of deferred financing costs in
connection with the repayment of the Company's previous credit facility.
Interest expense for the Company was $3.0 million during the 1998 Six
Month Period as compared to $1.6 million during the 1997 Six Month Period, an
increase of $1.4 million. This increase was the result of interest incurred
under the Senior Notes as compared to interest incurred on the Company's
outstanding debt balance under the previous credit facility which had a much
lower outstanding principal balance. Interest expense for the Holding Company
was $1.0 million during the 1998 Six Month Period as compared to $0.6 million
during the 1997 Six Month Period, an increase of $0.4 million. This increase
was the result of the compounding of the interest on the Holding Company's
outstanding Senior Subordinated Notes due 2005.
The Company achieved net income of $1.7 million during the 1998 Six Month
Period as compared to $2.5 million during the 1997 Six Month Period, a decrease
of $0.8 million. The decrease in the net income was the result of higher
amortization and interest costs incurred as a result of the issuance of the
Senior Notes. The net income of the Holding Company for the 1998 Six Month
Period was $1.0 million as compared to $2.1 million for the 1997 Six Month
Period, a decrease of $1.1 million. The decrease in the net income of the
Holding Company was the result of the factors described above in addition to a
higher level of interest accruing during the 1998 Six Month Period on the
Holding Company's outstanding Senior Subordinated Notes due 2005, as interest
on such notes is compounding.
LIQUIDITY AND CAPITAL RESOURCES
Comparison of the Three Months Ended January 31, 1998 with the Three Months
Ended January 25, 1997.
In the 1998 Three Month Period, cash provided by operations was $6.0
million as compared to $3.5 million for the 1997 Three Month Period. This
increase is primarily the result of the factoring of the Company's Third Party
Plan prescription receivables during the 1998 Three Month Period, the lower
level of income tax payments during the 1998 Three Month Period and the fact
that no cash was used to pay interest on the Company's outstanding long-term
debt during the 1998 Three Month Period as interest is paid semi-annually on
the Senior Notes as compared to upon the maturity of the various LIBOR options
elected under the previous credit facility. Cash used in investing activities
was -$1.3 million during the 1998 Three Month Period as compared to $0.4
million during the 1997 Three Month Period, an increase of $0.9 million. This
increase is the result of the opening of two new store locations and the
purchase of certain assets of an independent pharmacy during the 1998 Three
Month Period, as compared to no new store openings during the 1997 Three Month
Period. Cash used in financing activities was $0.5 million for the 1998 Three
Month Period as compared to $4.0 million during the 1997 Three Month Period.
This decrease in the use of cash in financing activities was the result of the
regularly scheduled principal payments made on the Company's previous credit
facility during the 1997 Three Month Period, while no principal payments were
required to be made during the 1998 Three Month Period after the previous
credit facility was repaid with the proceeds received from the issuance of the
Senior Notes.
Comparison of the Six Months Ended January 31, 1998 with the Six Months Ended
January 25, 1997.
In the 1998 Six Month Period, cash provided by operations was $3.1 million
as compared to $3.0 million for the 1997 Period. This increase was the result
of the factoring of the Company's Third Party Plan prescription receivables
during the 1998 Six Month Period, the lower level of income tax payments during
the 1998 Six Month Period and the fact that no cash was used to pay interest on
the Company's outstanding long-term debt during the 1998 Six Month Period as
interest is paid semi-annually on the Senior Notes as compared to upon the
maturity of the various LIBOR options elected under the previous credit
facility, offset by the reinvestment of cash into inventory, primarily for the
higher number of new stores opened during the 1998 Six Month Period. Cash used
in investing activities was $1.9 million during the 1998 Six Month Period as
compared to $0.9 million during the 1997 Six Month Period, an increase of $1.0
million. This increase is the result of the opening of two new store locations
and the purchase of certain assets of an independent pharmacy during the 1998
Six Month Period as compared to opening of only one new store during the 1997
Six Month Period. Cash provided by financing activities was $2.3 million for
the 1998 Six Month Period as compared to a use of cash of $3.9 million during
the 1997 Six Month Period. The cash provided during the 1998 Six Month Period
was the result of the net proceeds from the issuance of the Senior Notes while
the use of cash in the 1997 Six Month Period was the result of regularly
scheduled principal payments made under the previous credit facility.
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 25, 1998 and
July 31, 1999. 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. Although the Company's cash flow and borrowings
under its outstanding $20.0 million credit facility is intended to cover the
Company's debt service obligations and working capital requirements over the
near term, this credit facility does not mature until October 2002, and the
Senior Notes do not mature until October 2004. Accordingly, the Company's
principal financing expenses over the near term are expected to relate to the
payment of interest on such indebtedness. 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 interest rates.
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Exchange of Outstanding Senior Notes
On February 13, 1998, the Company commenced an offer to exchange $80.0
million in aggregate principal amount of its 10 1/4% Senior Notes due 2004 (the
"Exchange Notes") that had been registered under the Securities Act of 1933, as
amended (the "Securities Act"), for a like principal amount of the Company's
outstanding 10 1/4% Senior Notes due 2004 (the "Original Notes"). This exchange
was commenced in accordance with the terms of the Registration Rights
Agreement, dated as of October 16, 1997, between the Company and the initial
purchasers of the Original Notes. The Original Notes were issued by the Company
on October 16, 1997 in a transaction exempt from the registration requirements
of the Securities Act by virtue of Rule 144A promulgated thereunder. Each of
the Exchange Notes and the Original Notes has been guaranteed by the Holding
Company.
Headquarters Lease
The leases for the Company's current warehouse and office facilities
expire on December 31, 1998 and the Company has not yet entered into a lease
for a new warehouse and office facility. If the Company is unable to enter into
a lease for an adequate facility prior to the expiration of the leases for the
current office and warehouse facilities, the Company may be required to seek an
extension of its current lease, which may not be available. In the event that
no extension is available, or if the terms of such an extension are not
favorable, the Company may incur a disruption to its operations which could
have a negative impact on the Company's business and results of operations.
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.*
-----------------
* Incorporated by reference to the same numbered exhibit to the
registrants' registration statement on Form S-4 (Reg.
No. 333-41281).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended January 31, 1998.
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 16, 1998 By: /s/ Todd H. Pluymers
--------------------------
Todd H. Pluymers,
Chief Financial Officer
(Authorized Officer and Principal
Finance and Accounting Officer)
CDI GROUP, INC.
March 16, 1998 By: /s/ Todd H. Pluymers
--------------------------
Todd H. Pluymers,
Chief Financial Officer
(Authorized Officer and Principal
Finance and Accounting Officer)