SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the twelve weeks ended July 18, 1998.
OR
[ ] Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 01-19592
GENERAL NUTRITION COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3056351
(state or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
300 Sixth Avenue 15222
Pittsburgh, Pennsylvania (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code:
(412) 2884600
Indicate by a check mark whether the registrant (1) has
filed all reports required to be filed by section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X No ____
As of August 19, 1998, the number of shares outstanding of
the registrant's common stock was 73,303,005.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
July 18, January 31,
1998 1998
(unaudited)
ASSETS
Current Assets:
Receivables, net $ 84,035 $ 75,274
Inventories 286,079 244,196
Deferred taxes 13,177 14,190
Other current assets 12,636 29,305
Total current assets 395,927 362,965
Note due from related parties 24,706 21,960
Property, plant, and equipment, net 246,757 207,975
Other assets 40,050 33,895
Deferred financing fees, net of
accumulated amortization of
$3,188 and $2,646 3,182 3,710
Goodwill, net of accumulated
amortization of $67,599 and $62,327 329,822 303,433
$ 1,040,444 $ 933,938
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 110,347 $ 126,905
Accrued salaries, wages, vacations and 21,297 23,542
related taxes
Accrued income taxes - 4,825
Other current liabilities 66,546 65,392
Accrued treasury stock purchase 35,750 -
Long-term debt, current portion 967 940
Total current liabilities 234,907 221,604
Long-term debt 465,625 357,408
Deferred taxes 3,065 4,214
Commitments and contingencies
Put options 44,555 -
Shareholders' Equity:
Common stock, $.01 par value: 802 819
Authorized 200,000,000 shares, issued
and outstanding, 80,199,602 shares at
July 18, 1998 and 81,930,801 shares at
January 31, 1998
Additional paid-in capital 97,397 171,224
Stock options outstanding 7,066 7,693
Subscriptions receivable (3,997) (3,598)
Accumulated earnings 233,112 174,892
Accumulated other comprehensive income
(loss) (211) (318)
334,169 350,712
Put options (41,877) -
292,292 350,712
$ 1,040,444 $ 933,938
Notes to Consolidated Financial Statements are an integral part
of these statements.
GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings and Comprehensive Income
(in thousands, except per share data)
(unaudited)
12 Weeks Ended 24 Weeks Ended
July 18, July 19, July 18, July 19,
1998 1997 1998 1997
Net revenue $ 327,949 $ 265,604 $ 655,566 $ 538,663
Cost of sales, including
costs of warehousing,
distribution and
occupancy 201,545 161,495 397,398 327,875
Selling, general and
administrative 74,983 61,036 152,555 123,335
Operating earnings 51,421 43,073 105,613 87,453
Interest expense, net 6,271 5,540 11,530 10,657
Earnings before income taxes
and minority interest 45,150 37,533 94,083 76,796
Income taxes 17,167 14,593 35,863 29,997
Minority interest - (114) - (114)
Net earnings $ 27,983 $ 23,054 $ 58,220 $ 46,913
Other comprehensive income
(loss):
Foreign currency
translation
adjustment, net 158 (82) 107 (321)
Other comprehensive
income (loss), net 158 (82) 107 (321)
Comprehensive income $ 28,141 $ 22,972 $ 58,327 $ 46,592
Basic earnings per share $ 0.34 $ 0.29 $ 0.71 $ 0.58
Basic weighted average
common shares 81,474 80,520 81,943 80,824
Diluted earnings per share $ 0.34 $ 0.28 $ 0.69 $ 0.57
Diluted weighted average
common shares 83,219 82,453 83,945 82,646
Notes to Consolidated Financial Statements are an integral part of
these statements.
GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
24 Weeks Ended
July 18, July 19,
1998 1997
Cash flows from operating activities:
Net earnings $ 58,220 $ 46,913
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation and amortization 24,962 20,370
Amortization of deferred financing fees 542 475
Compensation expense - 289
(Increase) decrease in deferred taxes (136) 16
Other 178 (338)
Change in operating assets and
liabilities:
Increase in receivables (8,512) (4,575)
Increase in inventories (36,733) (9,189)
Increase in other assets (1,309) (971)
(Decrease) increase in accrued taxes (4,825) 1,497
Increase (decrease) in accounts payable
and accrued liabilities 4,532 (7,669)
Decrease in other working capital items 14,761 7,565
Total adjustments (6,540) 7,470
Net cash provided by operating activities 51,680 54,383
Cash flows from investing activities:
Capital expenditures (53,961) (20,995)
Proceeds from disposals 31 1,050
Increase in franchisee notes receivable (5,878) (1,386)
Payments for franchise store
acquisitions (41,302) (4,626)
Loan to related party (2,149) (6,698)
Net cash used in investing activities (103,259) (32,655)
Cash flows from financing activities:
Net borrowings on revolving credit
facility 108,800 4,700
Decrease in book balance bank overdraft (20,315) (2,033)
Decrease in capital lease obligations (556) (464)
Redemption of redeemable preferred
stock (27) (168)
Net proceeds from issuance of common
stock 10,003 10,302
Net proceeds from sale of put options 2,521 3,080
Net payments for treasury stock (48,941) (35,072)
Increase in deferred financing fees (13) (1,752)
Net cash provided by (used in) financing
activities 51,472 (21,407)
Effect of exchange rate changes on cash 107 (321)
Net change in cash - -
Beginning balance, cash - -
Ending balance, cash $ - $ -
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 10,793 $ 10,280
Income taxes $ 40,416 $ 30,998
Non-cash activities:
Purchase of treasury stock $ 35,750 $ -
Notes to Consolidated Financial Statements are an integral part of
these statements.
GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Reporting. In the opinion of General Nutrition
Companies, Inc. (the "Company"), the information furnished
includes all adjustments necessary for fair presentation of the
consolidated financial position of the Company as of July 18,
1998 and January 31, 1998, and the results of operations for
the twelve and twenty-four weeks ended July 18, 1998 and July
19, 1997. All such adjustments are of a normal and recurring nature.
Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with
generally accepted accounting principles have been either
condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial
statements and footnotes included in the Company's 1997 Annual Report
on Form 10-K for the fiscal year ended on January 31, 1998 filed with
the Securities and Exchange Commission. The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries after the elimination of intercompany balances and
transactions. The results of operations for the twelve and
twentyfour weeks ended July 18, 1998 and July 19, 1997, and the
cash flows for the twenty-four weeks ended July 18, 1998 and July
19, 1997, are not necessarily indicative of the operating results
for the full year.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. New Accounting Pronouncements. In June 1997, the FASB
issued Statement of Financial Accounting Standard ("SFAS") No.
130 "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting comprehensive income and its components,
some of which have been historically excluded from the Statement
of Earnings and recorded directly to the equity section of an entity's
statement of financial position. SFAS No. 130 also requires that the
cumulative balance of these items of other comprehensive income are
reported separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
This statement is effective for fiscal years beginning after December
15, 1997. The Company has adopted SFAS No. 130 in 1998 and has elected
to include the required items of other comprehensive income in its
Consolidated Statements of Earnings and Comprehensive Income.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way public companies report
selected information about operating segments in both quarterly
and annual financial statements to their shareholders. It also
established standards for related disclosures about products
and services, geographic areas, and major customers. SFAS No.
131 is effective for fiscal years beginning after December 15,
1997. This statement is not required to be applied to interim
financial statements in the initial year of its application. The
Company does not believe that SFAS No. 131 will have a significant effect
on the disclosures in it consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets of
liabilities in the statement of financial position and measure
those instruments at fair value, with the potential effect on
operations dependent upon certain conditions being met. The
statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company has not determined
what impact, if any, that adoption of SFAS No. 133 will have on
its financial position or results of operations.
3. Cash. The Company utilizes a cash management system under which
a book balance cash overdraft exists for the Company's primary
disbursement accounts. This overdraft represents uncleared
checks in excess of cash balances in bank accounts. The
Company's funds are borrowed on an as needed basis to pay for
clearing checks. At July 18, 1998 and January 31, 1998, cash
overdrafts of $12.0 million and $32.4 million, respectively, were
included in accounts payable. At July 18, 1998, the Company had
$231.9 million available on its revolving credit facility after
excluding $3.6 million restricted for letters of credit.
4. Reclassifications. Certain amounts reported in previously issued
financial statements have been reclassified to conform to the 1998
presentation.
5. Earnings Per Share. Basic earnings per common share are computed based
on the weighted average common shares outstanding. Diluted earnings
per common share are computed based on the weighted average common
shares outstanding plus additional shares assumed to be outstanding to
reflect the dilutive effect of common stock equivalents. The following
table sets forth the computation of basic and diluted earnings
per share:
12 Weeks Ended 24 Weeks Ended
July 18, July 19, July 18, July 19,
1998 1997 1998 1997
(in thousands, except per share data)
Net earnings available for
common shares $ 27,983 $ 23,054 $ 58,220 $ 46,913
Basic weighted average
common shares 81,474 80,520 81,943 80,824
Basic earnings per share $ 0.34 $ 0.29 $ 0.71 $ 0.58
Basic weighted average
common shares 81,474 80,520 81,943 80,824
Shares issuable from assumed
conversion of dilutive stock
options 1,745 1,933 2,002 1,822
Diluted weighted average
common shares 83,219 82,453 83,945 82,646
Diluted earnings per share $ 0.34 $ 0.28 $ 0.69 $ 0.57
For the twenty-four weeks ended July 18, 1998, there were 1,885,000 options
that were antidilutive and as such, were not included in the earnings per
share calculation above. There were no antidilutive options for either the
twelve weeks ended July 18, 1998 and July 19, 1997 or the twenty-four weeks
ended July 19, 1997.
6. Put Options. During the twenty-four weeks ended July 18, 1998, the
Company traded put options on a net 2.4 million shares of the Company's
common stock and recorded net proceeds of $2.5 million. The amount
related to the Company's potential obligation has been recorded as a
liability and reclassified from shareholders' equity to put options.
The remaining 1.4 million options outstanding at July 18, 1998 expire
during the current fiscal year and have exercise prices ranging from
$31.00 to $34.43 per share with an average price of $31.94.
7. Treasury Stock. During the second quarter of 1998, the Company's
Board of Directors authorized up to $300 million to be available
to purchase its common shares in the open market and the Company
purchased and retired 2.5 million shares of its stock at an
average price of $33.88 per share totaling an aggregate amount
of $84.7 million.
8. Legal Proceedings. Certain Company subsidiaries are named
as defendants in legal actions brought in federal and state
courts by certain parties seeking damages resulting from the
ingestion of certain products containing manufactured
LTryptophan. No provision has been made in the financial
statements for any loss that may result to the Company from
these actions. See Note 13 in the Company's Form 10-K for the
fiscal year ended January 31, 1998.
On June 24, 1996, a putative class action, Lavalla v. Lee et al,
C.A. No. 15080, was commenced against the Company and two directors
and shareholders in the Court of Chancery of the State of Delaware,
Newcastle County, alleging violations of the federal securities laws
arising out of the Prospectus and Registration Statement (the
"Prospectus") for a public offering of common stock of the
Company which took place on February 7, 1996 (the "Public
Offering"). The action was dismissed without prejudice on
December 29, 1997 pursuant to the parties' stipulation. The
named plaintiff, Gaetan Lavalla, subsequently became a named
plaintiff in Klein et al v. General Nutrition Companies, Inc.
et al, Civil Action No. 96-1455, another putative class action
filed on August 2, 1996, in the United States District Court
for the Western District of Pennsylvania. In Klein, plaintiffs
asserted that the Company is liable for violations of Sections
11 and 12(a) of the Securities Act of 1933 and Section 1501(a)
of the Pennsylvania Securities Act, arising out of allegedly
false and misleading statements in the Prospectus, and for
violations of Section 10(b) of the Securities Exchange Act of
1934 and for negligent misrepresentation arising out of
allegedly false and misleading public statements during the
period from the Public Offering through May 28, 1996.
Plaintiffs also alleged that certain officers, directors and
shareholders of the Company, as well as the underwriters for
the Public Offering, are liable for other violations of the
federal and state securities laws and for negligent
misrepresentation.
Defendants moved to dismiss the Complaint on December 2, 1996
and plaintiffs subsequently filed an Amended Complaint dated
March 21, 1997, which among other things, added Gaetan Lavalla
as a named plaintiff. On March 30, 1998 the Court granted the
motions of all defendants to dismiss the Amended Complaint with
prejudice. On April 20, 1998, the plaintiffs filed a Notice of
Appeal with the United States Court of Appeals for the Third Circuit.
The Company disputes the allegations contained in the complaint and
intends to defend the action vigorously.
The Company is presently engaged in various other legal actions and
governmental proceedings, and although ultimate liability cannot be
determined at the present time, the Company is currently of the
opinion that the amount of any such liability from these other
actions and proceedings when taking into consideration of the
Company's product liability coverage, will not have a material
adverse impact on its financial position, results of operations
or liquidity.
9. Inventories. Inventories consist of the following:
July 18, January 31,
1998 1998
(in thousands)
Product ready for sale $ 239,462 $ 201,155
Unpackaged bulk products
and raw materials 42,330 39,203
Packaging supplies 4,287 3,838
$ 286,079 $ 244,196
10. Subsequent Events. During the third quarter of 1998, the Company
purchased 6.9 million shares of its common stock in the open market
for approximately $162.5 million.
On August 10, 1998, the Company obtained a new thirty day credit
facility from members of its bank group in order to finance stock
repurchases and for general corporate purposes. The facility allows for
additional borrowings of up to $100 million with variable interest rates
based on prime plus add-on margins of 0.5% to 0.75% and/or Eurodollar
plus add-on margins of 1.5% to 2.0%. The maturity date of the facility
is July 1, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains statements relating
to future results of the Company (including certain projections and
business trends) that are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Actual results
may differ materially from those projected as a result of certain
risks and uncertainties, including but not limited to changes in
political and economic conditions; demand for and market acceptance
of new and existing products, as well as other risks and uncertainties
detailed from time to time in the filings of the Company with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
Revenue
Consolidated revenue for the twelve and twenty-four
week periods ended July 18, 1998 was $327.9 million and $655.6
million, respectively, representing increases of 23.5% and 21.7% from
the same periods in 1997. Below is a comparison of revenue for each of the
Company's businesses for the twelve and twenty-four week periods:
Consolidated Revenue
12 Weeks Ended 24 Weeks Ended
% of % of % of % of
July 18, Total July 19, Total July 18, Total July 19, Total
1998 Revenue 1997 Revenue 1998 Revenue 1997 Revenue
(millions) (millions) (millions) (millions)
Retail $ 233.1 71.1% $ 195.1 73.5% $ 473.6 72.2% $ 396.7 73.6%
Franchising 59.3 18.1% 50.5 19.0% 116.2 17.7% 104.2 19.4%
Manufacturing 35.5 10.8% 20.0 7.5% 65.8 10.1% 37.8 7.0%
Total $ 327.9 100.0% $ 265.6 100.0% $ 655.6 100.0% $ 538.7 100.0%
Retail Revenue. Domestically, the Company's products are
sold through retail stores operating primarily under the General
Nutrition Centers and GNC Live Well store names ("GNC stores"). The
Company also operates retail stores under the Nature's Fresh and Amphora
names. Internationally, products are sold through retail outlets
operating under the names of Health and Diet Centers and General
Nutrition Centers in the United Kingdom, Canada, and New Zealand.
Presented below is a summary of retail revenue and corresponding
store information:
Retail Revenue
12 Weeks Ended 24 Weeks Ended
% of % of % of % of
July 18, Retail July 19, Retail July 18, Retail July 19, Retail
1998 Revenue 1997 Revenue 1998 Revenue 1997 Revenue
(millions) (millions) (millions) (millions)
GNC stores $ 211.2 90.6% $ 175.4 89.9% $ 429.8 90.8% $ 356.9 90.0%
Other domestic
stores 14.1 6.0% 15.4 7.9% 29.1 6.1% 31.5 7.9%
International
stores 7.8 3.4% 4.3 2.2% 14.7 3.1% 8.3 2.1%
$ 233.1 100.0% $ 195.1 100.0% $ 473.6 100.0% $ 396.7 100.0%
Operating Company
Store Locations
July 18, July 19,
1998 1997
GNC stores 2,291 1,836
Other domestic stores 41 57
International stores 110 54
2,442 1,947
Revenue for GNC stores increased 20.5% and 20.4% for the twelve
and twenty-four week periods ended July 18, 1998 when compared with
the same periods in 1997, the result of 455 net new or acquired
store openings and favorable comparable store sales gains of 3.0%
and 4.3% for the twelve and twenty-four week period ended July 18,
1998, respectively. The Company's increase in comparable store sales
were generated from the success of its marketing efforts focusing on
the men's and women's brands as well as the continued demand for
sports nutrition and herbal products.
Revenue from the 6 Nature's Fresh natural grocery stores, comprised $11.9
million or 84.4% of the other domestic stores category for the twelve
weeks ended July 18, 1998 versus $10.5 million or 68.2% for the same
period last year.
The Company has accelerated the store openings in the Canadian
markets, opening 19 and 33 new stores during the twelve and
twenty-four weeks periods ended for a total open of 67 at July
18, 1998. Additionally, the Company opened 3 international stores
in the second quarter and now operates 41 stores in the United
Kingdom and 2 in New Zealand.
Franchising Revenue. Revenue from the franchise segment
increased 17.4% and 11.5% for the twelve and twenty-four week
periods ended July 18, 1998 compared with the same period in
1997. This increase is primarily the result of franchise stores
comparable store sales increase of 11.8% and 13.4% for the twelve
and twenty-four weeks ended July 18, 1998, respectively.
The franchise program continues its strong growth potential as
114 and 232 more franchise stores were awarded in the twelve and
twenty-four week periods ending July 18, 1998. There are now 438
domestic and 402 international stores awarded or part of
development agreements that have not yet been opened.
Revenue at Franchising is generated primarily through sales of
products to franchises at wholesale prices and royalties on
franchises' retail sales. Additional revenue is generated through
the initial franchise license fee, sales of stores, fixtures and
graphic materials, as well as interest earned on franchise
accounts receivable. Revenue from domestic and international
franchise locations were $59.3 million and $116.2 million for the
twelve and twentyfour week periods ended July 18, 1998. Revenue
for domestic and international franchise stores increased 12.4%
and 5.4%, respectively, for the twelve week period ended July 18, 1998
when compared with the same period in 1997. For the twenty-four
week period ended July 18, 1998 the domestic and international franchise
stores increased 14.0% and 5.6%, respectively, when compared with
the same period in 1997.
Presented below is the number of operating franchise stores and
the number of outstanding development agreements and the number
of franchises awarded but not yet open:
Number of Operating Franchise Locations
July 18, 1998 July 19, 1997
Franchise Locations Domestic International Domestic International
At beginning of period 1,062 158 1,086 127
Added during period 88 12 49 7
Closed or converted
during period (30) - (18) -
At end of period 1,120 170 1,117 134
Development agreements
and stores awarded but
not open 438 402 278 367
Manufacturing Revenue. Revenue at Manufacturing increased to
$89.1 million or 34.2% in the twelve weeks and $177.8 million or
32.0% in the twenty-four weeks ended July 18, 1998 when compared
with $66.4 million and $134.7 million for the same periods in 1997.
Revenue at the Company's South Carolina facility was $84.8 million
and $169.1 million or 95.2% and 95.1% of total Manufacturing revenue
for the twelve and twenty-four weeks ended.
Manufacturing Revenue
12 Weeks Ended 24 Weeks Ended
July 18, % of July 19, % of July 18, % of July 19, % of
1998 Total 1997 Total 1998 Total 1997 Total
(millions) (millions) (millions) (millions)
Third party $ 35.5 39.8% $ 20.0 30.1% $ 65.8 37.0% $ 37.8 28.1%
Intercompany 53.6 60.2% 46.4 69.9% 112.0 63.0% 96.9 71.9%
Total $ 89.1 100.0% $ 66.4 100.0% $ 177.8 100.0% $ 134.7 100.0%
Sales to third-party customers were $35.5 million and $65.8 million
for the twelve and twenty-four weeks ended July 18, 1998, an increase of
77.5% and 74.1% over the twelve and twenty-four weeks for the periods ended
July 19, 1997. The intercompany sales are eliminated from the Company's
consolidated revenue. The Company anticipates continuing sales increases
at Manufacturing over 1997 as a result of the acceleration of the store
opening program, both company-owned and franchised, and the continuing
demand from third-party customers.
Analysis of Consolidated Operating Costs and Expenses
12 Weeks Ended 24 Weeks Ended
July 18, July 19, July 18, July 19,
1998 1997 1998 1997
(in thousands) (in thousands)
Cost of sales, including
costs of warehousing,
distribution and
occupancy $ 201,545 $ 161,495 $ 397,398 $ 327,875
Percent of net revenue 61.4% 60.8% 60.6% 60.9%
Selling, general and
administrative $ 74,983 $ 61,036 $ 152,555 $ 123,335
Percent of net revenue 22.9% 23.0 23.3% 22.9%
Operating earnings $ 51,421 $ 43,073 $ 105,613 $ 87,453
Percent of net revenue 15.7% 16.2% 16.1% 16.2%
Cost of sales including the cost of warehousing, distribution and
occupancy increased as a percentage of net revenue by 0.6% in the twelve
weeks ended July 18, 1998 when compared with the same period in
1997. The increase was the result of higher third-party sales at
Manufacturing which carry lower margins than retail and a marketing
promotion at Retail on certain commodity vitamins and sports nutrition
products.
Selling, general and administrative costs increased $13.9 million
and $29.2 million in the twelve and twenty-four weeks ended July
18, 1998 compared with the same periods in 1997. The dollar
increase was due primarily to the increased number of company-owned
stores and the Company's first sponsorship of the Olympic Games in February
1998. Non-Operating Expense Analysis Interest expense for the quarter
increased $0.7 million to $6.3 million, when compared to the same
period in 1997. The increase in interest expense was the result
of $83.5 million of additional borrowings made since the second
quarter of 1997 to fund the Company's franchise store buyback
program, increased capital expenditures and the purchases of
Company stock.
Review of Financial Condition
Analysis of Liquidity and Capital Resources
During the twenty-four weeks ended July 18, 1998, the Company's
business segments continued to contribute to increased earnings
from continuing operations. The Company's cash flows from operating,
investing and financing activities as reflected in the Consolidated
Statements of Cash Flows is summarized as follows:
24 Weeks Ended
July 18, July 19,
1998 1997
(in thousands)
Cash provided by (used in):
Operating activities $ 51,680 $ 54,383
Investing activities (103,259) (32,655)
Financing activities 51,472 (21,407)
Effect of exchange rate 107 (321)
Net change in cash $ - $ -
Operating Activities. Cash provided by operating activities
for the twenty-four weeks ended July 18, 1998 was $ 51.7 million
versus $54.4 million for the same period in 1997, a decrease of
$2.7 million. The decrease was due primarily to the increase in
inventory, which was purchased from third parties in large volumes
at significantly discounted rates.
Investing Activities. The Company's primary investing activities
have been for capital expenditures made in connection with new store
construction, the remodeling of existing stores, and expansion
requirements at the manufacturing facilities. Capital expenditures for
the twenty-four weeks ended July 18, 1998 increased $33.0 million or
157.0% from the same period in 1997 due principally to the accelerated
opening of new company stores and increased spending at Manufacturing.
Additionally, the Company has spent $41.3 million for franchise store
acquisitions in the twenty-four weeks ended July 18, 1998 compared to
$4.6 million in the same period in 1997, as a result of an accelerated
buyback program of existing franchise store locations, which commenced
in the third quarter of 1997.
Financing Activities. Cash provided by financing activities
increased $72.9 million for the twenty-four weeks ended July 18,
1998 versus the same period in 1997. During 1998, the Company borrowed
$108.8 million on its line of credit facility, primarily to fund the
aforementioned increase in capital expenditures, franchise store
acquisitions and to purchase the Company's stock. Additionally in 1998,
the Company received net proceeds of $2.5 million by trading put options
giving the Company the potential obligation to purchase 2.4 million shares
of its own stock for $44.6 million. For the twenty-four weeks ended
July 18, 1998, the Company repurchased 2.5 million shares of its own
stock for $84.7 million with borrowed funds. At July 18, 1998, the
Company had $231.9 million available on its revolving credit facility after
excluding $3.6 million restricted for letters of credit. During the third
quarter of 1998, the Company purchased 6.9 million shares of its
common stock in the open market for approximately $162.5 million. The
Company also acquired a new credit facility for additional borrowings
of up to $100 million.
Year 2000. In 1996, the Company began the necessary modifications
to existing computer systems to meet the year 2000 requirements and
expects to complete these modifications early in 1999. Costs associated
with system modification are expensed as incurred and will not have a
material impact on the Company's results of operations nor its ability
to provide the necessary requirements for the Company's operations.
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
There have been no material developments in the matters disclosed
or incorporated by reference in Part I Item 3
LEGAL PROCEEDINGS, of the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1998.
ITEM 2.CHANGES IN SECURITIES
None
ITEM 3a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk. The company is exposed to certain market
risks from transactions that are entered into during the
normal course of business. The Company's policies do not
permit active trading of, or speculation in, derivative
financial instruments. The Company's primary market risk
exposure relates to interest rate risk. The Company
manages its interest rate risk in order to balance its
exposure between fixed and variable rates while attempting
to minimize its interest costs.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held in Pittsburgh,
Pennsylvania on June 25, 1998.
(b) The following directors were re-elected as Class I Directors for
three-year terms expiring in 2001 with the votes indicated:
WITHHELD
FOR AUTHORITY
David Lucas 71,321,057 1,274,855
W. Harrison Wellford 71,319,597 1,276,315
The remaining directors continue in office with their class and
term as follows:
- Class II with terms expiring in 2000
William E. Watts and Ronald L. Rosetti
- Class III with terms expiring in 1999
Jerry D. Horn and Thomas R. Shepherd
(c) In addition, at the meeting the following matters were voted upon
with the vote indicated below:
(i) A proposal to approve the Company's 1998 Management and
Director Stock Option Plan
FOR AGAINST ABSTAIN
66,763,726 5,583,478 148,708
(ii) A proposal to ratify the appointment of the Company's
independent auditors, Deloitte & Touche LLP, for the current
fiscal year
FOR AGAINST ABSTAIN
72,509,844 29,920 56,148
(d) Not applicable.
ITEM 5.OTHER INFORMATION
None
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
(23) Interim review report of the Company's independent
accountants, Deloitte & Touche LLP, for the fiscal
quarter ended July 18, 1998
(23.1) Letter in lieu of consent of the Company's independent
accountants, Deloitte & Touche LLP, for the fiscal quarter
ended July 18, 1998
(27) Financial Data Schedule
No current reports on Form 8K were filed during the
current fiscal quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.
GENERAL NUTRITION COMPANIES, INC.
By: /s/ Edwin J. Kozlowski
Edwin J. Kozlowski
Executive Vice President, Chief
Financial Officer, and Principal
Accounting Officer
DATE: August 21, 1998
EXHIBIT 23
INDEPENDENT ACCOUNTANTS' REPORT
To The Board of Directors and Stockholders of
General Nutrition Companies, Inc. Pittsburgh, Pennsylvania
We have reviewed the accompanying consolidated balance sheet of
General Nutrition Companies, Inc. and subsidiaries as of July 18,
1998, the related consolidated statements of earnings and
comprehensive income for the twelve and twenty-four weeks ended
July 18, 1998 and July 19, 1997, and the consolidated statements
of cash flows for the twenty-four weeks ended July 18, 1998 and
July 19, 1997. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such consolidated financial
statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of General
Nutrition Companies, Inc. and subsidiaries as of January 31,
1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated April 20, 1998, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of January 31, 1998,
and the related statements of earnings and comprehensive income
is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
August 3, 1998
EXHIBIT 23.1
August 21, 1998
General Nutrition Companies, Inc.
300 Sixth Avenue
Pittsburgh, Pennsylvania
Dear Sirs:
We have made a review, in accordance with standards
established by the American Institute of Certified Public
Accountants, of the unaudited interim financial information of
General Nutrition Companies, Inc. and subsidiaries for the twelve
and twenty-four weeks ended July 18, 1998 and July 19, 1997, as
indicated in our report dated August 3, 1998; because we did not
perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which was
included in your Quarterly Report on Form 10-Q for the quarter
ended July 18, 1998, is incorporated by reference in Registration
Statement Nos. 33-58096, 33-68590, 33-93370, 333-00128, and
333-21397 on Form S-8.
We also are aware that the aforementioned report, pursuant to
Rule 436(c) under the Securities Act of 1933, is not considered a
part of the Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant
within the meaning of Sections 7 and 11 of that Act.
Yours truly,
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27
GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES
Financial Data Schedule
(dollars in thousands, except per share data)
24 Weeks
Ended
Item Number July 18, 1998
fiscal year end February 6, 1999
period end date July 18, 1998
5-02(1) cash and cash items 0
5-02(2) marketable securities 0
5-02(3)(a)(1) notes and accounts receivable-trade 84,035
5-02(4) allowance for doubtful accounts 0
5-02(6) inventory 286,079
5-02(9) total current assets 395,927
5-02(13) property, plant and equipment 246,757
5-02(14) accumulated depreciation 0
5-02(18) total assets 1,040,444
5-02(21) total current liabilities 234,907
5-02(22) bonds, mortgages and similar debt 465,625
(L-T debt)
5-02(28) preferred stock-mandatory redemption 0
5-02(29) preferred stock-no mandatory redemption 0
5-02(30) common stock 802
5-02(31) other stockholders' equity 291,490
5-02(32) total liabilities and 1,040,444
stockholders' equity
5-03(b)1(a) net sales of tangible products 655,566
5-03(b)1 total revenue 655,566
5-03(b)2(a) cost of tangible goods sold 397,398
5-03(b)2 total costs and expenses 549,953
applicable to sales and revenue
5-03(b)3 other costs and expenses 0
5-03(b)5 provision for doubtful accounts and notes 0
5-03(b)(8) interest and amortization of debt 11,530
discount
5-03(b)(10) income before taxes and other items 94,083
5-03(b)(11) income tax expense 35,863
5-03(b)(14) income from continuing operations 58,220
5-03(b)(15) discontinued operations 0
5-03(b)(17) extraordinary items 0
5-03(b)(18) cumulative effect-changes in accounting 0
principles
5-03(b)(19) net income or loss 58,220
5-03(b)(20) earnings per share - Basic 0.71
5-03(b)(20) earnings per share - Diluted 0.69
</TABLE>
