- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the period ended April 25, 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 X No ___
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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 Nine months Ended April 25, 1998 and April 26, 1997.............................. 3
Condensed Balance Sheets - As of April 25, 1998 and April 26, 1997...................... 4
Condensed Statements of Cash Flows - For the Quarter
and Nine months Ended April 25, 1998 and April 26, 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 Nine months Ended April 25, 1998 and April 26, 1997.............................. 7
Condensed Consolidated Balance Sheets - As of April 25, 1998
and April 26, 1997................................................................... 8
Condensed Consolidated Statements of Cash Flows - For the Quarter
and Nine months Ended April 25, 1998 and April 26, 1997.............................. 9
Notes to Condensed Consolidated Financial Statements of
CDI Group, Inc. and Subsidiary....................................................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations...................................................................... 11
PART II. OTHER INFORMATION
Item 5. Other Information....................................................................... 16
Item 6. Exhibits and Reports on Form 8-K........................................................ 16
Signatures.............................................................................. 17
2
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
COMMUNITY DISTRIBUTORS, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
--------------------------- --------------------------
April 25, April 26, April 25, April 26,
1998 1997 1998 1997
----------- ----------- ----------- ----------
(Dollars in thousands)
Net sales $ 54,974 $ 54,758 $ 184,159 $ 172,996
Cost of sales 39,897 39,090 132,351 122,819
----------- ----------- ----------- -----------
Gross profit 15,077 15,668 51,808 50,177
Selling, general and administrative expenses 14,054 12,360 41,492 37,796
Administrative fees 62 63 188 188
Depreciation and amortization 1,307 1,132 4,032 3,286
Other income, net 224 114 476 295
----------- ----------- ----------- -----------
Operating (loss) income (122) 2,227 6,572 9,202
Interest expense, net 1,854 745 4,813 2,333
----------- ----------- ----------- -----------
(Loss) income before income taxes (1,976) 1,482 1,759 6,869
Provision for income taxes (1,054) 790 938 3,664
----------- ----------- ----------- -----------
Net (loss) income $ (922) $ 692 $ 821 $ 3,205
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
3
COMMUNITY DISTRIBUTORS, INC.
Condensed Balance Sheets
(Unaudited)
As of As of
April 25, July 26,
1998 1997
----------- -------
(Dollars in thousands)
ASSETS:
Cash and cash equivalents $ 16 $ 1,870
Accounts receivable 950 2,614
Inventory 35,586 30,233
Prepaid expenses and other current assets 808 1,085
----------- -----------
TOTAL CURRENT ASSETS 37,360 35,802
Property and equipment, net 9,464 8,649
Deferred charges and other assets 6,549 3,286
Goodwill, net 32,082 33,519
----------- -----------
TOTAL ASSETS $ 85,455 $ 81,256
=========== ===========
LIABILITIES:
Revolver borrowings $ - $ -
Current portion of long-term debt 80 4,750
Accounts payable 13,578 14,796
Accrued expenses and other current liabilities 3,082 4,118
Current portion of supplier advances 1,900 1,900
----------- -----------
TOTAL CURRENT LIABILITIES 18,640 25,564
Long-term debt 80,000 24,519
Supplier advances, net of current portion 55 1,353
Other long-term liabilities 3,361 2,122
COMMITMENTS & 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) (34,843) 9,698
----------- -----------
TOTAL STOCKHOLDER'S EQUITY (DEFICIT) (16,601) 27,698
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) $ 85,455 $ 81,256
=========== ===========
See accompanying notes to condensed financial statements.
4
COMMUNITY DISTRIBUTORS, INC.
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended Nine Months Ended
-------------------------- -------------------------
April 25, April 26, April 25, April 26,
1998 1997 1998 1997
----------- ----------- ----------- -------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (922) $ 692 $ 821 $ 3,205
Depreciation and amortization 1,307 1,132 4,032 3,286
Non-cash rent expense 132 87 393 273
LIFO provision 300 150 900 750
Changes in operating assets and liabilities (5,465) (3,006) (7,786) (6,477)
----------- ----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES: (4,648) (945) (1,640) 1,037
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (435) (302) (2,318) (1,201)
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES: (435) (302) (2,318) (1,201)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Revolver Borrowings 0 4,050 900 6,300
Payments made on Revolver Borrowings 0 (3,650) (900) (5,900)
Payments made on long-term debt 0 (2,125) (29,269) (5,034)
Proceeds from issuance of 101/4% Senior Notes 0 0 80,000 0
Transaction fees paid (235) 0 (3,869) 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 (235) (1,725) 2,104 (4,634)
Net decrease in cash and cash equivalents (5,318) (2,972) (1,854) (4,798)
Cash and cash equivalents at beginning of period 5,334 1,797 1,870 3,623
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16 $ (1,175) $ 16 $ (1,175)
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
5
COMMUNITY DISTRIBUTORS, INC.
Notes to Condensed Financial Statements
(Dollars in Thousands)
(Unaudited)
(1) BASIS OF PRESENTATION:
The accompanying financial statements should be read in conjunction with
the audited financial statements of Community Distributors, Inc. (the
"Company"), and the notes thereto contained in the Company's 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:
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 $0.4 million 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 April 25,
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 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.
6
CDI GROUP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
-------------------------- -------------------------
April 25, April 26, April 25, April 25,
1998 1997 1998 1997
---------- ----------- ----------- ---------
(Dollars in thousands except per share data)
Net sales $ 54,974 $ 54,758 $ 184,159 $ 172,996
Cost of sales 39,897 39,090 132,351 122,819
----------- ----------- ----------- -----------
Gross profit 15,077 15,668 51,808 50,177
Selling, general and administrative expenses 14,054 12,360 41,492 37,796
Administrative fees 62 63 188 188
Depreciation and amortization 1,307 1,132 4,032 3,286
Other income, net 224 114 476 295
----------- ----------- ----------- -----------
Operating (loss) income (122) 2,227 6,572 9,202
Interest expense, net 2,168 1,139 6,175 3,379
----------- ----------- ----------- -----------
(Loss) income before income taxes (2,290) 1,088 397 5,823
Provision for income taxes (1,164) 580 212 3,106
----------- ----------- ----------- -----------
Net (loss) income $ (1,126) $ 508 $ 185 $ 2,717
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
7
CDI GROUP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(Unaudited)
As of As of
April 25, July 26,
1998 1997
----------- -------
(Dollars in thousands)
ASSETS:
Cash and cash equivalents $ 16 $ 1,870
Accounts receivable 967 2,644
Inventory 35,586 30,233
Prepaid expenses and other current assets 808 1,131
----------- -----------
TOTAL CURRENT ASSETS 37,377 35,878
Property and equipment, net 9,464 8,649
Deferred charges and other assets 6,549 3,286
Goodwill, net 32,082 33,519
----------- -----------
TOTAL ASSETS $ 85,472 $ 81,332
=========== ===========
LIABILITIES:
Revolver borrowings $ - $ -
Current portion of long-term debt 80 4,836
Accounts payable 13,578 14,796
Accrued expenses and other current liabilities 2,356 3,983
Current portion of supplier advances 1,900 1,900
----------- -----------
TOTAL CURRENT LIABILITIES 17,914 25,515
Long-term debt 80,000 24,519
Subordinated debt 18,202 16,834
Supplier advances, net of current portion 55 1,353
Other long-term liabilities 1,981 1,402
COMMITMENTS AND CONTINGENCIES:
Redeemable preferred stock, $1.00 par value, 7,862 authorized,
issued and outstanding, redemption value $100 per share 786 726
Redeemable shares of Class A voting common stock, 57,963 and
33,726 shares issued and outstanding at net redemption value at
January 31, 1998 and July 26, 1997, respectively 493 128
STOCKHOLDERS' EQUITY (DEFICIT):
Class A voting common stock, $.00001 par value, authorized 600,000 shares,
196,632 issued and outstanding at April 25, 1998
and July 26, 1997 - -
Class B non-voting common stock, $.00001 par value, authorized 600,000
shares, 187,922 issued and outstanding at April 25, 1998
and July 26, 1997 - -
Additional paid-in capital 3,846 3,846
Retained earnings (accumulated deficit) (37,805) 7,009
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (33,959) 10,855
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 85,472 $ 81,332
=========== ===========
See accompanying notes to condensed consolidated financial statements.
8
CDI GROUP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Nine Months Ended
-------------------------- ------------------------
April 25, April 26, April 25, April 26,
1998 1997 1998 1997
----------- ----------- ----------- - -------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,126) $ 508 $ 185 $ 2,717
Depreciation and amortization 1,307 1,132 4,032 3,286
Non-cash rent expense 132 87 393 273
Non-cash interest expense 315 397 1,370 1,059
LIFO provision 300 150 900 750
Changes in operating assets and liabilities (5,576) (3,219) (5,240) (7,048)
----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES: (4,648) (945) (1,640) 1,037
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (435) (302) (2,318) (1,201)
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES: (435) (302) (2,318) (1,201)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Revolver Borrowings 0 4,050 900 6,300
Payments made on Revolver Borrowings 0 (3,650) (900) (5,900)
Payments made on long-term debt 0 (2,125) (29,269) (5,034)
Proceeds from issuance of 10 1/4% Senior Notes 0 0 80,000 0
Transaction fees paid (235) 0 (3,869) 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 0 87 87
Payments of subordinated debt 0 0 (87) (87)
----------- ----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (235) (1,725) 2,104 (4,634)
Net decrease in cash and cash equivalents (5,318) (2,972) (1,854) (4,798)
Cash and cash equivalents at beginning of period 5,334 1,797 1,870 3,623
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16 $ (1,175) $ 16 $ (1,175)
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
9
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:
On October 16, 1997, the Subsidiary 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 $0.4 million
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 Subsidiary 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 April 25,
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 Subsidiary's eligible inventory balances, as defined. The Facility
contains certain financial and operating covenants, including a minimum
fixed charge ratio. Additionally, the Subsidiary 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.
10
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; (ii)
the impact on the Company of its entrance into a lease for new headquarters and
warehouse space; and (iii) 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 45 drug and general merchandise stores, with 27
drugstores operating under the "Drug Fair" name, 17 general merchandise stores
operating under the "Cost Cutters" name, and one recently acquired drug store
currently operating under the name of Lloyd's Pharmacy which is expected to be
converted to a Drug Fair store in August 1998.
Results of Operations
Except where indicated below, the following discussion relates to the
operations of the Company only. The Holding Company conducts no operations
separate from the Company.
Comparison of the Three Months Ended April 25, 1998 (the "1998 Three Month
Period") with the Three Months Ended April 26, 1997 (the "1997 Three Month
Period").
Net sales for the 1998 Three Month Period were $55.0 million as
compared to $54.8 million for the 1997 Three Month Period, an increase of 0.4%.
This small increase was primarily due to the 1998 Three Month Period including
only 12 weeks of results of operations as compared to 13 weeks in the 1997 Three
Month Period, 2.7% decrease in sales of non-pharmacy products from $40.5 million
for the 1997 Three Month Period to $39.4 million for the 1998 Three Month
Period, and a 4.8% increase in same-store sales on a comparable 13 week basis
which was driven by a 9.1% increase in pharmacy sales from $14.3 million to
$15.6 million, including a 12.5% increase in pharmacy sales to managed health
care plans and other third-party payer plans ("Third Party Plans") from $10.4
million to $11.7 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 two independent pharmacies in the two fiscal
quarters preceding the 1998 Three Month Period as compared to one new store
opening in the two fiscal quarters preceding 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 Company also closed one store during the
1998 Three Month Period and closed no stores during the 1997 Three Month Period.
The number of prescriptions filled for Third Party Plan customers increased to
approximately 297,000 prescriptions for the 1998 Three Month Period, as compared
to 288,000 prescriptions for the 1997 Three Month Period, an increase of 3.1%,
as compared to the 3.2%
11
increase in pharmacy sales to Third Party Plans over the same period. Pharmacy
sales to non-Third Party Plan customers were $3.9 million in each of the 1998
Three Month Period and the 1997 Three Month Period, as the one less week of
sales in the 1998 Three Month Period was offset by an increase in the price of
pharmacy products sold to non-Third Party Plan customers as prescriptions filled
for such customers decreased from approximately 132,000 in the 1997 Three Month
Period to approximately 85,000 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 $15.1 million for the 1998 Three Month Period, as
compared to $15.7 million for the 1997 Three Month Period, a decrease of 3.8%
due primarily to the one less week included in the 1998 Three Month Period.
Gross profit as a percentage of net sales was 27.4% for the 1998 Three Month
Period as compared to 28.6% for the 1997 Three Month Period. This 1.2% 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 prescriptions sales as a percentage of total pharmacy sales.
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. As a result,
management believes that gross profit as a percentage of revenues will
eventually stabilize at a level below that historically experienced as movement
to Third Party Plans reaches the saturation point. 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 $3.3 million for each of the 1998 Three Month Period and the 1997
Three Month Period, primarily as a result of the 1998 Three Month Period
including one less week of sales, which was offset by the increase in total
pharmacy sales. Gross profit on sales to Third Party Plans was $1.6 million in
the 1998 Three Month Period as compared to $1.7 million in the 1997 Three Month
Period, a decrease of 5.9% which was primarily the result of the one less week
of sales in the more recent period in addition to a lower gross margin on the
sales of prescriptions to Third Party Plan customers for such period.
Gross profit on non-pharmacy sales was $11.8 million for the 1998 Three
Month Period, as compared to $12.4 million for the 1997 Three Month Period, a
decrease of 4.8%. This decrease was the result of the 1998 Three Month Period
including one less week of sales, increased competition throughout the industry
and increased sales of convenience foods (which generally offer lower gross
margins than other non-pharmacy products) as a percentage of overall
non-pharmacy sales, 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 25.6% for the 1998 Three Month Period as compared to 22.6% for the
1997 Three Month Period. This increase was primarily the result of the 1998
Three Month Period including one less week of sales, the payment of one-time
performance related bonuses to Mr. Marfino, the Company's Chief Executive
Officer, and Mr. Todd H. Pluymers, the Company's Chief Financial Officer, in the
aggregate amount of $0.8 million, as well as the maturing of stores opened
during the current and previous fiscal periods as selling, general and
administrative expenses are historically higher as a percent of new stores sales
as compared to a store which is opened more than three years.
Depreciation and amortization was $1.3 million during the 1998 Three
Month Period as compared to $1.1 million during the 1997 Three Month Period, an
increase of 18.2%. 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 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 $1.9 million during the 1998 Three
Month Period as compared to $0.7 million during the 1997 Three Month Period, an
increase of $1.2 million. This increase was the result of interest incurred
under the Senior Notes as compared to interest incurred on the Company's
outstanding debt
12
balance under its previous credit facility which had a much lower outstanding
principal balance. Interest expense for the Holding Company was $0.3 million
during the 1998 Three Month Period as compared to $0.4 million during the 1997
Three Month Period, a decrease of $0.1 million. This decrease was the result of
accruing one less week of interest during the 1998 Three Month Period on the
Holding Company's outstanding Subordinated Notes due 2005.
The Company achieved a net loss of $0.9 million during the 1998 Three
Month Period as compared to a net income of $0.7 million during the 1997 Three
Month Period, a decrease of $1.6 million. The decrease in the net income was the
result of lower gross margin, higher selling, general and administrative costs,
higher amortization and interest costs incurred as a result of the issuance of
the Senior Notes. The net loss of the Holding Company for the 1998 Three Month
Period was $1.1 million as compared to a net income of $0.5 million for the 1997
Three Month Period, a decrease of $1.6 million. The decrease in the net income
of the Holding Company was the result of the factors described above.
Comparison of the Nine Months Ended April 25, 1998 (the "1998 Nine Month
Period") with the Nine Months Ended April 26, 1997 (the "1997 Nine Month
Period").
Net sales for the 1998 Nine Month Period were $184.2 million as
compared to $173.0 million for the 1997 Nine Month Period, an increase of 6.5%.
This increase was primarily due to a 4.0% increase in sales of non-pharmacy
products from $131.7 million for the 1997 Nine Month Period to $137.0 million
for the 1998 Nine Month Period, and a 4.6% increase in same-store sales on a
comparable 39 week basis, which was driven by a 14.0% increase in pharmacy sales
from $41.3 million to $47.1 million, including a 22.2% increase in pharmacy
sales to Third Party Plans from $28.9 million to $35.3 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 two independent
pharmacies during the 1998 Nine Month Period as compared to one new store
opening in the 1997 Nine Month Period, as well as increased customer traffic in
the Company's stores associated with an increase in total pharmacy sales. The
Company also closed one store during the 1998 Nine Month Period and closed no
stores during the 1997 Nine Month Period. The number of prescriptions filled for
Third Party Plan customers increased to approximately 916,000 prescriptions for
the 1998 Nine Month Period, as compared to 810,000 prescriptions for the 1997
Nine Month Period, an increase of 13.1%, as compared to the 22.2% increase in
pharmacy sales to Third Party Plans over the same period. Pharmacy sales to
non-Third Party Plan customers were $11.8 million in the 1998 Nine Month Period
and $12.4 million in the 1997 Nine Month Period, a decrease of $0.6 million,
primarily as the result of increased participation of the Company customers in
Third Party Plans and 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 388,000 in the 1997 Nine Month Period to
approximately 300,000 in the 1998 Nine Month Period.
Gross profit was $51.8 million for the 1998 Nine Month Period, as
compared to $50.2 million for the 1997 Nine Month Period, an increase of 3.2%.
Gross profit as a percentage of net sales was 28.1% for the 1998 Nine Month
Period as compared to 29.0% for the 1997 Nine 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 prescriptions sales as a percentage of total pharmacy sales.
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. As a result,
management believes that gross profit as a percentage of revenues will
eventually stabilize at a level below that historically experienced as movement
to Third Party Plans reaches the saturation point. 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
Plan) was $9.8 million in the 1998 Nine Month Period as compared to $9.4 million
in the 1997 Nine Month Period, primarily the result of the increase in sales on
a same store basis combined with the maturing of new stores opened in each of
the periods. Gross profit on sales to Third Party Plans was $5.4 million in the
1998 Nine Month Period as compared to $5.0
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million in the 1997 Nine Month Period, an increase of 8.0% primarily the result
of the increase in the 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 $4.3 million for the 1998 Nine
Month Period and for the 1997 Nine Month Period, remaining unchanged primarily
as a result of the lower volume of sales the non-Third Party Plan customers
offset by an increase in the gross margin on sales to non-Third Party Plan
customers.
Gross profit on non-pharmacy sales was $40.7 million for the 1998
Nine Month Period, as compared to $40.8 million for the 1997 Nine Month
Period, a decrease of 0.2%. Gross profit on non-pharmacy sales decreased 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) as a percentage of overall non-pharmacy sales,
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 22.5% for the 1998 Nine Month Period as compared to 21.8% for the
1997 Nine Month Period. This increase was primarily the result of the greater
number of stores opened during the 1998 Nine Month Period as compared to the
1997 Nine Month Period. New stores typically incur a higher level of selling,
general and administrative expenses in their first three years of operations.
Additionally, selling, general and administrative expenses were impacted by
the one-time performance related bonuses paid to Messrs. Marfino and
Pluymers, in the aggregate amount of $0.8 million.
Depreciation and amortization was $4.0 million during the 1998 Nine
Month Period as compared to $3.3 million during the 1997 Nine Month Period, an
increase of 21.2%. 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 $4.8 million during the 1998 Nine
Month Period as compared to $2.3 million during the 1997 Nine Month Period, an
increase of $2.5 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 the previous credit facility which had a much
lower outstanding principal balance. Interest expense for the Holding Company
was $1.4 million during the 1998 Nine Month Period as compared to $1.0 million
during the 1997 Nine Month Period, an increase of $0.4 million. This increase
was the result of the compounding of the interest on the Parent's Senior
Subordinated Notes due 2005.
The Company achieved a net income of $0.8 million during the 1998 Nine
Month Period as compared to $3.2 million during the 1997 Nine Month Period, a
decrease of $2.4 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 Nine Month
Period was $0.2 million as compared to $2.7 million for the 1997 Nine Month
Period, a decrease of $2.5 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 Nine Month Period on the
Holding Company's Senior Subordinated Notes, as interest on such notes is
compounding.
Liquidity and Capital Resources
Comparison of the Three Month Ended April 25, 1998 with the Three Months Ended
April 26, 1997.
In the 1998 Three Month Period, cash used in operations was $4.6
million as compared to $2.0 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 Period as a result of the lower net
income before taxes which results from the higher level of interest expense,
offset by the additional investment in inventory for new stores and for the
acquired independent pharmacies. Cash used in investing activity was $0.4
million during the 1998 Three Month Period as compared to $0.3 million during
the 1997 Three Month Period, an increase of $0.1 million. This increase is the
result of a
14
higher level of investments made in computer systems during the 1998 Three Month
Period as compared to the 1997 Three Month Period. Cash used in financing
activities was $0.2 million for the 1998 Three Month Period as compared to $1.7
million during the 1997 Three Month Period. This decrease in the use of cash in
financing activities was the result of regularly scheduled principal payments
made on the Company's previous credit facility during the 1997 Three Month
Period when 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 due 2004.
Comparison of the Nine Months Ended April 25, 1998 with the Nine Months Ended
April 26, 1998.
In the 1998 Nine Month Period, cash used in operations was $1.6 million
as compared to cash provided by operations of $1.0 million for the 1997 Nine
Month Period. This decrease was the result of lower net income and a higher
investment of cash into inventory during the 1998 Nine Month Period, offset by
the factoring of the Company's Third Party Plan prescription receivables and the
lower level of income tax payments made during this same period. Cash used in
investing activities was $2.3 million during the 1998 Nine Month Period as
compared to $1.2 million during the 1997 Nine Month Period, an increase of $1.1
million. This increase is the result of the opening of two new store locations
and the purchase of certain assets of two independent pharmacies during the 1998
Nine Month Period as compared to opening of only one new store during the 1997
Nine Month Period in addition to a higher level of investment in computer
systems during the 1998 Three Month Period. Cash provided by financing
activities was $2.1 million for the 1998 Nine Month Period as compared to a use
of cash of $4.6 million during the 1997 Nine Month Period. The cash provided
during the 1998 Nine Month Period was the result of the net proceeds from the
issuance of the Senior Notes while the use of cash in the 1997 Nine Month Period
was the result of regularly scheduled principal payments made under the previous
credit facility.
The Company believes that, based on anticipated level 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 payment 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's cash flow and any borrowings under its
existing $20.0 million variable interest rate credit facility is intended to
cover the Company's debt service obligations and working capital requirements
over the near term. This credit facility matures in October 2002.
15
PART II -- OTHER INFORMATION
Item 5. Other Information
Headquarters Lease
In conjunction with the expiration of the Company's existing
headquarters lease, on May 21, 1998, the Company entered into a lease for new
warehouse and office facilities in Somerset, New Jersey. This lease provides for
the lease of approximately 204,000 square feet of warehouse and office space
between August 19, 1998 and March 21, 2004. The Company expects to commence
occupation of the new facility in the first quarter of the Company's fiscal year
ending July 31, 1999, and will vacate its existing corporate offices and two
warehouse facilities. The Company expects that its anticipated monthly payments
under the lease for the new facility will be approximately $67,000, and will
result in increased net annual facility expenditures of approximately $450,000.
The Company believes this new facility will improve operating efficiencies in
several areas, particularly distribution and inventory control.
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 April 25, 1998.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrants duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized.
COMMUNITY DISTRIBUTORS, INC.
June 9, 1998 By: /s/ Todd H. Pluymers
-------------------------
Todd H. Pluymers,
Chief Financial Officer
(Authorized Officer and Principal
Finance and Accounting Officer)
CDI GROUP, INC.
June 9, 1998 By: /s/ Todd H. Pluymers
-------------------------
Todd H. Pluymers,
Chief Financial Officer
(Authorized Officer and Principal
Finance and Accounting Officer)
17