-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AphdWXVxE+Gq/0ezXzVjtdSQbVhMlvqn1rLgq05uBwemRdiNFF5c214sWfvt291e gGsWJ/TGIgHjpmlUHhpi6A== 0000880120-97-000013.txt : 19971125 0000880120-97-000013.hdr.sgml : 19971125 ACCESSION NUMBER: 0000880120-97-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971011 FILED AS OF DATE: 19971124 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL NUTRITION COMPANIES INC CENTRAL INDEX KEY: 0000880120 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FOOD STORES [5400] IRS NUMBER: 043056351 STATE OF INCORPORATION: DE FISCAL YEAR END: 0202 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19592 FILM NUMBER: 97727255 BUSINESS ADDRESS: STREET 1: 300 SIXTH AVENUE CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 412-288-4600 MAIL ADDRESS: STREET 1: 921 PENN AVENUE CITY: PITTSBURGH STATE: PA ZIP: 15222 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________ FORM 10-Q (Mark One) [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the twelve weeks ended October 11, 1997. OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 01-19592 GENERAL NUTRITION COMPANIES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 4-3056351 (state or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 300 Sixth Avenue 15222 Pittsburgh, Pennsylvania (Zip Code) (Address of principal executive office) Registrant's telephone number, including area code: (412) 288-4600 Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period 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 As of November 21, 1997, the number of shares outstanding of the registrant's common stock was 81,648,569. PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except share data) October 11, February 1, 1997 1997 (unaudited) ASSETS Current Assets: Receivables $ 69,944 $ 58,711 Inventories 217,923 198,361 Deferred tax assets 18,903 18,903 Other current assets 14,403 17,498 Total current assets 321,173 293,473 Property, plant and equipment, net 190,117 175,352 Other assets 53,980 44,891 Deferred financing fees, net of accumulated amortization of $2,284 and $1,538 4,072 3,066 Goodwill, net of accumulated amortization of $59,607 and $52,907 271,084 263,060 $ 840,426 $ 779,842 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 89,769 $ 79,958 Accrued salaries, wages, vacations and related taxes 20,349 17,198 Accrued income taxes 23,194 7,008 Other current liabilities 62,452 54,637 Long-term debt, current portion 965 984 Total current liabilities 196,729 159,785 Long-term debt 345,978 377,885 Deferred tax liabilities 1,459 1,462 Commitments and contingencies - - Minority interest 317 487 Put options 98,500 - Shareholders' Equity: Common stock, $.01 par value: Authorized 200,000,000 shares, issued and outstanding 81,283,204 shares at October 11, 1997 and 91,287,289 shares, including shares in treasury, at February 1, 1997 813 913 Additional paid-in capital 143,480 319,297 Stock options outstanding 8,121 10,917 Subscriptions receivable (3,933) (3,295) Currency translation adjustment (350) 483 Accumulated earnings 142,372 71,527 290,503 399,842 Treasury stock, at cost, 10,000,000 shares at February 1, 1997 - (159,619) Put options (93,060) - 197,443 240,223 $ 840,426 $ 779,842 Notes to Consolidated Financial Statements are an integral part of these statements. GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (in thousands, except per share data) (unaudited) 12 Weeks Ended 36 Weeks Ended October 11, October 12, October 11, October 12, 1997 1996 1997 1996 Net revenue $277,970 $226,622 $816,633 $674,539 Cost of sales, including costs of warehousing, distribution and occupancy 170,625 139,723 498,500 417,707 Selling, general and administrative 61,234 50,909 179,421 147,184 Amortization of goodwill 1,884 2,129 6,743 6,520 Restructuring charge - - - 80,243 Compensation expense - - 289 - Operating earnings 44,227 33,861 131,680 22,885 Interest expense 5,309 4,438 15,966 10,761 Earnings before income taxes and minority interest 38,918 29,423 115,714 12,124 Income taxes 15,042 11,553 45,039 25,955 Minority interest (56) - (170) - Net earnings (loss) $ 23,932 $ 17,870 $ 70,845 $(13,831) Primary earnings (loss) per share $ 0.29 $ 0.21 $ 0.85 $ (0.16) Primary weighted average common shares 83,240 84,570 82,924 86,364 Fully diluted earnings (loss) per share $ 0.29 $ 0.21 $ 0.85 $ (0.16) Fully diluted weighted average common shares 83,345 84,997 83,201 86,364 Notes to Consolidated Financial Statements are an integral part of these statements. GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) (unaudited) 36 Weeks Ended October 11, October 12, 1997 1996 Cash flows from operating activities: Net earnings (loss) $ 70,845 $ (13,831) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities Depreciation and amortization 30,421 27,618 Amortization of deferred financing fees 746 423 Restructuring charge - 80,243 Compensation expense 289 - Other (228) 377 Change in operating assets and liabilities: Increase in receivables (10,105) (10,284) Increase in inventories (19,562) (41,724) Increase in other assets (1,209) (272) Increase (decrease) in accrued taxes 16,186 (561) Increase in accounts payable and accrued liabilities 14,795 11,085 Increase (decrease) in other working capital items 6,680 (5,553) Total adjustments 38,013 61,352 Net cash provided by operating activities 108,858 47,521 Cash flows from investing activities: Capital expenditures (39,155) (42,792) Proceeds from disposal of assets 1,050 - Increase in franchisee notes receivable (2,417) (5,582) Payments for franchise store acquisitions (14,522) (4,529) Payments made for acquisitions, net of cash acquired - (10,636) Loan to related party (7,662) (3,536) Net cash used in investing activities (62,706) (67,075) Cash flows from financing activities: Net (payments) borrowings on revolving credit facility (31,200) 126,401 Retirement of long-term debt - (34,001) Book balance bank overdraft 2,694 5,825 Decrease in capital lease obligations (726) (1,222) Redemption of redeemable preferred stock (184) (31) Net proceeds from issuance of common stock 15,150 40,469 Proceeds from sale of put options 5,440 - Stock subscriptions receivable 331 - Net payments for treasury stock (35,072) (117,300) Increase in deferred financing fees (1,752) (550) Net cash (used in) provided by financing activities (45,319) 19,591 Effect of exchange rate changes on cash (833) (37) Net change in cash - - Beginning balance, cash - - Ending balance, cash $ - $ - Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 15,924 $ 10,277 Income taxes $ 31,130 $ 25,076 Non-cash transactions: (a) On August 17, 1996, $9.2 million of common stock was issued in connection with the acquisition of Nature's Fresh Northwest, Inc. Notes to Consolidated Financial Statements are an integral part of these statements. GENERAL NUTRITION COMPANIES, INC. Notes to Consolidated Financial Statements (unaudited) 1.Basis of Reporting. In the opinion of General Nutrition Companies, Inc. (the "Company"), the information furnished includes all adjustments necessary for fair presentation of the consolidated financial position of the Company at October 11, 1997 and February 1, 1997 and the results of operations for the twelve and thirty-six weeks ended October 11, 1997 and October 12, 1996. All such adjustments are of a normal and recurring nature except for the restructuring charge discussed in Note 8. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been either condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and footnotes included in the Company's 1996 Annual Report on Form 10-K for the fiscal year ended on February 1, 1997 filed with the Securities and Exchange Commission. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after the elimination of intercompany balances and transactions. The consolidated statements of operations for the twelve and thirty-six weeks ended October 11, 1997 and October 12, 1996 and the consolidated statements of cash flows for the thirty- six weeks ended October 11, 1997 and October 12, 1996 are not necessarily indicative of the operating results for the full year. The preparation of financial statements in conformity with generally accepted accounting principles 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. 2.Earnings Per Share. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. This Statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. This Statement requires restatement of all prior-period earnings per share data presented. The basic earnings (loss) per share and diluted earnings (loss) per share as defined by SFAS No. 128 for the twelve and thirty-six weeks ended October 11, 1997 and October 12, 1996 approximates the historically presented primary and fully diluted earnings (loss) per share. 3.Cash. The Company utilizes a cash management system under which a book balance cash overdraft exists for the Company's primary disbursement accounts. This overdraft represents uncleared checks in excess of cash balances in bank accounts. The Company's funds are borrowed on an as needed basis to pay for clearing checks. At October 11, 1997 and February 1, 1997, cash overdrafts of $2.7 million and $3.9 million, respectively, were included in accounts payable. At October 11, 1997, the Company had $353.1 million available on its $700 million revolving credit facility after excluding $2.9 million restricted for letters of credit. 4.Reclassifications. Certain amounts reported in previously issued financial statements have been reclassified to conform to the 1997 presentation. 5.Put Options. During the thirty-six weeks ended October 11, 1997, the Company sold put options on 4 million shares of the Company's common stock and recorded proceeds of $5.4 million. The amount related to the Company's potential obligation has been recorded from shareholders' equity to put options. The 4 million options outstanding at October 11, 1997 expire in November and December, 1997 and have an exercise price ranging from $21 to $28 per share. On November 15, 1997, 1 million of the outstanding put options, with a settlement value of $21 million, expired with no shares being repurchased. 6.Legal Proceedings. Certain Company subsidiaries are named as defendants in legal actions brought in federal and state courts by certain parties seeking damages resulting from the ingestion of certain products containing manufactured L- Tryptophan. No provision has been made in the financial statements for any loss that may result to the Company from these actions. See Note 13 in the Company's Form 10-K for the fiscal year ended February 1, 1997. On June 24, 1996, an action was commenced against the Company in the Court of Chancery of the State of Delaware entitled LaValla v. Thomas H. Lee et al, Civil Action No. 15080. Plaintiff asserts that the Company is liable for a violation of Section 11 of the Securities Act of 1933, arising out of allegedly false and misleading statements in the Prospectus and Registration Statement for a public offering of common stock of the Company which took place on February 7, 1996. Plaintiff also alleges that two directors and shareholders of the Company, Thomas H. Lee (a director at the time of the offering) and Thomas R. Shepherd, are liable for a violation of Section 11 of the Securities Act of 1933, arising out of the same allegedly false and misleading statements in the Prospectus and Registration Statement. Plaintiff seeks certification of the action as a class action, purportedly on behalf of all persons other than defendants who purchased shares of the Company's common stock during the public offering. The Company disputes the allegations contained in the complaint and intends to defend the action vigorously. The LaValla case has been stayed in court pending resolution of the Klein case summarized below. On August 2, 1996, an action was commenced against the Company in the United States District Court for the Western District of Pennsylvania entitled Klein et al. v. General Nutrition Companies, Inc. et al., Civil Action No. 96-1455. Plaintiffs assert that the Company is liable for violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section 1- 501(a) of the Pennsylvania Securities Act, arising out of allegedly false and misleading statements in the Prospectus and Registration Statement for a public offering of common stock of the Company which took place on February 7, 1996, and for violations of Section 10(b) of the Securities Exchange Act of 1934 and for negligent misrepresentation arising out of allegedly false and misleading public statements during the period from the public offering through May 28, 1996. Plaintiffs also allege that certain officers, directors and shareholders of the Company, as well as the underwriters for the public offering, are liable for other violations of the federal and state securities laws and for negligent misrepresentation. Plaintiffs seek certification of the action as a class action, purportedly on behalf of all persons other than defendants who purchased shares of the Company's common stock during the proposed class period from February 7 through May 28, 1996. The Company disputes the allegations contained in the complaint and intends to defend the action vigorously. The Company is presently engaged in various other legal actions and governmental proceedings, and, although ultimate liability cannot be determined at the present time, the Company is currently of the opinion that the amount of any such liability from these other actions and proceedings when taking into consideration the Company's product liability coverage, will not have a material adverse impact on its financial position, results of operations or liquidity. 7.Inventories. Inventories consist of the following: October 11, February 1, 1997 1997 (in thousands) Product ready for sale $ 178,548 $ 158,800 Unpackaged bulk product and raw materials 36,499 36,121 Packaging supplies 2,876 3,440 $ 217,923 $ 198,361 8.Restructuring Charge. During the second quarter of 1996, the Company recorded a restructuring charge of $80.2 million related to the write-off of goodwill, property and equipment, inventories, and other assets associated with management's decision to discontinue the Nature Food Centres (NFC) retail concept. The charge for NFC of $66.7 million included $52.7 million of goodwill. The remaining $13.5 million of the recorded charge related to unproductive General Nutrition Centers (GNC) assets, primarily inventory relating to Natural Solutions cosmetic and other products, fitness and apparel products, all of which have been discontinued, as well as excess costs resulting from retrofitting the Alive prototype store. 9.Treasury Stock - During the quarter ended October 11, 1997, the Company retired 11.7 million shares of common stock that were held in treasury. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q contains statements relating to future results of the Company (including certain projections and business trends) that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to changes in political and economic conditions; demand for and market acceptance of new and existing products, as well as other risks and uncertainties detailed from time to time in the filings of the Company with the Securities and Exchange Commission. RESULTS OF OPERATIONS Revenue Consolidated revenue for the twelve and thirty-six week periods ended October 11, 1997 was $278.0 million and $816.6 million, respectively, representing increases of 22.7% and 21.1% from the same periods in 1996. Presented below is a comparison of revenue for each of the Company's businesses for the twelve and thirty-six week periods: CONSOLIDATED REVENUE 12 Weeks Ended October 11, % of Total October 12, % of Total 1997 Revenue 1996 Revenue (in millions) (in millions) Retail $ 198.6 71.4% $ 165.9 73.2% Franchising 54.7 19.7% 42.7 18.9% Manufacturing 24.7 8.9% 18.0 7.9% Total $ 278.0 100.0% $ 226.6 100.0% 36 Weeks Ended October 11, % of Total October 12, % of Total 1997 Revenue 1996 Revenue (in millions) (in millions) Retail $ 595.2 72.9% $ 493.9 73.2% Franchising 158.9 19.4% 128.6 19.1% Manufacturing 62.5 7.7% 52.0 7.7% Total $ 816.6 100.0% $ 674.5 100.0% Retail Revenue. Domestically, the Company's products are sold through retail outlets operating primarily under the General Nutrition Centers and GNC Live Well store names ("GNC"). The Company also operates retail stores under the Nature's Fresh, Nature Food Centres, and Amphora names. Internationally, products are sold through retail outlets operating under the names of Health and Diet Centres and General Nutrition Centres in the United Kingdom, Canada, and New Zealand. Presented below is a summary of revenue by operating retail entity and corresponding store information: RETAIL REVENUE 12 Weeks Ended October 11, % of Total October 12, % of Total 1997 Retail 1996 Retail (in millions) Revenue (in millions) Revenue General Nutrition Centers $ 178.9 90.1% $ 149.5 90.1% Other domestic stores 14.9 7.5% 14.1 8.5% International stores 4.8 2.4% 2.3 1.4% $ 198.6 100.0% $ 165.9 100.0% 36 Weeks Ended October 11, % of Total October 12, % of Total 1997 Retail 1996 Retail (in millions) Revenue (in millions) Revenue General Nutrition Centers $ 535.7 90.0% $ 455.4 92.2% Other domestic stores 46.3 7.8% 31.7 6.4% International stores 13.2 2.2% 6.8 1.4% $ 595.2 100.0% $ 493.9 100.0% Operating Store Locations October 11, October 12, 1997 1996 General Nutrition Centers 1,908 1,656 Other domestic stores 54 91 International stores 61 20 2,023 1,767 Revenue at GNC increased 19.7% and 17.6% for the twelve and thirty-six week periods ended October 11, 1997 when compared with the same periods in 1996. The increase in revenue is attributable to both the opening of 252 net new stores from October 12, 1996 to October 11, 1997, and favorable comparable store sales gains of 10.1% and 8.3% for the twelve and thirty-six week period ending October 11, 1997, respectively. The Company believes that the favorable increases in comparable store sales is mainly attributable to the combination of positive publicity relating to herbs and dietary supplements, the changes made in the Company's marketing strategy during the fourth quarter of 1996, as well as favorable scientific research. The Company also believes that the combined efforts of these attributes should continue to have a positive impact on revenue through the remainder of the year. Other domestic retail revenue, comprised of Nature's Fresh, Nature Food Centres, and Amphora, increased 5.7% for the twelve week period, and 46.1% for the thirty-six week period ended October 11, 1997 when compared to the same periods in 1996. The net increase in other domestic retail revenue is due to the Company's acquisition of Nature's Fresh in the third quarter of 1996, partially offset by NFC store closings related to the discontinuance of the NFC retail concept. (See Note 8 of Notes to Consolidated Financial Statements). Franchising Revenue. Revenue from the franchise segment increased 28.1% and 23.6% for the twelve and thirty-six week periods ended October 11, 1997 when compared with the same periods in 1996. The increase continues to be driven by both new store openings, 148 net new openings since October 12, 1996, coupled with strong franchisee comparable store sales for the twelve and thirty-six week period ended October 11, 1997 of 22.1% and 16.2% domestically, and 13.8% and 12.0% internationally. The Company believes that the increase in comparable store sales for its franchise stores continues to be driven by i) the benefit that an on-sight owner/operator has on the performance of the store; ii) the positive publicity relating to herbs and dietary supplements; iii) the changes made in the Company's marketing strategy during the fourth quarter of 1996 and; favorable scientific research. Product sales at wholesale prices and royalties on retail sales, representing the core of Franchising's ongoing revenues, comprised 92.4% and 93.6% of total franchise revenue for the twelve and thirty-six weeks ended October 11, 1997 versus 91% and 92.4% for the same period in 1996. Remaining franchising revenue included sales of stores, fixtures, franchise award fees and interest income on franchise accounts receivable. Total system- wide franchise retail sales were $106.2 million and $307.3 million for the twelve and thirty-six weeks ending October 11, 1997, an increase of $25.9 million and $68.4 million, respectively when compared with the same periods in 1996. Presented below are the number of operating franchise stores, the number of franchises awarded but not yet open, and the number of outstanding development agreements: Number of Operating Franchise Locations October 11, 1997 October 12, 1996 Franchise Locations Domestic International Domestic International At beginning of quarter 1,117 134 944 113 Added 65 5 73 5 Repurchased (50) - (14) - Closed (2) (1) - (1) At end of quarter 1,130 138 1,003 117 Stores awarded but not yet open 252 1 192 1 Development agreements 50 395 42 381 Manufacturing Revenue. Total revenue generated by the Company's manufacturing segment, including sales to other segments of the Company and sales to various other third-parties, increased to 21.3%, in the twelve weeks and 24.0%, in the thirty-six weeks ended October 11, 1997 when compared with the same periods in 1996. Domestic intercompany sales increased 12.9% during the current quarter and 24.9% on a year to date basis when compared to the same periods in 1996. During the quarter, third-party sales increased 36.6% or $5.6 million over the same quarter in 1996. The increase in third-party sales is the result of additional capacity and improved production efficiencies at manufacturing. Analysis of Consolidated Operating Costs and Expenses 12 Weeks Ended 36 Weeks Ended October 11, October 12, October 11, October 12, 1997 1996 1997 1996 (in thousands) (in thousands) Cost of sales, including cost of warehousing, distribution and occupancy $170,625 $139,723 $498,500 $417,707 Percent of net revenue 61.4% 61.7% 61.1% 61.9% Selling, general and administrative $ 63,118 $ 53,038 $186,453 $153,704 Percent of net revenue 22.7% 23.4% 22.8% 22.8% Restructuring charge $ - $ - $ - $ 80,243 Percent of net revenue - - - 11.9% Operating earnings $ 44,227 $ 33,861 $131,680 $ 22,885 Percent of net revenue 15.9% 14.9% 16.1% 3.4% Cost of sales decreased as a percentage of net revenue by .3% and .8% for the twelve and thirty-six week periods ended October 11, 1997 when compared with the same periods in 1996. The favorable decrease in cost of sales as a percentage of net revenue was attributable to the Company's ability to successfully leverage expenses against both rising retail revenues and comparable store sales, including occupancy costs which are primarily fixed in nature. The Company was also successful in leveraging its selling, general and administrative costs against revenues during the quarter, decreasing .7% versus the same period in 1996. During the second quarter of 1996, the Company recorded a restructuring charge of $80.2 million related to the write-off of goodwill, property and equipment, inventories, and other assets associated with the decision to discontinue the NFC retail concept and to adjust for certain unproductive assets, the majority of which were in the retail business segment. (See Note 8 of Notes to Consolidated Financial Statements). Non-Operating Income (Expense) Analysis Interest expense increased $.9 million and $5.2 million for the twelve and thirty-six week periods ended October 11, 1997 when compared to the same periods in 1996. The increase in interest expense is primarily the result of $49.3 million of net additional borrowings made under the Company's revolving credit facility since the second quarter of 1996, the majority of which was to fund the Company's stock repurchase activity. Interest expense for the remainder of the year should remain higher than the previous year as a result of these additional borrowings. Review of Financial Condition Analysis of Liquidity and Capital Resources During the thirty-six weeks ended October 11, 1997, the Company's business segments continued to contribute to increased earnings from continuing operations. The Company's cash flows from operating, investing and financing activities as reflected in the Consolidated Statements of Cash Flows are summarized as follows: 36 Weeks Ended October 11, October 12, 1997 1996 (in thousands) i Cash provided by (used in): Operating activities $ 108,858 $ 47,521 Investing activities (62,706) (67,075) Financing activities (45,319) 19,591 Effect of exchange rate changes on cash (833) (37) Net change in cash $ - $ - Operating Activities. Cash provided by operating activities for the thirty-six weeks ended October 11, 1997 was $108.9 million versus $47.5 million for the same period in 1996, an increase of $61.4 million. This increase is primarily the result of increased earnings and favorable changes in the Company's operating assets and liabilities of $54.1 million. Investing Activities. The Company's primary investing activities have historically been for capital expenditures made in connection with new store construction, the remodeling of existing stores, and expansion requirements at both the manufacturing and distribution facilities. Capital expenditures for the thirty-six weeks ended October 11, 1997 have decreased 8.4% from the same period in 1996. The Company has made payments for franchise store acquisitions of $14.5 million and $4.5 million for the thirty-six weeks ended October 11, 1997 and October 12, 1996, respectively, the result of the Company's accelerated buyback program of existing franchise store locations. The Company plans to spend between $60 million and $80 million for the franchise store buyback program. Financing Activities. Cash used in financing activities decreased $64.9 million for the thirty-six weeks ended October 11, 1997 versus the same period in 1996. For the thirty-six weeks ended October 11, 1997 and October 12, 1996, the Company repurchased $35.1 million and $117.3 million of treasury stock, respectively. Additional funds generated by operating activities were used to reduce debt under the Company's revolving credit facility. For the thirty-six weeks ended October 12, 1996, the Company's primary sources of cash were $126.4 million in net borrowings on its revolving credit facility and $33.4 million in funds received from the sale, in February 1996, of approximately 1.6 million shares of its common stock. The Company utilized this $159.5 million of cash inflow to repurchase 7.6 million shares of the Company's own stock for $117.3 million, as well as to repay $34.0 million on its bank term loan. At October 11, 1997, the Company had $353.1 million available on its $700 million revolving credit facility after excluding $2.9 million restricted for letters of credit. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (11.1) Computation of net earnings (loss) per share is attached. (23) Interim review report of the Company's independent accountants, Deloitte & Touche LLP, for the fiscal quarter ended October 11, 1997 is attached. (23.1) Letter in lieu of consent of the Company's independent accountants, Deloitte & Touche LLP, for the fiscal quarter ended October 11, 1997 is attached. (27) Financial Data Schedule is attached. No current reports on Form 8-K were filed during the current fiscal quarter. 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. GENERAL NUTRITION COMPANIES, INC. By: /s/ Edwin J. Kozlowski Edwin J. Kozlowski Executive Vice President, Chief Financial Officer, and Principal Accounting Officer DATE: November 21, 1997 EX-11.1 2 2 . Exhibit 11.1 GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES Computation of Net Earnings (Loss) Per Share 12 Weeks Ended 36 Weeks Ended October 11, October 12, October 11, October 12, 1997 1996 1997 1996 (in thousands except per share amounts) Net earnings (loss) $ 23,932 $ 17,870 $ 70,845 $ (13,831) available for common shares Common stock 81,040 82,853 80,896 86,364 Outstanding stock options 2,200 1,717 2,028 - Primary weighted average common shares 83,240 84,570 82,924 86,364 Common stock 81,040 82,853 80,896 86,364 Outstanding stock options 2,305 2,144 2,305 - Fully diluted weighted average common shares 83,345 84,997 83,201 86,364 Primary earnings (loss) per share $ 0.29 $ 0.21 $ 0.85 $(0.16) Fully diluted earnings (loss) per share $ 0.29 $ 0.21 $ 0.85 $(0.16) EX-23 3 3 EXHIBIT 23 INDEPENDENT ACCOUNTANTS' REPORT To The Board of Directors and Shareholders of General Nutrition Companies, Inc. Pittsburgh, Pennsylvania We have reviewed the accompanying consolidated balance sheet of General Nutrition Companies, Inc. and subsidiaries as of October 11, 1997, the related consolidated statements of operations for the twelve and thirty-six weeks ended October 11, 1997 and October 12, 1996 and the related consolidated statements of cash flows for the thirty-six weeks ended October 11, 1997 and October 12, 1996. These financial statements are the responsibility of the Corporation's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of General Nutrition Companies, Inc. and subsidiaries as of February 1, 1997, and the related consolidated statements of operations, shareholders equity, and cash flows for the year then ended (not presented herein); and in our report dated March 31, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of February 1, 1997 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Deloitte & Touche LLP Pittsburgh, Pennsylvania November 15, 1997 EX-23.1 4 2 EXHIBIT 23.1 November 21, 1997 General Nutrition Companies, Inc. 300 Sixth Avenue Pittsburgh, Pennsylvania, 15222 Dear Sirs: We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of General Nutrition Companies, Inc. and subsidiaries for the twelve and thirty-six weeks ended October 11, 1997 and October 12, 1996, as indicated in our report dated November 15, 1997; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which was included in your Quarterly Report on Form 10-Q for the quarter ended October 11, 1997, is incorporated by reference in Registration Statement Nos. 33-58096, 33-68590, 33-93370, 333- 00128 and 333-21397 on Form S-8. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. Yours truly, Deloitte & Touche LLP Pittsburgh, Pennsylvania EX-27 5
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