SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended April 24, 1999
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 0-21379
COMMUNITY DISTRIBUTORS, INC.
CDI GROUP, INC.
(Exact name of registrants as specified in their charters)
DELAWARE 22-1833660
22-3349976
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification Nos.)
800 COTTONTAIL LANE
FRANKLIN TOWNSHIP
SOMERSET, NEW JERSEY 08873-1227
(Address of principal executive offices)
(732) 748-8900
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants: (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Number of shares of Common Stock, $.01 par value per share, of Community
Distributors, Inc. outstanding at June 7, 1999: 1,000 shares.
Number of shares of Class A Voting Common Stock, $.00001 par value per share,
of CDI Group, Inc. outstanding at June 7, 1999: 196,632 shares.
Number of shares of Class B Non-Voting Common Stock, $.00001 par value per
share, of CDI Group, Inc. outstanding at June 7, 1999: 187,922 shares.
COMMUNITY DISTRIBUTORS, INC.
CDI GROUP, INC.
INDEX
ITEM PAGE
NUMBER NUMBER
- ------ ------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements ......................................................... 3
COMMUNTY DISTRIBUTORS, INC.
Condensed Statements of Operations (Unaudited) - For the Three
and Nine Month Periods Ended April 24, 1999 and April 25, 1998 ....................... 3
Condensed Balance Sheets (Unaudited) - As of April 24, 1999 and
July 25, 1998......................................................................... 4
Condensed Statements of Cash Flows (Unaudited) - For the Three
and Nine Month Periods Ended April 24, 1999 and April 25, 1998........................ 5
Notes to Condensed Financial Statements of
Community Distributors, Inc. ......................................................... 6
CDI GROUP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations (Unaudited) - For the Three
and Nine Month Periods Ended April 24, 1999 and April 25, 1998 ....................... 8
Condensed Consolidated Balance Sheets (Unaudited) - As of April 24, 1999
and July 25, 1998 .................................................................... 9
Condensed Consolidated Statements of Cash Flows (Unaudited) - For the Three
and Nine Month Periods Ended April 24, 1999 and April 25, 1998 ....................... 10
Notes to Condensed Consolidated Financial Statements of
CDI Group, Inc. and Subsidiary ....................................................... 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 23
PART II. OTHER INFORMATION
Item 4. Other Information ...................................................................... 24
Item 5. Exhibits and Reports on Form 8-K ....................................................... 24
SIGNATURES ............................................................................. 25
-2-
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
COMMUNITY DISTRIBUTORS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
Three Months Ended Nine Months Ended
------------------------- --------------------------
April 24, April 25, April 24, April 25,
1999 1998 1999 1998
--------- --------- ---------- ----------
Net sales $ 64,650 $ 54,974 $ 200,258 $ 184,159
Cost of sales 47,042 39,897 144,136 132,351
--------- --------- ---------- ----------
Gross profit 17,608 15,077 56,122 51,808
Selling, general and administrative expenses 15,553 14,054 45,998 41,492
Administrative fees 63 62 188 188
Depreciation and amortization 1,393 1,307 4,373 4,032
Other income, net 124 224 704 476
--------- --------- ---------- ----------
Operating (loss) income 723 (122) 6,267 6,572
Interest expense, net 2,046 1,854 5,974 4,813
--------- --------- ---------- ----------
Income (loss) before income taxes (1,323) (1,976) 293 1,759
Provision (benefit) for income taxes (714) (1,054) 158 938
--------- --------- ---------- ----------
Net (loss) income $ (609) $ (922) $ 135 $ 821
--------- --------- ---------- ----------
--------- --------- ---------- ----------
See accompanying notes to condensed financial statements.
-3-
COMMUNITY DISTRIBUTORS, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
As of As of
April 24, July 25,
1999 1998
----------- ----------
ASSETS:
Cash and cash equivalents $ - $ 10,770
Accounts receivable 6,066 1,079
Inventory 40,407 29,246
Prepaid expenses and other current assets 1,929 1,013
----------- ----------
TOTAL CURRENT ASSETS 48,402 42,108
Property and equipment, net 11,693 10,080
Deferred charges and other assets 5,803 6,290
Goodwill, net 30,166 31,603
----------- ----------
TOTAL ASSETS $ 96,064 $ 90,081
----------- ----------
----------- ----------
LIABILITIES:
Revolver borrowings $ 11,100 $ -
Accounts payable 13,885 11,035
Accrued expenses and other current liabilities 5,762 8,237
Current portion of supplier advances 1,068 1,068
----------- ----------
TOTAL CURRENT LIABILITIES 31,815 20,340
Long-term debt 74,000 80,000
Supplier advances, net of current portion 1,182 629
Other long-term liabilities 4,438 3,498
----------- ----------
TOTAL LIABILITIES $ 111,435 $ 104,467
----------- ----------
STOCKHOLDER'S DEFICIT:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding - -
Additional paid-in capital - -
Retained earnings 2,171 3,156
Distribution in excess of capital (17,542) (17,542)
----------- ----------
TOTAL STOCKHOLDER'S DEFICIT (15,371) (14,386)
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 96,064 $ 90,081
----------- ----------
----------- ----------
See accompanying notes to condensed financial statements.
-4-
COMMUNITY DISTRIBUTORS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three Months Ended Nine Months Ended
------------------------- -------------------------
April 24, April 25, April 24, April 25,
1999 1998 1999 1998
------- ------ ------- ------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net (loss) income $ (609) $ (922) $ 135 $ 821
Depreciation and amortization 1,393 1,307 4,373 4,032
Non-cash rent expense 172 132 421 393
LIFO provision 150 300 450 900
Gain on repurchase of Senior Notes - - (395) -
Changes in operating assets and liabilities (13,335) (5,516) (18,168) (7,769)
------- ------ ------- ------
NET CASH USED IN OPERATING ACTIVITIES (12,229) (4,699) (13,184) (1,623)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (395) (384) (3,485) (2,335)
------- ------ ------- ------
NET CASH USED IN INVESTING ACTIVITIES (395) (384) (3,485) (2,335)
CASH FLOWS FROM FINANCING ACTIVITES
Proceeds from revolver borrowings 24,250 - 33,960 900
Repayments of revolver borrowings (13,150) - (22,860) (900)
Cash overdraft 1,524 - 1,524 -
Payments made on long-term debt - - - (29,269)
Proceeds from issuance of Senior Notes - - - 80,000
Repurchase of Senior Notes - - (5,605) -
Transaction fees paid - (235) - (3,869)
Dividend paid to parent - - (1,120) (45,000)
Additional capital received from parent - - - 242
------- ------ ------- ------
NET CASH FROM (USED IN) FINANCING ACTIVITES 12,624 (235) 5,899 2,104
Net decrease in cash and cash equivalents - (5,318) (10,770) (1,854)
Cash and cash equivalents at beginning of period - 5,334 10,770 1,870
------- ------ ------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ 16 $ - $ 16
------- ------ ------- ------
------- ------ ------- ------
See accompanying notes to condensed financial statements.
-5-
COMMUNITY DISTRIBUTORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands)
(1) BASIS OF PRESENTATION:
The accompanying financial statements should be read in conjunction with
the audited financial statements of Community Distributors, Inc. (the
"Company"), and the notes thereto contained in the Company's annual report
on Form 10-K for its fiscal year ended July 25, 1998. The Company, a wholly
owned subsidiary of CDI Group, Inc. (the "Parent"), a company which
conducts no independent operations, is engaged in the operation of retail
drug and general merchandise stores throughout New Jersey. These interim
financial statements are unaudited but, in the opinion of management,
include all adjustments, consisting only of normal recurring items,
necessary to fairly present the financial position, operating results and
cash flows for the interim periods. Results for interim periods are not
necessarily indicative of results for the full year. The year-end balance
sheet data was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting
principles.
(2) ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(3) CONTINGENCIES:
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the disposition of these
lawsuits should not have a material impact on the Company's results of
operations, financial position, and cash flows.
(4) DEBT OFFERING:
In October 1997, the Company issued $80,000 of its 10 1/4% Senior Notes Due
2004 ("Senior Notes") which are guaranteed by the Parent. The net proceeds
of the issuance of the Senior Notes were approximately $76,000. The Company
used $29,000 of such net proceeds to refinance substantially all of its
then existing indebtedness and used $45,000 of the net proceeds to pay a
dividend to the Parent, which then distributed a dividend in the same
amount to its stockholders. Under the relevant debt agreements, in the
event of a change in control, as defined, the Company is required to
repurchase all outstanding Senior Notes.
In October 1997, the Company also replaced its then existing credit
facility with a $20,000 five year revolving credit facility (the
"Facility") concurrent with the issuance of the Senior Notes. This Facility
bears interest at either prime rate or the London Interbank Offered Rate
("LIBOR") plus 1.75% and is collateralized by the Company's eligible
accounts receivable and inventory balances, as defined. Included in the
Facility is a $5,000 letter of credit facility. Outstanding letters of
credit, guaranteeing certain contingent purchases which are not reflected
in the accompanying condensed financial statements, aggregated
approximately $51 and $1,666 at April 24, 1999 and July 25, 1998,
respectively. The Facility contains certain financial and operating
covenants, including a minimum fixed charge ratio. Additionally, the
Company cannot make any dividend or other distributions with respect to any
share of stock other than in certain limited circumstances.
-6-
COMMUNITY DISTRIBUTORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands)
In October 1998, the Company obtained a waiver from the lender under the
Facility permitting the repurchase of an aggregate of $6,000 principal
amount of Senior Notes and the payment of a dividend to the Parent in the
amount of $1,120. On October 6, 1998, the Company repurchased an aggregate
of $5,000 principal amount of Senior Notes at a purchase price of $930 per
$1,000 principal amount of Senior Notes, plus accrued and unpaid interest.
On October 13, 1998, the Company repurchased an additional $1,000 principal
amount of Senior Notes at a purchase price of $925 per $1,000 principal
amount of Senior Notes, plus accrued and unpaid interest. As of April 24,
1999, $74,000 aggregate principal amount of Senior Notes remained
outstanding. On January 4, 1999, the Company paid a dividend to its Parent
in the amount of $1,120, which immediately thereafter paid a dividend in
the same amount to the common shareholders of the Parent as of the same
date.
(5) ACCOUNTS RECEIVABLE:
On September 9, 1998, The Pharmacy Fund Receivables, Inc. ("PFR") filed for
bankruptcy under Chapter 11 of the Federal bankruptcy code. In connection
therewith, the Company is pursuing collection of approximately $455 of
prescription receivables from managed health care plans and other
third-party payer plans ("Third Party Plans") that were purchased by PFR.
Subsequent to the filing for bankruptcy, the Company entered into a
settlement agreement with PFR and expects to collect all of the PFR
receivables. The Company is unable to predict when the PFR receivables may
be collected.
In addition to the Third Party Plan prescription receivables that were
purchased by PFR, which the Company has yet to collect, the Company is also
pursuing $676 of post-petition prescription receivables, of which $598 has
been collected as of April 24, 1999. Post-petition receivables arose when
Third Party Plans continued to make payments to PFR for prescription
receivables generated subsequent to the September 9, 1998 bankruptcy
petition that were not purchased by PFR. Subsequent to the bankruptcy, the
Company assumed the risk associated with the collection of its Third Party
Plan receivables.
(6) INVENTORY COSTING METHOD:
Inventory at interim periods is valued on a last-in, first-out (LIFO) basis
which is determined based on estimates of gross profit rate, inflation
rates and inventory levels, and is adjusted for the results of physical
inventories which are taken twice a year. The results of the last physical
inventory that was taken on January 23, 1999 did not have a material impact
on the results of operations, financial position and cash flows.
-7-
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
Three Months Ended Nine Months Ended
----------------------- --------------------------
April 24, April 25, April 24, April 25,
1999 1998 1999 1998
------ ------ ------ -----
Net sales $ 64,650 $ 54,974 $ 200,258 $ 184,159
Cost of sales 47,042 39,897 144,136 132,351
------ ------ ------ -----
Gross profit 17,608 15,077 6,122 51,808
Selling, general and administrative expenses 15,553 14,054 45,998 41,492
Administrative fees 63 62 188 188
Depreciation and amortization 1,393 1,307 4,373 4,032
Other income, net 124 224 704 476
------ ------ ------ -----
Operating (loss) income 723 (122) 6,267 6,572
Interest expense, net 2,529 2,168 7,336 6,175
------ ------ ------ -----
Income (loss) before income taxes (1,806) (2,290) (1,069) 397
Provision (benefit) for income taxes (883) (1,164) (319) 212
------ ------ ------ -----
Net (loss) income $ (923) $ (1,126) $ (750) $ 185
------ ------ ------ -----
------ ------ ------ -----
See accompanying notes to condensed consolidated financial statements.
-8-
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
As of As of
April 24, July 25,
1999 1998
------------- -------------
ASSETS:
Cash and cash equivalents $ - $ 10,770
Accounts receivable 6,090 1,098
Inventory 40,407 29,246
Prepaid expenses and other current assets 1,929 1,582
----------- ----------
TOTAL CURRENT ASSETS 48,426 42,696
Property and equipment, net 11,693 10,080
Deferred charges and other assets 5,803 6,290
Goodwill, net 30,166 31,603
----------- ----------
TOTAL ASSETS $ 96,088 $ 90,669
----------- ----------
----------- ----------
LIABILITIES:
Revolver borrowings $ 11,100 $ -
Accounts payable 13,885 11,035
Accrued expenses and other current liabilities 5,285 8,237
Current portion of supplier advances 1,068 1,068
----------- ----------
TOTAL CURRENT LIABILITIES 31,338 20,340
Long-term debt 74,000 80,000
Subordinated debt 19,884 18,517
Supplier advances, net of current portion 1,182 629
Other long-term liabilities 2,489 2,118
----------- ----------
TOTAL LIABILITIES $ 128,893 $ 121,604
----------- ----------
COMMITMENTS AND CONTINGENCIES:
Redeemable preferred stock, $1.00 par value, 7,862 authorized,
issued and outstanding, redemption value $100 per share 786 786
Redeemable shares of Class A voting common stock, 57,963
shares issued and outstanding at net redemption
value at April 24, 1999 and July 25, 1998 493 493
STOCKHOLDERS' DEFICIT:
Class A voting common stock, $.00001 par value, authorized
600,000 shares, 196,632 issued and outstanding at
April 24, 1999 and July 25, 1998 - -
Class B non-voting common stock, $.00001 par value, authorized
600,000 shares, 187,922 issued and outstanding at
April 24, 1999 and July 25, 1998 - -
Additional paid-in capital - -
Retained earnings 520 2,390
Distribution in excess of capital (34,604) (34,604)
----------- ----------
TOTAL STOCKHOLDERS' DEFICIT (34,084) (32,214)
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 96,088 $ 90,669
----------- ----------
----------- ----------
See accompanying notes to condensed consolidated financial statements.
-9-
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three Months Ended Nine Months Ended
-------------------------------- -------------------------------
April 24, April 25, April 24, April 25,
1999 1998 1999 1998
-------------- ------------- ------------- -------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net (loss) income $ (923) $ (1,126) $ (750) $ 185
Depreciation and amortization 1,393 1,307 4,373 4,032
Non-cash rent expense 172 132 421 393
Non-cash interest expense 483 315 1,362 1,370
LIFO provision 150 300 450 900
Gain on repurchase of Senior Notes - - (395) -
Changes in operating assets and liabilities (13,504) (5,627) (18,645) (5,257)
-------------- ------------- ------------- -------------
NET CASH FROM (USED IN) OPERATING ACTIVITIES (12,229) (4,699) (13,184) (1,623)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (395) (384) (3,485) (2,335)
-------------- ------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (395) (384) (3,485) (2,335)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from revolver borrowings 24,250 - 33,960 900
Repayments of revolver borrowings (13,150) - (22,860) (900)
Cash overdraft 1,524 - 1,524 -
Payments made on long-term debt - - - (29,269)
Proceeds from issuance of Senior Notes - - - 80,000
Repurchase of Senior Notes - - (5,605) -
Transaction fees paid - (235) - (3,869)
Dividend paid - - (1,120) (45,000)
Proceeds from the exercise of common stock options - - - 242
Proceeds from loans to officers and directors - - - 87
Payments of subordinated debt - - - (87)
-------------- ------------- ------------- -------------
NET CASH FROM (USED IN) FINANCING ACTIVITES 12,624 (235) 5,899 2,104
Net decrease in cash and cash equivalents - (5,318) (10,770) (1,854)
Cash and cash equivalents at beginning of period $ - $ 5,334 $ 10,770 $ 1,870
-------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ 16 $ - $ 16
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
See accompanying notes to condensed consolidated financial statements.
-10-
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands)
(1) BASIS OF PRESENTATION:
The accompanying consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of CDI
Group, Inc. and Subsidiary (the "Company"), and the notes thereto contained
in the Company's annual report on Form 10-K for its fiscal year ended July
25, 1998. The Company consists of an operating entity, Community
Distributors, Inc. (the "Subsidiary"), which is engaged in the operation of
retail drug and general merchandise stores throughout New Jersey, and a
holding company, CDI Group, Inc. (the "Parent"), which conducts no
independent operations. These interim consolidated financial statements are
unaudited but, in the opinion of management, include all adjustments,
consisting only of normal recurring items, necessary to fairly present the
financial position, operating results and cash flows for the interim
periods. Results for interim periods are not necessarily indicative of
results for the full year. The year-end balance sheet data was derived from
audited financial statements but does not include all disclosures required
by generally accepted accounting principles.
(2) ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(3) CONTINGENCIES:
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the disposition of these
lawsuits should not have a material impact on the Company's consolidated
results of operations, financial position, and cash flows.
(4) DEBT OFFERING:
In October 1997, the Subsidiary issued $80,000 of its 10 1/4% Senior Notes
Due 2004 ("Senior Notes") which are guaranteed by the Parent. The net
proceeds of the issuance of the Senior Notes were approximately $76,000.
The Subsidiary used $29,000 of such net proceeds to refinance substantially
all of its then existing indebtedness and used $45,000 of the net proceeds
to pay a dividend to the Parent, which then distributed a dividend in the
same amount to its stockholders. Under the relevant debt agreements, in the
event of a change in control, as defined, the Subsidiary is required to
repurchase all outstanding Senior Notes.
In October 1997, the Subsidiary also replaced its then existing credit
facility with a $20,000 five year revolving credit facility (the
"Facility") concurrent with the issuance of the Senior Notes. This Facility
bears interest at either prime rate or the London Interbank Offered Rate
("LIBOR") plus 1.75% and is collateralized by the Subsidiary's eligible
accounts receivable and inventory balances, as defined. Included in the
Facility is a $5,000 letter of credit facility. Outstanding letters of
credit, guaranteeing certain contingent purchases which are not reflected
in the accompanying condensed consolidated financial statements, aggregated
approximately $51 and $1,666 at April 24, 1999 and July 25, 1998,
respectively. 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.
-11-
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands)
In October 1998, the Subsidiary obtained a waiver from the lender under the
Facility permitting the repurchase of an aggregate of $6,000 principal
amount of Senior Notes and the payment of a dividend to the shareholders of
the Parent in the amount of $1,120. On October 6, 1998, the Subsidiary
repurchased an aggregate of $5,000 principal amount of Senior Notes at a
purchase price of $930 per $1,000 principal amount of Senior Notes, plus
accrued and unpaid interest. On October 13, 1998, the Subsidiary
repurchased an additional $1,000 principal amount of Senior Notes at a
purchase price of $925 per $1,000 principal amount of Senior Notes, plus
accrued and unpaid interest. As of April 24, 1999, $74,000 aggregate
principal amount of Senior Notes remained outstanding. On January 4, 1999,
the Parent paid a dividend to its common shareholders in the amount of
$1,120.
In addition to the outstanding Senior Notes issued by the Subsidiary, the
Parent had outstanding long term debt, consisting of senior subordinated
notes due January 31, 2005, in the amount of $19,884 and $18,517 at April
24, 1999 and July 25, 1998, respectively, which includes accrued interest.
(5) ACCOUNTS RECEIVABLE:
On September 9, 1998, The Pharmacy Fund Receivables, Inc. ("PFR") filed for
bankruptcy under Chapter 11 of the Federal bankruptcy code. In connection
therewith, the Subsidiary is pursuing collection of approximately $455 of
prescription receivables from managed health care plans and other
third-party payer plans ("Third Party Plans") that were purchased by PFR.
Subsequent to the filing for bankruptcy, the Subsidiary entered into a
settlement agreement with PFR and expects to collect all of the PFR
receivables. The Company is unable to predict when the PFR receivables may
be collected.
In addition to the Third Party Plan prescription receivables that were
purchased by PFR, which the Subsidiary has yet to collect, the Subsidiary
is also pursuing $676 of post-petition prescription receivables, of which
$598 has been collected as of April 24, 1999. Post-petition receivables
arose when the Third Party Plans continued to make payments to PFR for
prescription receivables generated subsequent to the September 9, 1998
bankruptcy petition that were not purchased by PFR. Subsequent to the
bankruptcy, the Subsidiary assumed the risk associated with the collection
of its Third Party Plan receivables.
(6) INVENTORY COSTING METHOD:
Inventory at interim periods is valued on a last-in, first-out (LIFO) basis
which is determined based on estimates of gross profit rate, inflation
rates and inventory levels, and is adjusted for the results of physical
inventories which are taken twice a year. The results of the last physical
inventory that was taken on January 23, 1999 did not have a material impact
on the results of operations, financial position and cash flows.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY NOTE
This Quarterly Report on Form 10-Q may contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
including, but not limited to, (i) statements about possible changes in the rate
of increase of pharmacy sales to participants in managed health care plans and
other third-party payer plans ("Third Party Plans") as a percentage of total
pharmacy sales, and its impact on profitability; (ii) the ability of Community
Distributors, Inc. (the "Company") to meet its debt service obligations and to
fund anticipated capital expenditures and working capital requirements in the
future; (iii) the amount and sufficiency of the Company's planned expenditures
to address the year 2000 dating problem; (iv) the impact on the Company of the
bankruptcy of The Pharmacy Fund Receivables, Inc. ("PFR") and the Company's
expectations regarding the recovery of funds owed to it by such party; and (v)
certain other statements identified or qualified by words such as "likely",
"will", "suggests", "may", "would", "could", "should", "expects", "anticipates",
"estimates", "plans", "projects", "believes", or similar expressions (and
variants of such words or expressions). Investors are cautioned that
forward-looking statements are inherently uncertain. These forward-looking
statements represent the best judgment of the Company and of CDI Group, Inc.
(the "Holding Company") as of the date of this Quarterly Report on Form 10-Q,
and the Company and the Holding Company caution readers not to place undue
reliance on such statements. Actual performance and results of operations may
differ materially from those projected or suggested in the forward-looking
statements due to certain risks and uncertainties, including, but not limited
to, the risks and uncertainties described or discussed under the heading
"Certain Risks" below and in the section "Risk Factors" in the Prospectus dated
February 13, 1998 of the Company and of the Holding Company.
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 48 drug and general merchandise stores, with 31
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 APRIL 24, 1999 (THE "1999 THREE-MONTH
PERIOD") WITH THE THREE MONTHS ENDED APRIL 25, 1998 (THE "1998 THREE-MONTH
PERIOD").
Net sales for the 1999 Three-month Period were $64.6 million as
compared to $55.0 million for the 1998 Three-month Period, an increase of $9.6
million, or 17.5%. The results for the 1999 Three-month Period include thirteen
weeks while the results for the 1998 Three-month Period include twelve weeks.
Net sales for the 1998 Three-month Period inclusive of the final week from the
1998 second fiscal quarter (the "Comparable 1998 Three-month Period") were $58.9
million as compared to $64.6 million for the 1999 Three-month Period, an
increase of $5.7 million, or 9.7%. This increase, which includes a 7.2% increase
in same-store sales, was primarily due to (i) a 4.8% increase in sales of
non-pharmacy products from $42.1 million for the Comparable 1998 Three-month
Period to $44.1 million for the 1999 Three-month Period, and (ii) a 22.6%
increase in pharmacy sales from $16.8 million for the Comparable 1998
Three-month Period to $20.6 million for the 1999 Three-month Period, including a
29.7% increase in pharmacy sales to Third Party Plans from $12.8 million for the
Comparable 1998 Three-month Period to $16.6 million for the 1999 Three-month
Period. The Company attributes the increase in net sales of non-pharmacy
products to the opening of three new store locations and the acquisition of the
inventory and the customer list of an independent pharmacy in the quarters
preceding the 1999 Three-month Period and the acquisition of the inventory
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and the customer list of an independent pharmacy during the 1999 Three-month
Period as compared to the opening of two new store locations and no acquisitions
of customer lists during the Comparable 1998 Three-month Period, as well as to
increased customer traffic in the Company's stores associated with the increase
in total pharmacy sales. The number of prescriptions filled (including
prescriptions filled for Third Party Plan customers) was approximately 486,000
for the 1999 Three-month Period as compared to approximately 422,000 for the
Comparable 1998 Three-month Period, an increase of approximately 64,000, or
15.2%. The number of prescriptions filled for Third Party Plan customers
increased to approximately 394,000 for the 1999 Three-month Period, as compared
to 323,000 for the Comparable 1998 Three-month Period, an increase of
approximately 71,000, or 22.0%. Pharmacy sales to non-Third Party Plan customers
were $4.0 million in both the 1999 Three-month Period and the Comparable 1998
Three-month Period, remaining constant primarily as the result of increased
participation of the Company's customers in Third Party Plans accompanied by
decrease in the volume of pharmacy products sold to non-Third Party Plan
customers from approximately 99,000 in the Comparable 1998 Three-month Period to
approximately 92,000 in the 1999 Three-month Period, which was offset by
improved retail prices on pharmacy products.
Gross profit was $17.6 million for the 1999 Three-month Period, as
compared to $15.1 million for the 1998 Three-month Period, an increase of $2.5
million, or 16.6%. Gross profit as a percentage of net sales was 27.2% for the
1999 Three-month Period as compared to 27.4% for the 1998 Three-month Period.
This 0.2% decrease in gross profit as a percentage of sales was due primarily to
the fact that pharmacy sales, which generate lower margins than sales of
non-pharmacy merchandise, represented a higher percentage of total sales in the
1999 Three-month Period as compared to the 1998 Three-month Period, offset by an
increase in the margin on non-pharmacy merchandise.
Gross profit on total pharmacy sales (including sales to Third Party
Plan customers) was $4.4 million for the 1999 Three-month Period as compared to
$3.3 million for the 1998 Three-month Period, an increase of $1.1 million, or
33.3%, which was primarily the result of the increase in sales on a same store
basis combined with the maturing of new stores opened in the Company's last
three fiscal years and improved purchase prices from the Company's primary
prescription drug wholesaler. Gross profit on sales to Third Party Plan
customers was $2.8 million for the 1999 Three-month Period as compared to $1.9
million for the 1998 Three-month Period, an increase of 0.9 million, or 47.4%,
which was primarily the result of the increase in sales of prescriptions to
Third Party Plan customers as a percentage of total sales of prescriptions.
Gross profit on sales of pharmacy products to non-Third Party Plan customers was
$1.5 million in the 1999 Three-month Period as compared to $1.4 million in the
1998 Three-month Period, an increase of $0.1 million, or 7.1%, primarily
resulting from an improved purchase prices from the Company's wholesaler and
improved retail prices.
Although management expects that sales to Third Party Plan customers as
a percentage of total pharmacy sales will continue to increase, management
believes that as this rate of increase slows, margins will stabilize, resulting
in pharmacy gross profit growth that more closely approximates pharmacy sales
growth rates. Management believes that the rate of increase in sales to Third
Party Plan customers as a percentage of total pharmacy sales will slow because
the current growth rate, if continued, would reach the point at which almost all
members of the population who may eligible for enrollment in Third Party Plans
will be so covered. However, management believes there will always be some
pharmacy customers who do not enroll in Third Party Plans. The Company is unable
to estimate when this increase will slow, or stop, if at all. Because of the
lower margins on prescription sales to Third Party Plan participants, management
believes that the increase in Third Party Plan prescription sales as a
percentage of total pharmacy sales will negatively impact profit margin,
although this may be partly or wholly offset by the increases in non-pharmacy
sales that may result from increased floor traffic associated with increased
pharmacy sales. There can be no assurance, however, that the increase in Third
Party Plan prescription sales as a percentage of total prescription sales will
continue, or that any resulting decrease in overall margins will be offset.
Gross profit on non-pharmacy sales was $13.3 million for the 1999
Three-month Period, as compared to $11.8 million for the 1998 Three-month
Period, an increase of $1.5 million, or 12.7%. Gross profit as a percentage of
non-pharmacy sales was 30.2% for the 1999 Three-month Period as compared to
29.9% for the 1998 Three-month Period, an increase of 0.3%. Gross profit as a
percentage of non-pharmacy sales increased primarily due to improved retail
prices on the Company's sales of one-hour film processing and seasonal
merchandise.
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Selling, general and administrative expense as a percentage of net
sales was 24.1% for the 1999 Three-month Period, as compared to 25.6% for the
1998 Three-month Period, a decrease of 1.5%. Excluding the one-time bonuses paid
to Mr. Marfino and Mr. Pluymers, the Company's Chief Executive Officer and Chief
Financial Officer, respectively, in the amount of $0.8 million during the 1998
Three-month Period, selling, general and administrative expense as a percentage
of net sales was 24.1% for both the 1999 Three-month Period and the 1998
Three-month Period, remaining consistent for both Periods.
Depreciation and amortization expense for the 1999 Three-month Period
was $1.4 million as compared to $1.3 million for the 1998 Three-month Period, an
increase of $0.1 million, or 7.7%, which resulted from the higher level of
amortization of deferred financing costs incurred in connection with the
issuance of the Company's 10 1/4% Senior Notes Due 2004 ("Senior Notes").
Other income, net was $0.1 million for the 1999 Three-month Period as
compared to $0.2 million for the 1998 Three-month Period, a decrease of $0.1
million, resulting from slightly lower levels of vending, video game other
miscellaneous income during the 1999 Three-month Period.
Net interest expense was $2.0 million in the 1999 Three-month Period as
compared to $1.9 million in the 1998 Three-month Period, an increase of $0.1
million, resulting from higher average balances borrowed against the Company's
revolving line of credit. Non-cash interest expense on the Holding Company's
outstanding subordinated debt was $0.5 million for the 1999 Three-month Period
as compared to $0.3 million for the 1998 Three-month Period, an increase of $0.2
million, resulting from the compounding of interest on the Holding Company's
subordinated debt.
The benefit for income taxes was $0.7 million for the 1999 Three-month
Period as compared to $1.1 million for the 1998 Three-month Period, a decrease
of $0.4 million, or 36.4%, which was primarily the result of a lower net loss
before income taxes in the 1999 Three-month Period. The Holding Company
experienced a benefit from income taxes of $0.9 million for the 1999 Three-month
Period as compared to $1.2 million for the 1998 Three-month Period, a decrease
of $0.3 million, or 25.0%, also resulting from the lower net loss before income
taxes in the 1999 Three-month Period. The Company's effective tax rate is
consistently higher than the statutory tax rates, and varies from period to
period, due to the amortization of goodwill and of beneficial leaseholds which
are not deductible when calculating taxable income.
The net loss for the 1999 Three-month Period was $0.6 million as
compared to $0.9 million in the 1998 Three-month Period, a decrease of $0.3
million which is due to the one-time bonuses paid to Mr. Marfino and Mr.
Pluymers during the 1998 Three-month Period offset by higher levels of
depreciation, interest and amortization expenses in the 1999 Three-month Period.
The net loss for the Holding Company for the 1999 Three-month Period was $0.9
million as compared to $1.1 in the 1998 Three-month Period, a decrease of $0.2
million, principally as a result of the factors described above as well as the
compounded interest incurred on the Holding Company's outstanding subordinated
debt.
COMPARISON OF THE NINE MONTHS ENDED APRIL 24, 1999 (THE "1999 NINE-MONTH
PERIOD") WITH THE NINE MONTHS ENDED APRIL 25, 1998 (THE "1998 NINE-MONTH
PERIOD").
Net sales for the 1999 Nine-month Period were $200.3 million as
compared to $184.2 million for the 1998 Nine-month Period, an increase of $16.1
million, or 8.7%. The results for the 1999 Nine-month Period and for the 1998
Nine-month Period both include thirty-nine weeks. The increase in net sales,
which includes a 6.0% increase in same-store sales, was primarily due to (i) a
4.5% increase in sales of non-pharmacy products from $137.0 million for the 1998
Nine-Month Period to $143.1 million for the 1999 Nine-month Period, and (ii) a
21.4% increase in pharmacy sales from $47.1 million for the 1998 Nine-month
Period to $57.2 million for the 1999 Nine-month Period, including a 30.1%
increase in pharmacy sales to customers of Third Party Plans from $34.9 million
for the 1998 Nine-month Period to $45.4 million for the 1999 Nine-month Period.
The Company attributes the increase in net sales of non-pharmacy products to the
opening of three new store locations and to the acquisitions of the inventory
and customer lists of two independent pharmacies during the 1999 Nine-month
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period, as compared to the opening of two new store locations and no
acquisitions of customer lists during the 1998 Nine-month Period, as well as
to increased customer traffic in the Company's stores associated with the
increase in total pharmacy sales. The number of prescriptions filled
(including prescriptions filled for Third Party Plan customers) was
approximately 1,383,000 for the 1999 Nine-month Period as compared to
approximately 1,222,000 for the 1998 Nine-month Period, an increase of
approximately 161,000, or 13.2%. The number of prescriptions filled for Third
Party Plan customers increased to approximately 1,107,000 for the 1999
Nine-month Period, as compared to 916,000 for the 1998 Nine-month Period, an
increase of 20.9%. Pharmacy sales to non-Third Party Plan customers were
$11.8 million in the 1999 Nine-month Period as compared to $12.2 million in
the 1998 Nine-month Period, a decrease of $0.4 million, or 3.3%. This
decrease occurred primarily as the result of increased participation of the
Company's customers in Third Party Plans accompanied by a decrease in the
volume of pharmacy products sold to non-Third Party Plan customers from
approximately 305,000 prescriptions filled in the 1998 Nine-month Period to
approximately 277,000 prescriptions filled in the 1999 Nine-month Period, a
decrease of 9.2%, which was partially offset by improved retail prices on
pharmacy products.
Gross profit was $56.1 million for the 1999 Nine-month Period, as
compared to $51.8 million for the 1998 Nine-month Period, an increase of 8.3%.
Gross profit as a percentage of net sales was 28.0% for the 1999 Nine-month
Period as compared to 28.1% for the 1998 Nine-month Period. This 0.1% decrease
in gross profit as a percentage of net sales was the result of the Company's
ability to increase the margin on non-pharmacy merchandise to partially offset
the fact that pharmacy sales, which generate lower margins than sales of
non-pharmacy merchandise, represented a higher percentage of total sales in the
1999 Nine-month Period as compared to the 1998 Nine-month Period.
Gross profit on total pharmacy sales (including sales to Third Party
Plan customers) was $12.1 million for the 1999 Nine-month Period as compared to
$9.8 million for the 1998 Nine-month Period, an increase of $2.3 million, or
23.5%, which was primarily the result of the increase in sales on a same store
basis combined with the maturing of new stores opened in the Company's last
three fiscal years and improved purchase prices from the Company's primary
prescription drug wholesaler. Gross profit on sales to Third Party Plan
customers was $7.6 million for the 1999 Nine-month Period as compared to $5.4
million for the 1998 Nine-month Period, an increase of $2.2 million, or 40.7%,
which was primarily the result of the increase in sales of prescriptions to
Third Party Plan customers as a percentage of total sales of prescriptions.
Gross profit on sales of pharmacy products to non-Third Party Plan customers was
$4.5 million in the 1999 Nine-month Period as compared to $4.4 million in the
1998 Nine-month Period, an increase of 2.3%, resulting from improved retail
pricing to non-Third Party Plan customers which offset the decrease in the
volume of product sold to non-Third Party Plan customers.
Gross profit on non-pharmacy sales was $44.0 million for the 1999
Nine-month Period, as compared to $42.0 million for the 1998 Nine-month Period,
an increase of 4.8%. Gross profit as a percentage of non-pharmacy sales was
30.8% for the 1999 Nine-month Period as compared to 30.7% for the 1998
Nine-month Period, an increase of 0.1%. Gross profit on non-pharmacy sales
increased primarily due to increased levels of sales and improved pricing on
higher margin seasonal merchandise during the 1999 Nine-month Period, offset by
higher levels of sales in lower gross profit categories, including convenience
foods.
Selling, general and administrative expense as a percentage of net
sales was 23.0% for the 1999 Nine-month Period, as compared to 22.5% for the
1998 Nine-month Period, an increase of 0.5%. This increase in selling, general
and administrative expenses is primarily due to the higher level of warehousing
payroll incurred to consolidate the Company's warehouses and corporate office
into one larger facility, the higher cost of occupancy of the one larger
warehouse and corporate office facility, as well as higher levels of selling,
general and administrative expenses incurred at its three new store openings
during the 1999 Nine-month Period as new stores typically incur higher levels of
selling, general and administrative expenses during the first three years after
they are opened.
Depreciation and amortization expense for the 1999 Nine-month Period
was $4.4 million as compared to $4.0 million for the 1998 Nine-month Period, an
increase of 10.0%. The 1999 Nine-month Period included a one-time write off of
$0.3 million of unamortized deferred financing costs related to the repurchase
of the Company's 10 1/4% Senior Notes Due 2004 ("Senior Notes") while the 1998
Nine-month Period included a one-time write off of unamortized deferred
financing costs of $0.4 million related to the paydown of the Company's former
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credit facility in connection with the issuance of the Senior Notes.
Excluding the one-time charges in both the 1999 and 1998 Nine-month Periods,
depreciation and amortization expense for the 1999 Nine-month Period was $4.1
million as compared to $3.6 million for the 1998 Nine-month Period, an
increase of 13.9%, which resulted from the higher level of amortization of
deferred financing costs incurred in connection with the issuance of the
Senior Notes.
Other income, net was $0.7 million for the 1999 Nine-month Period as
compared to $0.5 million for the 1998 Nine-month Period, an increase of $0.2
million, which is the result of the one-time gain on the repurchase of an
aggregate of $6.0 million in principal amount of Senior Notes in October 1998.
Net interest expense was $6.0 million in the 1999 Nine-month Period as
compared to $4.8 million in the 1998 Nine-month Period, an increase of $1.2
million, or 25.0%, resulting from higher average balances borrowed against the
Company's revolving line of credit. Non-cash interest expense on the Holding
Company's outstanding subordinated debt was $1.4 million in both the 1999
Nine-month Period and 1998 Nine-month Period.
Provision for income taxes was $0.2 million for the 1999 Nine-month
Period as compared to $0.9 million for the 1998 Nine-month Period, a decrease of
$0.7 million, or 77.8%, which was primarily the result of the lower income
before income taxes in the 1999 Nine-month Period. The Holding Company
experienced a benefit from income taxes of $0.3 million for the 1999 Nine-month
Period as compared to a provision for income taxes of $0.2 million for the 1998
Nine-month Period, a decrease of $0.5 million resulting from the lower income
before income taxes in the 1999 Nine-month Period. The Company's effective tax
rate is consistently higher than the statutory tax rates, and varies from period
to period, due to the amortization of goodwill and of beneficial leaseholds
which are not deductible when calculating taxable income.
Net income for the 1999 Nine-month Period was $0.1 million as compared
to net income of $0.8 million in the 1998 Nine-month Period, a decrease of $0.7
million which is primarily due to lower operating income and to increased levels
of interest, depreciation and amortization incurred. The Holding Company
incurred a net loss of $0.8 million for the 1999 Nine-month Period as compared
to net income of $0.2 million in the 1998 Nine-month Period, a decrease of $1.0
million, principally as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF THE THREE MONTHS ENDED APRIL 24, 1999 (THE "1999 THREE-MONTH
PERIOD") WITH THE THREE MONTHS ENDED APRIL 25, 1998 (THE "1998 THREE-MONTH
PERIOD").
During the 1999 Three-month Period, cash used in operations was $12.2
million as compared to $4.7 million for the 1998 Three-month Period, an
increased use of cash of $7.5 million. This increase in cash used in operations
is the result of the higher level of investments in inventory related to the
significant increase in pharmacy sales and to improve the replenishment rate to
the Company's stores from its warehouse, as well as slower collection of Third
Party Plan prescription receivables due to the bankruptcy filing of PFR with
whom the Company had an arrangement to factor its Third Party Plan prescription
receivables. Cash used in investing activities was $0.4 million during both the
1999 Three-month Period and the 1998 Three-month Period, in each case as a
result of expenditures related to the new store openings to occur subsequent to
the 1999 Three-month Period and to continued expenditures on technology
enhancements. Cash provided by financing activities was $12.6 million during the
1999 Three-month Period as compared to cash used in financing activities of $0.2
million during the 1998 Three-month Period. During the 1999 Three-month Period,
the cash provided by financing activities resulted from the net revolver
borrowings of $11.1 million and the cash overdraft of $1.5 million while the
cash used during the 1998 Three-month Period consisted of $0.2 million related
to transaction fees paid in connection with the Company's issuance of $80
million aggregate principal amount of its Senior Notes.
COMPARISON OF THE NINE MONTHS ENDED APRIL 24, 1999 (THE "1999 NINE-MONTH
PERIOD") WITH THE NINE MONTHS ENDED APRIL 25, 1998 (THE "1998 NINE-MONTH
PERIOD").
During the 1999 Nine-month Period, cash used in operations was $13.2
million as compared to $1.6 million for the 1998 Nine-month Period, an increased
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use of cash of $11.6 million. The increase in cash used in operations is the
result of the higher level of investment in inventory related to the
significant increase in pharmacy sales and to improve the replenishment rate
to the Company's stores from its warehouse, as well as slower collection of
Third Party Plan prescription receivables due to the bankruptcy filing of PFR
with whom the Company had an arrangement to factor its Third Party Plan
prescription receivables. Cash used in investing activities was $3.5 million
during the 1999 Nine-month Period as compared to $2.3 million during the 1998
Nine-month Period, an increased use of cash of $1.2 million, which was the
result of the opening of three new store locations and the acquisition of the
inventory and customer lists of two independent pharmacies during the 1999
Nine-month Period as compared to two new store openings during the 1998
Nine-month Period. Cash provided by financing activities was $5.9 million
during the 1999 Nine-month Period as compared to $2.1 million during the 1998
Nine-month Period. During the 1998 Period, the cash provided by financing
activities resulted from the net proceeds, after payment of the dividend to
the common shareholders of the Holding Company, of the issuance of the $80.0
million aggregate principal amount of Senior Notes. The cash provided by
financing activities during the 1999 Nine-month Period consisted primarily of
net revolver borrowings of $11.1 million and a cash overdraft of $1.5 million
which offset $5.6 million used for the repurchase of $6.0 million aggregate
principal amount of Senior Notes, and $1.1 million used for the payment of
the dividend to the common shareholders of the Holding Company.
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 31, 1999
and July 29, 2000. The Company's ability to make scheduled payments of principal
or interest on or to refinance its indebtedness will depend on future operating
performance and cash flow, which are subject to prevailing economic conditions,
prevailing interest rates and financial, competitive, business and other factors
beyond its control. The Company expects that substantially all of its borrowings
under its credit facility will bear interest at floating rates, therefore, the
Company's financial condition will be affected by any changes in prevailing
rates.
To date, the Company has repurchased an aggregate of $6.0 million of
its outstanding Senior Notes. The Company may in the future repurchase
additional Senior Notes if it is able to obtain appropriate waivers under the
Facility and such Senior Notes are available at a discount. Any such repurchases
could affect the Company's ability to cover its debt service obligations and
working capital requirements in the future.
YEAR 2000
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. To the extent that a business system does not fail or make
miscalculations as a result of the Year 2000 date change, such a system is
described as being "Year 2000 Compliant." While the Company believes that it has
been taking adequate steps to make sure that its business systems are Year 2000
Compliant, and does not believe that it will incur material cost to prepare for
the Year 2000 date change, achieving complete Year 2000 Compliance is subject to
various risks and uncertainties, and there can be no assurance that the Year
2000 date change will not lead to failures of such systems that may have a
material adverse effect on the Company's future results of operations and
financial condition. The Company has been aware of the possible impact of Year
2000 issues on its operations for some time and has focused on making its
business systems Year 2000 Compliant since that time.
In anticipation of the Company's continued growth and need for
additional functionality, the Company has sought to acquire packaged software
solutions as compared to the internal development of software solutions. As a
result, a majority of the Company's Year 2000 Compliance issues have been
resolved by continuously deploying the most recently available versions of the
packaged software solutions.
Beginning in 1996, the Company decided to deploy the JDA Software, Inc.
Merchandise Management System ("MMS"), a packaged software solution, which it
believes, based on representations from its licensor and on certain limited
testing performed by the Company, to be Year 2000 Compliant. The total estimated
implementation cost of the MMS is $2.1 million, with $1.9 million having already
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been incurred through April 24, 1999. The Company anticipates that the
remaining implementation cost of $0.2 will be fully incurred and all
remaining implementation issues will be completed by the end of June 1999.
The $1.9 million incurred cost of the MMS and the remaining $0.2 million of
costs to be incurred for the MMS have been and will be paid for out of the
Company's capital expenditures budget. Management believes that at the
completion of the MMS implementation at the end of June 1999, the Company's
business systems will be Year 2000 Compliant in the areas of purchasing,
inventory management, cost management, retail price management, warehouse
management, sales audit, and accounts payable.
The Company is currently in the process of upgrading to the next
version of its packaged software solution for payroll, human resources, general
ledger, budgeting, and cost allocation applications which are used pursuant to a
license from Lawson Associates, Inc. Upon completion of implementation of this
next version, the Company expects the business systems used in these departments
to be Year 2000 Compliant. The Company expects to have this upgrade
implementation, including applicable Year 2000 testing, completed by the end of
June 1999. The cost for the implementation of this next version of such
applications is $0.1 million which will be paid for out of the Company's capital
expenditures budget. The Company has not yet incurred any costs related to this
upgrade.
The Company manages its property, plant and equipment expenditures with
a packaged software solution provided by Para Research. The Company has already
implemented the most recent version of this application software, and based upon
limited testing, the Company expects these business systems to be Year 2000
Compliant. No additional costs were incurred or are expected to be incurred in
the future related to this application.
Store systems include the pharmacy operating system, the point-of-sale
systems that run the cash register related point-of-sale applications, and
non-pharmacy radio frequency applications for store ordering and shelf price
auditing. The Company's pharmacy operating system is licensed from Renlar, Inc.,
which has certified that its most recent version is Year 2000 Compliant. Of its
39 stores with pharmacies, 31 of the Company's stores are operating with the
Year 2000 Compliant version of the Renlar, Inc. system. The Company estimates
having the remaining eight stores operating with the Year 2000 Compliant version
of the Renlar, Inc. system by the end of June 1999. The cost incurred to
implement the most recent version of the Renlar, Inc. pharmacy system in the 31
pharmacies in which it has been installed was $0.1 million, which was primarily
related to purchasing new computer hardware to operate the Renlar, Inc. pharmacy
software, paid for out of the Company's capital expenditures budget. It is
estimated that less than $0.1 million will be incurred to implement the Renlar,
Inc. pharmacy system in the remaining eight pharmacy locations. Based upon
ongoing testing and certifications from the software licensors, management
believes that the Company's software applications with respect to cash register
related point-of-sale systems are Year 2000 Compliant. However, the Company will
be required to upgrade the computer hardware at a majority of its store
locations in order to operate the Year 2000 Compliant point-of-sale software in
the stores. The Company estimates incurring a cost of $0.2 million to upgrade
this hardware and anticipates having the upgraded hardware and Year 2000
Compliant software installed at all of the Company's stores by the end of July
1999. In addition, the Company estimates incurring a cost of $0.1 million to
upgrade the software related to its non-pharmacy radio frequency applications
which will be incurred as a normal operating cost. No additional hardware
purchases or modifications are anticipated to upgrade these radio frequency
applications in order for them to be Year 2000 Compliant.
Finally, the Company is in the process of evaluating the remaining
internally developed software applications for Year 2000 Compliance and
estimates that the required modifications to those solutions will be completed
by September 1999. These internally developed software applications provide
functionality in the areas of inventory returns to vendors and advertising. The
cost of making the required modifications to these programs is estimated by the
Company to be $0.2 million and will be incurred as normal cost of operations as
the work is completed through the end of September 1999.
In summary, the Company estimates that a minimum of $0.9 million of
future costs will be required to be incurred to achieve Year 2000 Compliance,
including: $0.2 million for the remaining modifications of the JDA MMS; $0.1
million for the upgrade of the Lawson Associates, Inc. packaged software
applications; $0.1 million for the implementation of the Renlar, Inc. pharmacy
system; $0.2 million for the acquisition of hardware to be installed in the
Company's store to run the Year 2000 Compliant point-of-sale applications; $0.1
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million for the modifications to the store radio frequency software
applications; and $0.2 million for remediation of the remaining internally
developed software applications. These costs will be incurred as part of the
Company's capital expenditures budget or as normal operating expenses as
discussed above.
In addition, the Company relies upon various third parties for
merchandise and services. Interruption of supplier operations, due to their lack
of Year 2000 Compliance could significantly affect the Company's operations,
particularly if the Company is unable to acquire merchandise for sale in its
stores or is unable to obtain services needed to operate its stores. The Company
has surveyed its third party suppliers of merchandise and services and is in the
process of evaluating their efforts toward achieving Year 2000 Compliance and,
if necessary, to define appropriate contingency plans. The Company expects to
have the evaluation of its third party suppliers' Year 2000 Compliance completed
by approximately August 1999 and certain contingency plans in place by
approximately October 1999. Various contingency plans could include
identification of alternate third party suppliers and accumulation of inventory
to ensure that merchandise is available for sale in its stores. The evaluations
of third party suppliers are a means to ensure the continued flow of merchandise
and services to the Company, but cannot eliminate the potential for disruption
due to lack of Year 2000 Compliance by a third party supplier.
The Company's evaluation of Year 2000 Compliance, both of its internal
systems and of its suppliers, is an ongoing process. Due to the uncertainty of
Year 2000 Compliance by the Company's third party suppliers as noted above, the
Company is establishing applicable contingency plans, which it believes will
appropriately address Year 2000 Compliance. However, no assurance can be given
that such contingency plans will address all potential Year 2000 Compliance
failures.
CERTAIN RISKS
The Company is subject to certain risks, including:
"FREEDOM OF CHOICE" AND "ANY WILLING PROVIDER" LEGISLATION
In July 1994, New Jersey adopted "Freedom of Choice" legislation that
requires Third-Party Plans to allow their customers to purchase prescription
drugs from the provider of their choice as long as the provider meets uniformly
established requirements, and "Any Willing Provider" legislation that requires
each Third-Party Plan that has entered into an agreement with a prescription
provider to permit other prescription providers to enter into similar
agreements. If this legislation were repealed, larger national drugstore chains
could enter into exclusive contracts with Third-Party Plans, which could reduce
the Company's sales of prescriptions and potentially non-prescription items as
well. In addition, since none of the states surrounding New Jersey (other than
Delaware) has enacted similar legislation, the Company may be at a disadvantage
if it chooses to expand outside of New Jersey.
GOVERNMENT REGULATION AND REIMBURSEMENT PROGRAMS
The Company is subject to numerous federal, state, and local licensing
and registration regulations with respect to, among other things, its pharmacy
operations. Violations of any such regulations could result in various
penalties, including suspension or revocation of the Company's licenses or
registrations or monetary fines, which could have a material adverse effect on
the Company's financial condition and results of operations.
Federal and New Jersey law requires the Company's pharmacists to offer
free counseling to customers about their medication. In addition, the Company's
pharmacists are required to conduct a prospective drug review before any new
prescriptions are dispensed, and may conduct a similar review prior to refilling
any prescriptions. New Jersey also regulates the dispensing of over-the-counter
controlled dangerous substances. These requirements could result in increased
costs to the Company.
MEDICAID AND MEDICARE
A portion of the Company's services are reimbursed by government
sponsored programs such as Medicaid and Medicare, with the remainder being
reimbursed by individual patients or Third-Party Plans. If the Company
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were to fail to comply with reimbursement regulations, or if such reimbursement
programs were modified, the Company's business could be adversely affected. The
Company is also subject to laws prohibiting the submission of false or
fraudulent claims and certain financial relationships between health care
providers that are intended to induce the referral of patients, or the
recommendations of particular items or services. Violation of these laws could
result in loss of licensure, civil and criminal penalties, and exclusion from
federal health care programs.
EMPLOYMENT REGULATION
The Company is subject to employment laws governing minimum wage
requirements, overtime and working conditions. An increase in the minimum wage
rate, employee benefit costs, or other costs associated with employees could
adversely affect the Company.
POTENTIAL GROWTH AND EXPANSION
The Company has grown in recent years by opening new stores, remodeling
and relocating existing stores and refining the product mix in existing stores.
The ability of the Company to continue to grow in the future will depend on
factors including existing and emerging competition, the availability of working
capital to support growth, the Company's ability to manage costs and maintain
margins in the face of pricing pressures, and the ability to recruit and train
additional qualified personnel. New stores that the Company opens may not be
profitable.
RESTRICTIONS ON THE COMPANY
Both the Indenture governing the Senior Notes and the Facility impose
on the Company certain requirements and restriction, such as a requirement that
the Company maintain certain financial ratios and satisfy certain financial
tests, limitations on capital expenditures, and restrictions on the ability of
the Company to incur debt, pay dividends, or take certain other corporate
actions. These limitations may restrict the Company's ability to pursue its
business strategies.
COMPETITION
The industries in which the Company operates are highly competitive.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
The Company uses various trade names, service marks and trademarks,
including "Drug Fair" and "Cost Cutters," in the conduct of its business. A
third party registered the service mark "Cost Cutters," but does not currently
operate in the Company's market areas. If such third party commences operations
in the Company's geographic market areas or licenses the use of the name to a
third party, the Company could be required to stop using the name "Cost
Cutters." In addition, any of the Company's other trade names, service marks or
trademarks could be challenged or invalidated in the future.
ECONOMIC CONDITIONS AND REGIONAL CONCENTRATION
All of the Company's stores are located in northern and central New
Jersey. As a result, the Company is sensitive to economic, competitive, and
regulatory conditions in that region.
LEASE RENEWALS ON THE COMPANY'S STORES
All of the Company's stores are leased. Although the Company has
historically been successful in renewing its most important store leases when
they have expired, there can be no assurance that the Company will continue to
be able to do so.
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LEVERAGE
In connection with the Company's issuance of the Senior Notes, the
Company incurred a significant amount of indebtedness and, as a result, the
Company is highly leveraged. The Company is permitted to incur substantial
additional indebtedness in the future, subject to certain limitations contained
in the Indenture governing the Senior Notes.
CONTROLLING STOCKHOLDERS
The Holding Company owns all of the outstanding capital stock of the
Company. The existing stockholders of the Holding Company, which include the
Company's President and Chief Executive Officer, certain entities affiliated
with the other directors of the Company, and other officers and employees of the
Company, own all of the outstanding common stock of the Holding Company. These
stockholders have the power to appoint new management and approve any action
requiring the approval of the Company's stockholders, including adopting
amendments to the Company's charter and approving mergers or sales of
substantially all of the Company's assets.
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends upon the efforts, abilities and
expertise of its executive officers and other key employees, including its Chief
Executive Officer and President. The loss of the services of any key employees
could have a material adverse effect on the Company's financial condition and
results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Neither the Company nor the Holding Company engages in trading market
risk sensitive instruments or purchases hedging instruments or "other than
trading" instruments that are likely to expose the Company or the Holding
Company to market risk, whether interest rate, foreign currency exchange,
commodity price or equity price risk. Neither the Company nor the Holding
Company has purchased options or entered into swaps or forward or futures
contracts. The ability of the Company and the Holding Company (as guarantor) to
make periodic interest payments on the Senior Notes, at a fixed rate of 10 1/4%,
is not directly affected by fluctuations in the market. The Company's primary
market risk exposure is that of interest rate risk on borrowings under the
Facility, which are subject to interest rates based either on the lender's prime
rate or London Interbank Offered Rate ("LIBOR"), and a change in the applicable
interest rate would affect the rate at which the Company could borrow funds.
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PART II - - OTHER INFORMATION
ITEM 4. OTHER INFORMATION
None.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule of Community Distributors,
Inc.
27.2 Financial Data Schedule of CDI Group, Inc.
(b) No Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended April 24, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrants duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized.
COMMUNITY DISTRIBUTORS, INC.
June 8, 1999 By: /S/ TODD H. PLUYMERS
-----------------------------------------
Todd H. Pluymers,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
CDI GROUP, INC.
June 8, 1999 By: /S/ TODD H. PLUYMERS
---------------------------------------
Todd H. Pluymers,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
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