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Index to Exhibits is on Page 12
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended June 30, 1998 Commission File #1-11955
=================================================================
=================================================================
GUEST SUPPLY, INC.
(Exact name of registrant as specified in its charter)
State of New Jersey 22-2320483
------------------------------- -----------------------
(State or other jurisdiction of (Identification number)
incorporation or organization)
4301 U.S. Highway One 08852-0902
Monmouth Junction, New Jersey ----------
- ---------------------------------------- (Zip Code)
(Address of principal executive offices)
Registrants telephone number and area code 609-514-9696
------------
=================================================================
=================================================================
Indicate by check mark whether the registrant (1) has filed all
reports 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
------- -------
The number of shares of common stock, without par value,
outstanding as of June 30, 1998 was 6,664,978 shares.
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Page 2
Part 1
Guest Supply, Inc. and Subsidiaries
Consolidated Balance Sheets
=================================================================
Dollars in Thousands
June 30, September 30,
1998 1997*
_____________ _____________
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,587 $ 4,152
Accounts receivable 32,693 30,429
Inventories:
Raw materials 8,535 7,706
Finished goods 32,550 26,970
Deferred income taxes 1,967 2,067
Prepaid expenses and other
current assets 2,556 1,732
- ------------------------------------------------------------------
Total current assets 80,888 73,056
Property and equipment 33,177 33,141
Other assets 1,288 1,312
Excess of cost over net assets acquired 4,883 5,160
- ------------------------------------------------------------------
$120,236 $112,669
==================================================================
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 35,008 $ 32,493
Current maturities of long-term debt 937
- ------------------------------------------------------------------
Total current liabilities 35,008 33,430
==================================================================
Long-term debt 28,681 27,617
Deferred income taxes 5,253 5,025
- ------------------------------------------------------------------
Total long-term liabilities 33,934 32,642
==================================================================
Commitments and contingencies
Shareholders' equity:
Preferred stock - without par value;
authorized 1,000,000 shares,
outstanding none
Common stock - without par value;
stated value $0.10; authorized
20,000,000 shares, issued and
outstanding 6,664,978 shares at
June 30, 1998 and 6,190,307 at
September 30, 1997 594 546
Additional paid-in capital 38,166 35,336
Retained earnings 12,402 10,745
Cumulative foreign currency
translation adjustments 132 (30)
- ------------------------------------------------------------------
Total shareholders' equity 51,294 46,597
- ------------------------------------------------------------------
$120,236 $112,669
==================================================================
* From audited financial statements
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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Page 3
Guest Supply, Inc. and Subsidiaries
Consolidated Statements of Operations
=================================================================
In Thousands
except per share amounts
(Unaudited)
Nine Months Ended Three Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
Sales $166,545 $144,514 $ 60,986 $ 52,571
Cost of sales 133,469 114,776 48,921 40,827
- -----------------------------------------------------------------
Gross profit 33,076 29,738 12,065 11,744
Selling, general &
administrative expenses 28,701 25,529 10,173 8,526
- -----------------------------------------------------------------
Operating income 4,375 4,209 1,892 3,218
Interest and other income 65 35 30 8
Interest expense 1,718 1,566 543 512
- -----------------------------------------------------------------
Income before income taxes 2,722 2,678 1,379 2,714
Income tax expense 1,065 1,160 510 1,096
- -----------------------------------------------------------------
Net income $ 1,657 $ 1,518 $ 869 $ 1,618
=================================================================
Earnings per share:
Basic $ 0.26 $ 0.25 $ 0.13 $ 0.26
=================================================================
Diluted $ 0.22 $ 0.22 $ 0.12 $ 0.23
=================================================================
Weighted average number
of common shares
Basic 6,431 6,170 6,624 6,167
=================================================================
Diluted 7,382 6,931 7,498 7,160
=================================================================
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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Page 4
Guest Supply, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
=================================================================
In Thousands
(Unaudited)
Nine Months Ended
June 30,
--------------------
1998 1997
--------- --------
Cash flows from operating activities:
Net income $ 1,657 $ 1,518
- -----------------------------------------------------------------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,317 2,951
Provision for losses on accounts
receivable 364 729
Gain on sale of fixed assets (138)
Deferred income tax expense 328 432
Changes in assets and liabilities:
Increase in accounts receivable (2,628) (1,679)
(Increase) decrease in inventories (6,409) 442
Increase in prepaid expenses and
other current assets (824) (298)
Increase in other assets (43) (14)
Increase in accounts payable and
accrued expenses 2,515 830
- -----------------------------------------------------------------
Net cash provided by (used in)
operating activities (1,723) 4,773
- -----------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (3,076) (5,316)
Decrease in other assets 67
Proceeds from sale of fixed assets 168
- -----------------------------------------------------------------
Net cash used in investing activities (3,009) (5,148)
- -----------------------------------------------------------------
Cash flows from financing activities:
Proceeds from revolving credit agreement 42,678 37,743
Repayment on revolving credit agreement (56,614) (34,964)
Proceeds from issuance of senior
note payable 25,000
Repayment of long-term debt (10,937) (2,923)
Proceeds from issuance of common stock 2,878 187
- -----------------------------------------------------------------
Net cash provided by
financing activities 3,005 43
Foreign currency translation adjustments 162 79
- -----------------------------------------------------------------
Net decrease in cash and cash equivalents (1,565) (253)
Cash and cash equivalents at
beginning of period 4,152 2,591
- -----------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,587 $ 2,338
=================================================================
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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Page 5
Note 1: Basis of Presentation
The unaudited consolidated condensed financial statements have
been prepared from the books and records of Guest Supply, Inc.
and subsidiaries (the Company) in accordance with generally
accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal and recurring
adjustments) considered necessary for a fair presentation have
been included. It is suggested that the consolidated condensed
financial statements be read in conjunction with the audited
consolidated financial statements and notes thereto for the year
ended September 30, 1997 included in the Company's annual report
on Form 10-K. Interim results are not necessarily indicative of
the results that may be expected for the full year.
Note 2: Earnings Per Common Share
At December 31, 1997, the Company adopted Statement of Financial
Standards (SFAS) No. 128 "Earnings per Share". Under the new
requirements, primary earnings per share is replaced by a new
measure called basic earnings per share which excludes common
stock equivalents. All prior periods have been restated to
reflect this change.
Note 3: Long-Term Debt
On December 3, 1997, the Company completed a Private Placement in
the amount of $25.0 million of unsecured senior notes with fixed
interest rates ranging from 6.70% to 7.06%. These notes have
maturities ranging from fiscal years 2000 to 2010. Concurrently
with the issuance of the notes, the Company entered into a credit
agreement with two banks for a five-year $15.0 million unsecured
revolving credit facility. Availability under the new facility
is based upon agreed levels of eligible accounts receivable and
bears interest at a rate equal to LIBOR plus .85% or the bank's
prime rate, as selected by the Company. These loans are subject
to certain financial covenants. The proceeds from the notes and
credit facility were used to repay the outstanding balance under
the existing credit facility and term notes.
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Page 6
GUEST SUPPLY, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
=================================================================
Dollars in Thousands
NINE MONTHS ENDED JUNE 30, 1998 VS. NINE MONTHS ENDED JUNE 30, 1997
- -------------------------------------------------------------------
Sales for the nine months ended June 30, 1998 increased by
$22,031 or 15.2% to $166,545 from $144,514 for the nine months
ended June 30, 1997. Revenues generated from our hotel customers
increased $25,994 or 21.0% to $149,630. The increase in sales to
hotels is the result of the addition of new customers, the sale
of additional products to existing customers and the continued
expansion of the Company's product line. New customers were
added by the direct sales force in existing sales territories and
by new salespeople in new territories. Both additional hotels and
product categories were added through new or expanded agreements
with management companies and hotel corporations.
Sales to consumer products companies and retailers were $16,915
for the nine months ended June 30, 1998 compared to $20,878 for
the nine months ended June 30, 1997. The decrease of $3,963 or
19.0% was a result of an 11.6% decline in sales to an existing
customer in addition to the expiration of a contract with another
customer during the third quarter of fiscal 1997. During the
first quarter of fiscal 1998, a major amount of time was devoted
to the development and scale-up of new formulas for a major
customer that resulted in reduced production rates and margins.
In addition, one of their product lines historically produced by
the Company was allocated to another manufacturer, but plans are
to replace this business with higher volume of another product
line that we currently produce.
Gross profit for the nine months ended June 30, 1998 was $33,076
or 19.9% of sales compared to $29,738 or 20.6% of sales for the
nine months ended June 30, 1997. Excluding a charge to cost of
sales in the second quarter 1997 of $2,187 to write-off damaged,
obsolete and substandard inventory, gross profit increased by
$1,151 or 3.6% to $33,076 compared to $31,925 for the prior
period. The decrease in gross profit as a percentage of sales
was due to lower sales to consumer products companies and the
start-up costs associated with new formulas at lower margins for
a major contract manufacturing customer.
Selling, general and administrative expenses were $28,701 or
17.2% of sales for the nine months ended June 30, 1998 compared
to $25,529 or 17.7% of sales for the nine months ended June 30,
1997. The increase of $3,172 or 12.4% was due primarily to an
increase in payroll and payroll related costs and delivery
expense associated with the Company's hotel sales growth.
Net interest expense was $1,653 for the nine months ended June
30, 1998 compared to $1,531 for the nine months ended June 30,
1997.
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Page 7
GUEST SUPPLY, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
=================================================================
Dollars in Thousands
THREE MONTHS ENDED JUNE 30, 1998 VS. THREE MONTHS ENDED JUNE 30, 1997
- ---------------------------------------------------------------------
Sales for the three months ended June 30, 1998 increased by
$8,415 or 16.0% to $60,986 from $52,571 for the three months
ended June 30, 1997. Revenues generated from our hotel customers
increased $9,771 or 20.6% to $57,111. The increase in sales to
hotels is the result of the addition of new customers, the sale
of additional products to existing customers and the continued
expansion of the Company's product line. New customers were
added by the direct sales force in existing sales territories and
by new salespeople in new territories. Hotel customers and
additional product categories were also added through new and
expanded agreements with management companies and hotel
corporations.
Sales to consumer products companies and retailers were $3,875
for the three months ended June 30, 1998 compared to $5,231 for
the three months ended June 30, 1997. The decline of $1,356 or
25.9% was a result of a decrease in sales to an existing contract
customer and the expiration of a contract with another customer
during the third quarter of 1997.
Gross profit for the three months ended June 30, 1998 was $12,065
or 19.8% of sales compared to $11,744 or 22.3% of sales for the
three months ended June 30, 1997. The decrease in gross profit
as a percentage of sales was principally due to a change in
pricing and product mix with a major contract manufacturing
customer.
Selling, general and administrative expenses were $10,173 or
16.7% of sales for the three months ended June 30, 1998 compared
to $8,526 or 16.2% of sales for the three months ended June 30,
1997. The increase of $1,647 or 19.3% was due primarily to an
increase in payroll and payroll related costs and delivery
expense associated with the Company's hotel sales growth. The
increase as a percentage of sales was primarily the result of
lower sales to consumer product companies and start-up costs
relating to opening of a new distribution center in Hayward, CA.
Net interest expense was $513 for the three months ended June 30,
1998 compared to $504 for the three months ended June 30, 1997.
Income tax expense was $510 for the three months ended June 30,
1998 compared with income tax expense of $1,096 for the prior
period. This decrease was primarily the result of a decrease in
pretax income of $1,335 for the three months ended June 30, 1998
as compared to the prior year.
<PAGE>
Page 8
GUEST SUPPLY, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
=================================================================
continued
Liquidity and Capital Resources at June 30, 1998
- ------------------------------------------------
At June 30, 1998, the Company had $45,880 of working capital
compared to $39,626 at September 30, 1997. The increase of
$6,254 is primarily the result of an increase in accounts
receivable and inventory of $2,264 and $6,409, respectively,
offset by an increase in current liabilities of $1,578.
On December 3, 1997, the Company completed a Private Placement in
the amount of $25.0 million of unsecured senior notes with fixed
interest rates ranging from 6.70% to 7.06%. These notes have
maturities ranging from fiscal years 2000 to 2010. Concurrently
with the issuance of the notes, the Company entered into a credit
agreement with two banks for a five-year $15.0 million unsecured
revolving credit facility. Availability under the new facility
is based upon agreed levels of eligible accounts receivable and
bears interest at a rate equal to LIBOR plus .85% or the bank's
prime rate, as selected by the Company. These loans are subject
to certain financial covenants. The proceeds from the notes and
credit facility were used to repay the outstanding balance under
the existing credit facility and term notes.
The Company believes that the amount available under its
revolving credit facility together with the cash flow from
operations will be sufficient to meet the Company's short-term
working capital requirements and identifiable long-term capital
needs. The Company also believes that, if necessary, additional
financing will be available to it on commercially reasonable
terms.
Recently Issued Accounting Standards
- ------------------------------------
In June 1997, the Financial Accounting Standards Board released
Statement No. 130, "Reporting Comprehensive Income" and Statement
No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Both statements become effective for fiscal years
beginning after December 15, 1997 with early adoption permitted.
These statements require disclosure of certain components of
changes in equity and certain information about operating
segments and geographic areas of operation. Management believes
that these statements will not have any effect on the results of
operations or financial position of the Company.
Year 2000 Compliance
- --------------------
The Company recognizes that the arrival of the Year 200 presents
a challenge to the ability of all systems to properly recognize
and process date-sensitive information relative to the Year 2000
and beyond. Accordingly, the Company has been evaluating and
adjusting all date-sensitive systems and equipment for compliance
with the Year 2000 and anticipates completing all remaining
conversions during fiscal 1999.
<PAGE>
Page 9
GUEST SUPPLY, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
=================================================================
continued
Year 2000 Compliance, continued
- -------------------------------
In addition, the Company is in the process of contacting its
major suppliers and vendors to ensure their awareness of the Year
2000, however, there can be no guarantee that the systems of
other companies will be converted in a timely manner or that
failure to convert by another company would not have a material
impact on the Company.
The cost of conversions is not anticipated to be material to the
Company's financial position, results of operations or cash
flows.
Cautionary Statement
- --------------------
This quarterly report on Form 10-Q may contain forward-looking
information about the Company. The Company is hereby setting
forth statements identifying important factors that may cause the
Company's actual results to differ materially from those set
forth in any forward-looking statements made by the Company.
Some of the most significant factors include an unanticipated
slowdown in the lodging industry or in contract manufacturing (or
both) resulting in lower demand for the Company's products,
unforeseen inefficiencies at the Company's manufacturing or
distribution facilities, an increase in price pressures or the
loss of, or a decline in sales to, a majr customer. Accordingly,
there can be no assurances that any anticipated future results
will be achieved.
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Page 10
GUEST SUPPLY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
=================================================================
Item 6: Exhibits and Reports on Form 8-K
- -----------------------------------------
a) The exhibits filed as part of this report are listed on the
index to the exhibits.
b) No reports on Form 8-K have been filed during the three
month period ended June 30, 1998.
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Page 11
SIGNATURES
=================================================================
Pursuant to the requirements of the Securities Exchange Act of
1934. The Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
GUEST SUPPLY, INC.
Dated: 8/14/98 By:
----------------- -----------------------------------
Clifford W. Stanley
President & Chief Executive Officer
Dated: 8/14/98 By:
----------------- ------------------------------------
Paul Xenis
Vice President, Finance
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Page 12
INDEX TO EXHIBITS
=================================================================
Exhibit No. Description Page
- ----------- ----------------------------------- ----
27 Financial Data Schedule 13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,587
<SECURITIES> 0
<RECEIVABLES> 32,693
<ALLOWANCES> 0
<INVENTORY> 41,085
<CURRENT-ASSETS> 80,888
<PP&E> 58,081
<DEPRECIATION> (24,904)
<TOTAL-ASSETS> 120,236
<CURRENT-LIABILITIES> 35,008
<BONDS> 0
0
0
<COMMON> 594
<OTHER-SE> 50,700
<TOTAL-LIABILITY-AND-EQUITY> 120,236
<SALES> 166,545
<TOTAL-REVENUES> 166,545
<CGS> 133,469
<TOTAL-COSTS> 133,469
<OTHER-EXPENSES> 28,701
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,653
<INCOME-PRETAX> 2,722
<INCOME-TAX> 1,065
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,657
<EPS-PRIMARY> .26
<EPS-DILUTED> .22
</TABLE>
