1 of 12 pages Index to Exhibits is on Page 12 ================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended June 30, 1998 Commission File #1-11955 ================================================================= ================================================================= GUEST SUPPLY, INC. (Exact name of registrant as specified in its charter) State of New Jersey 22-2320483 ------------------------------- ----------------------- (State or other jurisdiction of (Identification number) incorporation or organization) 4301 U.S. Highway One 08852-0902 Monmouth Junction, New Jersey ---------- - ---------------------------------------- (Zip Code) (Address of principal executive offices) Registrants telephone number and area code 609-514-9696 ------------ ================================================================= ================================================================= Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ------- ------- The number of shares of common stock, without par value, outstanding as of June 30, 1998 was 6,664,978 shares. Page 2 Part 1 Guest Supply, Inc. and Subsidiaries Consolidated Balance Sheets ================================================================= Dollars in Thousands June 30, September 30, 1998 1997* _____________ _____________ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 2,587 $ 4,152 Accounts receivable 32,693 30,429 Inventories: Raw materials 8,535 7,706 Finished goods 32,550 26,970 Deferred income taxes 1,967 2,067 Prepaid expenses and other current assets 2,556 1,732 - ------------------------------------------------------------------ Total current assets 80,888 73,056 Property and equipment 33,177 33,141 Other assets 1,288 1,312 Excess of cost over net assets acquired 4,883 5,160 - ------------------------------------------------------------------ $120,236 $112,669 ================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 35,008 $ 32,493 Current maturities of long-term debt 937 - ------------------------------------------------------------------ Total current liabilities 35,008 33,430 ================================================================== Long-term debt 28,681 27,617 Deferred income taxes 5,253 5,025 - ------------------------------------------------------------------ Total long-term liabilities 33,934 32,642 ================================================================== Commitments and contingencies Shareholders' equity: Preferred stock - without par value; authorized 1,000,000 shares, outstanding none Common stock - without par value; stated value $0.10; authorized 20,000,000 shares, issued and outstanding 6,664,978 shares at June 30, 1998 and 6,190,307 at September 30, 1997 594 546 Additional paid-in capital 38,166 35,336 Retained earnings 12,402 10,745 Cumulative foreign currency translation adjustments 132 (30) - ------------------------------------------------------------------ Total shareholders' equity 51,294 46,597 - ------------------------------------------------------------------ $120,236 $112,669 ================================================================== * From audited financial statements The accompanying notes are an integral part of these consolidated condensed financial statements. Page 3 Guest Supply, Inc. and Subsidiaries Consolidated Statements of Operations ================================================================= In Thousands except per share amounts (Unaudited) Nine Months Ended Three Months Ended June 30, June 30, ------------------ ------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Sales $166,545 $144,514 $ 60,986 $ 52,571 Cost of sales 133,469 114,776 48,921 40,827 - ----------------------------------------------------------------- Gross profit 33,076 29,738 12,065 11,744 Selling, general & administrative expenses 28,701 25,529 10,173 8,526 - ----------------------------------------------------------------- Operating income 4,375 4,209 1,892 3,218 Interest and other income 65 35 30 8 Interest expense 1,718 1,566 543 512 - ----------------------------------------------------------------- Income before income taxes 2,722 2,678 1,379 2,714 Income tax expense 1,065 1,160 510 1,096 - ----------------------------------------------------------------- Net income $ 1,657 $ 1,518 $ 869 $ 1,618 ================================================================= Earnings per share: Basic $ 0.26 $ 0.25 $ 0.13 $ 0.26 ================================================================= Diluted $ 0.22 $ 0.22 $ 0.12 $ 0.23 ================================================================= Weighted average number of common shares Basic 6,431 6,170 6,624 6,167 ================================================================= Diluted 7,382 6,931 7,498 7,160 ================================================================= The accompanying notes are an integral part of these consolidated condensed financial statements. Page 4 Guest Supply, Inc. and Subsidiaries Consolidated Statements of Cash Flows ================================================================= In Thousands (Unaudited) Nine Months Ended June 30, -------------------- 1998 1997 --------- -------- Cash flows from operating activities: Net income $ 1,657 $ 1,518 - ----------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 3,317 2,951 Provision for losses on accounts receivable 364 729 Gain on sale of fixed assets (138) Deferred income tax expense 328 432 Changes in assets and liabilities: Increase in accounts receivable (2,628) (1,679) (Increase) decrease in inventories (6,409) 442 Increase in prepaid expenses and other current assets (824) (298) Increase in other assets (43) (14) Increase in accounts payable and accrued expenses 2,515 830 - ----------------------------------------------------------------- Net cash provided by (used in) operating activities (1,723) 4,773 - ----------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (3,076) (5,316) Decrease in other assets 67 Proceeds from sale of fixed assets 168 - ----------------------------------------------------------------- Net cash used in investing activities (3,009) (5,148) - ----------------------------------------------------------------- Cash flows from financing activities: Proceeds from revolving credit agreement 42,678 37,743 Repayment on revolving credit agreement (56,614) (34,964) Proceeds from issuance of senior note payable 25,000 Repayment of long-term debt (10,937) (2,923) Proceeds from issuance of common stock 2,878 187 - ----------------------------------------------------------------- Net cash provided by financing activities 3,005 43 Foreign currency translation adjustments 162 79 - ----------------------------------------------------------------- Net decrease in cash and cash equivalents (1,565) (253) Cash and cash equivalents at beginning of period 4,152 2,591 - ----------------------------------------------------------------- Cash and cash equivalents at end of period $ 2,587 $ 2,338 ================================================================= The accompanying notes are an integral part of these consolidated condensed financial statements. Page 5 Note 1: Basis of Presentation The unaudited consolidated condensed financial statements have been prepared from the books and records of Guest Supply, Inc. and subsidiaries (the Company) in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal and recurring adjustments) considered necessary for a fair presentation have been included. It is suggested that the consolidated condensed financial statements be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended September 30, 1997 included in the Company's annual report on Form 10-K. Interim results are not necessarily indicative of the results that may be expected for the full year. Note 2: Earnings Per Common Share At December 31, 1997, the Company adopted Statement of Financial Standards (SFAS) No. 128 "Earnings per Share". Under the new requirements, primary earnings per share is replaced by a new measure called basic earnings per share which excludes common stock equivalents. All prior periods have been restated to reflect this change. Note 3: Long-Term Debt On December 3, 1997, the Company completed a Private Placement in the amount of $25.0 million of unsecured senior notes with fixed interest rates ranging from 6.70% to 7.06%. These notes have maturities ranging from fiscal years 2000 to 2010. Concurrently with the issuance of the notes, the Company entered into a credit agreement with two banks for a five-year $15.0 million unsecured revolving credit facility. Availability under the new facility is based upon agreed levels of eligible accounts receivable and bears interest at a rate equal to LIBOR plus .85% or the bank's prime rate, as selected by the Company. These loans are subject to certain financial covenants. The proceeds from the notes and credit facility were used to repay the outstanding balance under the existing credit facility and term notes. Page 6 GUEST SUPPLY, INC. AND SUBSIDIARIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================= Dollars in Thousands NINE MONTHS ENDED JUNE 30, 1998 VS. NINE MONTHS ENDED JUNE 30, 1997 - ------------------------------------------------------------------- Sales for the nine months ended June 30, 1998 increased by $22,031 or 15.2% to $166,545 from $144,514 for the nine months ended June 30, 1997. Revenues generated from our hotel customers increased $25,994 or 21.0% to $149,630. The increase in sales to hotels is the result of the addition of new customers, the sale of additional products to existing customers and the continued expansion of the Company's product line. New customers were added by the direct sales force in existing sales territories and by new salespeople in new territories. Both additional hotels and product categories were added through new or expanded agreements with management companies and hotel corporations. Sales to consumer products companies and retailers were $16,915 for the nine months ended June 30, 1998 compared to $20,878 for the nine months ended June 30, 1997. The decrease of $3,963 or 19.0% was a result of an 11.6% decline in sales to an existing customer in addition to the expiration of a contract with another customer during the third quarter of fiscal 1997. During the first quarter of fiscal 1998, a major amount of time was devoted to the development and scale-up of new formulas for a major customer that resulted in reduced production rates and margins. In addition, one of their product lines historically produced by the Company was allocated to another manufacturer, but plans are to replace this business with higher volume of another product line that we currently produce. Gross profit for the nine months ended June 30, 1998 was $33,076 or 19.9% of sales compared to $29,738 or 20.6% of sales for the nine months ended June 30, 1997. Excluding a charge to cost of sales in the second quarter 1997 of $2,187 to write-off damaged, obsolete and substandard inventory, gross profit increased by $1,151 or 3.6% to $33,076 compared to $31,925 for the prior period. The decrease in gross profit as a percentage of sales was due to lower sales to consumer products companies and the start-up costs associated with new formulas at lower margins for a major contract manufacturing customer. Selling, general and administrative expenses were $28,701 or 17.2% of sales for the nine months ended June 30, 1998 compared to $25,529 or 17.7% of sales for the nine months ended June 30, 1997. The increase of $3,172 or 12.4% was due primarily to an increase in payroll and payroll related costs and delivery expense associated with the Company's hotel sales growth. Net interest expense was $1,653 for the nine months ended June 30, 1998 compared to $1,531 for the nine months ended June 30, 1997. Page 7 GUEST SUPPLY, INC. AND SUBSIDIARIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================= Dollars in Thousands THREE MONTHS ENDED JUNE 30, 1998 VS. THREE MONTHS ENDED JUNE 30, 1997 - --------------------------------------------------------------------- Sales for the three months ended June 30, 1998 increased by $8,415 or 16.0% to $60,986 from $52,571 for the three months ended June 30, 1997. Revenues generated from our hotel customers increased $9,771 or 20.6% to $57,111. The increase in sales to hotels is the result of the addition of new customers, the sale of additional products to existing customers and the continued expansion of the Company's product line. New customers were added by the direct sales force in existing sales territories and by new salespeople in new territories. Hotel customers and additional product categories were also added through new and expanded agreements with management companies and hotel corporations. Sales to consumer products companies and retailers were $3,875 for the three months ended June 30, 1998 compared to $5,231 for the three months ended June 30, 1997. The decline of $1,356 or 25.9% was a result of a decrease in sales to an existing contract customer and the expiration of a contract with another customer during the third quarter of 1997. Gross profit for the three months ended June 30, 1998 was $12,065 or 19.8% of sales compared to $11,744 or 22.3% of sales for the three months ended June 30, 1997. The decrease in gross profit as a percentage of sales was principally due to a change in pricing and product mix with a major contract manufacturing customer. Selling, general and administrative expenses were $10,173 or 16.7% of sales for the three months ended June 30, 1998 compared to $8,526 or 16.2% of sales for the three months ended June 30, 1997. The increase of $1,647 or 19.3% was due primarily to an increase in payroll and payroll related costs and delivery expense associated with the Company's hotel sales growth. The increase as a percentage of sales was primarily the result of lower sales to consumer product companies and start-up costs relating to opening of a new distribution center in Hayward, CA. Net interest expense was $513 for the three months ended June 30, 1998 compared to $504 for the three months ended June 30, 1997. Income tax expense was $510 for the three months ended June 30, 1998 compared with income tax expense of $1,096 for the prior period. This decrease was primarily the result of a decrease in pretax income of $1,335 for the three months ended June 30, 1998 as compared to the prior year. Page 8 GUEST SUPPLY, INC. AND SUBSIDIARIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================= continued Liquidity and Capital Resources at June 30, 1998 - ------------------------------------------------ At June 30, 1998, the Company had $45,880 of working capital compared to $39,626 at September 30, 1997. The increase of $6,254 is primarily the result of an increase in accounts receivable and inventory of $2,264 and $6,409, respectively, offset by an increase in current liabilities of $1,578. On December 3, 1997, the Company completed a Private Placement in the amount of $25.0 million of unsecured senior notes with fixed interest rates ranging from 6.70% to 7.06%. These notes have maturities ranging from fiscal years 2000 to 2010. Concurrently with the issuance of the notes, the Company entered into a credit agreement with two banks for a five-year $15.0 million unsecured revolving credit facility. Availability under the new facility is based upon agreed levels of eligible accounts receivable and bears interest at a rate equal to LIBOR plus .85% or the bank's prime rate, as selected by the Company. These loans are subject to certain financial covenants. The proceeds from the notes and credit facility were used to repay the outstanding balance under the existing credit facility and term notes. The Company believes that the amount available under its revolving credit facility 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 1997, the Financial Accounting Standards Board released Statement No. 130, "Reporting Comprehensive Income" and Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information." Both statements become effective for fiscal years beginning after December 15, 1997 with early adoption permitted. These statements require disclosure of certain components of changes in equity and certain information about operating segments and geographic areas of operation. Management believes that these statements will not have any effect on the results of operations or financial position of the Company. Year 2000 Compliance - -------------------- The Company recognizes that the arrival of the Year 200 presents a challenge to the ability of all systems to properly recognize and process date-sensitive information relative to the Year 2000 and beyond. Accordingly, the Company has been evaluating and adjusting all date-sensitive systems and equipment for compliance with the Year 2000 and anticipates completing all remaining conversions during fiscal 1999. Page 9 GUEST SUPPLY, INC. AND SUBSIDIARIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================= continued Year 2000 Compliance, continued - ------------------------------- In addition, the Company is in the process of contacting its major suppliers and vendors to ensure their awareness of the Year 2000, however, there can be no guarantee that the systems of other companies will be converted in a timely manner or that failure to convert by another company would not have a material impact on the Company. The cost of conversions is not anticipated to be material to the Company's financial position, results of operations or cash flows. Cautionary Statement - -------------------- This quarterly report on Form 10-Q may contain forward-looking information about the Company. The Company is hereby setting forth statements identifying important factors that may cause the Company's actual results to differ materially from those set forth in any forward-looking statements made by the Company. Some of the most significant factors include an unanticipated slowdown in the lodging industry or in contract manufacturing (or both) resulting in lower demand for the Company's products, unforeseen inefficiencies at the Company's manufacturing or distribution facilities, an increase in price pressures or the loss of, or a decline in sales to, a majr customer. Accordingly, there can be no assurances that any anticipated future results will be achieved. Page 10 GUEST SUPPLY, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ================================================================= Item 6: Exhibits and Reports on Form 8-K - ----------------------------------------- a) The exhibits filed as part of this report are listed on the index to the exhibits. b) No reports on Form 8-K have been filed during the three month period ended June 30, 1998. Page 11 SIGNATURES ================================================================= Pursuant to the requirements of the Securities Exchange Act of 1934. The Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GUEST SUPPLY, INC. Dated: 8/14/98 By: ----------------- ----------------------------------- Clifford W. Stanley President & Chief Executive Officer Dated: 8/14/98 By: ----------------- ------------------------------------ Paul Xenis Vice President, Finance Page 12 INDEX TO EXHIBITS ================================================================= Exhibit No. Description Page - ----------- ----------------------------------- ---- 27 Financial Data Schedule 13