<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the twelve weeks ended May 1, 1999.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 01-19592
GENERAL NUTRITION COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3056351
(state or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
300 Sixth Avenue
Pittsburgh, Pennsylvania 15222
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (412) 288-4600
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
As of June 4, 1999, the number of shares outstanding of the registrant's
common stock was 67,885,001.
<PAGE>
TABLE OF CONTENTS
Page
----------
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statement of Earnings and
Comprehensive Income 3
Condensed Consolidated Statement of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5 - 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 13
Item 3 Quantitative and Qualitative Disclosure About Market Risk 13
Part II Other Information
Item 1 Legal Proceedings 14
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
May 1, February 6,
1999 1999
-------------------- -------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Receivables, net $ 97,204 $ 98,926
Inventories 299,413 294,325
Deferred taxes 14,776 17,617
Prepaid income taxes - 4,071
Other current assets 18,157 14,625
-------------------- -------------------
Total current assets 429,550 429,564
Note due from related parties 18,118 28,526
Property, plant, and equipment, net 282,023 275,473
Other assets 45,058 52,549
Deferred financing fees, net of accumulated
amortization of $4,196 and $3,889 2,725 3,032
Goodwill, net of accumulated amortization of
$77,400 and $74,425 339,478 338,842
==================== ===================
$ 1,116,952 $ 1,127,986
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 142,382 $ 121,386
Accrued salaries, wages, vacations and related taxes 27,955 23,009
Accrued income taxes 5,511 -
Other current liabilities 55,831 73,404
Long-term debt, current portion 518 623
-------------------- -------------------
Total current liabilities 232,197 218,422
Long-term debt 757,280 796,877
Deferred taxes 4,886 7,771
Commitments and contingencies
Shareholders' Equity:
Common stock, $.01 par value: 679 677
Authorized 200,000,000 shares, issued and
outstanding, 67,857,847 shares at May 1, 1999
and 67,753,329 shares at February 6, 1999
Additional paid-in capital 1,452 -
Stock options outstanding 7,025 7,040
Subscriptions receivable (4,204) (3,804)
Accumulated other comprehensive loss (484) (346)
Accumulated earnings 118,121 101,349
-------------------- -------------------
122,589 104,916
-------------------- -------------------
$ 1,116,952 $ 1,127,986
==================== ===================
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
<PAGE>
GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings and Comprehensive Income
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
12 Weeks Ended
-----------------------------------
May 1, April 25, 1998
1999
----------------- ----------------
<S> <C> <C>
Net revenue $ 336,357 $ 327,617
Cost of sales, including costs of warehousing,
distribution and occupancy 222,088 195,852
Selling, general and administrative 75,844 77,572
----------------- ----------------
Operating earnings 38,425 54,193
Interest expense, net 11,802 5,259
----------------- ----------------
Earnings before income taxes 26,623 48,934
Income taxes 9,851 18,696
----------------- ----------------
Net earnings 16,772 30,238
Other comprehensive loss:
Foreign currency translation adjustment, net (138) (51)
----------------- ----------------
Comprehensive income $ 16,634 $ 30,187
================= ================
Basic earnings per share $ 0.25 $ 0.37
================= ================
Basic weighted average common shares 67,842 82,424
================= ================
Diluted earnings per share $ 0.25 $ 0.36
================= ================
Diluted weighted average common shares 68,256 84,700
================= ================
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
<PAGE>
GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
12 Weeks Ended
-----------------------------------
May 1, April 25,
1999 1998
---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 16,772 $ 30,238
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 15,124 12,189
Amortization of deferred financing fees 307 271
Loss on disposal of fixed assets 111 -
Increase in deferred taxes (44) -
Other (1) 1
Change in operating assets and liabilities, net of acquisitions:
Decrease (increase) in receivables 2,611 (9,020)
Increase in inventories (4,461) (30,331)
Decrease (increase) in other assets 121 (1,302)
Increase in accrued taxes 5,511 14,500
(Decrease) increase in accounts payable and accrued liabilities
(15,002) 6,897
Decrease in other working capital items 3,550 3,420
---------------- -----------------
Total adjustments 7,827 (3,375)
---------------- -----------------
Net cash provided by operating activities 24,599 26,863
---------------- -----------------
Cash flows from investing activities:
Capital expenditures (17,988) (27,115)
(Increase) decrease in franchisee notes receivable (2,006) 580
Payments for franchise store acquisitions (4,943) (28,766)
Net repayments (advances) on related party loan and investment in
related party 18,778 (1,140)
---------------- -----------------
Net cash used in investing activities (6,159) (56,441)
---------------- -----------------
Cash flows from financing activities:
Net (repayments) borrowings on revolving credit facility (39,500) 20,800
Increase (decrease) in book balance bank overdraft 20,360 (3,864)
Decrease in capital lease obligations (202) (331)
Net proceeds from issuance of common stock 1,039 8,807
Net proceeds from sale of put options - 4,218
Decrease (increase) in deferred financing fees 1 (1)
---------------- -----------------
Net cash (used in) provided by financing activities (18,302) 29,629
Effect of exchange rate changes on cash (138) (51)
---------------- -----------------
Net change in cash - -
Beginning balance, cash - -
================ =================
Ending balance, cash $ - $ -
================ =================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 14,018 $ 3,940
Income taxes $ 248 $ 3,959
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
<PAGE>
GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Reporting. In the opinion of General Nutrition Companies, Inc.
(the "Company"), the information furnished includes all adjustments
necessary for fair presentation of the consolidated financial position of
the Company as of May 1, 1999 and February 6, 1999 and the results of
operations for the twelve weeks ended May 1, 1999 and April 25, 1998. All
such adjustments are of a normal and recurring nature.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been either condensed or omitted. These
consolidated financial statements should be read in conjunction with the
financial statements and footnotes included in the Company's 1998 Annual
Report on Form 10-K for the fiscal year ended on February 6, 1999 filed
with the Securities and Exchange Commission. The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries after the elimination of intercompany balances and
transactions. The results of operations and cash flows for the twelve weeks
ended May 1, 1999 and April 25, 1998 are not necessarily indicative of the
operating results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. New Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value, with the
potential effect on operations dependent upon certain conditions being met.
The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management is currently in the process of
evaluating what impact, if any, the adoption of the statement will have on
its financial position or results of operations when adopted.
3. Cash. The Company utilizes a cash management system under which typically a
book balance cash overdraft exists for the Company's primary disbursement
accounts. This overdraft represents uncleared checks in excess of cash
balances in bank accounts. The Company's funds are borrowed on an as needed
basis to pay for clearing checks. At May 1, 1999 and February 6, 1999, cash
overdrafts of $22.4 million and $2.1 million, respectively, were included
in accounts payable. At May 1, 1999, the Company had $22.7 million
available on its revolving credit facility after excluding $2.7 million
restricted for letters of credit.
4. Reclassifications. Certain amounts reported in previously issued financial
statements have been reclassified to conform to the 1999 presentation.
5. Other Comprehensive Loss. Other comprehensive loss is shown net of income
taxes. The income tax benefit related to items of other comprehensive loss
were $0.08 million and $0.05 million for the twelve weeks ended May 1, 1999
and April 25, 1998, respectively.
<PAGE>
6. Earnings Per Share. Basic earnings per common share are computed based on
the weighted average common shares outstanding. Diluted earnings per common
share are computed based on the weighted average common shares outstanding
plus additional shares assumed to be outstanding to reflect the dilutive
effect of common stock equivalents. The following table sets forth the
computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
12 Weeks Ended
------------------------------------------
May 1, April 25,
1999 1998
-------------------- --------------------
(in thousands, except per share data)
<S> <C> <C>
Net earnings available for common shares $ 16,772 $ 30,238
==================== ====================
Basic weighted average common shares 67,842 82,424
==================== ====================
Basic earnings per share $ 0.25 $ 0.37
==================== ====================
Basic weighted average common shares 67,842 82,424
Shares issuable from assumed conversion of dilutive
stock options and exercise of put options 414 2,276
==================== ====================
Diluted weighted average common shares 68,256 84,700
==================== ====================
Diluted earnings per share $ 0.25 $ 0.36
==================== ====================
</TABLE>
7. Legal Proceedings. The Company and/or one of its subsidiaries (the "GNC
Companies") are currently named as defendants in approximately 7 lawsuits
in state and federal courts alleging damages arising from the ingestion of
products containing manufactured L-Tryptophan that were processed and
distributed by the GNC Companies and other non-related companies prior to
1990. These lawsuits are all that remain of over 400 such actions against
the GNC Companies and the Company believes that like all that were resolved
previously, the remaining cases will be resolved at no cost to the Company.
The cases are being vigorously defended pursuant to a joint defense
agreement (the "Agreement") among Showa Denko America ("SDA") and numerous
parties in the nutritional supplement industry who manufactured, processed,
sold, distributed or bottled L-Tryptophan. SDA's parent, SHOWA Denko
("SDK"), was the manufacturer of the L-Tryptophan that plaintiffs allege
caused their injuries. Pursuant to the Agreement, SDA has agreed to pay all
legal fees incurred by the GNC Companies in the defense of these claims and
to indemnify the GNC Companies against liability.
By separate agreement, SDK has unconditionally and irrevocably guaranteed
all obligations of SDA under the Agreement. In addition, the GNC Companies,
with the other signatories to the Agreement, are beneficiaries of a $20
million letter of credit delivered to secure SDA's performance of its
obligations.
The Agreement does not indemnify the GNC Companies against injuries
proximately caused by them or against punitive, exemplary or other damages
attributable to their intentional misconduct. Several of the pending
actions seek such damages. The GNC Companies believe they have reasonable
defenses to such claims. The GNC Companies also believe that they are
entitled to indemnification or contribution from other parties to the
pending actions but, pursuant to the Agreement, are not pursuing those
claims at this time.
In the unlikely event that the benefit of the Agreement, the guaranty by
SDK and letter of credit were to be unavailable, the GNC Companies have
product liability insurance which they believe provides coverage for the
L-Tryptophan product claims. The damages sought by the pending actions
<PAGE>
could exceed such coverage in the unlikely event that damages were to be
awarded solely against the GNC Companies and no indemnification or
contribution by other parties was awarded or available. Although the
outcome of litigation is uncertain, management of the Company, upon
consultation with counsel, believes that the Company will not be required
to make any material payments in connection with the remaining actions, and
no provisions have been made in the consolidated financial statement for
any such possible loss.
On June 24, 1996, a putative class action, Lavalla v. Lee et al, C.A. No.
15080, was commenced against the Company and two directors and shareholders
in the Court of Chancery of the State of Delaware, Newcastle County,
alleging violations of the federal securities laws arising out of the
Prospectus and Registration Statement (the "Prospectus") for a public
offering of common stock of the Company which took place on February 7,
1996 (the "Public Offering"). The action was dismissed without prejudice on
December 29, 1997 pursuant to the parties' stipulation. The named
plaintiff, Gaetan Lavalla, subsequently became a named plaintiff in Klein
et al v. General Nutrition Companies, Inc. et al, Civil Action No. 96-1455,
another putative class action filed on August 2, 1996, in the United States
District Court for the Western District of Pennsylvania. In Klein,
plaintiffs asserted that the Company is liable for violations of Sections
11 and 12(a) of the Securities Act of 1933 and Section 1-501(a) of the
Pennsylvania Securities Act, arising out of allegedly false and misleading
statements in the Prospectus, and for violations of Section 10(b) of the
Securities Exchange Act of 1934 and for negligent misrepresentation arising
out of allegedly false and misleading public statements during the period
from the Public Offering through May 28, 1996. Plaintiffs also alleged that
certain officers, directors and shareholders of the Company, as well as the
underwriters for the Public Offering, are liable for other violations of
the federal and state securities laws and for negligent misrepresentation.
Defendants moved to dismiss the Complaint on December 2, 1996 and
plaintiffs subsequently filed an Amended Complaint dated March 21, 1997,
which among other things, added Gaetan Lavalla as a named plaintiff. On
March 30, 1998, the Court granted the motions of all defendants to dismiss
the Amended Complaint with prejudice. On April 20, 1998, the plaintiffs
filed a Notice of Appeal with the United States Court of Appeals for the
Third Circuit. The Company disputes the allegations contained in the
complaint and intends to defend the action vigorously. The appeal has been
fully briefed and was argued on December 2, 1998. The appeal has not yet
been decided.
The Company is presently engaged in various other legal actions and
governmental proceedings, and, although ultimate liability cannot be
determined at the present time, the Company is currently of the opinion
that the amount of any such liability from these other actions and
proceedings when taking into consideration the Company's product liability
coverage, will not have a material adverse impact on its financial
position, results of operations or liquidity.
8. Inventories. Inventories consist of the following:
<TABLE>
<CAPTION>
May 1, February 6,
1999 1999
----------------- -----------------
(in thousands)
<S> <C> <C>
Product ready for sale $ 253,302 $ 245,403
Unpackaged bulk products and raw materials 42,887 45,485
Packaging supplies 3,224 3,437
================= =================
$ 299,413 $ 294,325
================= =================
</TABLE>
9. Supplemental Cash Flow Information. The Company extended net loans to
executives of $0.2 million during the twelve weeks ended May 1, 1999
related to the 1996 Management Stock Purchase Plan.
<PAGE>
10. Business Segment Information. Effective February 6, 1999, the Company
adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Segment net revenues and operating earnings for the
twelve week periods ended May 1, 1999 and April 25, 1998, consist of the
following:
<TABLE>
<CAPTION>
Manufacturing/Wholesale Corporate/ Consolidated
Retail Franchising Other Totals
--------------- ----------------- -------------- ------------- ----------------
(in thousands)
May 1, 1999
<S> <C> <C> <C> <C> <C>
Net revenue $ 245,637.1 $ 27,618.4 $ 63,101.8 $ - $ 336,357.3
Operating earnings 23,218.6 9,254.9 15,483.7 (9,532.2) 38,425.0
April 25, 1998
Net revenue $ 240,443.3 $ 30,261.7 $ 56,912.0 $ - $ 327,617.0
Operating earnings 35,149.8 14,280.3 13,038.8 (8,276.3) 54,192.6
</TABLE>
(a) For all periods presented, segment amounts, when aggregated, agree to the
Company's consolidated totals. Intersegment sales for
Manufacturing/Wholesale are eliminated in consolidation of net revenues.
(b) Intersegment sales from Manufacturing/Wholesale totaled $44.4 million and
$58.4 million for the twelve weeks ended May 1, 1999 and April 25, 1998,
respectively. These sales are eliminated in consolidation of Net Revenues.
11. Sale of Nature's fresh Northwest. As part of the Company's strategy to
re-focus on its core business, on April 22, 1999, the Company executed a
definitive agreement to sell its Nature's fresh Northwest gourmet grocery
store chain to Wild Oats Markets, Inc. The Company expects to complete this
transaction during the second quarter of 1999, and will reflect such
transaction in the Company's second quarter results.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains statements relating to future
results of the Company (including certain projections and business trends) that
are "forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of certain risks and uncertainties, including but not limited to
changes in political and economic conditions; demand for and market acceptance
of new and existing products, as well as other risks and uncertainties detailed
from time to time in the filings of the Company with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
Revenue
Consolidated revenue for the twelve week period ended May 1, 1999 was $336.4
million representing an increase of 2.7% from the same period in 1998. The
increase results primarily from an increased number of company-owned and
Franchise stores operating during the first quarter of 1999 versus 1998. At May
1, 1999 and April 25, 1998, there were 2,726 and 2,336 company-owned and 1,477
and 1,220 franchise stores in operation, respectively. Below is a comparison of
revenue for each of the Company's businesses for the twelve weeks ended:
<TABLE>
<CAPTION>
Consolidated Revenue
---------------------------------------------------------------
12 Weeks Ended
---------------------------------------------------------------
May 1, % of Total April 25, % of Total
1999 Revenue 1998 Revenue
------------- -------------- ------------- ----------------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Retail $ 245.7 73.0% $ 240.4 73.4%
Franchising 63.1 18.8% 56.9 17.4%
Manufacturing/Wholesale 27.6 8.2% 30.3 9.2%
============= ============== ============= ================
Total $ 336.4 100.0% $ 327.6 100.0%
============= ============== ============= ================
</TABLE>
Retail Revenue. Domestically, the Company's products are sold through
retail stores operating primarily under the General Nutrition Centers(R) and GNC
Live Wel(TM) store names ("GNC stores"). Internationally, products are sold
through retail outlets operating under the names of Health and Diet Centres(R)
and General Nutrition Centres(R) in the United Kingdom and Canada. Presented
below is a summary of retail revenue and corresponding store information:
<TABLE>
<CAPTION>
Retail Revenue for the Company-owned
12 Weeks Ended Store Locations as of
--------------------------------------------------------- -----------------------------
% of Retail % of Retail
May 1, April 25, May 1, April 25,
1999 Revenue 1998 Revenue 1999 1998
------------- ------------ ------------- -------------- ------------- ------------
(in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C>
GNC stores $ 218.6 89.0% $ 218.5 90.9% 2,552 2,204
Other domestic stores 16.6 6.7% 15.0 6.2% 28 44
International stores 10.5 4.3% 6.9 2.9% 146 88
============= ============ ============= ============ ============== =============
$ 245.7 100.0% $ 240.4 100.0% 2,726 2,336
============= ============ ============= ============ ============== =============
</TABLE>
Revenue at domestic GNC stores was flat for the twelve weeks ended May 1, 1999
when compared to the same period in 1998. For the same time period, comparable
store sales decreased 2% due to adjustments made to better align the Company's
pricing on certain sports nutrition and commodity vitamin product to address
competitive pressures and one less Gold Card Promotion. GNC had a net 56 new or
acquired store openings during the first quarter of 1999.
<PAGE>
The Company opened 7 new stores in Canadian markets during the twelve week
period ended May 1, 1999 for a total of 99. Additionally, the Company operates
44 stores in the United Kingdom.
As part of the Company's strategy to re-focus on its core business, on April 22,
1999, the Company executed a definitive agreement to sell its Nature's fresh
Northwest gourmet grocery store chain to Wild Oats Markets, Inc. The Company
expects to complete this transaction during the second quarter of 1999, and, as
such, will reflect the gain on the sale in the Company's second quarter results.
Franchising Revenue. Revenue at Franchising is generated primarily through
sales of products to franchises at wholesale prices and royalties on franchises'
retail sales. Additional revenue is generated through the initial franchise
license fee, sales of store fixtures and graphic materials, as well as interest
income earned for the financing of the purchase of the store including the
initial stock of inventory.
Consolidated revenue from Franchising increased by 10.9% to $63.1 million for
the twelve week period ended May 1, 1999 when compared with the same period in
1998. This increase is primarily the result of franchise stores comparable
stores sales increases of 2.1% and 18.4% at domestic and international franchise
stores, respectively.
The franchise program continued its growth potential as 22 more franchise stores
were awarded in the twelve week period ended May 1, 1999. There are now 265
domestic and 468 international stores awarded or part of development agreements
that have not yet been opened.
Presented below is the number of operating franchise stores and the number of
outstanding development agreements and franchises awarded but not yet open:
<TABLE>
<CAPTION>
Number of Operating Franchise Locations
May 1, 1999 April 25, 1998
------------------------------- -------------------------------
Franchise Locations Domestic International Domestic International
- -------------------------------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
At beginning of period 1,226 196 1,074 151
Added during period 64 12 67 7
Closed/converted during period 21 - 79 -
============= =============== ============= ===============
At end of period 1,269 208 1,062 158
============= =============== ============= ===============
Development agreements and stores
awarded but not yet open 265 468 436 409
</TABLE>
Manufacturing/Wholesale Revenue. Revenue at Manufacturing/Wholesale was
$72.0 million for the twelve weeks ended May 1, 1999. For the same time period,
revenue at the Company's South Carolina facility was $64.5 million or 89.6% of
total Manufacturing/Wholesale revenue.
<TABLE>
<CAPTION>
Manufacturing/Wholesale Revenue
--------------------------------------------------------
12 Weeks Ended
--------------------------------------------------------
May 1, % of April 25, % of
1999 Total 1998 Total
------------- ------------ ------------ ------------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Third party $ 27.6 38.3% $ 30.3 34.2%
Intercompany 44.4 61.7% 58.4 65.8%
============= ============ ============ ============
Total $ 72.0 100.0% $ 88.7 100.0%
============= ============ ============ ============
</TABLE>
<PAGE>
For the twelve weeks ended May 1, 1999, third party and intercompany sales
decreased by $2.7 million and $14.0 million, respectively. This decrease is due
primarily to the Company shifting production capacity from these areas to
production of inventory to meet the Company's obligations under the Rite Aid
Agreement. Intercompany sales are eliminated from the Company's consolidated
revenue.
Analysis of Consolidated Operating Costs and Expenses
<TABLE>
<CAPTION>
12 Weeks Ended
--------------------------------------
May 1, April 25,
1999 1998
------------------ ------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cost of sales, including costs of
warehousing, distribution and occupancy $ 222,088 $ 195,852
Percent of net revenue 66.0% 59.8%
Selling, general and administrative $ 75,844 $ 77,572
Percent of net revenue 22.5% 23.7%
Operating earnings $ 38,425 $ 54,193
Percent of net revenue 11.5% 16.5%
</TABLE>
Cost of sales including the cost of warehousing, distribution and occupancy
increased as a percentage of net revenue by 6.2% for the twelve weeks ended May
1, 1999 when compared with the same period in 1998. The increase was caused
primarily by lower margins due to adjustments made to better align the Company's
pricing on certain sports nutrition and commodity vitamin products to address
competitive pressures, as well as the Company's inability to leverage its
occupancy costs due to the negative comparable store sales.
Selling, general and administrative costs decreased $1.7 million for the twelve
weeks ended May 1, 1999 compared with the same period in 1998. The decrease was
caused primarily by two factors: the Company's sponsorship of the Winter Olympic
Games in February 1998 and the impact of the Company's strategic cost reduction
program which was completed during the third quarter of 1998.
Operating earnings decreased by $15.8 million for the twelve weeks ended May 1,
1999 when compared to the same period in 1998. This decrease was driven
primarily by lower margins as discussed above.
Non-Operating Expense Analysis
Interest expense for the quarter increased $6.5 million to $11.8 million, when
compared to the same period in 1998. The increase in interest expense was the
result of $379.0 million of net additional borrowings made since the first
quarter of 1998 to repurchase Company stock, fund the Company's franchise store
buyback program, and build the new manufacturing/distribution center in
Anderson, South Carolina and a higher average interest rate on the credit
facility which was 6.54% and 6.18% in the first quarter of 1999 and 1998,
respectively.
<PAGE>
Review of Financial Condition
Analysis of Liquidity and Capital Resources
During the twelve weeks ended May 1, 1999, the Company's cash flows from
operating, investing and financing activities as reflected in the Consolidated
Statements of Cash Flows is summarized as follows:
<TABLE>
<CAPTION>
12 Weeks Ended
-------------------------------------
May 1, April 25,
1999 1998
----------------- -----------------
(in thousands)
Cash provided by (used in):
<S> <C> <C>
Operating activities $ 24,599 $ 26,863
Investing activities (6,159) (56,441)
Financing activities (18,302) 29,629
Effect of exchange rate (138) (51)
changes on cash
================= =================
Net change in cash $ - $ -
================= =================
</TABLE>
Operating Activities. Cash provided by operating activities for the twelve
weeks ended May 1, 1999 was $24.6 million versus $26.9 million for the same
period in 1998, a decrease of $2.3 million. The decrease results primarily from
a $13.5 million decrease in net earnings. This decrease was driven by decreased
margins due to the Company revising its pricing strategy and only two Gold Card
promotions for the twelve weeks ended May 1, 1999 compared to three Gold Card
promotions for the twelve weeks ended April 25, 1998.
Investing Activities. The Company's primary investing activities have been
for capital expenditures made in connection with new store construction, the
remodeling of existing stores, and expansion requirements at the
manufacturing/distribution facilities. Capital expenditures for the twelve weeks
ended May 1, 1999 were $18.0 million, which results from spending at
Manufacturing/Wholesale related to the construction of a new manufacturing
facility/distribution center in Anderson, South Carolina. This amount
represented a decrease in capital expenditures for the twelve weeks ended May 1,
1999 of $9.1 million or 33.7% when compared to the same period in 1998 due
primarily to the Company's accelerated opening of new stores program in 1998
which was not repeated in 1999. The Company utilized $4.9 million for franchise
store acquisitions in the twelve weeks ended May 1, 1999 compared to $28.8
million in the same period in 1998, as a result of an accelerated buyback
program of existing franchise store locations in 1998. Additionally, the Company
received a $21.3 million payment on a note receivable from a related party and
made advances of $2.5 million to an additional related party during the twelve
weeks ended May 1, 1999.
Financing Activities. Cash provided by financing activities decreased $47.9
million for the twelve weeks ended May 1, 1999 versus the same period in 1998.
During the first quarter of 1999, the Company repaid a net $39.5 million on its
credit facility while during the first quarter of 1998, the Company borrowed a
net $20.8 million on its line of credit facility, primarily to fund the increase
in capital expenditures and franchise store acquisitions. Additionally, during
the first quarter of 1999, the Company's cash overdraft position increased by
$24.2 million over the first quarter of 1998 and during the first quarter of
1998, the Company received proceeds of $4.2 million through the sale of put
options. At May 1, 1999, the Company had $22.7 million available on its
revolving credit facility after excluding $2.7 million restricted for letters of
credit.
Year 2000
Year 2000. Reference is made to the Company's explanation of its potential
exposures that could result from the failure of the Company, or of its
subsidiaries, customers or suppliers, or of governmental bodies, to prepare for
so-called Year 2000 (Y2K) problems as discussed on pages 19 and 20 of its 1998
Form 10-K Annual Report. The Company's management believes the explanation of
potential exposures continues to be appropriate.
<PAGE>
The Company is continuing its ongoing efforts to identify, remediate and test
their systems, and consider contingency plans to deal with certain Y2K issues in
the event that remediation efforts by themselves or others prove unsuccessful.
The Company has used, and will continue to use, principally internal resources
for Y2K modifications. Management currently believes that the total cost
associated with required modifications to become Y2K compliant will not have a
material adverse impact on its business, results of operations, liquidity or
financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The analysis of market risks presented on page 21 of the Company's 1998 Annual
Report on Form 10-K is not updated here inasmuch as management believes that
there has not been any significant changes in such exposures. The Company's
primary significant market risk exposure continues to be interest rate risk.
<PAGE>
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the matters disclosed or
incorporated by reference in Part I Item 3 LEGAL PROCEEDINGS, of the
Company's Annual Report on Form 10-K for the fiscal year ended
February 6, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(23) Interim review report of the Company's independent accountants,
Deloitte & Touche LLP, for the fiscal quarter ended May 1, 1999
(23.1) Letter in lieu of consent of the Company's independent
accountants, Deloitte & Touche LLP, for the fiscal quarter ended
May 1, 1999 (27) Financial Data Schedule
No current reports on Form 8-K were filed during the current fiscal
quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL NUTRITION COMPANIES, INC.
By: /s/ Edwin J. Kozlowski
Edwin J. Kozlowski
Executive Vice President, Chief Financial
Officer, and Principal Accounting Officer
DATE: June 10, 1999
<PAGE>
EXHIBIT 23
INDEPENDENT ACCOUNTANTS' REPORT
To The Board of Directors and Shareholders of
General Nutrition Companies, Inc.
Pittsburgh, Pennsylvania
We have reviewed the accompanying consolidated balance sheet of General
Nutrition Companies, Inc. and subsidiaries as of May 1, 1999, the related
consolidated statements of earnings and comprehensive income and cash flows for
the twelve weeks ended May 1, 1999 and April 25, 1998. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of General Nutrition Companies, Inc.
and subsidiaries as of February 6, 1999, and the related consolidated statements
of earnings and comprehensive income, stockholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated March 3,
1999 (April 22, 1999 as to Note 19 to the consolidated financial statements), we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of February 6, 1999 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
May 17, 1999
<PAGE>
EXHIBIT 23.1
June 10, 1999
General Nutrition Companies, Inc.
300 Sixth Avenue
Pittsburgh, Pennsylvania
Dear Sirs:
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of General Nutrition Companies, Inc. and subsidiaries for the twelve
weeks ended May 1, 1999 and April 25, 1998, as indicated in our report dated May
17, 1999; because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which was included in your
Quarterly Report on Form 10-Q for the quarter ended May 1, 1999, is incorporated
by reference in Registration Statement Nos. 33-58096, 33-68590, 33-93370,
333-00128, and 333-21397 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
<PAGE>
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