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 10, 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) 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 10, 1998, the number of shares outstanding of the
registrant's common stock was 68,224,859.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
October 10, January 31,
1998 1998
----------- ----------
(unaudited)
ASSETS
Current Assets:
Cash $ 9,407 $ --
Receivables, net 76,205 75,274
Inventories 312,161 244,196
Deferred taxes 12,976 14,190
Other current assets 14,272 29,305
----------- ---------
Total current assets 425,021 362,965
Note due from related parties 25,442 21,960
Property, plant, and equipment, net 263,486 207,975
Other assets 41,276 33,895
Deferred financing fees, net of accumulated
amortization of $3,483 and $2,646 3,387 3,710
Goodwill, net of accumulated amortization of
$70,485 and $62,327 336,335 303,433
----------- ---------
$ 1,094,947 $ 933,938
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 126,184 $ 126,905
Accrued salaries, wages, vacations
and related taxes 24,245 23,542
Accrued income taxes 10,487 4,825
Other current liabilities 75,193 65,392
Long-term debt, current portion 895 940
----------- ---------
Total current liabilities 237,004 221,604
Long-term debt 755,997 357,408
Deferred taxes 3,215 4,214
Commitments and contingencies
Put options 15,906 --
Shareholders' Equity:
Common stock, $.01 par value: 682 819
Authorized 200,000,000 shares, issued and
outstanding, 68,203,105 shares at October
10, 1998 and 81,930,801 shares at
January 31, 1998
Additional paid-in capital -- 171,224
Stock options outstanding 7,066 7,693
Subscriptions receivable (3,997) (3,598)
Accumulated earnings 95,470 174,892
Accumulated other comprehensive loss (490) (318)
----------- ---------
98,731 350,712
Put options (15,906) --
----------- ---------
82,825 350,712
----------- ---------
$ 1,094,947 $ 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 36 Weeks Ended
----------------------- ----------------------
October 10, October 11, October 10, October 11,
1998 1997 1998 1997
---------- ---------- --------- ---------
Net revenue $ 304,652 $ 277,970 $ 960,217 $ 816,633
Cost of sales, including costs of warehousing,
distribution and occupancy 190,932 170,625 588,331 498,500
Selling, general and administrative 76,039 63,118 228,595 186,453
--------- --------- --------- ---------
Operating earnings 37,681 44,227 143,291 131,680
Interest expense, net 8,677 5,309 20,206 15,966
--------- --------- --------- ---------
Earnings before income taxes and minority interest 29,004 38,918 123,085 115,714
Income taxes 11,049 15,042 46,912 45,039
Minority interest -- (56) (1) (170)
--------- --------- --------- ---------
Net earnings 17,955 23,932 76,174 70,845
Other comprehensive loss:
Foreign currency translation adjustment, net (278) (521) (172) (833)
--------- --------- --------- ---------
Comprehensive income $ 17,677 $ 23,411 $ 76,002 $ 70,012
========= ========= ========= =========
Basic earnings per share $ 0.25 $ 0.30 $ 0.97 $ 0.88
========= ========= ========= =========
Basic weighted average common shares 72,473 81,040 78,788 80,896
========= ========= ========= =========
Diluted earnings per share $ 0.25 $ 0.29 $ 0.94 $ 0.86
========= ========= ========= =========
Diluted weighted average common shares 73,276 83,122 80,670 82,781
========= ========= ========= =========
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)
36 Weeks Ended
-------------------------
October 10, October 11,
1998 1997
---------- -----------
Cash flows from operating activities:
Net earnings $ 76,174 $ 70,845
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 38,406 30,421
Amortization of deferred financing fees 837 746
Loss (gain) on disposal of fixed assets 425 (54)
Decrease (increase) in deferred taxes 94 (4)
Compensation expense -- 289
Other 199 (170)
Change in operating assets and liabilities:
Decrease (increase) in receivables 87 (10,105)
Increase in inventories (61,535) (19,562)
Increase in other assets (2,207) (1,209)
Increase in accrued taxes 5,662 16,186
Increase in accounts payable and accrued
liabilities 40,584 14,795
Decrease in other working capital items 16,801 6,680
--------- ---------
Total adjustments 39,353 38,013
--------- ---------
Net cash provided by operating activities 115,527 108,858
--------- ---------
Cash flows from investing activities:
Capital expenditures (80,412) (39,155)
Proceeds from disposals 31 1,050
Increase in franchisee notes receivable (7,089) (2,417)
Payments for franchise store acquisitions (52,949) (14,522)
Loan to related party (2,886) (7,662)
--------- ---------
Net cash used in investing activities (143,305) (62,706)
--------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on revolving credit
facility 399,300 (31,200)
(Increase) decrease in book balance bank overdraft (32,362) 2,694
Decrease in capital lease obligations (756) (726)
Redemption of redeemable preferred stock (248) (184)
Net proceeds from issuance of common stock 10,446 15,150
Net proceeds from sale of put options 2,834 5,440
Stock subscription receivable (399) 331
Net payments for treasury stock (340,866) (35,072)
Increase in deferred financing fees (592) (1,752)
--------- ---------
Net cash provided by (used in) financing activities 37,357 (45,319)
Effect of exchange rate changes on cash (172) (833)
--------- ---------
Net change in cash 9,407 --
Beginning balance, cash -- --
--------- ---------
Ending balance, cash $ 9,407 $ --
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 19,592 $ 15,924
Income taxes $ 40,867 $ 31,130
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 October 10, 1998 and January 31, 1998, and the results of
operations for the twelve and thirty-six weeks ended October 10, 1998 and
October 11, 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
thirty-six weeks ended October 10, 1998 and October 11, 1997, and the cash
flows for the thirty-six weeks ended October 10, 1998 and October 11, 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 Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("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 balance sheet. 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 balance sheet. 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 its
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 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. As the Company is not currently
involved with derivative instruments or hedging activities, management
believes that adoption of SFAS No. 133 will not have a significant effect
on its financial position or results of operations.
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 January 31, 1998, a cash overdraft of
$32.4 million was included in accounts payable and at October 10, 1998, due
to the timing of cash disbursements, the Company maintained a cash balance
of $9.4 million. At October 10, 1998, the Company had $42.3 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 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 36 Weeks Ended
------------------------------- ----------------------------
October 10, October 11, October 10, October 11,
1998 1997 1998 1997
--------------- ------------- ------------- ------------
(in thousands, except per share data)
Net earnings available for common shares $ 17,955 $ 23,932 $ 76,174 $ 70,845
=============== ============= ============= ============
Basic weighted average common shares 72,473 81,040 78,788 80,896
=============== ============= ============= ============
Basic earnings per share $ 0.25 $ 0.30 $ 0.97 $ 0.88
=============== ============= ============= ============
Basic weighted average common shares 72,473 81,040 78,788 80,896
Shares issuable from assumed conversion of
dilutive stock options and exercise of put
options 803 2,082 1,882 1,885
--------------- ------------- ------------- ============
Diluted weighted average common shares 73,276 83,122 80,670 82,781
=============== ============= ============= ============
Diluted earnings per share $ 0.25 $ 0.29 $ 0.94 $ 0.86
=============== ============= ============= ============
6. Put Options. During the thirty-six weeks ended October 10, 1998, the
Company traded put options on a net 3.5 million shares of the Company's
common stock and recorded net proceeds of $2.8 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 0.5 million
options outstanding at October 10, 1998 expire during the current fiscal
year's fourth quarter and have an exercise price of $31.81 per share.
7. Treasury Stock. For the twelve weeks ended October 10, 1998, the Company
repurchased and retired 12 million shares of its own stock at an average
price of $21.35 per share. The total repurchased and retired for the
thirty-six weeks ended October 10, 1998 was 14.5 million shares at an
average price of $23.51 per share and an aggregate amount of $340.9
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 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 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 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 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:
October 10, January 31,
1998 1998
--------- ----------
(in thousands)
Product ready for sale $268,165 $201,155
Unpackaged bulk products and raw materials 40,357 39,203
Packaging supplies 3,639 3,838
-------- --------
$312,161 $244,196
======== ========
10. Credit Facility. On August 10, 1998, the Company acquired a new credit
facility from members of its bank group in order to finance stock
repurchases and for general corporate purposes. The facility allows
additional borrowings Company the option to borrow $200 million in $100
million increments of up to $100 million and bears interest at variable
rates based on prime plus add-on margins of .5% to .75% and/or Eurodollar
plus add-on margins of 1.5% to 2.0%. The maturity date of the facility is
July 1, 2002. Currently, under the original and above mentioned credit
agreements, the Company has the ability to acquire an additional $100
million credit facility.
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 thirty-six week periods ended October
10, 1998 was $304.7 million and $960.2 million, respectively, representing
increases of 9.6% and 17.6% from the same periods in 1997. 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 Ended 36 Weeks Ended
--------------------------------------------------- ---------------------------------------------------
October 10, % of Total October 11, % of Total October 10, % of Total October 11, % of Total
1998 Revenue 1997 Revenue 1998 Revenue 1997 Revenue
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(millions) (millions) (millions) (millions)
Retail $ 230.0 75.5% $ 198.6 71.4% $ 703.7 73.3% $ 595.2 72.9%
Franchising 53.0 17.4% 54.7 19.7% 169.1 17.6% 158.9 19.4%
Manufacturing 21.7 7.1% 24.7 8.9% 87.4 9.1% 62.5 7.7%
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 304.7 100.0% $ 278.0 100.0% $ 960.2 100.0% $ 816.6 100.0%
=========== =========== =========== =========== =========== =========== =========== ===========
Retail Revenue. Domestically, the Company's products are sold through
retail stores operating primarily under the General Nutrition Centers(R) and GNC
Live Well(TM) store names ("GNC stores"). The Company also operates retail
stores under the Nature's Fresh(TM) and Amphora(TM) names. 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, Canada,
and New Zealand. Presented below is a summary of retail revenue and
corresponding store information:
Retail Revenue
Operating Company
12 Weeks Ended 36 Weeks Ended Store Locations
------------------------------------------- ------------------------------------------- ---------------------
October % of October % of October % of October % of October October
10, Retail 11, Retail 10, Retail 11, Retail 10, 11,
1998 Revenue 1997 Revenue 1998 Revenue 1997 Revenue 1998 1997
--------- ---------- ---------- --------- --------- ---------- ---------- --------- --------- ----------
(millions) (millions) (millions) (millions)
GNC stores $ 206.4 89.7% $178.9 90.1% $ 636.2 90.4% $535.7 90.0% 2,395 1,908
Other domestic
stores 15.3 6.7% 14.9 7.5% 44.4 6.3% 46.3 7.8% 40 54
International
stores 8.3 3.6% 4.8 2.4% 23.1 3.3% 13.2 2.2% 131 61
--------- --------- ---------- --------- --------- ---------- ---------- --------- --------- ----------
$ 230.0 100.0% $198.6 100.0% $ 703.7 100.0% $595.2 100.0% 2,566 2,023
========= ========= ========== ========= ========= ========== ========== ========= ========= ==========
Revenue for GNC stores increased 15.4% and 18.8% for the twelve and thirty-six
week periods ended October 10, 1998, respectively, when compared with the same
periods in 1997, the result of 487 net new or acquired store openings and
favorable comparable store sales gains of 2.3% for the thirty-six week period
ended October 10, 1998. For the twelve week period ending October 10, 1998, the
comparable store sales decreased 1.6% when compared to the same period in 1997.
The primary reason for this comparable store sales decrease was a result of a
slowing in herb category sales as strong publicity and a media campaign in 1997
were not repeated in 1998. In addition, the Company revised its pricing
strategy, lowering prices on branded sports products and certain commidity
vitamins.
Revenue from the 6 Nature's Fresh natural grocery stores, comprised $13.4
million or 87.6% of the other domestic stores category for the twelve weeks
ended October 10, 1998 versus $10.4 million or 69.8% for the same period last
year. Comparable store sales for Nature's Fresh stores increased 8.1% and 11.2%
for the twelve and thirty-six week periods ended October 10, 1998, respectively,
when compared with the same periods in 1997.
The Company opened 18 and 51 new stores in Canadian markets during the twelve
and thirty-six week periods ended October 10, 1998, respectively, for a total of
85. Additionally, the Company opened 3 international stores in the third quarter
and now operates 46 stores in the United Kingdom and New Zealand. The Company is
reevaluating its international market strategy, and, with the exception of the
Canadian market, has no current plans for expansion.
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 stores, fixtures and graphic materials, as well
as interest earned on franchise accounts receivable.
Consolidated revenue from the franchise segment increased 6.4% for the
thirty-six week period ended October 10, 1998 compared with the same period in
1997. This increase is primarily the result of franchise stores comparable store
sales increase of 10.2% for the thirty-six weeks ended October 10, 1998. For the
twelve weeks ended October 10, 1998, revenue at Franchising decreased by $1.7
million when compared to the same period in 1997. The decrease was due to lower
comparable store sales in franchise stores of 4.2% and the impact of the
Company's franchise store repurchase program in 1997.
Revenue from domestic and international franchise locations were $53.0 million
and $169.1 million for the twelve and thirty-six week periods ended October 10,
1998. Comparable store sales for domestic and international franchise stores
increased 4.3% and 3.1%, respectively, for the twelve week period ended October
10, 1998 when compared with the same period in 1997. For the thirty-six week
period ended October 10, 1998 the domestic and international franchise
comparable store sales increased 10.7% and 4.7%, respectively, when compared
with the same period in 1997.
The franchise program continues its strong growth potential as 105 and 336 more
franchise stores were awarded in the twelve and thirty-six week periods ending
October 10, 1998. There are now 424 domestic and 436 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 the number of franchises awarded but not
yet open:
Number of Operating Franchise Locations
October 10, 1998 October 11, 1997
------------------------------- -------------------------------
Franchise Locations Domestic International Domestic International
- -------------------------------------- ------------- --------------- ------------- ---------------
At beginning of period 1,120 170 1,117 134
Added during period 64 5 65 5
Closed/converted during period (25) (2) (52) (1)
------------- --------------- ------------- ---------------
At end of period 1,159 173 1,130 138
============= =============== ============= ===============
Development agreements and stores
awarded but not yet open 424 436 302 396
Manufacturing Revenue. Revenue at Manufacturing was $65.5 million and
$243.3 million in the twelve and thirty-six weeks ended October 10, 1998.
Revenue at the Company's South Carolina facility was $61.3 million and $230.4
million or 93.6% and 94.7% of total Manufacturing revenue for the twelve and
thirty-six weeks ended.
Manufacturing Revenue
---------------------------------------------------------------------------------------------------------
12 Weeks Ended 36 Weeks Ended
--------------------------------------------------- ---------------------------------------------------
October October October October
10, % of 11, % of 10, % of 11, % of
1998 Total 1997 Total 1998 Total 1997 Total
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(millions) (millions) (millions) (millions)
Third party $ 21.7 33.1% $ 24.7 37.0% $ 87.4 35.9% $ 62.5 31.0%
Intercompany 43.8 66.9% 42.0 63.0% 155.9 64.1% 138.9 69.0%
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 65.5 100.0% $ 66.7 100.0% $ 243.3 100.0% $ 201.4 100.0%
=========== =========== =========== =========== =========== =========== =========== ===========
Sales to third-party customers were $21.7 million and $87.4 million for the
twelve and thirty-six weeks ended October 10, 1998. The intercompany sales are
eliminated from the Company's consolidated revenue. For the twelve week period
ended October 10, 1998, third party revenue at the Company's Greenville, South
Carolina facility decreased by 13.7% to $18.2 million, due primarily to
third-party customers delaying orders until the fourth quarter of fiscal 1998.
Analysis of Consolidated Operating Costs and Expenses
- -----------------------------------------------------
12 Weeks Ended 36 Weeks Ended
-------------------------------------- --------------------------------------
October 10, October 11, October 10, October 11,
1998 1997 1998 1997
------------------ ------------------ ------------------ -----------------
(in thousands) (in thousands)
Cost of sales, including costs of
warehousing, distribution and occupancy $ 190,932 $ 170,625 $ 588,331 $ 498,500
Percent of net revenue 62.6% 61.4% 61.3% 61.1%
Selling, general and administrative $ 76,039 $ 63,118 $ 228,595 $ 186,453
Percent of net revenue 25.0% 22.7% 23.8% 22.8%
Operating earnings $ 37,681 $ 44,227 $ 143,291 $ 131,680
Percent of net revenue 12.4% 15.9% 14.9% 16.1%
Cost of sales including the cost of warehousing, distribution and occupancy
increased as a percentage of net revenue by 1.2% in the twelve weeks ended
October 10, 1998 when compared with the same period in 1997. The increase was
caused primarily by a marketing promotion for certain sports nutrition products
and lower retail prices charged on certain commodity vitamins. The Company
expects to continue its current pricing strategies in the fourth quarter.
Selling, general and administrative costs increased $12.9 million and $42.1
million in the twelve and thirty-six weeks ended October 10, 1998, respectively,
compared with the same periods in 1997. For the twelve weeks ended October 10,
1998, the selling, general and administrative expenses increase of 2.3% of net
revenue when compared with the same period in 1997 was due primarily to the
decrease in comparable store sales of 1.6% and a one time severance charge of
$1.6 million. The increase in dollars in both the twelve and thirty-six weeks
ended October 10, 1998 when compared with the same periods in 1997 was primarily
due to the addition of new company-owned stores and increased advertising
expenditures.
Non-Operating Expense Analysis
Interest expense for the quarter increased $3.4 million to $8.7 million, when
compared to the same period in 1997. The increase in interest expense was the
result of $410.0 million of additional borrowings made since the third quarter
of 1997 to repurchase Company stock, fund the Company's franchise store buyback
program and increased capital expenditures.
Review of Financial Condition
Analysis of Liquidity and Capital Resources
During the thirty-six weeks ended October 10, 1998, 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 Ended
-------------------------------------
October 10, October 11,
1998 1997
----------------- -----------------
(in thousands)
Cash provided by (used in):
Operating activities $ 115,527 $ 108,858
Investing activities (143,305) (62,706)
Financing activities 37,357 (45,319)
Effect of exchange rate (172) (833)
changes on cash
----------------- -----------------
Net change in cash $ 9,407 $ -
================= =================
Operating Activities. Cash provided by operating activities for the
thirty-six weeks ended October 10, 1998 was $115.5 million versus $108.9 million
for the same period in 1997, a increase of $6.6 million. The increase was due
primarily to an increase in earnings as well as to favorable changes in the
Company's operating assets and liabilities.
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 thirty-six weeks ended October 10, 1998
increased $41.3 million or 105.4% from the same period in 1997 due principally
to the completion of a new Nature's Fresh prototype store, the accelerated
opening of new company stores, increased spending at Manufacturing related to
the expansion of the Greenville, South Carolina facility and the commencement of
construction of a new manufacturing facility/distribution center in Anderson,
South Carolina. Additionally, the Company utilized $52.9 million for franchise
store acquisitions in the thirty-six weeks ended October 10, 1998 compared to
$14.5 million in the same period in 1997, as a result of an accelerated buyback
program of existing franchise store locations, which commenced late in the third
quarter of 1997.
Financing Activities. Cash provided by financing activities increased $82.7
million for the thirty-six weeks ended October 10, 1998 versus the same period
in 1997. During 1998, the Company borrowed a net amount of $399.3 million on its
line of credit, primarily to repurchase the Company's stock and fund the
aforementioned increase in capital expenditures and franchise store
acquisitions. Additionally in 1998, the Company received net proceeds of $2.8
million by trading put options giving the Company the potential obligation to
purchase 3.5 million shares of its own stock for $118.8 million. As of October
10, 1998, the remaining potential obligation for the Company related to the puts
is 0.5 million shares at an aggregate of $15.9 million. For the thirty-six weeks
ended October 10, 1998, the Company repurchased, and subsequently retired, 14.5
million shares of its own stock for $340.9 million with borrowed funds. At
October 10, 1998, the Company had $42.3 million available on its revolving
credit facility after excluding $2.7 million restricted for letters of credit.
During the twelve weeks ended October 10, 1998, the Company acquired a new
credit facility allowing the Company the option to borrow $200 million in $100
million increments of which the Company borrowed $100 million. The Company chose
not to exercise its right to borrow the remaining $100 million and currently
expects cash flows from operating activities to be sufficient to fund current
operations.
Year 2000
The Year 2000 problem arises from the fact that many existing information
technology ("IT") hardware and software systems and non-information technology
("non-IT") products containing embedded microchip processors were originally
programmed to represent any date with six digits (e.g., 12/31/99), as opposed to
eight digits (e.g., 12/31/1999). Accordingly, problems may arise for many such
products and systems when attempting to process information containing dates
that fall after December 31, 1999. As a result, many such products and systems
could experience miscalculations, malfunctions or disruptions. Additionally,
such products and systems may experience miscalculations, malfunctions or
disruptions caused by other dates, such as September 9, 1999 (9/9/99), which was
a date traditionally used as a default date by computer programmers. This
problem is commonly referred to as the "Year 2000" problem, and the acronym"Y2K"
is commonly substituted for the phrase "Year 2000." Although the Company is
unable at this time to assess the possible impact on its results of operations,
liquidity or financial condition of any Y2K-related disruptions to its business
caused by the malfunctioning of any IT or non-IT system and products that it
uses or that third parties with which it has material relationships use,
management believes at the current time that the cost of remediating the
Company's internal Y2K problems will not have a material adverse impact upon its
business, results of operations, liquidity or financial condition.
The Company's State Of Readiness For Its Year 2000 Issues. As a result of the
Company's software upgrades and computer system purchases over the past few
years, a substantial number of the Company's computer systems should not have a
Y2K problem (i.e., are "Y2K-compliant") or have been warranted to be
Y2K-compliant by third-party vendors. The Company has created a task force (the
"Y2K Task Force"), that includes members from the Company's significant
operating areas. To date, the Y2K Task Force has implemented a program, the goal
of which is to assess the potential exposure of each such area to the Y2K
problem, which is the first phase of the Company's overall Y2K program, and, as
the second phase thereof, has designed a coordinated plan to determine whether
any such potential exposure would result in a problem that would require some
remediation. As each such area's Y2K problems are identified, the third phase
will be to formulate proposals to determine the best course of action to address
each such problem and to address each such problem, and contingency plans will
be developed, to the extent possible and necessary. The final phase of the
overall Y2K program will be both independent and coordinated testing to ensure
Y2K compliance in each operating area. The Company believes that the Y2K Task
Force has identified all material IT and non-IT systems owned or operated by the
Company that require a Y2K compliance review. The Y2K Task Force has the
responsibility for addressing any Y2K problems in either IT or non-IT systems.
All of the Company's IT systems, including its accounting and human resources,
are in the formulate proposals/testing phase. Testing for Y2K compliance has
already begun or has been planned for each such system and the Y2K Task Force
projects that testing of the Company's most critical IT systems will be
substantially completed by 1st quarter 1999. The Y2K Task Force has also
identified those third parties, such as software and hardware suppliers,
significant vendors and external file exchange system providers, whose Y2K
compliance or lack thereof may pose problems for the Company. Pursuant to the
Y2K Task Force's plan, inquiries have been sent to those third parties. The Y2K
Task Force estimates that it will receive initial responses to its inquiries
from all such third parties by 1st quarter 1999.
The Costs To Address The Company's Year 2000 Issues. The cost of purchases
allocated for hardware and software as well as all other expenditures will be
expensed as incurred or capitalized in accordance with the Company's fixed asset
policy. Although the Y2K task force has completed the first and second phases of
its overall Y2K program, the third and fourth phases, while substantially
complete, remain in process and, therefore, the estimate for direct costs may be
materially increased. The total cost associated with required modifications to
become Year 2000 compliant is not expected to be material to the Company's
financial position.
Risks Related To The Company's Year 2000 Issues. The Company has begun to
outline several possible worst-case scenarios that could arise because of Y2K
issues; however, at this time, the Company does not have sufficient information
to make an assessment of the likelihood of any of these worst-case scenarios.
The Company has shifted some of its focus and resources to the resolution of Y2K
issues. This will result in the deferral of some existing or contemplated
projects, particularly computer-system oriented projects. Although the Company
is unable at this time to quantify its internal, indirect costs resulting from
such change in focus, with its resultant deferral of projects, management does
not believe that the cost of remediating the Company's internal Y2K problems
will have a material adverse impact upon its business, results of operations,
liquidity or financial condition. The Company is also reviewing the Y2K
compliance efforts of its transfer agent and the NASDAQ National Market System.
The Bank of New York, the Company's registrar and transfer agent, has reported
that the goal of its Y2K project is to be compliant by December 31, 1998, that
it has already completed a comprehensive inventory of its mainframe systems, and
that it is currently assessing, remediating and testing its software for Y2K
compliance. The National Association of Securities Dealers, Inc. ("NASD"), the
parent company for the NASDAQ National Market System, is coordinating all Y2K
activities for NASD-related entities. The NASD has publicly disclosed that it
has analyzed all of its products and systems and launched its systems-testing
process in July 1998. The NASD also participated in industry-wide beta testing
conducted by the Securities Industry Association, which was completed on July
16, 1998. Industry-wide testing will resume in March and April 1999. The Y2K
Task Force plans to make inquiries of the major financial institutions and
utilities that provide services to the Company and is taking measures to assess
the potential effects of those entities' failures to become Y2K-compliant within
the time remaining. If, notwithstanding any such entity's representations that
it will be Y2K-compliant in time, it is not compliant, the Company's business
and operations could be adversely affected.
Contingency Plans. The Y2K Task Force's responsibilities include developing
contingency plans for each of the Company's significant operating areas. These
contingency plans would be utilized in the event that, despite the Company's
best efforts, or due to the Company's lack of control over certain third
parties, a system is not Y2K-compliant and the Company's business is adversely
affected. These contingency plans are being developed by each operating area and
are expected to include: estimating the cost of back-up generators for power
failures, isolating a noncompliant system so that it does not affect other
operating systems and "turning back the clock" on date sensitive systems.
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
None
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 October 10, 1998
(23.1) Letter in lieu of consent of the Company's independent
accountants, Deloitte & Touche LLP, for the fiscal quarter
ended October 10, 1998
(27) Financial Data Schedule
No current reports on Form 8-K were filed during the current fiscal quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL NUTRITION COMPANIES, INC.
By: /s/ Edwin J. Kozlowski
Edwin J. Kozlowski
Executive Vice President, Chief Financial
Officer, and Principal Accounting Officer
DATE: November 11, 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 October 10, 1998, the related
consolidated statements of earnings and comprehensive income for the twelve and
thirty-six weeks ended October 10, 1998 and October 11, 1997, and the
consolidated statements of cash flows for the thirty-six weeks ended October 10,
1998 and October 11, 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, 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
October 26, 1998
EXHIBIT 23.1
November 11, 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 thirty-six weeks ended October 10, 1998 and October 11, 1997, as indicated
in our report dated October 26, 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 October 10, 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