<PAGE> 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 April 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-8055
GENERAL NUTRITION, INCORPORATED
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA 25-1027307
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
921 Penn Avenue 15222
Pittsburgh, Pennsylvania (Zip Code)
(Address of principal executive offices)
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 8, 1994, the number of shares outstanding of the
registrant's common stock was 140.
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL NUTRITION, INCORPORATED
CONSOLIDATED CONDENSED AND SUMMARIZED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
April 30, February 5,
1994 1994
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents................................................ $ -- $ --
Restricted cash..................................................... 1,125 1,144
Receivables......................................................... 28,618 26,610
Inventories......................................................... 102,798 94,917
Deferred taxes on income, current portion........................... 5,647 5,647
Other current assets................................................ 3,576 6,839
-------- --------
TOTAL CURRENT ASSETS.............................................. 141,764 135,157
Property, plant and equipment, net..................................... 75,692 74,050
Other assets........................................................... 11,660 11,197
Deferred financing fees, net of accumulated amortization of
$1,893 and $1,652.................................................... 5,227 5,723
Goodwill, net of accumulated amortization of $31,756 and $30,194....... 238,948 240,510
-------- --------
$473,291 $466,637
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................... $ 48,965 $ 45,458
Accrued salaries, wages, benefits and related taxes................. 8,075 10,202
Accrued income taxes................................................ 9,459 1,949
Accrued interest.................................................... 1,385 3,758
Other current liabilities........................................... 19,778 21,934
Redeemable preferred stock, current portion......................... 1,125 1,144
Long-term debt, current portion..................................... 9,770 9,770
-------- --------
TOTAL CURRENT LIABILITIES......................................... 98,557 94,215
Deferred taxes on income............................................... 4,272 4,272
Long-term debt......................................................... 163,888 171,437
Preferred stock, Series B.............................................. 40,000 40,000
SHAREHOLDER'S EQUITY:
Common Stock, $.01 par value; 3,000 shares authorized
and 140 shares issued and outstanding at April 30, 1994
and February 5, 1994.............................................. 186,649 186,649
Earnings deficit....................................................... (20,075) (29,936)
-------- --------
166,574 156,713
-------- --------
$473,291 $466,637
======== ========
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
2
<PAGE> 3
GENERAL NUTRITION, INCORPORATED
CONSOLIDATED CONDENSED AND SUMMARIZED
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
12 Weeks 12 Weeks
Ended Ended
April 30, May 1,
1994 1993
---------- ----------
<S> <C> <C>
Net revenue........................................................... $147,728 $124,007
Cost of sales, including costs of warehousing,
distribution and occupancy......................................... 90,265 75,711
Selling, general and administrative................................... 33,173 29,112
Amortization of goodwill.............................................. 1,562 1,562
-------- --------
Operating earnings.................................................... 22,728 17,622
Interest expense...................................................... 3,731 5,464
-------- --------
Earnings before income taxes and
extraordinary item................................................. 18,997 12,158
Income taxes.......................................................... 7,923 5,421
-------- --------
Earnings before extraordinary item.................................... 11,074 6,737
Extraordinary loss from early retirement
of debt, net of income tax benefit of $275.......................... 511 --
-------- --------
Net earnings.......................................................... $ 10,563 $ 6,737
======== ========
Average number of shares outstanding................................ 140 140
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
3
<PAGE> 4
GENERAL NUTRITION, INCORPORATED
CONSOLIDATED CONDENSED AND SUMMARIZED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
12 Weeks 12 Weeks
Ended Ended
April 30, May 1,
1994 1993
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings................................................................................ $ 10,563 $ 6,737
-------- --------
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary loss from early retirement of debt....................................... 511 --
Depreciation and amortization.......................................................... 5,563 4,808
Increase in deferred tax liability..................................................... -- 894
Other adjustments...................................................................... 61 370
Change in operating assets and liabilities:
Increase in receivables.............................................................. (1,443) (2,596)
Increase in inventories.............................................................. (7,881) (7,420)
Increase in accrued taxes............................................................ 7,785 4,409
Increase in other assets............................................................. (72) (112)
Increase in accounts payable and accrued liabilities................................. 1,417 17,709
Increase in other working capital items.............................................. (1,237) (6,090)
-------- --------
Total adjustments................................................................. 4,704 11,972
-------- --------
Net cash provided by operating activities................................................... 15,267 18,709
-------- --------
Cash flows from investing activities:
Capital expenditures........................................................................ (5,404) (3,025)
Increase in franchisee notes receivable..................................................... (956) (666)
Proceeds from sale or disposal of fixed assets.............................................. 2 200
-------- --------
Net cash used in investing activities....................................................... (6,358) (3,491)
-------- --------
Cash flows from financing activities:
Long-term debt agreements:
Payments............................................................................... (35,500) (22,913)
Borrowings............................................................................. 36,000 7,500
-------- --------
Net (payments) borrowings on long-term debt................................................. 500 (15,413)
Retirement of long-term debt................................................................ (7,641) --
Decrease in capital lease obligations....................................................... (409) (373)
Cash dividends on Series B Preferred stock.................................................. (767) --
Redemption of redeemable preferred stock.................................................... (19) (43,048)
Premiums paid on early retirement of debt................................................... (592) --
-------- --------
Net cash used in financing activities....................................................... (8,928) (58,834)
Net decrease in cash and equivalents............................................................ (19) (43,616)
Beginning balance, cash and equivalents......................................................... 1,144 44,948
-------- --------
Ending balance, cash and equivalents............................................................ $ 1,125 $ 1,332
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................................................... $ 5,901 $ 9,562
Income taxes........................................................................... $ 137 $ 118
_________
Supplemental schedule of non-cash financing activities:
<FN>
(a) GNI elected to pay dividends on its Redeemable Series B Preferred Stock in additional shares until
January 28, 1993, when the election to pay cash dividends was made. At May 1, 1993, dividends of
$597,893 were accrued to be paid on May 15, 1993. At April 30, 1994, dividends of $624,999 were
accrued to be paid on May 15, 1994.
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
4
<PAGE> 5
GENERAL NUTRITION, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED AND SUMMARIZED
FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of General Nutrition, Incorporated and Subsidiaries
(the "Company"), the information furnished includes all adjustments
necessary for fair presentation of the consolidated financial position of
the Company at April 30, 1994 and February 5, 1994 and the results of
operations for the twelve weeks ended April 30, 1994 and May 1, 1993.
All such adjustments are of a normal and recurring nature.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been either condensed or omitted. It is
suggested that these consolidated condensed financial statements be read
in conjunction with the financial statements and footnotes included in
the Company's Form 10-K filed with the Securities and Exchange
Commission. The Consolidated Condensed and Summarized Financial
Statements include the accounts of the Company and its wholly owned
subsidiaries after the elimination of material intercompany balances and
transactions. The results of operations for the twelve weeks ended April
30, 1994 are not necessarily indicative of the operating results for the
full year.
2. 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 April 30, 1994, cash overdrafts of
$1,413,000 were included in accounts payable.
3. Certain amounts in previously issued financial statements have been
reclassified to conform to the 1994 presentation.
4. Inventories consist of the following:
<TABLE>
<CAPTION>
April 30, February 5,
1994 1994
--------- -----------
(In thousands)
<S> <C> <C>
Product ready for sale . . . . . . . . . . . . $ 90,350 $81,531
Unpackaged bulk product and raw material . . . 10,955 11,769
Packaging supplies . . . . . . . . . . . . . . 1,493 1,617
-------- -------
$102,798 $94,917
======== =======
</TABLE>
5. The Company and certain 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 as a result of
these actions. See Note 12 in the Company's Annual Report on Form 10-K
for the fiscal year ended on February 5, 1994.
5
<PAGE> 6
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE. Consolidated revenue for the twelve weeks ended April 30,
1994 was $147.7 million; an increase of $23.7 million or 19.1% compared with
the same period in 1993. Below is a comparison of revenue for each of the
Company's business segments for the twelve week periods:
<TABLE>
CONSOLIDATED REVENUE
<CAPTION>
12 Weeks 12 Weeks
Ended % of Ended % of
April 30, Total May 1, Total
1994 Revenue 1993 Revenue
-------------- ------- -------------- -------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Retail . . . . . . . . . $112,515 76.2 $102,040 82.3
Franchising . . . . . . 21,861 14.8 12,885 10.4
Manufacturing . . . . . 13,333 9.0 8,870 7.2
Corporate . . . . . . . 19 - 212 .1
-------- ----- -------- -----
Total . . . . . . . . $147,728 100.0% $124,007 100.0%
======== ===== ======== =====
</TABLE>
RETAIL REVENUE. In the twelve weeks ended April 30, 1994, revenue
from the retail segment increased 10.3% compared with the same period in 1993.
The Company operated 1,062 stores at April 30, 1994 compared with 948 stores at
May 1, 1993. The retail stores had comparable store sales increases of
approximately 7.5% for the twelve weeks ended April 30, 1994 compared with the
same period in 1993. This revenue increase was generated primarily from the
continuing success of the Company's Gold Card program, the conversion of the
Company's stores to the updated format and the addition of new Company stores
in 1993 and the first quarter of 1994.
FRANCHISING REVENUE. Revenue from the franchise segment increased
69.7% in the twelve weeks ended April 30, 1994 compared with the same period in
1993, as the number of operating franchises increased from 321 at May 1, 1993
to 555 at April 30, 1994. Franchise revenue, which in the twelve weeks ended
April 30, 1994 and May 1, 1993, represented 14.8% and 10.4%, respectively, of
total revenue, was generated primarily from the sale of products and fixtures,
royalties, franchise fees and interest income on franchise notes receivable.
Comparable store sales at the franchise locations for the twelve weeks ended
April 30, 1994 increased approximately 21%. Comparable store sales for first
year converted franchise stores increased an average of 23% for the twelve
weeks ended April 30, 1994 when compared with the same period in the year prior
to conversion.
Of the 555 operating franchise stores at the end of the period, 513
were domestic locations and 42 were international locations. At April 30,
1994 an additional 152 franchises had been awarded but were not yet opened.
MANUFACTURING REVENUE. Revenue from sales to third parties was $13.3
million for the twelve weeks ended April 30, 1994, an increase of 50.3%
compared with the same period in 1993. The 1994 revenue increase was primarily
the result of increased capacity in the soft gelatin production area, allowing
the Company to remain competitive in the wholesale vitamin supplement market
with respect to pricing, quality and customer service. The Company plans to
add further capacity for soft gelatin production later this year.
6
<PAGE> 7
<TABLE>
ANALYSIS OF OPERATING COSTS AND EXPENSES
<CAPTION>
12 Weeks 12 Weeks
Ended Ended
April 30, May 1,
1994 1993
--------- --------
(In thousands)
<S> <C> <C>
Cost of sales, including costs of warehousing,
distribution and occupancy . . . . . . . . . . $90,265 $75,711
Percent of net revenue . . . . . . . . . . . . . 61.1% 61.1%
Selling, general and administrative . . . . . . . $34,735 $30,674
Percent of net revenue . . . . . . . . . . . . . 23.5% 24.7%
Operating earnings . . . . . . . . . . . . . . . $22,728 $17,622
Percent of net revenue . . . . . . . . . . . . . 15.3% 14.2%
</TABLE>
Cost of sales, including cost of warehousing, distribution and
occupancy remained constant as a percentage of net revenue for the twelve weeks
ended April 30, 1994 compared with the twelve weeks ended May 1, 1993.
Consolidated product costs increased as a percentage of revenue for the quarter
when compared with the first quarter of 1993, due primarily to increased
revenue in the franchising and manufacturing segments as a percentage of
consolidated net revenue. Margins generated by these segments are
significantly lower than those of the retail segment. As revenue from these
segments continues to increase as a percentage of consolidated revenue, the
consolidated product costs will continue to increase. Consolidated
warehousing, distribution and occupancy costs declined as a percentage of
revenue for the quarter offsetting the increase in consolidated product costs.
The Company continued to leverage its selling, general and
administrative costs which declined as a percentage of net revenue for the
quarter from 24.7% in 1993 to 23.5% in 1994. The dollar increase of $4,061,000
in the first quarter was a result of increased salaries and operating costs
associated with new stores that were opened in 1993 and the first quarter of
1994 and increased retail advertising.
As a result of improved operations in each of the Company's business
segments and continued emphasis on controlling costs, operating earnings
increased 29.0% for the first twelve weeks ended April 30, 1994 when compared
with the same period in 1993.
NON-OPERATING INCOME (EXPENSE) ANALYSIS
Interest expense, including amortization expense of deferred financing
fees, decreased to $3.7 million in the twelve weeks ended April 30, 1994
compared with $5.5 million for the same period in 1993. The decrease was
primarily the result of repurchases of senior subordinated debt in 1993
utilizing the proceeds from the stock offering completed by the Company's
parent in July 1993 and borrowings from the Company's revolving credit
facility.
The Company recognized an after tax extraordinary loss of $0.5 million
as a result of the retirement of $5.6 million of senior subordinated notes in
the first quarter of 1994.
REVIEW OF FINANCIAL CONDITION
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES
In the first twelve weeks of 1994, increased earnings in each of the
Company's business segments improved the financial condition of the Company.
The Company's current ratio was unchanged from year end at 1.44, while the
debt to equity ratio improved to 1.04 from 1.16 at February 5, 1994. The
Company continued its new store expansion program opening 21 new Company-owned
and 48 franchise locations in the first quarter of 1994. The funds necessary
for the continuation of this expansion will be generated internally or from the
Company's revolving credit facility.
7
<PAGE> 8
The Company's first quarter cash flows from operating, investing and
financing activities as reflected in the Consolidated Statements of Cash Flows
is summarized as follows:
<TABLE>
<CAPTION>
12 Weeks 12 Weeks
Ended Ended
April 30, May 1,
1994 1993
--------- --------
(In thousands)
<S> <C> <C>
Cash provided by (used in)
Operating activities . . . . . . . . $15,267 $ 18,709
Investing activities . . . . . . . . (6,358) (3,491)
Financing activities . . . . . . . . (8,928) (58,834)
------- --------
Net increase (decrease) in
Cash and equivalents . . . . . . . . $ (19) $(43,616)
======= ========
</TABLE>
OPERATING ACTIVITIES. Cash provided by operating activities in the
first twelve weeks of both 1994 and 1993, reflects continued improvement in the
operations of each of the Company's business segments. The Company continued
to reinvest operating funds into its inventory and franchise program to support
the ongoing store expansion program and the increased retail and wholesale
sales.
INVESTING ACTIVITIES. The primary use of funds in each of the reported
periods, excluding the funds used in financing activities, was for capital
expenditures. The Company incurred capital expenditures of approximately $5.4
million and $3.0 million for the first twelve weeks of 1994 and 1993,
respectively. The capital expenditures were used primarily for the Company's
new store expansion program. The Company has planned capital expenditures of
approximately $29 million for 1994.
Receivables from franchisees increased by $956,000 in the first twelve
weeks of 1994 as the number of operating franchise locations increased to 555
from 509 at February 5, 1994.
The funds required for the Company's future investing activities will
come from a number of sources including the operating cash flow, the revolving
credit facility and repayment of franchisee notes.
FINANCING ACTIVITIES. On April 15, 1994, the Company made a principal
repayment of $2.0 million on its bank term loan. At April 30, 1994, the
Company had $8.9 million available on its $51.0 million revolving credit
facility after excluding $6.1 million restricted for letters of credit.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Interim review report of the Company's independent
accountants, Deloitte & Touche, for the first fiscal
quarter ended April 30, 1994 is attached.
(b) No current reports on Form 8-K were filed during the
twelve-week period ended April 30, 1994.
8
<PAGE> 9
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, INCORPORATED
By: /s/ Edwin J. Kozlowski
-----------------------
Edwin J. Kozlowski
Senior Vice President, Chief
Financial Officer and Principal
Accounting Officer
DATE: June 13, 1994
9
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Deloitte & Touche <Logo>
2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
Telephone: (412) 338-7200
Facsimile: (412) 338-7380
INDEPENDENT ACCOUNTANTS' REPORT
To The Board of Directors and Stockholder of
General Nutrition, Incorporated
Pittsburgh, Pennsylvania
We have reviewed the accompanying consoldiated condensed and summarized balance
sheet of General Nutrition, Incorporated and subsidiaries as of April 30, 1994,
and the related consolidated condensed and summarized statements of operations
and cash flows for the twelve weeks ended April 30, 1994 and May 1, 1993. 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 condensed and summarized 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, Incorporated
and subsidiaries as of February 5, 1994, and the related consolidated
statements of operations, stockholder's equity, and cash flows for the year
then ended (not presented herein); our report on those consolidated financial
statements, dated March 7, 1994, includes an explanatory paragraph as to a
litigation uncertainty. In our opinion, the information set forth in the
accompanying consolidated condensed and summarized balance sheet as of February
5, 1994 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche
May 16, 1994
