-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SYQj2MQSqKOM+v1+h3M1t4FoxU1u+JZ0lyq8AFSmT/Do46FqnjRJR0iXZHaUtYPO ccig42cR38ta6NtSB7+mgg== 0000950130-99-007213.txt : 19991224 0000950130-99-007213.hdr.sgml : 19991224 ACCESSION NUMBER: 0000950130-99-007213 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991001 FILED AS OF DATE: 19991223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GUEST SUPPLY INC CENTRAL INDEX KEY: 0000722642 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 222320483 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11955 FILM NUMBER: 99780037 BUSINESS ADDRESS: STREET 1: 4301 U.S. HWY ONE CITY: MONMOUTH JUNCTION STATE: NJ ZIP: 08852 BUSINESS PHONE: 9082463011 MAIL ADDRESS: STREET 1: P.O. BOX 902 STREET 2: 720 U S HIGHWAY ONE CITY: MONMOUTH JUNCTION STATE: NJ ZIP: 08852 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended October 1, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from _______ to _______ Commission file number 1-11955 ------- GUEST SUPPLY, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New Jersey 22-2320483 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4301 U.S. Highway One Monmouth Junction, New Jersey 08852-0902 ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (609) 514-9696 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock, without par value New York Stock Exchange,Inc. Securities registered pursuant to Section 12(g) of the Act: NONE ---- (Title of class) Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- --- Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] 1 State the aggregate market value of the voting stock held by non- affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. Aggregate market value as of December 10, 1999..........................................$86,284,762 Indicate the number of shares outstanding of each of the issuer's classes of capital stock, as of the latest practicable date. Common Stock, without par value, as of December 10, 1999............................................6,320,160 DOCUMENTS INCORPORATED BY REFERENCE List hereunder the documents, all or portions of which are incorporated by reference herein and the Part of the Form 10-K into which the document is incorporated: Part III incorporates information by reference from portions of the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders to be held on January 20, 2000. 2 PART I 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 has available more than 20 amenity items in a variety of brands in Company-designed packaging options. Housekeeping supplies for the lodging industry consist primarily of paper products, cleaning chemicals and cleaning implements. Room accessories include such items as wastebaskets, glassware, stationery, laundry bags, pens, shower curtains and signs. Textiles include sheets, towels and bedding. In total, the Company distributes more than 100 different product categories. The products manufactured and packaged for its consumer products and retail customers include health and beauty aid items such as shampoo, hair conditioner, hand and body lotions, liquid soaps and bath additives. The Company has pursued a strategy designed to enhance its leadership position in the lodging supply industry by becoming a full-service company with a nationwide network of Company-operated distribution centers which provide prompt delivery to hotel properties. Each center consists of a warehouse and sales office and is staffed by sales personnel who call on customers to obtain orders and provide customer service. The Company's amenity product lines consist of customized amenity programs designed by the Company for hotel chains ("customized corporate amenity programs") or for individual lodging establishments ("customized individual amenity programs") and uncustomized amenities and accessories. Customized corporate amenity programs consist of one or more items which are presented in Company-designed packaging. This packaging displays the corporate name or logo of the hotel chain or lodging establishment for which the program is designed. Customized corporate amenity programs are designed for hotel chains, such as Choice International, The Four Seasons, Holiday Inns, Howard Johnson, Hyatt Hotels, Marriott Corporation, Ramada and Wyndham Hotels and may consist of up to 20 amenity and accessory items. In some cases, purchasing decisions for these programs are made by the central buying organization for the chain, and in other cases, such decisions are made by individual members or franchisees of the chain. Customized individual amenity programs typically consist of six to 12 amenity and accessory items. Individual programs generally involve more elaborate designing and packaging, in an attempt to accent the guest room decor and the marketing image of the particular lodging establishment. The Company has designed individual amenity programs for such lodging establishments as The Waldorf-Astoria in New York, New York, The Atlantis in 3 Paradise Island, Bahamas, The Hotel Monaco in San Francisco, California, Trump Hotels in Atlantic City, New Jersey, and Foxwood Resort and Casino in Mashantucket, Connecticut. The Company sells amenities in uncustomized color coordinated packaging under such brand names as Bath and Body Works(R), Jhirmack(R) and Neutrogena(R). Some of these brand name products are also sold as part of customized amenity programs. In addition, the Company markets its own guest amenity lines under the "Heritage Collection(TM)," "Botanicals(TM)," "Institute Swiss(R)" and "Nautic(TM)" labels. The Company's lodging industry customers consist of hotel chains (including supply divisions), individual members or franchisees of hotel chains, independent hotel properties, management companies and cruise ship lines. The Company distributes its products to approximately 18,000 customers worldwide. The Company has supply agreements with each of the 10 largest lodging chains in the United States. The Company's strategy is to increase its penetration of the lodging industry at all levels and to become a "one-stop shopping" supplier to lodging establishments. In order to increase operating efficiencies and responsiveness to customer needs, the Company has become a more vertically integrated supplier of customized and uncustomized amenity programs by enhancing its design capability, expanding its distribution network and increasing its manufacturing capabilities. In addition, the Company sells disposable housekeeping products, room accessories and textiles in order to provide a complete range of products to the lodging industry. As part of this strategy, the Company, through its manufacturing subsidiary Guest Packaging, Inc., manufactures and packages substantially all of its liquid products such as shampoos, hair conditioners, hand and body lotions and bath gels, as well as a portion of its bar soap requirements. The Company's manufacturing operations allow the Company to provide both the service and wide variety of products required by the lodging industry. In addition, the Company utilizes its manufacturing facility to compound, fill and package a variety of products used by consumer product companies and retailers. These are principally health and beauty aid items such as shampoo, hair conditioner, hand and body lotions, liquid soaps and bath additives. In fiscal 1997, the Company completed a program to expand its manufacturing facility and to increase its production capability and capacity. See "Manufacturing, Packaging and Shipping" below. The Company's Breckenridge-Remy Co. ("Breckenridge") subsidiary (doing business as Guest Distribution) also contributes to the Company's strategy of vertical integration through an improved and expanded product line and national distribution capability. In addition to personal care products and room accessories, Breckenridge markets a line of paper products, cleaning chemicals, glassware, housekeeping items and textiles. Breckenridge's business includes a direct sales force and a network of 13 distribution centers. This distribution network provides the Company with the ability to warehouse products in close proximity to the lodging properties served by the Company. In addition, each distribution center is staffed with a direct sales force who call on customers to obtain sales orders and provide direct customer service. The Company currently has approximately 138 sales consultants. Management believes that the 4 Company's complete product line and nationwide distribution capability provides superior service to all of its customer groups. On April 23, 1999, the Company acquired all of the capital stock of Kapadia Enterprises, Inc., d/b/a Nasco Supply Company and McDonald Contract Sales, Inc. (collectively "Nasco"), a privately held distributor of textile products to the lodging industry. Nasco markets a complete line of towels, sheets, blankets, mattress pads, pillows, shower curtains and table linen from such major textile manufacturers as Pillowtex Corporation, Springs Dundee and Westpoint Stevens. Nasco operates utilizing a direct salesforce and has two distribution centers located in Chatsworth, California and Concord, North Carolina. In November 1999, all accounting and computer operations were merged into the Company's current systems. The acquisition of Nasco further enhanced the Company's strategic position as a one-stop-shopping source for the lodging industry by further expanding its product line. Products - -------- The Company markets and sells a broad range of personal care, housekeeping and disposable products for use in lodging establishments. The Company's amenity product line consists of more than 20 different products, including shampoo, hair conditioner, soap, bath gel, hand and body lotion, mouthwash, shower caps, soap dishes, shoe shine and sewing kits and decorative containers and trays. Six amenity products account for a substantial majority of the Company's sales of customized and uncustomized packaging options. The Company's housekeeping, room accessory and textile product lines include paper products, cleaning chemicals, cleaning implements, sheets, towels and other bed linens, and other housekeeping items and accessories such as wastebaskets, glassware, stationery, laundry bags, pens, shower curtains and signs. The Company believes that its range of products for the lodging industry is one of the most extensive available from a single source in the United States. Customized amenity programs consist of one or more items which are packaged and presented in Company designed bottles, boxes, tubes and wrappings. The packaging and wrappings display the corporate name or logo of the hotel chain or lodging establishment for which the program is designed. Customized corporate amenity programs are designed for hotel chains. Customized individual amenity programs typically consist of six to 12 amenity and accessory items. These programs generally involve more elaborate design and packaging, in an attempt to accent the guest room decor and the marketing image of the particular lodging establishment. The sales price per room stay for an amenity program varies with the number of items selected by the customer. Because customized corporate amenity programs and uncustomized amenity programs also vary widely in the number of items, the cost of such programs also vary widely. The Company sells national brand name products, as well as generic and the Company's own private label products and accessories. During the fiscal year ended October 1, 1999, less than 10% of the Company's sales were attributable to sales of national brand name products which include Bath and Body Works(R), Jhirmack(R) and Neutrogena(R). 5 Guest Supply also markets guest amenity programs under proprietary brand names owned by the Company. These programs were designed by the Company as an alternative to customized amenity programs with inventory available for immediate delivery. The Company has entered into arrangements with certain manufacturers of national brand name products pursuant to which the Company has been granted the exclusive right to market certain products to the lodging industry in the United States. Certain of these manufacturers have reserved the right to approve the design of the packaging of their products and to monitor quality control with respect to the manufacturing and packaging processes. None of such exclusivity arrangements obligates the Company to purchase products from any one supplier or to market any brand exclusively. The Company believes that there are adequate alternative sources of supply available for all products it currently distributes. Moreover, the Company believes that its competitive success is dependent more on the quality of the Company's services, design capability and the selection and availability of products, than on the availability of any one particular brand name product or group of products. Design, Marketing and Sales - --------------------------- In the view of the Company, an important aspect of its marketing approach and competitive position is the capability of its professional design staff to assist customers in designing customized packaging and in the coordination and presentation of their amenity programs. In addition, the Company believes that its position in the industry is in part attributable to the Company's ability, on a single source basis, to design, manufacture, package and distribute complete customized amenity programs for its customers which meet the customers' corporate image, product and budgetary requirements and which include brand name products with a reputation for high quality and wide-spread consumer acceptance. The design of amenity programs takes into account five essential elements: packaging components (size, shape and type of container), packaging graphics (colors and logos), brand identity (use of national or generic brands), product mix (which amenity items to present) and presentation method (tray, placemat, wicker basket or decorative tin). The Company's design personnel, who include graphic, industrial and mechanical artists and packaging engineers, are responsible for creating packages, selecting colors and applying graphic designs to accent guest room decor and for the production of finished engineering drawings and materials specifications. The Company's design personnel consult directly with the Company's customers on all aspects of the design of guest room amenities, at times leading to unique and proprietary packaging and presentations of amenity programs. The Company's design process can vary in length, depending on the customer's needs and complexity of the program. Once a design is accepted by the customer and a purchase order is received, the initial shipment is typically made within 10-14 weeks and the balance of the shipment is generally delivered over the next 12-24 months. The Company employs direct sales personnel who consult regularly with the Company's existing customers and solicit new customers. In addition, the Company employs in-house sales people responsible for telemarketing sales and customer service. Further, the 6 senior management of the Company devotes a substantial amount of time to sales activities, as well as to the overall coordination of customers' amenity programs and the development of new concepts to enhance the effectiveness of the programs. The Company believes that prompt, professional and responsive customer service is an important element in attracting new customers and satisfying existing ones. In addition, the Company maintains regional distribution centers throughout the United States. This distribution network consists of 15 regional warehouses and a central warehouse and distribution facility in Sayreville, New Jersey. These distribution centers provide the Company with the ability to deliver manufactured and purchased products to the lodging properties served by the Company throughout the United States. In addition, each regional distribution center is staffed with route salespersons who call on customers to obtain sales orders and provide direct customer service. See "Item 2. Properties." The Company attends most major trade conventions and exhibits its product lines at such events. One lodging supply segment customer accounted for 15.3% and 15.5% of the Company's total sales in 1999 and 1998, respectively. In 1997, one manufacturing segment customer accounted for 13.2% of the Company's total sales. As of October 1, 1999 and September 30, 1998, one customer accounted for 5.2% and 9.1%, respectively, of the Company's total accounts receivable. The Company's consolidated sales included approximately $8,407,000, $5,814,000 and $5,789,000, respectively, by foreign subsidiaries for the fiscal years ended October 1, 1999, September 30, 1998 and September 30, 1997. The Company currently has subsidiaries located in England, New Zealand and Canada. At October 1, 1999 and September 30, 1998, the Company had unfilled orders for its products which aggregated approximately $11,923,000 and $12,145,000, respectively. Most of the amount for fiscal 1999 is expected to be shipped within the current fiscal year. Unfilled orders are not necessarily an important indicator of total future sales, since a substantial portion of the Company's revenues are attributable to sales of disposable housekeeping products and accessories, uncustomized amenity products and corporate amenity programs which are ordered for delivery on a current basis and for which no significant unfilled orders exist. In addition, certain orders are subject to further confirmation. Substantially all of the Company's sales are to customers to whom the Company extends credit. The Company's credit policy generally requires payment in full within 30 days and allows discounts in certain cases for early payment. Manufacturing, Packaging and Shipping - ------------------------------------- Most of the amenity products marketed and distributed by the Company are sold in packaging and wrappings designed to customer specifications by the Company and are customized with the name of the particular hotel, in the case of customized individual amenity programs, or the corporate logo of the lodging chain in the case of customized corporate amenity programs, and also display the brand name of the product, where appropriate. In some cases, the 7 shapes of the containers are also designed specifically to the customer's requirements. Packaging components include bottles, boxes, bags, packets, tubes and various other containers that come in a wide range of sizes and shapes. The Company's manufacturing facility is located in Rahway, New Jersey. This facility has approximately 68,000 square feet of production space. The plant has 21 filling lines, including 10 highly automated lines which the Company believes incorporate the most efficient technology presently available. Each line is equipped to apply front, back, and full wrap labels, and video jets for batch and date coding of each container. A variety of reactors or compounding vessels with capacities ranging from 100 to 6,000 gallons are located at this facility as well as 249,000 gallons of liquid bulk storage vessels. The facility also includes an analytical and development laboratory. In fiscal 1997, the Company completed a program to expand its manufacturing facility and to increase its production capability and capacity. As part of this expansion project, 18,000 square feet of manufacturing space was added to the Company's facility in Rahway, New Jersey. Additional mixing and storage tanks were installed increasing compounding capacity by more than 350%. The Company installed four new high-speed filling lines which are highly automated and provide the Company with the capacity and capability to manufacture retail size health and beauty aid products in high volume. In December 1996, the Company occupied a new, leased 226,000 square foot warehouse facility in Sayreville, New Jersey, which consolidated all of the Company's New Jersey warehousing facilities. The new facility was fully operational by April 1, 1997. The Company believes that with the new equipment and systems, it is in a position to improve efficiency in the production of high-quality health and beauty aid products thereby providing the Company with what it believes will be a competitive advantage. See "Item 2. Properties" below. Currently, the Company compounds and fills substantially all of its liquid products. Compounding involves the batch mixing of components such as detergents, conditioners, dyes and fragrances in accordance with proprietary formulas. Filling entails the transfer of finished products from bulk to the unit of use containers in which they are distributed. In addition, the Company utilizes its manufacturing facility to compound, fill and package a variety of products used by consumer product companies and retailers. These are principally health and beauty aid items such as shampoo, hair conditioner, hand and body lotions, liquid soaps and bath additives. In some instances the Company also formulates products for its customers. The Company believes that these services, among others, are attractive to these companies since most lack production expertise or the costs of providing these functions in-house could be prohibitive. The Company's other products such as soaps, shower caps, soap dishes, shoe shine and sewing kits, toothpaste, toothbrushes, razors, shaving creams, paper products, cleaning chemicals, cleaning implements, glassware and other accessories are produced by independent manufacturers. Soaps are manufactured in accordance with the Company's specifications, including colors and fragrances, from materials furnished by suppliers selected by the Company. 8 Additionally, the Company manufactures a portion of its bar soap requirements, which it sells to the lodging industry, at its facility in Rahway, New Jersey. The bottles and other packaging components for the Company's products are manufactured by independent suppliers in accordance with the Company's or the Company's customers' specifications. In certain instances, these independent suppliers utilize equipment and molds owned by the Company. In certain instances, the Company also utilizes the services of companies which decorate the bottles and other packaging components prior to delivery to the Company or to its contract packagers. The Company usually orders the component materials for its products in bulk quantities directly from the manufacturers of such products for delivery to its manufacturing facilities or to the facilities of the Company's contract packagers. This procedure permits the Company to assure adequate supplies of product components and to benefit from quantity discounts and other economies of scale. Substantially all of the Company's finished products are shipped to the Company's warehouse facilities for later shipment to its customers. See "Item 2. Properties" below. In the view of the Company, an important aspect of its marketing approach and competitive position is its capacity for localized distribution. The ability to store and distribute both manufactured and purchased products in close proximity to the lodging properties served by the Company is a service which the Company believes will assist in providing improved service to its existing customer groups and in attracting new customers. Quality Control - --------------- The Company believes that maintaining the highest standards of quality in all aspects of its operations is an important aspect of its ability to generate customer confidence and to maintain its competitive position. To that end, the Company carries and markets only products that have a reputation for quality and that meet the Company's own quality standards. The Company sends its representatives from time to time to the facilities of its suppliers to inspect and approve the manufacturing and packaging of all products prior to acceptance by the Company for delivery to customers. In addition, certain suppliers of materials to the Company also approve the Company's manufacturing procedures and inspect the packaged products to insure compliance with their own quality standards. The Company has adopted strict quality assurance systems and procedures which it regularly reviews and revises with a view of maintaining the consistency of the quality of its products. The Company adheres to all applicable filling and packaging regulations of the U.S. Food and Drug Administration, as well as others which are not technically applicable to the Company's operations. Proprietary Rights - ------------------ Although the Company follows a policy of protecting its proprietary rights to its products and designs to the full extent legally permissible, it does not believe that its business as a whole is materially dependent upon such protection. Such protection has significance 9 primarily in the Company's marketing efforts. The Company has received protection under federal trademark and copyright laws for certain names used in its business, including Guest Supply(R), Guest Distribution(R), L'avenie(R), Guest Design(R), Institute Swiss(R), Whispermint(TM), Alliance(TM), Evergreen(TM), Botanicals(TM), Nautic(TM) and the Heritage Collection(TM). The Company, from time to time, applies for copyright and design patent protection for the designs of certain bottles and other packaging components designed by the Company. In addition, pursuant to arrangements with the producers of its packaging components, the Company has obtained title to the molds which it has developed for the production of certain bottles and other packaging components. Many of these arrangements restrict these companies from using the Company's molds for anyone other than the Company without the Company's consent. The aggregate net book value of all molds owned by the Company at October 1, 1999 was approximately $2,088,000. Competition - ----------- The business of supplying disposable products, amenities and accessories to the lodging industry and of manufacturing and packaging personal care products for consumer product and retail companies is highly competitive. Important competitive factors include price, product range, distribution capability and product quality and design. The Company competes with companies which offer customized amenity programs and broad lines of customized and uncustomized amenity and personal care products, as well as large distributors of housekeeping and related products. The Company believes that it can compete effectively with these companies in view of the variety and quality of products it offers, the scope and efficiency of customer services, its distribution capability and price. In addition, the Company believes that its ability to offer professional and sophisticated design assistance in formulating customized amenity programs and products for customers enhances its competitive position and distinguishes the Company from most of its competitors. Personnel - --------- As of October 1, 1999, the Company had approximately 962 employees. None of the Company's employees is covered by a collective bargaining agreement, and the Company considers its relationship with its employees to be excellent. Executive Officers - ------------------ The current executive officers of the Company are as follows: Age at Name Position with the Company October 1, 1999 - ---- ------------------------- ---------------- Clifford W. Stanley President, Chief Executive Officer 53 and Chairman of the Board of Directors R. Eugene Biber Vice President - Operations 51 10 Teri E. Unsworth Vice President - Market Development 48 and Director Paul T. Xenis Vice President - Finance and 39 Secretary Clifford W. Stanley has been President and Chief Executive Officer of the Company since January 1988, a director of the Company since January 1987 and Chairman of the Board of Directors since August 1997. From April 1986 to January 1988, he was Executive Vice President and Chief Financial Officer of the Company. Mr. Stanley joined the Company in August 1985 as Vice President - Finance. From 1984 until joining the Company, Mr. Stanley was Vice President and Chief Operating Officer for Transfer Print Foils, Inc. (hot stamping foils). During the period from 1982 to 1984, he was Vice President of Finance for the Permacel Division of Avery International. From 1979 through 1982, Mr. Stanley was a Vice President of Johnson & Johnson. R. Eugene Biber has been Vice President - Operations of the Company since 1997. Prior to joining the Company, Mr. Biber was Senior Vice President at Dep Corporation from 1988 to 1995. Prior to 1988, Mr. Biber worked for Richardson-Vicks and Procter & Gamble, where he was Director of Manufacturing and Distribution for a hair-care division. Teri E. Unsworth has been Vice President - Market Development since joining the Company in May 1985 and a director of the Company since November 1989. Prior thereto, Ms. Unsworth was employed by Vidal Sassoon, Inc. as Director of Sales from 1979 to 1981, as Product Director from 1981 to 1983 and as Group Product Director from 1983 to 1985. Paul T. Xenis has been Vice President - Finance since May 1994. From April 1984 to May 1994, he was Corporate Controller of the Company. Prior to joining the Company, Mr. Xenis was a senior accountant with KMG Main Hurdman (now part of KPMG LLP) from 1981 to 1984. Mr. Xenis also serves as Secretary of the Company. ITEM 2. PROPERTIES. The Company's executive offices and principal operating facilities are located in Monmouth Junction, New Jersey, where the Company leases approximately 21,900 square feet of space in an office building. The lease expires on December 15, 2006 and provides for three five-year renewal options. In connection with its manufacturing and packaging operations, the Company currently leases a manufacturing facility in Rahway, New Jersey. The manufacturing facility consists of approximately 68,000 square feet of space. The lease for this facility expires in 2010. See "Item 1. Business - Manufacturing, Packaging and Shipping" above. This lease may be cancelled by the Company on 90 days' notice. During fiscal 1997, the Company moved into a newly constructed 226,000 square foot distribution and warehouse facility designed to its specifications in Sayreville, New Jersey. 11 This new facility consolidated all of the Company's then existing New Jersey warehousing facilities. The lease for the facility expires in November 2006. As part of its regional distribution strategy, the Company currently also leases 13 regional warehouses. The warehouses range in size from 12,800 square feet to 103,700 square feet and are located in Ohio (three), Michigan, Indiana, Texas, Florida, Illinois, Maryland, California (two), Georgia and North Carolina. The leases for these warehouses have expiration dates through 2004. In connection with the acquisition of Nasco, the Company also assumed operating leases with the previous owners of Nasco for two distribution facilities located in California (94,000 square feet) and North Carolina (120,000 square feet). These leases, which may be terminated by the Company on two years notice, expire through 2012. ITEM 3. LEGAL PROCEEDINGS. From time to time, the Company is party to certain other claims, suits and complaints which arise in the ordinary course of business. Currently, there are no such claims, suits or complaints which, in the opinion of management, would have a material adverse effect on the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS. Not applicable. 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock trades on the New York Stock Exchange, Inc. ("NYSE") under the symbol GSY. The table below sets forth the high and low closing prices during each of the last two fiscal years on the NYSE. The approximate number of holders of the Company's common stock at October 1, 1999 was 436. No cash dividends have been declared on the common stock since the Company was organized. Market Price Range - ------------------
Year Ended October 1, 1999 --------------------------------- High Low ----------- ------------- First Quarter $12.875 $8.125 Second Quarter 11.813 8.625 Third Quarter 13.063 8.625 Fourth Quarter 15.875 13.500
Year Ended September 30, 1998 --------------------------------- High Low --------- ------------- First Quarter $15.625 $11.500 Second Quarter 15.187 10.187 Third Quarter 17.375 13.625 Fourth Quarter 19.250 9.250
On December 10, 1999, the closing sales price for the Company's common stock was $14.25 per share. 13 ITEM 6. SELECTED FINANCIAL DATA. Fiscal Years Dollars in thousands except per share amounts - ---------------------------------------------
1999 1998 1997 1996 1995 ---------------- ---------------- ---------------- ---------------- ---------------- Sales $306,044 $236,743 $200,917 $179,042 $159,450 Gross Profit 65,067 47,718 42,825 37,998 37,365 Selling, General and Administrative Expenses 49,511 39,669 34,043 30,919 28,409 Operating Income 15,556 8,049 8,782 7,079 8,956 Net Income 7,708 3,633 3,816 3,151 5,090 Working Capital 51,806 43,330 39,626 35,223 27,475 Total Assets 161,257 118,107 112,669 102,888 95,607 Total Long-Term Liabilities 50,568 30,996 32,642 28,292 22,866 Total Liabilities 101,790 66,122 66,072 60,485 56,498 Total Equity 59,467 51,985 46,597 42,403 39,109 Common Share Data - ----------------- Diluted Earnings Per Share $ 1.10 $ 0.51 $ 0.55 $ 0.45 $ 0.70 Book Value Per Share $ 9.04 $ 7.95 $ 7.53 $ 6.89 $ 6.36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Dollars in thousands except per share amounts General On April 23, 1999, the Company acquired all of the capital stock of Kapadia Enterprises, Inc., d/b/a Nasco Supply Company and McDonald Contract Sales, Inc. (collectively "Nasco"), a privately held distributor of textile products to the lodging industry for $24,493. The purchase price consisted of (i) $17,755 in cash, (ii) the issuance by the Company of a 5.18% convertible subordinated promissory note in the aggregate principal amount of $5,000 which note is convertible into shares of the Company's common stock at a price of $13.275 per share, (iii) 45,198 shares of the Company's common stock valued at $500, (iv) other liabilities assumed of $500 and, (v) transaction costs of $738. The acquisition has been accounted for under the purchase method of accounting and accordingly, the results of Nasco are included since the date of acquisition. Fiscal 1999 Compared To Fiscal 1998 Sales for the year ended October 1, 1999 increased by 29.3% or $69,301 to $306,044 from $236,743 for the year ended September 30, 1998. Revenues from lodging supply segment customers increased $65,261 or 30.8% to $277,442. Excluding the impact of the Nasco acquisition, sales rose 18.1% over the prior year. The increase in sales in lodging supply is due primarily to the addition of new customers, the sale of additional products to existing customers 14 and the continued expansion of the Company's product line. New customers were added by the direct sales force in existing territories and by new salespeople and territories that were established during fiscal 1999. Lodging customers were also added through new or expanded agreements with hotel management companies and hotel corporations. Sales of additional products to existing lodging customers were achieved by the direct sales force at individual properties and by national account managers at hotel corporations. This increased penetration at existing accounts can be attributed to sales management, sales training, territory realignment and the use of the Company's catalog. Sales to manufacturing segment customers were $28,602 in 1999 compared to $24,562 in 1998. The increase of $4,040 or 16.4% was primarily due to increased sales to new customers secured during the latter part of fiscal 1998. Gross profit for the year ended October 1, 1999 was $65,067 or 21.3% of sales compared to $47,718 or 20.2% for the year ended September 30, 1998. The increase in gross profit as a percentage of sales was primarily due to efficiency improvements and increased volume in the manufacturing segment. This increase was offset by a decrease in gross profit percent in lodging supply as a result of an increase in textile sales, arising primarily from the Nasco acquisition, which have a lower margin than other product categories sold to hotels. Excluding the effects of the acquisition, margins in lodging supply increased over the prior year. Selling, general and administrative expenses were $49,511 or 16.2% of sales for the year ended October 1, 1999 compared to $39,669 or 16.8% for the prior year. The increase of $9,842 was due primarily to increased customer rebates, payroll, sales commissions, and delivery expenses associated with the Company's lodging sales growth and increased operating expenses and amortization of goodwill associated with the Nasco acquisition. Operating income increased $7,507 or 93.3% to $15,556 for the year ended October 1, 1999 from $8,049 last year. Operating income in the lodging supply segment increased 35.3% to $16,474 in 1999 compared with $12,174 in 1998 due principally to higher sales volume and reduced incremental selling, general and administrative costs, offset by lower gross margins. The operating loss in manufacturing was reduced by $3,207 to a loss of $918 in 1999 from a loss of $4,125 in 1998 due principally to higher sales volume and improved manufacturing efficiencies. The effective tax rate increased to 40.2% in fiscal 1999 from 38.4% in fiscal 1998. The increase in the effective tax rate is due principally to an increase in the valuation allowance related to deferred tax assets and an increase in state income taxes. Overall, net income for 1999 increased 112.2% to $7,708 or $1.10 per diluted share compared to $3,633 or $0.51 per diluted share in 1998. 15 Fiscal 1998 Compared To Fiscal 1997 Sales for the year ended September 30, 1998 increased by 17.8% or $35,826 to $236,743 from $200,917 for the year ended September 30, 1997. Revenues from lodging customers increased $39,679 or 23.0% to $212,181. The increase in sales to hotels is the result of the addition of new customers, the sale of additional products to existing customers and the continued expansion of the Company's product line. New customers were added by the direct sales force in existing sales territories and by new salespeople and territories that were established during fiscal 1998. In July 1998, a sales and distribution center was opened in Hayward California, increasing market share in that geographic area. Lodging customers were also added through new or expanded agreements with hotel management companies and hotel corporations. Sales of additional products to existing lodging customers were achieved by the direct sales force at individual properties and by national account managers at hotel corporations. This increased penetration at existing accounts can be attributed to sales management, sales training, territory realignment and the use of the Company's catalog. Sales to manufacturing segment customers were $24,562 in 1998 compared to $28,415 in 1997. The decrease of $3,853 or 13.6% was a result of a decline in sales to an existing long-term customer and the expiration of a contract with another customer. During 1998, one long-term customer accounted for substantially all of manufacturing revenue. Gross profit for the year ended September 30, 1998 was $47,718 or 20.2% of sales compared to $42,825 or 21.3% for the year ended September 30, 1997. Excluding a cost of goods charge of $2,187 in fiscal 1997, which related to damaged and obsolete inventories identified during the consolidation of the Company's warehouses, gross profit declined from 22.4% of sales in fiscal 1997 to 20.2% in fiscal 1998. The decrease in gross margin was a result of reduced volume, an unfavorable mix and a formula change in the manufacturing segment offset by an increase in lodging supply gross margins. Selling, general and administrative expenses were $39,669 or 16.8% of sales for the year ended September 30, 1998 compared to $34,043 or 16.9% for the prior year. The increase of $5,626 was due primarily to increased payroll and payroll related costs, delivery expenses, moving warehouses to larger facilities and opening a new branch in Hayward, California. Operating income declined $733 or 8.4% to $8,049 for the year ended September 30, 1998 from $8,782 in 1997. Operating income in the lodging supply segment increased 182.4% to $12,174 in 1998 compared to $4,311 in 1997 due principally to higher sales volume to new and existing customers, focused efforts to contain selling, general and administrative costs and the effects of the charge of $2,187 in 1997 related to damaged and obsolete inventories. Operating results in the manufacturing segment declined by $8,596 to a loss of $4,125 in 1998 from a profit of $4,471 due principally to lower sales volume to two significant customers, a change in sourcing arrangements and contract terms with a significant customer, a change in 16 product mix and unfavorable manufacturing variances associated with lower manufacturing throughput. The effective tax rate decreased to 38.4% in fiscal 1998 from 43.2% in fiscal 1997. The lower effective rate was the result of a focused tax strategy designed to reduce, where applicable, the Company's tax burden. Overall, net income for 1998 declined by 4.8% to $3,633 or $0.51 per diluted share compared to $3,816 or $0.55 per diluted share in 1997. Liquidity And Capital Resources The Company had $51,806 of working capital at October 1, 1999 compared to $43,330 at September 30, 1998. The increase of $8,476 is primarily the result of the acquisition of Nasco Supply Company. Net cash flows from operating activities increased to $10,043 for the fiscal year ended October 1, 1999, compared with $5,120 for the twelve months ended September 30, 1998. The increase was primarily due to higher net earnings and higher levels of depreciation and amortization offset by changes in working capital items during the fiscal year ended October 1, 1999. Changes in working capital items including an increase in the allowance for doubtful accounts of $533 were due principally to increased sales activity and the acquisition of Nasco. Net cash flows used for investing activities totaled $23,589, compared with $4,329 in 1998. Included in 1999 was the funding for the Nasco acquisition of $17,962. Capital expenditures for the year were $4,511 versus $4,126 in 1998. In 1999, capital expenditures for the lodging supply and manufacturing segments amounted to $2,096 and $2,415, respectively. Capital expenditures in fiscal 2000 of approximately $4,000 are expected. Net cash flows provided by financing activities totaled $12,870, compared with $2,255 used in financing activities in 1998. Borrowings in 1999 increased to fund the acquisition of Nasco and to purchase $2,582 of treasury stock under the Company's stock repurchase program. Concurrent with the closing of the acquisition of Nasco, the Company entered into an amended and restated six year revolving credit agreement ("revolver") with its banks and amended the terms of its $25,000 senior notes. The effects of these amendments were to increase the amounts available under the revolver from $25,000 to $35,000, to secure the borrowings under the revolver and the senior notes by substantially all of the assets of the Company, to increase the interest rates on the revolver and the senior notes by .40% and .25%, respectively and to add certain restrictive covenants. Borrowings under the revolver bear interest at the Eurodollar rate plus 125 basis points (6.625% at October 1, 1999) or the prime rate (8.25% at October 1, 1999), at the Company's option. The unused amount available to the Company under the revolver was $19,100 at October 1, 1999. Both the revolver and the senior notes contain restrictive covenants including covenants which limit the Company's ability to incur additional indebtedness, sell certain assets, make acquisitions and other investments and require the Company to comply with various financial ratios specified in the loan agreements. The Company was in compliance with all covenants at October 1, 1999. 17 During 1999, the Company purchased a total of 250,300 shares of treasury stock at a cost of $2,582 completing the stock repurchase program authorized in 1997. Subsequent to October 1, 1999, the Company purchased 242,300 shares at a cost of $3,223 completing the stock repurchase program authorized in 1998. In November 1999, the Board of Directors authorized the repurchase of an additional 5% of its outstanding common stock. The Company believes that the amount available under the revolving credit agreement together with the cash flow from operations will be sufficient to meet the Company's short-term working capital requirements and identifiable long-term capital needs. The Company also believes that, if necessary, additional financing will be available to it on commercially reasonable terms. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for hedging activities and derivative instruments, including certain derivative instruments embedded in other contracts. As originally issued, SFAS 133 would have been effective for the Company beginning September 30, 2000. However, in July 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", which delays the effective date of SFAS 133 by one year. SFAS 133 will now become effective for the Company beginning September 29, 2001. The Company is reviewing the potential impact, if any, of SFAS 133 on its consolidated results of operations and financial position. Year 2000 Readiness The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, any of the Company's computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which in turn could result in system miscalculations or failures causing disruptions in the operations of the Company and its suppliers and customers. The Company has completed its evaluation of all its information technology ("IT") and non-IT systems. All software packages considered critical to the Company's operations have been upgraded and tested to be Year 2000 compliant. As part of the Company's Year 2000 project, the Company has contacted its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate year 2000 compliance issues. The Company has also contacted its large customers where potential exposure exists to ascertain their readiness. While the Company will continue to monitor its significant suppliers and customers, there can be no assurances that their systems will be timely converted or that failure to convert would not have a material adverse effect on the Company and its operations. Total costs incurred by the Company, relating to Year 2000 remediation efforts, have not exceeded $250. 18 The Company believes that the "most reasonably likely worst case scenario" as a result of the Company, customers or suppliers not being fully Year 2000 compliant could include temporary plant closings, delays in the delivery of products or delays in the receipt of raw materials and finished goods. The consequences could have a material adverse impact to the results of operations or the financial position of the Company. The Company is addressing these potential consequences as part of its contingency plans in order to mitigate the adverse effect any such disruption may have on the Company's operations, which includes stockpiling of raw materials and other finished goods and using alternative suppliers. Notwithstanding the preparation of contingency plans, there can be no assurance that the implementation of such plan will be successful in addressing all problems that may arise. Quantitative And Qualitative Disclosures About Market Risks At October 1, 1999, the financial liabilities of the Company exposed to changes in interest rates consist mainly of $15,900 in variable rate borrowings outstanding under the revolver. The Company has entered into an interest rate collar agreement with a notional amount of $11,000. Under the terms of the agreement, the Company would be reimbursed the interest difference in the event that the three-month LIBOR rate exceeds 9.7% or would pay the interest difference if the three-month LIBOR rate falls below 4.75%. Assuming a hypothetical increase of 1% in interest rates and debt levels were to remain constant, interest expense would increase $159 per year. Included in indebtedness is also $25,000 of fixed rate debt, which is not subject to interest rate risk. Forward Looking Information This Annual Report may contain forward-looking information about the Company. The Company is hereby setting forth statements identifying important factors that may cause the Company's actual results to differ materially from those set forth in any forward-looking statements made by the Company. Some of the most significant factors include an unanticipated downturn in the lodging industry resulting in lower demand for the Company's products, the unanticipated loss of or decline in sales to a major customer, failure to secure new business and unforeseen inefficiencies at the Company's manufacturing facility. In addition, difficulties in completing remediation of Year 2000 issues by the Company, its customers or suppliers may have a material adverse effect on the Company and its operations. Accordingly, there can be assurances that any anticipated future results will be achieved. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. GUEST SUPPLY, INC. AND SUBSIDIARIES ---------- Consolidated Financial Statements October 1, 1999, September 30, 1998 and September 30, 1997 20 Index to Financial Statements - -----------------------------
Page Number ------ 1. Financial Statements: Independent Auditors' Report.................................................... 22 Consolidated Balance Sheets -- October 1, 1999 and September 30, 1998........... 23 Consolidated Statements of Income and Comprehensive Income -- Fiscal Years Ended October 1, 1999, September 30, 1998 and September 30, 1997.......... 24 Consolidated Statements of Cash Flows -- Fiscal Years Ended October 1, 1999, September 30, 1998 and September 30, 1997...................... 25 Consolidated Statements of Shareholders' Equity -- Fiscal Years Ended October 1, 1999, September 30, 1998 and September 30, 1997...................... 26 Notes to Consolidated Financial Statements...................................... 27 2. Financial Statement Schedule: II - Valuation and Qualifying Accounts......................................... 37
All other schedules have been omitted because they are inapplicable or the information is provided in the consolidated financial statements, including the notes thereto. 21 Independent Auditors' Report The Board of Directors and Shareholders Guest Supply, Inc.: We have audited the consolidated financial statements of Guest Supply, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Guest Supply, Inc. and subsidiaries as of October 1, 1999 and September 30, 1998 and the results of their operations and their cash flows for the fifty-three week period ended October 1, 1999 and the years ended September 30, 1998 and September 30, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Short Hills, New Jersey November 16, 1999 22
======================================================================================================================== CONSOLIDATED BALANCE SHEETS As of October 1, 1999 and September 30, 1998 Dollars in thousands except stated value 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 2,200 $ 2,558 Accounts receivable, net of allowance for doubtful accounts of $1,076 - 1999 and $543 - 1998 43,471 34,054 Inventories 53,937 37,989 Deferred income taxes 1,626 1,373 Prepaid expenses and other current assets 1,794 2,482 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 103,028 78,456 Property and equipment, net of accumulated depreciation and amortization 33,593 33,305 Other assets 2,821 1,555 Excess of cost over net assets acquired, net of accumulated amortization of $5,364 - 1999 and $4,626 - 1998 21,815 4,791 - ------------------------------------------------------------------------------------------------------------------------- $ 161,257 $ 118,107 ========================================================================================================================= Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses $ 50,111 $ 35,126 Current maturities of long-term debt 1,111 - - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 51,222 35,126 - ------------------------------------------------------------------------------------------------------------------------- Long-term debt 39,789 26,126 Note payable to related party 5,000 - Deferred income taxes 5,779 4,870 - ------------------------------------------------------------------------------------------------------------------------- Total long-term liabilites 50,568 30,996 - ------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies Shareholders' equity: Preferred stock - without par value; authorized 1,000,000 shares, outstanding none Common stock - without par value; stated value $0.10; authorized 20,000,000 shares, issued 6,671,638 shares - 1999 and 1998 594 594 Additional paid-in capital 39,247 38,595 Retained earnings 20,559 14,378 Treasury stock - 95,178 shares - 1999 and 135,800 shares - 1998, at cost (1,091) (1,422) Accumulated other comprehensive income 158 (160) - ------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 59,467 51,985 - ------------------------------------------------------------------------------------------------------------------------- $ 161,257 $ 118,107 - -------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 23 ================================================================================ CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years ended October 1, 1999, September 30, 1998 and September 30, 1997
Dollars in thousands except per share amounts 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Sales $ 306,044 $ 236,743 $ 200,917 Cost of sales 240,977 189,025 158,092 - ----------------------------------------------------------------------------------------------------------------------------------- Gross profit 65,067 47,718 42,825 Selling, general and administrative expenses 49,511 39,669 34,043 - ----------------------------------------------------------------------------------------------------------------------------------- Operating income 15,556 8,049 8,782 Interest and other income 63 76 45 Interest expense 2,737 2,225 2,110 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 12,882 5,900 6,717 Income tax expense 5,174 2,267 2,901 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 7,708 $ 3,633 $ 3,816 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings per common share: Basic $ 1.19 $ 0.56 $ 0.62 =================================================================================================================================== Diluted $ 1.10 $ 0.51 $ 0.55 =================================================================================================================================== Comprehensive Income: Net income $ 7,708 $ 3,633 $ 3,816 Other comprehensive income - foreign currency translation adjustment 318 (130) 81 - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive income $ 8,026 $ 3,503 $ 3,897 - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 24 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended October 1, 1999, September 30, 1998 and September 30, 1997
Dollars in thousands 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 7,708 $ 3,633 $ 3,816 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 5,008 4,302 3,888 Provision for losses on accounts receivable 858 497 880 (Gain) loss on sale of fixed assets - 17 (172) Deferred income tax expense 656 539 1,195 Change in assets and liabilities, net of effects of business acquired: Increase in accounts receivable (819) (4,122) (3,225) Increase in inventories (7,468) (3,313) (1,314) Decrease in prepaid expenses and other current assets 787 962 90 Decrease (increase) in other assets 81 (28) (178) Increase in accounts payable and accrued expenses 3,232 2,633 4,217 - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 10,043 5,120 9,197 - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (4,511) (4,126) (6,881) Acquisition, net of cash acquired (17,962) - - Decrease (increase) in other assets (1,139) (215) (1,000) Proceeds from sale of fixed assets 23 12 202 - -------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (23,589) (4,329) (7,679) - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from revolving credit agreements 65,837 56,705 52,528 Repayment on revolving credit agreements (51,063) (73,196) (48,945) Payment of debt issuance costs (208) - - Proceeds from issuance of long-term debt - 25,000 - Repayment of long-term debt - (10,937) (3,874) Purchase of treasury stock (2,582) (1,422) - Proceeds from issuance of common stock 886 1,595 253 - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 12,870 (2,255) (38) - -------------------------------------------------------------------------------------------------------------------------------- Foreign currency translation adjustments 318 (130) 81 - -------------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (358) (1,594) 1,561 Cash and cash equivalents at beginning of year 2,558 4,152 2,591 - -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 2,200 $ 2,558 $ 4,152 - -------------------------------------------------------------------------------------------------------------------------------- Supplemental disclosures of each cash flow information: Cash paid during the year for: Interest, net of capitalized interest in 1997 $ 2,681 $ 1,908 $ 2,099 Income taxes, net of refunds 1,449 1,090 928 Supplemental schedule of non-cash financing and investing activities: Tax benefit on exercise of stock options and warrants $ 652 $ 1,712 $ 44 Convertible note and common stock issued in connection with acquisition $ 5,500 - -
The accompanying notes are an integral part of these consolidated financial statements 25 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended October 1, 1999, September 30, 1998 and September 30, 1997
Accumulated Common Stock Additional Other ----------------------- Number of Paid-In Retained Treasury Comprehensive Dollars in thousands Shares Amount Capital Earnings Stock Income - ---------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1996 6,156,075 $ 543 $ 35,042 $ 6,929 $ - $ (111) Net income - - - 3,816 - - Shares issued under employee stock option, warrant and purchase plans 34,232 3 250 - - - Tax benefit on exercise of stock options and warrants - - 44 - - - Foreign currency translation adjustment - - - - - 81 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1997 6,190,307 546 35,336 10,745 - (30) Net income - - - 3,633 - - Shares issued under employee stock option, warrant and purchase plans 481,331 48 1,547 - - - Tax benefit on exercise of stock options and warrants - - 1,712 - - - Purchase of treasury stock (135,800) - - - (1,422) - Foreign currency translation adjustment - - - - - (130) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1998 6,535,838 594 38,595 14,378 (1,422) (160) Net income - - - 7,708 - - Purchase of treasury stock (250,300) - - - (2,582) - Shares issued in connection with acquistion 45,198 - 82 - 418 - Shares issued under employee stock option, warrant and purchase plans 245,724 - (82) (1,527) 2,495 - Tax benefit on exercise of stock options and warrants - - 652 - - - Foreign currency translation adjustment - - - - - 318 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, October 1, 1999 6,576,460 $ 594 $ 39,247 $20,559 $ (1,091) $ 158 - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements 26 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dollars in thousands except share and per share amounts Business Description The Company operates principally as a manufacturer, packager and distributor of personal care guest amenities, housekeeping supplies, room accessories and textiles to the lodging industry. The Company also manufactures and packages products for major consumer products and retail companies. Summary of Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of Guest Supply, Inc. and all of its subsidiaries ("the Company"), each of which is wholly owned. All significant intercompany transactions and balances are eliminated in consolidation. Fiscal Year - Effective October 1, 1998, the Company adopted a 52 or 53 week fiscal year, changing the year end date from September 30 to the Friday nearest September 30. The fiscal year ended October 1, 1999 had 53-weeks. Risks and Uncertainties - The Company's revenues are dependent on the continued operation of its manufacturing facility and its various distribution centers. The operation of these facilities involves many risks, including the breakdown, failure or substandard performance of equipment, natural disasters and the need to comply with directives of governmental agencies. The occurrence of material operational problems, including but not limited to the above events, may have a material adverse effect on the productivity and profitability of a particular facility or with respect to certain facilities, the Company, as a whole during the period of such operational difficulty. In addition, other factors may cause the Company's results to differ materially from historic levels. Some of the most significant factors include a downturn in the lodging industry resulting in lower demand for the Company's products, the unanticipated loss or decline in sales to a major customer, pricing pressures, unforeseen inefficiencies at the Company's manufacturing facility, and difficulties resulting from year 2000 issues by the Company, its customers or suppliers. Foreign Currency Translation - Assets and liabilities of the Company's foreign subsidiaries are translated into US dollars at current exchange rates, while revenues and expenses are translated at average exchange rates during each reporting period. Adjustments resulting from translation of financial statements are reported as a separate component of shareholders' equity. Use of Estimates - In conformity with generally accepted accounting principles, the preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition - The Company recognizes revenue at the time the goods are shipped or title has passed. Inventories - Inventories are stated at the lower of cost or market. Cost is determined using the weighted-average and first-in, first-out methods. The Company evaluates the need to record adjustments for markdowns of inventory on a quarterly basis. Provisions for potentially obsolete or slow moving inventory is made based on management's analysis of inventory levels and future sales forecasts. Property and Equipment - Property and equipment are carried at cost. Depreciation and amortization is calculated for financial reporting purposes using the straight-line method based on the estimated useful lives of the assets as follows: buildings, 40 years; machinery and equipment, 3 to 15 years; furniture and fixtures, 3 to 8 years; computers, 3 to 10 years; and leasehold improvements, the shorter of the life of the lease or the life of the asset. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. Excess of Cost Over Net Assets Acquired - Excess of cost over net assets acquired is being amortized using the straight-line method over a period of up to 25 years. The Company continually evaluates the amortization period of its intangible assets. Estimates of useful lives are revised when circumstances or events indicate that the original estimate is no longer appropriate. Earnings Per Share - Basic earnings per share is calculated based on the weighted average number of common shares outstanding. Diluted earnings per share includes the dilutive effect of stock options, warrants and convertible debt, and is adjusted, if applicable, for the effect on net earnings of such transactions. Financial Instruments - The carrying values of financial instruments (principally cash and cash equivalents, accounts receivable, certain other assets, accounts payable and long-term debt) included in the Company's consolidated balance sheets approximated their fair values at October 1, 1999 and September 30, 1998. Fair values were determined based on management's estimates using the latest available market data. The Company also uses a derivative financial instrument to manage interest rate fluctuations. The Company does not hold or issue derivative financial instruments for trading purposes. Concentration of Credit Risk - The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. As of October 1, 1999 and September 30, 1998, one customer accounted for 5.2% and 9.1%, respectively, of the Company's total accounts receivable. 27 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts Income Taxes - Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statements carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Statements of Cash Flows - For purposes of reporting cash flows, cash and cash equivalents include cash on hand and certificates of deposit with a maturity at time of purchase of three months or less. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of -Long- lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell. Stock-Based Compensation - The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price at the date of the grant over the amount an employee must pay to acquire the stock. Because the Company grants options at a price equal to the market price of the stock at the date of grant, no compensation expense is recorded. As required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the Company discloses pro forma net income and earnings per share as if the fair value method had been applied. Comprehensive Income - On October 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and foreign currency translation adjustments and is presented in the consolidated statements of income and comprehensive income. The Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. Acquisition On April 23, 1999, the Company acquired all of the outstanding shares of Kapadia Enterprises, Inc., d/b/a Nasco Supply Company and McDonald Contract Sales, Inc. (collectively "Nasco"), a distributor of textile products to the lodging industry for approximately $24,493 including transaction costs of $738. Total consideration paid included cash of $17,755, a convertible promissory note of $5,000, issuance of 45,198 shares of common stock valued at $500 and other liabilities assumed of $500. The acquisition was funded principally through borrowings under the Company's revolving credit agreement. The acquisition has been accounted for as a purchase and the results of Nasco's operations have been included in the consolidated financial statements since the date of acquisition. The purchase price has been allocated based upon estimated fair values at the date of acquisition, pending final determination of certain acquired balances. The excess of the purchase price over the estimated fair value of the net assets acquired of $17,762 has been recorded as goodwill, and is being amortized on a straight-line basis over 20 years. In connection with the acquisition, the Company also assumed operating leases with the previous owners of Nasco for two distribution facilities. The future minimum rental commitments under these leases, which may be terminated by the Company on two years notice, is approximately $965 per year, subject to annual increases for inflation, through 2012. The following unaudited pro forma information presents a summary of the consolidated results of operations of the Company as if the acquisition of Nasco had occurred at the beginning of the periods presented. These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments such as additional goodwill amortization expense, interest expense, and income tax expense. They do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred at the beginning of the periods presented or of future results of operations.
1999 1998 - ------------------------------------------------------------------------------------------------- Sales $ 338,697 $ 299,657 Net income $ 7,897 $ 4,755 Earnings per common share: Basic $ 1.22 $ 0.73 Diluted $ 1.10 $ 0.65
28 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts
1999 1998 - ---------------------------------------------------------------------------------------------------- Raw materials $ 7,126 $ 8,666 Finished goods 46,811 29,323 - ---------------------------------------------------------------------------------------------------- $ 53,937 $ 37,989 - ----------------------------------------------------------------------------------------------------
Costs included in inventories are comprised of raw materials, direct labor and overhead related to the manufacturing process.
Property and Equipment 1999 1998 - ----------------------------------------------------------------------------------------------------- Land, building and leasehold improvements $ 6,619 $ 6,750 Machinery and equipment 45,712 46,497 Furniture and fixtures 1,563 2,248 Computers 3,014 2,631 Construction in progress 872 958 - ----------------------------------------------------------------------------------------------------- 57,780 59,084 Less accumulated depreciation and amortization (24,187) (25,779) - ----------------------------------------------------------------------------------------------------- $ 33,593 $ 33,305 - -----------------------------------------------------------------------------------------------------
Depreciation and amortization of property and equipment charged to income was $4,270, $3,934 and $3,520 for the fiscal years ended 1999, 1998 and 1997, respectively. Leases The Company leases its office, warehouse facilities and vehicles under long-term lease agreements. These leases are classified as operating leases and expire in various years through fiscal 2007. Future minimum lease payments under noncancelable operating leases as of October 1, 1999 are: 2000 $ 5,831 2001 4,471 2002 3,086 2003 2,646 2004 2,290 Thereafter 3,251 - ------------------------------------------------------------------------------------------------- Total minimum lease payments $ 21,575 - -------------------------------------------------------------------------------------------------
Rent expense under operating leases was $5,940, $4,737 and $4,820 for the fiscal years ended 1999, 1998 and 1997, respectively. 29 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts Income Taxes Income tax expense is comprised of the following:
1999 1998 1997 - -------------------------------------------------------------------------------------------------- Federal - Current $ 4,066 $ 1,334 $ 1,229 - Deferred 439 893 1,133 - -------------------------------------------------------------------------------------------------- Total federal income taxes 4,505 2,227 2,362 - -------------------------------------------------------------------------------------------------- State - Current 413 369 297 - Deferred 217 (354) 158 - -------------------------------------------------------------------------------------------------- Total state income tax 630 15 455 - -------------------------------------------------------------------------------------------------- Foreign 39 25 84 - -------------------------------------------------------------------------------------------------- Total income tax provision $ 5,174 $ 2,267 $ 2,901 - --------------------------------------------------------------------------------------------------
The following is a reconciliation of federal income tax expense computed using the statutory rate of 35% in 1999 and 34% in 1998 and 1997, to the Company's effective income tax rate:
1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Computed "expected" income tax expense $ 4,509 $ 2,006 $ 2,284 Increase (reduction) in tax expense resulting from: State income taxes, net of federal income tax benefit 117 (112) 300 Change in valuation allowance 450 350 - Nondeductible amortization of goodwill 129 125 125 Foreign (41) 25 84 Effect of income tax rate differential (100) - - Adjustment to net deferred taxes for change in effective state income tax rate - (165) - Other, net 110 38 108 - --------------------------------------------------------------------------------------------------------------------------------- $ 5,174 $ 2,267 $ 2,901 - ---------------------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at October 1, 1999 and September 30, 1998 are as follows:
1999 1998 - ------------------------------------------------------------------------------------------------------------- Deferred tax assets: Allowance for doubtful accounts $ 413 $ 209 Inventory obsolescence reserve and uniform capitalization 1,092 980 Net operating loss carryforwards - states 1,198 940 Alternative minimum tax credits carryforwards - 228 Other 121 184 - ------------------------------------------------------------------------------------------------------------- Gross deferred tax assets 2,824 2,541 Less: valuation allowance (800) (350) - ------------------------------------------------------------------------------------------------------------- Net deferred tax assets 2,024 2,191 Deferred tax liability - principally excess of tax over financial statement depreciation (6,177) (5,688) - ------------------------------------------------------------------------------------------------------------- Net deferred liability $ (4,153) $ (3,497) - -------------------------------------------------------------------------------------------------------------
30 ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts The valuation allowance for deferred tax assets as of October 1, 1999 and September 30, 1998 was $800 and $350, respectively. The net change in the total valuation allowance for the fiscal years ended October 1, 1999 and September 30, 1998 was an increase of $450 and $350, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the tax deferred assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income during the periods in which those temporary differences become deductible. Based upon the level of historical taxable income, projections for future taxable income and the availability of tax planning strategies to prevent the tax net operating loss carryforwards from expiring unused, management believes that it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at October 1, 1999. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. At October 1, 1999, the Company has net operating loss carryforwards for state income tax purposes of approximately $19,961 which are available to reduce the future state income taxes, if any, through the year 2006. Indebtedness Indebtedness consists of the following at October 1, 1999 and September 30, 1998:
1999 1998 =================================================================================================================================== Revolving credit agreement $ 15,900 $ 1,126 Series A senior notes payable; 7.31%; due in semi-annual installments through November, 2009 15,000 15,000 Series B senior notes payable; 7.20%; due in semi-annual installments through November, 2007 5,000 5,000 Series C senior notes payable; 6.95%; due in semi-annual installments through November, 2003 5,000 5,000 Convertible subordinated promissory note; 5.18%; due March, 2004 5,000 - - ----------------------------------------------------------------------------------------------------------------------------------- 45,900 26,126 Less current maturities (1,111) - - ----------------------------------------------------------------------------------------------------------------------------------- $ 44,789 $26,126 ===================================================================================================================================
Concurrent with the closing of the acquisition of Nasco, the Company entered into an amended and restated six year revolving credit agreement ("revolver") with its banks and amended the terms of its $25,000 senior notes. The effects of these amendments were to increase the amounts available under the revolver from $25,000 to $35,000, to secure the borrowings under the revolver and the senior notes by substantially all of the assets of the Company, to increase the interest rates on the revolver and the senior notes by .40% and .25%, respectively and to add certain restrictive covenants. Borrowings under the revolver bear interest at the Eurodollar rate plus 125 basis points (6.625% at October 1, 1999) or the prime rate (8.25% at October 1, 1999), at the Company's option. The unused amount available to the Company under the revolver was $19,100 at October 1, 1999. Both the revolver and the senior notes contain restrictive covenants including covenants which limit the Company's ability to incur additional indebtedness, sell certain assets, make acquisitions and other investments and require the Company to comply with various financial ratios specified in the loan agreements. In June 1999, the Company entered into an interest rate collar agreement ("collar') in connection with borrowings under its revolver. The collar is for an initial notional amount of $11,000 which declines to $6,000 through June 2002, the expiration date of the collar. Under the terms of the agreement, the Company would be reimbursed the interest difference in the event that the three- month LIBOR rate exceeds 9.7% or would pay the interest difference if the three- month LIBOR rate falls below 4.75%. The convertible subordinated promissory note issued to the former owners of Nasco, who are currently employed by the Company, is convertible into shares of the Company's common stock at $13.275 per share. Indebtedness at October 1, 1999 matures as follows: 2000 $ 1,111 2001 1,486 2002 3,376 2003 3,626 2004 8,070 Thereafter 28,231 ============================================================================== 31 ============================================================================= NOTES TO FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts Litigation From time to time, the Company is a party to legal actions arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without material effects on the Company's consolidated financial statement taken as a whole. Earnings Per Share Earnings per share is calculated as follows:
1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- Basic EPS Net income $ 7,708 $ 3,633 $ 3,816 =============================================================================================================================== Weighed average common shares outstanding 6,463,000 6,489,000 6,177,000 =============================================================================================================================== Basic EPS $ 1.19 $ 0.56 $ 0.62 =============================================================================================================================== Diluted EPS Net income $ 7,708 $ 3,633 $ 3,816 Effect of convertible promissory note 68 - - - ------------------------------------------------------------------------------------------------------------------------------- Adjusted net income $ 7,776 $ 3,633 $ 3,816 =============================================================================================================================== Weighted average common shares outstanding 6,463,000 6,489,000 6,177,000 Effect of dilutive stock options and warrants 438,000 636,000 806,000 Effect of convertible promissory note 163,000 - - =============================================================================================================================== Weighted average common shares outstanding assuming dilution 7,064,000 7,125,000 6,983,000 =============================================================================================================================== Diluted EPS $ 1.10 $ 0.51 $ 0.55 ===============================================================================================================================
Options to purchase 84,800, 86,000 and 86,000 shares of common stock at an average price of $15.35, $15.36 and $15.36 per share at October 1, 1999, September 30, 1998 and 1997, respectively were anti-dilutive and are not included in the calculations of diluted earnings per share because the option exercise price was greater than the average market price of common shares of each respective period. Stock Based Compensation Plans The Company has two stock option plans which provide for the granting of options to key employees. Options granted under these plans are to purchase shares of common stock at not less than fair market value at the date of grant. Options vest 20% per year over five years and generally expire ten years from the date of grant. The Company also maintains a long-term incentive plan which provides for the granting of a wide range of awards, including options, stock appreciation rights, restricted stock, performance awards and other stock-based awards to any employee or director. The terms of awards granted under this plan may vary at the discretion of the Stock Option Committee. All awards granted under this plan consisted of stock options. At October 1, 1999, 207,000 shares are available for future grants. Transactions relating to these plans are summarized as follows:
1999 1998 1997 ---------------------- ------------------------ ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------------------- ------------------------ ----------------------- Outstanding at beginning of year 828,000 $ 7.16 1,042,300 $ 6.31 1,171,300 $ 7.25 Granted 105,000 9.56 - - 48,000 11.38 Exercised (144,500) 3.37 (214,300) 3.00 (21,300) 6.27 Forefeited (1,200) 16.25 - - (155,700) 14.95 ------------------------------------------------------------------------- Outstanding at end of year 787,300 $ 8.16 828,000 $ 7.16 1,042,300 $ 6.31 ---------------------- ------------------------ ----------------------- Exercisable at end of year 619,500 $ 7.42 731,400 $ 6.38 858,650 $ 5.06 ====================== ======================== ======================= Weighted average fair value of options granted during the year $ 5.47 $ 6.51 ========= ========
32 ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts The fair value of each stock option granted during 1999 and 1997 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for 1999 and 1997; expected life of 7.0 years; expected volatility of 45%; expected dividend yield of 0%; and risk-free interest rate of 6.5%. The following table summarizes information about stock options outstanding and exercisable at October 1, 1999:
Options Outstanding Options Exercisable -------------------------- -------------------------- Weighted Average Weighted Weighted Remaining Average Average Number Contractual Exercise Number Exercise Range of Exercise Prices Outstanding Life Price Exercisable Price ============================================================================================ ========================== $ 2.67 - $ 3.75 68,750 1.4 years $ 2.67 68,750 $ 2.67 4.67 - 5.75 249,250 3.4 years 4.68 249,250 4.68 9.50 - 11.50 384,500 6.3 years 9.82 252,500 9.89 15.25 - 16.25 84,800 6.5 years 15.35 49,000 15.34 - -------------------------------------------------------------------------------------------- -------------------------- 787,300 5.0 years $ 8.16 619,500 $ 7.42 ============================================================================================ ==========================
The Company also maintains an employee stock purchase plan in which eligible employees may purchase a limited number of shares over successive six-month offering periods at 85% of fair market value on either the first or last day of each six-month period, whichever is less. During fiscal 1999, 1998 and 1997, 11,224, 12,031, and 11,432 shares, respectively, were purchased under this plan. At October 1, 1999, 57,093 shares are reserved for future issuance under this plan. Under SFAS No. 123, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes model with the following assumptions; expected life of 6 months; expected volatility of 45% in 1999, 48% in 1998 and 45% in 1997; expected dividend yield of 0%; and risk-free interest rate of 6.5%. The weighted average fair-value of those purchase rights granted in 1999, 1998 and 1997 was $3.13, $3.04 and $4.34, respectively. The Company has adopted the disclosure-only provisions of SFAS No. 123 and applies APB Opinion No. 25, and related interpretations in accounting for its plans and, accordingly, has not recognized compensation cost for stock option plans and stock purchase plans in its financial statements. Had the Company determined compensation cost based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net income would have been changed to the pro forma amounts indicated below:
1999 1998 1997 =================================================================================================================================== Net income: As reported $ 7,708 $ 3,633 $ 3,816 Pro forma 7,521 3,483 3,678 Basic earnings per share: As reported $ 1.19 $ 0.56 $ 0.62 Pro forma 1.16 0.54 0.60 Diluted earnings per share: As reported $ 1.10 $ 0.51 $ 0.55 Pro forma 1.07 0.49 0.53
33 ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts Common Stock Warrants The Board of Directors may grant common stock warrants to directors and officers of the Company at exercise prices not less than fair market value at the date of grant. All outstanding warrants expire through February 2001. Transactions relating to common stock warrants are summarized as follows:
1999 1998 1997 ------------------------- -------------------------- ----------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ---------------------------------------------------------------- -------------------------- ----------------------------- Outstanding at beginning of year 486,750 $ 3.02 741,750 $ 3.11 743,250 $ 3.11 Exercised (90,000) 3.17 (255,000) 3.29 (1,500) 3.17 ------------------------- -------------------------- ----------------------------- Outstanding at end of year 396,750 $ $2.98 486,750 $ 3.02 741,750 $ 3.11 ------------------------- -------------------------- ----------------------------- Exercisable at year end 396,750 $ $2.98 486,750 $ 3.02 741,750 $ 3.11 ========================= ========================== =============================
Employee Benefit Plan The Company has a 401(k) Salary Reduction Plan under which the Company usually matches a portion of the amount of contributions made by the employee. All domestic employees with one year of continuous service are eligible for the plan. Company matching contributions are 100% vested, as are any contributions made by the employee. The Company may also make, at its sole discretion, annual discretionary contributions, which vest over a six-year period. The Company has not made any discretionary contributions. Employer contributions relating to these plans were $247, $226, and $181 for the fiscal years ended 1999, 1998 and 1997, respectively. Shareholders' Preferred Purchase Rights On July 14, 1988, as amended on August 6, 1997, the Board of Directors of the Company declared a dividend of one preferred share purchase rights for each outstanding share of common stock of the Company and for each share of common stock issued from that date. The dividend was payable on July 26, 1988 to the shareholders of record on that date. Each right entitles the registered holder to purchase from the Company one one-hundredth of a preferred share at a price of $30.00, subject to adjustment. The rights agreement provides that, until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons have acquired beneficial ownership of 20% or more of the outstanding common stock, or (ii) 10 days following the commencement or announcement of an intention to make a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 20% or more of such outstanding common stock, the rights will be transferred with and only with the common stock. Each holder of a right will in such event have the right to receive shares of the Company's common stock having a market value of two times the exercise price of the right, which has been set at $30.00; and in the event that the Company is acquired in a merger or other business combination, or if more than 50% of its assets or earning power is sold, each holder of a right would have the right to receive common stock of the acquiring company with a market value of two times the exercise price of the right. Following the occurrence of any of these events, any rights that are beneficially owned by any acquiring person will immediately become null and void. The rights are not exercisable until the earlier of such date as described above and will expire on July 15, 2008, unless the final expiration date is extended or the rights are earlier redeemed by the Company at $.01 per right. Business Segments Effective October 1, 1998, the Company adopted SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 supercedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise" and changes the way the Company reports information about its operating segments, geographic areas of operations and major customers. The Company has two reportable segments (Lodging Supply and Manufacturing). The Lodging Supply segment includes sales to hotel customers of cleaning chemicals, room accessories, paper products, personal care amenities, linens, appliances, fixtures, and miscellaneous housekeeping supplies. The Manufacturing segment includes sales to retailers, consumer products companies, and intercompany sales of personal care amenities. The reportable segments are strategic businesses that offer different products and services and accordingly are managed separately. The accounting policies of the segments are the same as those described in 34 ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts the summary of significant accounting policies. Intersegment sales are accounted for at prices that approximate arms length transactions, and have generally been at or below cost. Sales by geographic area are determined based on the location of the Company's operations. The Company evaluates performance based on operating income (loss) of the respective business segment. Summarized segment information for the fiscal years 1999, 1998 and 1997 are as follows:
Lodging Total Supply Manufacturing Segments - ------------------------------------------------------------------------------------------------------------------------------- 1999 Sales to external customers $ 277,442 $ 28,602 $ 306,044 Intersegment sales - 12,036 12,036 - ------------------------------------------------------------------------------------------------------------------------------- Total sales 277,442 40,638 318,080 Operating income (loss) 16,474 (918) 15,556 Identifiable assets 135,693 29,437 165,130 Capital expenditures 2,096 2,415 4,511 Depreciation and amortization 2,163 2,845 5,008 - ------------------------------------------------------------------------------------------------------------------------------- 1998 Sales to external customers $ 212,181 $ 24,562 $ 236,743 Intersegment sales - 9,896 9,896 - ------------------------------------------------------------------------------------------------------------------------------- Total sales 212,181 34,458 246,639 Operating income (loss) 12,174 (4,125) 8,049 Identifiable assets 89,329 31,571 120,900 Capital expenditures 1,599 2,527 4,126 Depreciation and amortization 1,524 2,778 4,302 - ------------------------------------------------------------------------------------------------------------------------------- 1997 Sales to external customers $ 172,502 $ 28,415 $ 200,917 Intersegment sales - 9,420 9,420 - ------------------------------------------------------------------------------------------------------------------------------- Total sales 172,502 37,835 210,337 Operating income/1/ 4,311 4,471 8,782 Identifiable assets 78,153 33,837 111,990 Capital expenditures 3,606 3,275 6,881 Depreciation and amortization 1,260 2,628 3,888 - -------------------------------------------------------------------------------------------------------------------------------
/1/ Includes a charge to cost of sales for the lodging supply segment of $2,187 as a result of damaged, obsolete and below standard inventory identified during the Company's consolidation of its distribution facilities. 35 ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts The following table provides a reconciliation of selected segment information to corresponding amounts contained in the Company's Consolidated Financial Statements:
1999 1998 1997 ========================================================================================================================= Sales: Sales from reportable segments $318,080 $246,639 $210,337 Elimination of intersegment revenue (12,036) (9,896) (9,420) - ------------------------------------------------------------------------------------------------------------------------- Total consolidated sales $306,044 $236,743 $200,917 - ------------------------------------------------------------------------------------------------------------------------- Total assets: Identifiable assets from reportable segments $165,130 $120,900 $111,990 Elimination of intersegment receivables (5,499) (4,166) (1,388) Other unallocated amounts 1,626 1,373 2,067 - ------------------------------------------------------------------------------------------------------------------------- Total consolidated assets $161,257 $118,107 $112,669 - -------------------------------------------------------------------------------------------------------------------------
One lodging supply segment customer accounted for 15.3% and 15.5% of the Company's total sales in 1999 and 1998, respectively. In 1997, one manufacturing segment customer accounted for 13.2% of the Company's total sales. Substantially all of the Company's operations are in the United States. Operations outside of the Unites States, which include subsidiaries in Canada, England and New Zealand, are not significant to the consolidated operations of the Company. Subsequent Event In November 1999, the Company's Board of Directors authorized the repurchase of up to 5% of its outstanding common stock, which may be purchased in open market transactions or block purchases and depends on many factors, including stock price, business developments, strategies and opportunities and legal requirements. Quarterly Financial Data The following table sets forth certain unaudited quarterly financial information:
First Second Third Fourth Year ended October 1, 1999 Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------- Sales $62,918 $64,625 $86,550 $91,951 Gross profit 12,505 13,321 18,778 20,463 Net income 764 817 2,823 3,304 Earnings per common share: Basic $ 0.12 $ 0.13 $ 0.43 $ 0.50 Diluted $ 0.11 $ 0.12 $ 0.39 $ 0.45 Year ended September 30, 1998 - ------------------------------------------------------------------------------------------------------------------------- Sales $52,765 $52,794 $60,986 $70,198 Gross profit 10,440 10,571 12,065 14,642 Net income 418 370 869 1,976 Earnings per common share: Basic $ 0.07 $ 0.06 $ 0.13 $ 0.30 Diluted $ 0.06 $ 0.05 $ 0.12 $ 0.28
36 GUEST SUPPLY, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- Additions ----------------------------- Balance at Charged to Charged to Balance Beginning Costs and Other at End of Description Period Expenses Accounts Deductions Period - -------------------------------------------- ------------------ ------------- ------------ -------------- ------------- Reserves and allowances deducted from asset accounts: Allowance for Doubtful Accounts - ------------------------------------------------------------------- Year ended October 1, 1999 $ 543,000 858,000 259,000 584,000 $ 1,076,000 ================== ============= ========== ============= ============== Year ended September 30, 1998 $ 1,032,000 497,000 0 986,000 $ 543,000 ================== ============= ========== ============= ============== Year ended September 30, 1997 $ 898,000 880,000 0 746,000 $ 1,032,000 ================== ============= ========== ============= ============== Allowance for Inventory Obsolescence - ---------------------------------------------------------------------------------- Year ended October 1, 1999 $ 1,550,000 1,586,000 100,000 1,726,000 $ 1,510,000 ================== ============= ========== ============= ============== Year ended September 30, 1998 $ 1,934,000 1,152,000 0 1,536,000 $ 1,550,000 ================== ============= ========== ============= ============== Year ended September 30, 1997 $ 1,606,000 1,858,000 0 1,530,000 $ 1,934,000 ================== ============= ========== ============= ==============
37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 38 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. For information concerning this item, see "Item 1. - Business - Executive Officers" and the table and text under the caption "Certain Information Concerning Nominees and Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" of the Proxy Statement to be filed with respect to the 2000 Annual Meeting of Shareholders to be held on January 20, 2000 (the "Proxy Statement"), which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. For information concerning this item, see the table and text under the captions "Executive Compensation," "Compensation of Directors," "Compensation Committee Interlocks and Insider Participation" and "Employment Agreements" of the Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. For information concerning this item, see the table and text under the caption "Information Concerning Certain Shareholders" of the Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. For information concerning this item, see the text under the caption "Compensation Committee Interlocks and Insider Participation" of the Proxy Statement, which information is incorporated herein by reference. 39 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements: Included in Part II of this report: Page Number ------ Independent Auditors' Report........................... 22 Consolidated Balance Sheets -- October 1, 1999 and September 30, 1998................. 23 Consolidated Statements of Income and Comprehensive Income -- Fiscal Years Ended October 1, 1999, September 30, 1998 and September 30, 1997.............. 24 Consolidated Statements of Cash Flows - Fiscal Years Ended October 1, 1999, September 30, 1998 and September 30, 1997................................. 25 Consolidated Statements of Shareholders' Equity -- Fiscal Years Ended October 1, 1999, September 30, 1998 and September 30, 1997................................. 26 Notes to Consolidated Financial Statements............. 27 2. Financial Statement Schedule: Included in Part II of this report: II - Valuation and Qualifying Accounts................. 37 All other schedules have been omitted because they are inapplicable or the information is provided in the consolidated financial statements, including the notes thereto. 3. Exhibits: The exhibits required to be filed as part of this Annual Report on Form 10-K are listed in the attached Index to Exhibits. (b) Current Reports on Form 8-K: 40 No reports on Form 8-K were filed during the three-month period ended October 1, 1999. 41 POWER OF ATTORNEY The registrant and each person whose signature appears below hereby appoint Clifford W. Stanley and Thomas M. Haythe as attorneys-in-fact with full power of substitution, severally, to execute in the name and on behalf of the registrant and each such person, individually and in each capacity stated below, one or more amendments to the annual report which amendments may make such changes in the report as the attorney-in-fact acting in the premises deems appropriate and to file any such amendment to the report with the Securities and Exchange Commission. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: December 21, 1999 GUEST SUPPLY, INC. By /s/ Clifford W. Stanley ----------------------------- Clifford W. Stanley President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Dated: December 21, 1999 By /s/ Clifford W. Stanley ----------------------------- Clifford W. Stanley President, Principal Executive Officer and Director Dated: December 21, 1999 By /s/ Thomas M. Haythe -------------------------- Thomas M. Haythe Director 42 Dated: December 21, 1999 By /s/ Peter L. Richard -------------------------- Peter L. Richard Director Dated: December 21, 1999 By /s/ Teri E. Unsworth ------------------------ Teri E. Unsworth Vice President - Market Development and Director Dated: December 21, 1999 By /s/ Edward J. Walsh ------------------------ Edward J. Walsh Director Dated: December 21, 1999 By /s/ George S. Zabrycki ------------------------- George S. Zabrycki Director Dated: December 21, 1999 By /s/ Paul T. Xenis ------------------------------ Paul T. Xenis Vice President - Finance and Principal Financial and Accounting Officer 43 Index to Exhibits ----------------- Page ---- 3(a) Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). -- 3(b) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). -- 3(c) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). -- 3(d) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). -- 3(e) Certificate of Correction to the Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, (incorporated by reference to Exhibit 3(d) to the Company's Annual Report on Form 10-K for the year ended September 30, 1993). -- 3(f) Certificate of Merger of Miraflores Designs, Inc. into the Company (incorporated by reference to -Exhibit 3(e) to the Company's Annual Report on Form 10-K for the year ended September 30, 1993). -- 3(g) Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3(g) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). -- 4(a) Article THIRD of Certificate of Incorporation of the Company (incorporated by reference to Exhibit -3(a) to Registration Statement on Form S-1 No. 33-7246). -- 4(b) Form of Series W Warrant Certificate to purchase Common Stock of the Company (incorporated by reference to Exhibit 4(b) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994). -- 44 4(c) Form of Series A Warrant Certificate to purchase Common Stock of the Company (incorporated by reference to Exhibit 4(c) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994). -- 4(d) Form of Series B Warrant Certificate to purchase Common Stock of the Company (incorporated by reference to Exhibit 4(d) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994). -- 4(e) Rights Agreement dated as of July 15, 1988 between the Company and First Fidelity Bank (incorporated by reference to Exhibit 4(e) to the Company's Annual Report on Form 10-K for the year ended September 30, 1993). -- 4(f) Amendment No. 1 dated as of August 15, 1998 by and among the Company, First Fidelity Bank and ChaseMellon Shareholder Services, L.L.C. to the Rights Agreement (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated September 8, 1998). -- 10(a) 1983 Stock Option Plan of the Company, as amended (incorporated by reference to Exhibit 10(a) to Company's Annual -- Report on Form 10-K for the year ended September 30, 1993). 10(b) 1993 Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-8 No. 33-63352). -- 10(c) 1993 Stock Option Plan of the Company (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8 No. 33-63352). -- 10(d) Lease dated February 28, 1985 between the Company and The Benenson Capital Company (incorporated by reference to Exhibit 10(l) to Registration Statement on Form S-1 No. 2-98274). -- 10(e) Lease dated October 28, 1985 between the Company and Shore Point Distributors (incorporated by reference to Exhibit 10(y) to Registration Statement on Form S-1 No. 33-7246). -- 10(f) Guest Supply, Inc. 401(k) Plan & Trust (incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended September 30, 1996). -- 10(g) Guest Supply, Inc. 1996 Long Term Incentive Plan (incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended September 30, 1996). -- 45 10(h) Lease dated March 16, 1995 between the Company and The Morris Company (incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). -- 10(i) Employment Agreement dated as of August 6, 1998 between the Company and Clifford W. Stanley (incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). -- 10(j) Employment Agreement dated as of August 6, 1998 between the Company and Teri E. Unsworth (incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). -- 10(k) Employment Agreement dated as of August 6, 1998 between the Company and Paul T. Xenis (incorporated by reference to Exhibit 10(k) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). -- 10(l) Employment Agreement dated as of August 6, 1998 between the Company and R. Eugene Biber (incorporated by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). -- 10(m) General Counsel Agreement dated as of August 6, 1998 between the Company and Thomas M. Haythe (incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). -- 10(n) Revolving Credit Agreement by and among the Company, Guest Packaging, Inc., Breckenridge-Remy Co., and Guest Distribution Services, Inc., all as the Borrower, PNC Bank, National Association, First Union National Bank, both as Lenders and PNC Bank, National Association, as agent, dated as of December 3, 1998 (incorporated by reference to Exhibit 10(n)to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). -- 10(o) Revolving Credit Note dated December 3, 1998 made by the Company, Guest Packaging, Inc., Breckenridge-Remy Co. and Guest Distribution Services, Inc., as joint and several obligors to First Union National Bank (incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). -- 46 10(p) Revolving Credit Note dated December 3, 1998 made by the Company, Guest Packaging, Inc., Breckenridge-Remy Co. and Guest Distribution Services, Inc., as joint and several obligors to PNC Bank, National Association (incorporated by reference to Exhibit 10(p) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). -- 10(q) Form of Note Purchase Agreement dated as of December 3, 1998 by and among the Company, Breckenridge-Remy Co., Guest Distribution Services, Inc., Guest Packaging, Inc. and each of The Mutual Life Insurance Company of New York, AUSA Life Insurance Company, Inc., Great-West Life & Annuity Insurance Company and Nationwide Life and Annuity Insurance Company (incorporated by reference to Exhibit 10(q) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). -- 10(r) 7.06% Series A Senior Note due November 15, 2009 made by the Company, Guest Packaging, Inc., Breckenridge-Remy Co. and Guest Distribution Services, Inc. for the benefit of the Mutual Life Insurance Company of New York (incorporated by reference to Exhibit 10(r) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). -- 10(s) 7.06% Series A Senior Note due November 15, 2009 made by the Company, Guest Packaging, Inc., Breckenridge-Remy Co. and Guest Distribution Services, Inc. for the benefit of AUSA Life Insurance Company, Inc. (incorporated by reference to Exhibit 10(s) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). -- 10(t) 6.95% Series B Senior Note due November 15, 2007 made by the Company, Guest Packaging, Inc., Breckenridge-Remy Co. and Guest Distribution Services, Inc. for the benefit of Great-West Life & Annuity Insurance Company (incorporated by reference to Exhibit 10(t) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). -- 10(u) 6.70% Series C Senior Note due November 15, 2003 made by the Company, Guest Packaging, Inc., Breckenridge-Remy Co. and Guest Distribution Services, Inc. for the benefit of Nationwide Life and Annuity Insurance Company. (incorporated by reference to Exhibit 10(u) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). -- 47 10(v) Stockholders Agreement dated as of December 3, 1997 by and among the Company, Barry Igdaloff and the other parties thereto (incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). -- 10(w) Stock Purchase Agreement dated as of April 23, 1999 by and among the Company, Breckenridge-Remy Co., Madhukar Kapadia and Naina Kapadia, as Trustees of the Kapadia Family Trust, Kapadia Enterprises, Inc., MacDonald Contract Sales, Inc., Madhukar Kapadia and Naina Kapadia (incorporated by reference to Exhibit 10 (w) to the Company's Current Report on Form 8-K filed on May 10, 1999). Pursuant to Regulation S-K Item 601(b)(2), the Company agrees to furnish a copy of the Schedules -- to such Agreement to the Commission upon request. 10(x) 5.18% Convertible Subordinated Promissory Note due April 23, 2004 in the principal amount of $5,000,000 by the Company in favor of Madhukar Kapadia and Naina Kapadia, as Trustees of the Kapadia Family Trust (incorporated by reference to Exhibit 10 (x) to the Company's Current Report on Form 8-K filed on May 10, -- 1999). 10(y) Employment Agreement dated as of April 23, 1999 by and between the Company and Madhukar Kapadia (incorporated by reference to Exhibit 10 (y) to the Company's Current Report on Form 8-K filed on May 10, 1999). 10(z) Amended and Restated Revolving Credit Agreement dated as of April 21, 1999 by and among the Company, Guest Packaging, Inc., Breckenridge-Remy Co., Guest Distribution Services, Inc., Kapadia Enterprises, Inc., PNC Bank, National Association, as Agent and as Lender, First Union National Bank, as Lender,and Fleet Bank, N.A., as Lender (incorporated by reference to Exhibit 10 (z) to the Company's Current Report on Form 8-K filed on -- May 10, 1999). 10(aa) Form of Security Agreement dated as of April 21, 1999 executed by the Company and each of its subsidiaries in favor of PNC Bank, National Association, as Agent (incorporated by reference to Exhibit 10 (aa) to the Company's Current Report on Form 8-K -- filed on May 10, 1999). 10(bb) Amendment No. 1 to Note Purchase Agreements dated as of April 21, 1999 by and among the Company, Guest Packaging, Inc., Breckenridge-Remy Co., Guest Distribution Services, Inc., Kapadia Enterprises, Inc., MONY Life Insurance Company, AUSA Life Insurance Company, Inc., Great-West Life and 48 Annuity Insurance Company and Nationwide Life and Annuity Insurance Company (incorporated by reference to Exhibit 10 (bb) to the Company's Current Report on Form 8-K filed on May 10, -- 1999). 21 Subsidiaries of the Registrant 50 23 Consent of KPMG LLP 51 24 Power of Attorney (see "Power of Attorney" in Form 10-K) -- 27 Financial Data Schedule 52 Copies of the exhibits filed with this Annual Report on Form 10-K or incorporated by reference herein do not accompany copies hereof for distribution to shareholders of the Company. The Company will furnish a copy of any of such exhibits to any shareholder requesting the same. 49 EX-21 2 SUBSIDIARIES OF GUEST SUPPLY, INC. Exhibit 21 Subsidiaries of Guest Supply, Inc. ---------------------------------- Guest Supply, Inc. has the following subsidiaries: 1. Guest International, Ltd., an English corporation. 2. Guest Packaging, Inc., a New Jersey corporation. 3. Breckenridge-Remy Co., a Delaware corporation. 4. Guest International (Canada) Ltd., a Canadian corporation. 5. Guest International New Zealand Limited, a New Zealand corporation. 6. Guest Distribution Services, Inc., a Delaware corporation. 7. McDonald Contract Sales, a Canadian Corporation 8. Kapadia Enterprises, Inc., a California Corporation (merged into Breckenridge-Remy Co. in October 1999) EX-23 3 INDEPENDENT AUDITORS CONSENT Exhibit 23 Independent Auditors' Consent ----------------------------- The Board of Directors Guest Supply, Inc.: We consent to incorporation by reference in the Registration Statements (File Nos. 2-89233, 2-89234, 33-22872, 33-63352 and 333-26709) on Form S-8 of Guest Supply, Inc. of our report dated November 16, 1999, relating to the consolidated balance sheets of Guest Supply, Inc. and subsidiaries as of October 1, 1999 and September 30, 1998, and the related consolidated statements of income and comprehensive income, cash flows, and shareholders' equity for the fifty three week period ended October 1, 1999 and the years ended September 30, 1998 and September 30, 1997, and related schedule, which report appears in the October 1, 1999 annual report on Form 10-K of Guest Supply, Inc. /s/ KPMG LLP Short Hills, New Jersey December 21, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 12-MOS OCT-01-1999 OCT-01-1999 2,200 0 43,471 0 53,937 103,028 57,780 (24,187) 161,257 51,222 0 0 0 594 58,873 161,257 306,044 306,044 240,977 240,977 49,511 0 2,674 12,882 5,174 0 0 0 0 7,708 1.19 1.10
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