-----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, MlxPMqN2q+EbQ0pXsVD6C1Dec0VDKllIIJt0pragS8ZZ20lEQ+1UuYTgfR89Fg+V bYdyQu+lZLMmzrONl5gIRQ== 0000880120-98-000007.txt : 19980824 0000880120-98-000007.hdr.sgml : 19980824 ACCESSION NUMBER: 0000880120-98-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980718 FILED AS OF DATE: 19980821 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: 98696065 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 July 18, 1998. 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 04-3056351 (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) 2884600 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 August 19, 1998, the number of shares outstanding of the registrant's common stock was 73,303,005. PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except share data) July 18, January 31, 1998 1998 (unaudited) ASSETS Current Assets: Receivables, net $ 84,035 $ 75,274 Inventories 286,079 244,196 Deferred taxes 13,177 14,190 Other current assets 12,636 29,305 Total current assets 395,927 362,965 Note due from related parties 24,706 21,960 Property, plant, and equipment, net 246,757 207,975 Other assets 40,050 33,895 Deferred financing fees, net of accumulated amortization of $3,188 and $2,646 3,182 3,710 Goodwill, net of accumulated amortization of $67,599 and $62,327 329,822 303,433 $ 1,040,444 $ 933,938 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 110,347 $ 126,905 Accrued salaries, wages, vacations and 21,297 23,542 related taxes Accrued income taxes - 4,825 Other current liabilities 66,546 65,392 Accrued treasury stock purchase 35,750 - Long-term debt, current portion 967 940 Total current liabilities 234,907 221,604 Long-term debt 465,625 357,408 Deferred taxes 3,065 4,214 Commitments and contingencies Put options 44,555 - Shareholders' Equity: Common stock, $.01 par value: 802 819 Authorized 200,000,000 shares, issued and outstanding, 80,199,602 shares at July 18, 1998 and 81,930,801 shares at January 31, 1998 Additional paid-in capital 97,397 171,224 Stock options outstanding 7,066 7,693 Subscriptions receivable (3,997) (3,598) Accumulated earnings 233,112 174,892 Accumulated other comprehensive income (loss) (211) (318) 334,169 350,712 Put options (41,877) - 292,292 350,712 $ 1,040,444 $ 933,938 Notes to Consolidated Financial Statements are an integral part of these statements. GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Earnings and Comprehensive Income (in thousands, except per share data) (unaudited) 12 Weeks Ended 24 Weeks Ended July 18, July 19, July 18, July 19, 1998 1997 1998 1997 Net revenue $ 327,949 $ 265,604 $ 655,566 $ 538,663 Cost of sales, including costs of warehousing, distribution and occupancy 201,545 161,495 397,398 327,875 Selling, general and administrative 74,983 61,036 152,555 123,335 Operating earnings 51,421 43,073 105,613 87,453 Interest expense, net 6,271 5,540 11,530 10,657 Earnings before income taxes and minority interest 45,150 37,533 94,083 76,796 Income taxes 17,167 14,593 35,863 29,997 Minority interest - (114) - (114) Net earnings $ 27,983 $ 23,054 $ 58,220 $ 46,913 Other comprehensive income (loss): Foreign currency translation adjustment, net 158 (82) 107 (321) Other comprehensive income (loss), net 158 (82) 107 (321) Comprehensive income $ 28,141 $ 22,972 $ 58,327 $ 46,592 Basic earnings per share $ 0.34 $ 0.29 $ 0.71 $ 0.58 Basic weighted average common shares 81,474 80,520 81,943 80,824 Diluted earnings per share $ 0.34 $ 0.28 $ 0.69 $ 0.57 Diluted weighted average common shares 83,219 82,453 83,945 82,646 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) 24 Weeks Ended July 18, July 19, 1998 1997 Cash flows from operating activities: Net earnings $ 58,220 $ 46,913 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 24,962 20,370 Amortization of deferred financing fees 542 475 Compensation expense - 289 (Increase) decrease in deferred taxes (136) 16 Other 178 (338) Change in operating assets and liabilities: Increase in receivables (8,512) (4,575) Increase in inventories (36,733) (9,189) Increase in other assets (1,309) (971) (Decrease) increase in accrued taxes (4,825) 1,497 Increase (decrease) in accounts payable and accrued liabilities 4,532 (7,669) Decrease in other working capital items 14,761 7,565 Total adjustments (6,540) 7,470 Net cash provided by operating activities 51,680 54,383 Cash flows from investing activities: Capital expenditures (53,961) (20,995) Proceeds from disposals 31 1,050 Increase in franchisee notes receivable (5,878) (1,386) Payments for franchise store acquisitions (41,302) (4,626) Loan to related party (2,149) (6,698) Net cash used in investing activities (103,259) (32,655) Cash flows from financing activities: Net borrowings on revolving credit facility 108,800 4,700 Decrease in book balance bank overdraft (20,315) (2,033) Decrease in capital lease obligations (556) (464) Redemption of redeemable preferred stock (27) (168) Net proceeds from issuance of common stock 10,003 10,302 Net proceeds from sale of put options 2,521 3,080 Net payments for treasury stock (48,941) (35,072) Increase in deferred financing fees (13) (1,752) Net cash provided by (used in) financing activities 51,472 (21,407) Effect of exchange rate changes on cash 107 (321) Net change in cash - - Beginning balance, cash - - Ending balance, cash $ - $ - Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 10,793 $ 10,280 Income taxes $ 40,416 $ 30,998 Non-cash activities: Purchase of treasury stock $ 35,750 $ - Notes to Consolidated Financial Statements are an integral part of these statements. GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES 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 as of July 18, 1998 and January 31, 1998, and the results of operations for the twelve and twenty-four weeks ended July 18, 1998 and July 19, 1997. All such adjustments are of a normal and recurring nature. 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 1997 Annual Report on Form 10-K for the fiscal year ended on January 31, 1998 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 results of operations for the twelve and twentyfour weeks ended July 18, 1998 and July 19, 1997, and the cash flows for the twenty-four weeks ended July 18, 1998 and July 19, 1997, 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. New Accounting Pronouncements. In June 1997, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 130 "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components, some of which have been historically excluded from the Statement of Earnings and recorded directly to the equity section of an entity's statement of financial position. SFAS No. 130 also requires that the cumulative balance of these items of other comprehensive income are reported separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. This statement is effective for fiscal years beginning after December 15, 1997. The Company has adopted SFAS No. 130 in 1998 and has elected to include the required items of other comprehensive income in its Consolidated Statements of Earnings and Comprehensive Income. In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way public companies report selected information about operating segments in both quarterly and annual financial statements to their shareholders. It also established standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. This statement is not required to be applied to interim financial statements in the initial year of its application. The Company does not believe that SFAS No. 131 will have a significant effect on the disclosures in it consolidated financial statements. In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets of liabilities in the statement of financial position and measure those instruments at fair value, with the potential effect on operations dependent upon certain conditions being met. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not determined what impact, if any, that adoption of SFAS No. 133 will have on its financial position or results of operations. 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 July 18, 1998 and January 31, 1998, cash overdrafts of $12.0 million and $32.4 million, respectively, were included in accounts payable. At July 18, 1998, the Company had $231.9 million available on its revolving credit facility after excluding $3.6 million restricted for letters of credit. 4. Reclassifications. Certain amounts reported in previously issued financial statements have been reclassified to conform to the 1998 presentation. 5. Earnings Per Share. Basic earnings per common share are computed based on the weighted average common shares outstanding. Diluted earnings per common share are computed based on the weighted average common shares outstanding plus additional shares assumed to be outstanding to reflect the dilutive effect of common stock equivalents. The following table sets forth the computation of basic and diluted earnings per share: 12 Weeks Ended 24 Weeks Ended July 18, July 19, July 18, July 19, 1998 1997 1998 1997 (in thousands, except per share data) Net earnings available for common shares $ 27,983 $ 23,054 $ 58,220 $ 46,913 Basic weighted average common shares 81,474 80,520 81,943 80,824 Basic earnings per share $ 0.34 $ 0.29 $ 0.71 $ 0.58 Basic weighted average common shares 81,474 80,520 81,943 80,824 Shares issuable from assumed conversion of dilutive stock options 1,745 1,933 2,002 1,822 Diluted weighted average common shares 83,219 82,453 83,945 82,646 Diluted earnings per share $ 0.34 $ 0.28 $ 0.69 $ 0.57 For the twenty-four weeks ended July 18, 1998, there were 1,885,000 options that were antidilutive and as such, were not included in the earnings per share calculation above. There were no antidilutive options for either the twelve weeks ended July 18, 1998 and July 19, 1997 or the twenty-four weeks ended July 19, 1997. 6. Put Options. During the twenty-four weeks ended July 18, 1998, the Company traded put options on a net 2.4 million shares of the Company's common stock and recorded net proceeds of $2.5 million. The amount related to the Company's potential obligation has been recorded as a liability and reclassified from shareholders' equity to put options. The remaining 1.4 million options outstanding at July 18, 1998 expire during the current fiscal year and have exercise prices ranging from $31.00 to $34.43 per share with an average price of $31.94. 7. Treasury Stock. During the second quarter of 1998, the Company's Board of Directors authorized up to $300 million to be available to purchase its common shares in the open market and the Company purchased and retired 2.5 million shares of its stock at an average price of $33.88 per share totaling an aggregate amount of $84.7 million. 8. 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 LTryptophan. 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 January 31, 1998. On June 24, 1996, a putative class action, Lavalla v. Lee et al, C.A. No. 15080, was commenced against the Company and two directors and shareholders in the Court of Chancery of the State of Delaware, Newcastle County, alleging violations of the federal securities laws arising out of the Prospectus and Registration Statement (the "Prospectus") for a public offering of common stock of the Company which took place on February 7, 1996 (the "Public Offering"). The action was dismissed without prejudice on December 29, 1997 pursuant to the parties' stipulation. The named plaintiff, Gaetan Lavalla, subsequently became a named plaintiff in Klein et al v. General Nutrition Companies, Inc. et al, Civil Action No. 96-1455, another putative class action filed on August 2, 1996, in the United States District Court for the Western District of Pennsylvania. In Klein, plaintiffs asserted that the Company is liable for violations of Sections 11 and 12(a) of the Securities Act of 1933 and Section 1501(a) of the Pennsylvania Securities Act, arising out of allegedly false and misleading statements in the Prospectus, 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 alleged 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. Defendants moved to dismiss the Complaint on December 2, 1996 and plaintiffs subsequently filed an Amended Complaint dated March 21, 1997, which among other things, added Gaetan Lavalla as a named plaintiff. On March 30, 1998 the Court granted the motions of all defendants to dismiss the Amended Complaint with prejudice. On April 20, 1998, the plaintiffs filed a Notice of Appeal with the United States Court of Appeals for the Third Circuit. 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 of the Company's product liability coverage, will not have a material adverse impact on its financial position, results of operations or liquidity. 9. Inventories. Inventories consist of the following: July 18, January 31, 1998 1998 (in thousands) Product ready for sale $ 239,462 $ 201,155 Unpackaged bulk products and raw materials 42,330 39,203 Packaging supplies 4,287 3,838 $ 286,079 $ 244,196 10. Subsequent Events. During the third quarter of 1998, the Company purchased 6.9 million shares of its common stock in the open market for approximately $162.5 million. On August 10, 1998, the Company obtained a new thirty day credit facility from members of its bank group in order to finance stock repurchases and for general corporate purposes. The facility allows for additional borrowings of up to $100 million with variable interest rates based on prime plus add-on margins of 0.5% to 0.75% and/or Eurodollar plus add-on margins of 1.5% to 2.0%. The maturity date of the facility is July 1, 2002. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 twenty-four week periods ended July 18, 1998 was $327.9 million and $655.6 million, respectively, representing increases of 23.5% and 21.7% from the same periods in 1997. Below is a comparison of revenue for each of the Company's businesses for the twelve and twenty-four week periods: Consolidated Revenue 12 Weeks Ended 24 Weeks Ended % of % of % of % of July 18, Total July 19, Total July 18, Total July 19, Total 1998 Revenue 1997 Revenue 1998 Revenue 1997 Revenue (millions) (millions) (millions) (millions) Retail $ 233.1 71.1% $ 195.1 73.5% $ 473.6 72.2% $ 396.7 73.6% Franchising 59.3 18.1% 50.5 19.0% 116.2 17.7% 104.2 19.4% Manufacturing 35.5 10.8% 20.0 7.5% 65.8 10.1% 37.8 7.0% Total $ 327.9 100.0% $ 265.6 100.0% $ 655.6 100.0% $ 538.7 100.0% Retail Revenue. Domestically, the Company's products are sold through retail stores operating primarily under the General Nutrition Centers and GNC Live Well store names ("GNC stores"). The Company also operates retail stores under the Nature's Fresh and Amphora names. Internationally, products are sold through retail outlets operating under the names of Health and Diet Centers and General Nutrition Centers in the United Kingdom, Canada, and New Zealand. Presented below is a summary of retail revenue and corresponding store information: Retail Revenue 12 Weeks Ended 24 Weeks Ended % of % of % of % of July 18, Retail July 19, Retail July 18, Retail July 19, Retail 1998 Revenue 1997 Revenue 1998 Revenue 1997 Revenue (millions) (millions) (millions) (millions) GNC stores $ 211.2 90.6% $ 175.4 89.9% $ 429.8 90.8% $ 356.9 90.0% Other domestic stores 14.1 6.0% 15.4 7.9% 29.1 6.1% 31.5 7.9% International stores 7.8 3.4% 4.3 2.2% 14.7 3.1% 8.3 2.1% $ 233.1 100.0% $ 195.1 100.0% $ 473.6 100.0% $ 396.7 100.0% Operating Company Store Locations July 18, July 19, 1998 1997 GNC stores 2,291 1,836 Other domestic stores 41 57 International stores 110 54 2,442 1,947 Revenue for GNC stores increased 20.5% and 20.4% for the twelve and twenty-four week periods ended July 18, 1998 when compared with the same periods in 1997, the result of 455 net new or acquired store openings and favorable comparable store sales gains of 3.0% and 4.3% for the twelve and twenty-four week period ended July 18, 1998, respectively. The Company's increase in comparable store sales were generated from the success of its marketing efforts focusing on the men's and women's brands as well as the continued demand for sports nutrition and herbal products. Revenue from the 6 Nature's Fresh natural grocery stores, comprised $11.9 million or 84.4% of the other domestic stores category for the twelve weeks ended July 18, 1998 versus $10.5 million or 68.2% for the same period last year. The Company has accelerated the store openings in the Canadian markets, opening 19 and 33 new stores during the twelve and twenty-four weeks periods ended for a total open of 67 at July 18, 1998. Additionally, the Company opened 3 international stores in the second quarter and now operates 41 stores in the United Kingdom and 2 in New Zealand. Franchising Revenue. Revenue from the franchise segment increased 17.4% and 11.5% for the twelve and twenty-four week periods ended July 18, 1998 compared with the same period in 1997. This increase is primarily the result of franchise stores comparable store sales increase of 11.8% and 13.4% for the twelve and twenty-four weeks ended July 18, 1998, respectively. The franchise program continues its strong growth potential as 114 and 232 more franchise stores were awarded in the twelve and twenty-four week periods ending July 18, 1998. There are now 438 domestic and 402 international stores awarded or part of development agreements that have not yet been opened. Revenue at Franchising is generated primarily through sales of products to franchises at wholesale prices and royalties on franchises' retail sales. Additional revenue is generated through the initial franchise license fee, sales of stores, fixtures and graphic materials, as well as interest earned on franchise accounts receivable. Revenue from domestic and international franchise locations were $59.3 million and $116.2 million for the twelve and twentyfour week periods ended July 18, 1998. Revenue for domestic and international franchise stores increased 12.4% and 5.4%, respectively, for the twelve week period ended July 18, 1998 when compared with the same period in 1997. For the twenty-four week period ended July 18, 1998 the domestic and international franchise stores increased 14.0% and 5.6%, respectively, when compared with the same period in 1997. Presented below is the number of operating franchise stores and the number of outstanding development agreements and the number of franchises awarded but not yet open: Number of Operating Franchise Locations July 18, 1998 July 19, 1997 Franchise Locations Domestic International Domestic International At beginning of period 1,062 158 1,086 127 Added during period 88 12 49 7 Closed or converted during period (30) - (18) - At end of period 1,120 170 1,117 134 Development agreements and stores awarded but not open 438 402 278 367 Manufacturing Revenue. Revenue at Manufacturing increased to $89.1 million or 34.2% in the twelve weeks and $177.8 million or 32.0% in the twenty-four weeks ended July 18, 1998 when compared with $66.4 million and $134.7 million for the same periods in 1997. Revenue at the Company's South Carolina facility was $84.8 million and $169.1 million or 95.2% and 95.1% of total Manufacturing revenue for the twelve and twenty-four weeks ended. Manufacturing Revenue 12 Weeks Ended 24 Weeks Ended July 18, % of July 19, % of July 18, % of July 19, % of 1998 Total 1997 Total 1998 Total 1997 Total (millions) (millions) (millions) (millions) Third party $ 35.5 39.8% $ 20.0 30.1% $ 65.8 37.0% $ 37.8 28.1% Intercompany 53.6 60.2% 46.4 69.9% 112.0 63.0% 96.9 71.9% Total $ 89.1 100.0% $ 66.4 100.0% $ 177.8 100.0% $ 134.7 100.0% Sales to third-party customers were $35.5 million and $65.8 million for the twelve and twenty-four weeks ended July 18, 1998, an increase of 77.5% and 74.1% over the twelve and twenty-four weeks for the periods ended July 19, 1997. The intercompany sales are eliminated from the Company's consolidated revenue. The Company anticipates continuing sales increases at Manufacturing over 1997 as a result of the acceleration of the store opening program, both company-owned and franchised, and the continuing demand from third-party customers. Analysis of Consolidated Operating Costs and Expenses 12 Weeks Ended 24 Weeks Ended July 18, July 19, July 18, July 19, 1998 1997 1998 1997 (in thousands) (in thousands) Cost of sales, including costs of warehousing, distribution and occupancy $ 201,545 $ 161,495 $ 397,398 $ 327,875 Percent of net revenue 61.4% 60.8% 60.6% 60.9% Selling, general and administrative $ 74,983 $ 61,036 $ 152,555 $ 123,335 Percent of net revenue 22.9% 23.0 23.3% 22.9% Operating earnings $ 51,421 $ 43,073 $ 105,613 $ 87,453 Percent of net revenue 15.7% 16.2% 16.1% 16.2% Cost of sales including the cost of warehousing, distribution and occupancy increased as a percentage of net revenue by 0.6% in the twelve weeks ended July 18, 1998 when compared with the same period in 1997. The increase was the result of higher third-party sales at Manufacturing which carry lower margins than retail and a marketing promotion at Retail on certain commodity vitamins and sports nutrition products. Selling, general and administrative costs increased $13.9 million and $29.2 million in the twelve and twenty-four weeks ended July 18, 1998 compared with the same periods in 1997. The dollar increase was due primarily to the increased number of company-owned stores and the Company's first sponsorship of the Olympic Games in February 1998. Non-Operating Expense Analysis Interest expense for the quarter increased $0.7 million to $6.3 million, when compared to the same period in 1997. The increase in interest expense was the result of $83.5 million of additional borrowings made since the second quarter of 1997 to fund the Company's franchise store buyback program, increased capital expenditures and the purchases of Company stock. Review of Financial Condition Analysis of Liquidity and Capital Resources During the twenty-four weeks ended July 18, 1998, 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 is summarized as follows: 24 Weeks Ended July 18, July 19, 1998 1997 (in thousands) Cash provided by (used in): Operating activities $ 51,680 $ 54,383 Investing activities (103,259) (32,655) Financing activities 51,472 (21,407) Effect of exchange rate 107 (321) Net change in cash $ - $ - Operating Activities. Cash provided by operating activities for the twenty-four weeks ended July 18, 1998 was $ 51.7 million versus $54.4 million for the same period in 1997, a decrease of $2.7 million. The decrease was due primarily to the increase in inventory, which was purchased from third parties in large volumes at significantly discounted rates. Investing Activities. The Company's primary investing activities have been for capital expenditures made in connection with new store construction, the remodeling of existing stores, and expansion requirements at the manufacturing facilities. Capital expenditures for the twenty-four weeks ended July 18, 1998 increased $33.0 million or 157.0% from the same period in 1997 due principally to the accelerated opening of new company stores and increased spending at Manufacturing. Additionally, the Company has spent $41.3 million for franchise store acquisitions in the twenty-four weeks ended July 18, 1998 compared to $4.6 million in the same period in 1997, as a result of an accelerated buyback program of existing franchise store locations, which commenced in the third quarter of 1997. Financing Activities. Cash provided by financing activities increased $72.9 million for the twenty-four weeks ended July 18, 1998 versus the same period in 1997. During 1998, the Company borrowed $108.8 million on its line of credit facility, primarily to fund the aforementioned increase in capital expenditures, franchise store acquisitions and to purchase the Company's stock. Additionally in 1998, the Company received net proceeds of $2.5 million by trading put options giving the Company the potential obligation to purchase 2.4 million shares of its own stock for $44.6 million. For the twenty-four weeks ended July 18, 1998, the Company repurchased 2.5 million shares of its own stock for $84.7 million with borrowed funds. At July 18, 1998, the Company had $231.9 million available on its revolving credit facility after excluding $3.6 million restricted for letters of credit. During the third quarter of 1998, the Company purchased 6.9 million shares of its common stock in the open market for approximately $162.5 million. The Company also acquired a new credit facility for additional borrowings of up to $100 million. Year 2000. In 1996, the Company began the necessary modifications to existing computer systems to meet the year 2000 requirements and expects to complete these modifications early in 1999. Costs associated with system modification are expensed as incurred and will not have a material impact on the Company's results of operations nor its ability to provide the necessary requirements for the Company's operations. PART II. OTHER INFORMATION ITEM 1.LEGAL PROCEEDINGS There have been no material developments in the matters disclosed or incorporated by reference in Part I Item 3 LEGAL PROCEEDINGS, of the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998. ITEM 2.CHANGES IN SECURITIES None ITEM 3a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Market Risk. The company is exposed to certain market risks from transactions that are entered into during the normal course of business. The Company's policies do not permit active trading of, or speculation in, derivative financial instruments. The Company's primary market risk exposure relates to interest rate risk. The Company manages its interest rate risk in order to balance its exposure between fixed and variable rates while attempting to minimize its interest costs. ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company's Annual Meeting of Stockholders was held in Pittsburgh, Pennsylvania on June 25, 1998. (b) The following directors were re-elected as Class I Directors for three-year terms expiring in 2001 with the votes indicated: WITHHELD FOR AUTHORITY David Lucas 71,321,057 1,274,855 W. Harrison Wellford 71,319,597 1,276,315 The remaining directors continue in office with their class and term as follows: - Class II with terms expiring in 2000 William E. Watts and Ronald L. Rosetti - Class III with terms expiring in 1999 Jerry D. Horn and Thomas R. Shepherd (c) In addition, at the meeting the following matters were voted upon with the vote indicated below: (i) A proposal to approve the Company's 1998 Management and Director Stock Option Plan FOR AGAINST ABSTAIN 66,763,726 5,583,478 148,708 (ii) A proposal to ratify the appointment of the Company's independent auditors, Deloitte & Touche LLP, for the current fiscal year FOR AGAINST ABSTAIN 72,509,844 29,920 56,148 (d) Not applicable. ITEM 5.OTHER INFORMATION None ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K (23) Interim review report of the Company's independent accountants, Deloitte & Touche LLP, for the fiscal quarter ended July 18, 1998 (23.1) Letter in lieu of consent of the Company's independent accountants, Deloitte & Touche LLP, for the fiscal quarter ended July 18, 1998 (27) Financial Data Schedule No current reports on Form 8K 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: August 21, 1998 EX-23 2 EXHIBIT 23 INDEPENDENT ACCOUNTANTS' REPORT To The Board of Directors and Stockholders of General Nutrition Companies, Inc. Pittsburgh, Pennsylvania We have reviewed the accompanying consolidated balance sheet of General Nutrition Companies, Inc. and subsidiaries as of July 18, 1998, the related consolidated statements of earnings and comprehensive income for the twelve and twenty-four weeks ended July 18, 1998 and July 19, 1997, and the consolidated statements of cash flows for the twenty-four weeks ended July 18, 1998 and July 19, 1997. These financial statements are the responsibility of the Company'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 January 31, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated April 20, 1998, 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 January 31, 1998, and the related statements of earnings and comprehensive income 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 August 3, 1998 EX-23.1 3 EXHIBIT 23.1 August 21, 1998 General Nutrition Companies, Inc. 300 Sixth Avenue Pittsburgh, Pennsylvania 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 twenty-four weeks ended July 18, 1998 and July 19, 1997, as indicated in our report dated August 3, 1998; 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 July 18, 1998, 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 4 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. Exhibit 27 GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES Financial Data Schedule (dollars in thousands, except per share data) 24 Weeks Ended Item Number July 18, 1998 fiscal year end February 6, 1999 period end date July 18, 1998 5-02(1) cash and cash items 0 5-02(2) marketable securities 0 5-02(3)(a)(1) notes and accounts receivable-trade 84,035 5-02(4) allowance for doubtful accounts 0 5-02(6) inventory 286,079 5-02(9) total current assets 395,927 5-02(13) property, plant and equipment 246,757 5-02(14) accumulated depreciation 0 5-02(18) total assets 1,040,444 5-02(21) total current liabilities 234,907 5-02(22) bonds, mortgages and similar debt 465,625 (L-T debt) 5-02(28) preferred stock-mandatory redemption 0 5-02(29) preferred stock-no mandatory redemption 0 5-02(30) common stock 802 5-02(31) other stockholders' equity 291,490 5-02(32) total liabilities and 1,040,444 stockholders' equity 5-03(b)1(a) net sales of tangible products 655,566 5-03(b)1 total revenue 655,566 5-03(b)2(a) cost of tangible goods sold 397,398 5-03(b)2 total costs and expenses 549,953 applicable to sales and revenue 5-03(b)3 other costs and expenses 0 5-03(b)5 provision for doubtful accounts and notes 0 5-03(b)(8) interest and amortization of debt 11,530 discount 5-03(b)(10) income before taxes and other items 94,083 5-03(b)(11) income tax expense 35,863 5-03(b)(14) income from continuing operations 58,220 5-03(b)(15) discontinued operations 0 5-03(b)(17) extraordinary items 0 5-03(b)(18) cumulative effect-changes in accounting 0 principles 5-03(b)(19) net income or loss 58,220 5-03(b)(20) earnings per share - Basic 0.71 5-03(b)(20) earnings per share - Diluted 0.69
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