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, Westin Rio Mar
in Puerto Rico, The Hotel Monaco in San Francisco, California, Trump Hotels in Atlantic City, New Jersey, and The Park Hyatt Hotels in Philadelphia, Pennsylvania, San Francisco, California and Los Angeles, California. The Company also has amenity programs for the cruise industry for such customers as Holland America Line and Royal Carribean International.
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," "Botanicals," "Institute Swiss(R)" and "Onyx" 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 20,000 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 and 2 sales support facilities. 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 164 sales consultants. Management believes that the 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 MacDonald 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 previously had two distribution centers located in Chatsworth, California and Concord, North Carolina. The Chatsworth, California operation was subsequently consolidated with an existing California warehouse. 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.
In August 2000, the Company entered the furniture, fixtures and equipment ("FF&E") marketplace with the creation of Guest Purchasing Services ("GPS") located in Memphis, Tennessee. GPS provides FF&E products and hospitality design services to the lodging industry on a nationwide basis which further compliments the Company's vertical integration strategy. The addition of the FF&E product line expands the Company's market potential from approximately $2.5 billion to over $7 billion.
On October 31, 2000 the Company acquired T.J. MacDonald Institutional Textiles, Ltd., a leading supplier of textile products to the Canadian hospitality industry. The Mississauga, Ontario, Canada entity, formally a privately held company, was subsequently amalgamated with the Company's existing subsidiary Guest International (Canada) Ltd. to form a full service supplier for the Canadian lodging market. Together T.J. MacDonald and Guest International will become one of the largest suppliers to the Canadian lodging industry.
The Company is prepared to launch its business-to-business, e-commerce initiative, "guestsupply.com". This online procurement site will provide a quick and efficient one-stop shopping capability over the internet. Guestsupply.com will equip users with an innovative e-procurement solution that allows customers to make real-time purchases over a secure internet connection and to automate a number of key business processes.
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 September 29, 2000, 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).
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 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 13 regional warehouses and a central warehouse and distribution facility in Sayreville, New Jersey. These distribution centers provide the Company with the ability to deliver manufactured and purchased products to the lodging properties served by the Company throughout the United States. In addition, each regional distribution center is staffed with route salespersons who call on customers to obtain sales orders and provide direct customer service. See "Item 2.
ITEM 2. PROPERTIES.
The Company's executive offices and principal operating facilities are located in Monmouth Junction, New Jersey, where the Company leases approximately 27,100 square feet of space in an office building. The lease expires on December 15, 2006 and provides for three five-year renewal options.
In connection with its manufacturing and packaging operations, the Company currently leases a manufacturing facility in Rahway, New Jersey. The manufacturing facility consists of approximately 68,000 square feet of space. The lease for this facility expires in 2010. See "Item 1. Business - Manufacturing, Packaging and Shipping" above. This lease may be cancelled by the Company on 90 days' notice.
During fiscal 1997, the Company moved into a newly constructed 226,000 square foot distribution and warehouse facility designed to its specifications in Sayreville, New Jersey. This new facility consolidated all of the Company's then existing New Jersey warehousing facilities. The lease for the facility expires in November 2006.
As part of its regional distribution strategy, the Company currently also leases 12 regional warehouses. The warehouses range in size from 18,600 square feet to 103,700 square feet and are located in Ohio (three), Michigan, Indiana, Texas, Florida, Illinois, Maryland, California (two) and Georgia. The leases for these warehouses have expiration dates through 2004.
In connection with the acquisition of Nasco, the Company also assumed an operating lease with the previous owners of Nasco for a distribution facility located in North Carolina (120,000 square feet). This lease, which may be terminated by the Company on two years notice, expires in 2012.
In 2000, the Company leased two sales support facilities located in California (5,000 square feet) and Tennessee (3,700 square feet). The leases expire through 2005.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades on the New York Stock Exchange, Inc. ("NYSE") under the symbol GSY. 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 September 29, 2000 was 420. No cash dividends have been declared on the common stock since the Company was organized.
Market Price Range - ------------------
On December 15, 2000, the closing sales price for the Company's common stock was $16.8125 per share.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Fiscal Years Dollars in thousands except per share amounts - ---------------------------------------------
(1) In accordance with the Emerging Issues Task Force Issue No. 00-14, "Accounting for Certain Sales Incentives," the Company has reclassed incentive rebates from Selling, General and Administrative (S,G&A) expenses to Sales and Cost of Sales. The amounts reclassed from S,G&A for years ended 2000, 1999, 1998, 1997 and 1996 were $4,760, $3,328, $2,188, $1,407 and $1,427, respectively, of which $4,316, $2,743, $1,701, $1,366 and $1,383, respectively, was reclassed to sales.
ITEM 7.
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 MacDonald 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.
In accordance with the Emerging Issues Task Force Issue No. 00-14, "Accounting for Certain Sales Incentives," the Company has reclassed incentive rebates from Selling, General and Administrative (S,G&A) expenses to Sales and Cost of Sales. The amounts reclassed from S,G&A for years ended 2000, 1999 and 1998 were $4,760, $3,328 and $2,188, respectively. The majority of the incentive rebates reclassed reduced sales for years reported below.
Fiscal 2000 Compared to Fiscal 1999
Sales for the year ended September 29, 2000 increased by 20.7% or $62,627 to $365,928 from $303,301 for the year ended October 1, 1999. Revenues from lodging supply segment customers increased $64,602 or 23.5% to $339,301. Excluding the impact of the Nasco acquisition, sales rose 14.6% over the prior year. The increase in sales in lodging supply is due primarily to the addition of new customers, the sale of additional products to existing customers and the continued expansion of the Company's product line. New customers were added by the direct sales force in existing territories and by new salespeople and territories that were established during fiscal 2000.
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 $26,627 in 2000 compared to $28,602 in 1999. The decrease of $1,975 or 6.9% was primarily due to non- recurring sales programs for two contract customers in the prior year.
Gross profit for the year ended September 29, 2000 was $76,664 or 21.0% of sales compared to $61,739 or 20.4% for the year ended October 1, 1999. The increase in gross profit as a percentage of sales was primarily due to efficiency improvements in the manufacturing segment. This increase was offset by a slight 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 $55,994 or 15.3% of sales for the year ended September 29, 2000 compared to $46,183 or 15.2% for the prior year. The increase of $9,811 was due primarily to 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 $5,114 or 32.9% to $20,670 for the year ended September 29, 2000 from $15,556 last year. Operating income in the lodging supply segment
increased 27.3% to $20,965 in 2000 compared with $16,474 in 1999 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 $623 to a loss of $295 in 2000 from a loss of $918 in 1999 due principally to improved manufacturing efficiencies.
The effective tax rate decreased to 38.7% in fiscal 2000 from 40.2% in fiscal 1999. The decrease in the effective tax rate is due principally to a decrease in state income taxes.
Overall, net income for 2000 increased 35.5% to $10,448 or $1.44 per diluted share compared to $7,708 or $1.10 per diluted share in 1999.
Fiscal 1999 Compared to Fiscal 1998
Sales for the year ended October 1, 1999 increased by 29.0% or $68,259 to $303,301 from $235,042 for the year ended September 30, 1998. Revenues from lodging customers increased $64,219 or 30.5% to $274,699. Excluding the impact of the Nasco acquisition, sales rose 17.8% over the prior year. The increase in sales to lodging supply 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 1999. 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 $61,739 or 20.4% of sales compared to $45,530 or 19.4% 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 $46,183 or 15.2% of sales for the year ended October 1, 1999 compared to $37,481 or 15.9% for the prior year. The increase of $8,702 was due primarily to increased payroll and payroll related costs, delivery expenses, and amortization of goodwill related to the Nasco acquisition.
Operating income increased $7,507 or 93.3% to $15,556 for the year ended October 1, 1999 from $8,049 in 1998. Operating income in the lodging supply segment increased 35.3% to $16,474 in 1999 compared to $12,174 in 1998 due principally to higher sales volume to new and existing customers, focused efforts to contain selling, general and administrative costs offset by lower gross margins. Operating results in the manufacturing segment improved by $3,207 to a loss of $918 in 1999 from a loss of $4,125 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 effective tax rate is due principally to an increase in the valuation allowance for deferred tax assets and an increase in state income taxes.
Overall, net income for 1999 increased by 112.2% to $7,708 or $1.10 per diluted share compared to $3,633 or $0.51 per diluted share in 1998.
Liquidity and Capital Resources
The Company had $59,399 of working capital at September 29, 2000 compared to $52,240 at October 1, 1999. The increase of $7,159 is the result of an increase in cash and accounts receivable offset by a decrease in inventories and an increase in accounts payable and accrued expenses.
Net cash flows from operating activities increased to $13,100 for the fiscal year ended September 29, 2000, compared with $10,043 for the year ended October 1, 1999. The increase was primarily due to higher net earnings and higher levels of depreciation and amortization offset by changes in working capital items during the fiscal year ended September 29, 2000.
Net cash flows used in investing activities totaled $6,086 compared with $23,589 in 1999. Included in 1999 was the funding for the Nasco acquisition of $17,962. Capital expenditures for the year were $5,132 versus $4,511 in 1999. In 2000, capital expenditures for the lodging supply and manufacturing segments amounted to $2,323 and $2,809, respectively. Capital expenditures in fiscal 2001 of approximately $4,200 are expected.
Net cash flows used in financing activities totaled $4,489 compared with $12,870 provided by financing activities in 1999. In November 1999, the Board of Directors authorized the repurchase of an additional 5% of the Company's outstanding common stock. During the year ended September 29, 2000, the Company purchased a total of 284,100 shares of treasury stock at a cost of $3,826 under this program and a previously approved program. At September 29, 2000, the remaining shares authorized to be repurchased were approximately 275,000.
At September 29, 2000, the Company had a $35,000 revolving credit agreement ("Revolver") and $23,889 in senior notes with its banks. Borrowings under the Revolver bear interest at the Eurodollar rate plus 125 basis points (7.62% to 7.77% at September 29, 2000) or the prime rate (9.25% at September 29, 2000), at the Company's option. The unused amount available to the Company under the Revolver was $19,675 at September 29, 2000.
The senior notes have fixed interest rates ranging from 6.95% to 7.31% and are due through 2009. 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.
At September 29, 2000, the Company was in default of a covenant which limited the amount of capital expenditures for the year ended September 29, 2000 to $5,000. The Company, which exceeded the covenant by $132, received a waiver for this default from the banks.
The Company believes that the amount available under the Revolver 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, as amended, establishes accounting and reporting standards for hedging activities and derivative instruments, including certain derivative instruments embedded in other contracts. SFAS 133 is effective for the Company commencing in the first quarter of fiscal 2001. The Company has reviewed the accounting requirements of SFAS 133, and based on the type and dollar amount of the derivative instrument held by the Company as of September 29, 2000, the Company has concluded that SFAS 133 will not have a material effect on the Company's consolidated results of operations or financial position based on current market conditions.
In September 2000, the FASB issued its final consensus on Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). Among other things, EITF 00-10 prohibits the netting of shipping and handling costs against shipping and handling revenues. EITF 00- 10 permits companies to adopt a policy of including shipping and handling costs in cost of sales or in other income statement line items. If shipping or handling costs are significant and are not included in cost of sales, a company is required to disclose both the amounts of such costs and the line items(s) on the income statement that include them. EITF 00-10 will become effective for the Company in the first quarter of fiscal 2001 and upon application, requires reclassification of prior period comparative financial statements. The Company's current policy is to net shipping costs against shipping revenues as a component of selling, general and administrative expenses and to reflect warehousing costs as a component of selling, general and administrative expenses. The Company expects to implement the requirements set forth in the consensus during the first quarter of fiscal 2001. Such implementation will have no effect on net income, but will result in higher reported net sales offset by higher costs of sales.
Other
At September 29, 2000, the financial liabilities of the Company exposed to changes in interest rates consist mainly of $15,325 in variable rate borrowings outstanding under the Revolver. At September 29, 2000, the Company has an interest rate cap agreement with a notional amount of $11,000, which declines to $6,000 through June 2002, the expiration date of the cap. 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%.
Assuming that a hypothetical increase of 1% in interest rates and debt levels were to remain constant, interest expense would increase $153 per year. Included in indebtedness is also $23,889 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 following factors are some of the most significant factors that may cause the Company's actual results to differ materially from those described in any forward-looking statements made by the Company: a downturn in the lodging industry resulting in lower demand for the Company's products, the loss of or decline in sales to a major customer, failure to secure new business, inefficiencies at the Company's manufacturing facility, the inability to increase prices to customers to compensate for inflationary cost increases, problems implementing the Company's e-commerce initiative, or a decline in sales and gross margin as a result of competitive pressures, including from aggregators on the internet.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
GUEST SUPPLY, INC. AND SUBSIDIARIES
----------
Consolidated Financial Statements September 29, 2000, October 1, 1999 and September 30, 1998
- -----------------------------
All other schedules have been omitted because they are inapplicable or the information is provided in the consolidated financial statements, including the notes thereto.
Independent Auditors' Report
The Board of Directors and Shareholders Guest Supply, Inc.:
We have audited the consolidated financial statements of Guest Supply, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Guest Supply, Inc. and subsidiaries as of September 29, 2000 and October 1, 1999 and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended September 29, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 14, 2000
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
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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 September 29, 2000 had 52 weeks and 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, and unforeseen inefficiencies at the Company's manufacturing facility.
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.
Sales Incentives - The Company records incentives paid to its customers as reductions to sales.
Reclassifications - In accordance with the Emerging Issues Task Force Issue No. 00-14, "Accounting for Certain Sales Incentives," the Company has reclassed sales incentives from Selling, General and Administrative (S,G&A) expenses to sales. In addition, certain other S,G&A costs were reclassed to cost of sales. The amounts reclassed from S,G&A for fiscal years 2000, 1999, and 1998 were $4,760, $3,328 and $2,188, respectively, of which $4,316, $2,743 and $1,701, respectively, were reclassed to sales.
Inventories - Inventories are stated at the lower of cost or market. Cost is determined using the weighted-average and first-in, first-out methods.
Property and Equipment - Property and equipment are carried at cost. Depreciation and amortization are 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.
Investments - On January 14, 2000, concurrent with the execution of a service agreement to provide e-procurement services, the Company purchased 93,633 shares of common stock in GoCo-op, Inc., and was issued a warrant to purchase $500 of common stock, subject to certain conditions, at a price to be determined by the per share offering price of GoCo-op's common stock which may be sold, in an initial public offering, for $1,250 in cash. Under the terms of the agreement, GoCo-op will provide the Company with an Internet-based procurement system, which will be trademarked and operated as guestsupply.com. The Company accounts for its investment in GoCo-op., Inc. stock under the cost method.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts
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 September 29, 2000 and October 1, 1999. 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 September 29, 2000 and October 1, 1999, one customer accounted for 7.9% and 5.2%, respectively, of the Company's total accounts receivable.
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 undiscounted 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 (SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company discloses pro forma net income and earnings per share as if the fair value method had been applied.
Comprehensive Income - The Company reports comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income." 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.
Recently Issued Accounting Standards - In September 2000, the Financial Accounting Standards Board issued its final consensus on Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). Among other things, EITF 00-10 prohibits the netting of shipping and handling costs against shipping and handling revenues. EITF 00-10 permits companies to adopt a policy of including shipping and handling costs in cost of sales or in other income statement line items. If shipping or handling costs are significant and are not included in cost of sales, a company is required to disclose both the amounts of such costs and the line item(s) on the income statement that includes them. EITF 00-10 will become effective for the Company in the first quarter of fiscal 2001 and, upon application, requires reclassification of prior period comparative financial statements. The Company's current policy is to net shipping costs against shipping revenues as a component of selling, general and administrative expenses and to reflect warehousing costs as a component of selling, general and administrative expenses. The Company expects to implement the requirements set forth in the consensus during the first quarter of fiscal 2001. Such implementation will have no effect on net income, but will result in higher reported net sales offset by higher cost of sales.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts
Acquisition On April 23, 1999, the Company acquired all of the outstanding shares of Kapadia Enterprises, Inc., d/b/a Nasco Supply Company and MacDonald Contract Sales, Inc. (collectively "Nasco"), a distributor of textile products to the lodging industry for approximately $24,493 including transaction costs of $738. Total consideration paid included cash of $17,755, a convertible promissory note of $5,000, issuance of 45,198 shares of common stock valued at $500 and other liabilities assumed of $500. The acquisition was funded principally through borrowings under the Company's revolving credit agreement. The acquisition has been accounted for 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. 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 an operating lease with the previous owners of Nasco for a distribution facility. The future minimum rental commitments under this lease, which may be terminated by the Company on two years notice, is approximately $400 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.
Depreciation and amortization of property and equipment charged to income was $4,603, $4,270 and $3,934 for the fiscal years ended 2000, 1999 and 1998, respectively .
================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts
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 September 29, 2000 are:
Rent expense under operating leases was $7,408, $5,940, and $4,737 for the fiscal years ended 2000, 1999, and 1998, respectively.
Income Taxes Income tax expense is comprised of the following:
The following is a reconciliation of federal income tax expense computed using the statutory rate of 35% in 2000 and 1999 and 34% in 1998 to the Company's effective income tax rate:
================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 29, 2000 and October 1, 1999 are as follows:
The valuation allowance, which relates to the Company's state net operating loss carryforwards, amounted to $1,100 and $800 as of September 29, 2000 and October 1, 1999, respectively. The net change in the total valuation allowance for the fiscal years ended September 29, 2000 and October 1, 1999 was an increase of $300 and $450, 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 that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at September 29, 2000. 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 September 29, 2000, the Company has net operating loss carryforwards for state income tax purposes of approximately $21,800 which expire between the years 2003 and 2007.
Indebtedness Indebtedness consists of the following at September 29, 2000 and October 1, 1999:
================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts
At September 29, 2000, the Company had a $35,000 revolving credit agreement ("Revolver") with its banks. Borrowings under the Revolver are limited to agreed upon levels of eligible accounts receivable and inventory and bear interest at the Eurodollar rate plus 125 basis points (7.62% to 7.77% at September 29, 2000) or the prime rate (9.25% at September 29, 2000), at the Company's option. The unused amount available to the Company under the Revolver was $19,675 at September 29, 2000. Both the Revolver and the senior notes are secured by substantially all of the assets of the Company and 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. At September 29, 2000, the Company was in default of a covenant which limited the amount of capital expenditures for the fiscal year to $5,000. The Company, which exceeded the covenant by $132, received a waiver for this default from the banks.
At September 29, 2000, the Company has an interest rate cap agreement ("cap") with an initial notional amount of $11,000 which declines to $6,000 through June 2002, the expiration date of the cap. 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%.
The convertible subordinated promissory note issued to the former owner of Nasco, who is currently employed by the Company, is convertible into shares of the Company's common stock at $13.275 per share.
Indebtedness at September 29, 2000 matures as follows:
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 statements taken as a whole.
Earnings Per Share Earnings per share is calculated as follows:
================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts
Options to purchase 51,000, 84,000 and 86,000 shares of common stock at an average price of $17.43, $15.35 and $15.36 per share at September 29, 2000, October 1, 1999 and 1998, 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 September 29, 2000, 177,449 shares are available for future grants. Transactions relating to these plans are summarized as follows:
The fair value of each stock option granted during 2000 and 1999 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: 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 September 29, 2000:
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,
================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts
whichever is less. During fiscal 2000, 1999 and 1998, 12,228, 11,224, and 12,031,shares, respectively, were purchased under this plan. At September 29, 2000, 44,865 shares are reserved for future issuance under this plan.
Under SFAS No. 123, proforma compensation cost is measured 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 35% in 2000, 45% in 1999, and 48% in 1998; expected dividend yield of 0%; and risk-free interest rate of 6.5%. The weighted average fair-value of those purchase rights granted in 2000, 1999, and 1998 was $2.89, $3.13, and $3.04, 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:
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:
Stock Repurchase Plan In November 1999, the Board of Directors authorized the repurchase of an additional 5% of the Company's outstanding common stock. During the year ended September 29, 2000, the Company purchased a total of 284,100 shares of treasury stock at a cost of $3,826 under this program and a previously approved program. At September 29, 2000, the remaining shares authorized to be repurchased were approximately 275,000.
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 $271, $247 and $226, for the fiscal years ended 2000, 1999 and 1998, respectively.
================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts
Business Segments The Company has two reportable segments (Lodging Supply and Manufacturing) in accordance with SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information." 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 the summary of significant accounting policies. Intersegment sales are accounted for at prices that management estimates approximate arm's-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 2000, 1999 and 1998 are as follows:
================================================================================ 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:
Two lodging supply segment customers accounted for 15.0% and 14.8% of the Company's total sales in 2000. One lodging supply segment customer accounted for 15.3% and 15.5% of the total sales in 1999 and 1998, respectively.
Substantially all of the Company's operations are in the United States. Operations outside of the United States, which include subsidiaries in Canada, England and New Zealand, are not significant to the consolidated operations of the Company.
Shareholders' Preferred Purchase Rights On July 14, 1988, as amended on August 6, 1997, the Board of Directors of the Company declared a dividend of one preferred share purchase right for each outstanding share of common stock of the Company 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.
================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued Dollars in thousands except share and per share amounts
Unaudited Quarterly Financial Data The following table sets forth certain unaudited quarterly financial information:
(1) In accordance with the Emerging Issues Task Force Issue No. 00-14, "Accounting for Certain Sales Incentives," the Company has reclassed incentive rebates from Selling, General and Administrative (S,G&A) expenses to Sales. In addition, certain other S,G&A costs were reclassed to cost of sales. The amounts reclassed to sales for the first, second, third and fourth quarters of fiscal 2000 were $901, $950, $1,110 and $1,355, respectively. The amounts reclassed from S,G&A to Sales for the first, second, third and fourth quarters of fiscal 1999 were $635, $480, $677 and $951, respectively.
GUEST SUPPLY, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For information concerning this item, see "Item 1. - Business - Executive Officers" and the table and text under the caption "Certain Information Concerning Nominees and Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" of the Proxy Statement to be filed with respect to the 2001 Annual Meeting of Shareholders (the "Proxy Statement"), which information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
For information concerning this item, see the table and text under the captions "Executive Compensation," "Compensation of Directors," "Compensation Committee Interlocks and Insider Participation" and "Employment Agreements" of the Proxy Statement, which information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
For information concerning this item, see the table and text under the caption "Information Concerning Certain Shareholders" of the Proxy Statement, which information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS 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.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements: Included in Part II of this report:
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 22, 2000
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 22, 2000 By /s/ Clifford W. Stanley ----------------------------- Clifford W. Stanley President, Principal Executive Officer and Director
Dated: December 22, 2000 By /s/ Thomas M. Haythe -------------------------- Thomas M. Haythe Director
Dated: December 22, 2000 By /s/ Peter L. Richard -------------------------- Peter L. Richard Director
Dated: December 22, 2000 By /s/ Teri E. Unsworth ------------------------ Teri E. Unsworth Vice President - Market Development and Director
Dated: December 22, 2000 By /s/ Edward J. Walsh ------------------------ Edward J. Walsh Director
Dated: December 22, 2000 By /s/ George S. Zabrycki ------------------------- George S. Zabrycki Director
Dated: December 22, 2000 By /s/ Paul T. Xenis ------------------------- Paul T. Xenis Vice President - Finance and Principal Financial and Accounting Officer
Index to Exhibits -----------------
Page ----
3(a) Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). --
3(b) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). --
3(c) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). --
3(d) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). --
3(e) Certificate of Correction to the Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, (incorporated by reference to Exhibit 3(d) to the Company's Annual Report on Form 10-K for the year ended September 30, 1993). --
3(f) Certificate of Merger of Miraflores Designs, Inc. into the Company (incorporated by reference to Exhibit 3(e) to the Company's Annual Report on Form 10-K for the year ended September 30, 1993). --
3(g) Amended and Restated By-Laws of the Company (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). --
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). --
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). --
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). --
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
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 --
23 Consent of KPMG LLP --
24 Power of Attorney (see "Power of Attorney" in Form 10-K) --
27 Financial Data Schedule --
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.