<PAGE>
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 December 31, 1999
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXHANGE
ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 1-11955
================================================================================
GUEST SUPPLY, INC.
(Exact name of registrant as specified in its charter)
State of New Jersey 22-2320483
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (Identification
number)
4301 U.S. Highway One, Monmouth Junction, New Jersey 08852-0902
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
609-514-9696
- --------------------------------------------------------------------------------
(Registrants telephone number and area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
================================================================================
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
December 31, 1999 was 6,304,660 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 stated value
<TABLE>
<CAPTION>
December 31 1999 October 1, 1999
----------------- ---------------
<S> <C> <C>
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 5,626 $ 2,200
Accounts receivable, net 41,271 43,471
Inventories:
Raw materials 7,713 7,126
Finished goods 46,666 46,811
Deferred income taxes 1,839 1,626
Prepaid expenses and other current assets 2,829 2,228
- -------------------------------------------------------------------------------------------
Total current assets 105,944 $ 103,462
Property and equipment, net 33,763 33,593
Other assets 2,750 2,387
Excess of cost over net assets acquired 21,501 21,815
- -------------------------------------------------------------------------------------------
$ 163,958 $ 161,257
===========================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 48,817 $ 50,111
Current maturities of long-term debt 1,299 1,111
- -------------------------------------------------------------------------------------------
Total current liabilities $ 50,116 $ 51,222
===========================================================================================
Long-term debt 45,545 39,789
Note payable to related party 5,000 5,000
Deferred income taxes 5,673 5,779
- -------------------------------------------------------------------------------------------
Total long-term liabilities 56,218 50,568
===========================================================================================
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 December 31, 1999 and at October 1, 1999 594 594
Additional paid-in capital 39,247 39,247
Retained earnings 22,381 20,559
Treasury stock - 366,978 shares at December 31, 1999
and 95,178 shares at October 1, 1999, at cost (4,738) (1,091)
Accumulated other comprehensive income 140 158
- -------------------------------------------------------------------------------------------
Total shareholders' equity 57,624 59,467
- -------------------------------------------------------------------------------------------
$ 163,958 $ 161,257
===========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
Page 3
Guest Supply, Inc. and Subsidiaries
Consolidated Condensed Statements of Income
and Comprehensive Income
================================================================================
In Thousands
except per share amounts
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Fourteen Weeks
Ended Ended
December 31, 1999 January 1, 1999
------------------- ----------------
<S> <C> <C>
Sales $ 80,091 $ 62,918
Cost of sales 62,618 50,413
- --------------------------------------------------------------------------------------------------
Gross profit 17,473 12,505
Selling, general and administrative expenses 13,527 10,696
- --------------------------------------------------------------------------------------------------
Operating income 3,946 1,809
Interest and other income 7 6
Interest expense 874 502
- --------------------------------------------------------------------------------------------------
Income before income taxes 3,079 1,313
Income tax expense 1,257 549
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Net Income $ 1,822 $ 764
==================================================================================================
Earnings per common share:
Basic $ 0.28 $ 0.12
==================================================================================================
Diluted $ 0.26 $ 0.11
==================================================================================================
Comprehensive income:
Net income $ 1,822 $ 764
Other comprehensive (loss) income - foreign
currency translation adjustment (18) 103
- --------------------------------------------------------------------------------------------------
Comprehensive income $ 1,804 $ 867
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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Page 4
Guest Supply, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
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In Thousands
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Fourteen Weeks
Ended Ended
December 31, 1999 January 1, 1999
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,822 $ 764
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,466 1,194
Provision for losses on accounts receivable 169 136
Deferred income tax (benefit) expense (319) 39
Changes in assets and liabilities:
Decrease in accounts receivable 2,031 5,120
Increase in inventories (442) (3,809)
(Increase) decrease in prepaid expenses
and other current assets (310) 534
Decrease (increase) in other assets 21 (1,139)
Decrease in accounts payable and accrued expenses (1,294) (3,249)
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 3,144 (410)
- -----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (1,322) (956)
(Increase) decrease in other assets (675) 137
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,997) (819)
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Cash flows from financing activities:
Proceeds from revolving credit agreement 24,766 19,469
Repayment on revolving credit agreement (18,267) (16,395)
Repayment of long-term debt (555) -
Proceeds from issuance of common stock - 13
Purchase of treasury stock (3,647) (2,581)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,297 506
Foreign currency translation adjustments (18) 103
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,426 (620)
Cash and cash equivalents at beginning of period 2,200 2,558
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Cash and cash equivalents at end of period $ 5,626 $ 1,938
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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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 October 1, 1999
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. Certain October 1, 1999 amounts have been reclassified to conform
to the December 31, 1999 presentation.
Note 2: Earnings Per Common Share
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
Thirteen weeks Fourteen weeks
ended ended
December 31, 1999 January 1, 1999
=====================================================================================================
<S> <C> <C>
Basic EPS:
Net Income $ 1,822 $ 764
==================================================================================================
Weighted average common shares outstanding 6,418,000 6,381,000
==================================================================================================
Basic EPS $ 0.28 $ 0.12
==================================================================================================
Diluted EPS:
Net income $ 1,822 $ 764
Effects of convertible promissory note 40 --
- --------------------------------------------------------------------------------------------------
Adjusted net income $ 1,862 $ 764
==================================================================================================
Weighted average common shares outstanding 6,418,000 6,381,000
Effects of dilutive stock options and warrants 487,000 443,000
Effects of convertible promissory note 377,000 --
- --------------------------------------------------------------------------------------------------
Weighted average common shares outstanding
assuming dilution 7,282,000 6,824,000
==================================================================================================
Diluted EPS $ 0.26 $ 0.11
==================================================================================================
</TABLE>
<PAGE>
Page 6
Notes to the Consolidated Condensed Financial Statements
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Dollars in Thousands
continued
Note 3: Business Segments
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 of
those described in the summary of significant accounting policies in the annual
report. 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 are as follows:
<TABLE>
<CAPTION>
Lodging Supply Manufacturing Total Segment
=============================================================================================================
<S> <C> <C> <C>
Thirteen weeks ended December 31, 1999
Sales to external customers $ 73,514 $ 6,577 $ 80,091
Intersegment sales - 2,972 2,972
- -------------------------------------------------------------------------------------------------------------
Total sales 73,514 9,549 83,063
Operating income 3,791 155 3,946
Fourteen weeks ended January 1, 1999
Sales to external customers $ 54,958 $ 7,960 $ 62,918
Intersegment sales - 2,664 2,664
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Total sales 54,958 10,624 65,582
Operating income (loss) 2,490 (681) 1,809
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Note 4: Acquisition
On April 23, 1999, the Company acquired all of the outstanding shares of
Kapadia Enterprises, Inc., d/b/a Nasco Supply Company and MacDonald 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 under the purchase method of accounting.
<PAGE>
Page 7
Notes to the Consolidated Condensed Financial Statements
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Dollars in Thousands
continued
Note 5: Long-Term Debt
At December 31, 1999, and October 1, 1999, the Company's long-term debt
consisted of the following:
<TABLE>
<CAPTION>
December 31, 1999 October 1, 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit agreement $22,399 $15,900
Senior notes 24,445 25,000
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$46,844 $40,900
================================================================================
</TABLE>
Note 6: Subsequent Event
On January 18, 2000, the Company entered into an agreement with, and purchased
common stock in GoCo-op, Inc. for $1,250. Under the terms of the agreement,
GoCo-op will provide the Company with an Internet based procurement system,
which will be trademarked and operated as guestsupply.com. GoCo-op, Inc. is a
leader in the development and hosting of business-to-business e-commerce sites.
<PAGE>
Page 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Dollars in Thousands
Thirteen weeks ended December 31, 1999 vs. Fourteen Weeks ended January 1, 1999
- -------------------------------------------------------------------------------
Sales for the thirteen weeks ended December 31, 1999 increased by 27.3% or
$17,173 to $80,091 from $62,918 for the fourteen weeks ended January 1, 1999.
Revenues from lodging supply segment customers increased $18,556 or 33.8% to
$73,514. Excluding the impact of the Nasco acquisition and the extra week during
last year, sales rose 18.0% 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 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 in expanded geographic territories.
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 $6,577 in fiscal 2000 compared
to $7,960 in fiscal 1999. The decrease of $1,383 or 17.4% was primarily due to
decreased sales to an existing customer.
Gross profit for the thirteen weeks ended December 31, 1999 was $17,473 or
21.8% of sales compared to $12,505 or 19.9% for the fourteen weeks ended January
1, 1999. The increase in gross profit as a percentage of sales was primarily due
to improved manufacturing efficiencies 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 $13,527 or 16.9% of sales
for the thirteen weeks ended December 31, 1999 compared to $10,696 or 17.0% for
the comparable prior year period. The increase of $2,831 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 $2,137 or 118.1% to $3,946 for the thirteen weeks
ended December 31, 1999 from $1,809 last year. Operating income in the lodging
supply segment increased 52.2% to $3,791 in fiscal 2000 compared with $2,490 in
fiscal 1999 due principally to higher sales volume and reduced incremental
general and administrative costs, offset by lower gross margins. The
manufacturing segment generated operating income of $155 for the thirteen weeks
ended December 31, 1999, an increase of $836 from the $681 operating loss during
the fourteen weeks ended January 1, 1999 due principally to improved
manufacturing efficiencies.
Net interest expense was $867 for the thirteen weeks ended December 31, 1999
compared to $496 for the fourteen weeks ended January 1, 1999. The increase was
the result of an increase in borrowings to finance the acquisition of Nasco.
The effective tax rate decreased to 40.8% in fiscal 2000 from 41.8% in fiscal
1999. In fiscal 1999, the Company had a higher tax rate due to an increase in
its valuation reserve related to deferred tax assets and an increase in state
taxes.
Overall, net income for fiscal 2000 increased 138.5% to $1,822 or $0.26 per
diluted share compared to $764 or $0.11 per diluted share in fiscal 1999.
<PAGE>
Page 9
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
- -------------------------------
The Company had $55,828 of working capital at December 31, 1999 compared to
$52,240 at October 1, 1999. The increase of $3,588 is primarily the result of an
increase in net cash from operations.
Net cash flows from operating activities increased to $3,144 for the fiscal
thirteen weeks ended December 31, 1999, compared with net cash used in operating
activities of $410 for the fourteen weeks ended January 1, 1999. 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 thirteen
weeks ended December 31, 1999.
Net cash flows used for investing activities totaled $1,997, compared with
$819 in 1999. Capital expenditures for the thirteen weeks ended December 31,
1999 were $1,322 versus $956 in 1999. In 2000, capital expenditures for the
lodging supply and manufacturing segments amounted to $484 and $838,
respectively. Capital expenditures in fiscal 2000 of approximately $4,500 are
expected.
Net cash flows provided by financing activities totaled $2,297 compared with
$506 in 1999. Borrowings during the thirteen weeks ended December 31, 1999
increased primarily due to capital expenditures and other long-term investments
of $1,997 and the purchase of $3,647 of treasury stock under the Company's stock
repurchase program.
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
- ---------
The Company did not experience any significant year 2000 system failures or
miscalculations from either internal or external sources. Total remediation
costs incurred to date by the Company have not exceeded $250.
<PAGE>
Page 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Dollars in Thousands
Other
- -----
At December 31, 1999, the financial liabilities of the Company exposed to
changes in interest rates consist mainly of $22,399 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 that a hypothetical increase of 1% in interest rates and debt levels
were to remain constant, interest expense would increase $224 per year. Included
in long-term debt is also $24,445 of fixed rate debt, which is not subject to
interest rate risk.
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 or decline in sales to a major customer, failure to
secure new business, unforeseen inefficiencies at the Company's manufacturing
facility and difficulties in implementing its e-commerce initiative.
Accordingly, there can be no assurances that any anticipated future results will
be achieved.
<PAGE>
Page 11
Guest Supply, Inc. And Subsidiaries
Part II - Other Information
================================================================================
Item 4: Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
The following matters were submitted to a vote of security holders during the
Company's Annual Meeting of Stockholders held January 20, 2000:
Description of Matter
Authority
Votes Cast For Withheld
-------------- --------
1. Election of Class B Directors 5,391,672 462,811
Thomas M. Haythe
George S. Zabrycki
For Against Abstained
--- ------- ---------
2. Ratification of appointment of 5,815,113 9,700 29,670
KPMG LLP as independent auditors
for fiscal 2000.
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Page 12
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
None
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Page 13
SIGNATURES
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934. The
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GUEST SUPPLY, INC.
Dated: February 14, 2000 By: /s/ Clifford W. Stanley
----------------- ---------------------------
Clifford W. Stanley
President & Chief Executive Officer
Dated: February 14, 2000 By: /s/ Paul T. Xenis
----------------- ---------------------------
Paul T. Xenis
Vice President, Finance
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-29-2000
<PERIOD-END> DEC-31-1999
<CASH> 5,626
<SECURITIES> 0
<RECEIVABLES> 41,271
<ALLOWANCES> 0
<INVENTORY> 54,379
<CURRENT-ASSETS> 105,944
<PP&E> 59,102
<DEPRECIATION> (25,339)
<TOTAL-ASSETS> 163,958
<CURRENT-LIABILITIES> 50,116
<BONDS> 0
0
0
<COMMON> 594
<OTHER-SE> 57,030
<TOTAL-LIABILITY-AND-EQUITY> 163,958
<SALES> 80,091
<TOTAL-REVENUES> 80,091
<CGS> 62,618
<TOTAL-COSTS> 62,618
<OTHER-EXPENSES> 13,527
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 867
<INCOME-PRETAX> 3,079
<INCOME-TAX> 1,257
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,822
<EPS-BASIC> .28
<EPS-DILUTED> .26
</TABLE>
