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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 October 1, 1999
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
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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
----
(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 10, 1999..........................................$86,284,762
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 10, 1999............................................6,320,160
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 2000 Annual Meeting of
Shareholders to be held on January 20, 2000.
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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 in
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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(R), Jhirmack(R) and
Neutrogena(R). 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(TM)," "Botanicals(TM)," "Institute
Swiss(R)" and "Nautic(TM)" 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 18,000 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 138 sales consultants. Management believes that the
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Company's complete product line and nationwide distribution capability provides
superior service to all of its customer groups.
On April 23, 1999, the Company acquired all of the capital stock of
Kapadia Enterprises, Inc., d/b/a Nasco Supply Company and McDonald Contract
Sales, Inc. (collectively "Nasco"), a privately held distributor of textile
products to the lodging industry. Nasco markets a complete line of towels,
sheets, blankets, mattress pads, pillows, shower curtains and table linen from
such major textile manufacturers as Pillowtex Corporation, Springs Dundee and
Westpoint Stevens. Nasco operates utilizing a direct salesforce and has two
distribution centers located in Chatsworth, California and Concord, North
Carolina. In November 1999, all accounting and computer operations were merged
into the Company's current systems. The acquisition of Nasco further enhanced
the Company's strategic position as a one-stop-shopping source for the lodging
industry by further expanding its product line.
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 October 1, 1999, less than 10% of the Company's sales were attributable to
sales of national brand name products which include Bath and Body Works(R),
Jhirmack(R) and Neutrogena(R).
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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. 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
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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 15 regional
warehouses and a central warehouse and distribution facility in Sayreville, New
Jersey. These distribution centers provide the Company 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.
One lodging supply segment customer accounted for 15.3% and 15.5% of
the Company's total sales in 1999 and 1998, respectively. In 1997, one
manufacturing segment customer accounted for 13.2% of the Company's total sales.
As of October 1, 1999 and September 30, 1998, one customer accounted for 5.2%
and 9.1%, respectively, of the Company's total accounts receivable.
The Company's consolidated sales included approximately $8,407,000,
$5,814,000 and $5,789,000, respectively, by foreign subsidiaries for the fiscal
years ended October 1, 1999, September 30, 1998 and September 30, 1997. The
Company currently has subsidiaries located in England, New Zealand and Canada.
At October 1, 1999 and September 30, 1998, the Company had unfilled
orders for its products which aggregated approximately $11,923,000 and
$12,145,000, respectively. Most of the amount for fiscal 1999 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
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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 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 is 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.
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.
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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.
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 of 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
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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(TM), Alliance(TM),
Evergreen(TM), Botanicals(TM), Nautic(TM) and the Heritage Collection(TM). 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.
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 October 1, 1999
was approximately $2,088,000.
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 October 1, 1999, the Company had approximately 962 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 October 1, 1999
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Clifford W. Stanley President, Chief Executive Officer 53
and Chairman of the Board of
Directors
R. Eugene Biber Vice President - Operations 51
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Teri E. Unsworth Vice President - Market Development 48
and Director
Paul T. Xenis Vice President - Finance and 39
Secretary
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 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.
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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 12,800
square feet to 103,700 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 2004.
In connection with the acquisition of Nasco, the Company also assumed
operating leases with the previous owners of Nasco for two distribution
facilities located in California (94,000 square feet) and North Carolina
(120,000 square feet). These leases, which may be terminated by the Company on
two years notice, expire through 2012.
ITEM 3. LEGAL PROCEEDINGS.
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 complaints 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 October 1, 1999
was 436. No cash dividends have been declared on the common stock since the
Company was organized.
Market Price Range
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<TABLE>
<CAPTION>
Year Ended October 1, 1999
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High Low
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<S> <C> <C>
First Quarter $12.875 $8.125
Second Quarter 11.813 8.625
Third Quarter 13.063 8.625
Fourth Quarter 15.875 13.500
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30, 1998
---------------------------------
High Low
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<S> <C> <C>
First Quarter $15.625 $11.500
Second Quarter 15.187 10.187
Third Quarter 17.375 13.625
Fourth Quarter 19.250 9.250
</TABLE>
On December 10, 1999, the closing sales price for the Company's common
stock was $14.25 per share.
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ITEM 6. SELECTED FINANCIAL DATA.
Fiscal Years
Dollars in thousands except per share amounts
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<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Sales $306,044 $236,743 $200,917 $179,042 $159,450
Gross Profit 65,067 47,718 42,825 37,998 37,365
Selling, General and
Administrative Expenses 49,511 39,669 34,043 30,919 28,409
Operating Income 15,556 8,049 8,782 7,079 8,956
Net Income 7,708 3,633 3,816 3,151 5,090
Working Capital 51,806 43,330 39,626 35,223 27,475
Total Assets 161,257 118,107 112,669 102,888 95,607
Total Long-Term Liabilities 50,568 30,996 32,642 28,292 22,866
Total Liabilities 101,790 66,122 66,072 60,485 56,498
Total Equity 59,467 51,985 46,597 42,403 39,109
Common Share Data
- -----------------
Diluted Earnings Per Share $ 1.10 $ 0.51 $ 0.55 $ 0.45 $ 0.70
Book Value Per Share $ 9.04 $ 7.95 $ 7.53 $ 6.89 $ 6.36
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Dollars in thousands except per share amounts
General
On April 23, 1999, the Company acquired all of the capital stock of
Kapadia Enterprises, Inc., d/b/a Nasco Supply Company and McDonald Contract
Sales, Inc. (collectively "Nasco"), a privately held distributor of textile
products to the lodging industry for $24,493. The purchase price consisted of
(i) $17,755 in cash, (ii) the issuance by the Company of a 5.18% convertible
subordinated promissory note in the aggregate principal amount of $5,000 which
note is convertible into shares of the Company's common stock at a price of
$13.275 per share, (iii) 45,198 shares of the Company's common stock valued at
$500, (iv) other liabilities assumed of $500 and, (v) transaction costs of $738.
The acquisition has been accounted for under the purchase method of accounting
and accordingly, the results of Nasco are included since the date of
acquisition.
Fiscal 1999 Compared To Fiscal 1998
Sales for the year ended October 1, 1999 increased by 29.3% or $69,301
to $306,044 from $236,743 for the year ended September 30, 1998. Revenues from
lodging supply segment customers increased $65,261 or 30.8% to $277,442.
Excluding the impact of the Nasco acquisition, sales rose 18.1% over the prior
year. The increase in sales in lodging supply is due primarily to the addition
of new customers, the sale of additional products to existing customers
14
<PAGE>
and the continued expansion of the Company's product line. New customers were
added by the direct sales force in existing territories and by new salespeople
and territories that were established during fiscal 1999.
Lodging customers were also added through new or expanded agreements
with hotel management companies and hotel corporations.
Sales of additional products to existing lodging 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 manufacturing segment customers were $28,602 in 1999 compared
to $24,562 in 1998. The increase of $4,040 or 16.4% was primarily due to
increased sales to new customers secured during the latter part of fiscal 1998.
Gross profit for the year ended October 1, 1999 was $65,067 or 21.3%
of sales compared to $47,718 or 20.2% for the year ended September 30, 1998. The
increase in gross profit as a percentage of sales was primarily due to
efficiency improvements and increased volume in the manufacturing segment. This
increase was offset by a decrease in gross profit percent in lodging supply as a
result of an increase in textile sales, arising primarily from the Nasco
acquisition, which have a lower margin than other product categories sold to
hotels. Excluding the effects of the acquisition, margins in lodging supply
increased over the prior year.
Selling, general and administrative expenses were $49,511 or 16.2% of
sales for the year ended October 1, 1999 compared to $39,669 or 16.8% for the
prior year. The increase of $9,842 was due primarily to increased customer
rebates, payroll, sales commissions, and delivery expenses associated with the
Company's lodging sales growth and increased operating expenses and amortization
of goodwill associated with the Nasco acquisition.
Operating income increased $7,507 or 93.3% to $15,556 for the year
ended October 1, 1999 from $8,049 last year. Operating income in the lodging
supply segment increased 35.3% to $16,474 in 1999 compared with $12,174 in 1998
due principally to higher sales volume and reduced incremental selling, general
and administrative costs, offset by lower gross margins. The operating loss in
manufacturing was reduced by $3,207 to a loss of $918 in 1999 from a loss of
$4,125 in 1998 due principally to higher sales volume and improved manufacturing
efficiencies.
The effective tax rate increased to 40.2% in fiscal 1999 from 38.4% in
fiscal 1998. The increase in the effective tax rate is due principally to an
increase in the valuation allowance related to deferred tax assets and an
increase in state income taxes.
Overall, net income for 1999 increased 112.2% to $7,708 or $1.10 per
diluted share compared to $3,633 or $0.51 per diluted share in 1998.
15
<PAGE>
Fiscal 1998 Compared To Fiscal 1997
Sales for the year ended September 30, 1998 increased by 17.8% or
$35,826 to $236,743 from $200,917 for the year ended September 30, 1997.
Revenues from lodging customers increased $39,679 or 23.0% to $212,181. 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 1998.
In July 1998, a sales and distribution center was opened in Hayward
California, increasing market share in that geographic area.
Lodging customers were also added through new or expanded agreements
with hotel management companies and hotel corporations.
Sales of additional products to existing lodging 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 manufacturing segment customers were $24,562 in 1998 compared
to $28,415 in 1997. The decrease of $3,853 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 manufacturing revenue.
Gross profit for the year ended September 30, 1998 was $47,718 or
20.2% of sales compared to $42,825 or 21.3% for the year ended September 30,
1997. Excluding a cost of goods charge of $2,187 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 the manufacturing segment
offset by an increase in lodging supply gross margins.
Selling, general and administrative expenses were $39,669 or 16.8% of
sales for the year ended September 30, 1998 compared to $34,043 or 16.9% for the
prior year. The increase of $5,626 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.
Operating income declined $733 or 8.4% to $8,049 for the year ended
September 30, 1998 from $8,782 in 1997. Operating income in the lodging supply
segment increased 182.4% to $12,174 in 1998 compared to $4,311 in 1997 due
principally to higher sales volume to new and existing customers, focused
efforts to contain selling, general and administrative costs and the effects of
the charge of $2,187 in 1997 related to damaged and obsolete inventories.
Operating results in the manufacturing segment declined by $8,596 to a loss of
$4,125 in 1998 from a profit of $4,471 due principally to lower sales volume to
two significant customers, a change in sourcing arrangements and contract terms
with a significant customer, a change in
16
<PAGE>
product mix and unfavorable manufacturing variances associated with lower
manufacturing throughput.
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.
Overall, net income for 1998 declined by 4.8% to $3,633 or $0.51 per
diluted share compared to $3,816 or $0.55 per diluted share in 1997.
Liquidity And Capital Resources
The Company had $51,806 of working capital at October 1, 1999 compared
to $43,330 at September 30, 1998. The increase of $8,476 is primarily the result
of the acquisition of Nasco Supply Company.
Net cash flows from operating activities increased to $10,043 for the
fiscal year ended October 1, 1999, compared with $5,120 for the twelve months
ended September 30, 1998. The increase was primarily due to higher net earnings
and higher levels of depreciation and amortization offset by changes in working
capital items during the fiscal year ended October 1, 1999. Changes in working
capital items including an increase in the allowance for doubtful accounts of
$533 were due principally to increased sales activity and the acquisition of
Nasco.
Net cash flows used for investing activities totaled $23,589, compared
with $4,329 in 1998. Included in 1999 was the funding for the Nasco acquisition
of $17,962. Capital expenditures for the year were $4,511 versus $4,126 in
1998. In 1999, capital expenditures for the lodging supply and manufacturing
segments amounted to $2,096 and $2,415, respectively. Capital expenditures in
fiscal 2000 of approximately $4,000 are expected.
Net cash flows provided by financing activities totaled $12,870,
compared with $2,255 used in financing activities in 1998. Borrowings in 1999
increased to fund the acquisition of Nasco and to purchase $2,582 of treasury
stock under the Company's stock repurchase program.
Concurrent with the closing of the acquisition of Nasco, the Company
entered into an amended and restated six year revolving credit agreement
("revolver") with its banks and amended the terms of its $25,000 senior notes.
The effects of these amendments were to increase the amounts available under the
revolver from $25,000 to $35,000, to secure the borrowings under the revolver
and the senior notes by substantially all of the assets of the Company, to
increase the interest rates on the revolver and the senior notes by .40% and
.25%, respectively and to add certain restrictive covenants. Borrowings under
the revolver bear interest at the Eurodollar rate plus 125 basis points (6.625%
at October 1, 1999) or the prime rate (8.25% at October 1, 1999), at the
Company's option. The unused amount available to the Company under the revolver
was $19,100 at October 1, 1999. Both the revolver and the senior notes contain
restrictive covenants including covenants which limit the Company's ability to
incur additional indebtedness, sell certain assets, make acquisitions and other
investments and require the Company to comply with various financial ratios
specified in the loan agreements. The Company was in compliance with all
covenants at October 1, 1999.
17
<PAGE>
During 1999, the Company purchased a total of 250,300 shares of
treasury stock at a cost of $2,582 completing the stock repurchase program
authorized in 1997. Subsequent to October 1, 1999, the Company purchased 242,300
shares at a cost of $3,223 completing the stock repurchase program authorized in
1998. In November 1999, the Board of Directors authorized the repurchase of an
additional 5% of its outstanding common stock.
The Company believes that the amount available under the revolving
credit agreement together with the cash flow from operations will be sufficient
to meet the Company's short-term working capital requirements and identifiable
long-term capital needs. The Company also believes that, if necessary,
additional financing will be available to it on commercially reasonable terms.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for hedging activities and derivative instruments, including certain
derivative instruments embedded in other contracts. As originally issued, SFAS
133 would have been effective for the Company beginning September 30, 2000.
However, in July 1999, the FASB issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133", which delays the effective date of SFAS 133 by one year.
SFAS 133 will now become effective for the Company beginning September 29, 2001.
The Company is reviewing the potential impact, if any, of SFAS 133 on its
consolidated results of operations and financial position.
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 has completed its evaluation of all its information
technology ("IT") and non-IT systems. All software packages considered critical
to the Company's operations have been upgraded and tested to be Year 2000
compliant.
As part of the Company's Year 2000 project, the Company has 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 contacted its large 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.
Total costs incurred by the Company, relating to Year 2000 remediation
efforts, have not exceeded $250.
18
<PAGE>
The Company believes that the "most reasonably likely worst case
scenario" as a result of the Company, customers or suppliers not being fully
Year 2000 compliant could include temporary plant closings, delays in the
delivery of products or delays in the receipt of raw materials and finished
goods. The consequences could have a material adverse impact to the results of
operations or the financial position of the Company.
The Company is addressing these potential consequences as part of its
contingency plans in order to mitigate the adverse effect any such disruption
may have on the Company's operations, which includes stockpiling of raw
materials and other finished goods and using alternative suppliers.
Notwithstanding the preparation of contingency plans, there can be no
assurance that the implementation of such plan will be successful in addressing
all problems that may arise.
Quantitative And Qualitative Disclosures About Market Risks
At October 1, 1999, the financial liabilities of the Company exposed
to changes in interest rates consist mainly of $15,900 in variable rate
borrowings outstanding under the revolver. The Company has entered into an
interest rate collar agreement with a notional amount of $11,000. Under the
terms of the agreement, the Company would be reimbursed the interest difference
in the event that the three-month LIBOR rate exceeds 9.7% or would pay the
interest difference if the three-month LIBOR rate falls below 4.75%.
Assuming a hypothetical increase of 1% in interest rates and debt
levels were to remain constant, interest expense would increase $159 per year.
Included in indebtedness is also $25,000 of fixed rate debt, which is not
subject to interest rate risk.
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 assurances that any
anticipated future results will be achieved.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
GUEST SUPPLY, INC. AND SUBSIDIARIES
----------
Consolidated Financial Statements
October 1, 1999, September 30, 1998 and September 30, 1997
20
<PAGE>
Index to Financial Statements
- -----------------------------
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
1. Financial Statements:
Independent Auditors' Report.................................................... 22
Consolidated Balance Sheets -- October 1, 1999 and September 30, 1998........... 23
Consolidated Statements of Income and Comprehensive Income -- Fiscal
Years Ended October 1, 1999, September 30, 1998 and September 30, 1997.......... 24
Consolidated Statements of Cash Flows -- Fiscal Years Ended
October 1, 1999, September 30, 1998 and September 30, 1997...................... 25
Consolidated Statements of Shareholders' Equity -- Fiscal Years Ended
October 1, 1999, September 30, 1998 and September 30, 1997...................... 26
Notes to Consolidated Financial Statements...................................... 27
2. Financial Statement Schedule:
II - Valuation and Qualifying Accounts......................................... 37
</TABLE>
All other schedules have been omitted because they are inapplicable or the
information is provided in the consolidated financial statements, including the
notes thereto.
21
<PAGE>
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 October 1, 1999 and September 30, 1998 and
the results of their operations and their cash flows for the fifty-three week
period ended October 1, 1999 and the years ended September 30, 1998 and
September 30, 1997, 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 LLP
Short Hills, New Jersey
November 16, 1999
22
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================================
CONSOLIDATED BALANCE SHEETS
As of October 1, 1999 and September 30, 1998
Dollars in thousands except stated value 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,200 $ 2,558
Accounts receivable, net of allowance for doubtful accounts of
$1,076 - 1999 and $543 - 1998 43,471 34,054
Inventories 53,937 37,989
Deferred income taxes 1,626 1,373
Prepaid expenses and other current assets 1,794 2,482
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 103,028 78,456
Property and equipment, net of accumulated depreciation and amortization 33,593 33,305
Other assets 2,821 1,555
Excess of cost over net assets acquired, net of accumulated amortization of
$5,364 - 1999 and $4,626 - 1998 21,815 4,791
- -------------------------------------------------------------------------------------------------------------------------
$ 161,257 $ 118,107
=========================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 50,111 $ 35,126
Current maturities of long-term debt 1,111 -
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 51,222 35,126
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt 39,789 26,126
Note payable to related party 5,000 -
Deferred income taxes 5,779 4,870
- -------------------------------------------------------------------------------------------------------------------------
Total long-term liabilites 50,568 30,996
- -------------------------------------------------------------------------------------------------------------------------
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 - 1999 and 1998 594 594
Additional paid-in capital 39,247 38,595
Retained earnings 20,559 14,378
Treasury stock - 95,178 shares - 1999 and 135,800 shares - 1998, at cost (1,091) (1,422)
Accumulated other comprehensive income 158 (160)
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 59,467 51,985
- -------------------------------------------------------------------------------------------------------------------------
$ 161,257 $ 118,107
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
================================================================================
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Years ended October 1, 1999, September 30, 1998 and September 30, 1997
<TABLE>
<CAPTION>
Dollars in thousands except per share amounts 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 306,044 $ 236,743 $ 200,917
Cost of sales 240,977 189,025 158,092
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 65,067 47,718 42,825
Selling, general and administrative expenses 49,511 39,669 34,043
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 15,556 8,049 8,782
Interest and other income 63 76 45
Interest expense 2,737 2,225 2,110
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 12,882 5,900 6,717
Income tax expense 5,174 2,267 2,901
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 7,708 $ 3,633 $ 3,816
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Basic $ 1.19 $ 0.56 $ 0.62
===================================================================================================================================
Diluted $ 1.10 $ 0.51 $ 0.55
===================================================================================================================================
Comprehensive Income:
Net income $ 7,708 $ 3,633 $ 3,816
Other comprehensive income - foreign
currency translation adjustment
318 (130) 81
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 8,026 $ 3,503 $ 3,897
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended October 1, 1999, September 30, 1998 and September 30, 1997
<TABLE>
<CAPTION>
Dollars in thousands 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,708 $ 3,633 $ 3,816
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation and amortization 5,008 4,302 3,888
Provision for losses on accounts receivable 858 497 880
(Gain) loss on sale of fixed assets - 17 (172)
Deferred income tax expense 656 539 1,195
Change in assets and liabilities, net of effects of business acquired:
Increase in accounts receivable (819) (4,122) (3,225)
Increase in inventories (7,468) (3,313) (1,314)
Decrease in prepaid expenses and other current assets 787 962 90
Decrease (increase) in other assets 81 (28) (178)
Increase in accounts payable and accrued expenses 3,232 2,633 4,217
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,043 5,120 9,197
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (4,511) (4,126) (6,881)
Acquisition, net of cash acquired (17,962) - -
Decrease (increase) in other assets (1,139) (215) (1,000)
Proceeds from sale of fixed assets 23 12 202
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (23,589) (4,329) (7,679)
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from revolving credit agreements 65,837 56,705 52,528
Repayment on revolving credit agreements (51,063) (73,196) (48,945)
Payment of debt issuance costs (208) - -
Proceeds from issuance of long-term debt - 25,000 -
Repayment of long-term debt - (10,937) (3,874)
Purchase of treasury stock (2,582) (1,422) -
Proceeds from issuance of common stock 886 1,595 253
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 12,870 (2,255) (38)
- --------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments 318 (130) 81
- --------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (358) (1,594) 1,561
Cash and cash equivalents at beginning of year 2,558 4,152 2,591
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,200 $ 2,558 $ 4,152
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of each cash flow information:
Cash paid during the year for:
Interest, net of capitalized interest in 1997 $ 2,681 $ 1,908 $ 2,099
Income taxes, net of refunds 1,449 1,090 928
Supplemental schedule of non-cash financing and investing activities:
Tax benefit on exercise of stock options and warrants $ 652 $ 1,712 $ 44
Convertible note and common stock issued in connection with acquisition $ 5,500 - -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
25
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended October 1, 1999, September 30, 1998 and September 30, 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
-----------------------
Number of Paid-In Retained Treasury Comprehensive
Dollars in thousands Shares Amount Capital Earnings Stock Income
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996 6,156,075 $ 543 $ 35,042 $ 6,929 $ - $ (111)
Net income - - - 3,816 - -
Shares issued under employee stock
option, warrant and purchase plans 34,232 3 250 - - -
Tax benefit on exercise of stock options
and warrants - - 44 - - -
Foreign currency translation adjustment - - - - - 81
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 6,190,307 546 35,336 10,745 - (30)
Net income - - - 3,633 - -
Shares issued under employee stock
option, warrant and purchase plans 481,331 48 1,547 - - -
Tax benefit on exercise of stock options
and warrants - - 1,712 - - -
Purchase of treasury stock (135,800) - - - (1,422) -
Foreign currency translation adjustment - - - - - (130)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 6,535,838 594 38,595 14,378 (1,422) (160)
Net income - - - 7,708 - -
Purchase of treasury stock (250,300) - - - (2,582) -
Shares issued in connection with
acquistion 45,198 - 82 - 418 -
Shares issued under employee stock
option, warrant and purchase plans 245,724 - (82) (1,527) 2,495 -
Tax benefit on exercise of stock options
and warrants - - 652 - - -
Foreign currency translation adjustment - - - - - 318
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, October 1, 1999 6,576,460 $ 594 $ 39,247 $20,559 $ (1,091) $ 158
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
26
<PAGE>
- --------------------------------------------------------------------------------
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.
Fiscal Year - Effective October 1, 1998, the Company adopted a 52 or 53 week
fiscal year, changing the year end date from September 30 to the Friday nearest
September 30. The fiscal year ended October 1, 1999 had 53-weeks.
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 or decline in sales to a major customer,
pricing pressures, unforeseen inefficiencies at the Company's manufacturing
facility, and difficulties resulting from 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.
Revenue Recognition - The Company recognizes revenue at the time the goods are
shipped or title has passed.
Inventories - Inventories are stated at the lower of cost or market. Cost is
determined using the weighted-average and first-in, first-out methods. The
Company evaluates the need to record adjustments for markdowns of inventory on a
quarterly basis. Provisions for potentially obsolete or slow moving inventory is
made based on management's analysis of inventory levels and future sales
forecasts.
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 a period of up
to 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 - 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, warrants and convertible debt,
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 October 1, 1999
and September 30, 1998. Fair values were determined based on management's
estimates using the latest available market data. The Company also uses a
derivative financial instrument to manage interest rate fluctuations. The
Company does not hold or issue derivative financial instruments for trading
purposes.
Concentration of Credit Risk - The Company performs ongoing credit evaluations
of its customers' financial condition and generally requires no collateral from
its customers. As of October 1, 1999 and September 30, 1998, one customer
accounted for 5.2% and 9.1%, respectively, of the Company's total accounts
receivable.
27
<PAGE>
- --------------------------------------------------------------------------------
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
statements 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.
Comprehensive Income - On October 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130). SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and foreign currency translation
adjustments and is presented in the consolidated statements of income and
comprehensive income. The Statement requires only additional disclosures in the
consolidated financial statements; it does not affect the Company's financial
position or results of operations. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
Acquisition On April 23, 1999, the Company acquired all of the outstanding
shares of Kapadia Enterprises, Inc., d/b/a Nasco Supply Company and McDonald
Contract Sales, Inc. (collectively "Nasco"), a distributor of textile products
to the lodging industry for approximately $24,493 including transaction costs of
$738. Total consideration paid included cash of $17,755, a convertible
promissory note of $5,000, issuance of 45,198 shares of common stock valued at
$500 and other liabilities assumed of $500. The acquisition was funded
principally through borrowings under the Company's revolving credit agreement.
The acquisition has been accounted for as a purchase and the results of Nasco's
operations have been included in the consolidated financial statements since the
date of acquisition. The purchase price has been allocated based upon estimated
fair values at the date of acquisition, pending final determination of certain
acquired balances. The excess of the purchase price over the estimated fair
value of the net assets acquired of $17,762 has been recorded as goodwill, and
is being amortized on a straight-line basis over 20 years. In connection with
the acquisition, the Company also assumed operating leases with the previous
owners of Nasco for two distribution facilities. The future minimum rental
commitments under these leases, which may be terminated by the Company on two
years notice, is approximately $965 per year, subject to annual increases for
inflation, through 2012.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company as if the acquisition of Nasco
had occurred at the beginning of the periods presented. These unaudited pro
forma results have been prepared for comparative purposes only and include
certain adjustments such as additional goodwill amortization expense, interest
expense, and income tax expense. They do not purport to be indicative of the
results of operations that actually would have resulted had the acquisition
occurred at the beginning of the periods presented or of future results of
operations.
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $ 338,697 $ 299,657
Net income $ 7,897 $ 4,755
Earnings per common share:
Basic $ 1.22 $ 0.73
Diluted $ 1.10 $ 0.65
</TABLE>
28
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Dollars in thousands except share and per share amounts
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 7,126 $ 8,666
Finished goods 46,811 29,323
- ----------------------------------------------------------------------------------------------------
$ 53,937 $ 37,989
- ----------------------------------------------------------------------------------------------------
</TABLE>
Costs included in inventories are comprised of raw materials, direct labor and
overhead related to the manufacturing process.
<TABLE>
<CAPTION>
Property and Equipment
1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Land, building and leasehold improvements $ 6,619 $ 6,750
Machinery and equipment 45,712 46,497
Furniture and fixtures 1,563 2,248
Computers 3,014 2,631
Construction in progress 872 958
- -----------------------------------------------------------------------------------------------------
57,780 59,084
Less accumulated depreciation and amortization (24,187) (25,779)
- -----------------------------------------------------------------------------------------------------
$ 33,593 $ 33,305
- -----------------------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization of property and equipment charged to income was
$4,270, $3,934 and $3,520 for the fiscal years ended 1999, 1998 and 1997,
respectively.
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 October 1, 1999 are:
<TABLE>
<S> <C>
2000 $ 5,831
2001 4,471
2002 3,086
2003 2,646
2004 2,290
Thereafter 3,251
- -------------------------------------------------------------------------------------------------
Total minimum lease payments $ 21,575
- -------------------------------------------------------------------------------------------------
</TABLE>
Rent expense under operating leases was $5,940, $4,737 and $4,820 for the
fiscal years ended 1999, 1998 and 1997, respectively.
29
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Dollars in thousands except share and per share amounts
Income Taxes
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal - Current $ 4,066 $ 1,334 $ 1,229
- Deferred 439 893 1,133
- --------------------------------------------------------------------------------------------------
Total federal income taxes 4,505 2,227 2,362
- --------------------------------------------------------------------------------------------------
State - Current 413 369 297
- Deferred 217 (354) 158
- --------------------------------------------------------------------------------------------------
Total state income tax 630 15 455
- --------------------------------------------------------------------------------------------------
Foreign 39 25 84
- --------------------------------------------------------------------------------------------------
Total income tax provision $ 5,174 $ 2,267 $ 2,901
- --------------------------------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of federal income tax expense computed using
the statutory rate of 35% in 1999 and 34% in 1998 and 1997, to the Company's
effective income tax rate:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" income tax expense $ 4,509 $ 2,006 $ 2,284
Increase (reduction) in tax expense resulting from:
State income taxes, net of federal income tax benefit 117 (112) 300
Change in valuation allowance 450 350 -
Nondeductible amortization of goodwill 129 125 125
Foreign (41) 25 84
Effect of income tax rate differential (100) - -
Adjustment to net deferred taxes for change in effective state income tax rate - (165) -
Other, net 110 38 108
- ---------------------------------------------------------------------------------------------------------------------------------
$ 5,174 $ 2,267 $ 2,901
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at October 1, 1999 and September 30,
1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 413 $ 209
Inventory obsolescence reserve and uniform capitalization 1,092 980
Net operating loss carryforwards - states 1,198 940
Alternative minimum tax credits carryforwards - 228
Other 121 184
- -------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 2,824 2,541
Less: valuation allowance (800) (350)
- -------------------------------------------------------------------------------------------------------------
Net deferred tax assets 2,024 2,191
Deferred tax liability - principally excess of tax over financial
statement depreciation (6,177) (5,688)
- -------------------------------------------------------------------------------------------------------------
Net deferred liability $ (4,153) $ (3,497)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Dollars in thousands except share and per share amounts
The valuation allowance for deferred tax assets as of October 1, 1999 and
September 30, 1998 was $800 and $350, respectively. The net change in the total
valuation allowance for the fiscal years ended October 1, 1999 and September 30,
1998 was an increase of $450 and $350, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the tax deferred 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 the Company
will realize the benefits of these deductible differences, net of the existing
valuation allowances at October 1, 1999. The amount of the net 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 October 1, 1999, the Company has net operating loss carryforwards for state
income tax purposes of approximately $19,961 which are available to reduce the
future state income taxes, if any, through the year 2006.
Indebtedness Indebtedness consists of the following at October 1, 1999 and
September 30, 1998:
<TABLE>
<CAPTION>
1999 1998
===================================================================================================================================
<S> <C> <C>
Revolving credit agreement $ 15,900 $ 1,126
Series A senior notes payable; 7.31%; due in semi-annual installments through November, 2009 15,000 15,000
Series B senior notes payable; 7.20%; due in semi-annual installments through November, 2007 5,000 5,000
Series C senior notes payable; 6.95%; due in semi-annual installments through November, 2003 5,000 5,000
Convertible subordinated promissory note; 5.18%; due March, 2004 5,000 -
- -----------------------------------------------------------------------------------------------------------------------------------
45,900 26,126
Less current maturities (1,111) -
- -----------------------------------------------------------------------------------------------------------------------------------
$ 44,789 $26,126
===================================================================================================================================
</TABLE>
Concurrent with the closing of the acquisition of Nasco, the Company entered
into an amended and restated six year revolving credit agreement ("revolver")
with its banks and amended the terms of its $25,000 senior notes. The effects of
these amendments were to increase the amounts available under the revolver from
$25,000 to $35,000, to secure the borrowings under the revolver and the senior
notes by substantially all of the assets of the Company, to increase the
interest rates on the revolver and the senior notes by .40% and .25%,
respectively and to add certain restrictive covenants. Borrowings under the
revolver bear interest at the Eurodollar rate plus 125 basis points (6.625% at
October 1, 1999) or the prime rate (8.25% at October 1, 1999), at the Company's
option. The unused amount available to the Company under the revolver was
$19,100 at October 1, 1999. Both the revolver and the senior notes contain
restrictive covenants including covenants which limit the Company's ability to
incur additional indebtedness, sell certain assets, make acquisitions and other
investments and require the Company to comply with various financial ratios
specified in the loan agreements.
In June 1999, the Company entered into an interest rate collar agreement
("collar') in connection with borrowings under its revolver. The collar is for
an initial notional amount of $11,000 which declines to $6,000 through June
2002, the expiration date of the collar. Under the terms of the agreement, the
Company would be reimbursed the interest difference in the event that the three-
month LIBOR rate exceeds 9.7% or would pay the interest difference if the three-
month LIBOR rate falls below 4.75%.
The convertible subordinated promissory note issued to the former owners of
Nasco, who are currently employed by the Company, is convertible into shares of
the Company's common stock at $13.275 per share.
Indebtedness at October 1, 1999 matures as follows:
2000 $ 1,111
2001 1,486
2002 3,376
2003 3,626
2004 8,070
Thereafter 28,231
==============================================================================
31
<PAGE>
=============================================================================
NOTES TO FINANCIAL STATEMENTS, continued
Dollars in thousands except share and per share amounts
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 statement taken as a whole.
Earnings Per Share Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS
Net income $ 7,708 $ 3,633 $ 3,816
===============================================================================================================================
Weighed average common shares outstanding 6,463,000 6,489,000 6,177,000
===============================================================================================================================
Basic EPS $ 1.19 $ 0.56 $ 0.62
===============================================================================================================================
Diluted EPS
Net income $ 7,708 $ 3,633 $ 3,816
Effect of convertible promissory note 68 - -
- -------------------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 7,776 $ 3,633 $ 3,816
===============================================================================================================================
Weighted average common shares outstanding 6,463,000 6,489,000 6,177,000
Effect of dilutive stock options and warrants 438,000 636,000 806,000
Effect of convertible promissory note 163,000 - -
===============================================================================================================================
Weighted average common shares outstanding assuming dilution 7,064,000 7,125,000 6,983,000
===============================================================================================================================
Diluted EPS $ 1.10 $ 0.51 $ 0.55
===============================================================================================================================
</TABLE>
Options to purchase 84,800, 86,000 and 86,000 shares of common stock at an
average price of $15.35, $15.36 and $15.36 per share at October 1, 1999,
September 30, 1998 and 1997, respectively 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 of
each respective period.
Stock Based Compensation Plans The Company has two stock option plans which
provide for the granting of options to key employees. Options granted under
these plans are to purchase shares of common stock at not less than fair market
value at the date of grant. Options vest 20% per year over five years and
generally expire ten years from the date of grant. The Company also maintains a
long-term incentive plan which provides for the granting of a wide range of
awards, including options, stock appreciation rights, restricted stock,
performance awards and other stock-based awards to any employee or director. The
terms of awards granted under this plan may vary at the discretion of the Stock
Option Committee. All awards granted under this plan consisted of stock options.
At October 1, 1999, 207,000 shares are available for future grants. Transactions
relating to these plans are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ------------------------ -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------- ------------------------ -----------------------
<S> <C> <C> <C>
Outstanding at beginning of year 828,000 $ 7.16 1,042,300 $ 6.31 1,171,300 $ 7.25
Granted 105,000 9.56 - - 48,000 11.38
Exercised (144,500) 3.37 (214,300) 3.00 (21,300) 6.27
Forefeited (1,200) 16.25 - - (155,700) 14.95
-------------------------------------------------------------------------
Outstanding at end of year 787,300 $ 8.16 828,000 $ 7.16 1,042,300 $ 6.31
---------------------- ------------------------ -----------------------
Exercisable at end of year 619,500 $ 7.42 731,400 $ 6.38 858,650 $ 5.06
====================== ======================== =======================
Weighted average fair value of options
granted during the year $ 5.47 $ 6.51
========= ========
</TABLE>
32
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Dollars in thousands except share and per share amounts
The fair value of each stock option granted during 1999 and 1997 is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions for 1999 and 1997; expected life of 7.0
years; expected volatility of 45%; expected dividend yield of 0%; and risk-free
interest rate of 6.5%.
The following table summarizes information about stock options outstanding and
exercisable at October 1, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
============================================================================================ ==========================
<S> <C> <C> <C> <C> <C>
$ 2.67 - $ 3.75 68,750 1.4 years $ 2.67 68,750 $ 2.67
4.67 - 5.75 249,250 3.4 years 4.68 249,250 4.68
9.50 - 11.50 384,500 6.3 years 9.82 252,500 9.89
15.25 - 16.25 84,800 6.5 years 15.35 49,000 15.34
- -------------------------------------------------------------------------------------------- --------------------------
787,300 5.0 years $ 8.16 619,500 $ 7.42
============================================================================================ ==========================
</TABLE>
The Company also maintains an employee stock purchase plan in which eligible
employees may purchase a limited number 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 fiscal 1999, 1998 and 1997,
11,224, 12,031, and 11,432 shares, respectively, were purchased under this plan.
At October 1, 1999, 57,093 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; expected life of 6 months; expected volatility
of 45% in 1999, 48% in 1998 and 45% in 1997; expected dividend yield of 0%; and
risk-free interest rate of 6.5%. The weighted average fair-value of those
purchase rights granted in 1999, 1998 and 1997 was $3.13, $3.04 and $4.34,
respectively.
The Company has adopted the disclosure-only provisions of SFAS No. 123 and
applies APB Opinion No. 25, and related interpretations 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:
<TABLE>
<CAPTION>
1999 1998 1997
===================================================================================================================================
<S> <C> <C> <C>
Net income:
As reported $ 7,708 $ 3,633 $ 3,816
Pro forma 7,521 3,483 3,678
Basic earnings per share:
As reported $ 1.19 $ 0.56 $ 0.62
Pro forma 1.16 0.54 0.60
Diluted earnings per share:
As reported $ 1.10 $ 0.51 $ 0.55
Pro forma 1.07 0.49 0.53
</TABLE>
33
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Dollars in thousands except share and per share amounts
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 fair
market value at the date of grant. All outstanding warrants expire through
February 2001.
Transactions relating to common stock warrants are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- -------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------- -------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 486,750 $ 3.02 741,750 $ 3.11 743,250 $ 3.11
Exercised (90,000) 3.17 (255,000) 3.29 (1,500) 3.17
------------------------- -------------------------- -----------------------------
Outstanding at end of year 396,750 $ $2.98 486,750 $ 3.02 741,750 $ 3.11
------------------------- -------------------------- -----------------------------
Exercisable at year end 396,750 $ $2.98 486,750 $ 3.02 741,750 $ 3.11
========================= ========================== =============================
</TABLE>
Employee Benefit Plan The Company has a 401(k) Salary Reduction Plan under which
the Company usually 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 $247, $226, and $181 for the
fiscal years ended 1999, 1998 and 1997, respectively.
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 rights for each outstanding share of common stock of
the Company and for each share of common stock issued from that date. 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.
Each holder of a right will in such event have the right to receive shares of
the Company's common stock having a market value of two times the exercise price
of the right, which has been set at $30.00; and in the event that the Company is
acquired in a merger or other business combination, or if more than 50% of its
assets or earning power is sold, each holder of a right would have the right to
receive common stock of the acquiring company with a market value of two times
the exercise price of the right. Following the occurrence of any of these
events, any rights that are beneficially owned by any acquiring person will
immediately become null and void.
The rights are not exercisable until the earlier of such date as 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.
Business Segments Effective October 1, 1998, the Company adopted SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information" (SFAS 131).
SFAS 131 supercedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise" and changes the way the Company reports information about its
operating segments, geographic areas of operations and major customers.
The Company has two reportable segments (Lodging Supply and Manufacturing). The
Lodging Supply segment includes sales to hotel customers of cleaning chemicals,
room accessories, paper products, personal care amenities, linens, appliances,
fixtures, and miscellaneous housekeeping supplies. The Manufacturing segment
includes sales to retailers, consumer products companies, and intercompany sales
of personal care amenities. The reportable segments are strategic businesses
that offer different products and services and accordingly are managed
separately. The accounting policies of the segments are the same as those
described in
34
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Dollars in thousands except share and per share amounts
the summary of significant accounting policies. Intersegment sales are accounted
for at prices that approximate arms length transactions, and have generally been
at or below cost. Sales by geographic area are determined based on the location
of the Company's operations. The Company evaluates performance based on
operating income (loss) of the respective business segment.
Summarized segment information for the fiscal years 1999, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Lodging Total
Supply Manufacturing Segments
- -------------------------------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C>
Sales to external customers $ 277,442 $ 28,602 $ 306,044
Intersegment sales - 12,036 12,036
- -------------------------------------------------------------------------------------------------------------------------------
Total sales 277,442 40,638 318,080
Operating income (loss) 16,474 (918) 15,556
Identifiable assets 135,693 29,437 165,130
Capital expenditures 2,096 2,415 4,511
Depreciation and amortization 2,163 2,845 5,008
- -------------------------------------------------------------------------------------------------------------------------------
1998
Sales to external customers $ 212,181 $ 24,562 $ 236,743
Intersegment sales - 9,896 9,896
- -------------------------------------------------------------------------------------------------------------------------------
Total sales 212,181 34,458 246,639
Operating income (loss) 12,174 (4,125) 8,049
Identifiable assets 89,329 31,571 120,900
Capital expenditures 1,599 2,527 4,126
Depreciation and amortization 1,524 2,778 4,302
- -------------------------------------------------------------------------------------------------------------------------------
1997
Sales to external customers $ 172,502 $ 28,415 $ 200,917
Intersegment sales - 9,420 9,420
- -------------------------------------------------------------------------------------------------------------------------------
Total sales 172,502 37,835 210,337
Operating income/1/ 4,311 4,471 8,782
Identifiable assets 78,153 33,837 111,990
Capital expenditures 3,606 3,275 6,881
Depreciation and amortization 1,260 2,628 3,888
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Includes a charge to cost of sales for the lodging supply segment of $2,187
as a result of damaged, obsolete and below standard inventory identified during
the Company's consolidation of its distribution facilities.
35
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Dollars in thousands except share and per share amounts
The following table provides a reconciliation of selected segment information to
corresponding amounts contained in the Company's Consolidated Financial
Statements:
<TABLE>
<CAPTION>
1999 1998 1997
=========================================================================================================================
<S> <C> <C> <C>
Sales:
Sales from reportable segments $318,080 $246,639 $210,337
Elimination of intersegment revenue (12,036) (9,896) (9,420)
- -------------------------------------------------------------------------------------------------------------------------
Total consolidated sales $306,044 $236,743 $200,917
- -------------------------------------------------------------------------------------------------------------------------
Total assets:
Identifiable assets from reportable segments $165,130 $120,900 $111,990
Elimination of intersegment receivables (5,499) (4,166) (1,388)
Other unallocated amounts 1,626 1,373 2,067
- -------------------------------------------------------------------------------------------------------------------------
Total consolidated assets $161,257 $118,107 $112,669
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
One lodging supply segment customer accounted for 15.3% and 15.5% of the
Company's total sales in 1999 and 1998, respectively. In 1997, one manufacturing
segment customer accounted for 13.2% of the Company's total sales. Substantially
all of the Company's operations are in the United States. Operations outside of
the Unites States, which include subsidiaries in Canada, England and New
Zealand, are not significant to the consolidated operations of the Company.
Subsequent Event In November 1999, the Company's Board of Directors authorized
the repurchase of up to 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.
Quarterly Financial Data The following table sets forth certain unaudited
quarterly financial information:
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended October 1, 1999 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $62,918 $64,625 $86,550 $91,951
Gross profit 12,505 13,321 18,778 20,463
Net income 764 817 2,823 3,304
Earnings per common share:
Basic $ 0.12 $ 0.13 $ 0.43 $ 0.50
Diluted $ 0.11 $ 0.12 $ 0.39 $ 0.45
Year ended September 30, 1998
- -------------------------------------------------------------------------------------------------------------------------
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
</TABLE>
36
<PAGE>
GUEST SUPPLY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
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
- -------------------------------------------- ------------------ ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Reserves and allowances deducted from
asset accounts:
Allowance for Doubtful Accounts
- -------------------------------------------------------------------
Year ended October 1, 1999 $ 543,000 858,000 259,000 584,000 $ 1,076,000
================== ============= ========== ============= ==============
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
================== ============= ========== ============= ==============
Allowance for Inventory Obsolescence
- ----------------------------------------------------------------------------------
Year ended October 1, 1999 $ 1,550,000 1,586,000 100,000 1,726,000 $ 1,510,000
================== ============= ========== ============= ==============
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
================== ============= ========== ============= ==============
</TABLE>
37
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
38
<PAGE>
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 2000 Annual Meeting of Shareholders to be held on January
20, 2000 (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.
39
<PAGE>
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........................... 22
Consolidated Balance Sheets --
October 1, 1999 and September 30, 1998................. 23
Consolidated Statements of Income and Comprehensive
Income -- Fiscal Years Ended October 1, 1999,
September 30, 1998 and September 30, 1997.............. 24
Consolidated Statements of Cash Flows -
Fiscal Years Ended October 1, 1999, September 30, 1998
and September 30, 1997................................. 25
Consolidated Statements of Shareholders' Equity --
Fiscal Years Ended October 1, 1999, September 30, 1998
and September 30, 1997................................. 26
Notes to Consolidated Financial Statements............. 27
2. Financial Statement Schedule:
Included in Part II of this report:
II - Valuation and Qualifying Accounts................. 37
All other schedules have been omitted because they are inapplicable or the
information is provided in the consolidated 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:
40
<PAGE>
No reports on Form 8-K were filed during the three-month period ended
October 1, 1999.
41
<PAGE>
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 21, 1999
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 21, 1999 By /s/ Clifford W. Stanley
-----------------------------
Clifford W. Stanley
President, Principal
Executive Officer and
Director
Dated: December 21, 1999 By /s/ Thomas M. Haythe
--------------------------
Thomas M. Haythe
Director
42
<PAGE>
Dated: December 21, 1999 By /s/ Peter L. Richard
--------------------------
Peter L. Richard
Director
Dated: December 21, 1999 By /s/ Teri E. Unsworth
------------------------
Teri E. Unsworth
Vice President -
Market Development and
Director
Dated: December 21, 1999 By /s/ Edward J. Walsh
------------------------
Edward J. Walsh
Director
Dated: December 21, 1999 By /s/ George S. Zabrycki
-------------------------
George S. Zabrycki
Director
Dated: December 21, 1999 By /s/ Paul T. Xenis
------------------------------
Paul T. Xenis
Vice President -
Finance and
Principal Financial
and Accounting Officer
43
<PAGE>
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). --
44
<PAGE>
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). --
45
<PAGE>
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). --
46
<PAGE>
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). --
47
<PAGE>
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). --
10(w) Stock Purchase Agreement dated as of April 23, 1999 by and
among the Company, Breckenridge-Remy Co., Madhukar Kapadia
and Naina Kapadia, as Trustees of the Kapadia Family Trust,
Kapadia Enterprises, Inc., MacDonald Contract Sales, Inc.,
Madhukar Kapadia and Naina Kapadia (incorporated by reference
to Exhibit 10 (w) to the Company's Current Report on Form 8-K
filed on May 10, 1999). Pursuant to Regulation S-K Item
601(b)(2), the Company agrees to furnish a copy of the Schedules --
to such Agreement to the Commission upon request.
10(x) 5.18% Convertible Subordinated Promissory Note due April 23,
2004 in the principal amount of $5,000,000 by the Company in
favor of Madhukar Kapadia and Naina Kapadia, as Trustees of the
Kapadia Family Trust (incorporated by reference to Exhibit 10 (x)
to the Company's Current Report on Form 8-K filed on May 10, --
1999).
10(y) Employment Agreement dated as of April 23, 1999 by and
between the Company and Madhukar Kapadia (incorporated by
reference to Exhibit 10 (y) to the Company's Current Report on
Form 8-K filed on May 10, 1999).
10(z) Amended and Restated Revolving Credit Agreement dated as of
April 21, 1999 by and among the Company, Guest Packaging, Inc.,
Breckenridge-Remy Co., Guest Distribution Services, Inc.,
Kapadia Enterprises, Inc., PNC Bank, National Association, as
Agent and as Lender, First Union National Bank, as Lender,and
Fleet Bank, N.A., as Lender (incorporated by reference to Exhibit
10 (z) to the Company's Current Report on Form 8-K filed on --
May 10, 1999).
10(aa) Form of Security Agreement dated as of April 21, 1999 executed
by the Company and each of its subsidiaries in favor of PNC Bank,
National Association, as Agent (incorporated by reference to
Exhibit 10 (aa) to the Company's Current Report on Form 8-K --
filed on May 10, 1999).
10(bb) Amendment No. 1 to Note Purchase Agreements dated as of April
21, 1999 by and among the Company, Guest Packaging, Inc.,
Breckenridge-Remy Co., Guest Distribution Services, Inc.,
Kapadia Enterprises, Inc., MONY Life Insurance Company,
AUSA Life Insurance Company, Inc., Great-West Life and
48
<PAGE>
Annuity Insurance Company and Nationwide Life and Annuity
Insurance Company (incorporated by reference to Exhibit 10 (bb)
to the Company's Current Report on Form 8-K filed on May 10, --
1999).
21 Subsidiaries of the Registrant 50
23 Consent of KPMG LLP 51
24 Power of Attorney (see "Power of Attorney" in Form 10-K) --
27 Financial Data Schedule 52
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.
49
<PAGE>
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.
7. McDonald Contract Sales, a Canadian Corporation
8. Kapadia Enterprises, Inc., a California Corporation (merged into
Breckenridge-Remy Co. in October 1999)
<PAGE>
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 16, 1999, relating to the consolidated
balance sheets of Guest Supply, Inc. and subsidiaries as of October 1, 1999 and
September 30, 1998, and the related consolidated statements of income and
comprehensive income, cash flows, and shareholders' equity for the fifty three
week period ended October 1, 1999 and the years ended September 30, 1998 and
September 30, 1997, and related schedule, which report appears in the October 1,
1999 annual report on Form 10-K of Guest Supply, Inc.
/s/ KPMG LLP
Short Hills, New Jersey
December 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-01-1999
<PERIOD-END> OCT-01-1999
<CASH> 2,200
<SECURITIES> 0
<RECEIVABLES> 43,471
<ALLOWANCES> 0
<INVENTORY> 53,937
<CURRENT-ASSETS> 103,028
<PP&E> 57,780
<DEPRECIATION> (24,187)
<TOTAL-ASSETS> 161,257
<CURRENT-LIABILITIES> 51,222
<BONDS> 0
0
0
<COMMON> 594
<OTHER-SE> 58,873
<TOTAL-LIABILITY-AND-EQUITY> 161,257
<SALES> 306,044
<TOTAL-REVENUES> 306,044
<CGS> 240,977
<TOTAL-COSTS> 240,977
<OTHER-EXPENSES> 49,511
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,674
<INCOME-PRETAX> 12,882
<INCOME-TAX> 5,174
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,708
<EPS-BASIC> 1.19
<EPS-DILUTED> 1.10
</TABLE>
