SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the twelve weeks ended October 12, 1996.April 26, 1997.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 01-19592
GENERAL NUTRITION COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 4-3056351
(state or other jurisdiction of (I.R.S.Employer(I.R.S. Employer
Incorporation or organization) Identification No.)
921 Penn300 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 Xx No
As of November 19, 1996,May 24, 1997, the number of shares outstanding of the
registrant's common stock was 82,299,916.80,230,426.
PART 1 - FINANCIAL INFORMATION,
ITEM 1. FINANCIAL STATEMENTS
GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Oct. 12, Feb. 3,
(InConsolidated Balance Sheets
(in thousands, except share data)
1996 1996April 26, February 1,
1997 1997
(unaudited)
ASSETS (unaudited)
Current Assets:
Restricted cash 930 961
Receivables 49,955 38,292$ 63,893 $ 58,711
Inventories 184,375 147,723209,102 198,361
Deferred taxes 9,757 9,64718,903 18,903
Other current assets 15,378 13,69919,656 17,498
Total current assets 260,395 210,322311,554 293,473
Property, plant and equipment, net 157,296 145,969176,627 175,352
Other assets 37,116 28,51548,019 44,404
Deferred financing fees, net of
accumulated amortization of
$1,312$1,742 and $889 3,268 3,141$1,538 4,614 3,066
Goodwill, net of accumulated
amortization of $53,187$55,234 and $46,667 258,712 295,865
716,787 683,812$52,907 262,586 263,060
$ 803,400 $ 779,355
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable 83,685 75,905$ 102,490 $ 79,958
Accrued salaries, wages, vacations
and related taxes 14,919 18,22518,544 17,198
Accrued income taxes 3,904 4,465
Accrued interest 855 49221,695 7,008
Other current liabilities 52,900 36,127
Redeemable preferred stock 930 96154,196 54,637
Long-term debt, current portion 997 21,466971 984
Total current liabilities 158,190 157,641197,896 159,785
Long-term debt 310,379 197,006367,163 377,885
Deferred taxes on income 2,704 2,5081,460 1,462
Commitments and contingencies - -
Shareholders' Equity:
Common stock, $.01 par value:
Authorized 200,000,000 shares,
issued and outstanding,
including shares in treasury,
90,662,87991,752,080 shares at October 12, 1996April 26, 1997
and 87,744,01991,287,289 shares at
February 3, 1996 907 8771, 1997 918 913
Additional paid-in capital 304,530 253,521326,027 319,297
Stock options outstanding 3,755 4,7698,916 10,917
Subscriptions receivable (3,379) (3,295)
Currency translation adjustment (139) (102)244 483
Accumulated earnings 53,761 67,592
Less95,386 71,527
428,112 399,842
Treasury stock, at cost, (7,610,70011,500,000
shares at October 12, 1996) (117,300) -
245,514 326,657
716,787 683,812
Notes to Consolidated Financial Statements are an integral part of these
statements.
GENERAL NUTRITION COMPANIES,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
12 Weeks Ended 36 Weeks Ended
Oct. 12, Oct. 14, Oct. 12, Oct. 14,
1996 1995 1996 1995
Net revenue 226,622 193,546 674,539 579,958
Cost of sales, including
costs of warehousing,
distributionApril 26, 1997 and
occupancy 139,723 118,350 417,707 353,274
Selling, general and
administrative 50,909 41,981 147,184 127,518
Amortization of goodwill 2,129 1,996 6,520 5,828
Restructuring charge - - 80,243 -
Operating earnings 33,861 31,219 22,885 93,338
Interest expense 4,438 4,218 10,761 14,648
Earnings before
income taxes 29,423 27,001 12,124 78,690
Income taxes 11,553 11,112 25,955 32,553
Net earnings (loss) 17,870 15,889 (13,831) 46,137
Primary earnings (loss)
per share 0.21 0.18 (0.16) 0.55
Average number of10,000,000 shares outstanding 84,570 89,346 86,364 83,506
Fully diluted earnings
(loss) per share 0.21 0.18 (0.16) 0.52
Average number of shares
outstanding 84,997 90,196 86,364 90,084at
February 1, 1997 (191,231) (159,619)
236,881 240,223
$ 803,400 $ 779,355
Notes to Consolidated Financial Statements are an integral part of these
statements.
GENERAL NUTRITION COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
36 Weeks 36Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
12 Weeks Ended
Ended
October 12, October 14,
(In thousands)April 26, April 27,
1997 1996
1995
Cash flows from operating activities:Net revenue $ 273,059 $ 230,167
Cost of sales, including costs of
warehousing, distribution and occupancy 166,380 141,332
Selling, general and administrative 59,895 49,386
Amortization of goodwill 2,404 2,221
Operating earnings 44,380 37,228
Interest expense 5,117 2,948
Earnings before income taxes 39,263 34,280
Income taxes 15,404 14,102
Net earnings (loss) (13,831) 46,137
Adjustments to reconcile net (loss)$ 23,859 $ 20,178
Primary earnings to net cash provided by
operating activities:
Depreciation and amortization 27,618 20,970
Amortizationper share $ 0.29 $ 0.22
Average number of deferred financing fees 423 399
Restructuring charge 80,243 -
Other, principally loss on
disposalshares outstanding 82,951 92,206
Fully diluted earnings per share $ 0.29 $ 0.22
Average number of fixed assets 377 1,026
Change in operating assets and liabilities:
(Increase) decrease in receivables (10,284) 868
Increase in inventories (41,724) (17,540)
(Increase) decrease in other assets (272) 299
(Decrease) increase in accrued taxes (561) 11,904
Increase in accounts payable and
accrued liabilities 16,879 23,783
(Decrease) increase in other
working capital items (5,553) 4,592
Total adjustments 67,146 46,301
Net cash provided by operating activities 53,315 92,438
Cash flows from investing activities:
Capital expenditures (42,792) (34,319)
Increase in franchisee notes receivable (5,582) (3,980)
Payments for store acquisitions (4,529) (4,439)
Payments made for acquisitions, net of
cash acquired (10,636) _
Loan to related party (3,536) -
Net cash used in investing activities (67,075) (42,738)
Cash flows from financing activities:
Net borrowings (payments) on revolving
credit facility 126,401 (40,700)
Retirement of long-term debt (34,001) (12,000)
Decrease in capital lease obligations (1,222) (1,322)
Redemption of redeemable preferred stock (31) (100)
Net proceeds from issuance of common stock 40,469 1,918
Exercise of warrants to purchase common stock - 3,171
Net payments for treasury stock (117,300) -
Increase in deferred financing fees (550) -
Net cash provided by (used) in financing activities 13,766 (49,033)
Effect of exchange rate changes on cash (37) -
Net (decrease) increase in cash (31) 667
Beginning balance, cash 961 1,095
Ending balance, cash 930 1,762
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 10,277 13,666
Income taxes 25,076 20,921
Non-cash transactions:
(a) In August 1995, the Company converted $40 million of its junior
subordinated debt into approximately 8.2 million shares of common stock
at a rate of $4.88.
(b) On August 17, 1996, $9.2 million of common stock was issued in
connection with the acquisition of Nature's Fresh Northwest, Inc.outstanding 82,963 92,210
Notes to Consolidated Financial Statements are an integral part of these
statements.
GENERAL NUTRITION COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
12 Weeks Ended
April 26, April 27,
1997 1996
(in thousands)
Cash flows from operating activities:
Net earnings $ 23,859 $ 20,178
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation and amortization 10,113 9,176
Amortization of deferred financing fees 204 133
Other, principally loss on disposal of
fixed assets 72 19
Change in operating assets and liabilities:
Increase in receivables (4,268) (6,810)
Increase in inventories (10,741) (14,493)
(Increase) decrease in other assets (326) 95
Increase in accrued taxes 14,687 13,071
Increase in accounts payable
and accrued liabilities 4,641 6,819
Decrease in other working capital items (200) (6,432)
Total adjustments 14,182 1,578
Net cash provided by operating activities 38,041 21,756
Cash flows from investing activities:
Capital expenditures (8,962) (12,505)
Increase in franchisee notes receivable (1,137) (1,533)
Payments for store acquisitions (1,877) (2,216)
Loan to related party (3,295) (1,750)
Net cash used in investing activities (15,271) (18,004)
Cash flows from financing activities:
Net payments on revolving credit facility (10,500) (24,999)
Retirement of long-term debt - (34,001)
Book balance bank overdraft 17,004 17,650
Decrease in capital lease obligations (235) (411)
Redemption of redeemable preferred stock (168) (8)
Net proceeds from issuance of common stock 3,012 38,628
Proceeds from sale of put options 1,720 -
Net payments for treasury stock (31,612) -
Increase in deferred financing fees (1,752) (536)
Net cash used in financing (22,531) (3,677)
Effect of exchange rate changes on cash (239) (75)
Net change in cash - -
Beginning and ending balance, cash $ - $ -
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,643 $ 2,724
Income taxes $ 3,886 $ 598
Notes to Consolidated Financial Statements are an integral part of these
statements.
GENERAL NUTRITION COMPANIES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis1.Basis of Reporting. In the opinion of the General Nutrition Companies, Inc.
(the "Company"), the information furnished includes all adjustments
necessary for fair presentation of the consolidated financial position
of the Company at October
12, 1996April 26, 1997 and February 3, 19961, 1997 and the results of
operations for the twelve and thirty-six weeks ended October 12, 1996April 26, 1997 and October 14, 1995.April 27, 1996.
All such adjustments are of a normal and recurring nature except for the restructuring charge discussed
in Note 7.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 1995 Annual
Report and1996 Annual Report on Form 10-K for the fiscal year ended on
February 3, 19961, 1997 filed with the Securities and Exchange Commission. The
consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after the elimination of intercompany
balances and transactions. The results of operations and cash flows for
the twelve and thirty-six weeks ended October 12,April 26, 1997 and April 27, 1996 and
October 14, 1995 are not
necessarily indicative of the operating results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. Accounting Changes.2.Earnings Per Share. In October 1995,February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
(SFAS)("SFAS") No. 123, "Accounting128, "Earnings per Share", which establishes standards for
Stock-Based
Compensation."computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. This standardStatement is
effective in 1996. The new
standard defines a fair value method of accounting for stock
options and similar equity instruments. Pursuant to the new
standard, companies are encouraged, but not required, to adopt
the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to
account for such transactions under Accounting Principles
Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to
Employees," but would be required to disclose in a note to the financial statements pro forma net incomeissued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. This Statement requires restatement of all prior-period
earnings per share data presented. The basic earnings per share and
diluted earnings per share as ifdefined by SFAS No. 128 for the Company had applied12 weeks
ended April 26, 1997 and April 27, 1996 approximates the new method of
accounting. The Company has elected not to adopt the fair
value method of accounting for employee stock-based
transactionshistorically
presented primary and will continue to account for such
transactions under the provisions of APBO No. 25.
3. Cash.fully diluted earnings per share.
3.Cash. The Company utilizes a cash management system under which a book
balance cash overdraft exists for the Company's primary disbursement
accounts. This overdraft represents uncleared checks in excess of cash
balances in bank accounts. The Company's funds are borrowed on an as
needed basis to pay for clearing checks. At October 12, 1996,April 26, 1997 and February
3,
1996,1, 1997, cash overdrafts of $6.8$17.0 million and $8.9$3.9 million,
respectively, were included in accounts payable. At October
12, 1996,April 26, 1997, the
Company had $89.2$332.4 million available on its revolving credit facility
after excluding $3.1$2.9 million restricted for letters of credit.
4. Reclassifications.4.Reclassifications. Certain amounts reported in previously issued
financial statements have been reclassified to conform to the 19961997
presentation.
5. Inventories. Inventories consist of the following:
October 12, February 3,
1996 1996
(In thousands)
Product ready for sale $ 153,384 $ 122,666
Unpackaged bulk product and raw materials 27,672 21,678
Packaging supplies 3,319 3,379
$ 184,375 $ 147,723
6. Legal.5.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 Annual Report on Form 10-K for the fiscal
year ended February 3, 1996.1, 1997.
On June 24, 1996, an action was commenced against the Company in the
Court of Chancery of the State of Delaware entitled LaValla v. Thomas H.
Lee et al,al., Civil Action No. 15080. Plaintiff asserts that the Company
is liable for a violation of Section 11 of the Securities Act of 1933,
arising out of allegedly false and misleading statements in the
Prospectus and Registration Statement for a public offering of common
stock of the Company which took place on February 7, 1996. Plaintiff
also alleges that two directors and shareholders of the Company, Thomas
H. Lee (a director at the time of the offering) and Thomas R. Shepherd,
are liable for a violation of Section 11 of the Securities Act of 1933,
arising out of the same allegedly false and misleading statements in the
Prospectus and Registration Statement. Plaintiff seeks certification of
the action as a class action, purportedly on behalf of all persons other
than defendants who purchased shares of the Company's common stock
during the public offering. The Company disputes the allegations
contained in the complaint and intends to defend the action vigorously.
This actionThe LaValla case has been stayed in court pending resolution of the
Klein et al. Case referred tocase summarized below.
On August 2, 1996, an action was commenced against the Company in the
United States District Court for the Western District of Pennsylvania
entitled Klein et al. v. General Nutrition Companies, Inc. et al., Civil
Action No. 96-1455. Plaintiffs assert that the Company is liable for
violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 and
Section 1-501(a) of the Pennsylvania Securities Act, arising out of
allegedly false and misleading statements in the Prospectus and
Registration Statement for a public offering of common stock of the
Company which took place on February 7, 1996, and for violations of
sectionSection 10(b) of the Securities Exchange Act of 1934 and for negligent
misrepresentation arising out of allegedly false and misleading public
statements during the period from the public offering through May 28,
1996. Plaintiffs also allege that certain officers, directors and
shareholders of the Company, as well as the underwriters for the public
offering, are liable for other violations of the federal and state
securities laws and for negligent misrepresentation. Plaintiffs seek
certification of the action as a class action, purportedly on behalf of
all persons other than defendants who purchased shares of the Company's
common stock during the proposed class period from February 7 through
May 28, 1996. The Company disputes the allegations contained in the
complaint and intends to defend the action vigorously.
7. Restructuring Charge. DuringThe Company is presently engaged in various other legal actions and
governmental proceedings, and, although ultimate liability cannot be
determined at the second quarter of 1996,present time, the Company recorded a restructuring charge of $80.2 million
($68.8 million after tax). The charge recorded by the Company
related to the write-off of goodwill, property, equipment,
inventories, and other assets associated with management's
decision to discontinue the Nature Food Centres (NFC) retail
concept. The charge for NFC of $66.7 million included $52.6
million of goodwill. The remaining $13.5 millionis currently of the recorded charge relates to unproductive General Nutrition
Centers (GNC) assets, primarily inventory relating to Natural
Solutions cosmetic and other products, fitness and apparel
products, all of which will be discontinued, as well as excess
costs resulting from retrofitting the Alive prototype store.
8. Subsequent Events. On October 25, 1996, the Company's
shareholders approved the adoption of the Company's 1996 Long
Term Incentive Program which included the 1996 Management and
Director Stock Purchase Plan (the "Stock Purchase Plan") and
the 1996 Management and Director Stock Option Plan (the
"Stock Option Plan").
Under the Stock Purchase Plan, participants are permitted to
purchase shares of the Company's common stock at a price equal
to 80 % of the average market price of the common stock during
certain specified periods. The Company will recognize
compensation expense in periods in which shares are purchased
under the Stock Purchase Plan in the amount by which the fair
market value per share of the Company's common stock at the
time of such purchase exceeds the purchase price per share
under the plan. The maximum number of shares which participants
are permitted to purchase under the plan is twice their annual
compensation or director fees, as the case may be. Non-officer
participants may participate to one times their annual
compensation. The Company may extend loans to participants for
up to 50 % of the amount necessary to purchase the shares under
the plan and the applicable withholding tax, providedopinion
that no
participant shall borrow more than an amount equal to such
participant's annual base salary. Any such loans would bear
interest at 6 % per annum and are secured by the common stock
purchased by the participant. The Company will forgive the loan
in the event the market price of the Company's common stock
appreciates by at least 25 % or more over the base market price
of the common stock in each of the four years commencing from
the date of grant of such loan. To the extent that such loans
are not forgiven, they are required to be repaid at the earlier
of termination of employment or expiration of the four year
period.
Under the Stock Purchase Plan, a total of 1.0 million shares
have been reserved for issuance. On October 25, 1996, 535,028
shares were purchased under the Stock Purchase Plan for
approximately $6.7 million, 80% of the average market price of
the common stock. The Company extended loans in the amount of $4.1 million in connection withany such purchase. The Companyliability from these other actions and
proceedings when taking into consideration the Company's product
liability coverage, will record $3.4 million in compensation expense in the fourth
quarter in connection with the discount from the market pricenot have a material adverse impact on its
financial position, results of operations or liquidity.
6.Inventories. Inventories consist of the common stock.
Under the Stock Option Plan, a total of 5.0 million option
shares have been reservedfollowing:
April 26, February 1,
1997 1997
(in thousands)
Product ready for issuance. Of the 5.0 million
shares, 2.5 million are initially available for grant
thereunder,sale $ 174,257 $ 158,800
Unpackaged bulk product and
2.5 million shares will become available for
grant if the market price of the Company's stock reaches
predetermined levels on or prior to August 22, 2000. Option
shares vest under the Stock Option Plan on both a daily and
annual basis over a four year period. The Company has granted
2.225 million option shares at an exercise price of $15.50
which was less than the market value on the date of
shareholder approval of the Long Term Incentive Program. The
Company will record $7.5 million in compensation expense in
the fourth quarter related to such grant.
At November 22, 1996, and subsequent to the close of the third
quarter, the Company had repurchased 1.43 million shares of
its common stock for $25.58 million at an average price of
$17.92 per share. The Board of Directors of the Company has
authorized up to $150.0 million of the Company's stock be
repurchased.
PART 1. FINANCIAL INFORMATIONraw materials 31,736 36,121
Packaging supplies 3,109 3,440
$ 209,102 $ 198,361
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This 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 fillings of the company
with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Revenue.Revenue
Consolidated revenue for the twelve and thirty-six
weeks ended October 12, 1996April 26, 1997 was
$226.6$273.1 million, and $674.5
million, respectively. This represents an increase of $33.1
million and $94.5 million or 17.1% and 16.3%, respectively, when
compared with18.6% from the same periods of 1995.period in 1996. Below
is a comparison of revenue for each of the Company's businesses for the
twelve and
thirty-six week periods:period:
Consolidated Revenue
12 weeks % of 12 weeks
Ended % of Ended % of
April 26, Total EndedApril 27, Total
Oct. 12,1997 Revenue 1996 Revenue
Oct. 14, 1995 Revenue
(In(in millions) (in millions)
Retail $ 165.9 73.2 %201.6 73.8% $ 148.2 76.6 %169.9 73.8%
Franchising 42.7 18.8 34.8 18.053.6 19.6% 43.3 18.8%
Manufacturing 18.0 7.9 10.5 5.417.9 6.6% 17.0 7.4%
Total $ 226.6 100.0 %273.1 100.0% $ 193.5 100.0 %
36 weeks % of 36 weeks % of
Ended Total Ended Total
Oct. 12, 1996 Revenue Oct. 14, 1995 Revenue
(In millions)
Retail $ 493.9 73.2 % $ 452.6 78.0 %
Franchising 128.6 19.1 99.2 17.1
Manufacturing 52.0 7.7 28.2 4.9
Total $ 674.5 100.0 % $ 580.0 100.0 %230.2 100.0%
Retail Revenue. Domestically, the Company's products are sold
through retail outlets operating primarily under the General Nutrition
Centers and GNC Live Well store names ("GNC"). The Company currently sells itsalso operates
retail stores under the Nature's Fresh, Nature Food Centres, and Amphora
names. Internationally, products are sold through retail outlets operating
under the General Nutrition
Centers (GNC), Nature Food Centres (NFC),names of Health and Diet Centres, (HDC) , Amphora (AMP) and newly acquired Nature's
Fresh Northwest (NAT) names. BelowGeneral Nutrition Centres
in the United Kingdom, Canada, and New Zealand. Presented below is a
summary of revenue by operating retail name.entity and corresponding store
information:
Retail Revenue
12 weeks % of 3612 weeks
Ended % of Ended % of
April 26, Total EndedApril 27, Total
Oct. 12,1997 Revenue 1996 Revenue
Oct. 12, 1996 Revenue
(In(in millions) (in millions)
General Nutrition Centers $ 149.5 90.1 %181.5 90.0% $ 455.4 92.2 %
Nature Food Centres 7.7 4.6 25.3 5.1
Health and Diet Centres158.2 93.1%
Other domestic stores 16.1 8.0% 9.4 5.5%
International stores 4.0 2.0% 2.3 1.4 6.8 1.4
Nature's Fresh Northwest 6.4 3.9 6.4 1.3
Amphora - - - -
Total $ 165.9 100.0 % $ 493.9 100.0 %
Sales1.4%
201.6 100.0% 169.9 100.0%
Operating
Company-Owned
Store Locations
April 26, April 27,
1997 1996
General Nutrition Centers 1,798 1,524
Other domestic stores 65 100
International stores 45 20
1,908 1,644
Revenue at GNC increased 7.5% and 7.4%14.7% for the twelve and thirty-
six weeks ended October 12, 1996 when compared with the same
periods in 1995. Comparable stores sales in GNC stores decreased
by .6% in the third quarter when compared with the third quarter
of 1995, the continuing result of reduced sales of weight loss
products and the negative publicity associated with herbal
products containing Ephedrine. Future regulatory actions
concerning these products could further affect comparable store
sales in both Company and franchise stores.
NFC stores, as discussed in the second quarter, are no longer
part of the Company's long-term strategy and are being closed or
converted to GNC stores. At October 12, 1996 there were 84
stores operating.
The Company's HDC stores in the United Kingdom reported
comparable stores sales in the third quarter of 11.5%April 26, 1997
when compared with the same period in 1995. At October 12, 1996, there
were 20 HDC stores operating.
NATthe result of 274 net new store
openings and favorable comparable store sales gains of 5.6% during the
quarter. The Company believes that this increase is attributable to its
new marketing efforts. The Company's marketing emphasis has been
significantly altered in an effort to attract and retain both new and
existing customers. Internally, the Company has developed a 6-store natural food grocery chain locatednew marketing
strategy by: i) creating a new chief marketing officer position; ii)
contracting a major New York advertising agency with strong retail and
strategic experience and; iii) assembling a scientific affairs group to
enhance scientific credibility for the Company and its products. This new
collective marketing group has focused its efforts on mainstream health
issues of targeted customer groups such as women, senior citizens, etc.,
through the use of major network TV, print, media, and complementary in-
store fixtures and signage. The Company believes that the combined efforts
of these key marketing initiatives should continue to have a positive
impact on revenue through the remainder of the year.
Other domestic retail revenue, comprised of Nature's Fresh, Nature Food
Centres, and Amphora, increased 71.3% to $16.1 million for the twelve week
period ended April 26, 1997 when compared to $9.4 million of the same
period in the
northwest United States. NAT was acquired on August 17, 1996.
Franchising Revenue. Revenue from the franchise segment increased
22.4% and 29.7% respectively,23.8% for the twelve and thirty-
six weeks ended October 12, 1996,April 26, 1997 when compared with the same
periodsperiod in 1995.1996. The increased revenue continuedincrease continues to be driven primarily fromby both new store
openings, 63 for the quarter,205 net new openings since April 27, 1996, coupled with strong
franchisee comparable store sales increases averaging 6.2% in the
franchise retail sales.gains of 11.7% domestically, and 10.7%
internationally.
Product sales at wholesale prices and royalties on retail sales,
representing the core of franchiseFranchising's ongoing revenue,revenues, comprised 88.9% and 90.7%94.0% of
total franchise revenue in the twelve and thirty-six weeks ended October 12, 1996.April 26, 1997. The
remaining revenue included sales of stores, fixtures, franchise award fees
and interest income on franchise accounts receivable. FranchiseTotal system-wide
franchise retail sales were $80.3$100.7 million and $238.9 million,
respectively, for the twelve and thirty-six weeks ending
October
12, 1996,April 26, 1997, an increase of 22.6% and 25.4%$20.2 million or 25% when compared with the
same periodsperiod in 1995. At October 12, 1996, there were 1,1201996.
Presented below are the number of operating franchise stores, operating compared with 890 franchise stores
operating at October 14, 1995. In addition, at October 12, 1996,
there were 615 development agreements outstanding for which
stores arethe number of
franchises awarded but not yet opened. Foropen, and the thirty-six week period ended
October 12, 1996, the Company awarded 68 new franchise stores.
The franchise operating stores are categorized as follows:
October 12, October 14,
1996 1995number of outstanding
development agreements:
Number of Operating Franchise Stores:Locations
April 26, 1997 April 27, 1996
Franchise Locations Domestic 1,003 793
International 117 97
1,120 890Domestic International
At beginning of period 1,049 125 848 111
Added during period 55 5 61 4
Closed or converted
during period 18 3 15 1
At end of period 1,086 127 894 114
Stores awarded but
not yet open 222 1 237 -
Development agreements 39 370 5 408
Manufacturing Revenue. Total revenue fromgenerated by the Company's
manufacturing segment, including sales to other segments of the Company and
sales to various other third-parties, increased 72.7% and 84.7%to $68.3 million, or
32.9%, in the twelve and thirty-six weeks ended October 12, 1996April 26, 1997 when compared with $51.4
million for the same periodsperiod in 1995. Manufacturing1996. Third - party revenues for the
current quarter remained consistent with the first quarter of 1996 due to
the increasing demand on the manufacturing capacity for the Company's own
product. Intersegment sales activity, accounting for the majority of the
increase in total manufacturing revenue includes bothfor the current quarter, increased
46.5% to $50.4 million from $34.4 million in the first quarter of 1996.
The increase in intersegment sales and
Health & Diet Foods (HDF),activity was due to the strong demand
for product by existing GNC stores, as well as product requirement needs of
new stores added through the Company's United Kingdomongoing store expansion program.
The Company's international manufacturing business. Third party sales increased 71.4% in the
third quarter when compared with 1995. The sales increase is
attributed to increased demand for commodity vitaminsoperations contributed $3.5
million and the
addition of $2.6 million from HDF. The Healthin third - party revenue and Diet Group,
Ltd., was acquired$.5 million and $.2
million in intersegment revenue for the 4th quartertwelve week periods ended April 26,
1997 and April 27, 1996, respectively.
Analysis of 1995. IntersegmentConsolidated Operating Costs and Expenses
12 Weeks 12 Weeks
Ended Ended
April 26, April 27,
1997 1996
(in thousands)
Cost of sales, grew by 19.8% in the third quarter versus the third quarterincluding
costs of 1995 to support the continuing stores expansion programwarehousing,
distribution and the increased numberoccupancy $ 166,380 $ 141,332
Percent of new products developed in 1996 versus a
year ago.
Analysis of Operating Costs and Expenses
12 Weeks 12 Weeks 36 Weeks 36 Weeks
Ended Ended Ended Ended
October 12, October 14, October 12, October 14,
1996 1995 1996 1995
(In thousands)
Cost of sales, including
costs of warehousing,
distribution and occupancy $ 139,723 $ 118,350 $ 417,707 $ 353,274
Percent net revenue 61.7 % 61.1 % 61.9 % 60.9 %
Selling, general and
administrative $ 53,038 $ 43,977 $ 153,704 $ 133,346
Percent net revenue 23.4 % 22.7 % 22.8 % 23.0 %
Restructuring charge $ - $ - $ 80,243 $ -
Percent net revenue - - 11.9 % -
Operating earnings $ 33,861 $ 31,219 $ 22,885 $ 93,338
Percent net revenue 14.9 % 16.1 % 3.4 % 16.1 %
net revenue 60.9% 61.4%
Selling, general and administrative $ 62,299 $ 51,607
Percent of net revenue 22.8% 22.4%
Operating earnings $ 44,380 $ 37,228
Percent of net revenue 16.3% 16.2%
Cost of sales, including the cost of warehousing, distribution and
occupancy increaseddecreased as a percentage of net revenue by .6%.5% to 61.7%60.9% in the
thirdfirst quarter of 1996,1997, when compared with the same quarter in 1995.1996. The
cost increase as a percentage of net
revenue is a direct result of fixed occupancy charges in retail,
coupled with lower retail sales volume. Total retail sales
increased 11.9% in the third quarter versus the same period in
1995, while occupancy costs increased 15.0%. Also contributing
to the increasedecrease in cost of sales as a percentage of net revenue iswas primarily the
increase in revenueresult of the lower margin businesses,
franchising and manufacturing, and the newly acquired NAT. The
impact of cost of sales as a percentage of net revenue will
continueCompany's ability to increase as these lower margin businesses continue to
increase as a percentage of total revenue.successfully leverage expenses against
rising revenues, including occupancy costs, which are primarily fixed in
nature.
Selling, general and administrative costs increased in the thirdfirst
quarter as a percentage of net revenue when compared with the same quarter
in 19951996 by .7%. The increase is.4%, primarily attributable to advertisingthe Company's retail segment. In
retail, increases in selling, general and administrative expenses were
recognized as a result of $10.2 million for the
third quarter of 1996 versus $7.6 million for the same quarter in
1995. The Company was able to control other expenses despite the
growth in retail sales volume.
During the second quarter of 1996, the Company recorded a
restructuring charge of $80.2 million ($68.8 million after tax).
The charge recorded by the Companyincreased bonus accruals, which are directly
related to store profits, and expenses relating to the write-offdevelopment of goodwill, property,the
marketing and equipment, inventories, and other assets
associated with the decision to discontinue the NFC retail
concept. The charge recorded was to adjust for certain
unproductive assets, the majority of which are in the retail
business segment. (See Note 7 of Notes to Consolidated Financial
Statements)scientific affairs groups.
Non-Operating Income (Expense) Analysis
Interest expense for the quarter increased $ 2.2 million to $4.4$5.1
million
or 5.2% when compared to the same period in 1995.1996. The increase in interest
expense for the quarter was the result of the
repurchase of $117.3$191.2 million of additional borrowings made
since the second quarter of 1996 to fund the Company's common stock financed by the Company's revolving line of credit facility.repurchase
activity. Interest expense for the durationremainder of the year willshould remain
higher than the previous year as a result of thethese additional borrowings
to finance the stock repurchases.
For the thirty-six week period ending October 12, 1996, interest
expense declined to $10.7 million, a 26.5% decrease when compared
to the same period in 1995. The decline in interest expense for
the thirty-six week period ending October 12, 1996 versus the
same period in 1995 is the result of two events. First, early in
the first quarter of 1996, the Company amended and restated the
existing credit agreement providing for a revolving credit
facility with reduced interest rates which are based on prime or
Eurodollar rates plus an add on margin of .5%. Secondly, in
February 1996, the Company sold approximately 1.6 million shares
of common stock and repaid $34.0 million on its bank term loan.
These two events offset the increase related to the additional
borrowings to finance the stock repurchases.borrowings.
Review of Financial Condition
Analysis of Liquidity and Capital Resources
In the first thirty-sixtwelve weeks of 1996,1997, 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:
3612 Weeks 3612 Weeks
Ended Ended
October 12, October 14,April 26, April 27,
1997 1996
1995
(In(in thousands)
Cash provided by (used in):
Operating activities $ 53,31538,041 $ 92,43821,756
Investing activities (67,075) (42,738)(15,271) (18,004)
Financing activities 13,766 (49,033)(22,531) (3,677)
Effect of exchange rate changes
on cash (37) -(239) (75)
Net (decrease) increasechange in cash $ (31)- $ 667-
Operating Activities. Cash provided by operating activities although favorable at $53.3 million for the
thirty-
sixtwelve weeks ended October 12, 1996,April 26, 1997 was 42.3% less than$38.0 million versus $21.8 million
for the same period in 1995. The decline in cash provided by operating
activities is primarily attributable to the1996, an increase in the
inventory levels of the Company as discussed below. For the
thirty-six weeks ended October 12, 1996, net$16.2 million or 74.3%. Net
earnings, adjusted for non-cash charges and before changes in operating
assets and liabilities, increased by 15.9% to $94.8$34.2 million an increase of 38.4%
whenfor the twelve
week period ended April 26, 1997, compared to $68.5with $29.5 million in the same
period in 1995.
Changes1996. Favorable changes in operating assets and liabilities include increases in
accounts receivable, inventories, accounts payable and accrued
liabilities. The $10.3of
$11.5 million increase in accounts receivable
is mainly attributablecontributed to the increase in product sales to
domestic franchisees as well asnet cash provided by operating
activities of $16.2 million for the increase inquarter when compared with the volumefirst
quarter of
third party product sales at manufacturing. Increases in
inventory levels of $41.7 million were generated primarily as a
result of new store expansion requirements, the buildup of
inventory levels due to seasonal requirements, and the stocking
of the Company's new full line distribution center located in
Phoenix, Arizona. The increase in accounts payable and accrued
liabilities of $16.9 million is the result of the buildup of
inventory levels due to seasonal requirements and the
restructuring charge for NFC recorded during the 12 week period
ending July 20, 1996.
Investing Activities. The Company's primary use of funds in both 1995
and 1996 wasinvesting activities have
been for capital expenditures. The Company incurred
capital expenditures made in connection with new store
construction, the remodeling of approximately $42.8 million inexisting stores, and expansion requirements
at both the first
three quarters of 1996 versus $34.3 million in the first three
quarters of 1995.
In 1996, approximately $31.2 million of thesemanufacturing and distribution facilities. Capital
expenditures were used to finance the Company's store expansion program and $11.0
million was used to add additional capacity to the distribution
and manufacturing facilities. Notes receivable from the sale of
stores to franchisees and Company purchases of franchise or
independently owned stores were $10.1$9.0 million and $8.4$12.5 million
respectively for the thirty-sixtwelve week period
ended April 26, 1997 and April 27, 1996, respectively.
Financing Activities. Cash used in financing activities increased
$18.9 million for the twelve weeks ended October 12, 1996 and
October 14, 1995. The Company anticipates total capital
expenditures of approximately $63 millionApril 26, 1997 versus the same
period in 1996. In 1996,1997, the Company expended $10.6repurchased 1.5 million in connectionshares of its
own stock for $31.6 million with borrowed funds, and repaid $10.5 million
on the acquisitionsline of two new subsidiaries, Nature's Fresh
Northwest and Amphora.
Financing Activities.credit. In the thirty-six weeks ended October
12,first quarter of 1996, the Company repaid
$34.0$25.0 million on its bank term loan
with funds received from the sale, in February 1996,line of approximately 1.6 million shares of its common stock at an
average price of approximately $20.75 per share. In addition,
the Company borrowed approximately $117.3 million on its
revolving credit facility to repurchase approximately 7.6 million
shares of its common stock at an average of $15.41 per share.
The Company also sold European put options to purchase an
additional 2.0 million shares of its common stock at an average
net price of $16.33 per share expiring on various dates in
October 1996. All put options have expired and the Company was
not required to purchase additional shares of its own common
stock.credit. At October 12, 1996,April 26, 1997, the Company had
$89.2$332.4 million available on its revolving credit facility.facility after excluding
$2.9 million restricted for letters of credit. Subsequent to April 26,
1997, the Company sold put options to repurchase 1.0 million of the
Company's stock for $21.5 million. The options were sold for $1.4 million
and expire during the fourth quarter of 1997.
PART II. OTHER INFORMATION
ItemITEM 1. Legal Proceedings
See Note 6 to the Notes to Consolidated Financial Statements.
See also Note 6 in the Company's Quarterly Report on Form 10-Q
for the 12 weeks ended July 20, 1996.
ItemLEGAL PROCEEDINGS
None.
ITEM 6. Exhibits and Reports on FormEXHIBITS AND REPORTS ON FORM 8-K
(11.1) Computation of net earnings per share is attached.
(23) Interim review report of the Company's independent
accountants, Deloitte & Touche LLP, for the thirdfirst fiscal
quarter ended October 12, 1996April 26, 1997 is attached.
(23.1) Letter in lieu of consent of the Company's independent
accountants, Deloitte & Touche LLP, for the thirdfirst fiscal
quarter ended October 12, 1996April 26, 1997 is attached.
(27) Financial Data Schedule is attached.
No current reports on Form 8-K were filed during the thirdfirst
fiscal quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL NUTRITION COMPANIES, INC.
By: /s/ Edwin J. Kozlowski
Edwin J. Kozlowski
Executive Vice President, Chief Financial
Officer, and Principal Accounting Officer
DATE: November 25, 1996June 10, 1997