-----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, NczmVxYBHW6Fm4ClDkH83fxakTGeEH7ki6LqsTZo9ncfPfQwNv4Hi7OKKqQh2RPL CJSIU0PCekoOvbSnHb5q1w== 0000880120-99-000008.txt : 19990615 0000880120-99-000008.hdr.sgml : 19990615 ACCESSION NUMBER: 0000880120-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990501 FILED AS OF DATE: 19990610 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: 99644042 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 GENERAL NUTRION COMPANIES, INC. FORM 10-Q 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 May 1, 1999. 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 Pittsburgh, Pennsylvania 15222 (Address of principal executive office) (Zip Code) 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 June 4, 1999, the number of shares outstanding of the registrant's common stock was 67,885,001. TABLE OF CONTENTS Page ---------- Part I Financial Information Item 1 Financial Statements Condensed Consolidated Balance Sheets 2 Condensed Consolidated Statement of Earnings and Comprehensive Income 3 Condensed Consolidated Statement of Cash Flows 4 Notes to Condensed Consolidated Financial Statements 5 - 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 13 Item 3 Quantitative and Qualitative Disclosure About Market Risk 13 Part II Other Information Item 1 Legal Proceedings 14 Item 6 Exhibits and Reports on Form 8-K 14 Signatures 15 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands, except share data)
May 1, February 6, 1999 1999 -------------------- ------------------- (unaudited) ASSETS Current Assets: Receivables, net $ 97,204 $ 98,926 Inventories 299,413 294,325 Deferred taxes 14,776 17,617 Prepaid income taxes - 4,071 Other current assets 18,157 14,625 -------------------- ------------------- Total current assets 429,550 429,564 Note due from related parties 18,118 28,526 Property, plant, and equipment, net 282,023 275,473 Other assets 45,058 52,549 Deferred financing fees, net of accumulated amortization of $4,196 and $3,889 2,725 3,032 Goodwill, net of accumulated amortization of $77,400 and $74,425 339,478 338,842 ==================== =================== $ 1,116,952 $ 1,127,986 ==================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 142,382 $ 121,386 Accrued salaries, wages, vacations and related taxes 27,955 23,009 Accrued income taxes 5,511 - Other current liabilities 55,831 73,404 Long-term debt, current portion 518 623 -------------------- ------------------- Total current liabilities 232,197 218,422 Long-term debt 757,280 796,877 Deferred taxes 4,886 7,771 Commitments and contingencies Shareholders' Equity: Common stock, $.01 par value: 679 677 Authorized 200,000,000 shares, issued and outstanding, 67,857,847 shares at May 1, 1999 and 67,753,329 shares at February 6, 1999 Additional paid-in capital 1,452 - Stock options outstanding 7,025 7,040 Subscriptions receivable (4,204) (3,804) Accumulated other comprehensive loss (484) (346) Accumulated earnings 118,121 101,349 -------------------- ------------------- 122,589 104,916 -------------------- ------------------- $ 1,116,952 $ 1,127,986 ==================== ===================
Notes to Consolidated Financial Statements are an integral part of these statements. GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Earnings and Comprehensive Income (in thousands, except per share data) (unaudited)
12 Weeks Ended ----------------------------------- May 1, April 25, 1998 1999 ----------------- ---------------- Net revenue $ 336,357 $ 327,617 Cost of sales, including costs of warehousing, distribution and occupancy 222,088 195,852 Selling, general and administrative 75,844 77,572 ----------------- ---------------- Operating earnings 38,425 54,193 Interest expense, net 11,802 5,259 ----------------- ---------------- Earnings before income taxes 26,623 48,934 Income taxes 9,851 18,696 ----------------- ---------------- Net earnings 16,772 30,238 Other comprehensive loss: Foreign currency translation adjustment, net (138) (51) ----------------- ---------------- Comprehensive income $ 16,634 $ 30,187 ================= ================ Basic earnings per share $ 0.25 $ 0.37 ================= ================ Basic weighted average common shares 67,842 82,424 ================= ================ Diluted earnings per share $ 0.25 $ 0.36 ================= ================ Diluted weighted average common shares 68,256 84,700 ================= ================
Notes to Consolidated Financial Statements are an integral part of these statements. GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)
12 Weeks Ended ----------------------------------- May 1, April 25, 1999 1998 ---------------- ----------------- Cash flows from operating activities: Net earnings $ 16,772 $ 30,238 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 15,124 12,189 Amortization of deferred financing fees 307 271 Loss on disposal of fixed assets 111 - Increase in deferred taxes (44) - Other (1) 1 Change in operating assets and liabilities, net of acquisitions: Decrease (increase) in receivables 2,611 (9,020) Increase in inventories (4,461) (30,331) Decrease (increase) in other assets 121 (1,302) Increase in accrued taxes 5,511 14,500 (Decrease) increase in accounts payable and accrued liabilities (15,002) 6,897 Decrease in other working capital items 3,550 3,420 ---------------- ----------------- Total adjustments 7,827 (3,375) ---------------- ----------------- Net cash provided by operating activities 24,599 26,863 ---------------- ----------------- Cash flows from investing activities: Capital expenditures (17,988) (27,115) (Increase) decrease in franchisee notes receivable (2,006) 580 Payments for franchise store acquisitions (4,943) (28,766) Net repayments (advances) on related party loan and investment in related party 18,778 (1,140) ---------------- ----------------- Net cash used in investing activities (6,159) (56,441) ---------------- ----------------- Cash flows from financing activities: Net (repayments) borrowings on revolving credit facility (39,500) 20,800 Increase (decrease) in book balance bank overdraft 20,360 (3,864) Decrease in capital lease obligations (202) (331) Net proceeds from issuance of common stock 1,039 8,807 Net proceeds from sale of put options - 4,218 Decrease (increase) in deferred financing fees 1 (1) ---------------- ----------------- Net cash (used in) provided by financing activities (18,302) 29,629 Effect of exchange rate changes on cash (138) (51) ---------------- ----------------- Net change in cash - - Beginning balance, cash - - ================ ================= Ending balance, cash $ - $ - ================ ================= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 14,018 $ 3,940 Income taxes $ 248 $ 3,959
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 May 1, 1999 and February 6, 1999 and the results of operations for the twelve weeks ended May 1, 1999 and April 25, 1998. 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. These consolidated financial statements should be read in conjunction with the financial statements and footnotes included in the Company's 1998 Annual Report on Form 10-K for the fiscal year ended on February 6, 1999 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 and cash flows for the twelve weeks ended May 1, 1999 and April 25, 1998 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 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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 or liabilities in the balance sheet 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. Management is currently in the process of evaluating what impact, if any, the adoption of the statement will have on its financial position or results of operations when adopted. 3. Cash. The Company utilizes a cash management system under which typically 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 May 1, 1999 and February 6, 1999, cash overdrafts of $22.4 million and $2.1 million, respectively, were included in accounts payable. At May 1, 1999, the Company had $22.7 million available on its revolving credit facility after excluding $2.7 million restricted for letters of credit. 4. Reclassifications. Certain amounts reported in previously issued financial statements have been reclassified to conform to the 1999 presentation. 5. Other Comprehensive Loss. Other comprehensive loss is shown net of income taxes. The income tax benefit related to items of other comprehensive loss were $0.08 million and $0.05 million for the twelve weeks ended May 1, 1999 and April 25, 1998, respectively. 6. 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 ------------------------------------------ May 1, April 25, 1999 1998 -------------------- -------------------- (in thousands, except per share data) Net earnings available for common shares $ 16,772 $ 30,238 ==================== ==================== Basic weighted average common shares 67,842 82,424 ==================== ==================== Basic earnings per share $ 0.25 $ 0.37 ==================== ==================== Basic weighted average common shares 67,842 82,424 Shares issuable from assumed conversion of dilutive stock options and exercise of put options 414 2,276 ==================== ==================== Diluted weighted average common shares 68,256 84,700 ==================== ==================== Diluted earnings per share $ 0.25 $ 0.36 ==================== ====================
7. Legal Proceedings. The Company and/or one of its subsidiaries (the "GNC Companies") are currently named as defendants in approximately 7 lawsuits in state and federal courts alleging damages arising from the ingestion of products containing manufactured L-Tryptophan that were processed and distributed by the GNC Companies and other non-related companies prior to 1990. These lawsuits are all that remain of over 400 such actions against the GNC Companies and the Company believes that like all that were resolved previously, the remaining cases will be resolved at no cost to the Company. The cases are being vigorously defended pursuant to a joint defense agreement (the "Agreement") among Showa Denko America ("SDA") and numerous parties in the nutritional supplement industry who manufactured, processed, sold, distributed or bottled L-Tryptophan. SDA's parent, SHOWA Denko ("SDK"), was the manufacturer of the L-Tryptophan that plaintiffs allege caused their injuries. Pursuant to the Agreement, SDA has agreed to pay all legal fees incurred by the GNC Companies in the defense of these claims and to indemnify the GNC Companies against liability. By separate agreement, SDK has unconditionally and irrevocably guaranteed all obligations of SDA under the Agreement. In addition, the GNC Companies, with the other signatories to the Agreement, are beneficiaries of a $20 million letter of credit delivered to secure SDA's performance of its obligations. The Agreement does not indemnify the GNC Companies against injuries proximately caused by them or against punitive, exemplary or other damages attributable to their intentional misconduct. Several of the pending actions seek such damages. The GNC Companies believe they have reasonable defenses to such claims. The GNC Companies also believe that they are entitled to indemnification or contribution from other parties to the pending actions but, pursuant to the Agreement, are not pursuing those claims at this time. In the unlikely event that the benefit of the Agreement, the guaranty by SDK and letter of credit were to be unavailable, the GNC Companies have product liability insurance which they believe provides coverage for the L-Tryptophan product claims. The damages sought by the pending actions could exceed such coverage in the unlikely event that damages were to be awarded solely against the GNC Companies and no indemnification or contribution by other parties was awarded or available. Although the outcome of litigation is uncertain, management of the Company, upon consultation with counsel, believes that the Company will not be required to make any material payments in connection with the remaining actions, and no provisions have been made in the consolidated financial statement for any such possible loss. 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 1-501(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 appeal has been fully briefed and was argued on December 2, 1998. The appeal has not yet been decided. 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. 8. Inventories. Inventories consist of the following:
May 1, February 6, 1999 1999 ----------------- ----------------- (in thousands) Product ready for sale $ 253,302 $ 245,403 Unpackaged bulk products and raw materials 42,887 45,485 Packaging supplies 3,224 3,437 ================= ================= $ 299,413 $ 294,325 ================= =================
9. Supplemental Cash Flow Information. The Company extended net loans to executives of $0.2 million during the twelve weeks ended May 1, 1999 related to the 1996 Management Stock Purchase Plan. 10. Business Segment Information. Effective February 6, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Segment net revenues and operating earnings for the twelve week periods ended May 1, 1999 and April 25, 1998, consist of the following:
Manufacturing/Wholesale Corporate/ Consolidated Retail Franchising Other Totals --------------- ----------------- -------------- ------------- ---------------- (in thousands) May 1, 1999 Net revenue $ 245,637.1 $ 27,618.4 $ 63,101.8 $ - $ 336,357.3 Operating earnings 23,218.6 9,254.9 15,483.7 (9,532.2) 38,425.0 April 25, 1998 Net revenue $ 240,443.3 $ 30,261.7 $ 56,912.0 $ - $ 327,617.0 Operating earnings 35,149.8 14,280.3 13,038.8 (8,276.3) 54,192.6
(a) For all periods presented, segment amounts, when aggregated, agree to the Company's consolidated totals. Intersegment sales for Manufacturing/Wholesale are eliminated in consolidation of net revenues. (b) Intersegment sales from Manufacturing/Wholesale totaled $44.4 million and $58.4 million for the twelve weeks ended May 1, 1999 and April 25, 1998, respectively. These sales are eliminated in consolidation of Net Revenues. 11. Sale of Nature's fresh Northwest. As part of the Company's strategy to re-focus on its core business, on April 22, 1999, the Company executed a definitive agreement to sell its Nature's fresh Northwest gourmet grocery store chain to Wild Oats Markets, Inc. The Company expects to complete this transaction during the second quarter of 1999, and will reflect such transaction in the Company's second quarter results. 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 week period ended May 1, 1999 was $336.4 million representing an increase of 2.7% from the same period in 1998. The increase results primarily from an increased number of company-owned and Franchise stores operating during the first quarter of 1999 versus 1998. At May 1, 1999 and April 25, 1998, there were 2,726 and 2,336 company-owned and 1,477 and 1,220 franchise stores in operation, respectively. Below is a comparison of revenue for each of the Company's businesses for the twelve weeks ended:
Consolidated Revenue --------------------------------------------------------------- 12 Weeks Ended --------------------------------------------------------------- May 1, % of Total April 25, % of Total 1999 Revenue 1998 Revenue ------------- -------------- ------------- ---------------- (in millions) (in millions) Retail $ 245.7 73.0% $ 240.4 73.4% Franchising 63.1 18.8% 56.9 17.4% Manufacturing/Wholesale 27.6 8.2% 30.3 9.2% ============= ============== ============= ================ Total $ 336.4 100.0% $ 327.6 100.0% ============= ============== ============= ================
Retail Revenue. Domestically, the Company's products are sold through retail stores operating primarily under the General Nutrition Centers(R) and GNC Live Wel(TM) store names ("GNC stores"). Internationally, products are sold through retail outlets operating under the names of Health and Diet Centres(R) and General Nutrition Centres(R) in the United Kingdom and Canada. Presented below is a summary of retail revenue and corresponding store information:
Retail Revenue for the Company-owned 12 Weeks Ended Store Locations as of --------------------------------------------------------- ----------------------------- % of Retail % of Retail May 1, April 25, May 1, April 25, 1999 Revenue 1998 Revenue 1999 1998 ------------- ------------ ------------- -------------- ------------- ------------ (in millions) (in millions) GNC stores $ 218.6 89.0% $ 218.5 90.9% 2,552 2,204 Other domestic stores 16.6 6.7% 15.0 6.2% 28 44 International stores 10.5 4.3% 6.9 2.9% 146 88 ============= ============ ============= ============ ============== ============= $ 245.7 100.0% $ 240.4 100.0% 2,726 2,336 ============= ============ ============= ============ ============== =============
Revenue at domestic GNC stores was flat for the twelve weeks ended May 1, 1999 when compared to the same period in 1998. For the same time period, comparable store sales decreased 2% due to adjustments made to better align the Company's pricing on certain sports nutrition and commodity vitamin product to address competitive pressures and one less Gold Card Promotion. GNC had a net 56 new or acquired store openings during the first quarter of 1999. The Company opened 7 new stores in Canadian markets during the twelve week period ended May 1, 1999 for a total of 99. Additionally, the Company operates 44 stores in the United Kingdom. As part of the Company's strategy to re-focus on its core business, on April 22, 1999, the Company executed a definitive agreement to sell its Nature's fresh Northwest gourmet grocery store chain to Wild Oats Markets, Inc. The Company expects to complete this transaction during the second quarter of 1999, and, as such, will reflect the gain on the sale in the Company's second quarter results. Franchising Revenue. 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 store fixtures and graphic materials, as well as interest income earned for the financing of the purchase of the store including the initial stock of inventory. Consolidated revenue from Franchising increased by 10.9% to $63.1 million for the twelve week period ended May 1, 1999 when compared with the same period in 1998. This increase is primarily the result of franchise stores comparable stores sales increases of 2.1% and 18.4% at domestic and international franchise stores, respectively. The franchise program continued its growth potential as 22 more franchise stores were awarded in the twelve week period ended May 1, 1999. There are now 265 domestic and 468 international stores awarded or part of development agreements that have not yet been opened. Presented below is the number of operating franchise stores and the number of outstanding development agreements and franchises awarded but not yet open:
Number of Operating Franchise Locations May 1, 1999 April 25, 1998 ------------------------------- ------------------------------- Franchise Locations Domestic International Domestic International - -------------------------------------- ------------- --------------- ------------- --------------- At beginning of period 1,226 196 1,074 151 Added during period 64 12 67 7 Closed/converted during period 21 - 79 - ============= =============== ============= =============== At end of period 1,269 208 1,062 158 ============= =============== ============= =============== Development agreements and stores awarded but not yet open 265 468 436 409
Manufacturing/Wholesale Revenue. Revenue at Manufacturing/Wholesale was $72.0 million for the twelve weeks ended May 1, 1999. For the same time period, revenue at the Company's South Carolina facility was $64.5 million or 89.6% of total Manufacturing/Wholesale revenue.
Manufacturing/Wholesale Revenue -------------------------------------------------------- 12 Weeks Ended -------------------------------------------------------- May 1, % of April 25, % of 1999 Total 1998 Total ------------- ------------ ------------ ------------ (in millions) (in millions) Third party $ 27.6 38.3% $ 30.3 34.2% Intercompany 44.4 61.7% 58.4 65.8% ============= ============ ============ ============ Total $ 72.0 100.0% $ 88.7 100.0% ============= ============ ============ ============
For the twelve weeks ended May 1, 1999, third party and intercompany sales decreased by $2.7 million and $14.0 million, respectively. This decrease is due primarily to the Company shifting production capacity from these areas to production of inventory to meet the Company's obligations under the Rite Aid Agreement. Intercompany sales are eliminated from the Company's consolidated revenue. Analysis of Consolidated Operating Costs and Expenses
12 Weeks Ended -------------------------------------- May 1, April 25, 1999 1998 ------------------ ------------------ (in thousands) Cost of sales, including costs of warehousing, distribution and occupancy $ 222,088 $ 195,852 Percent of net revenue 66.0% 59.8% Selling, general and administrative $ 75,844 $ 77,572 Percent of net revenue 22.5% 23.7% Operating earnings $ 38,425 $ 54,193 Percent of net revenue 11.5% 16.5%
Cost of sales including the cost of warehousing, distribution and occupancy increased as a percentage of net revenue by 6.2% for the twelve weeks ended May 1, 1999 when compared with the same period in 1998. The increase was caused primarily by lower margins due to adjustments made to better align the Company's pricing on certain sports nutrition and commodity vitamin products to address competitive pressures, as well as the Company's inability to leverage its occupancy costs due to the negative comparable store sales. Selling, general and administrative costs decreased $1.7 million for the twelve weeks ended May 1, 1999 compared with the same period in 1998. The decrease was caused primarily by two factors: the Company's sponsorship of the Winter Olympic Games in February 1998 and the impact of the Company's strategic cost reduction program which was completed during the third quarter of 1998. Operating earnings decreased by $15.8 million for the twelve weeks ended May 1, 1999 when compared to the same period in 1998. This decrease was driven primarily by lower margins as discussed above. Non-Operating Expense Analysis Interest expense for the quarter increased $6.5 million to $11.8 million, when compared to the same period in 1998. The increase in interest expense was the result of $379.0 million of net additional borrowings made since the first quarter of 1998 to repurchase Company stock, fund the Company's franchise store buyback program, and build the new manufacturing/distribution center in Anderson, South Carolina and a higher average interest rate on the credit facility which was 6.54% and 6.18% in the first quarter of 1999 and 1998, respectively. Review of Financial Condition Analysis of Liquidity and Capital Resources During the twelve weeks ended May 1, 1999, the Company's cash flows from operating, investing and financing activities as reflected in the Consolidated Statements of Cash Flows is summarized as follows:
12 Weeks Ended ------------------------------------- May 1, April 25, 1999 1998 ----------------- ----------------- (in thousands) Cash provided by (used in): Operating activities $ 24,599 $ 26,863 Investing activities (6,159) (56,441) Financing activities (18,302) 29,629 Effect of exchange rate (138) (51) changes on cash ================= ================= Net change in cash $ - $ - ================= =================
Operating Activities. Cash provided by operating activities for the twelve weeks ended May 1, 1999 was $24.6 million versus $26.9 million for the same period in 1998, a decrease of $2.3 million. The decrease results primarily from a $13.5 million decrease in net earnings. This decrease was driven by decreased margins due to the Company revising its pricing strategy and only two Gold Card promotions for the twelve weeks ended May 1, 1999 compared to three Gold Card promotions for the twelve weeks ended April 25, 1998. 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/distribution facilities. Capital expenditures for the twelve weeks ended May 1, 1999 were $18.0 million, which results from spending at Manufacturing/Wholesale related to the construction of a new manufacturing facility/distribution center in Anderson, South Carolina. This amount represented a decrease in capital expenditures for the twelve weeks ended May 1, 1999 of $9.1 million or 33.7% when compared to the same period in 1998 due primarily to the Company's accelerated opening of new stores program in 1998 which was not repeated in 1999. The Company utilized $4.9 million for franchise store acquisitions in the twelve weeks ended May 1, 1999 compared to $28.8 million in the same period in 1998, as a result of an accelerated buyback program of existing franchise store locations in 1998. Additionally, the Company received a $21.3 million payment on a note receivable from a related party and made advances of $2.5 million to an additional related party during the twelve weeks ended May 1, 1999. Financing Activities. Cash provided by financing activities decreased $47.9 million for the twelve weeks ended May 1, 1999 versus the same period in 1998. During the first quarter of 1999, the Company repaid a net $39.5 million on its credit facility while during the first quarter of 1998, the Company borrowed a net $20.8 million on its line of credit facility, primarily to fund the increase in capital expenditures and franchise store acquisitions. Additionally, during the first quarter of 1999, the Company's cash overdraft position increased by $24.2 million over the first quarter of 1998 and during the first quarter of 1998, the Company received proceeds of $4.2 million through the sale of put options. At May 1, 1999, the Company had $22.7 million available on its revolving credit facility after excluding $2.7 million restricted for letters of credit. Year 2000 Year 2000. Reference is made to the Company's explanation of its potential exposures that could result from the failure of the Company, or of its subsidiaries, customers or suppliers, or of governmental bodies, to prepare for so-called Year 2000 (Y2K) problems as discussed on pages 19 and 20 of its 1998 Form 10-K Annual Report. The Company's management believes the explanation of potential exposures continues to be appropriate. The Company is continuing its ongoing efforts to identify, remediate and test their systems, and consider contingency plans to deal with certain Y2K issues in the event that remediation efforts by themselves or others prove unsuccessful. The Company has used, and will continue to use, principally internal resources for Y2K modifications. Management currently believes that the total cost associated with required modifications to become Y2K compliant will not have a material adverse impact on its business, results of operations, liquidity or financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The analysis of market risks presented on page 21 of the Company's 1998 Annual Report on Form 10-K is not updated here inasmuch as management believes that there has not been any significant changes in such exposures. The Company's primary significant market risk exposure continues to be interest rate risk. 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 February 6, 1999. 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 May 1, 1999 (23.1) Letter in lieu of consent of the Company's independent accountants, Deloitte & Touche LLP, for the fiscal quarter ended May 1, 1999 (27) Financial Data Schedule 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: June 10, 1999 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 May 1, 1999, the related consolidated statements of earnings and comprehensive income and cash flows for the twelve weeks ended May 1, 1999 and April 25, 1998. 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 February 6, 1999, and the related consolidated statements of earnings and comprehensive income, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated March 3, 1999 (April 22, 1999 as to Note 19 to the consolidated financial statements), 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 6, 1999 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 May 17, 1999 EXHIBIT 23.1 June 10, 1999 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 weeks ended May 1, 1999 and April 25, 1998, as indicated in our report dated May 17, 1999; 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 May 1, 1999, 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. Deloitte & Touche LLP Pittsburgh, Pennsylvania EX-27 2 FDS
5 3-MOS FEB-05-2000 FEB-07-1999 MAY-01-1999 0 0 97,204 0 299,413 429,550 282,023 0 1,116,952 232,197 757,280 0 0 679 121,910 1,116,952 336,357 336,357 222,088 222,088 0 0 11,802 26,623 9,851 16,772 0 0 0 16,772 0.25 0.25
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