ITEM 1. BUSINESS.
General ------- 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 makes 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 Scottsdale Princess in Scottsdale, Arizona, Boston Harbor Hotel in Boston, Massachusetts, Nikko Hotels International in New York, New York, and The Registry Hotels in Dallas, Texas, and for cruiseship lines such as Holland America and Royal Caribbean.
The Company sells amenities in uncustomized color coordinated packaging under such brand names as Jhirmack , Jergens , Bath and Body Works and Neutrogena . Some of these brand name products are also sold as part of customized amenity programs. In addition, the Company markets its own lines of guest amenity lines under the "Heritage Collection ," "Botanicals " and "Nautic " labels.
The Company's lodging industry customers consist of hotel chains (including supply divisions), individual members or franchisees of hotel chains, independent hotel properties, management companies and cruise ship lines. The Company distributes its products to approximately 14,000 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 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 12 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 110 sales consultants. Management believes that the Company's product line and distribution capability has provided improved service to all of its customer groups.
Products -------- 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. A customized individual amenity program typically contains several items and is priced from $1.50 and up per room stay. Because customized corporate amenity programs and uncustomized amenity programs also vary widely in number of items, the cost of such programs also vary widely.
The Company sells national brand name products, as well as generic and the Company's own private label products and accessories. During the fiscal year ended September 30, 1997, less than 10% of the Company's sales were attributable to sales of national brand name products which include Bath and Body Works , Jhirmack , Jergens and Neutrogena .
Guest Supply also markets guest amenity programs under the "Institute Swiss " label and under Guest Supply's "Botanicals ," "Nautic ," "Heritage Jefferson Floral ," "Heritage American Country " and "Heritage Yankee Stripes ". 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 --------------------------- 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 ten to 14 weeks and the balance of the shipment is generally delivered over the next 12 to 24 months.
The Company employs direct sales personnel who consult regularly with the Company's existing customers and solicit new customers. In addition, the Company employs in-house sales people responsible for telemarketing sales
and customer service. Further, the senior management of the Company devotes a substantial amount of time to sales activities, as well as to the overall coordination of customers' amenity programs and the development of new concepts to enhance the effectiveness of the programs. The Company believes that prompt, professional and responsive customer service is an important element in attracting new customers and satisfying existing ones.
In addition, the Company maintains regional distribution centers throughout the United States. This distribution network consists of 12 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.
ITEM 2. PROPERTIES.
The Company's executive offices and principal operating facilities are located in Monmouth Junction, New Jersey, where the Company leases approximately 21,900 square feet of space in an office building. The lease expires on December 15, 2006 and provides for three five-year renewal options.
In connection with its manufacturing and packaging operations, the Company currently leases a manufacturing facility in Rahway, New Jersey. The manufacturing facility consists of approximately 68,000 square feet of space. The lease for this facility expires in 2010. See "Item 1. Business - Manufacturing, Packaging and Shipping" above. This lease may be cancelled by the Company on 90 days' notice.
During fiscal 1997, the Company moved into a newly constructed 226,000 square foot distribution and warehouse facility designed to its specifications in Sayreville, New Jersey. This new facility consolidated all of the Company's then existing New Jersey warehousing facilities. The lease for the facility expires in November 2006.
As part of its regional distribution strategy, the Company currently also leases 12 regional warehouses. The warehouses range in size from 12,000 square feet to 60,000 square feet and are located in Ohio (three), Michigan, Indiana, Texas, Florida, Illinois, Maryland, California, Georgia and North Carolina. The leases for these warehouses have expiration dates through 2003.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
In July 1994, Valley Products Co., Inc. ("Valley") commenced an action in the United States District Court for the Western District of Tennessee against Hospitality Franchise Systems, Inc. ("HFS") and certain of its subsidiaries (including those that franchise Days Inn, Howard Johnson, Ramada, Super 8 and Park Inn hotels and motels), and against the Company and Marietta Corporation ("Marietta").
The complaint arose from HFS's decision to terminate Valley's authority to sell guest room amenities to HFS franchisees, and to enter into "preferred vendor agreements" with the company and Marietta for guest room amenities. The complaint alleged claims under federal and state antitrust laws for tying, exclusive dealing and monopolization, and related common law and federal trademark law claims.
On December 22, 1994, the District Court issued an order dismissing the Valley complaint as to all defendants and denying Valley's motion to amend its complaint. Valley appealed that order to the United States Court of Appeals in May 1996.
On October 22, 1997, the Court of Appeals issued a decision affirming the order of dismissal by the District Court. Valley has not filed a petition for certiorari to the United States Supreme Court, and its time to do so will expire at approximately the end of January 1998.
From time to time, the Company is party to certain other claims, suits and complaints which arise in the ordinary course of business. Currently, there are no such claims, suits or complains which, in the opinion of management, would have a material adverse effect on the Company's financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
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. Prior to August 6, 1996, the Company's common stock was traded on the NASDAQ National Market System under the symbol GEST. The table below sets forth the high and low closing prices during each of the last two fiscal years on the NYSE and the NASDAQ National Market System, as applicable. The approximate number of holders of the Company's common stock at September 30, 1997 was 500. No cash dividends have been declared on the common stock since the Company was organized.
Market Price Range ------------------
Year Ended September 30, 1997 ----------------------------- High Low ------- ------- First Quarter $17.625 $11.875 Second Quarter 17.375 13.875 Third Quarter 14.500 8.750 Fourth Quarter 15.500 9.375
Year Ended September 30, 1996 ----------------------------- High Low ------- ------- First Quarter $23.125 $18.000 Second Quarter 23.250 11.250 Third Quarter 17.250 11.875 Fourth Quarter 16.750 12.375
On November 21, 1997, the closing sales price for the Company's common stock was $14.625 per share.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Years Ended September 30, In thousands except per share amounts
1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Sales $200,917 $179,042 $159,450 $116,325 $ 97,851 Gross Profit 42,825 37,998 37,365 30,751 26,804 Selling, General and Administrative Expenses 34,043 30,919 28,409 24,858 22,865 Operating Income 8,782 7,079 8,956 5,893 3,939 Income Before Extraordinary Item1 3,816 3,151 5,090 4,117 1,412 Net Income 3,816 3,151 5,090 4,117 2,243 Working Capital 39,626 35,223 27,475 22,689 21,810 Total Assets 112,669 102,888 95,607 72,967 55,621 Total Long-term Liabilities 32,642 28,292 22,866 16,778 13,793 Total Liabilities 66,072 60,485 56,498 39,722 26,960 Total Equity 46,597 42,403 39,109 33,245 28,661
Common Share Data - -----------------
Weighted Average Shares and Share Equivalents Outstanding 6,990 7,074 7,293 7,041 6,470 Earnings Per Share Before Extraordinary Item1 $0.55 $0.45 $0.70 $0.58 $0.22 Earnings Per Share $0.55 $0.45 $0.70 $0.58 $0.35 Book Value Per Share $7.53 $6.89 $6.36 $5.50 $4.82
1 Extraordinary item results from the utilization of net operating loss carryforwards.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fiscal 1997 Compared to Fiscal 1996 - ----------------------------------- Sales for the year ended September 30, 1997 increased by 12.2% or $21.9 million to $200.9 million from $179.0 million for the year ended September 30, 1996. Revenues from hotel customers increased $19.5 million or 12.7% to $172.5 million. This increase in sales to hotels is the result of the addition of new customers, the sale of additional products to existing customers and the continued expansion of the Company's product line. New customers were added by the direct sales force in existing sales territories and by new salespeople and territories that were established during fiscal 1997. In February 1997, a sales and distribution center was opened in Greensboro, North Carolina, increasing market share in that geographic area. Hotel customers were also added through new or expanded agreements with hotel management companies and hotel corporations. In August 1997, the Company signed an agreement with Marriott International, which increased the number of properties serviced from 225 to 950 and expanded the product line to include room accessories in addition to personal care amenities. Sales of additional products to existing hotel customers were achieved by the direct sales force at individual properties and by national account managers at hotel corporations. This increased penetration at existing accounts can be attributed to sales management, sales training, territory realignment and the use of the Company's catalog. Sales to consumer product companies and retailers were $28.4 million compared to $26.0 million for the year ended September 30, 1996. The increase of $2.4 million or 9.3%, which the Company attributes to the service and capabilities it provides, came from an existing customer. The Company discontinued manufacturing Proctor & Gamble body wash products during fiscal 1997, rather than during our 1998 second fiscal quarter as originally anticipated. These products are now produced by Proctor & Gamble at their own facility. At present, one long-term customer accounts for substantially all of contract manufacturing revenue. Gross profit for the year ended September 30, 1997 was $42.8 million or 21.3% of sales compared to $38.0 million or 21.2% for the year ended September 30, 1996. The most significant single factor affecting gross profit in fiscal 1997 was a charge to cost of sales in the amount of $2.2 million in the second quarter ended March 31, 1997. This charge was primarily the result of damaged, obsolete and below-standard inventory identified during the recent consolidation of the Company's seven New Jersey warehouses to its new central distribution facility and an increase to the Company's obsolescence reserve. Excluding the effects of this charge, gross profit as a percentage of sales for the year ended September 30, 1997 totaled 22.4%. In addition, an increase in textile sales also contributed to the decrease in gross profit as a percentage of sales as a result of a lower gross profit associated with textiles compared to the Company's other products. Also, the full year effect in fiscal 1997 of a pricing concession made to a major contract manufacturing customer in late fiscal 1996 further reduced gross margin percent. Offsetting all of these factors were improved manufacturing efficiencies, lower warehousing cost in the new facilities and increased volume.
Selling, general and administrative expenses were $34.0 million or 16.9% of sales for the year ended September 30, 1997 compared to $30.9 million or 17.3% for the prior year. The increase of $3.1 million was due primarily to increased payroll and payroll related costs. The decrease in selling, general and administrative costs as a percentage of sales was the result of increased sales volume combined with the Company's cost containment program. The effective tax rate increased to 43.2% in fiscal 1997 from 41.3% in fiscal 1996. The increase is primarily due to taxes incurred in foreign jurisdictions.
Fiscal 1996 Compared to Fiscal 1995 - ----------------------------------- Sales for the year ended September 30, 1996 increased by 12.3% or $19.6 million to $179.0 million from $159.4 million for the year ended September 30, 1995. Revenues from hotel customers increased $16.7 million or 12.2% to $153.0 million. This increase is the result of sales of additional products to existing customers, the addition of new customers, an increase in the sales of textiles and the continued introduction of new items to the Company's product line. Sales to consumer product companies and retailers were $26.0 million compared to $23.1 million for the year ended September 30, 1995. The increase of $2.9 million or 12.7% was due to increased sales to existing customers. The Company attributes this increase to the service and capabilities it provides to its customers. Gross profit for the year ended September 30, 1996 was $38.0 million or 21.2% of sales compared to $37.4 million or 23.4% for the year ended September 30, 1995. The decrease in gross profit as a percentage of sales was due to a number of factors. In the Company's second fiscal quarter, a major retail customer temporarily reduced its orders with the Company. Both the temporary nature and timing of this decrease in orders limited the Company's ability to reduce operating costs or seek replacement business. Gross profit as a percentage of sales was also reduced by a pricing concession to a customer which the Company believes was necessary to gain incremental volume in the future. In the fourth fiscal quarter, the Company experienced higher than anticipated waste factors over standard, and as a result recorded an inventory adjustment of approximately $0.6 million. Manufacturing inefficiencies also contributed to the decline in gross profit rate as a result of the expansion project which is now essentially completed. The increase in textiles product sales also contributed to a decline in gross profit as a percentage of sales as a result of a lower gross profit rate associated with textiles when compared with the Company's other products. Selling, general and administrative expenses were $30.9 million or 17.3% of sales for the year ended September 30, 1996 compared to $28.4 million or 17.8% for the prior year. The increase of $2.5 million was due primarily to increased payroll and payroll related costs. The decrease in selling, general and administrative costs as a percentage of sales was the result of increased sales volume combined with the Company's cost containment program. The effective tax rate increased to 41.3% in fiscal 1996 from 35.2% in fiscal 1995. The increase in tax rate is the result of a reduction in the utilization of net operating loss carryforwards
Liquidity and Capital Resources - ------------------------------- The Company had $39.6 million of working capital at September 30, 1997 compared to $35.2 million at September 30, 1996. This increase of $4.4 million was due primarily to a reclassification of current maturities as a result of the refinancing of the Company's revolving credit agreement and term loans in December 1997. At September 30, 1997, the Company had a $22.0 million secured revolving credit facility. This credit facility bears interest at a rate equal to LIBOR plus 1.5%, the bank's prime rate or a fixed rate, as selected by the Company. In addition, the Company had outstanding term loans in the amount of $10.9 million payable in equal monthly installments with maturities from February 1999 through November 2002. At September 30, 1997, the Company had outstanding $17.6 million under its revolving credit facility at an interest rate ranging from 6.97% to 8.5% and had an unused amount available of $4.4 million. On December 3, 1997, the Company completed a Private Placement in the amount of $25.0 million of unsecured senior notes with fixed interest rates ranging from 6.70% to 7.06%. These notes have maturities ranging from 2003 to 2009. Concurrently with the issuance of the notes, the Company entered into a credit agreement with two banks for a five-year $15.0 million unsecured revolving credit facility. Availability under the new facility is based upon agreed levels of eligible accounts receivable and bears interest at a rate equal to LIBOR plus .85% or the bank's prime rate, as selected by the Company. These loans are subject to certain financial covenants. The proceeds from the notes and new credit facility were used to repay the outstanding balance under the existing credit facility and term notes. The Company believes that the amount available under its new revolving credit facility together with the cash flow from operations will be sufficient to meet the Company's short-term working capital requirements and its identifiable long-term capital needs. The Company also believes that, if necessary, additional financing will be available to it on commercially reasonable terms.
Recently Issued Accounting Standards - ------------------------------------ In June 1997, the Financial Accounting Standards Board released Statement No. 130, "Reporting Comprehensive Income" and Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information." Both statements become effective for fiscal years beginning after December 15, 1997 with early adoption permitted. These statements require disclosure of certain components of changes in equity and certain information about operating segments and geographic areas of operation. Management believes that these statements will not have any effect on the results of operations or financial position of the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
GUEST SUPPLY, INC. AND SUBSIDIARIES
Consolidated Financial Statements September 30, 1997, 1996 and 1995
Page Number ------ 1. Financial Statements:
Independent Auditors' Report. . . . . . . . . . . . 23
Consolidated Balance Sheets -- September 30, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . 24
Consolidated Statements of Operations -- Years Ended September 30, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . .25
Consolidated Statements of Cash Flows -- Years Ended September 30, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . .26
Consolidated Statements of Shareholders' Equity -- Years Ended September 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . .28
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . .29
2. Financial Statement Schedule:
II - Valuation and Qualifying Accounts. . . . . . . .36
All other schedules have been omitted because they are inapplicable or the information is provided in the financial statements, including the notes thereto.
Independent Auditors' Report ----------------------------
The Board of Directors and Shareholders Guest Supply, Inc.:
We have audited the consolidated financial statements of Guest Supply, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Guest Supply, Inc. and subsidiaries as of September 30, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended 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.
KPMG Peat Marwick LLP
Short Hills, New Jersey November 18, 1997, except as to the note on Long Term Debt which is as of December 3, 1997
CONSOLIDATED BALANCE SHEETS Guest Supply, Inc. and Subsidiaries
September 30, Dollars In Thousands except per share amounts 1997 1996 - --------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 4,152 $ 2,591 Accounts receivable, net of allowance for doubtful accounts of $1,032 - 1997 and $898 - 1996 30,429 28,084 Inventories 34,676 33,362 Deferred income taxes 2,067 1,557 Prepaid expenses and other current assets 1,732 1,822 - --------------------------------------------------------------------------- Total current assets 73,056 67,416 Property and equipment, net of accumulated depreciation and amortization 33,141 29,810 Other assets 1,312 134 Excess of cost over net assets acquired, net of accumulated amortization of $4,257 - 1997 and $3,889 - 1996 5,160 5,528 - --------------------------------------------------------------------------- $112,669 $102,888 =========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 32,493 $ 28,320 Current maturities of long-term debt 937 3,873 - --------------------------------------------------------------------------- Total current liabilities 33,430 32,193 - --------------------------------------------------------------------------- Long-term debt 27,617 24,972 Deferred income taxes 5,025 3,320 - --------------------------------------------------------------------------- Total long-term liabilities 32,642 28,292 - --------------------------------------------------------------------------- Commitments and contingencies
Shareholders' equity: Preferred stock - without par value; authorized 1,000,000 shares, outstanding none Common stock - without par value; stated value $0.10; authorized 20,000,000 shares, issued and outstanding 6,190,307 shares - 1997 and 6,156,075 shares - 1996 546 543 Additional paid-in capital 35,336 35,042 Retained earnings 10,745 6,929 Cumulative foreign currency translation adjustments (30) (111) - --------------------------------------------------------------------------- Total shareholders' equity 46,597 42,403 - --------------------------------------------------------------------------- $112,669 $102,888 =========================================================================== The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS Guest Supply, Inc. and Subsidiaries
Years Ended September 30, Dollars In Thousands except per share amounts 1997 1996 1995 - --------------------------------------------------------------------------- Sales $200,917 $179,042 $159,450 Cost of sales 158,092 141,044 122,085 - --------------------------------------------------------------------------- Gross profit 42,825 37,998 37,365 Selling, general and administrative expenses 34,043 30,919 28,409 - --------------------------------------------------------------------------- Operating income 8,782 7,079 8,956 Interest and other income 45 53 10 Interest expense (2,110) (1,764) (1,109) - --------------------------------------------------------------------------- Income before income taxes 6,717 5,368 7,857 Income tax expense 2,901 2,217 2,767 - --------------------------------------------------------------------------- Net income $ 3,816 $ 3,151 $ 5,090 =========================================================================== Earnings per common share: Primary $0.55 $0.45 $0.70 =========================================================================== Fully diluted $0.54 $0.45 $0.68 =========================================================================== The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Guest Supply, Inc. and Subsidiaries
Years Ended September 30, Dollars in Thousands 1997 1996 1995 - ------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 3,816 $ 3,151 $ 5,090 - ------------------------------------------------------------------------------ Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 3,888 3,345 2,800 Provision for losses on accounts receivable 880 316 223 Gain on sale of fixed assets (172) Deferred income tax expense 1,195 1,321 442 Changes in assets and liabilities: (Increase) decrease in accounts receivable (3,225) 263 (9,636) Increase in inventories (1,314) (5,093) (6,137) Decrease (increase) in prepaid expenses and other current assets 90 (906) (183) Increase in other assets (178) (37) (13) Increase (decrease) in accounts payable and accrued expenses 4,217 (2,906) 10,315 - ------------------------------------------------------------------------------ Net cash provided by (used in) operating activities 9,197 (546) 2,901 - ------------------------------------------------------------------------------ Cash flows from investing activities: Capital expenditures (6,881) (4,280) (9,953) Increase in other assets (1,000) Proceeds from sale of fixed assets 202 - ------------------------------------------------------------------------------ Net cash used in investing activities (7,679) (4,280) (9,953) - ------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from revolving credit agreement 52,528 55,685 58,247 Repayment on revolving credit agreement (48,945) (57,081) (49,492) Proceeds from issuance of long-term debt 10,500 Repayment of long-term debt (3,874) (3,655) (1,909) Proceeds from issuance of common stock 253 121 308 - ------------------------------------------------------------------------------ Net cash (used in) provided by financing activities (38) 5,570 7,154 - ------------------------------------------------------------------------------ Foreign currency translation adjustments 81 22 (59) - ------------------------------------------------------------------------------ Net increase in cash and cash equivalents 1,561 766 43 Cash and cash equivalents at beginning of year 2,591 1,825 1,782 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 4,152 $ 2,591 $ 1,825 ============================================================================== The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Guest Supply, Inc. and Subsidiaries
Years Ended September 30, Dollars in Thousands
1997 1996 1995 - --------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of capitalized interest $2,099 $1,674 $1,082 Income taxes, net of refunds $ 928 $1,739 $1,909
Supplemental schedule of non-cash financing and investing activities: The Company received an income tax benefit on the exercise of certain of its stock options in the amount of $44 in 1997 and $125 in 1995 which benefit was credited to additional paid-in capital. In June 1995, the $400 convertible subordinated note was converted into 38,709 shares of the Company's stock.
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Guest Supply, Inc. and Subsidiaries Dollars in Thousands Cumulative Retained Foreign Additional Earnings Currency Number Paid-in (Accumulated Translation of Shares Amount Capital Deficit) Adjustment - ----------------------------------------------------------------------------- Balance, September 30, 1994 6,044,592 $532 $34,099 $(1,312) $(74) Net Income 5,090 Sales through employee stock option and purchase plans 40,534 4 188 Common stock warrants exercised 22,500 2 114 Conversion of convertible debt 38,709 4 396 Tax benefit associated with exercise of stock options 125 Equity adjustments from foreign currency translation (59) - ----------------------------------------------------------------------------- Balance, September 30, 1995 6,146,335 542 34,922 3,778 (133) Net income 3,151 Sales through employee stock option and purchase plans 9,740 1 120 Equity adjustments from foreign currency translation 22 - ----------------------------------------------------------------------------- Balance, September 30, 1996 6,156,075 543 35,042 6,929 (111) Net income 3,816 Sales through employee stock option and purchase plans 34,232 3 250 Tax benefit associated with exercise of stock options 44 Equity adjustments from foreign currency translation 81 - ----------------------------------------------------------------------------- Balance, September 30, 1997 6,190,307 $546 $35,336 $10,745 $(30) ============================================================================= The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Guest Supply, Inc. and Subsidiaries Dollars in Thousands except per share amount
BUSINESS DESCRIPTION The Company operates principally as a manufacturer, packager and distributor of personal care guest amenities, housekeeping supplies, room accessories and textiles to the lodging industry. The Company also manufactures and packages products for major consumer products and retail companies.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation - The consolidated financial statements include the accounts of Guest Supply, Inc. and all of its subsidiaries ("the Company"), each of which is wholly owned. All significant intercompany transactions and balances are eliminated in consolidation.
Risks and uncertainties - The Company's revenues are dependent on the continued operation of its manufacturing facility and its various distribution centers. The operation of these facilities involves many risks, including the breakdown, failure or substandard performance of equipment, natural disasters and the need to comply with directives of governmental agencies. The occurrence of material operational problems, including but not limited to the above events, may have a material adverse effect on the productivity and profitability of a particular facility or with respect to certain facilities, the Company as a whole, during the period of such operational difficulty. In addition, other factors may cause the Company's results to differ materially from historically levels. Some of the most significant factors include a down-turn in the lodging industry resulting in lower demand for the Company's products, the unanticipated loss of, or decline in sales to a major customer, pricing pressures and unforeseen inefficiencies at the Company's manufacturing facility.
Foreign Currency Translation - Foreign currency transactions and financial statements are translated into US dollars at current exchange rates except revenues, costs and expenses which are translated at average exchange rates during each reporting period. Exchange gains and losses resulting from foreign currency transactions are included in the Consolidated Statements of Operations currently, whereas, adjustments resulting from translations of financial statements are reflected as a separate component of shareholders' equity.
Use of Estimates - In conformity with generally accepted accounting principles, the preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Inventories - Inventories are stated at the lower of cost or market. Cost is determined by using the weighted-average and first-in, first-out methods.
Property and equipment - Property and equipment are carried at cost. Depreciation and amortization is calculated for financial reporting purposes using the straight-line method based on the estimated useful lives of the assets as follows: buildings, 40 years; machinery and equipment, 3 to 15 years; furniture and fixtures, 3 to 8 years; computers, 3 to 10 years and leasehold improvements, the shorter of the life of the lease or the life of the asset. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized.
Excess of cost over net assets acquired - Excess of cost over net assets acquired is being amortized using the straight-line method over 25 years. The Company continually evaluates the amortization period of its intangible assets. Estimates of useful lives are revised when circumstances or events indicate that the original estimate is no longer appropriate.
Revenue - Revenues are recognized at the time goods are shipped and title has passed. Credit is generally extended to customers within these industries on an uncollateralized basis.
Concentration of Credit Risk - Concentration of credit risk consists principally of accounts receivable. At September 30, 1997 and 1996, one customer accounted for 20.1% and 22.2%, respectively, of the Company's total accounts receivable, and 13.2% and 11.1%, respectively, of the Company's total sales in 1997 and 1996. For the year ended September 30, 1995, sales to two customers totaled 11.3% and 10.8% of the Company's total sales and accounted for approximately 36% of the Company's total accounts receivable.
Income taxes - The provision for income taxes is based on earnings reported in the financial statements under the asset and liability approach in accordance with SFAS No. 109 "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Guest Supply, Inc. and Subsidiaries
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of - The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," as of October 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be 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. Adoption of this Statement did not have an impact on the Company's financial position or results of operations as the Company previously followed the basic tenets of this Statement.
Stock-Based Compensation - Effective as of October 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting For Stock-Based Compensation." SFAS No. 123 encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account 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. The Company, as required, has provided pro forma disclosures of compensation expense as determined under the provisions of SFAS No. 123.
Stock Split - On October 24, 1995, the Company effected a three-for-two stock split of its common stock in the form of a stock dividend. All share and per share data included in this annual report have been restated to reflect the stock split.
Inventories 1997 1996 - --------------------------------------------------------------------------- Raw material $ 7,706 $ 10,441 Finished goods 26,970 22,921 - --------------------------------------------------------------------------- $ 34,676 $ 33,362 =========================================================================== Costs included in inventories are comprised of raw materials, direct labor and overhead related to the manufacturing process.
Property and Equipment 1997 1996 - --------------------------------------------------------------------------- Building, land and leasehold improvements $ 5,880 $ 3,608 Machinery and equipment 44,103 39,309 Furniture and fixtures 2,047 1,580 Computers 2,249 2,032 Construction in progress 726 1,774 - --------------------------------------------------------------------------- 55,005 48,303 Less accumulated depreciation and amortization 21,864 18,493 - --------------------------------------------------------------------------- $ 33,141 $ 29,810 =========================================================================== Depreciation and amortization of equipment and leasehold improvements charged to income was $3,520, $2,977 and $2,432 for the years ended September 30, 1997, 1996 and 1995, respectively.
Income Taxes
Income tax expense is comprised of the following:
1997 1996 1995 - --------------------------------------------------------------------------- Federal - Current $1,229 $ 828 $1,981 - Deferred 1,133 960 356 - --------------------------------------------------------------------------- Total Federal income taxes 2,362 1,788 2,337 - --------------------------------------------------------------------------- State - Current 297 245 344 - Deferred 158 184 86 - --------------------------------------------------------------------------- Total State income taxes 455 429 430 Foreign 84 - --------------------------------------------------------------------------- Total income tax provision $2,901 $2,217 $2,767 ===========================================================================
The following is a reconciliation of Federal income tax expense computed using the statutory rate of 34% to the Company's effective income tax rate:
1997 1996 - --------------------------------------------------------------------------- Computed "expected" income tax expense $2,284 $1,825 Increase (reduction) in tax expense resulting from: State income taxes, net of Federal income tax benefit 300 283 Amortization of goodwill 125 125 Foreign 84 Other, net 108 (16) - --------------------------------------------------------------------------- $2,901 $2,217 ===========================================================================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 30, 1997 and 1996 are as follows: 1997 1996 - --------------------------------------------------------------------------- Deferred tax assets: Allowance for doubtful accounts $ 409 $ 350 Inventory obsolescence reserve and uniform capitalization 1,206 1,040 Net operating loss carryforwards - states 260 137 Alternative minimum tax credit carryforwards 163 500 Other 192 167 - --------------------------------------------------------------------------- Net deferred tax asset 2,230 2,194 Deferred tax liability - principally excess of tax over financial statement depreciation (5,188) (3,957) - --------------------------------------------------------------------------- Net deferred taxes $(2,958) $(1,763) ===========================================================================
At September 30, 1997, the Company has net operating loss carryforwards for state income tax purposes of approximately $4,328 which are available to reduce future state income taxes, if any, through the year 2004. In addition, the Company has alternative minimum tax credit carryforwards of approximately $163 which are available to reduce future Federal regular income taxes, if any, over an indefinite period.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Guest Supply, Inc. and Subsidiaries
LONG TERM DEBT At September 30, 1997, the Company had a $22,000 revolving credit facility which bears interest at a rate equal to LIBOR plus 1.5%, the bank's prime rate or a fixed rate, as selected by the Company. At September 30, 1997, the revolving credit facility carried an interest rate ranging from 6.97% to 8.5%. The unused amount available to the Company at September 30, 1997 was $4,384.
1997 1996 - --------------------------------------------------------------------------- Revolving credit facility $17,616 $14,034 $5,000 five-year term note payable, due in equal monthly payments of $83 through February 1999, interest at 6.45% 1,417 2,417 $5,000 four-year term note payable, due in equal monthly payments of $104 through February 1999, interest at 8.25% 1,771 3,021 $10,500 seven-year term note payable, due in equal monthly payments of $125 through November 2002, interest at 7.0% 7,750 9,250 Capital lease obligations 123 - --------------------------------------------------------------------------- 28,554 28,845 Less: Current maturities 937 3,873 - --------------------------------------------------------------------------- $27,617 $24,972 ===========================================================================
All of the Company's loans with the banks are secured by substantially all of its assets and are subject to certain financial covenants. On December 3, 1997, the Company completed a Private Placement in the amount of $25.0 million of unsecured senior notes with fixed interest rates ranging from 6.70% to 7.06%. These notes have maturities ranging from 2003 to 2009. Concurrently with the issuance of the notes, the Company entered into a credit agreement with two banks for a five-year $15.0 million unsecured revolving credit facility. Availability under the new facility is based upon agreed levels of eligible accounts receivable and bears interest at a rate equal to LIBOR plus .85% or the bank's prime rate, as selected by the Company. These loans are subject to certain financial covenants. The proceeds from the notes and credit facility were used to repay the outstanding balance under the existing credit facility and term notes. After giving effect to the new financing arrangement, long-term debt at September 30, 1997 matures as follows:
1998 $ 937 1999 - 2000 1,111 2001 1,486 2002 3,376 Thereafter 21,644 ==========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Guest Supply, Inc. and Subsidiaries
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 non-cancelable operating leases as of September 30, 1997 are:
September 30, Operating Leases - --------------------------------------------------------------------------- 1998 $ 3,666 1999 2,973 2000 2,440 2001 1,860 2002 1,681 Thereafter 6,226 - --------------------------------------------------------------------------- Total minimum lease payments $ 18,846 - --------------------------------------------------------------------------- Rent expense under operating leases was $4,820, $4,079 and $3,421 for the years ended September 30, 1997, 1996 and 1995, respectively.
LITIGATION From time to time, the Company is a party to legal actions arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without material effects on the Company's financial statements taken as a whole.
EARNINGS PER COMMON SHARE Primary and fully diluted earnings per common share are based on the weighted average number of common and common share equivalents outstanding during each year. When stock options and warrants are dilutive, they are included as share equivalents using the modified treasury stock method. Where the effect of the assumed exercise on net income would be anti-dilutive, primary and fully diluted earnings per common share are stated the same. Weighted average shares for computing primary earnings per share were 6,990,000, 7,074,000 and 7,293,000 for the years ended September 30, 1997, 1996 and 1995, respectively. Weighted average shares for computing fully diluted earnings per share were 7,049,000, 7,074,000 and 7,433,000 for the years ended September 30, 1997, 1996 and 1995, respectively. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements, primary earnings per share is replaced by a new measure called basic earnings per share which excludes common stock equivalents. The impact of the new statement would result in a basic earnings per share which is $.07, $.06 and $.14 higher than primary earnings per share for the years ended September 30, 1997, 1996 and 1995, respectively. The impact of SFAS No. 128 on the calculation of fully diluted earnings per share is not material.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Guest Supply, Inc. and Subsidiaries
STOCK INCENTIVE PLANS Under the stock option plans approved by the Company's stockholders, key employees may be granted options to purchase shares of common stock exercisable at prices not less than fair market value at the date of grant. Options generally become exercisable 20% one year from the date of grant, with an additional 20% exercisable each succeeding year. The options generally expire ten years from the date of grant. In March 1996, the shareholders of the Company adopted the 1996 Long-Term Incentive Plan. Under the plan, 400,000 shares of Common Stock will be available for issuance of awards. The Stock Option Committee is authorized to grant a wide range of awards, including options, stock appreciation rights, restricted stock, performance awards and other stock-based awards to any employee or director.
Transactions relating to these stock option plans are summarized as follows:
1997 1996 1995 ------------------ ---------------- ---------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------------ ---------------- ---------------- Outstanding at beginning of year 1,171,300 $ 7.25 934,800 $5.26 967,425 $5.20 Granted 48,000 11.38 241,000 15.03 Exercised (21,300) 6.27 (1,500) 2.67 (32,625) 3.44 Forfeited (155,700) 14.95 (3,000) 15.25 - --------------------------------------------------------------------------- Outstanding at end of year 1,042,300 $ 6.31 1,171,300 $7.25 934,800 $5.26 - --------------------------------------------------------------------------- Options exercisable at year end 798,530 $5.06 742,380 $4.86 382,500 $5.83 =========================================================================== Weighted average fair value of options granted during the year $6.51 $8.60 ===== =====
The fair value of each stock option granted during 1997 and 1996 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for 1997 and 1996: expected life of 7.0 years; expected volatility of 45%; expected dividend yield of 0% and risk-free interest rate of 6.5%.
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Weighted Weighted Remaining Average Average Number Contractual Exercise Number Exercise Outstanding Life Price Exercisable Price - --------------------------------------------------------------------------- $ 2.67 - $ 3.75 407,550 2.04 years $ 2.99 407,550 $ 2.99 4.67 - 5.75 269,250 5.37 years 4.68 214,800 4.68 9.75 - 11.50 279,500 7.08 years 9.91 161,580 9.86 15.25 - 16.25 86,000 8.69 years 15.36 14,600 15.29 - --------------------------------------------------------------------------- 1,042,300 4.80 years $6.31 798,530 $5.06 ===========================================================================
The Company maintains an Employee Stock Purchase Plan in which eligible employees may purchase a limited amount of shares over successive six-month offering periods at 85% of fair market value on either the first or last day of each six-month period, whichever is less. During the years ended September 30, 1997, 1996 and 1995, there were 11,432, 8,240 and 7,910 shares purchased under this plan, respectively. At September 30, 1997, 80,592 shares are reserved for future issuance under this plan. Under SFAS No. 123, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes model with the following assumptions: an expected life of 6 months; expected volatility of 45%; expected dividend yield of 0% and risk-free interest rate of 6.5%. The weighted-average fair value of those purchase rights granted in 1997 and 1996 was $4.34 and $5.89, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Guest Supply, Inc. and Subsidiaries
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and applies APB Opinion No. 25 in accounting for its plans and, accordingly, has not recognized compensation cost for stock option plans and stock purchase plans in its financial statements. Had the Company determined compensation cost based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net income would have been changed to the pro forma amounts indicated below:
Years Ended September 30, 1997 1996 - --------------------------------------------------------------------------- Net income: As reported $3,816 $3,151 Pro forma 3,678 3,002 Primary earnings per share: As reported $ 0.55 $ 0.45 Pro forma 0.53 0.42 Fully diluted earnings per share: As reported $ 0.54 $ 0.45 Pro forma 0.52 0.42
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply for awards prior to 1996, and the Company anticipates granting additional awards in future years.
COMMON STOCK WARRANTS The Board of Directors may grant common stock warrants to directors and officers of the Company at exercise prices not less than market value at the date of grant. All outstanding warrants expire during the fiscal years 1998 through 2000.
Transactions relating to common stock warrants as summarized as follows:
1997 1996 1995 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------------- ---------------- ---------------- Outstanding at beginning of year 743,250 $3.11 743,250 $3.11 765,750 $3.17 Exercised (1,500) 3.17 (22,500) 5.17 ---------------- ---------------- ---------------- Outstanding at end of year 741,750 $3.11 743,250 $3.11 743,250 $3.11 ---------------- ---------------- ---------------- Options exercisable at year end 741,750 $3.11 743,250 $3.11 743,250 $3.11 ================ ================ ================
EMPLOYEE BENEFIT PLAN The Company has a 401(k) Salary Reduction Plan under which the Company annually matches a portion of the amount of contributions made by the employee. All domestic employees with one year of continuous service are eligible for the plan. Company matching contributions are 100% vested, as are any contributions made by the employee. The Company may also make, at its sole discretion, annual discretionary contributions, which vest over a six-year period. The Company has not made any discretionary contributions. Employer contributions relating to these plans were $174, $138 and $130 for the years ended September 30, 1997, 1996 and 1995, 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 right for each outstanding share of Common Stock of the Company. The dividend was payable on July 26, 1988 to the shareholders of record on that date. Each right entitles the registered holder to purchase from the Company one one-hundredth of a Preferred Share at a price of $30.00, subject to adjustment. The rights agreement provides that, until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons have acquired beneficial ownership of 20% or more of the outstanding Common Stock, or (ii) 10 days following the commencement of, or announcement of an intention to make a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 20% or more of such outstanding Common Stock, the rights will be transferred with and only with the Common Stock. The rights are not exercisable until the earlier of such date described above and will expire on July 15, 2008, unless the final expiration date is extended or the rights are earlier redeemed by the Company at $.01 per right.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Guest Supply, Inc. and Subsidiaries
QUARTERLY FINANCIAL DATA The following table sets forth certain unaudited quarterly financial information.
First Second Third Fourth Year ended September 30, 1997 Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------- Sales $47,656 $44,287 $52,571 $56,403 Gross profit 11,071 6,923 11,744 13,087 Net income (loss) 1,219 (1,319) 1,618 2,298 Earnings (loss) per common share $0.17 $(0.21) $0.23 $0.32
Year ended September 30, 1996 - --------------------------------------------------------------------------- Sales $41,714 $37,281 $47,863 $52,184 Gross profit 9,495 6,634 10,752 11,117 Net income (loss) 944 (824) 1,440 1,591 Earnings (loss) per common share $0.13 $(0.13) $0.20 $0.22
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Guest Supply, Inc. and Subsidiaries
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Additions ------------------- Balance Charged Charged Balance at to to at Beginning Costs and Other End of Description Period Expenses Accounts Deductions Period - ----------------------- ---------- ---------- -------- ---------- ----------- Reserves and allowances deducted from asset accounts: Allowance for Uncollectible Accounts - ----------------------- Year ended September 30, 1997 $898,000 $880,000 $0 $746,000 $1,032,000
Year ended September 30, 1996 $692,000 $316,000 $0 $110,000 $898,000
Year ended September 30, 1995 $852,000 $223,000 $0 $383,000 $692,000
Allowance for Obsolescence and Inventory Chargebacks - ----------------------------------------------------
Year ended September 30, 1997 $1,606,000 $1,858,000 $0 $1,530,000 $1,934,000
Year ended September 30, 1996 $1,344,000 $828,000 $0 $566,000 $1,606,000
Year ended September 30, 1995 $1,368,000 $328,000 $0 $352,000 $1,344,000
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable. PART III
ITEM 10.
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 1998 Annual Meeting of Shareholders to be held on January 15, 1998 (the "Proxy Statement"), which information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
For information concerning this item, see the table and text under the captions "Executive Compensation," "Compensation of Directors," "Personnel and Compensation Committee Interlocks and Insider Participation" and "Employment Agreements" of the Proxy Statement, which information is incorporated herein by reference.
ITEM 12.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For information concerning this item, see the text under the caption "Personnel and Compensation Committee Interlocks and Insider Participation" of the Proxy Statement, which information is incorporated herein by reference.
PART IV
ITEM 14.
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 . . . . . . . . . . . . . . 23
Consolidated Balance Sheets -- September 30 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . 24
Consolidated Statements of Operations -- Years Ended September 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 25
Consolidated Statements of Cash Flows - -- Years Ended September 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 26
Consolidated Statements of Shareholders' Equity -- Years Ended September 30, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . 27
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 28
2. Financial Statement Schedule:
Included in Part II of this report:
II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . 36
All other schedules have been omitted because they are inapplicable or the information is provided in the financial statements, including the notes thereto.
3. Exhibits:
The exhibits required to be filed as part of this Annual Report on Form 10-K are listed in the attached Index to Exhibits.
(b) Current Reports on Form 8-K:
The Company filed a report on Form 8-K on September 8, 1997.
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 5, 1997
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 5, 1997 By /s/ Clifford W. Stanley ----------------------- Clifford W. Stanley President, Principal Executive Officer and Director
Dated: December 5, 1997 By /s/ Thomas M. Haythe ----------------------- Thomas M. Haythe Director
Dated: December 5, 1997 By /s/ Peter L. Richard ----------------------- Peter L. Richard Director
Dated: December 5, 1997 By /s/ Teri E. Unsworth ----------------------- Teri E. Unsworth Vice President - Market Development and Director
Dated: December 5, 1997 By /s/ Edward J. Walsh ----------------------- Edward J. Walsh Director
Dated: December 5, 1997 By /s/ George S. Zabrycki ----------------------- George S. Zabrycki Director
Dated: December 5, 1997 By /s/ Paul T. Xenis ----------------------- Paul T. Xenis Vice President - Finance and Principal Financial and Accounting Officer 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 . . . . . . . . . . . . . . . . . . . . 47
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). --
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, 1997 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, 1997). --
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). --
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, 1997 between the Company and Clifford W. Stanley. . . . . . . . . . . . . . . . . 82
10(j) Employment Agreement dated as of August 6, 1997 between the Company and Teri E. Unsworth . . . . . . . . . . . . . . . . . . 100
10(k) Employment Agreement dated as of August 6, 1997 between the Company and Paul T. Xenis. . . . . . . . . . . . . . . . . . . . 118
10(l) Employment Agreement dated as of August 6, 1997 between the Company and R. Eugene Biber . . . . . . . . . . . . . . . . . . . 136
10(m) General Counsel Agreement dated as of August 6, 1997 between the Company and Thomas M. Haythe . . . . . . . . . . . . . . . . . . 153
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, 1997. . . . . . . . . . . . . . . . . . . . . 164
10(o) Revolving Credit Note dated December 3, 1997 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 . . . . . . . . . . . . . . . . . . . 242
10(p) Revolving Credit Note dated December 3, 1997 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. . . . . . . . . . . . . . . . 244
10(q) Form of Note Purchase Agreement dated as of December 3, 1997 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 . . . . . . . . . . . . . . . . . . . . 246
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. . . . . . . . . . . . . . . . . . . . . . . . . . . 359
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.. . . . . . . . . . . . . . . 362
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 . . . . . . . . . . . . . . . . . . . . . . . . . 365
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.. . . . . . . . . . . . . . . . . . . . . . . . . 368
21 Subsidiaries of the Registrant . . . . . . . . . . . . . . . . 371
23 Consent of KPMG Peat Marwick LLP . . . . . . . . . . . . . . . 372
24 Power of Attorney (see "Power of Attorney" in Form 10-K). . . . . . . . . . . . . . . . . . . . 40
27 Financial Data Schedule. . . . . . . . . . . . . . . . . . . . 373
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.