SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the twelve weeks ended October 12, 1996.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission file number 01-19592
GENERAL NUTRITION COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 4-3056351
(state or other jurisdiction of (I.R.S.Employer
Incorporation or organization) Identification No.)
921 Penn Avenue 15222
Pittsburgh, Pennsylvania (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (412) 288-4600
Indicate by a check mark whether the registrant (1) has
filed all reports required to be filed by section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
As of November 19, 1996, the number of shares outstanding of
the registrant's common stock was 82,299,916.
GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Oct. 12, Feb. 3,
(In thousands, except share data) 1996 1996
ASSETS (unaudited)
Current Assets:
Restricted cash 930 961
Receivables 49,955 38,292
Inventories 184,375 147,723
Deferred taxes 9,757 9,647
Other current assets 15,378 13,699
Total current assets 260,395 210,322
Property, plant and equipment, net 157,296 145,969
Other assets 37,116 28,515
Deferred financing fees, net of accumulated
amortization of $1,312 and $889 3,268 3,141
Goodwill, net of accumulated amortization of
$53,187 and $46,667 258,712 295,865
716,787 683,812
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable 83,685 75,905
Accrued salaries, wages, vacations and
related taxes 14,919 18,225
Accrued income taxes 3,904 4,465
Accrued interest 855 492
Other current liabilities 52,900 36,127
Redeemable preferred stock 930 961
Long-term debt, current portion 997 21,466
Total current liabilities 158,190 157,641
Long-term debt 310,379 197,006
Deferred taxes on income 2,704 2,508
Commitments and contingencies - -
Shareholders' Equity:
Common stock, $.01 par value:
Authorized 200,000,000 shares,
issued and outstanding, including shares
in treasury, 90,662,879 shares at
October 12, 1996 and 87,744,019 shares
at February 3, 1996 907 877
Additional paid-in capital 304,530 253,521
Stock options outstanding 3,755 4,769
Currency translation adjustment (139) (102)
Accumulated earnings 53,761 67,592
Less Treasury stock, at cost (7,610,700
shares at October 12, 1996) (117,300) -
245,514 326,657
716,787 683,812
Notes to Consolidated Financial Statements are an integral part of these
statements.
GENERAL NUTRITION COMPANIES,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
12 Weeks Ended 36 Weeks Ended
Oct. 12, Oct. 14, Oct. 12, Oct. 14,
1996 1995 1996 1995
Net revenue 226,622 193,546 674,539 579,958
Cost of sales, including
costs of warehousing,
distribution and occupancy 139,723 118,350 417,707 353,274
Selling, general and
administrative 50,909 41,981 147,184 127,518
Amortization of goodwill 2,129 1,996 6,520 5,828
Restructuring charge - - 80,243 -
Operating earnings 33,861 31,219 22,885 93,338
Interest expense 4,438 4,218 10,761 14,648
Earnings before
income taxes 29,423 27,001 12,124 78,690
Income taxes 11,553 11,112 25,955 32,553
Net earnings (loss) 17,870 15,889 (13,831) 46,137
Primary earnings (loss)
per share 0.21 0.18 (0.16) 0.55
Average number of shares
outstanding 84,570 89,346 86,364 83,506
Fully diluted earnings
(loss) per share 0.21 0.18 (0.16) 0.52
Average number of shares
outstanding 84,997 90,196 86,364 90,084
Notes to Consolidated Financial Statements are an integral part of these
statements.
GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
36 Weeks 36 Weeks
Ended Ended
October 12, October 14,
(In thousands) 1996 1995
Cash flows from operating activities:
Net earnings (loss) (13,831) 46,137
Adjustments to reconcile net (loss)
earnings to net cash provided by
operating activities:
Depreciation and amortization 27,618 20,970
Amortization of deferred financing fees 423 399
Restructuring charge 80,243 -
Other, principally loss on
disposal of fixed assets 377 1,026
Change in operating assets and liabilities:
(Increase) decrease in receivables (10,284) 868
Increase in inventories (41,724) (17,540)
(Increase) decrease in other assets (272) 299
(Decrease) increase in accrued taxes (561) 11,904
Increase in accounts payable and
accrued liabilities 16,879 23,783
(Decrease) increase in other
working capital items (5,553) 4,592
Total adjustments 67,146 46,301
Net cash provided by operating activities 53,315 92,438
Cash flows from investing activities:
Capital expenditures (42,792) (34,319)
Increase in franchisee notes receivable (5,582) (3,980)
Payments for store acquisitions (4,529) (4,439)
Payments made for acquisitions, net of
cash acquired (10,636) _
Loan to related party (3,536) -
Net cash used in investing activities (67,075) (42,738)
Cash flows from financing activities:
Net borrowings (payments) on revolving
credit facility 126,401 (40,700)
Retirement of long-term debt (34,001) (12,000)
Decrease in capital lease obligations (1,222) (1,322)
Redemption of redeemable preferred stock (31) (100)
Net proceeds from issuance of common stock 40,469 1,918
Exercise of warrants to purchase common stock - 3,171
Net payments for treasury stock (117,300) -
Increase in deferred financing fees (550) -
Net cash provided by (used) in financing activities 13,766 (49,033)
Effect of exchange rate changes on cash (37) -
Net (decrease) increase in cash (31) 667
Beginning balance, cash 961 1,095
Ending balance, cash 930 1,762
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 10,277 13,666
Income taxes 25,076 20,921
Non-cash transactions:
(a) In August 1995, the Company converted $40 million of its junior
subordinated debt into approximately 8.2 million shares of common stock
at a rate of $4.88.
(b) On August 17, 1996, $9.2 million of common stock was issued in
connection with the acquisition of Nature's Fresh Northwest, Inc.
Notes to Consolidated Financial Statements are an integral part of these
statements.
GENERAL NUTRITION COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Reporting. In the opinion of the General Nutrition
Companies, Inc. (the "Company"), the information furnished
includes all adjustments necessary for fair presentation of
the consolidated financial position of the Company at October
12, 1996 and February 3, 1996 and the results of operations
for the twelve and thirty-six weeks ended October 12, 1996 and
October 14, 1995. All such adjustments are of a normal and
recurring nature except for the restructuring charge discussed
in Note 7.
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 1995 Annual
Report and Annual Report on Form 10-K for the fiscal year
ended on February 3, 1996 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 and thirty-six weeks ended October 12, 1996 and
October 14, 1995 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. Accounting Changes. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This standard is effective in 1996. The new
standard defines a fair value method of accounting for stock
options and similar equity instruments. Pursuant to the new
standard, companies are encouraged, but not required, to adopt
the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to
account for such transactions under Accounting Principles
Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to
Employees," but would be required to disclose in a note to the
financial statements pro forma net income and earnings per
share as if the Company had applied the new method of
accounting. The Company has elected not to adopt the fair
value method of accounting for employee stock-based
transactions and will continue to account for such
transactions under the provisions of APBO No. 25.
3. Cash. The Company utilizes a cash management system under
which a book balance cash overdraft exists for the Company's
primary disbursement accounts. This overdraft represents
uncleared checks in excess of cash balances in bank accounts.
The Company's funds are borrowed on an as needed basis to pay
for clearing checks. At October 12, 1996, and February 3,
1996, cash overdrafts of $6.8 million and $8.9 million
respectively, were included in accounts payable. At October
12, 1996, the Company had $89.2 million available on its
revolving credit facility after excluding $3.1 million
restricted for letters of credit.
4. Reclassifications. Certain amounts reported in previously
issued financial statements have been reclassified to conform
to the 1996 presentation.
5. Inventories. Inventories consist of the following:
October 12, February 3,
1996 1996
(In thousands)
Product ready for sale $ 153,384 $ 122,666
Unpackaged bulk product and raw materials 27,672 21,678
Packaging supplies 3,319 3,379
$ 184,375 $ 147,723
6. Legal. Certain Company subsidiaries are named as defendants
in legal actions brought in federal and state courts by
certain parties seeking damages resulting from the ingestion
of certain products containing manufactured L-Tryptophan. No
provision has been made in the financial statements for any
loss that may result to the Company from these actions. See
Note 13 in the Company's Annual Report on Form 10-K for the
fiscal year ended February 3, 1996.
On June 24, 1996, an action was commenced against the Company
in the Court of Chancery of the State of Delaware entitled
LaValla v. Thomas H. Lee et al, Civil Action No. 15080.
Plaintiff asserts that the Company is liable for a violation
of Section 11 of the Securities Act of 1933, arising out of
allegedly false and misleading statements in the Prospectus and
Registration Statement for a public offering of common stock of
the Company which took place on February 7, 1996. Plaintiff
also alleges that two directors and shareholders of the
Company, Thomas H. Lee and Thomas R. Shepherd, are liable for a
violation of Section 11 of the Securities Act of 1933, arising
out of the same allegedly false and misleading statements in
the Prospectus and Registration Statement. The Company
disputes the allegations contained in the complaint and intends
to defend the action vigorously. This action has been stayed
pending resolution of the Klein, et al. Case referred to below.
On August 2, 1996, an action was commenced against the Company
in the United States District Court for Western District
of Pennsylvania entitled Klein et al. v. General Nutrition
Companies, Inc. et al., Civil Action No. 96-1455. Plaintiffs
assert that the Company is liable for violations of Sections 11
and 12(a)(2) of the Securities Act of 1933 and Section 1-501(a)
of the Pennsylvania Securities Act, arising out of allegedly
false and misleading statements in the Prospectus and
Registration Statement for a public offering of common stock of
the Company which took place on February 7, 1996, and for
violations of section 10(b) of the Securities Exchange Act of
1934 and for negligent misrepresentation arising out of
allegedly false and misleading public statements during the
period from the public offering through May 28, 1996.
Plaintiffs also allege that certain officers, directors and
shareholders of the Company, as well as the underwriters for
the public offering, are liable for other violations of
the federal and state securities laws for negligent
misrepresentation. Plaintiffs seek certification of the action
as a class action, purportedly on behalf of all persons other
than defendants who purchased shares of the Company's common
stock during the proposed class period from February 7
through May 28, 1996. The Company disputes the allegations
contained in the complaint and intends to defend the action
vigorously.
7. Restructuring Charge. During the second quarter of 1996, the
Company recorded a restructuring charge of $80.2 million
($68.8 million after tax). The charge recorded by the Company
related to the write-off of goodwill, property, equipment,
inventories, and other assets associated with management's
decision to discontinue the Nature Food Centres (NFC) retail
concept. The charge for NFC of $66.7 million included $52.6
million of goodwill. The remaining $13.5 million of the
recorded charge relates to unproductive General Nutrition
Centers (GNC) assets, primarily inventory relating to Natural
Solutions cosmetic and other products, fitness and apparel
products, all of which will be discontinued, as well as excess
costs resulting from retrofitting the Alive prototype store.
8. Subsequent Events. On October 25, 1996, the Company's
shareholders approved the adoption of the Company's 1996 Long
Term Incentive Program which included the 1996 Management and
Director Stock Purchase Plan (the "Stock Purchase Plan") and
the 1996 Management and Director Stock Option Plan (the
"Stock Option Plan").
Under the Stock Purchase Plan, participants are permitted to
purchase shares of the Company's common stock at a price equal
to 80 % of the average market price of the common stock during
certain specified periods. The Company will recognize
compensation expense in periods in which shares are purchased
under the Stock Purchase Plan in the amount by which the fair
market value per share of the Company's common stock at the
time of such purchase exceeds the purchase price per share
under the plan. The maximum number of shares which participants
are permitted to purchase under the plan is twice their annual
compensation or director fees, as the case may be. Non-officer
participants may participate to one times their annual
compensation. The Company may extend loans to participants for
up to 50 % of the amount necessary to purchase the shares under
the plan and the applicable withholding tax, provided that no
participant shall borrow more than an amount equal to such
participant's annual base salary. Any such loans would bear
interest at 6 % per annum and are secured by the common stock
purchased by the participant. The Company will forgive the loan
in the event the market price of the Company's common stock
appreciates by at least 25 % or more over the base market price
of the common stock in each of the four years commencing from
the date of grant of such loan. To the extent that such loans
are not forgiven, they are required to be repaid at the earlier
of termination of employment or expiration of the four year
period.
Under the Stock Purchase Plan, a total of 1.0 million shares
have been reserved for issuance. On October 25, 1996, 535,028
shares were purchased under the Stock Purchase Plan for
approximately $6.7 million, 80% of the average market price of
the common stock. The Company extended loans in the amount
of $4.1 million in connection with such purchase. The Company
will record $3.4 million in compensation expense in the fourth
quarter in connection with the discount from the market price
of the common stock.
Under the Stock Option Plan, a total of 5.0 million option
shares have been reserved for issuance. Of the 5.0 million
shares, 2.5 million are initially available for grant
thereunder, and 2.5 million shares will become available for
grant if the market price of the Company's stock reaches
predetermined levels on or prior to August 22, 2000. Option
shares vest under the Stock Option Plan on both a daily and
annual basis over a four year period. The Company has granted
2.225 million option shares at an exercise price of $15.50
which was less than the market value on the date of
shareholder approval of the Long Term Incentive Program. The
Company will record $7.5 million in compensation expense in
the fourth quarter related to such grant.
At November 22, 1996, and subsequent to the close of the third
quarter, the Company had repurchased 1.43 million shares of
its common stock for $25.58 million at an average price of
$17.92 per share. The Board of Directors of the Company has
authorized up to $150.0 million of the Company's stock be
repurchased.
PART 1. 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 and thirty-six
weeks ended October 12, 1996 was $226.6 million and $674.5
million, respectively. This represents an increase of $33.1
million and $94.5 million or 17.1% and 16.3%, respectively, when
compared with the same periods of 1995. Below is a comparison of
revenue for each of the Company's businesses for the twelve and
thirty-six week periods:
Consolidated Revenue
12 weeks % of 12 weeks % of
Ended Total Ended Total
Oct. 12, 1996 Revenue Oct. 14, 1995 Revenue
(In millions)
Retail $ 165.9 73.2 % $ 148.2 76.6 %
Franchising 42.7 18.8 34.8 18.0
Manufacturing 18.0 7.9 10.5 5.4
Total $ 226.6 100.0 % $ 193.5 100.0 %
36 weeks % of 36 weeks % of
Ended Total Ended Total
Oct. 12, 1996 Revenue Oct. 14, 1995 Revenue
(In millions)
Retail $ 493.9 73.2 % $ 452.6 78.0 %
Franchising 128.6 19.1 99.2 17.1
Manufacturing 52.0 7.7 28.2 4.9
Total $ 674.5 100.0 % $ 580.0 100.0 %
Retail Revenue. The Company currently sells its products
through retail outlets operating under the General Nutrition
Centers (GNC), Nature Food Centres (NFC), Health and Diet
Centres (HDC) , Amphora (AMP) and newly acquired Nature's
Fresh Northwest (NAT) names. Below is a summary of revenue by
retail name.
Retail Revenue
12 weeks % of 36 weeks % of
Ended Total Ended Total
Oct. 12, 1996 Revenue Oct. 12, 1996 Revenue
(In millions)
General Nutrition Centers $ 149.5 90.1 % $ 455.4 92.2 %
Nature Food Centres 7.7 4.6 25.3 5.1
Health and Diet Centres 2.3 1.4 6.8 1.4
Nature's Fresh Northwest 6.4 3.9 6.4 1.3
Amphora - - - -
Total $ 165.9 100.0 % $ 493.9 100.0 %
Sales at GNC increased 7.5% and 7.4% for the twelve and thirty-
six weeks ended October 12, 1996 when compared with the same
periods in 1995. Comparable stores sales in GNC stores decreased
by .6% in the third quarter when compared with the third quarter
of 1995, the continuing result of reduced sales of weight loss
products and the negative publicity associated with herbal
products containing Ephedrine. Future regulatory actions
concerning these products could further affect comparable store
sales in both Company and franchise stores.
NFC stores, as discussed in the second quarter, are no longer
part of the Company's long-term strategy and are being closed or
converted to GNC stores. At October 12, 1996 there were 84
stores operating.
The Company's HDC stores in the United Kingdom reported
comparable stores sales in the third quarter of 11.5% when
compared with the same period in 1995. At October 12, 1996 there
were 20 HDC stores operating.
NAT is a 6-store natural food grocery chain located in the
northwest United States. NAT was acquired on August 17, 1996.
Franchising Revenue. Revenue from the franchise segment
increased 22.4% and 29.7% respectively, for the twelve and thirty-
six weeks ended October 12, 1996, when compared with the same
periods in 1995. The increased revenue continued to be driven
primarily from new store openings, 63 for the quarter, coupled
with comparable store sales increases averaging 6.2% in the
franchise retail sales. Product sales at wholesale and royalties
on retail sales, representing the core of franchise ongoing
revenue, comprised 88.9% and 90.7% of total franchise revenue in
the twelve and thirty-six weeks ended October 12, 1996. The
remaining revenue included sales of stores, fixtures, franchise
award fees and interest income on franchise accounts receivable.
Franchise retail sales were $80.3 million and $238.9 million,
respectively, for the twelve and thirty-six weeks ending October
12, 1996, an increase of 22.6% and 25.4% when compared with the
same periods in 1995. At October 12, 1996, there were 1,120
franchise stores operating compared with 890 franchise stores
operating at October 14, 1995. In addition, at October 12, 1996,
there were 615 development agreements outstanding for which
stores are not yet opened. For the thirty-six week period ended
October 12, 1996, the Company awarded 68 new franchise stores.
The franchise operating stores are categorized as follows:
October 12, October 14,
1996 1995
Operating Franchise Stores:
Domestic 1,003 793
International 117 97
1,120 890
Manufacturing Revenue. Total revenue from manufacturing
increased 72.7% and 84.7% in the twelve and thirty-six weeks
ended October 12, 1996 when compared with the same periods in
1995. Manufacturing revenue includes both intersegment sales and
Health & Diet Foods (HDF), the Company's United Kingdom
manufacturing business. Third party sales increased 71.4% in the
third quarter when compared with 1995. The sales increase is
attributed to increased demand for commodity vitamins and the
addition of $2.6 million from HDF. The Health and Diet Group,
Ltd., was acquired in the 4th quarter of 1995. Intersegment
sales grew by 19.8% in the third quarter versus the third quarter
of 1995 to support the continuing stores expansion program and
the increased number of new products developed in 1996 versus a
year ago.
<TABLE>
<CAPTION>
Analysis of Operating Costs and Expenses
12 Weeks 12 Weeks 36 Weeks 36 Weeks
Ended Ended Ended Ended
October 12, October 14, October 12, October 14,
1996 1995 1996 1995
(In thousands)
<S>
Cost of sales, including
costs of warehousing, <C> <C> <C> <C>
distribution and occupancy $ 139,723 $ 118,350 $ 417,707 $ 353,274
Percent net revenue 61.7 % 61.1 % 61.9 % 60.9 %
Selling, general and
administrative $ 53,038 $ 43,977 $ 153,704 $ 133,346
Percent net revenue 23.4 % 22.7 % 22.8 % 23.0 %
Restructuring charge $ - $ - $ 80,243 $ -
Percent net revenue - - 11.9 % -
Operating earnings $ 33,861 $ 31,219 $ 22,885 $ 93,338
Percent net revenue 14.9 % 16.1 % 3.4 % 16.1 %
</TABLE>
Cost of sales, including the cost of warehousing, distribution
and occupancy increased as a percentage of net revenue by .6% to
61.7% in the third quarter of 1996, when compared with the same
quarter in 1995. The cost increase as a percentage of net
revenue is a direct result of fixed occupancy charges in retail,
coupled with lower retail sales volume. Total retail sales
increased 11.9% in the third quarter versus the same period in
1995, while occupancy costs increased 15.0%. Also contributing
to the increase in cost of sales as a percentage of net revenue
is the increase in revenue of the lower margin businesses,
franchising and manufacturing, and the newly acquired NAT. The
impact of cost of sales as a percentage of net revenue will
continue to increase as these lower margin businesses continue to
increase as a percentage of total revenue.
Selling, general and administrative costs increased in the
third quarter as a percentage of net revenue when compared with
the same quarter in 1995 by .7%. The increase is primarily
attributable to advertising expenses of $10.2 million for the
third quarter of 1996 versus $7.6 million for the same quarter in
1995. The Company was able to control other expenses despite the
growth in retail sales volume.
During the second quarter of 1996, the Company recorded a
restructuring charge of $80.2 million ($68.8 million after tax).
The charge recorded by the Company related to the write-off of
goodwill, property, and equipment, inventories, and other assets
associated with the decision to discontinue the NFC retail
concept. The charge recorded was to adjust for certain
unproductive assets, the majority of which are in the retail
business segment. (See Note 7 of Notes to Consolidated Financial
Statements)
Non-Operating Income (Expense) Analysis
Interest expense for the quarter increased to $4.4 million,
or 5.2% when compared to the same period in 1995. The increase
in interest expense for the quarter was the result of the
repurchase of $117.3 million of the Company's common stock,
financed by the Company's revolving line of credit facility.
Interest expense for the duration of the year will remain higher
than the previous year as a result of the additional borrowings
to finance the stock repurchases.
For the thirty-six week period ending October 12, 1996, interest
expense declined to $10.7 million, a 26.5% decrease when compared
to the same period in 1995. The decline in interest expense for
the thirty-six week period ending October 12, 1996 versus the
same period in 1995 is the result of two events. First, early in
the first quarter of 1996, the Company amended and restated the
existing credit agreement providing for a revolving credit
facility with reduced interest rates which are based on prime or
Eurodollar rates plus an add on margin of .5%. Secondly, in
February 1996, the Company sold approximately 1.6 million shares
of common stock and repaid $34.0 million on its bank term loan.
These two events offset the increase related to the additional
borrowings to finance the stock repurchases.
Review of Financial Condition
Analysis of Liquidity and Capital Resources
In the first thirty-six weeks of 1996, 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:
36 Weeks 36 Weeks
Ended Ended
October 12, October 14,
1996 1995
(In thousands)
Cash provided by (used in)
Operating activities $ 53,315 $ 92,438
Investing activities (67,075) (42,738)
Financing activities 13,766 (49,033)
Effect of exchange rate changes on cash (37) -
Net (decrease) increase in cash $ (31) $ 667
Operating Activities. Cash provided by operating
activities, although favorable at $53.3 million for the thirty-
six weeks ended October 12, 1996, was 42.3% less than the same
period in 1995. The decline in cash provided by operating
activities is primarily attributable to the increase in the
inventory levels of the Company as discussed below. For the
thirty-six weeks ended October 12, 1996, net earnings, adjusted
for non-cash charges and before changes in operating assets and
liabilities, increased to $94.8 million, an increase of 38.4%
when compared to $68.5 million in the same period in 1995.
Changes in operating assets and liabilities include increases in
accounts receivable, inventories, accounts payable and accrued
liabilities. The $10.3 million increase in accounts receivable
is mainly attributable to the increase in product sales to
domestic franchisees as well as the increase in the volume of
third party product sales at manufacturing. Increases in
inventory levels of $41.7 million were generated primarily as a
result of new store expansion requirements, the buildup of
inventory levels due to seasonal requirements, and the stocking
of the Company's new full line distribution center located in
Phoenix, Arizona. The increase in accounts payable and accrued
liabilities of $16.9 million is the result of the buildup of
inventory levels due to seasonal requirements and the
restructuring charge for NFC recorded during the 12 week period
ending July 20, 1996.
Investing Activities. The primary use of funds in both 1995
and 1996 was for capital expenditures. The Company incurred
capital expenditures of approximately $42.8 million in the first
three quarters of 1996 versus $34.3 million in the first three
quarters of 1995.
In 1996, approximately $31.2 million of these expenditures were
used to finance the Company's store expansion program and $11.0
million was used to add additional capacity to the distribution
and manufacturing facilities. Notes receivable from the sale of
stores to franchisees and Company purchases of franchise or
independently owned stores were $10.1 million and $8.4 million,
respectively for the thirty-six weeks ended October 12, 1996 and
October 14, 1995. The Company anticipates total capital
expenditures of approximately $63 million in 1996.
In 1996, the Company expended $10.6 million in connection with
the acquisitions of two new subsidiaries, Nature's Fresh
Northwest and Amphora.
Financing Activities. In the thirty-six weeks ended October
12, 1996, the Company repaid $34.0 million on its bank term loan
with funds received from the sale, in February 1996, of
approximately 1.6 million shares of its common stock at an
average price of approximately $20.75 per share. In addition,
the Company borrowed approximately $117.3 million on its
revolving credit facility to repurchase approximately 7.6 million
shares of its common stock at an average of $15.41 per share.
The Company also sold European put options to purchase an
additional 2.0 million shares of its common stock at an average
net price of $16.33 per share expiring on various dates in
October 1996. All put options have expired and the Company was
not required to purchase additional shares of its own common
stock. At October 12, 1996, the Company had $89.2 million
available on its revolving credit facility.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 to the Notes to Consolidated Financial Statements.
See also Note 6 in the Company's Quarterly Report on Form 10-Q
for the 12 weeks ended July 20, 1996.
Item 6. Exhibits and Reports on Form 8-K
(11.1) Computation of net earnings per share is attached.
(23) Interim review report of the Company's independent
accountants, Deloitte & Touche LLP, for the third
fiscal quarter ended October 12, 1996 is attached.
(23.1) Letter in lieu of consent of the Company's independent
accountants, Deloitte & Touche LLP, for the third
fiscal quarter ended October 12, 1996 is attached.
(27) Financial Data Schedule is attached.
No current reports on Form 8-K were filed during the
third fiscal quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL NUTRITION COMPANIES, INC.
By: /s/ Edwin J. Kozlowski
Edwin J. Kozlowski
Executive Vice President
Chief Financial Officer and
Principal Accounting Officer
DATE: November 25, 1996
COMPUTATION OF NET EARNINGS PER SHARE
General Nutrition Companies, Inc.
Primary earnings per share is computed by dividing net earnings by the weighted
average number of common shares and common stock equivilents outstanding.
Fully diluted earnings per share further assumes the issuance of additional
shares of common stock and the elimination of tax effected interest expense for
the conversion of convertible debentures. The loss per share amounts do not
include common stock equivalents since that would reduce the net loss per share.
<TABLE>
<CAPTION>
12 Weeks 12 Weeks 36 Weeks 36 Weeks
Ended Ended Ended Ended
October 12, October 14, October 12, October 14,
1996 1995 1996 1995
(In thousands, except per share data)
<S>
Net earnings (loss) available <C> <C> <C> <C>
for common shares 17,870 15,899 (13,831) 46,137
Elimination of tax effected
interest expense on
convertible debt for fully
diluted per share calculations - 42 - 450
Common stock 82,853 86,070 86,364 80,041
Outstanding warrants - 372 - 1,058
Outstanding options 1,717 2,904 - 2,407
Primary weighted average
common shares 84,570 89,346 86,364 83,506
Common stock 82,853 86,070 86,364 80,041
Outstanding warrants - 372 - 1,090
Outstanding options 2,144 2,928 - 3,209
Conversion of convertible debt
into common stock - 826 - 5,744
Fully diluted weighted average
common shares 84,997 90,196 86,364 90,084
Primary earnings (loss)
per share 0.21 0.18 (0.16) 0.55
Fully diluted earnings (loss)
per share 0.21 0.18 (0.16) 0.52
</TABLE>
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
October 12, 1996 and the related consolidated statements of
operations and cash flows for the twelve and thirty-six weeks
ended October 12, 1996 and October 14, 1995. These financial
statements are the responsibility of the Corporation's
management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such consolidated financial
statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of General
Nutrition Companies, Inc. and subsidiaries as of February 3,
1996, 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 March 21, 1996, 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 3, 1996 is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it is derived.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
November 22, 1996
November 22, 1996
General Nutrition Companies, Inc.
921 Penn 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 thirty-six
weeks ended October 12, 1996 and October 14, 1995, as indicated
in our report dated November 22, 1996; because we did not perform
an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which was
included in your Quarterly Report on Form 10-Q for the quarter
ended October 12, 1996, is incorporated by reference in
Registration Statement Nos. 33-58096, 33-68590, 33-93370 and 333-
0128 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
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<PERIOD-END> OCT-12-1996
<CASH> 930000
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<RECEIVABLES> 49955000
<ALLOWANCES> 0
<INVENTORY> 184375000
<CURRENT-ASSETS> 260395000
<PP&E> 157296000
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<CURRENT-LIABILITIES> 158190000
<BONDS> 310379000
0
0
<COMMON> 907000
<OTHER-SE> 244607000
<TOTAL-LIABILITY-AND-EQUITY> 716787000
<SALES> 674539000
<TOTAL-REVENUES> 674539000
<CGS> 417707000
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<OTHER-EXPENSES> 233947000
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<INTEREST-EXPENSE> 10761000
<INCOME-PRETAX> 12124000
<INCOME-TAX> 25955000
<INCOME-CONTINUING> (13831000)
<DISCONTINUED> 0
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<NET-INCOME> (13831000)
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