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1 of 14 pages
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 2, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11955
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<CAPTION>
GUEST SUPPLY, INC.
(Exact name of registrant as specified in its charter)
<S> <C>
State of New Jersey 22-2320483
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(State or other jurisdiction of incorporation or organization) (Identification number)
4301 U.S. Highway One, Monmouth Junction, New Jersey 08852-0902
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(Address of principal executive offices) (Zip Code)
609-514-9696
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(Registrants telephone number and area code)
September 30
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(Former name, former address and former fiscal year, if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
The number of shares of common stock, without par value, outstanding as of April
2, 1999 was 6,416,042 shares.
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Page 2
Part 1
Guest Supply, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
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Dollars in Thousands
Except per Share Amounts
April 2, September 30,
1999 1998
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(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,843 $ 2,558
Accounts receivable, net 35,682 34,054
Inventories:
Raw materials 8,801 8,666
Finished goods 29,474 29,323
Deferred income taxes 1,409 1,373
Prepaid expenses and other current assets 2,180 2,482
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Total current assets 80,389 78,456
Property and equipment, net 32,892 33,305
Other assets 2,585 1,555
Excess of cost over net assets acquired 4,607 4,791
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$120,473 $118,107
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expense $ 34,525 $ 35,126
Current maturities of long-term debt 556 -
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Total current liabilities 35,081 35,126
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Long-term debt 28,444 26,126
Deferred income taxes 4,987 4,870
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Total long-term liabilities 33,431 30,996
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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 at April 2, 1999 and at September 30, 1998 594 594
Additional paid-in capital 38,948 38,595
Retained earnings 15,049 14,378
Treasury stock - 255,596 common shares at April 2, 1999
and 135,800 common shares at September 30, 1998, at cost (2,640) (1,422)
Accumulated other comprehensive income:
Cumulative foreign currency translation adjustments 10 (160)
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Total shareholders' equity 51,961 51,985
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$120,473 $118,107
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The accompanying notes are an integral part of these consolidated condensed financial statements.
</TABLE>
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<CAPTION>
Page 3
Guest Supply, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
and Comprehensive Income
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In Thousands
except per share amounts
(Unaudited)
27 Weeks Ended Six Mos 13 Weeks Three Mos
Ended Ended Ended Ended
Apr 2, 1999 Mar 31, 1998 Apr 2,1999 Mar 31, 1998
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<S> <C> <C> <C> <C>
Sales $127,543 $105,559 $64,625 $52,794
Cost of sales 101,717 84,548 51,304 42,223
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Gross profit 25,826 21,011 13,321 10,571
Selling, general & administrative expenses 22,032 18,528 11,336 9,378
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Operating income 3,794 2,483 1,985 1,193
Interest and other income 13 35 7 28
Interest expense (1,051) (1,175) (549) (657)
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Income before income taxes 2,756 1,343 1,443 564
Income tax expense 1,175 555 626 194
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Net income $ 1,581 $ 788 $ 817 $ 370
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Earnings per common share:
Basic $0.25 $0.12 $0.13 $0.06
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Diluted $0.23 $0.11 $0.12 $0.05
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Weighted average number of common
shares outstanding
Basic 6,380 6,343 6,378 6,466
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Diluted 6,807 7,040 6,788 7,099
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Comprehensive Income:
Net income $1,581 $788 $817 $370
Other comprehensive income - foreign
currency translation adjustment 170 124 67 128
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Comprehensive income $1,751 $912 $884 $498
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The accompanying notes are an integral part of these consolidated condensed financial statements.
</TABLE>
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Page 4
Guest Supply, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
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In Thousands
(Unaudited)
Twenty-Seven Six Months
Weeks Ended Ended
April 2, 1999 March 31, 1998
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,581 $ 788
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,366 2,212
Provision for losses on accounts receivable 281 218
Deferred income tax expense 81 151
Changes in assets and liabilities:
Increase in accounts receivable (1,909) (1,012)
Increase in inventories (286) (3,600)
Decrease (increase) in prepaid expenses and other current assets 655 (907)
(Increase) decrease in other assets (1,098) 38
Decrease in accounts payable and accrued expenses (601) (1,009)
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Net cash provided by (used in) operating activities 1,070 (3,121)
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Cash flows from investing activities:
Capital expenditures (1,769) (2,225)
Decrease in other assets 68 42
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Net cash used in investing activities (1,701) (2,183)
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Cash flows from financing activities:
Proceeds from revolving credit agreement 34,574 30,383
Repayment on revolving credit agreement (31,700) (41,999)
Proceeds from issuance of senior note payable - 25,000
Repayment of long-term debt - (10,937)
Proceeds from issuance of common stock 454 2,510
Purchase of treasury stock (2,582)
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Net cash provided by financing activities 746 4,957
Foreign currency translation adjustments 170 124
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Net increase (decrease) in cash and cash equivalents 285 (223)
Cash and cash equivalents at beginning of period 2,558 4,152
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Cash and cash equivalents at end of period $ 2,843 $ 3,929
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The accompanying notes are an integral part of these consolidated condensed financial statements.
</TABLE>
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Page 5
Notes to the Consolidated Condensed Financial Statements
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Dollars in Thousands
Except per Share Amounts
Note 1: Basis of Presentation
The unaudited consolidated condensed financial statements have been prepared
from the books and records of Guest Supply, Inc. and subsidiaries (the Company)
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal and recurring adjustments) considered necessary for a fair
presentation have been included. It is suggested that the consolidated
condensed financial statements be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended September
30, 1998 included in the Company's annual report on Form 10-K. Effective
October 1, 1998, the Company adopted a fifty-two or fifty-three week fiscal year
changing the year-end date from September 30 to the Friday closest to October 1.
Interim results are not necessarily indicative of the results that may be
expected for the full year.
Note 2: Earnings Per Common Share
Basic earnings per common share excludes dilution and was computed by dividing
net income by the weighted-average number of common shares outstanding for the
period. Diluted earnings per common share was computed by dividing net income
by the weighted-average number of common shares outstanding for the period
adjusted (i.e., increased) for all additional common shares that would have been
outstanding if potentially dilutive common shares had been issued.
Note 3: Comprehensive Income
Effective October 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
requires disclosure of certain components of changes in equity (See
"Consolidated Condensed Statements of Operations and Comprehensive Income").
Adoption of this statement did not have any effect on the results of operations
or financial position of the Company.
Note 4: Subsequent Event
On April 23, 1999, the Company completed the acquisition of Kapadia Enterprises,
Inc., d/b/a Nasco Supply Company and McDonald Contract Sales, Inc. (collectively
"Nasco"), acquiring all of the capital stock of the privately-held distributor
of textile products to the lodging industry from Madhukar and Naina Kapadia.
Nasco will continue to operate under the direction of current management. The
negotiated purchase price (the "Purchase Price") paid in the Nasco acquisition
was (i) $18.0 million in cash at the closing of the acquisition, which price is
subject to a post-closing purchase price adjustment based upon Nasco's closing
adjusted net worth, as defined (ii) the issuance by the Company of a 5.18%
convertible subordinated promissory note in the aggregate principal amount of
$5.0 million, which note is convertible into shares of the Company's common
stock, no par value ("Common Stock") at a price of $13.275 per share, subject to
adjustment as provided in the note, and (iii) 45,198 shares of the Company's
Common Stock ($500 of Common Stock based on a per share price of $11 1/16) and
(iv) transaction costs (the "Acquisition"). The acquisition will be accounted
for under the purchase method of accounting.
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Notes to the Consolidated Condensed Financial Statements
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continued
Concurrent with the closing of the acquisition of Nasco, the Company and its
subsidiaries entered into a $35.0 million amended and restated revolving credit
facility with PNC Bank, N.A., First Union National Bank and Fleet Bank, N.A.
(the "Financing Agreement") and an amendment to the Company and its
subsidiaries' outstanding $25.0 million aggregate principal amount senior notes
(the "Senior Notes"). Borrowings under the Financing Agreement were used to
fund the cash portion of the Purchase Price and will be used to finance ongoing
working capital requirements of the Company and its subsidiaries. The
Financing Agreement is a six-year revolving credit facility, with interest on
outstanding borrowings determined, at the Company's option, based upon stated
margins at or below the prime rate or in excess of eurodollar rates. Borrowings
under the Financing Agreement are secured by substantially all of the assets of
the Company and its subsidiaries. The Senior Notes have fixed interest rates
ranging from 6.95% to 7.31%, maturities ranging from 2003 to 2009, and are
secured by substantially all of the assets of the Company and its subsidiaries.
As a result of the Acquisition, the interest rates on the Senior Notes and the
Financing Agreement increased by 0.25% and 0.40%, respectively.
The Financing Agreement and the Senior Notes contain a number of restrictive
covenants, including covenants which limit incurrence of liens and indebtedness,
limit transactions with affiliates, acquisitions, sales of assets, investments
and other restricted payments. The Financing Agreement and the Senior Notes
further require that the Company comply with certain financial and other
covenants as set forth therein.
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Page 7
GUEST SUPPLY, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Dollars in Thousands
Twenty-Seven Weeks ended April 2, 1999 vs. Six Months ended March 31, 1998
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Sales for the twenty-seven weeks ended April 2, 1999 increased by $21,984 or
20.8% to $127,543 from $105,559 for the six months ended March 31, 1998.
Revenues generated from our hotel customers increased $21,790 or 23.6% to
$114,310. The increase in sales to hotels is the result of the addition of new
customers, the sale of additional products to existing customers and the
continued expansion of the Company's product line. New customers were added by
the direct sales force in existing sales territories and by new salespeople in
new territories. Both additional hotels and product categories were added
through new or expanded agreements with management companies and hotel
corporations. The effect of the change in the Company's year-end accounted for
$2,334 of the sales increase.
Sales to consumer products companies and retailers were $13,233 for the twenty-
seven weeks ended April 2, 1999 compared to $13,039 for the six months ended
March 31, 1998.
Gross profit for the twenty-seven weeks ended April 2, 1999 increased $4,815 to
$25,826 or 20.2% of sales compared to $21,011 or 19.9% of sales for the six
months ended March 31, 1998.
Selling, general and administrative expenses were $22,032 or 17.3% of sales for
the twenty-seven weeks ended April 2, 1999 compared to $18,528 or 17.6% of sales
for the six months ended March 31, 1998. The increase of $3,504 or 18.9% was
due primarily to an increase in customer rebates, payroll and payroll related
costs and delivery expenses associated with the Company's hotel sales growth.
The decline as a percent of sales was due to the increased sales volume and cost
containment programs.
Net interest expense was $1,038 for the twenty-seven weeks ended April 2, 1999
compared to $1,140 for the six months ended March 31, 1998. The decrease was
due to lower borrowings during the period.
Income tax expense was $1,175 for the twenty-seven weeks ended April 2, 1999
compared with $555 for the six months ended March 31, 1998. The Company's
effective tax rate has remained relatively consistent with the prior year
comparable period.
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GUEST SUPPLY, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Dollars in Thousands
Thirteen weeks ended April 2, 1999 vs. Three Months ended March 31, 1998
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Sales for the thirteen weeks ended April 2, 1999 increased by $11,831 or 22.4%
to $64,625 from $52,794 for the three months ended March 31, 1998. Revenues
generated from our hotel customers increased $11,662 or 24.5% to $59,352. The
increase in sales to hotels is the result of the addition of new customers, the
sales of additional products to existing customers, and the continued expansion
of the Company's product line. New customers were added by the direct sales
force in existing sales territories and by new salespeople in new territories.
Both additional hotels and product categories were added through new or expanded
agreements with management companies and hotel corporations.
Sales to consumer product companies and retailers increased to $5,273 for the
thirteen weeks ended April 2, 1999 compared to $5,104 of sales for the three
months ended March 31, 1998.
Gross profit for the thirteen weeks ended April 2, 1999 increased $2,750 to
$13,321 or 20.6% of sales compared to $10,571 or 20.0% of sales for the three
months ended March 31, 1998.
Selling, general and administrative expenses were $11,336 or 17.5% of sales for
the thirteen weeks ended April 2, 1999 compared to $9,378 or 17.8% of sales for
the three months ended March 31, 1998. The increase of $1,958 or 20.9% was due
primarily to an increase in customer rebates, payroll and payroll related costs
and delivery expense associated with the Company's hotel sales growth.
Net interest expense was $542 for the thirteen weeks ended April 2, 1999
compared to $629 for the three months ended March 31, 1998. This decrease was
the result of lower borrowings during the period.
Income tax expense was $626 for the thirteen weeks ended April 2, 1999 compared
with $194 for the three months ended March 31, 1998. The Company's effective
tax rate for the three months ended March 31, 1998 reflected an adjustment in
the Company's estimated fiscal year 1998 annual effective tax rate.
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Page 9
GUEST SUPPLY, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Dollars in Thousands
Liquidity and Capital Resources at April 2, 1999
- ------------------------------------------------
At April 2, 1999, the Company had $45,308 of working capital compared to $43,330
at September 30, 1998. The increase of $1,978 is primarily the result of an
increase in accounts receivable and inventory of $1,628 and $286 respectively.
On April 23, 1999, the Company completed the acquisition of Kapadia Enterprises,
Inc., d/b/a Nasco Supply Company and McDonald Contract Sales, Inc. (collectively
"Nasco"), acquiring all of the capital stock of the privately-held distributor
of textile products to the lodging industry from Madhukar and Naina Kapadia.
Nasco will continue to operate under the direction of current management. The
negotiated purchase price (the "Purchase Price") paid in the Nasco acquisition
was (i) $18.0 million in cash at the closing of the acquisition, which price is
subject to a post-closing purchase price adjustment based upon Nasco's closing
adjusted net worth, as defined (ii) the issuance by the Company of a 5.18%
convertible subordinated promissory note in the aggregate principal amount of
$5.0 million, which note is convertible into shares of the Company's common
stock, no par value ("Common Stock") at a price of $13.275 per share, subject to
adjustment as provided in the note, and (iii) 45,198 shares of the Company's
Common Stock ($500 of Common Stock based on a per share price of $11 1/16) and
(iv) transaction costs (the "Acquisition"). The acquisition will be accounted
for under the purchase method of accounting.
Concurrent with the closing of the acquisition of Nasco, the Company and its
subsidiaries entered into a $35.0 million amended and restated revolving credit
facility with PNC Bank, N.A., First Union National Bank and Fleet Bank, N.A.
(the "Financing Agreement") and an amendment to the Company and its
subsidiaries' outstanding $25.0 million aggregate principal amount senior notes
(the "Senior Notes"). Borrowings under the Financing Agreement were used to
fund the cash portion of the Purchase Price and will be used to finance ongoing
working capital requirements of the Company and its subsidiaries. The
Financing Agreement is a six-year revolving credit facility, with interest on
outstanding borrowings determined, at the Company's option, based upon stated
margins at or below the prime rate or in excess of eurodollar rates. Borrowings
under the Financing Agreement are secured by substantially all of the assets of
the Company and its subsidiaries. The Senior Notes have fixed interest rates
ranging from 6.95% to 7.31%, maturities ranging from 2003 to 2009, and are
secured by substantially all of the assets of the Company and its subsidiaries.
As a result of the Acquisition, the interest rates on the Senior Notes and the
Financing Agreement increased by 0.25% and 0.40%, respectively.
The Financing Agreement and the Senior Notes contain a number of restrictive
covenants, including covenants which limit incurrence of liens and indebtedness,
limit transactions with affiliates, acquisitions, sales of assets, investments
and other restricted payments. The Financing Agreement and the Senior Notes
further require that the Company comply with certain financial and other
covenants as set forth therein.
In connection with the common stock repurchase program authorized by the Board
of Directors, the Company purchased 250,300 shares of its outstanding shares at
a cost of $2,581 during the twenty-seven weeks ended April 2, 1999.
The Company believes that the amount available under the Financing 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.
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Page 10
GUEST SUPPLY, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Dollars in Thousands
Recently Issued Accounting Standards
- ------------------------------------
In June 1997, the Financial Accounting Standards Board released Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 became effective for the Company beginning October 1,
1998 and requires disclosure of certain information about operating segments and
geographic areas of operation. The Company has adopted SFAS 131 which does not
require interim period reporting in the year of adoption. The Company is
completing its evaluation of the disclosure requirements of SFAS 131 and will
begin such disclosures in its Form 10-K filing for the year ended October 1,
1999. Implementation of SFAS 131 will not have any effect on the results of
operations or financial position of the Company.
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. Many of the software packages that the Company
currently uses have been upgraded to be Year 2000 compliant. Other software
considered critical to the Company's operations has been reviewed to determine
the necessary changes needed to be upgraded. All changes are expected to be
completed by June 30, 1999.
As part of the Company's Year 2000 project, the Company will continue to monitor
its significant suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate Year 2000 compliance
issues. The Company has also begun to contact its large customers where
potential exposure exists to ascertain their readiness. While the Company will
continue to monitor its significant suppliers and customers, there can be no
assurances that their systems will be timely converted or that failure to
convert would not have a material adverse effect on the Company and its
operations.
Management estimates that based on the information known to date, the cost to
complete its remediation of its systems will not exceed $250.
The Company does not believe that its failure to resolve Year 2000 issues with
respect to internal non-compliant systems will cause material disruption in its
operations. While the Company believes its Year 2000 project will adequately
address its internal issues, failure of the Company's suppliers and customers to
timely remediate their Year 2000 issues may result in a material adverse effect
on the Company and its operations.
The Company has not, to date, developed a Year 2000 Contingency Plan. It is the
Company's goal to develop a contingency plan for all mission critical systems by
September 30, 1999.
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Page 11
GUEST SUPPLY, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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continued
Cautionary Statement
- --------------------
This quarterly report on Form 10-Q may contain forward-looking information about
the Company. The Company is hereby setting forth statements identifying
important factors that may cause the Company's actual results to differ
materially from those set forth in any forward-looking statements made by the
Company. Some of the most significant factors include an unanticipated downturn
in the lodging industry resulting in lower demand for the Company's products,
the unanticipated loss of or decline in sales to a major customer, failure to
secure new business and unforeseen inefficiencies at the Company's manufacturing
facility. In addition, difficulties in completing remediation of Year 2000
issues by the Company, its customers or suppliers may have a material adverse
effect on the Company and its operations. Accordingly, there can be no
assurances that any anticipated future results will be achieved.
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Page 12
GUEST SUPPLY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
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Item 5: Other Information
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None
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Page 13
GUEST SUPPLY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 6: Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits
No. 27 Financial Data Schedule
b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated April 23, 1999,
reporting under Item 2 of Form 8-K the registrant's entering into a Stock
Purchase Agreement relating to the acquisition of Kapadia Enterprises, Inc.
d/b/a Nasco Supply Company and McDonald Contract Sales Inc.
<PAGE>
Page 14
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934. The
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GUEST SUPPLY, INC.
Dated: May 21, 1999 By: /s/ Clifford W. Stanley
--------------------------- -------------------------------------
Clifford W. Stanley
President & Chief Executive Officer
Dated: May 21, 1999 By: /s/ Paul T. Xenis
--------------------------- -------------------------------------
Paul T. Xenis
Vice President, Finance
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-01-1999
<PERIOD-END> APR-02-1999
<CASH> 2,843
<SECURITIES> 0
<RECEIVABLES> 35,682
<ALLOWANCES> 0
<INVENTORY> 38,275
<CURRENT-ASSETS> 80,839
<PP&E> 60,849
<DEPRECIATION> (27,957)
<TOTAL-ASSETS> 120,473
<CURRENT-LIABILITIES> 35,081
<BONDS> 0
0
0
<COMMON> 594
<OTHER-SE> 51,367
<TOTAL-LIABILITY-AND-EQUITY> 120,473
<SALES> 127,543
<TOTAL-REVENUES> 127,543
<CGS> 101,717
<TOTAL-COSTS> 101,717
<OTHER-EXPENSES> 22,032
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,038
<INCOME-PRETAX> 2,756
<INCOME-TAX> 1,175
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,581
<EPS-PRIMARY> .25
<EPS-DILUTED> .23
</TABLE>
