SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from _______ to _______
Commission file number 1-11955
GUEST SUPPLY, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2320483
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4301 U.S. Highway One
Monmouth Junction, New Jersey 08852-0902
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 514-9696
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, without par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of class)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period as the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers, pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
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State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the stock was sold, or the
average bid and asked prices of such stock, as of a specified date within
60 days prior to the date of filing.
Aggregate market value as of
December 9, 1998 . . . . . . . . . . . . . . . . $69,561,528
Indicate the number of shares outstanding of each of the issuer's classes
of capital stock, as of the latest practicable date.
Common Stock, without par value, as of
December 9, 1998 . . . . . . . . . . . . . . . . . 6,309,238
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents, all or portions of which are incorporated
by reference herein and the Part of the Form 10-K into which the document
is incorporated: Part III incorporates information by reference from
portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders to be held on January 21, 1999.
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PART I
ITEM 1. BUSINESS.
General
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The Company operates principally as a manufacturer, packager and
distributor of personal care guest amenities, housekeeping supplies, room
accessories and textiles to the lodging industry. The Company also
manufactures and packages personal care products for major consumer
products and retail companies. Personal care guest amenity items include
shampoo, hair conditioner, soap, bath gel, hand and body lotion, mouthwash,
shoe care and sewing kits, shower caps, soap dishes and decorative
containers and trays. The Company has available more than 20 amenity items
in a variety of brands in Company-designed packaging options. Housekeeping
supplies for the lodging industry consist primarily of paper products,
cleaning chemicals and cleaning implements. Room accessories include such
items as wastebaskets, glassware, stationery, laundry bags, pens, shower
curtains and signs. Textiles include sheets, towels and bedding. In
total, the Company distributes more than 100 different product categories.
The products manufactured and packaged for its consumer products and retail
customers include health and beauty aid items such as shampoo, hair
conditioner, hand and body lotions, liquid soaps and bath additives.
The Company has pursued a strategy designed to enhance its leadership
position in the lodging supply industry by becoming a full-service company
with a nationwide network of Company-operated distribution centers which
provide prompt delivery to hotel properties. Each center consists of a
warehouse and sales office and is staffed by sales personnel who call on
customers to obtain orders and provide customer service.
The Company's amenity product lines consist of customized amenity
programs designed by the Company for hotel chains ("customized corporate
amenity programs") or for individual lodging establishments ("customized
individual amenity programs") and uncustomized amenities and accessories.
Customized corporate amenity programs consist of one or more items which
are presented in Company-designed packaging. This packaging displays the
corporate name or logo of the hotel chain or lodging establishment for
which the program is designed. Customized corporate amenity programs are
designed for hotel chains, such as Choice International, The Four Seasons,
Holiday Inns, Howard Johnson, Hyatt Hotels, Marriott Corporation, Ramada
and Wyndham Hotels and may consist of up to 20 amenity and accessory items.
In some cases, purchasing decisions for these programs are made by the
central buying organization for the chain, and in other cases, such
decisions are made by individual members or franchisees of the chain.
Customized individual amenity programs typically consist of six to 12
amenity and accessory items. Individual programs generally involve more
elaborate designing and packaging, in an attempt to accent the guest room
decor and the marketing image of the particular lodging establishment. The
Company has designed individual amenity programs for such lodging
establishments as The Waldorf-Astoria in New York, New York, The Atlantis
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in Paradise Island, Bahamas, The Hotel Monaco in San Francisco, California,
Trump Hotels in Atlantic City, New Jersey, and Foxwood Resort and Casino in
Mashantucket, Connecticut.
The Company sells amenities in uncustomized color coordinated packaging
under such brand names as Bath and Body Works, Jergens, Jhirmack
and Neutrogena. Some of these brand name products are also sold as part
of customized amenity programs. In addition, the Company markets its own
guest amenity lines under the "Heritage Collection,Botanicals,Institute
Swiss" and "Nautic" labels.
The Company's lodging industry customers consist of hotel chains
(including supply divisions), individual members or franchisees of hotel
chains, independent hotel properties, management companies and cruise ship
lines. The Company distributes its products to approximately 15,000
customers worldwide. The Company has supply agreements with each of the 10
largest lodging chains in the United States.
The Company's strategy is to increase its penetration of the lodging
industry at all levels and to become a "one-stop shopping" supplier to
lodging establishments. In order to increase operating efficiencies and
responsiveness to customer needs, the Company has become a more vertically
integrated supplier of customized and uncustomized amenity programs by
enhancing its design capability, expanding its distribution network and
increasing its manufacturing capabilities. In addition, the Company sells
disposable housekeeping products, room accessories and textiles in order to
provide a complete range of products to the lodging industry.
As part of this strategy, the Company, through its manufacturing
subsidiary Guest Packaging, Inc., manufactures and packages substantially
all of its liquid products such as shampoos, hair conditioners, hand and
body lotions and bath gels, as well as a portion of its bar soap
requirements. The Company's manufacturing operations allow the Company to
provide both the service and wide variety of products required by the
lodging industry. In addition, the Company utilizes its manufacturing
facility to compound, fill and package a variety of products used by
consumer product companies and retailers. These are principally health and
beauty aid items such as shampoo, hair conditioner, hand and body lotions,
liquid soaps and bath additives. In fiscal 1997, the Company completed a
program to expand its manufacturing facility and to increase its production
capability and capacity. See "Manufacturing, Packaging and Shipping"
below.
The Company's Breckenridge-Remy Co. ("Breckenridge") subsidiary (doing
business as Guest Distribution) also contributes to the Company's strategy
of vertical integration through an improved and expanded product line and
national distribution capability. In addition to personal care products
and room accessories, Breckenridge markets a line of paper products,
cleaning chemicals, glassware, housekeeping items and textiles.
Breckenridge's business includes a direct sales force and a network of 13
distribution centers. This distribution network provides the Company with
the ability to warehouse products in close proximity to the lodging
properties served by the Company. In addition, each distribution center is
staffed with a direct sales force who call on customers to obtain sales
orders and provide direct customer service. The Company currently has
approximately 120 sales consultants. Management believes that the
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Company's product line and distribution capability has provided improved
service to all of its customer groups.
Products
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The Company markets and sells a broad range of personal care,
housekeeping and disposable products for use in lodging establishments.
The Company's amenity product line consists of more than 20 different
products, including shampoo, hair conditioner, soap, bath gel, hand and
body lotion, mouthwash, shower caps, soap dishes, shoe shine and sewing
kits and decorative containers and trays. Six amenity products account for
a substantial majority of the Company's sales of customized and
uncustomized packaging options. The Company's housekeeping, room accessory
and textile product lines include paper products, cleaning chemicals,
cleaning implements, sheets, towels and other bed linens, and other
housekeeping items and accessories such as wastebaskets, glassware,
stationery, laundry bags, pens, shower curtains and signs. The Company
believes that its range of products for the lodging industry is one of the
most extensive available from a single source in the United States.
Customized amenity programs consist of one or more items which are
packaged and presented in Company designed bottles, boxes, tubes and
wrappings. The packaging and wrappings display the corporate name or logo
of the hotel chain or lodging establishment for which the program is
designed. Customized corporate amenity programs are designed for hotel
chains. Customized individual amenity programs typically consist of six to
12 amenity and accessory items. These programs generally involve more
elaborate design and packaging, in an attempt to accent the guest room
decor and the marketing image of the particular lodging establishment.
The sales price per room stay for an amenity program varies with the
number of items selected by the customer. Because customized corporate
amenity programs and uncustomized amenity programs also vary widely in the
number of items, the cost of such programs also vary widely.
The Company sells national brand name products, as well as generic and
the Company's own private label products and accessories. During the
fiscal year ended September 30, 1998, less than 10% of the Company's sales
were attributable to sales of national brand name products which include
Bath and Body Works(r), Jergens(r), Jhirmack(r) and Neutrogena(r).
Guest Supply also markets guest amenity programs under proprietary brand
names owned by the Company. These programs were designed by the Company as
an alternative to customized amenity programs with inventory available for
immediate delivery.
The Company has entered into arrangements with certain manufacturers of
national brand name products pursuant to which the Company has been granted
the exclusive right to market certain products to the lodging industry in
the United States. Certain of these manufacturers have reserved the right
to approve the design of the packaging of their products and to monitor
quality control with respect to the manufacturing and packaging processes.
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None of such exclusivity arrangements obligates the Company to purchase
products from any one supplier or to market any brand exclusively.
The Company believes that there are adequate alternative sources of
supply available for all products it currently distributes. Moreover, the
Company believes that its competitive success is dependent more on the
quality of the Company's services, design capability and the selection and
availability of products, than on the availability of any one particular
brand name product or group of products.
Design, Marketing and Sales
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In the view of the Company, an important aspect of its marketing
approach and competitive position is the capability of its professional
design staff to assist customers in designing customized packaging and in
the coordination and presentation of their amenity programs. In addition,
the Company believes that its position in the industry is in part
attributable to the Company's ability, on a single source basis, to design,
manufacture, package and distribute complete customized amenity programs
for its customers which meet the customers' corporate image, product and
budgetary requirements and which include brand name products with a
reputation for high quality and wide-spread consumer acceptance.
The design of amenity programs takes into account five essential
elements: packaging components (size, shape and type of container),
packaging graphics (colors and logos), brand identity (use of national or
generic brands), product mix (which amenity items to present) and
presentation method (tray, placemat, wicker basket or decorative tin). The
Company's design personnel, who include graphic, industrial and mechanical
artists and packaging engineers, are responsible for creating packages,
selecting colors and applying graphic designs to accent guest room decor
and for the production of finished engineering drawings and materials
specifications. The Company's design personnel consult directly with the
Company's customers on all aspects of the design of guest room amenities,
at times leading to unique and proprietary packaging and presentations of
amenity programs. The Company's design process can vary in length,
depending on the customer's needs and complexity of the program. Once a
design is accepted by the customer and a purchase order is received, the
initial shipment is typically made within 10-14 weeks and the balance of
the shipment is generally delivered over the next 12-24 months.
The Company employs direct sales personnel who consult regularly with
the Company's existing customers and solicit new customers. In addition,
the Company employs in-house sales people responsible for telemarketing
sales and customer service. Further, the senior management of the Company
devotes a substantial amount of time to sales activities, as well as to the
overall coordination of customers' amenity programs and the development of
new concepts to enhance the effectiveness of the programs. The Company
believes that prompt, professional and responsive customer service is an
important element in attracting new customers and satisfying existing ones.
In addition, the Company maintains regional distribution centers
throughout the United States. This distribution network consists of 13
regional warehouses and a central warehouse and distribution facility in
Sayreville, New Jersey. These distribution centers provide the Company<PAGE>
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with the ability to deliver manufactured and purchased products to the
lodging properties served by the Company throughout the United States. In
addition, each regional distribution center is staffed with route
salespersons who call on customers to obtain sales orders and provide
direct customer service. See "Item 2. Properties."
The Company attends most major trade conventions and exhibits its
product lines at such events.
At September 30, 1998, 1997 and 1996, one customer accounted for 9.1%,
20.1% and 22.2%, respectively, of the Company's total accounts receivable,
and 15.5%, 13.2% and 11.1%, respectively, of the Company's total sales in
1998, 1997 and 1996.
The Company's consolidated sales included approximately $5,814,000,
$5,789,000 and $5,750,000, respectively, by foreign subsidiaries for the
fiscal years ended September 30, 1998, September 30, 1997 and September 30,
1996. The Company currently has subsidiaries located in England, New
Zealand and Canada.
At September 30, 1998 and September 30, 1997, the Company had unfilled
orders for its products which aggregated approximately $12,145,000 and
$11,215,000, respectively. Most of the amount for fiscal 1998 is expected
to be shipped within the current fiscal year. Unfilled orders are not
necessarily an important indicator of total future sales, since a
substantial portion of the Company's revenues are attributable to sales of
disposable housekeeping products and accessories, uncustomized amenity
products and corporate amenity programs which are ordered for delivery on a
current basis and for which no significant unfilled orders exist. In
addition, certain orders are subject to further confirmation.
Substantially all of the Company's sales are to customers to whom the
Company extends credit. The Company's credit policy generally requires
payment in full within 30 days and allows discounts in certain cases for
early payment.
Manufacturing, Packaging and Shipping
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Most of the amenity products marketed and distributed by the Company are
sold in packaging and wrappings designed to customer specifications by the
Company and are customized with the name of the particular hotel, in the
case of customized individual amenity programs, or the corporate logo of
the lodging chain in the case of customized corporate amenity programs, and
also display the brand name of the product, where appropriate. In some
cases, the shapes of the containers are also designed specifically to the
customer's requirements. Packaging components include bottles, boxes,
bags, packets, tubes and various other containers that come in a wide range
of sizes and shapes.
The Company's manufacturing facility is located in Rahway, New Jersey.
This facility has approximately 68,000 square feet of production space.
The plant has 21 filling lines, including 10 highly automated lines which
the Company believes incorporate the most efficient technology presently
available. Each line is equipped to apply front, back, and full wrap
labels, and video jets for batch and date coding of each container. A
variety of reactors or compounding vessels with capacities ranging from 100
to 6,000 gallons are located at this facility as well as 249,000 gallons of
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liquid bulk storage vessels. The facility also includes an analytical and
development laboratory.
In fiscal 1997, the Company completed a program to expand its
manufacturing facility and to increase its production capability and
capacity. As part of this expansion project, 18,000 square feet of
manufacturing space was added to the Company's facility in Rahway, New
Jersey. Additional mixing and storage tanks were installed increasing
compounding capacity by more than 350%. The Company installed four new
high-speed filling lines which are highly automated and provide the Company
with the capacity and capability to manufacture retail size health and
beauty aid products in high volume.
In December 1996, the Company occupied a new, leased 226,000 square foot
warehouse facility in Sayreville, New Jersey, which consolidated all of the
Company's New Jersey warehousing facilities. The new facility was fully
operational by April 1, 1997. The Company believes that with the new
equipment and systems, it will be in a position to improve efficiency in
the production of high-quality health and beauty aid products thereby
providing the Company with what it believes will be a competitive
advantage. See "Item 2. Properties" below and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
below.
Currently, the Company compounds and fills substantially all of its
liquid products. Compounding involves the batch mixing of components such
as detergents, conditioners, dyes and fragrances in accordance with
proprietary formulas. Filling entails the transfer of finished products
from bulk to the unit of use containers in which they are distributed.
In addition, the Company utilizes its manufacturing facility to compound,
fill and package a variety of products used by consumer product companies
and retailers. These are principally health and beauty aid items such as
shampoo, hair conditioner, hand and body lotions, liquid soaps and bath
additives. In some instances the Company also formulates products for its
customers. The Company believes that these services, among others, are
attractive to these companies since most lack production expertise or the
costs of providing these functions in-house could be prohibitive.
The Company's other products such as soaps, shower caps, soap dishes,
shoe shine and sewing kits, toothpaste, toothbrushes, razors, shaving
creams, paper products, cleaning chemicals, cleaning implements, glassware
and other accessories are produced by independent manufacturers. Soaps are
manufactured in accordance with the Company's specifications, including
colors and fragrances, from materials furnished by suppliers selected by
the Company. Additionally, the Company manufactures a portion of its bar
soap requirements, which it sells to the lodging industry, at its facility
in Rahway, New Jersey.
The bottles and other packaging components for the Company's products
are manufactured by independent suppliers in accordance with the Company's
or the Company's customers' specifications. In certain instances, these
independent suppliers utilize equipment and molds owned by the Company. In
certain instances, the Company also utilizes the services of companies
which decorate the bottles and other packaging components prior to delivery
to the Company or to its contract packagers.
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The Company usually orders the component materials for its products in
bulk quantities directly from the manufacturers of such products for
delivery to its manufacturing facilities or to the facilities of the
Company's contract packagers. This procedure permits the Company to assure
adequate supplies of product components and to benefit from quantity
discounts and other economies of scale.
Substantially all of the Company's finished products are shipped to the
Company's warehouse facilities for later shipment to its customers. See
"Item 2. Properties" below. In the view of the Company, an important
aspect of its marketing approach and competitive position is its capacity
for localized distribution. The ability to store and distribute both
manufactured and purchased products in close proximity to the lodging
properties served by the Company is a service which the Company believes
will assist in providing improved service to its existing customer groups
and in attracting new customers.
Quality Control
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The Company believes that maintaining the highest standards of quality
in all aspects of its operations is an important aspect of its ability to
generate customer confidence and to maintain its competitive position. To
that end, the Company carries and markets only products that have a
reputation for quality and that meet the Company's own quality standards.
The Company sends its representatives from time to time to the facilities
of its suppliers to inspect and approve the manufacturing and packaging of
all products prior to acceptance by the Company for delivery to customers.
In addition, certain suppliers of materials to the Company also approve the
Company's manufacturing procedures and inspect the packaged products to
insure compliance with their own quality standards.
The Company has adopted strict quality assurance systems and procedures
which it regularly reviews and revises with a view to maintaining the
consistency of the quality of its products. The Company adheres to all
applicable filling and packaging regulations of the U.S. Food and Drug
Administration, as well as others which are not technically applicable to
the Company's operations.
Proprietary Rights
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Although the Company follows a policy of protecting its proprietary
rights to its products and designs to the full extent legally permissible,
it does not believe that its business as a whole is materially dependent
upon such protection. Such protection has significance primarily in the
Company's marketing efforts. The Company has received protection under
federal trademark and copyright laws for certain names used in its
business, including Guest Supply(r), Guest Distribution(r), L'avenie(r),
Guest Design(r), Institute Swiss(r), Whispermint(, Alliance(, Evergreen(,
Botanicals(, Nautic( and the Heritage Collection(. The Company, from time
to time, applies for copyright and design patent protection for the designs
of certain bottles and other packaging components designed by the Company.
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In addition, pursuant to arrangements with the producers of its
packaging components, the Company has obtained title to the molds which it
has developed for the production of certain bottles and other packaging
components. Many of these arrangements restrict these companies from using
the Company's molds for anyone other than the Company without the Company's
consent. The aggregate net book value of all molds owned by the Company at
September 30, 1998 was approximately $1,904,000.
Competition
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The business of supplying disposable products, amenities and accessories
to the lodging industry and of manufacturing and packaging personal care
products for consumer product and retail companies is highly competitive.
Important competitive factors include price, product range, distribution
capability and product quality and design. The Company competes with
companies which offer customized amenity programs and broad lines of
customized and uncustomized amenity and personal care products, as well as
large distributors of housekeeping and related products.
The Company believes that it can compete effectively with these
companies in view of the variety and quality of products it offers, the
scope and efficiency of customer services, its distribution capability and
price. In addition, the Company believes that its ability to offer
professional and sophisticated design assistance in formulating customized
amenity programs and products for customers enhances its competitive
position and distinguishes the Company from most of its competitors.
Personnel
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As of September 30, 1998, the Company had approximately 864 employees.
None of the Company's employees is covered by a collective bargaining
agreement, and the Company considers its relationship with its employees to
be excellent.
Executive Officers
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The current executive officers of the Company are as follows:
Age at
Name Position with the Company September 30, 1998
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Clifford W. Stanley President, Chief Executive
Officer and Chairman of the
Board of Directors 52
R. Eugene Biber Vice President - Operations 50
Teri E. Unsworth Vice President - Market
Development and Director 47
Paul T. Xenis Vice President - Finance
and Secretary 38
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Clifford W. Stanley has been President and Chief Executive Officer of
the Company since January 1988, a director of the Company since January
1987 and Chairman of the Board of Directors since August 1997. From April
1986 to January 1988, he was Executive Vice President and Chief Financial
Officer of the Company. Mr. Stanley joined the Company in August 1985 as
Vice President - Finance. From 1984 until joining the Company, Mr. Stanley
was Vice President and Chief Operating Officer for Transfer Print Foils,
Inc. (hot stamping foils). During the period from 1982 to 1984, he was
Vice President of Finance for the Permacel Division of Avery International.
From 1979 through 1982, Mr. Stanley was a Vice President of Johnson &
Johnson.
R. Eugene Biber has been Vice President - Operations of the Company
since 1997. Prior to joining the Company, Mr. Biber was Senior Vice
President at Dep Corporation from 1988 to 1995. Prior to 1988, Mr. Biber
worked for Richardson-Vicks and Procter & Gamble, where he was Director of
Manufacturing and Distribution for a hair-care division.
Teri E. Unsworth has been Vice President - Market Development since
joining the Company in May 1985 and a director of the Company since
November 1989. Prior thereto, Ms. Unsworth was employed by Vidal Sassoon,
Inc. as Director of Sales from 1979 to 1981, as Product Director from 1981
to 1983 and as Group Product Director from 1983 to 1985.
Paul T. Xenis has been Vice President - Finance since May 1994. From
April 1984 to May 1994, he was Corporate Controller of the Company. Prior
to joining the Company, Mr. Xenis was a senior accountant with KMG Main
Hurdman (now part of KPMG Peat Marwick LLP) from 1981 to 1984. Mr. Xenis
also serves as Secretary of the Company.
ITEM 2. PROPERTIES.
The Company's executive offices and principal operating facilities are
located in Monmouth Junction, New Jersey, where the Company leases
approximately 21,900 square feet of space in an office building. The lease
expires on December 15, 2006 and provides for three five-year renewal
options.
In connection with its manufacturing and packaging operations, the
Company currently leases a manufacturing facility in Rahway, New Jersey.
The manufacturing facility consists of approximately 68,000 square feet of
space. The lease for this facility expires in 2010. See "Item 1.
Business - Manufacturing, Packaging and Shipping" above. This lease may be
cancelled by the Company on 90 days' notice.
During fiscal 1997, the Company moved into a newly constructed 226,000
square foot distribution and warehouse facility designed to its
specifications in Sayreville, New Jersey. This new facility consolidated
all of the Company's then existing New Jersey warehousing facilities. The
lease for the facility expires in November 2006.
As part of its regional distribution strategy, the Company currently
also leases 13 regional warehouses. The warehouses range in size from
19,200 square feet to 60,000 square feet and are located in Ohio (three),
Michigan, Indiana, Texas, Florida, Illinois, Maryland, California (two),
Georgia and North Carolina. The leases for these warehouses have
expiration dates through 2003.
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ITEM 3. LEGAL PROCEEDINGS.
Effective December 3, 1997, the Company and Barry Igdaloff entered into
a Stockholders Agreement (the "Stockholders Agreement") pursuant to which
Mr. Igdaloff agreed to vote the shares of Common Stock controlled by him
for the election of the Company's nominees for director at last year's
Annual Meeting of Shareholders (the "1998 Meeting") and for the election of
the Company's nominees for director at the 1999 Annual Meeting of
Shareholders (the "1999 Meeting"). Pursuant to the Stockholders Agreement,
Mr. Igdaloff became a Class B director following the 1998 Meeting.
The Stockholders Agreement also provides that (i) until the 1999
Meeting, Mr. Igdaloff will not engage in or assist in any solicitation of
proxies relating to the Company not publicly supported by a resolution of a
majority of the current members of the Board of Directors, and (ii) Mr.
Igdaloff will not, in any event, nominate any individual for election as a
director of the Company or vote for any individual as a director of the
Company who is not nominated by a majority of the current members of the
Company's Board of Directors (a "Continuing Director Nominee") if the
election of such individual (and all other individuals who are not
Continuing Director Nominees) would result in less than a majority of the
directors of the Company being Continuing Director Nominees.
The Company has commenced an action in the New York Supreme Court, New
York County, seeking to compel Mr. Igdaloff to perform certain of the
foregoing obligations under the Stockholders Agreement.
From time to time, the Company is party to certain other claims, suits
and complaints which arise in the ordinary course of business. Currently,
there are no such claims, suits or complains which, in the opinion of
management, would have a material adverse effect on the Company's financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock trades on the New York Stock Exchange, Inc.
("NYSE") under the symbol GSY. The table below sets forth the high and low
closing prices during each of the last two fiscal years on the NYSE. The
approximate number of holders of the Company's common stock at September
30, 1998 was 456. No cash dividends have been declared on the common stock
since the Company was organized.
Market Price Range
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Year Ended September 30, 1998
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High Low
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First Quarter $15.625 $11.500
Second Quarter 15.187 10.187
Third Quarter 17.375 13.625
Fourth Quarter 19.250 9.250
Year Ended September 30, 1997
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High Low
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First Quarter $17.625 $11.875
Second Quarter 17.375 13.875
Third Quarter 14.500 8.750
Fourth Quarter 15.500 9.375
On December 9, 1998, the closing sales price for the Company's common
stock was $12.6875 per share.
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ITEM 6. SELECTED FINANCIAL DATA.
Years Ended September 30,
Dollars in thousands except per share amounts
- ---------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Sales $236,743 $200,917 $179,042 $159,450 $116,325
Gross Profit 47,718 42,825 37,998 37,365 30,751
Selling, General and
Administrative Expenses 39,669 34,043 30,919 28,409 24,858
Operating Income 8,049 8,782 7,079 8,956 5,893
Net Income 3,633 3,816 3,151 5,090 4,117
Working Capital 43,330 39,626 35,223 27,475 22,689
Total Assets 118,107 112,669 102,888 95,607 72,967
Total Long-Term Liabilities 30,996 32,642 28,292 22,866 16,778
Total Liabilities 66,122 66,072 60,485 56,498 39,722
Total Equity 51,985 46,597 42,403 39,109 33,245
Common Share Data
- -----------------
Diluted Earnings Per Share $0.51 $0.55 $0.45 $0.70 $0.58
Book Value Per Share $7.95 $7.53 $6.89 $6.36 $5.50
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997
- -----------------------------------
Sales for the year ended September 30, 1998 increased by 17.8% or $35.8
million to $236.7 million from $200.9 million for the year ended September
30, 1997. Revenues from hotel customers increased $39.7 million or 23.0%
to $212.2 million. This 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 and territories that were established
during fiscal 1998.
In July, 1998, a sales and distribution center was opened in Hayward,
California, increasing market share in that geographic area.
Hotel customers were also added through new or expanded agreements with
hotel management companies and hotel corporations.
Sales of additional products to existing hotel customers were achieved
by the direct sales force at individual properties and by national account
managers at hotel corporations. This increased penetration at existing
accounts can be attributed to sales management, sales training, territory
realignment and the use of the Company's catalog.
<PAGE>
Page 15
Sales to consumer product companies and retailers were $24.6 million in
1998 compared to $28.4 million in 1997. The decrease of $3.8 million or
13.6% was a result of a decline in sales to an existing long-term customer
and the expiration of a contract with another customer. During 1998, one
long-term customer accounted for substantially all of contract
manufacturing revenue. The Company has expanded its contract manufacturing
customer base for fiscal 1999 to include four divisions of two major
consumer products companies and two companies that market sun care
products. The Company is also in discussions with other potential clients
and expects growth in volume from existing customers. As a result of these
actions, the Company believes sales of contract manufacturing services will
increase in fiscal 1999.
Gross profit for the year ended September 30, 1998 was $47.7 million or
20.2% of sales compared to $42.8 million or 21.3% for the year ended
September 30, 1997. Excluding a cost of goods charge of $2.2 million in
fiscal 1997, which related to damaged and obsolete inventories identified
during the consolidation of the Company's warehouses, gross profit declined
from 22.4% of sales in fiscal 1997 to 20.2% in fiscal 1998. The decrease
in gross margin was a result of reduced volume, an unfavorable mix and a
formula change in contract manufacturing offset by an increase in hotel
supply gross margins.
With the addition of new customers in fiscal 1999, the Company believes
contract manufacturing gross margin will improve.
Selling, general and administrative expenses were $39.7 million or 16.8%
of sales for the year ended September 30, 1998 compared to $34.0 million or
16.9% for the prior year. The increase of $5.7 million was due primarily
to increased payroll and payroll related costs, delivery expenses, moving
warehouses to larger facilities and opening a new branch in Hayward,
California.
The effective tax rate decreased to 38.4% in fiscal 1998 from 43.2% in
fiscal 1997. The lower effective rate was the result of a focused tax
strategy designed to reduce, where applicable, the Company's tax burden.
Fiscal 1997 Compared to Fiscal 1996
- -----------------------------------
Sales for the year ended September 30, 1997 increased by 12.2% or $21.9
million to $200.9 million from $179.0 million for the year ended September
30, 1996. Revenues from hotel customers increased $19.5 million or 12.7%
to $172.5 million. 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 and territories that were established
during fiscal 1997. In February 1997, a sales and distribution center was
opened in Greensboro, North Carolina, increasing market share in that
geographic area. Hotel customers were also added through new or expanded
agreements with hotel management companies and hotel corporations. In
August 1997, the Company signed an agreement with Marriott International,
which increased the number of properties serviced from 225 to 950 and
expanded the product line to include room accessories in addition to
personal care amenities.
<PAGE>
Page 16
Sales of additional products to existing hotel customers were achieved
by the direct sales force at individual properties and by national account
managers at hotel corporations. This increased penetration at existing
accounts can be attributed to sales management, sales training, territory
realignment and the use of the Company's catalog.
Sales to consumer product companies and retailers were $28.4 million
compared to $26.0 million for the year ended September 30, 1996. The
increase of $2.4 million or 9.3%, came from an existing customer.
The Company discontinued manufacturing Procter & Gamble body wash
products during fiscal 1997, rather than during our 1998 second fiscal
quarter as originally anticipated. These products are now produced by
Procter & Gamble at one of its own facilities. During 1997, one long-term
customer accounted for substantially all of contract manufacturing revenue.
Gross profit for the year ended September 30, 1997 was $42.8 million or
21.3% of sales compared to $38.0 million or 21.2% for the year ended
September 30, 1996. The most significant single factor affecting gross
profit in fiscal 1997 was a charge to cost of sales in the amount of $2.2
million in the second quarter ended March 31, 1997. This charge was
primarily the result of damaged, obsolete and below-standard inventory
identified during the recent consolidation of the Company's seven New
Jersey warehouses to its new central distribution facility and an increase
to the Company's obsolescence reserve. Excluding the effects of this
charge, gross profit as a percentage of sales for the year ended September
30, 1997 totaled 22.4%. In addition, an increase in textile sales also
contributed to the decrease in gross profit as a percentage of sales as a
result of a lower gross profit rate associated with textiles compared to
the Company's other products. Also, the full year effect in fiscal 1997
of a pricing concession made to a major contract manufacturing customer in
late fiscal 1996 further reduced gross margin percent. Offsetting all of
these factors were improved manufacturing efficiencies, lower warehousing
cost in the new facilities and increased volume.
Selling, general and administrative expenses were $34.0 million or 16.9%
of sales for the year ended September 30, 1997 compared to $30.9 million or
17.3% for the prior year. The increase of $3.1 million was due primarily
to increased payroll and payroll related costs. The decrease in selling,
general and administrative costs as a percentage of sales was the result of
increased sales volume combined with the Company's cost containment
program.
The effective tax rate increased to 43.2% in fiscal 1997 from 41.3% in
fiscal 1996. The increase is primarily due to taxes incurred in foreign
jurisdictions.
Liquidity and Capital Resources
- -------------------------------
The Company had $43.3 million of working capital at September 30, 1998
compared to $39.6 million at September 30, 1997. This increase of $3.7
million is primarily the result of an increase in accounts receivable and
inventories of $6.9 million offset by an increase in current liabilities of
$1.7 million.
<PAGE>
Page 17
At September 30, 1998, the Company had 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. At September 30, 1998, the Company had outstanding $1.1 million
under its revolving credit facility bearing interest at a rate of 8.5% and
had an unused amount available of $13.9 million.
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 2003
to 2009. All of the Company's loans are subject to certain financial
covenants.
Capital expenditures totaled $4.1 million in 1998, compared to $6.9
million in 1997 and $4.3 million in 1996. In fiscal 1999, capital
expenditures of approximately $3.6 million are expected.
In fiscal 1997, the Board of Directors authorized the Company to
purchase up to 5% of its outstanding common stock. As of September 30,
1998, 135,800 shares at a cost of $1.4 million had been repurchased under
this program. Subsequent to September 30, 1998, the Company purchased
174,200 shares at a cost of $1.7 million completing its authorized
repurchase. In November 1998, the Board of Directors authorized the
repurchase of up to an additional 5% of its outstanding common stock, which
may be purchased in open market transactions or block purchases and depends
on many factors, including stock price, business developments, strategies
and opportunities and legal requirements.
The Company believes that the amount available under its new revolving
credit facility, together with the cash flow from operations, will be
sufficient to meet the Company's short-term working capital requirements
and its identifiable long-term capital needs. The Company also believes
that, if necessary, additional financing will be available on commercially
reasonable terms.
Year 2000 Readiness
- -------------------
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. As a result,
any of the Company's computer programs that have date sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000,
which, in turn, could result in system miscalculations or failures causing
disruptions in the operations of the Company and its suppliers and
customers.
The Company expects to complete its evaluation of all its information
technology ("IT") and non-IT systems by January 31, 1999. Many of the
software packages that the Company currently uses have been upgraded to be
Year 2000 compliant. Other software considered critical to the Company's
operations has been reviewed to determine the necessary changes needed to
be upgraded. All changes are expected to be completed by June 30, 1999.
As part of the Company's Year 2000 project, the Company has also
contacted its significant suppliers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate Year
2000 compliance issues. The Company has also begun to contact its large
<PAGE>
Page 18
customers where potential exposure exists to ascertain their readiness.
While the Company will continue to monitor its significant suppliers and
customers, there can be no assurances that their systems will be timely
converted or that failure to convert would not have a material adverse
effect on the Company and its operations.
Management estimates that based on the information known to date, the
cost to complete its remediation of its systems will not exceed $250,000.
The Company does not believe that its failure to resolve Year 2000
issues with respect to internal non-compliant systems will cause material
disruption in its operations. While the Company believes its Year 2000
project will adequately address its internal issues, failure of the
Company's suppliers and customers to timely remediate their Year 2000
issues may result in a material adverse effect on the Company and its
operations.
The Company has not, to date, developed a Year 2000 Contingency Plan.
It is the Company's goal to develop a contingency plan for all mission
critical systems by September 30, 1999.
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.
Forward Looking Information
- ---------------------------
This Annual Report 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 downturn in the lodging
industry resulting in lower demand for the Company's products, the unanticipated
loss of or decline in sales to a major customer, failure to secure new business
and unforeseen inefficiencies at the Company's manufacturing facility. In
addition, difficulties in completing remediation of Year 2000 issues by the
Company, its customers or suppliers may have a material adverse effect on the
Company and its operations. Accordingly, there can be no assurances that any
anticipated future results will be achieved.
<PAGE>
Page 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
GUEST SUPPLY, INC. AND SUBSIDIARIES
-----
Consolidated Financial Statements
September 30, 1998, 1997 and 1996
<PAGE>
Page 20
Index to Financial Statements
- -----------------------------
Page
Number
------
1. Financial Statements:
Independent Auditors' Report . . . . . . . . . . . . . . . . . . 21
Consolidated Balance Sheets - September 30, 1998 and 1997 . . . . 22
Consolidated Statements of Operations - Years Ended
September 30, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . 23
Consolidated Statements of Cash Flows -- Years Ended
September 30, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . 24
Consolidated Statements of Shareholders' Equity -
Years Ended September 30, 1998, 1997 and 1996 . . . . . . . . . . 25
Notes to Consolidated Financial Statements . . . . . . . . . . . . 26
2. Financial Statement Schedule:
II - Valuation and Qualifying Accounts . . . . . . . . . . . . . 34
All other schedules have been omitted because they are inapplicable or the
information is provided in the financial statements, including the notes
thereto.
<PAGE>
Page 21
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Guest Supply, Inc.:
We have audited the consolidated financial statements of Guest Supply, Inc.
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Guest
Supply, Inc. and subsidiaries as of September 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in
the three-year period ended September 30, 1998, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/KPMG Peat Marwick LLP
Short Hills, New Jersey
November 20, 1998
<PAGE>
Page 22
CONSOLIDATED BALANCE SHEETS
September 30,
Dollars In Thousands except share and per share amounts
1998 1997
- ---------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,558 $ 4,152
Accounts receivable, net of allowance
for doubtful accounts of
$543 - 1998 and $1,032 - 1997 34,054 30,429
Inventories 37,989 34,676
Deferred income taxes 1,373 2,067
Prepaid expenses and other current assets 2,482 1,732
- ---------------------------------------------------------------------------
Total current assets 78,456 73,056
Property and equipment, net of accumulated
depreciation and amortization 33,305 33,141
Other assets 1,555 1,312
Excess of cost over net assets acquired,
net of accumulated amortization of
$4,626 - 1998 and $4,257 - 1997 4,791 5,160
- ---------------------------------------------------------------------------
$118,107 $112,669
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 35,126 $ 32,493
Current maturities of long-term debt - 937
- ---------------------------------------------------------------------------
Total current liabilities 35,126 33,430
- ---------------------------------------------------------------------------
Long-term debt 26,126 27,617
Deferred income taxes 4,870 5,025
- ---------------------------------------------------------------------------
Total long-term liabilities 30,996 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 6,671,638
shares - 1998 and 6,190,307 shares - 1997 594 546
Additional paid-in capital 38,595 35,336
Retained earnings 14,378 10,745
Treasury stock - 135,800 common shares
in 1998, at cost (1,422) -
Cumulative foreign currency
translation adjustments (160) (30)
- ---------------------------------------------------------------------------
Total shareholders' equity 51,985 46,597
- ---------------------------------------------------------------------------
$118,107 $112,669
===========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Page 23
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30,
Dollars In Thousands except per share amounts
1998 1997 1996
- ---------------------------------------------------------------------------
Sales $236,743 $200,917 $179,042
Cost of sales 189,025 158,092 141,044
- ---------------------------------------------------------------------------
Gross profit 47,718 42,825 37,998
Selling, general and
administrative expenses 39,669 34,043 30,919
- ---------------------------------------------------------------------------
Operating income 8,049 8,782 7,079
Interest and other income 76 45 53
Interest expense (2,225) (2,110) (1,764)
- ---------------------------------------------------------------------------
Income before income taxes 5,900 6,717 5,368
Income tax expense 2,267 2,901 2,217
- ---------------------------------------------------------------------------
Net income $ 3,633 $ 3,816 $ 3,151
===========================================================================
Earnings per common share:
Basic $ 0.56 $ 0.62 $ 0.51
===========================================================================
Diluted $ 0.51 $ 0.55 $ 0.45
===========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Page 24
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30,
Dollars in Thousands 1998 1997 1996
- ---------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 3,633 $ 3,816 $ 3,151
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,302 3,888 3,345
Provision for losses on
accounts receivable 497 880 316
(Gain) loss on sale of
fixed assets 17 (172) -
Deferred income tax expense 539 1,195 1,321
Changes in assets and liabilities:
(Increase) decrease in
accounts receivable (4,122) (3,225) 263
Increase in inventories (3,313) (1,314) (5,093)
Decrease (increase) in prepaid
expenses and other current assets 962 90 (906)
Increase in other assets (28) (178) (37)
Increase (decrease) in accounts
payable and accrued expenses 2,633 4,217 (2,906)
- ---------------------------------------------------------------------------
Net cash provided by
(used in) operating activies 5,120 9,197 (546)
- ---------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (4,126) (6,881) (4,280)
Increase in other assets (215) (1,000) -
Proceeds from sale of fixed assets 12 202 -
- ---------------------------------------------------------------------------
Net cash used in investing activities (4,329) (7,679) (4,280)
- ---------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from revolving credit agreements 56,705 52,528 55,685
Repayment on revolving credit agreements (73,196) (48,945) (57,081)
Proceeds from issuance of long-term debt 25,000 - 10,500
Repayment of long-term debt (10,937) (3,874) (3,655)
Purchase of treasury stock (1,422) - -
Proceeds from issuance of common stock 1,595 253 121
- ---------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (2,255) (38) 5,570
- ---------------------------------------------------------------------------
Foreign currency translation adjustments (130) 81 22
- ---------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents (1,594) 1,561 766
Cash and cash equivalents at
beginning of year 4,152 2,591 1,825
- ---------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,558 $ 4,152 $ 2,591
===========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Page 25
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
Years Ended September 30,
Dollars in Thousands 1998 1997 1996
- ---------------------------------------------------------------------------
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest, net of capitalized interest $ 1,908 $ 2,099 $ 1,674
Income taxes, net of refunds $ 1,090 $ 928 $ 1,739
Supplemental schedule of non-cash financing and investing activities:
The Company received an income tax benefit on the exercise of certain of
its stock options in the amount of $1,712 in 1998 and $44 in 1997 which
benefit was credited to additional paid-in capital.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Cumulative
Foreign
Additional Currency
Dollars in Thousands, Number Paid-in Retained Treasury Translation
except share amounts of Shares Amount Capital Earnings Stock Adjustment
- ------------------------------------------------------------------------------
Balance,
September 30, 1995 6,146,335 $ 542 $34,922 $ 3,778 $ - $ (133)
Net income - - - 3,151 - -
Sales through employee
stock option
and purchase plans 9,740 1 120 - - -
Equity adjustments from
foreign currency
translation - - - - - 22
- --------------------------------------------------------------------------------
Balance,
September 30, 1996 6,156,075 543 35,042 6,929 - (111)
Net income - - - 3,816 - -
Sales through employee
stock option and
purchase plans 34,232 3 250 - - -
Tax benefit associated
with exercise of
stock options - - 44 - - -
Equity adjustments from
foreign currency
translation - - - - - 81
- --------------------------------------------------------------------------------
Balance,
September 30, 1997 6,190,307 546 35,336 10,745 - (30)
Net income - - - 3,633 - -
Sales through employee
stock option and
purchase plans 481,331 48 1,547 - - -
Tax benefit associated
with exercise of
stock options - - 1,712 - - -
Purchase of
treasury stock (135,800) - - - (1,422) -
Equity adjustments from
foreign currency
translation - - - - - (130)
- --------------------------------------------------------------------------------
Balance,
September 30, 1998 6,535,838 $ 594 $38,595 $ 14,378 $ (1,422) $ (160)
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Page 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands except share and per share amounts
BUSINESS DESCRIPTION The Company operates principally as a manufacturer,
packager and distributor of personal care guest amenities, housekeeping
supplies, room accessories and textiles to the lodging industry. The
Company also manufactures and packages products for major consumer products
and retail companies.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -
The consolidated financial statements include the accounts of Guest Supply,
Inc. and all of its subsidiaries ("the Company"), each of which is wholly
owned. All significant intercompany transactions and balances are
eliminated in consolidation.
Risks and Uncertainties - The Company's revenues are dependent on the
continued operation of its manufacturing facility and its various
distribution centers. The operation of these facilities involves many
risks, including the breakdown, failure or substandard performance of
equipment, natural disasters and the need to comply with directives of
governmental agencies. The occurrence of material operational
problems, including but not limited to the above events, may have a
material adverse effect on the productivity and profitability of a
particular facility or with respect to certain facilities, the Company as a
whole, during the period of such operational difficulty.
In addition, other factors may cause the Company's results to differ
materially from historic levels. Some of the most significant factors
include a downturn in the lodging industry resulting in lower demand for
the Company's products, the unanticipated loss of or decline in sales to a
major customer, pricing pressures, unforeseen inefficiencies at the
Company's manufacturing facility, and difficulties in completing
remediation of Year 2000 issues by the Company, its customers or
suppliers.
Foreign Currency Translation Assets and liabilities of the Company's
foreign subsidiaries are translated into US dollars at current exchange
rates, while revenues and expenses are translated at average exchange rates
during each reporting period. Adjustments resulting from translation of
financial statements are reported as a separate component of shareholders'
equity.
Use of Estimates - In conformity with generally accepted accounting
principles, the preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure 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.
Inventories - Inventories are stated at the lower of cost or market.
Cost is determined using the weighted-average and first-in, first-out
methods.
Property and Equipment - Property and equipment are carried at cost.
Depreciation and amortization is calculated for financial reporting
purposes using the straight-line method based on the estimated useful lives
of the assets as follows: buildings, 40 years; machinery and equipment, 3
to 15 years; furniture and fixtures, 3 to 8 years; computers, 3 to 10
years; and leasehold improvements, the shorter of the life of the lease or
the life of the asset. When assets are retired or otherwise disposed of,
the cost and accumulated depreciation are removed from the accounts and
any resulting gain or loss is recognized in income for the period. The
cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized.
Excess of Cost Over Net Assets Acquired - Excess of cost over net assets
acquired is being amortized using the straight-line method over 25 years.
The Company continually evaluates the amortization period of its intangible
assets. Estimates of useful lives are revised when circumstances or events
indicate that the original estimate is no longer appropriate.
Earnings Per Share - On October 1, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No.
128), which supercedes Accounting Principal Board Opinion No. 15, "Earnings
per Share" (APB No. 15), and requires companies to present basic and
2diluted earnings per share instead of primary and fully diluted earnings
per share as previously required. All earnings per share amounts have been
restated in accordance with SFAS No. 128. Basic earnings per share is
calculated based on the weighted average number of common shares
outstanding. Diluted earnings per share includes the dilutive effect
of stock options and warrants (unless anti-dilutive) and is adjusted, if
applicable, for the effect on net earnings of such transactions.
Financial Instruments The carrying values of financial instruments
(principally cash and cash equivalents, accounts receivable, certain other
assets, accounts payable and long-term debt) included in the Company's
consolidated balance sheets approximated their fair values at September 30,
1998 and 1997. Fair values were determined based on management's estimates
using the latest available market data.
Concentration of Credit Risk - Concentration of credit risk consists
principally of accounts receivable. At September 30, 1998, 1997 and 1996,
one customer accounted for 9.1%, 20.1% and 22.2%, respectively, of the
Company's total accounts receivable, and 15.5%, 13.2% and 11.1%,
respectively, of the Company's total sales in 1998, 1997 and 1996. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral or other security to
support the financial instruments with credit risk.
<PAGE>
Page 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Dollars in Thousands except share and per share amounts
Income Taxes - Income taxes are accounted for using the asset and
liability method. Deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to differences between
the financial statement carrying amount of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Statements of Cash Flows - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand and certificates of deposit with a
maturity at time of purchase of three months or less.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of -
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of the assets to the future net cash flows expected to
be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less the cost to sell.
Stock-Based Compensation - The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the quoted
market price at the date of the grant over the amount an employee must pay
to acquire the stock. Because the Company grants options at a price equal
to the market price of the stock at the date of grant, no compensation
expense is recorded. As required by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123), the Company discloses pro forma net income and earnings per share as
if the fair value method had been applied.
Stock Split - On October 24, 1995, the Company effected a three-for-two
stock split of its common stock in the form of a stock dividend. All share
and per share data have been restated to reflect the stock split.
INVENTORIES
1998 1997
===========================================================================
Raw materials $ 8,666 $ 7,706
Finished goods 29,323 26,970
- ---------------------------------------------------------------------------
$ 37,989 $ 34,676
- ---------------------------------------------------------------------------
Costs included in inventories are comprised of raw materials, direct labor
and overhead related to the manufacturing process.
PROPERTY AND EQUIPMENT
1998 1997
===========================================================================
Land, building and leasehold improvements $ 6,750 $ 5,880
Machinery and equipment 46,497 44,103
Furniture and fixtures 2,248 2,047
Computers 2,631 2,249
Construction in progress 958 726
- ---------------------------------------------------------------------------
59,084 55,005
Less accumulated depreciation and amortization 25,779 21,864
- ---------------------------------------------------------------------------
$ 33,305 $ 33,141
===========================================================================
Depreciation and amortization of property and equipment charged to income
was $3,934, $3,520 and $2,977 for the years ended September 30, 1998, 1997
and 1996, respectively.
<PAGE>
Page 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
INCOME TAXES
Income tax expense is comprised of the following:
1998 1997 1996
- ---------------------------------------------------------------------------
Federal - Current $ 1,334 $ 1,229 $ 828
- Deferred 893 1,133 960
- ---------------------------------------------------------------------------
Total Federal income taxes 2,227 2,362 1,788
- ---------------------------------------------------------------------------
State - Current 369 297 245
- Deferred (354) 158 184
- ---------------------------------------------------------------------------
Total state income taxes 15 455 429
- ---------------------------------------------------------------------------
Foreign 25 84 -
- ---------------------------------------------------------------------------
Total income tax provision $ 2,267 $ 2,901 $ 2,217
===========================================================================
The following is a reconciliation of Federal income tax expense computed
using the statutory rate of 34% to the Company's effective income tax rate:
1998 1997 1996
- ---------------------------------------------------------------------------
Computed "expected" income tax expense $ 2,006 $ 2,284 $ 1,825
Increase (reduction) in tax expense
resulting from:
State income taxes, net of Federal
income tax benefit (112) 300 283
Change in valuation allowance 350 - -
Nondeductible amortization of goodwill 125 125 125
Foreign 25 84 -
Adjustment to net deferred taxes for
change in effective state income
tax rate (165) - -
Other, net 38 108 (16)
- ---------------------------------------------------------------------------
$ 2,267 $ 2,901 $ 2,217
===========================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30, 1998
and 1997 are as follows:
1998 1997
Deferred tax assets:
Allowance for doubtful accounts $ 209 $ 409
Inventory obsolescence reserve and
uniform capitalization 980 1,206
Net operating loss carryforwards - states 940 260
Alternative minimum tax credit carryforwards 228 163
Other 184 192
- ---------------------------------------------------------------------------
Gross deferred tax assets 2,541 2,230
Less: valuation allowance (350) -
- ---------------------------------------------------------------------------
Net deferred tax assets 2,191 2,230
Deferred tax liability - principally excess
of tax over financial statement depreciation (5,688) (5,188)
- ---------------------------------------------------------------------------
Net deferred liability $ (3,497) $ (2,958)
===========================================================================
<PAGE>
Page 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company recorded a valuation allowance to reflect the estimated amount
of deferred tax assets which may not be realized due principally to the
expiration of net operating loss carryforwards for state income tax
purposes. The net change in the valuation allowance for the year ended
September 30, 1998 was an increase of $350.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of taxable income during the
periods in which those temporary differences become deductible. Based
upon the level of historical taxable income, projections for future taxable
income and the availability of tax planning strategies to prevent the tax
net operating loss carryforwards from expiring unused, management believes
that it is more likely than not that the deferred tax assets will be
realized. The amount of the deferred tax assets considered realizable,
however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
At September 30, 1998, the Company has net operating loss carryforwards
for state income tax purposes of approximately $15,672 which are available
to reduce future state income taxes, if any, through the year 2005. In
addition, the Company has alternative minimum tax credit carryforwards of
approximately $228 which are available to reduce future Federal regular
income taxes, if any, over an indefinite period.
LONG-TERM DEBT Long-term debt consists of the following at September 30,
1998 and 1997:
1998 1997
- ---------------------------------------------------------------------------
Revolving credit facility $ 1,126 $ 17,617
Series A senior notes payable; 7.06%;
due November, 2009 15,000 -
Series B senior notes payable; 6.95%;
due November, 2007 5,000 -
Series C senior notes payable; 6.70%;
due November, 2003 5,000 -
$5,000 five-year term note payable,
due in equal monthly payments of $83
through February 1999, interest at 6.45% - 1,416
$5,000 four-year term note payable,
due in equal monthly payments of $104
through February 1999, interest at 8.25% - 1,771
$10,500 seven-year term note payable,
due in equal monthly payments of $125
through November 2002, interest at 7.0% - 7,750
- ---------------------------------------------------------------------------
26,126 28,554
Less current maturities - 937
- ---------------------------------------------------------------------------
$ 26,126 $ 27,617
===========================================================================
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 2003
to 2009 and require semiannual principal payments in varying amounts
commencing in November 1999. 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
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
(8.5% at September 30, 1998), as selected by the Company. The proceeds
from the notes and credit facility were used to repay the outstanding
balance under the previous revolving credit facility and term notes. All of
the Company's loans are subject to certain financial covenants. The unused
amount available to the Company under the revolving credit facility as of
September 30, 1998 was $13,874.
Long-term debt at September 30, 1998 matures as follows:
1999 $ -
2000 1,111
2001 1,486
2002 3,376
2003 3,626
Thereafter 16,527
===========================================================================
<PAGE>
Page 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
LEASES The Company leases its office, warehouse facilities and vehicles
under long-term lease agreements. These leases are classified as operating
leases and expire in various years through fiscal 2007. Future minimum
lease payments under noncancelable operating leases as of September 30,
1998 are:
Operating
September 30, Leases
- ---------------------------------------------------------------------------
1999 $ 4,218
2000 3,541
2001 2,679
2002 2,067
2003 1,743
Thereafter 4,670
- ---------------------------------------------------------------------------
Total minimum lease payments $ 18,918
===========================================================================
Rent expense under operating leases was $4,737, $4,820 and $4,079 for the
years ended September 30, 1998, 1997 and 1996, respectively.
LITIGATION From time to time, the Company is a party to legal actions
arising in the ordinary course of business. Management believes that such
litigation and claims will be resolved without material effects on the
Company's consolidated financial statements taken as a whole.
EARNINGS PER SHARE Earnings per share is calculated as follows:
1998 1997 1996
- ---------------------------------------------------------------------------
BASIC EPS
Net earnings $ 3,633 $ 3,816 $ 3,151
===========================================================================
Weighted average common
shares outstanding 6,489,000 6,177,000 6,150,000
===========================================================================
Basic EPS $ 0.56 $ 0.62 $ 0.51
===========================================================================
DILUTED EPS
Net earnings $ 3,633 $ 3,816 $ 3,151
Effects of dilutive stock
options and warrants - - -
- ---------------------------------------------------------------------------
Adjusted net earnings $ 3,633 $ 3,816 $ 3,151
===========================================================================
Weighted average common
shares outstanding 6,489,000 6,177,000 6,150,000
Effects of dilutive stock
options and warrants 636,000 806,000 916,000
- ---------------------------------------------------------------------------
Weighted average common shares
outstanding assuming dilution 7,125,000 6,983,000 7,066,000
===========================================================================
Diluted EPS $ 0.51 $ 0.55 $ 0.45
===========================================================================
Options to purchase 86,000 shares of common stock at an average price of
$15.36 per share at September 30, 1998 and 1997 were anti-dilutive and are
not included in the calculations of diluted earnings per share because the
option exercise price was greater than the average market price of common
shares for each respective period. No options were anti-dilutive in fiscal
1996.
In fiscal 1997, the Board of Directors authorized the Company to purchase
up to 5% of its outstanding common stock. As of September 30, 1998, the
Company purchased 135,800 shares of common stock at prices ranging from
$9.25 to $11.375. Subsequent to September 30, 1998, the Company purchased
174,200 shares of common stock at prices ranging from $8.125 to $11.00,
completing its authorized repurchase. In November 1998, the Board of
Directors authorized the repurchase of up to an additional 5% of its
outstanding common stock, which may be purchased in open market
transactions or block purchases and depends on many factors, including
stock price, business developments, strategies and opportunities and legal
requirements.
<PAGE>
Page 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
STOCK INCENTIVE PLANS Under the stock option plans approved by the
Company's stockholders, key employees may be granted options to purchase
shares of common stock exercisable at prices not less than fair market
value at the date of grant. Options generally become exercisable 20% one
year from the date of grant, with an additional 20% exercisable each
succeeding year. The options generally expire ten years from the date of
grant.
In March 1996, the shareholders of the Company adopted the 1996 Long-Term
Incentive Plan. Under the plan, 400,000 shares of Common Stock are
available for issuance of awards. The Stock Option Committee is authorized
to grant a wide range of awards, including options, stock appreciation
rights, restricted stock, performance awards and other stock-based awards
to any employee or director.
Transactions relating to these stock option plans are summarized as
follows:
1998 1997 1996
================== =================== ==================
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------ ------------------- -----------------
Outstanding at
beginning of year 1,042,300 $ 6.31 1,171,300 $ 7.25 934,800 $ 5.26
Granted - - 48,000 11.38 241,000 15.03
Exercised (214,300) 3.00 (21,300) 6.27 (1,500) 2.67
Forfeited - - (155,700) 14.95 (3,000) 15.25
------------------ ------------------- ------------------
Outstanding at
end of year 828,000 $ 7.16 1,042,300 $ 6.31 1,171,300 $ 7.25
------------------ ------------------- ------------------
Exercisable at
year end 731,400 $ 6.38 858,650 $ 5.06 742,500 $ 4.86
================== =================== ==================
Weighted average
fair value of
options granted
during the year $ 6.51 $ 8.60
====== ======
<PAGE>
The fair value of each stock option granted during 1997 and 1996 is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions for 1997 and 1996: expected
life of 7.0 years; expected volatility of 45%; expected dividend yield of
0%; and risk-free interest rate of 6.5%.
Options Outstanding Options Exercisable
===================== =====================
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exericse Prices Outstanding Life Price Exercisable Price
- ---------------------------------------------------------------------------
$ 2.67 - $ 3.75 193,250 1.8 years $ 2.98 193,250 $ 2.98
4.67 - 5.75 269,250 4.4 years 4.68 269,250 4.68
9.75 - 11.50 279,500 6.1 years 9.91 237,100 9.87
15.25 - 16.25 86,000 7.7 years 15.36 31,800 15.33
- ----------------------------------------------------- ----------------
828,000 4.7 years $ 7.16 731,400 $ 6.38
===================================================== ================
<PAGE>
Page 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company maintains an Employee Stock Purchase Plan in which eligible
employees may purchase a limited amount of shares over successive six-month
offering periods at 85% of fair market value on either the first or last
day of each six-month period, whichever is less. During the years ended
September 30, 1998, 1997 and 1996, there were 12,031, 11,432 and 8,240
shares purchased under this plan, respectively. At September 30, 1998,
68,317 shares are reserved for future issuance under this plan.
Under SFAS No. 123, compensation cost is recognized for the fair value of
the employees' purchase rights, which was estimated using the Black-Scholes
model with the following assumptions: an expected life of 6 months;
expected volatility of 48% in 1998 and 45% in 1997 and 1996; expected
dividend yield of 0%; and risk-free interest rate of 6.5%. The
weighted-average fair value of those purchase rights granted in 1998, 1997
and 1996 was $3.04, $4.34 and $5.89, respectively.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and applies APB Opinion No. 25
in accounting for its plans and, accordingly, has not recognized
compensation cost for stock option plans and stock purchase plans in its
financial statements. Had the Company determined compensation cost based
on the fair value at the grant date consistent with the provisions of SFAS
No. 123, the Company's net income would have been changed to the pro forma
amounts indicated below:
Years Ended September 30, 1998 1997 1996
============================================================================
Net income:
As reported $3,633 $3,816 $3,151
Pro forma 3,483 3,678 3,002
Basic earnings per share:
As reported $ 0.56 $ 0.62 $ 0.51
Pro forma 0.54 0.60 0.49
Diluted earnings per share:
As reported $ 0.51 $ 0.55 $ 0.45
Pro forma 0.49 0.53 0.42
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. The Company anticipates granting additional
awards in future years.
<PAGE>
COMMON STOCK WARRANTS The Board of Directors may grant common stock
warrants to directors and officers of the Company at exercise prices not
less than market value at the date of grant. All outstanding warrants
expire through 2000.
Transactions relating to common stock warrants are summarized as
follows:
1998 1997 1996
================= ================= =================
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------ ----------------- -----------------
Outstanding at
beginning of year 741,750 $ 3.11 743,250 $ 3.11 743,250 $ 3.11
Exercised (255,000) 3.29 (1,500) 3.17 - -
------------------ ----------------- -----------------
Outstanding at
end of year 486,750 $ 3.02 741,750 $ 3.11 743,250 $ 3.11
------------------ ----------------- -----------------
Exercisable at
year end 486,750 $ 3.02 741,750 $ 3.11 743,250 $ 3.11
================== ================== =================
EMPLOYEE BENEFIT PLAN The Company has a 401(k) Salary Reduction Plan under
which the Company annually matches a portion of the amount of contributions
made by the employee. All domestic employees with one year of continuous
service are eligible for the plan. Company matching contributions are 100%
vested, as are any contributions made by the employee. The Company may
also make, at its sole discretion, annual discretionary contributions,
which vest over a six-year period. The Company has not made any
discretionary contributions.
Employer contributions relating to these plans were $226, $181 and $167
for the years ended September 30, 1998, 1997 and 1996, respectively.
<PAGE>
Page 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
SHAREHOLDERS' PREFERRED PURCHASE RIGHTS On July 14, 1988, as amended on
August 6, 1997, the Board of Directors of the Company declared a dividend
of one preferred share purchase right for each outstanding share of common
stock of the Company. The dividend was payable on July 26, 1988 to the
shareholders of record on that date. Each right entitles the registered
holder to purchase from the Company one one-hundredth of a preferred share
at a price of $30.00, subject to adjustment.
The rights agreement provides that, until the earlier to occur of (i) 10
days following a public announcement that a person or group of affiliated
or associated persons have acquired beneficial ownership of 20% or more of
the outstanding common stock, or (ii) 10 days following the commencement or
announcement of an intention to make a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a person
or group of 20% or more of such outstanding common stock, the rights will
be transferred with and only with the common stock.
The rights are not exercisable until the earlier of such date described
above and will expire on July 15, 2008, unless the final expiration date is
extended or the rights are earlier redeemed by the Company at $.01 per
right.
QUARTERLY FINANCIAL DATA The following table sets forth certain unaudited
quarterly financial information.
Year ended September 30, 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------
Sales $ 52,765 $ 52,794 $ 60,986 $ 70,198
Gross profit 10,440 10,571 12,065 14,642
Net income 418 370 869 1,976
Earnings per common share:
Basic $ 0.07 $ 0.06 $ 0.13 $ 0.30
Diluted $ 0.06 $ 0.05 $ 0.12 $ 0.28
Year ended September 30, 1997
- ---------------------------------------------------------------------------
Sales $ 47,656 $ 44,287 $ 52,571 $ 56,403
Gross profit 11,071 6,923 11,744 13,087
Net income (loss) 1,219 (1,319) 1,618 2,298
Earnings (loss) per common share:
Basic $ 0.20 $ (0.21) $ 0.26 $ 0.37
Diluted $ 0.17 $ (0.21) $ 0.24 $ 0.33
<PAGE>
Page 34
GUEST SUPPLY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- ---------
Additions
---------------------
Balance At Charged to Charged to Balance
Beginning Costs and Other At End Of
Description Period Expenses Accounts Deductions Period
- ---------------------- ---------- ---------- ---------- ---------- ---------
Reserves and allowances
deducted from asset
accounts :
Allowance for Uncollectible Accounts
Year ended
September 30, 1998 1,032,000 497,000 0 986,000 543,000
========= ========= ========== ========== =========
Year ended
September 30, 1997 898,000 880,000 0 746,000 1,032,000
========= ========= ========== ========== =========
Year ended
September 30, 1996 692,000 316,000 0 110,000 898,000
========= ========= ========== ========== =========
Allowance for Obsolescence and Inventory Chargebacks
- ----------------------------------------------------
Year ended
September 30, 1998 1,934,000 1,152,000 0 1,536,000 1,550,000
========= ========= ========== ========= =========
Year ended
September 30, 1997 1,606,000 1,858,000 0 1,530,000 1,934,000
========= ========= ========== ========= =========
Year ended
September 30, 1996 1,344,000 828,000 0 566,000 1,606,000
========= ========= ========== ========= =========
<PAGE>
Page 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
<PAGE>
Page 36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For information concerning this item, see "Item 1. - Business -
Executive Officers" and the table and text under the caption "Certain
Information Concerning Nominees and Directors" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" of the Proxy Statement to be
filed with respect to the 1999 Annual Meeting of Shareholders to be held on
January 21, 1999 (the "Proxy Statement"), which information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
For information concerning this item, see the table and text under the
captions "Executive Compensation," "Compensation of Directors,"
"Compensation Committee Interlocks and Insider Participation" and
"Employment Agreements" of the Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
For information concerning this item, see the table and text under the
caption "Information Concerning Certain Shareholders" of the Proxy
Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For information concerning this item, see the text under the caption
"Compensation Committee Interlocks and Insider Participation" of the Proxy
Statement, which information is incorporated herein by reference.
<PAGE>
Page 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
Included in Part II of this report:
Page
Number
------
Independent Auditors' Report . . . . . . . . . . . . . . . . 21
Consolidated Balance Sheets -
September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Operations -
Years Ended September 30, 1998, 1997 and 1996 . . . . . . . . 23
Consolidated Statements of Cash Flows -
Years Ended September 30, 1998, 1997 and 1996 . . . . . . . . 24
Consolidated Statements of Shareholders' Equity -
Years Ended September 30, 1998, 1997 and 1996 . . . . . . . . 25
Notes to Consolidated Financial Statements . . . . . . . . . . 26
2. Financial Statement Schedule:
Included in Part II of this report:
II - Valuation and Qualifying Accounts . . . . . . . . . . . . 34
All other schedules have been omitted because they are inapplicable or the
information is provided in the financial statements, including the notes
thereto.
3. Exhibits:
The exhibits required to be filed as part of this Annual Report on Form
10-K are listed in the attached Index to Exhibits.
(b) Current Reports on Form 8-K:
No reports on Form 8-K were filed during the three-month period ended
September 30, 1998.
<PAGE>
Page 38
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby
appoint Clifford W. Stanley and Thomas M. Haythe as attorneys-in-fact with
full power of substitution, severally, to execute in the name and on behalf
of the registrant and each such person, individually and in each capacity
stated below, one or more amendments to the annual report which amendments
may make such changes in the report as the attorney-in-fact acting in the
premises deems appropriate and to file any such amendment to the report
with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: December 15, 1998
GUEST SUPPLY, INC.
By /s/ Clifford W. Stanley
-------------------------
Clifford W. Stanley
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: December 15, 1998 By /s/ Clifford W. Stanley
-------------------------
Clifford W. Stanley
President, Principal
Executive Officer and
Director
Dated: December 15, 1998 By /s/ Thomas M. Haythe
-------------------------
Thomas M. Haythe
Director
<PAGE>
Page 39
Dated: December 15, 1998 By /s/ Barry Igdaloff
-------------------------
Barry Igdaloff
Director
Dated: December 15, 1998 By /s/ Peter L. Richard
-------------------------
Peter L. Richard
Director
Dated: December 15, 1998 By /s/ Teri E. Unsworth
-------------------------
Teri E. Unsworth
Vice President -
Market Development and
Director
Dated: December 15, 1998 By /s/ Edward J. Walsh
--------------------------
Edward J. Walsh
Director
Dated: December 15, 1998 By /s/ George S. Zabrycki
--------------------------
George S. Zabrycki
Director
Dated: December 15, 1998 By /s/ Paul T. Xenis
--------------------------
Paul T. Xenis
Vice President -
Finance and
Principal Financial
and Accounting Officer<PAGE>
Page 40
Index to Exhibits
-----------------
Page
3(a) Amended and Restated Certificate of Incorporation of
the Company (incorporated by reference to Exhibit 3
to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996). --
3(b) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996). --
3(c) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996). --
3(d) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996). --
3(e) Certificate of Correction to the Certificate of Amendment
of the Amended and Restated Certificate of Incorporation
of the Company, (incorporated by reference to Exhibit 3(d)
to the Company's Annual Report on Form 10-K for the year
ended September 30, 1993). --
3(f) Certificate of Merger of Miraflores Designs, Inc. into the
Company (incorporated by reference to Exhibit 3(e) to the
Company's Annual Report on Form 10-K for the year ended
September 30, 1993). --
3(g) Amended and Restated By-Laws of the Company (incorporated
by reference to Exhibit 3(g) to the Company's Annual
Report on Form 10-K for the year ended September 30,
1997). --
4(a) Article THIRD of Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3(a) to
Registration Statement on Form S-1 No. 33-7246). --
4(b) Form of Series W Warrant Certificate to purchase Common
Stock of the Company (incorporated by reference to
Exhibit 4(b) to the Company's Annual Report on Form 10-K
for the year ended September 30, 1994). --
<PAGE>
Page 41
4(c) Form of Series A Warrant Certificate to purchase
Common Stock of the Company (incorporated by
reference to Exhibit 4(c) to the Company's Annual
Report on Form 10-K for the year ended
September 30, 1994). --
4(d) Form of Series B Warrant Certificate to purchase
Common Stock of the Company (incorporated by reference
to Exhibit 4(d) to the Company's Annual Report on
Form 10-K for the year ended September 30, 1994). --
4(e) Rights Agreement dated as of July 15, 1988 between
the Company and First Fidelity Bank (incorporated
by reference to Exhibit 4(e) to the Company's Annual
Report on Form 10-K for the year ended September 30,
1993). --
4(f) Amendment No. 1 dated as of August 15, 1998 by and
among the Company, First Fidelity Bank and ChaseMellon
Shareholder Services, L.L.C. to the Rights Agreement
(incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated
September 8, 1998). --
10(a) 1983 Stock Option Plan of the Company, as amended
(incorporated by reference to Exhibit 10(a) to
Company's Annual Report on Form 10-K for
the year ended September 30, 1993). --
10(b) 1993 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.4 to Registration Statement
on Form S-8 No. 33-63352). --
10(c) 1993 Stock Option Plan of the Company (incorporated
by reference to Exhibit 4.1 to Registration Statement
on Form S-8 No. 33-63352). --
10(d) Lease dated February 28, 1985 between the Company
and The Benenson Capital Company (incorporated by
reference to Exhibit 10(l) to Registration Statement
on Form S-1 No. 2-98274). --
10(e) Lease dated October 28, 1985 between the Company and
Shore Point Distributors (incorporated by reference
to Exhibit 10(y) to Registration Statement on Form
S-1 No. 33-7246). --
10(f) Guest Supply, Inc. 401(k) Plan & Trust (incorporated
by reference to Exhibit 10(i) to the Company's Annual
Report on Form 10-K for the year ended
September 30, 1996). --
10(g) Guest Supply, Inc. 1996 Long Term Incentive Plan
(incorporated by reference to Exhibit 10(j) to the
Company's Annual Report on Form 10-K for the year
ended September 30, 1996). --<PAGE>
Page 42
10(h) Lease dated March 16, 1995 between the Company and
The Morris Company (incorporated by reference to
Exhibit 10(b) to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995). --
10(i) Employment Agreement dated as of August 6, 1998
between the Company and Clifford W. Stanley
(incorporated by reference to Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the year
ended September 30, 1997). --
10(j) Employment Agreement dated as of August 6, 1998
between the Company and Teri E. Unsworth (incorporated
by reference to Exhibit 10(j) to the Company's Annual
Report on Form 10-K for the year ended September 30,
1997). --
10(k) Employment Agreement dated as of August 6, 1998
between the Company and Paul T. Xenis (incorporated by
reference to Exhibit 10(k) to the Company's Annual
Report on Form 10-K for the year ended September 30,
1997). --
10(l) Employment Agreement dated as of August 6, 1998
between the Company and R. Eugene Biber (incorporated
by reference to Exhibit 10(l) to the Company's Annual
Report on Form 10-K for the year ended September 30,
1997). --
10(m) General Counsel Agreement dated as of August 6, 1998
between the Company and Thomas M. Haythe (incorporated
by reference to Exhibit 10(m) to the Company's Annual
Report on Form 10-K for the year ended September 30,
1997). --
10(n) Revolving Credit Agreement by and among the Company,
Guest Packaging, Inc., Breckenridge-Remy Co., and
Guest Distribution Services, Inc., all as the Borrower,
PNC Bank, National Association, First Union National
Bank, both as Lenders and PNC Bank, National
Association, as agent, dated as of December 3, 1998
(incorporated by reference to Exhibit 10(n) to the
Company's Annual Report on Form 10-K for the year
ended September 30, 1997). --
10(o) Revolving Credit Note dated December 3, 1998 made by
the Company, Guest Packaging, Inc., Breckenridge-Remy
Co. and Guest Distribution Services, Inc., as joint
and several obligors to First Union National Bank
(incorporated by reference to Exhibit 10(o) to the
Company's Annual Report on Form 10-K for the year
ended September 30, 1997). --
<PAGE>
Page 43
10(p) Revolving Credit Note dated December 3, 1998 made
by the Company, Guest Packaging, Inc., Breckenridge-
Remy Co. and Guest Distribution Services, Inc., as
joint and several obligors to PNC Bank, National
Association (incorporated by reference to Exhibit 10(p)
to the Company's Annual Report on Form 10-K for the
year ended September 30, 1997). --
10(q) Form of Note Purchase Agreement dated as of
December 3, 1998 by and among the Company, Breckenridge-
Remy Co., Guest Distribution Services, Inc., Guest
Packaging, Inc. and each of The Mutual Life Insurance
Company of New York, AUSA Life Insurance Company, Inc.,
Great-West Life & Annuity Insurance Company and
Nationwide Life and Annuity Insurance Company
(incorporated by reference to Exhibit 10(q) to the
Company's Annual Report on Form 10-K for the year ended
September 30, 1997). --
10(r) 7.06% Series A Senior Note due November 15, 2009 made
by the Company, Guest Packaging, Inc., Breckenridge-
Remy Co. and Guest Distribution Services, Inc. for the
benefit of the Mutual Life Insurance Company of New York
(incorporated by reference to Exhibit 10(r) to the
Company's Annual Report on Form 10-K for the year
ended September 30, 1997). --
10(s) 7.06% Series A Senior Note due November 15, 2009 made
by the Company, Guest Packaging, Inc., Breckenridge-Remy
Co. and Guest Distribution Services, Inc. for the benefit
of AUSA Life Insurance Company, Inc. (incorporated by
reference to Exhibit 10(s) to the Company's Annual
Report on Form 10-K for the year ended September 30, 1997). --
10(t) 6.95% Series B Senior Note due November 15, 2007 made
by the Company, Guest Packaging, Inc., Breckenridge-Remy
Co. and Guest Distribution Services, Inc. for the benefit
of Great-West Life & Annuity Insurance Company
(incorporated by reference to Exhibit 10(t) to the
Company's Annual Report on Form 10-K for the year
ended September 30, 1997). --
10(u) 6.70% Series C Senior Note due November 15, 2003 made
by the Company, Guest Packaging, Inc., Breckenridge-Remy
Co. and Guest Distribution Services, Inc. for the benefit
of Nationwide Life and Annuity Insurance Company.
(incorporated by reference to Exhibit 10(u) to the
Company's Annual Report on Form 10-K for the year
ended September 30, 1997). --
<PAGE>
Page 44
10(v) Stockholders Agreement dated as of December 3, 1997
by and among the Company, Barry Igdaloff and the
other parties thereto (incorporated by reference
to Exhibit 10 to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997). --
21 Subsidiaries of the Registrant 45
23 Consent of KPMG Peat Marwick LLP 46
24 Power of Attorney (see "Power of Attorney" in Form 10-K) --
27 Financial Data Schedule 47
Copies of the exhibits filed with this Annual Report on Form 10-K or
incorporated by reference herein do not accompany copies hereof for
distribution to shareholders of the Company. The Company will furnish a
copy of any of such exhibits to any shareholder requesting the same.
<PAGE>
Page 45
Exhibit 21
Subsidiaries of Guest Supply, Inc.
----------------------------------
Guest Supply, Inc. has the following subsidiaries:
1. Guest International, Ltd., an English corporation.
2. Guest Packaging, Inc., a New Jersey corporation.
3. Breckenridge-Remy Co., a Delaware corporation.
4. Guest International (Canada) Ltd., a Canadian corporation.
5. Guest International New Zealand Limited, a New Zealand corporation.
6. Guest Distribution Services, Inc., a Delaware corporation.
<PAGE>
Page 46
Exhibit 23
Independent Auditors' Consent
-----------------------------
The Board of Directors
Guest Supply, Inc.:
We consent to incorporation by reference in the Registration Statements
(File Nos. 2-89233, 2-89234, 33-22872, 33-63352 and 333-26709) on Form S-8
of Guest Supply, Inc. of our report dated November 20, 1998, relating to
the consolidated balance sheets of Guest Supply, Inc. and subsidiaries as
of September 30, 1998 and 1997, and the related consolidated statements of
operations, cash flows, and shareholders' equity for each of the years in
the three-year period ended September 30, 1998, and related schedule, which
report appears in the September 30, 1998 annual report on Form 10-K of
Guest Supply, Inc.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
December 11, 1998
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