Attached files
file | filename |
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EX-31.1 - EX-31.1 - GENERAL NUTRITION CENTERS, INC. | l39614exv31w1.htm |
EX-32.1 - EX-32.1 - GENERAL NUTRITION CENTERS, INC. | l39614exv32w1.htm |
EX-31.2 - EX-31.2 - GENERAL NUTRITION CENTERS, INC. | l39614exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark
one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
.
Commission File Number: 333-144396
GENERAL NUTRITION CENTERS, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of Incorporation or organization) |
72-1575168 (I.R.S. Employer Identification No.) |
|
300 Sixth Avenue Pittsburgh, Pennsylvania (Address of principal executive offices) |
15222 (Zip Code) |
Registrants telephone number, including area code: (412) 288-4600
Indicate by 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. o Yes þ No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). o
Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act:
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of May 5, 2010 100 shares of common stock, par value $0.01 per share (the Common Stock)
of General Nutrition Centers, Inc. were outstanding. All shares of our Common Stock are held by
GNC Corporation.
TABLE OF CONTENTS
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
(in thousands, except share data)
March 31, | December 31, | |||||||
2010 | 2009 * | |||||||
(unaudited) | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 110,628 | $ | 75,089 | ||||
Receivables, net |
96,964 | 94,355 | ||||||
Inventories, net (Note 3) |
390,187 | 370,492 | ||||||
Prepaids and other current assets |
35,883 | 42,219 | ||||||
Total current assets |
633,662 | 582,155 | ||||||
Long-term assets: |
||||||||
Goodwill (Note 4) |
624,808 | 624,753 | ||||||
Brands (Note 4) |
720,000 | 720,000 | ||||||
Other intangible assets, net (Note 4) |
152,277 | 154,370 | ||||||
Property, plant and equipment, net |
197,689 | 199,581 | ||||||
Deferred financing fees, net |
17,355 | 18,411 | ||||||
Other long-term assets |
4,692 | 4,332 | ||||||
Total long-term assets |
1,716,821 | 1,721,447 | ||||||
Total assets |
$ | 2,350,483 | $ | 2,303,602 | ||||
Current liabilities: |
||||||||
Accounts payable |
$ | 143,193 | $ | 95,904 | ||||
Accrued payroll and related liabilities |
20,903 | 22,277 | ||||||
Accrued interest (Note 5) |
6,079 | 14,552 | ||||||
Current portion, long-term debt (Note 5) |
1,513 | 1,724 | ||||||
Deferred revenue and other current liabilities |
74,750 | 65,130 | ||||||
Total current liabilities |
246,438 | 199,587 | ||||||
Long-term liabilities: |
||||||||
Long-term debt (Note 5) |
1,057,796 | 1,058,085 | ||||||
Deferred tax liabilities, net |
289,054 | 288,894 | ||||||
Other long-term liabilities |
40,033 | 39,520 | ||||||
Total long-term liabilities |
1,386,883 | 1,386,499 | ||||||
Total liabilities |
1,633,321 | 1,586,086 | ||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value,
1,000 shares authorized, 100 shares issued and outstanding |
| | ||||||
Paid-in-capital |
595,774 | 594,932 | ||||||
Retained earnings |
127,358 | 129,783 | ||||||
Accumulated other comprehensive loss |
(5,970 | ) | (7,199 | ) | ||||
Total stockholders equity |
717,162 | 717,516 | ||||||
Total liabilities and stockholders equity |
$ | 2,350,483 | $ | 2,303,602 | ||||
* | Footnotes summarized from the Audited Financial Statements |
The accompanying notes are an integral part of the consolidated financial statements.
1
Table of Contents
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands)
(unaudited)
(in thousands)
Three months ended | ||||||||
March 31, | March 31, | |||||||
2010 | 2009 | |||||||
Revenue |
$ | 465,019 | $ | 439,897 | ||||
Cost of sales, including costs of warehousing,
distribution and occupancy |
299,117 | 285,729 | ||||||
Gross profit |
165,902 | 154,168 | ||||||
Compensation and related benefits |
67,758 | 65,325 | ||||||
Advertising and promotion |
15,454 | 14,739 | ||||||
Other selling, general and administrative |
25,094 | 23,853 | ||||||
Foreign currency (gain) loss |
(76 | ) | 97 | |||||
Operating income |
57,672 | 50,154 | ||||||
Interest expense, net (Note 5) |
16,629 | 19,062 | ||||||
Income before income taxes |
41,043 | 31,092 | ||||||
Income tax expense (Note 11) |
15,084 | 11,647 | ||||||
Net income |
$ | 25,959 | $ | 19,445 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
2
Table of Contents
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity and Comprehensive Income
(in thousands, except share data)
(in thousands, except share data)
Accumulated | ||||||||||||||||||||||||
Other | Total | |||||||||||||||||||||||
Common Stock | Retained | Comprehensive | Stockholders | |||||||||||||||||||||
Shares | Dollars | Paid-in-Capital | Earnings | Income/(Loss) | Equity | |||||||||||||||||||
Balance at December 31, 2009 |
100 | $ | | $ | 594,932 | $ | 129,783 | $ | (7,199 | ) | $ | 717,516 | ||||||||||||
Comprehensive income : |
||||||||||||||||||||||||
Net income |
| | | 25,959 | | 25,959 | ||||||||||||||||||
Unrealized gain on derivatives designated and qualified
as cash flow hedges, net of tax of $159 |
| | | | 279 | 279 | ||||||||||||||||||
Foreign currency translation adjustments |
| | | | 950 | 950 | ||||||||||||||||||
Comprehensive income |
27,188 | |||||||||||||||||||||||
Non-cash stock-based compensation |
| | 842 | | | 842 | ||||||||||||||||||
Dividend payment |
| | | (28,384 | ) | | (28,384 | ) | ||||||||||||||||
Balance at March 31, 2010 (unaudited) |
100 | $ | | $ | 595,774 | $ | 127,358 | $ | (5,970 | ) | $ | 717,162 | ||||||||||||
Balance at December 31, 2008 |
100 | $ | | $ | 592,355 | $ | 73,764 | $ | (14,057 | ) | $ | 652,062 | ||||||||||||
Comprehensive income : |
||||||||||||||||||||||||
Net income |
| | | 19,445 | | 19,445 | ||||||||||||||||||
Unrealized gain on derivatives designated and qualified
as cash flow hedges, net of tax of $309 |
| | | | 540 | 540 | ||||||||||||||||||
Foreign currency translation adjustments |
| | | | (618 | ) | (618 | ) | ||||||||||||||||
Comprehensive income |
19,367 | |||||||||||||||||||||||
Return of capital to GNC Corporation |
| | (278 | ) | | | (278 | ) | ||||||||||||||||
Non-cash stock-based compensation |
| | 657 | | | 657 | ||||||||||||||||||
Balance at March 31, 2009 (unaudited) |
100 | $ | | $ | 592,734 | $ | 93,209 | $ | (14,135 | ) | $ | 671,808 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
3
Table of Contents
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
(unaudited)
(in thousands)
Three months ended | ||||||||
March 31, | March 31, | |||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 25,959 | $ | 19,445 | ||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||
Depreciation expense |
9,564 | 8,862 | ||||||
Amortization of intangible assets |
2,186 | 2,597 | ||||||
Amortization of deferred financing fees |
1,056 | 1,002 | ||||||
Amortization of original issue discount |
99 | 89 | ||||||
Increase in provision for inventory losses |
1,946 | 3,808 | ||||||
Non-cash stock-based compensation |
842 | 657 | ||||||
Decrease in provision for losses on accounts receivable |
(122 | ) | (1,284 | ) | ||||
Changes in assets and liabilities: |
||||||||
Increase in receivables |
(2,282 | ) | (306 | ) | ||||
Increase in inventory, net |
(20,846 | ) | (18,422 | ) | ||||
(Increase) decrease in franchise note receivables, net |
(246 | ) | 112 | |||||
Increase in accrued income taxes |
13,384 | 10,333 | ||||||
(Increase) decrease in other assets |
(2,802 | ) | 2,525 | |||||
Increase in accounts payable |
47,144 | 16,507 | ||||||
Decrease in interest payable |
(8,474 | ) | (8,927 | ) | ||||
Increase (decrease) in accrued liabilities |
4,692 | (2,656 | ) | |||||
Net cash provided by operating activities |
72,100 | 34,342 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Capital expenditures |
(7,313 | ) | (5,539 | ) | ||||
Store acquisition costs |
(226 | ) | (300 | ) | ||||
Net cash used in investing activities |
(7,539 | ) | (5,839 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Return of capital to Parent company |
| (278 | ) | |||||
Dividend payment |
(28,384 | ) | | |||||
Payments on long-term debt |
(599 | ) | (4,906 | ) | ||||
Net cash used in financing activities |
(28,983 | ) | (5,184 | ) | ||||
Effect of exchange rate on cash |
(39 | ) | 9 | |||||
Net increase in cash |
35,539 | 23,328 | ||||||
Beginning balance, cash |
75,089 | 42,307 | ||||||
Ending balance, cash |
$ | 110,628 | $ | 65,635 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
4
Table of Contents
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. NATURE OF BUSINESS
General Nature of Business. General Nutrition Centers, Inc. (GNC or the Company), a
Delaware corporation, is a leading specialty retailer of nutritional supplements, which includes:
vitamins, minerals and herbal supplements (VMHS), sports nutrition products, diet products and
other wellness products.
The
Companys business is vertically integrated, as the operations consist of
purchasing raw materials, formulating and manufacturing products and selling the finished products
through its retail, franchising and manufacturing/wholesale segments. The Company operates
primarily in three business segments: Retail, Franchising, and Manufacturing/Wholesale. Corporate
retail store operations are located in North America and Puerto Rico, and in addition the Company
offers products domestically through www.gnc.com. Franchise stores are located in the United
States and 49 countries. The Company operates its primary manufacturing facilities in South
Carolina and distribution centers in Arizona, Pennsylvania and South Carolina. The Company
manufactures the majority of its branded products, but also merchandises various third-party
products. Additionally, the Company licenses the use of its trademarks and trade names.
The processing, formulation, packaging, labeling and advertising of the Companys products are
subject to regulation by one or more federal agencies, including the Food and Drug Administration
(FDA), Federal Trade Commission (FTC), Consumer Product Safety Commission, United States
Department of Agriculture and the Environmental Protection Agency. These activities are also
regulated by various agencies of the states and localities in which the Companys products are
sold.
Merger of the Company. On February 8, 2007, GNC Parent Corporation entered into an Agreement
and Plan of Merger with GNC Acquisition Inc. and its parent company, GNC Acquisition Holdings Inc.
(Parent), pursuant to which GNC Acquisition Inc. agreed to merge with and into GNC Parent
Corporation, with GNC Parent Corporation as the surviving corporation and a wholly owned subsidiary
of Parent (the Merger). Immediately following the Merger, GNC Parent Corporation was converted
into a Delaware limited liability company and renamed GNC Parent LLC. The purchase equity
contribution was made by Ares Corporate Opportunities Fund II, L.P. (Ares) and Ontario Teachers
Pension Plan Board (OTPP) (collectively, the Sponsors), together with additional institutional
investors and certain management of the Company. The transaction closed on March 16, 2007 and was
accounted for under the purchase method of accounting. The transaction occurred between unrelated
parties and no common control existed. The Merger consideration (excluding acquisition costs of
$13.7 million) totaled $1.65 billion, including the repayment of existing debt and other
liabilities, and was funded with a combination of equity contributions and the issuance of new
debt. The Merger agreement requires payments to former shareholders and optionholders in lieu of
income tax payments made for utilizing net operating losses created as a result of the Merger. No
such payments were made during the three months ended March 31, 2010 or March 31, 2009.
5
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements and footnotes have been
prepared by the Company in accordance with accounting principles generally accepted in the United
States of America (U.S. GAAP) and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and related footnotes that would
normally be required by U.S. GAAP for complete financial reporting. These unaudited consolidated
financial statements should be read in conjunction with the Companys audited consolidated
financial statements in the Companys Annual Report on Form 10-K filed for the year ended December
31, 2009 (the Form 10-K). The Companys reporting period is based on a calendar year.
The accounting policies of the Company are consistent with the policies disclosed in the
Companys audited financial statements for the year ended December 31, 2009. There have been no
significant changes to these policies since December 31, 2009.
The accompanying unaudited consolidated financial statements include all adjustments
(consisting of a normal and recurring nature) that management considers necessary for a fair
statement of financial information for the interim periods. Interim results are not necessarily
indicative of the results that may be expected for the remainder of the year ending December 31,
2010.
Principles of Consolidation. The consolidated financial statements include the
accounts of the Company, all of its subsidiaries and a variable interest entity. All material
intercompany transactions have been eliminated in consolidation.
The Company has no relationships with unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off balance sheet arrangements, or other
contractually narrow or limited purposes.
Use of Estimates. The preparation of financial statements in conformity with U.S.
GAAP principles requires management to make estimates and assumptions. Accordingly, these estimates
and assumptions 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. Some of the most significant estimates
pertaining to the Company include the valuation of inventories, the allowance for doubtful
accounts, income tax valuation allowances and the recoverability of long-lived assets. On a
regular basis, management reviews its estimates utilizing currently available information, changes
in facts and circumstances, historical experience and reasonable assumptions. After such reviews
and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ
from those estimates.
Cash and Cash Equivalents. The Company considers cash and cash equivalents to include
all cash and liquid deposits and investments with a maturity of three months or less. The majority
of payments due from banks for third-party credit cards process within 24-48 hours, except for
transactions occurring on a Friday, which are generally processed the following Monday. All credit
card transactions are classified as cash, and the amounts due from these transactions totaled $2.2
million at March 31, 2010 and $2.1 million at December 31, 2009.
Book overdrafts of $10.4 million and $0.7 million as of March 31, 2010 and December 31, 2009,
respectively, represent checks issued that had not been presented for payment to the banks and are
classified as accounts payable in the Companys consolidated balance sheet. The Company typically
funds these overdrafts through normal collections of funds or transfers from bank balances at other
financial institutions. Under the terms of the Companys facilities with its banks, the respective
financial institutions are not obligated to honor the book overdraft balances as of March 31, 2010
and December 31, 2009, or any balance on any given date.
6
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Financial Instruments and Derivatives. As part of the Companys financial risk management
program, it uses certain derivative financial instruments. The Company does not enter into
derivative transactions for speculative purposes and holds no derivative instruments for trading
purposes. The Company uses derivative financial instruments to reduce its exposure to market risk
for changes in interest rates primarily in respect of its long term debt obligations. The Company
tries to manage its interest rate risk in order to balance its exposure to both fixed and floating
rates while minimizing its borrowing costs. Floating-to-fixed interest rate swap agreements,
designated as cash flow hedges of interest rate risk, are entered into from time to time to hedge
the Companys exposure to interest rate changes on a portion of the Companys floating rate debt.
These interest rate swap agreements convert a portion of its floating rate debt to fixed rate debt.
Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts
from a counterparty if interest rates fall below the strike rate on the contract in exchange for an
upfront premium. The Company records the fair value of these contracts as an asset or a liability,
as applicable, in the balance sheet. The effective portions of changes in the fair value of
derivatives designated and that qualify as cash flow hedges are recorded in accumulated other
comprehensive income, net of tax. The ineffective portions, if any, are recorded in interest
expense in the current period. As of March 31, 2010, the Company has not recorded any hedge
ineffectiveness in earnings related to its cash flow hedges.
Derivatives designated as hedging instruments have been recorded in the consolidated balance
sheet at fair value as follows:
Fair Value | ||||||||||||
Balance Sheet Location | March 31, 2010 | December 31, 2009 | ||||||||||
(unaudited) | ||||||||||||
(in thousands) | ||||||||||||
Interest Rate Products |
Other long-term liabilities | $ | (14,240 | ) | $ | (14,679 | ) | |||||
The Company has interest rate swap agreements outstanding that effectively converted an
aggregate $550.0 million of debt from floating to fixed interest rates which includes a derivative
contract that consists of an interest rate swap with a purchased interest rate floor that
effectively converted $150.0 million of the Senior Toggle Notes from a floating to a fixed rate,
effective September 2009. The floor is intended to replicate the optionality present in the
original debt agreement, providing an equivalent offset in the interest payments. The Company did
not enter into any new swap agreements during the first quarter of 2010. Each of its five
outstanding agreements mature between April 2010 and September 2012.
Amounts reported in accumulated other comprehensive income related to derivatives will be
reclassified to interest expense as interest payments are made on the Companys variable-rate debt.
During the twelve months ending March 31, 2011, the Company estimates that an additional $13.2
million will be reclassified as an increase to interest expense.
Components of gains and losses recorded in the consolidated balance sheet and consolidated
income statements for the three months ended March 31, 2010 and 2009, are as follows:
Amount of Gain or | Location of Gain or (Loss) | Amount of Gain or (Loss) | ||||||||||
Derivatives in Cash | (Loss) Recognized in | Reclassified from | Reclassified from | |||||||||
Flow Hedging | OCI on Derivative | Accumulated OCI into | Accumulated OCI into | |||||||||
Relationships | (Effective Portion) | Income (Effective Portion) | Income (Effective Portion) | |||||||||
2010 |
||||||||||||
Interest Rate Products |
$ | (3,659 | ) | Interest income / (expense) | $ | (4,097 | ) | |||||
2009 |
||||||||||||
Interest Rate Products |
$ | (2,208 | ) | Interest income / (expense) | $ | (3,057 | ) | |||||
7
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Under the Companys agreements with its derivative counterparty, if the Company defaults on
any of its indebtedness, including default where repayment of the indebtedness has not been
accelerated by the lender, then the Company could also be declared in default on its derivative
obligations.
As of March 31, 2010, the fair value of derivatives in a net liability position related to
these agreements was $17.7 million, including accrued interest of $2.8 million but excluding
adjustments for nonperformance risk.
Recently Issued Accounting Pronouncements
As of March 31, 2010, there were no developments related to recently issued accounting
standards, including the expected dates of adoption and estimated effects on the Companys
consolidated financial statements, in addition to those disclosed in the Companys Annual
Report on Form 10-K for the year ended December 31, 2009.
NOTE 3. INVENTORIES, NET
Inventories at each respective period consisted of the following:
March 31, 2010 | ||||||||||||
Net Carrying | ||||||||||||
Gross cost | Reserves (a) | Value | ||||||||||
(unaudited) | ||||||||||||
(in thousands) | ||||||||||||
Finished product ready for sale |
$ | 334,170 | $ | (7,104 | ) | $ | 327,066 | |||||
Work-in-process, bulk product and raw materials |
59,236 | (1,328 | ) | 57,908 | ||||||||
Packaging supplies |
5,213 | | 5,213 | |||||||||
$ | 398,619 | $ | (8,432 | ) | $ | 390,187 | ||||||
December 31, 2009 | ||||||||||||
Net Carrying | ||||||||||||
Gross cost | Reserves (a) | Value | ||||||||||
(in thousands) | ||||||||||||
Finished product ready for sale |
$ | 319,688 | $ | (8,266 | ) | $ | 311,422 | |||||
Work-in-process, bulk product and raw materials |
54,803 | (1,288 | ) | 53,515 | ||||||||
Packaging supplies |
5,555 | | 5,555 | |||||||||
$ | 380,046 | $ | (9,554 | ) | $ | 370,492 | ||||||
(a) | Reserves primarily consist of amounts recorded for valuation and obsolescence. |
8
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill represents the excess of purchase price over the fair value of identifiable net
assets of acquired entities. In accordance with the standard on intangibles and goodwill, goodwill
and intangible assets with indefinite useful lives are not amortized, but instead are tested for
impairment at least annually. Other intangible assets with finite lives are amortized on a
straight-line or declining balance basis over periods not exceeding 35 years.
For the three months ended March 31, 2010, the Company acquired seven franchise stores. These
acquisitions were accounted for utilizing the purchase method of accounting and the Company
recorded the acquired inventory, fixed assets, franchise rights and goodwill, with an applicable
reduction to receivables and cash. The total purchase price associated with these acquisitions was
$0.7 million, of which $0.2 million was paid in cash.
The following table summarizes the Companys goodwill activity from December 31, 2009 to March
31, 2010:
Manufacturing/ | ||||||||||||||||
Retail | Franchising | Wholesale | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Balance at December 31, 2009 |
$ | 304,609 | $ | 117,303 | $ | 202,841 | $ | 624,753 | ||||||||
Acquired franchise stores |
55 | | | 55 | ||||||||||||
Balance at March 31, 2010 (unaudited) |
$ | 304,664 | $ | 117,303 | $ | 202,841 | $ | 624,808 | ||||||||
The following table summarizes the Companys intangible asset activity from December 31,
2009 to March 31, 2010:
Retail | Franchise | Operating | Franchise | |||||||||||||||||||||
Gold Card | Brand | Brand | Agreements | Rights | Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Balance at December 31, 2009 |
$ | 375 | $ | 500,000 | $ | 220,000 | $ | 153,076 | $ | 919 | $ | 874,370 | ||||||||||||
Acquired franchise stores |
| | | | 93 | 93 | ||||||||||||||||||
Amortization expense |
(375 | ) | | | (1,713 | ) | (98 | ) | (2,186 | ) | ||||||||||||||
Balance at March 31, 2010 (unaudited) |
$ | | $ | 500,000 | $ | 220,000 | $ | 151,363 | $ | 914 | $ | 872,277 | ||||||||||||
The following table reflects the gross carrying amount and accumulated amortization for
each major intangible asset:
Estimated | March 31, 2010 | December 31, 2009 | ||||||||||||||||||||||||
Life | Accumulated | Carrying | Accumulated | Carrying | ||||||||||||||||||||||
in years | Cost | Amortization | Amount | Cost | Amortization | Amount | ||||||||||||||||||||
(unaudited) | (in thousands) | |||||||||||||||||||||||||
Brands retail |
| $ | 500,000 | $ | | $ | 500,000 | $ | 500,000 | $ | | $ | 500,000 | |||||||||||||
Brands franchise |
| 220,000 | | 220,000 | 220,000 | | 220,000 | |||||||||||||||||||
Gold card retail |
3 | 3,500 | (3,500 | ) | | 3,500 | (3,354 | ) | 146 | |||||||||||||||||
Gold card franchise |
3 | 5,500 | (5,500 | ) | | 5,500 | (5,271 | ) | 229 | |||||||||||||||||
Retail agreements |
25-35 | 31,000 | (3,353 | ) | 27,647 | 31,000 | (3,090 | ) | 27,910 | |||||||||||||||||
Franchise agreements |
25 | 70,000 | (8,517 | ) | 61,483 | 70,000 | (7,817 | ) | 62,183 | |||||||||||||||||
Manufacturing agreements |
25 | 70,000 | (8,517 | ) | 61,483 | 70,000 | (7,817 | ) | 62,183 | |||||||||||||||||
Other intangibles |
5 | 1,150 | (400 | ) | 750 | 1,150 | (350 | ) | 800 | |||||||||||||||||
Franchise rights |
1-5 | 3,154 | (2,240 | ) | 914 | 3,061 | (2,142 | ) | 919 | |||||||||||||||||
$ | 904,304 | $ | (32,027 | ) | $ | 872,277 | $ | 904,211 | $ | (29,841 | ) | $ | 874,370 | |||||||||||||
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table represents future estimated amortization expense of other intangible
assets, net, with definite lives at March 31, 2010:
Estimated | ||||
amortization | ||||
Years ending December 31, | expense | |||
(unaudited) | ||||
(in thousands) | ||||
2010 |
5,484 | |||
2011 |
7,120 | |||
2012 |
7,006 | |||
2013 |
6,953 | |||
2014 |
6,696 | |||
Thereafter |
119,018 | |||
Total |
$ | 152,277 | ||
NOTE 5. LONG-TERM DEBT / INTEREST EXPENSE
Long-term debt at each respective period consisted of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
(in thousands) | ||||||||
2007 Senior Credit Facility |
$ | 644,382 | $ | 644,619 | ||||
Senior Toggle Notes |
298,058 | 297,959 | ||||||
10.75% Senior Subordinated Notes |
110,000 | 110,000 | ||||||
Mortgage |
6,825 | 7,184 | ||||||
Capital leases |
44 | 47 | ||||||
Less: current maturities |
(1,513 | ) | (1,724 | ) | ||||
Total |
$ | 1,057,796 | $ | 1,058,085 | ||||
The Companys net interest expense for each respective period is as follows:
Three months ended | ||||||||
March 31, | March 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
(in thousands) | ||||||||
2007 Senior Credit Facility |
||||||||
Term Loan |
$ | 7,555 | $ | 9,205 | ||||
Revolver |
111 | 136 | ||||||
Senior Toggle Notes |
4,856 | 5,531 | ||||||
10.75% Senior Subordinated Notes |
2,956 | 2,956 | ||||||
Deferred financing fees |
1,056 | 1,002 | ||||||
Mortgage |
115 | 147 | ||||||
OID amortization |
99 | 89 | ||||||
Interest income-other |
(119 | ) | (4 | ) | ||||
Interest expense, net |
$ | 16,629 | $ | 19,062 | ||||
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Accrued interest at each respective period consisted of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
(in thousands) | ||||||||
2007 Senior Credit Facility |
$ | 4,681 | $ | 5,350 | ||||
Senior Toggle Notes |
872 | 5,720 | ||||||
10.75% Senior Subordinated Notes |
526 | 3,482 | ||||||
Total |
$ | 6,079 | $ | 14,552 | ||||
Interest on the 2007 Senior Credit Facility and the Senior Toggle Notes is based on
variable rates. At March 31, 2010 and December 31, 2009 the interest rate for the 2007 Senior
Credit Facility was 2.5%. At March 31, 2010 and December 31, 2009 the interest rate for the Senior
Toggle Notes was 5.8%.
NOTE 6. FINANCIAL INSTRUMENTS
At March 31, 2010 and December 31, 2009, the Companys financial instruments consisted of cash
and cash equivalents, receivables, franchise notes receivable, accounts payable, certain accrued
liabilities and long-term debt. The carrying amount of cash and cash equivalents, receivables,
accounts payable and accrued liabilities approximates their fair value because of the short
maturity of these instruments. Based on current interest rates and their underlying risk, the
carrying value of the franchise notes receivable approximates their fair value. These fair values
are reflected net of reserves, which are recognized according to Company policy. The Company
determined the estimated fair values of its debt by using currently available market information
and estimates and assumptions where appropriate. Accordingly, as considerable judgment is required
to determine these estimates, changes in the assumptions or methodologies may have an effect on
these estimates. The actual and estimated fair values of the Companys financial instruments are
as follows:
March 31, | December 31, | |||||||||||||||
2010 | 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
(unaudited) | ||||||||||||||||
(in thousands) | ||||||||||||||||
Cash and cash equivalents |
$ | 110,628 | $ | 110,628 | $ | 75,089 | $ | 75,089 | ||||||||
Receivables |
96,964 | 96,964 | 94,355 | 94,355 | ||||||||||||
Franchise notes receivable |
3,540 | 3,540 | 3,364 | 3,364 | ||||||||||||
Accounts payable |
143,193 | 143,193 | 95,904 | 95,904 | ||||||||||||
Long term debt (including current portion) |
1,059,309 | 982,034 | 1,059,809 | 977,718 |
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is engaged in various legal actions, claims and proceedings arising in the normal
course of business, including claims related to breach of contracts, products liabilities,
intellectual property matters and employment-related matters resulting from the Companys business
activities. As with most actions such as these, an estimation of any possible and/or ultimate
liability cannot always be determined. The Company continues to assess the requirement to account
for additional contingencies in accordance with the standard on contingencies. If the Company is
required to make a payment in connection with an adverse outcome in these matters, it could have a
material impact on its financial condition and operating results.
As a manufacturer and retailer of nutritional supplements and other consumer products that are
ingested by consumers or applied to their bodies, the Company has been and is currently subjected
to various product liability claims. Although the effects of these claims to date have not been
material to the Company, it is possible that current and future product liability claims could have
a material adverse impact on its business or financial condition. The Company currently maintains
product liability insurance with a deductible/retention of $3.0 million per claim with an aggregate
cap on retained loss of $10.0 million. The Company typically seeks and has obtained contractual
indemnification from most parties that supply raw materials for its products or that manufacture or
market products it sells. The Company also typically seeks to be added, and has been added, as an
additional insured under most of such parties insurance policies. The Company is also entitled to
indemnification by Numico for certain losses arising from claims related to products containing
ephedra or Kava Kava sold prior to December 5, 2003. However, any such indemnification or insurance
is limited by its terms and any such indemnification, as a practical matter, is limited to the
creditworthiness of the indemnifying party and its insurer, and the absence of significant defenses
by the insurers. The Company may incur material products liability claims, which could increase its
costs and adversely affect its reputation, revenues and operating income.
Pro-Hormone/Androstenedione Cases. The Company is currently defending six lawsuits (the Andro
Actions) relating to the sale by GNC of certain nutritional products alleged to contain the
ingredients commonly known as Androstenedione, Androstenediol, Norandrostenedione, and
Norandrostenediol (collectively, Andro Products). Five of these lawsuits were filed in
California, New York, New Jersey, Pennsylvania, and Florida. The most recent case was filed in
Illinois (see Stephens and Pio matter discussed below).
In each of the six cases, plaintiffs sought, or are seeking, to certify a class and obtain
damages on behalf of the class representatives and all those similarly-situated who purchased from
the Company certain nutritional supplements alleged to contain one or more Andro Products.
In April 2006, the Company filed pleadings seeking to remove the then-pending Andro Actions to
the respective federal district courts for the districts in which the respective Andro Actions were
pending. At the same time, the Company filed motions seeking to transfer the then-pending Andro
Actions to the U.S. District Court, Southern District of New York based on related to bankruptcy
jurisdiction, as one of the manufacturers supplying it with Andro Products, and from whom it sought
indemnity, MuscleTech Research and Development, Inc. (MuscleTech), had filed for bankruptcy. The
Company was successful in removing the New Jersey, New York, Pennsylvania, and Florida Andro
Actions to federal court and transferring these actions to the U.S. District Court, Southern
District of New York based on bankruptcy jurisdiction. The California case, Guzman v. General
Nutrition Companies, Inc., was not removed and remains pending in the Superior Court of the State
of California for the County of Los Angeles.
Following the conclusion of the MuscleTech bankruptcy case, in September 2007, plaintiffs
filed a stipulation dismissing all claims related to the sale of MuscleTech products in the four
cases then-pending in the U.S. District Court, Southern District of New York (New Jersey, New York,
Pennsylvania, and Florida). Additionally, plaintiffs filed motions with the Court to remand those
actions to their respective state courts, asserting that the federal court had been divested of
jurisdiction because the MuscleTech bankruptcy action was no longer pending. That motion was never
ruled upon and has been rendered moot by the disposition of the case, discussed below.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
On June 4, 2008, the U.S. District Court, Southern District of New York (on its own motion)
set a hearing for the purpose of hearing argument as to why the New Jersey, New York, Pennsylvania,
and Florida cases should not be dismissed for failure to prosecute in conformity to the Courts Case Management
Order. Following the hearing, the Court advised that all four cases would be dismissed with
prejudice and issued an order to that effect. In August 2008, plaintiffs appealed the dismissal of
the four cases to U.S. Court of Appeals for the Second Circuit, and oral argument was heard on
October 14, 2009. On December 14, 2009, the Second Circuit reversed the dismissal and remanded the
case to the U.S. District Court, Southern District of New York. On March 8, 2010, the District
Court granted plaintiffs previously filed motion to remand these cases to their respective state
courts. To date, no further proceedings have been scheduled in any of the state courts.
In the Guzman case in California, plaintiffs Motion for Class Certification was denied on
September 8, 2008. Plaintiffs appealed on October 31, 2008. Oral arguments took place on January
15, 2010 and the court reversed the order denying class certification. On March 1, 2010, the
Company filed a petition for review with the California Supreme Court which was denied. The case
will be tried as a class action lawsuit in the Superior Court of the State of California for the
County of Los Angeles.
On October 3, 2008, the plaintiffs in the five other Andro Actions filed another suit related
to the sale of Andro Products in state court in Illinois. Stephens and Pio v. General Nutrition
Companies, Inc. (Case No. 08 CH 37097, Circuit Court of Cook County, Illinois, County Department,
Chancery Division). The allegations are substantially similar to all of the other Andro Actions.
As any liabilities that may arise from these cases are not probable or reasonably estimable at
this time, no liability has been accrued in the accompanying financial statements.
California
Wage and Break Claim. On November 4, 2008, 98 plaintiffs filed
individual claims against the Company in the Superior Court of the State of California for the
County of Orange, which was removed to the U.S. District Court, Central District of California on
February 17, 2009. Each of the plaintiffs had previously been a member of a purported class in a
lawsuit filed against the Company in 2007 and resolved in September 2009. The plaintiffs allege
that they were not provided all of the rest and meal periods to which they were entitled under
California law, and further allege that the Company failed to pay them split shift and overtime
compensation to which they were entitled under California law. Discovery in this case is ongoing
and the Company is vigorously defending these matters. The court has developed a mediation
procedure for handling the pending claims and has ordered the parties to mediate with small groups
of plaintiffs and stayed the case as to the plaintiffs not participating in the mediations. The
first of the mediation sessions occurred February 10, 2010 and March 4, 2010 and did not result in
any settlements. Any liabilities that may arise from these matters are not probable or reasonably
estimable at this time.
Romero Claim. On April 27, 2009, plaintiff J.C. Romero, a professional baseball player, filed
a complaint against the Company, among others, in Superior Court of New Jersey (Law Division/
Camden County). Plaintiff alleges that he purchased from a GNC store and consumed 6-OXO Extreme,
which is manufactured by a third party, and in August 2008, was alleged to have tested positive for
a banned substance. Plaintiff served a 50 game suspension imposed by Major League Baseball. The
seven count complaint asserts, among other things, claims for negligence, strict liability,
misrepresentation, breach of implied warranty and violations of the New Jersey Consumer Fraud Act,
and seeks unspecified monetary damages. GNC tendered the claim to the insurance company of the
franchisee whose GNC store sold and allegedly misrepresented the product. On or about October 9,
2009, GNC answered plaintiffs first amended complaint and cross-claimed against co-defendants
Proviant Technologies and Ergopharm. Discovery in this case is ongoing and the Company is
vigorously defending the matter. Any liabilities that may arise from this matter are not probable
or reasonably estimable at this time.
Ciavarra Claim. On November 19, 2008, Ryan Ciavarra filed a personal injury lawsuit against,
among others, General Nutrition Corporation, in the District Court of Harris County, Texas.
Plaintiff alleges that his use and consumption of the diet product Hydroxycut, which is
manufactured by a third party and was, until recently, sold in the Companys stores, caused severe
liver damage, jaundice and elevated liver enzymes. Plaintiff asserts claims for strict liability,
negligence and breach of warranty and seeks unspecified monetary damages. Discovery in this case
is ongoing and the Company is vigorously defending the matter. Any liabilities that may arise from
this matter are not probable or reasonably estimable at this time.
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Hydroxycut Claims. On May 1, 2009, the FDA issued a warning on several Hydroxycut-branded
products manufactured by Iovate Health Sciences U.S.A., Inc. (Iovate). The FDA warning was based
on 23 reports of liver injuries from consumers who claimed to have used the products between 2002
and 2009. As a result, Iovate voluntarily recalled 14 Hydroxycut-branded products. Following
the recall, GNC was named, among other defendants, in 32 lawsuits in several states (note that
prior to May 1, 2009, GNC was a co-defendant in one Hydroxycut case (see Ciavarra Claim entry above). Iovate
previously accepted GNCs tender request for defense and indemnification under its purchasing
agreement with GNC and, as such, Iovate has accepted GNCs request for defense and indemnification
in the new Hydroxycut matters. GNCs ability to obtain full recovery in respect of any claims
against GNC in connection with products manufactured by Iovate under the indemnity is dependent on
Iovates insurance coverage, the creditworthiness of its insurer, and the absence of significant
defenses by such insurer. To the extent GNC is not fully compensated by Iovates insurer, it can
seek recovery directly from Iovate. GNCs ability to fully recover such amounts may be limited by
the creditworthiness of Iovate.
GNC has been named in several lawsuits related to Hydroxycut. The following personal injury
matters (in addition to the Ciavarra Claim discussed above) were filed by
individuals claiming injuries from use and consumption of Hydroxycut-branded products:
| Christopher and Dana Hamilton v. Iovate Health Sciences USA, Inc., et al., U.S. District Court, Northern District of Ohio, 09CV1944 (filed August 18, 2009); | ||
| Hector Manuel Abarca and Diana Curiel v. Iovate Health Sciences USA, Inc., et al., U.S. District Court, Northern District of California, 09CV3861 (filed August 21, 2009); | ||
| Jessica Rogoff v. General Nutrition Centers, Inc., et al., Superior Court of the State of California, County of Los Angeles, BC422842 (filed September 29, 2009); | ||
| Lucretia Ballou v. Muscletech Research and Development, Inc., et al., U.S. District Court, Western District of Louisiana, 09CV1996 (filed December 3, 2009); | ||
| Clinton Davis v. GNC Corporation, et al., U.S. District Court, Eastern District of Pennsylvania, 09CV5055 (filed November 11, 2009); | ||
| Michael Fyalka v. Iovate Health Sciences, et al., U.S. District Court, Southern District of Illinois, 09CV944 (filed November 10, 2009); | ||
| Monica Fay Stepter v. Iovate Health Sciences, USA, Inc., et al., 17th Judicial District Court, Parish of LaFourche, Louisiana (filed November 25, 2009); | ||
| Andrew Nolley v. Muscletech Research and Development, et al., U.S. District Court, Northern District of Mississippi, 09CV140 (filed December 18, 2009); | ||
| Kerry Donald v. Iovate Health Sciences Group, et al., Supreme Court of the State of New York, Kings County (filed January 22, 2010); | ||
| Casey Slyter v. GNC Corporation, et al., U.S. District Court, District of Kansas, 10CV2065 (filed January 29, 2010); | ||
| Debra Rutherford, et al. v. Muscletech Research and Development, Inc., U.S. District Court, Northern District of Alabama, 10CV370 (filed February 19, 2010); | ||
| Edward J. Torres v. General Nutrition Centers, Inc., et al., Superior Court of Arizona, Maricopa County, CV2010-005999 (filed March 11, 2010); | ||
| Amber Lutz, et al. v. General Nutrition Centers, Inc., et al., Superior Court of California, County of Orange, 30-2010 00357532 (filed March 26, 2010); | ||
| Shannon Justers, et al. v. General Nutrition Centers, Inc., et al., Superior Court of California, County of Orange, 30-2010 00357521 (filed March 26, 2010); | ||
| William Crowell, et al. v. General Nutrition Centers, Inc., et al., Superior Court of California, County of Orange, 30-2010 00357528 (filed March 26, 2010); | ||
| Scott Rosenthal, et al. v. General Nutrition Centers, Inc., et al., Superior Court of California, County of San Francisco, CGC 10-498138 (filed March 26, 2010); | ||
| Richard Limpert, et al. v. General Nutrition Centers, Inc., et al., Superior Court of California, County of San Francisco, CGC 10-498137 (filed March 26, 2010); | ||
| Savoen Roeun, et al. v. General Nutrition Centers, Inc., et al., Superior Court of California, County of San Francisco, CGC 10-497919 (filed March 19, 2010); | ||
| Torris Lucas, et al. v. GNC Corporation, et al., U.S. District Court, Northern District of Alabama, 10CV780 (filed March 31, 2010); |
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Phillip Sims v. GNC Corporation, et al., U.S. District Court, District of New Jersey, 10CV1728 (filed April 5, 2010); | ||
| Donna Natali v. GNC Corporation, et al., Superior Court of New Jersey, Atlantic County, ATL-L-001499-10 (filed April 5, 2010); | ||
| Matthew Carhart v. GNC Corporation, et al., Court of Common Pleas Philadelphia County, 10-0402210 (filed April 15, 2010); | ||
| Michael Brown v. GNC Corporation, et al., Court of Common Pleas Philadelphia County, 10-0402217 (filed April 15, 2010); and | ||
| Alan DAlessio, Jr. v. GNC Corporation, et al., Court of Common Pleas Philadelphia County, 10-0402214 (filed April 15, 2010). |
The following putative class actions generally include claims of consumer fraud,
misrepresentation, strict liability, and breach of warranty related to Hydroxycut-branded products:
| Andrew Dremak, et al. v. Iovate Health Sciences Group, Inc., et al., U.S. District Court, Southern District of California, 09CV1088 (filed May 19, 2009); | ||
| Enjoli Pennier, et al. v. Iovate Health Sciences, et al., U.S. District Court, Eastern District of Louisiana, 09CV3533 (filed May 13, 2009); | ||
| Alejandro M. Jimenez, et al. v. Iovate Health Sciences, Inc., et al., U.S. District Court, Eastern District of California, 09CV1473 (filed May 28, 2009); | ||
| Amy Baker, et al. v. Iovate Health Sciences USA, Inc., et al., U.S. District Court, Northern District of Alabama, 09CV872 (filed May 4, 2009); | ||
| Kyle Davis and Sara Carreon, et al. v. Iovate Health Sciences USA, Inc., et al., U.S. District Court, Northern District of Alabama, 09CV896 (filed May 7, 2009); and | ||
| Lenny Charles Gunn, et al. v. Iovate Health Sciences Group, Inc., et al., U.S. District Court, Southern District of California, 09CV2337 (filed October 24, 2009). |
By court order dated October 6, 2009, the United States Judicial Panel on Multidistrict Litigation
consolidated pretrial proceedings of many of the pending actions (including the above-listed GNC
class actions) in the Southern District of California (In re: Hydroxycut Marketing and Sales
Practices Litigation, MDL No. 2087). Any liabilities that may arise from these matters are not
probable or reasonably estimable at this time.
Bedell Claim. On May 1, 2009, plaintiff Eugene Bedell, Jr. filed a personal injury complaint
against, among others, the Company and GNC Corporation, in Circuit Court of Loudoun County,
Virginia. Plaintiff alleges that his use and consumption of a non-GNC product called Nitro T3
caused him to have a stroke. Plaintiff makes certain allegations regarding the risks of using and
consuming Nitro T3 and GNCs alleged failure to warn consumers of those risks. Plaintiff seeks
unspecified monetary damages. Under its purchasing agreement with the vendor, WellNx, GNC tendered
the matter to WellNx for defense and indemnification. WellNx has accepted GNCs request for
defense and indemnification. Any liabilities that may arise from this matter are not probable or
reasonably estimable at this time.
Chen Claim. On April 30, 2009, plaintiff Yuging Phillis Chen filed a Third Amended Complaint
against, among others, Nutra Manufacturing, Inc., in the Superior Court of California for the
County of Los Angeles. Plaintiff alleges that her use and consumption of various products,
including Mega Garlic Plus and Herbalifeline, manufactured by Nutra Manufacturing, caused personal
injuries. Plaintiff asserts, among other things, claims for strict liability, negligence, and
fraud, and seeks unspecified monetary damages. Any liabilities that may arise from this matter are
not probable or reasonably estimable at this time.
California False Labeling and Consumer Fraud Claims. Beginning in May 2009, a series of false
labeling and consumer fraud cases (listed below) were filed in California in connection with label
claims of non-GNC products sold in the Companys stores. The following cases are active:
| Richard Johnson, et al. v. Vianda, LLC, et al., Superior Court of California, County of Los Angeles, BC 423825 (filed October 20, 2009); | ||
| Michael Flores, et al. v. EP2. Inc., et al., U.S. District Court, Central District of California, 09CV7872 (filed October 28, 2009); and |
15
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Shalena Dysthe, et al. v. Basic Research, et al., U.S. District Court, Central District of California, 09CV8013 (filed November 2, 2009). |
GNC tendered each of the above matters to the applicable vendor for defense and indemnification.
Each such vendor accepted GNCs request for defense and indemnification. Any liabilities that
may arise from these matters are not probable or reasonably estimable at this time.
Environmental Compliance
In March 2008, the South Carolina Department of Health and Environmental Control (DHEC)
requested that the Company investigate its South Carolina facility for a possible source or sources
of contamination detected on an adjoining property. The Company has commenced the investigation at
the facility as requested by DHEC. After several phases of the investigation the possible source
or sources of contamination have not been sufficiently identified. The Company is continuing such
investigation. The proceedings in this matter have not yet progressed to a stage where it is
possible to estimate the timing and extent of any remedial action that may be required, the
ultimate cost of remediation, or the amount of the Companys potential liability.
In addition to the foregoing, the Company is subject to numerous federal, state, local, and
foreign environmental and health and safety laws and regulations governing its operations,
including the handling, transportation, and disposal of the Companys non-hazardous and hazardous
substances and wastes, as well as emissions and discharges from its operations into the
environment, including discharges to air, surface water, and groundwater. Failure to comply with
such laws and regulations could result in costs for remedial actions, penalties, or the imposition
of other liabilities. New laws, changes in existing laws or the interpretation thereof, or the
development of new facts or changes in their processes could also cause the Company to incur
additional capital and operation expenditures to maintain compliance with environmental laws and
regulations and environmental permits. The Company also is subject to laws and regulations that
impose liability and cleanup responsibility for releases of hazardous substances into the
environment without regard to fault or knowledge about the condition or action causing the
liability. Under certain of these laws and regulations, such liabilities can be imposed for cleanup
of previously owned or operated properties, or for properties to which substances or wastes that
were sent in connection with current or former operations at its facilities. The presence of
contamination from such substances or wastes could also adversely affect the Companys ability to
sell or lease its properties, or to use them as collateral for financing. From time to time, the
Company has incurred costs and obligations for correcting environmental and health and safety
noncompliance matters and for remediation at or relating to certain of its properties or properties
at which its waste has been disposed. The Company believes it has complied with, and is currently
complying with, its environmental obligations pursuant to environmental and health and safety laws
and regulations in all material respects, and that any liabilities for noncompliance will not have
a material adverse effect on its business or financial performance. However, it is difficult to
predict future liabilities and obligations, which could be material.
Contingencies
Due to the nature of the Companys business operations having a presence in multiple taxing
jurisdictions, the Company periodically receives inquiries and/or audits from various state and
local taxing authorities. Any probable and reasonably estimable liabilities that may arise from
these inquiries have been accrued and reflected in the accompanying financial statements.
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 8. STOCK-BASED COMPENSATION PLANS
Stock Options
In 2007, the Board of Directors of Parent (the Board) and Parents stockholders approved and
adopted the GNC Acquisition Holdings Inc. 2007 Stock Incentive Plan (the Plan). The purpose of
the Plan is to enable Parent to attract and retain highly qualified personnel who will contribute
to the success of the Company. The Plan provides for the granting of stock options, restricted
stock, and other stock-based awards. The Plan is available to certain eligible employees,
directors, consultants or advisors as determined by the Compensation Committee of the Board (the
Compensation Committee). The total number of shares of Parents Class A common stock reserved
and available for the Plan is 10.4 million shares. Stock options under the Plan generally are
granted with exercise prices at or above fair market value, typically vest over a four or five-year
period and expire ten years from date of grant. The Compensation Committee has used a valuation
methodology in which the fair market value of the common stock is based on the Companys business
enterprise value and, in situations deemed appropriate by the Compensation Committee, may be
discounted to reflect the lack of marketability associated with the common stock. No stock
appreciation rights, restricted stock, deferred stock or performance shares have been granted under
the Plan.
The Company utilizes the Black-Scholes model to calculate the fair value of options under the
standard on stock compensation. The resulting compensation cost is recognized in the Companys
financial statements over the option vesting period. At March 31, 2010, the net unrecognized
compensation cost was $8.8 million and is expected to be recognized over a weighted average period
of approximately 2.5 years.
The following table outlines the Parents stock option activity:
Weighted | ||||||||
Average | ||||||||
Total Options | Exercise Price | |||||||
Outstanding at December 31, 2009 |
9,263,640 | $ | 7.27 | |||||
Granted |
255,000 | 12.29 | ||||||
Exercised |
| | ||||||
Forfeited |
(130,016 | ) | 6.25 | |||||
Expired |
(28,502 | ) | 6.25 | |||||
Outstanding at March 31, 2010 |
9,360,122 | $ | 7.43 | |||||
Exercisable at March 31, 2010 |
4,762,099 | $ | 6.70 | |||||
The standard on stock compensation requires that the cost resulting from all share-based
payment transactions be recognized in the financial statements. Stock-based compensation expense
for the three months ended March 31, 2010 and 2009 was $0.8 million and $0.7 million, respectively.
17
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of March 31, 2010, the weighted average remaining contractual life of outstanding options
was 7.3 years. At March 31, 2010, the weighted average remaining contractual life of exercisable
options was 6.9 years. The weighted average fair value of options granted during 2010 was $3.43.
The Black-Scholes model utilizes the following assumptions in determining a fair value: price
of underlying stock, option exercise price, expected option term, risk-free interest rate, expected
dividend yield, and expected stock price volatility over the options expected term. As the Company
has had minimal exercises of stock options through December 31, 2009, 2008 and 2007, the option
term has been estimated by considering both the vesting period, which is typically five years, and
the contractual term of ten years. As the Companys underlying stock is not publicly traded on an
open market, the Company utilized its current peer group average to estimate the expected
volatility. The assumptions used in the Companys Black-Scholes valuation related to stock option
grants made during the three months ended March 31, 2010 were as follows:
March 31, | ||
2010 | ||
(unaudited) | ||
Dividend yield |
0.00% | |
Expected option life |
7.5 years | |
Volatility factor percentage of market price |
31.5% | |
Discount rate |
3.06 - 3.28% |
As the Black-Scholes model utilizes certain estimates and assumptions, the existing
models do not necessarily represent the definitive fair value of options for future periods.
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9. SEGMENTS
The Company has three reportable segments, each of which represents an identifiable
component of the Company for which separate financial information is available. This information
is utilized by management to assess performance and allocate assets accordingly. The Companys
management evaluates segment operating results based on several indicators. The primary key
performance indicators are sales and operating income or loss for each segment. Operating income
or loss, as evaluated by management, excludes certain items that are managed at the consolidated
level, such as distribution and warehousing, impairments and other corporate costs. The following
table represents key financial information for each of the Companys reportable segments,
identifiable by the distinct operations and management of each: Retail, Franchising, and
Manufacturing/Wholesale. The Retail reportable segment includes the Companys corporate store
operations in the United States, Canada and its www.gnc.com business. The Franchise reportable
segment represents the Companys franchise operations, both domestically and internationally. The
Manufacturing/Wholesale reportable segment represents the Companys manufacturing operations in
South Carolina and the Wholesale sales business. This segment supplies the Retail and Franchise
segments, along with various third parties, with finished products for sale. The Warehousing and
Distribution costs, Corporate Costs, and Other Unallocated Costs represent the Companys
administrative expenses. The accounting policies of the segments are the same as those described in
Note 2, Basis of Presentation and Summary of Significant Accounting Policies.
Three months ended | ||||||||
March 31, | March 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
(in thousands) | ||||||||
Revenue: |
||||||||
Retail |
$ | 350,834 | $ | 333,712 | ||||
Franchise |
72,602 | 64,483 | ||||||
Manufacturing/Wholesale: |
||||||||
Intersegment (1) |
47,345 | 47,751 | ||||||
Third Party |
41,583 | 41,702 | ||||||
Sub total Manufacturing/Wholesale |
88,928 | 89,453 | ||||||
Sub total segment revenues |
512,364 | 487,648 | ||||||
Intersegment elimination (1) |
(47,345 | ) | (47,751 | ) | ||||
Total revenue |
$ | 465,019 | $ | 439,897 | ||||
Operating income: |
||||||||
Retail |
$ | 50,196 | $ | 44,443 | ||||
Franchise |
22,401 | 19,207 | ||||||
Manufacturing/Wholesale |
16,872 | 17,881 | ||||||
Unallocated corporate and other costs: |
||||||||
Warehousing and distribution costs |
(13,892 | ) | (13,317 | ) | ||||
Corporate costs |
(17,905 | ) | (18,060 | ) | ||||
Sub total unallocated corporate and
other costs |
(31,797 | ) | (31,377 | ) | ||||
Total operating income |
$ | 57,672 | $ | 50,154 | ||||
(1) | Intersegment revenues are eliminated from consolidated revenue. |
19
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 10. SUPPLEMENTAL GUARANTOR INFORMATION
As of March 31, 2010 the Companys debt included its 2007 Senior Credit Facility, Senior
Toggle Notes and 10.75% Senior Subordinated Notes. The 2007 Senior Credit Facility has been
guaranteed by the Companys direct parent, GNC Corporation, and the Companys existing and future
direct and indirect material domestic subsidiaries. The Senior Toggle Notes are general non
collateralized obligations of the Company, are effectively subordinated to the Companys 2007
Senior Credit Facility to the extent of the value of the collateral securing the 2007 Senior Credit
Facility and are senior in right of payment to all existing and future subordinated obligations of
the Company, including its 10.75% Senior Subordinated Notes. The Senior Toggle Notes are
unconditionally guaranteed on a non collateralized basis by all of the Companys existing and
future direct and indirect material domestic subsidiaries. The 10.75% Senior Subordinated Notes
are general non collateralized obligations and are guaranteed on a senior subordinated basis by the
Companys existing and future direct and indirect material domestic subsidiaries and rank junior in
right of payment to the Companys 2007 Senior Credit Facility and Senior Toggle Notes. The
guarantors are the same for the 2007 Senior Credit Facility, Senior Toggle Notes and 10.75% Senior
Subordinated Notes. Non-guarantor subsidiaries include the Companys direct and indirect foreign
subsidiaries. Each subsidiary guarantor is 100% owned, directly or indirectly, by the Company.
The guarantees are full and unconditional and joint and several. Investments in subsidiaries are
accounted for under the equity method of accounting.
Presented below are condensed consolidating financial statements of the Company as the
parent/issuer, and the combined guarantor and non-guarantor subsidiaries as of March 31, 2010, and
December 31, 2009, and the three months ended March 31, 2010 and 2009. Intercompany balances and
transactions have been eliminated.
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Supplemental Condensed Consolidating Balance Sheets
Combined | Combined | |||||||||||||||||||
Parent/ | Guarantor | Non-Guarantor | ||||||||||||||||||
March 31, 2010 | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
(unaudited) | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Current assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 104,446 | $ | 2,904 | $ | 3,278 | $ | | $ | 110,628 | ||||||||||
Receivables, net |
483 | 95,927 | 554 | | 96,964 | |||||||||||||||
Intercompany receivables |
84,010 | | | (84,010 | ) | | ||||||||||||||
Inventories, net |
| 360,503 | 29,684 | | 390,187 | |||||||||||||||
Prepaids and other current assets |
10,078 | 21,593 | 4,212 | | 35,883 | |||||||||||||||
Total current assets |
199,017 | 480,927 | 37,728 | (84,010 | ) | 633,662 | ||||||||||||||
Goodwill |
| 624,340 | 468 | | 624,808 | |||||||||||||||
Brands |
| 720,000 | | | 720,000 | |||||||||||||||
Property, plant and equipment, net |
6,733 | 162,383 | 28,573 | | 197,689 | |||||||||||||||
Investment in subsidiaries |
1,578,724 | (7,750 | ) | | (1,570,974 | ) | | |||||||||||||
Other assets |
28,021 | 155,084 | | (8,781 | ) | 174,324 | ||||||||||||||
Total assets |
$ | 1,812,495 | $ | 2,134,984 | $ | 66,769 | $ | (1,663,765 | ) | $ | 2,350,483 | |||||||||
Current liabilities |
||||||||||||||||||||
Current liabilities |
$ | 22,235 | $ | 212,970 | $ | 11,233 | $ | | $ | 246,438 | ||||||||||
Intercompany payables |
| 65,441 | 18,569 | (84,010 | ) | | ||||||||||||||
Total current liabilities |
22,235 | 278,411 | 29,802 | (84,010 | ) | 246,438 | ||||||||||||||
Long-term debt |
1,052,439 | 30 | 14,108 | (8,781 | ) | 1,057,796 | ||||||||||||||
Deferred tax liabilities |
(4,594 | ) | 294,087 | (439 | ) | | 289,054 | |||||||||||||
Other long-term liabilities |
25,253 | 12,968 | 1,812 | | 40,033 | |||||||||||||||
Total liabilities |
1,095,333 | 585,496 | 45,283 | (92,791 | ) | 1,633,321 | ||||||||||||||
Total stockholders equity (deficit) |
717,162 | 1,549,488 | 21,486 | (1,570,974 | ) | 717,162 | ||||||||||||||
Total liabilities and stockholders
equity (deficit) |
$ | 1,812,495 | $ | 2,134,984 | $ | 66,769 | $ | (1,663,765 | ) | $ | 2,350,483 | |||||||||
21
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Supplemental Condensed Consolidating Balance Sheets
Combined | Combined | |||||||||||||||||||
Parent/ | Guarantor | Non-Guarantor | ||||||||||||||||||
December 31, 2009 | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Current assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 77,797 | $ | (4,801 | ) | $ | 2,093 | $ | | $ | 75,089 | |||||||||
Receivables, net |
895 | 92,273 | 1,187 | | 94,355 | |||||||||||||||
Intercompany receivables |
139,168 | | | (139,168 | ) | | ||||||||||||||
Inventories, net |
| 339,975 | 30,517 | | 370,492 | |||||||||||||||
Prepaids and other current assets |
19,308 | 14,409 | 8,502 | | 42,219 | |||||||||||||||
Total current assets |
237,168 | 441,856 | 42,299 | (139,168 | ) | 582,155 | ||||||||||||||
Goodwill |
| 624,285 | 468 | | 624,753 | |||||||||||||||
Brands |
| 720,000 | | | 720,000 | |||||||||||||||
Property, plant and equipment, net |
7,409 | 163,882 | 28,290 | | 199,581 | |||||||||||||||
Investment in subsidiaries |
1,550,708 | (7,687 | ) | | (1,543,021 | ) | | |||||||||||||
Other assets |
28,876 | 157,018 | | (8,781 | ) | 177,113 | ||||||||||||||
Total assets |
$ | 1,824,161 | $ | 2,099,354 | $ | 71,057 | $ | (1,690,970 | ) | $ | 2,303,602 | |||||||||
Current liabilities |
||||||||||||||||||||
Current liabilities |
$ | 34,129 | $ | 154,435 | $ | 11,023 | $ | | $ | 199,587 | ||||||||||
Intercompany payables |
| 113,359 | 25,809 | (139,168 | ) | | ||||||||||||||
Total current liabilities |
34,129 | 267,794 | 36,832 | (139,168 | ) | 199,587 | ||||||||||||||
Long-term debt |
1,052,341 | 32 | 14,493 | (8,781 | ) | 1,058,085 | ||||||||||||||
Deferred tax liabilities |
(4,754 | ) | 294,087 | (439 | ) | | 288,894 | |||||||||||||
Other long-term liabilities |
24,929 | 14,129 | 462 | | 39,520 | |||||||||||||||
Total liabilities |
1,106,645 | 576,042 | 51,348 | (147,949 | ) | 1,586,086 | ||||||||||||||
Total stockholders equity (deficit) |
717,516 | 1,523,312 | 19,709 | (1,543,021 | ) | 717,516 | ||||||||||||||
Total liabilities and stockholders
equity (deficit) |
$ | 1,824,161 | $ | 2,099,354 | $ | 71,057 | $ | (1,690,970 | ) | $ | 2,303,602 | |||||||||
22
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Supplemental Condensed Consolidating Statements of Operations
Combined | Combined | |||||||||||||||||||
Parent/ | Guarantor | Non-Guarantor | ||||||||||||||||||
Three months ended March 31, 2010 | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
(unaudited) | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenue |
$ | | $ | 439,780 | $ | 28,431 | $ | (3,192 | ) | $ | 465,019 | |||||||||
Cost of sales, including costs of warehousing,
distribution and occupancy |
| 281,901 | 20,408 | (3,192 | ) | 299,117 | ||||||||||||||
Gross profit |
| 157,879 | 8,023 | | 165,902 | |||||||||||||||
Compensation and related benefits |
10,169 | 53,330 | 4,259 | | 67,758 | |||||||||||||||
Advertising and promotion |
| 15,167 | 287 | | 15,454 | |||||||||||||||
Other selling, general and administrative |
8,103 | 16,735 | 256 | | 25,094 | |||||||||||||||
Subsidiary (income) expense |
(27,066 | ) | 63 | | 27,003 | | ||||||||||||||
Other (income) expense |
(17,343 | ) | 15,483 | 1,784 | | (76 | ) | |||||||||||||
Operating income
(loss) |
26,137 | 57,101 | 1,437 | (27,003 | ) | 57,672 | ||||||||||||||
Interest expense, net |
849 | 15,507 | 273 | | 16,629 | |||||||||||||||
Income (loss) before income taxes |
25,288 | 41,594 | 1,164 | (27,003 | ) | 41,043 | ||||||||||||||
Income tax (benefit) expense |
(671 | ) | 15,418 | 337 | | 15,084 | ||||||||||||||
Net income (loss) |
$ | 25,959 | $ | 26,176 | $ | 827 | $ | (27,003 | ) | $ | 25,959 | |||||||||
Supplemental Condensed Consolidating Statements of Operations
Combined | Combined | |||||||||||||||||||
Parent/ | Guarantor | Non-Guarantor | ||||||||||||||||||
Three months ended March 31, 2009 | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
(unaudited) | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenue |
$ | | $ | 418,582 | $ | 24,412 | $ | (3,097 | ) | $ | 439,897 | |||||||||
Cost of sales, including costs of warehousing,
distribution and occupancy |
| 272,177 | 16,649 | (3,097 | ) | 285,729 | ||||||||||||||
Gross profit |
| 146,405 | 7,763 | | 154,168 | |||||||||||||||
Compensation and related benefits |
10,084 | 51,535 | 3,706 | | 65,325 | |||||||||||||||
Advertising and promotion |
| 14,473 | 266 | | 14,739 | |||||||||||||||
Other selling, general and administrative |
8,224 | 15,411 | 218 | | 23,853 | |||||||||||||||
Subsidiary (income) expense |
(20,438 | ) | (1,445 | ) | | 21,883 | | |||||||||||||
Other (income) expense |
(17,592 | ) | 16,707 | 982 | | 97 | ||||||||||||||
Operating income
(loss) |
19,722 | 49,724 | 2,591 | (21,883 | ) | 50,154 | ||||||||||||||
Interest expense, net |
875 | 17,895 | 292 | | 19,062 | |||||||||||||||
Income (loss) before income taxes |
18,847 | 31,829 | 2,299 | (21,883 | ) | 31,092 | ||||||||||||||
Income tax (benefit) expense |
(598 | ) | 11,391 | 854 | | 11,647 | ||||||||||||||
Net income (loss) |
$ | 19,445 | $ | 20,438 | $ | 1,445 | $ | (21,883 | ) | $ | 19,445 | |||||||||
23
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Supplemental Condensed Consolidating Statements of Cash Flows
Combined | Combined | |||||||||||||||
Parent/ | Guarantor | Non-Guarantor | ||||||||||||||
Three months ended March 31, 2010 | Issuer | Subsidiaries | Subsidiaries | Consolidated | ||||||||||||
(unaudited) | ||||||||||||||||
(in thousands) | ||||||||||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES: |
$ | | $ | 69,850 | $ | 2,250 | $ | 72,100 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||
Capital expenditures |
(556 | ) | (6,090 | ) | (667 | ) | (7,313 | ) | ||||||||
Investment/distribution |
55,826 | (55,826 | ) | | | |||||||||||
Other investing |
| (226 | ) | | (226 | ) | ||||||||||
Net cash provided by (used in) investing activities |
55,270 | (62,142 | ) | (667 | ) | (7,539 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
Dividend payment |
(28,384 | ) | | | (28,384 | ) | ||||||||||
Other financing |
(237 | ) | (3 | ) | (359 | ) | (599 | ) | ||||||||
Net cash used in financing activities |
(28,621 | ) | (3 | ) | (359 | ) | (28,983 | ) | ||||||||
Effect of exchange rate on cash |
| | (39 | ) | (39 | ) | ||||||||||
Net increase in
cash |
26,649 | 7,705 | 1,185 | 35,539 | ||||||||||||
Beginning balance, cash |
77,797 | (4,801 | ) | 2,093 | 75,089 | |||||||||||
Ending balance,
cash |
$ | 104,446 | $ | 2,904 | $ | 3,278 | $ | 110,628 | ||||||||
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Supplemental Condensed Consolidating Statements of Cash Flows
Combined | Combined | |||||||||||||||
Parent/ | Guarantor | Non-Guarantor | ||||||||||||||
Three months ended March 31, 2009 | Issuer | Subsidiaries | Subsidiaries | Consolidated | ||||||||||||
(unaudited) | ||||||||||||||||
(in thousands) | ||||||||||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES: |
$ | | $ | 29,259 | $ | 5,083 | $ | 34,342 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||
Capital expenditures |
(754 | ) | (4,071 | ) | (714 | ) | (5,539 | ) | ||||||||
Investment/distribution |
57,258 | (57,258 | ) | | | |||||||||||
Other investing |
| (300 | ) | | (300 | ) | ||||||||||
Net cash provided by (used in) investing activities |
56,504 | (61,629 | ) | (714 | ) | (5,839 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
GNC Corporation investment in
General Nutrition Centers, Inc. |
(278 | ) | | | (278 | ) | ||||||||||
Other financing |
(4,569 | ) | (3 | ) | (334 | ) | (4,906 | ) | ||||||||
Net cash used in financing activities |
(4,847 | ) | (3 | ) | (334 | ) | (5,184 | ) | ||||||||
Effect of exchange rate on cash |
| | 9 | 9 | ||||||||||||
Net increase (decrease) in
cash |
51,657 | (32,373 | ) | 4,044 | 23,328 | |||||||||||
Beginning balance, cash |
| 40,077 | 2,230 | 42,307 | ||||||||||||
Ending balance, cash |
$ | 51,657 | $ | 7,704 | $ | 6,274 | $ | 65,635 | ||||||||
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 11. INCOME TAXES
The Company recognized $15.1 million of income tax expense (or 36.8% of pre-tax income) during
the three months ended March 31, 2010 compared to $11.6 million (or 37.5% of pre-tax income) for
the same period of 2009.
The Company files a consolidated federal tax return and various consolidated and separate tax
returns as prescribed by the tax laws of the state and local jurisdictions in which it and its
subsidiaries operate. The Company has been audited by the Internal Revenue Service (the IRS)
through its March 15, 2007 tax year. The Company has various state and local jurisdiction tax
years open to examination (the earliest open period is 2003), and is also currently under audit in
certain state and local jurisdictions. As of March 31, 2010, the Company believes that it has
appropriately reserved for any potential federal, state and local income tax exposures.
The Company recorded additional unrecognized tax benefits of approximately $0.3
million during the three months ended March 31, 2010, exclusive of amounts settled. The additional
unrecognized tax benefits recorded during the three months ended March 31, 2010 are principally
related to the continuation of previously taken tax positions. As of March 31, 2010 and December
31, 2009, the Company had $7.1 million and $6.8 million, respectively, of unrecognized tax
benefits. As of March 31, 2010, the Company is not aware of any tax positions for which it is
reasonably possible that the amounts of unrecognized tax benefits will significantly increase or
decrease within the next 12 months. The amount of unrecognized tax benefits that, if recognized,
would affect the effective tax rate is $6.2 million. The Company recognizes accrued interest and
penalties related to unrecognized tax benefits in income tax expense. As of March 31, 2010 and
December 31, 2009, the Company had accrued approximately $2.4 million and $2.2 million,
respectively, in potential interest and penalties associated with uncertain tax positions. To the
extent interest and penalties are not assessed with respect to the ultimate settlement of uncertain
tax positions, amounts previously accrued will be reduced and reflected as a reduction of the
overall income tax provision.
NOTE 12. FAIR VALUE MEASUREMENT
The Company adopted the standard on fair value measurements and disclosures under the new
Codification as of January 1, 2008. This standard defines fair value, establishes a consistent
framework for measuring fair value, and expands disclosures for each major asset and liability
category measured at fair value on either a recurring or nonrecurring basis. The standard clarifies
that fair value is an exit price, representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants. As such,
fair value is a market-based measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. As a basis for considering such
assumptions, the standard establishes a three-tier fair value hierarchy which prioritizes the
inputs used in measuring fair value as follows:
Level 1 | observable inputs such as quoted prices in active markets for identical assets and liabilities; | ||
Level 2 | observable inputs such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other inputs that are observable, or can be corroborated by observable market data; and | ||
Level 3 | unobservable inputs for which there are little or no market data, which require the reporting entity to develop its own assumptions. |
26
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the Companys financial assets and liabilities that were
accounted for at fair value on a recurring basis as of March 31, 2010 by level within the fair
value hierarchy:
Fair Value Measurements Using | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
(in thousands) | ||||||||||||
Other long-term
liabilities |
$ | 2,448 | $ | 14,240 | $ | |
The following table presents the Companys financial assets and liabilities that were
accounted for at fair value on a recurring basis as of December 31, 2009 by level within the fair
value hierarchy:
Fair Value Measurements Using | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
(in thousands) | ||||||||||||
Other long-term
liabilities |
$ | 2,337 | $ | 14,679 | $ | |
The following is a description of the valuation methodologies used for these items, as
well as the general classification of such items pursuant to the fair value hierarchy of the
standard on fair value measurements and disclosures:
Other long-term liabilities. Other long-term liabilities classified as Level 1 consist of
liabilities related to the Companys non-qualified deferred compensation plan. The liabilities
related to these plans are adjusted based on changes in the fair value of the underlying
employee-directed investment choices. Since the employee-directed investment choices are exchange
traded equity indexes with quoted prices in active markets, the liabilities are classified as
within Level 1 on the fair value hierarchy. Other long-term liabilities classified as Level 2
consist of the Companys interest rate swaps. The derivatives are pay-fixed, receive-variable
interest rate swaps based on a LIBOR rate. Fair value is based on a model-derived valuation using
the LIBOR rate, which is an observable input in an active market. Therefore, the Companys
derivative is classified as Level 2 on the fair value hierarchy.
In addition to the above table, the Companys financial instruments also consist of cash and
cash equivalents, accounts receivable, accounts payable and long-term debt. The Company did not
elect to value its long-term debt with the fair value option in accordance with the standard on
financial instruments. The Company believes that the recorded values of all of its other financial
instruments approximate their fair values because of their nature and respective durations.
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 13. RELATED PARTY TRANSACTIONS
Management Services Agreement. Upon consummation of the Merger, the Company entered into a
management services agreement with Parent. Under the agreement, Parent provides the Company and
its subsidiaries with certain services in exchange for an annual fee of $1.5 million, as well as
customary fees for services rendered in connection with certain major financial transactions, plus
reimbursement of expenses and a tax gross-up relating to a non-tax deductible portion of the fee.
The Company provides customary indemnifications to Parent and its affiliates and those providing
services on its behalf. In addition, upon consummation of the Merger, the Company incurred an
aggregate fee of $10.0 million, plus reimbursement of expenses, payable to Parent for services
rendered in connection with the Merger. For each of the three months ended March 31, 2010 and
2009, $0.4 million was paid pursuant to this agreement.
Credit Facility. Upon consummation of the Merger, the Company entered into a $735.0 million
credit agreement, under which various fund portfolios related to one of the Companys sponsors,
Ares, are lenders. As of March 31, 2010, certain affiliates of Ares held approximately $62.1
million of term loans under the Companys 2007 Senior Credit Facility.
Lease Agreements. General Nutrition Centres Company, a wholly owned subsidiary of the
Company, is party to 21 lease agreements, as lessee, with Cadillac Fairview Corporation, as lessor,
with respect to properties located in Canada (the Lease Agreements). Cadillac Fairview
Corporation is a direct, wholly owned subsidiary of OTPP, one of the principal stockholders of
Parent. For the three months ended March 31, 2010 and 2009, the Company paid $0.7 million and $0.6
million, respectively, under the Lease Agreements. Each lease was negotiated in the ordinary
course of business on an arms length basis.
Product Purchases. The Company purchases certain fish oil and probiotics products
manufactured by Lifelong Nutrition, Inc. (Lifelong) for resale under the Companys proprietary
brand name WELLbeING. Carmen Fortino, who serves as one of the directors of the Company and its
Parent, is the Managing Director, a member of the Board of Directors and a stockholder of Lifelong.
For the three months ended March 31, 2010 and 2009, the Company made $0.6 million and $1.6
million, respectively, in product purchases from Lifelong.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with Item 1, Financial Statements in Part I of this
quarterly report on Form 10-Q.
Forward-Looking Statements
The discussion in this section contains forward-looking statements that involve risks and
uncertainties. Forward-looking statements may relate to our plans, objectives, goals, strategies,
future events, future revenues or performance, capital expenditures, financing needs, and other
information that is not historical information. Forward-looking statements can be identified by
the use of terminology such as subject to, believes, anticipates, plans, expects,
intends, estimates, projects, may, will, should, can, the negatives thereof,
variations thereon and similar expressions, or by discussions of strategy.
All forward-looking statements, including, without limitation, our examination of historical
operating trends, are based upon our current expectations and various assumptions. We believe there
is a reasonable basis for our expectations and beliefs, but they are inherently uncertain. We may
not realize our expectations, and our beliefs may not prove correct. Actual results could differ
materially from those described or implied by such forward-looking statements. Factors that may
materially affect such forward-looking statements include, among others:
| uncertainty of continuing weakening of the economy and its impact on us and our partners; | ||
| significant competition in our industry; | ||
| unfavorable publicity or consumer perception of our products; | ||
| the incurrence of material product liability and product recall costs; | ||
| costs of compliance and our failure to comply with new and existing governmental regulations; | ||
| costs of litigation and the failure to successfully defend lawsuits and other claims against the Company; | ||
| the failure of our franchisees to conduct their operations profitably and limitations on our ability to terminate or replace under-performing franchisees; | ||
| economic, political, and other risks associated with our international operations; | ||
| our failure to keep pace with the demands of our customers for new products and services; | ||
| disruptions in our manufacturing system or losses of manufacturing certifications; | ||
| the lack of long-term experience with human consumption of ingredients in some of our products; | ||
| increases in the frequency and severity of insurance claims, particularly claims for which we are self-insured; | ||
| loss or retirement of key members of management; | ||
| increases in the cost of borrowings and limitations on availability of additional debt or equity capital; | ||
| the impact of our substantial debt on our operating income and our ability to grow; | ||
| the failure to adequately protect or enforce our intellectual property rights against competitors; | ||
| changes in applicable laws relating to our franchise operations; and | ||
| our inability to expand our franchise operations or attract new franchisees. |
We caution that these forward-looking statements, and those described elsewhere in this
report, involve material risks and uncertainties and are subject to change based on factors beyond
our control as discussed within Item 1A of Part II of this Quarterly Report on Form 10-Q and Item
1A of our Annual Report on Form 10-K for the year ended December 31, 2009. Consequently,
forward-looking statements should be regarded solely as our current plans, estimates, and beliefs.
You should not place undue reliance on forward-looking statements. We cannot guarantee future results,
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events, levels of activity, performance, or achievements. We do not undertake and
specifically decline any obligation to update, republish, or revise forward-looking statements to
reflect future events or circumstances or to reflect the occurrences of unanticipated events.
Business Overview
We are a leading global specialty retailer of nutritional supplements, which include VMHS,
sports nutrition products, diet products, and other wellness products. We derive our revenues
principally from product sales through our company-owned stores and online through www.gnc.com,
franchise activities, and sales of products manufactured in our facilities to third parties. We
sell products through a worldwide network of more than 7,000 locations operating under the GNC
brand name.
Revenues and Operating Performance from our Business Segments
We measure our operating performance primarily through revenues and operating income from our
three business segments, Retail, Franchise, and Manufacturing/Wholesale, and through the management
of unallocated costs from our warehousing, distribution and corporate segments, as follows:
| Retail revenues are generated by sales to consumers at our company-owned stores and online through www.gnc.com. Although we believe that our retail and franchise businesses are not seasonal in nature, historically we have experienced, and expect to continue to experience, a substantial variation in our net sales and operating results from quarter to quarter, with the first half of the year being stronger than the second half of the year. As a leader in our industry, we expect our retail revenue growth to be consistent with projected industry growth as a result of our disproportionate market share, scale economies in purchasing and advertising, strong brand awareness, and vertical integration. | ||
| Franchise revenues are generated primarily from: |
(1) | product sales to our franchisees; | ||
(2) | royalties on franchise retail sales; and | ||
(3) | franchise fees, which are charged for initial franchise awards, renewals, and transfers of franchises. |
Since we do not anticipate the number of our domestic franchised stores to increase, we expect
our domestic franchise revenue growth will be generated by royalties on increased franchise retail
sales and product sales to our existing franchisees. We expect that an increase in the number of
our international franchised stores over the next five years will result in increased initial
franchise fees associated with new store openings and increased revenues from product sales to new
franchisees. As international franchise trends continue to improve, we also anticipate that
franchise revenue from international operations will be driven by increased product sales to our
franchisees. Since our international franchisees pay royalties to us in U.S. dollars, any
strengthening of the U.S. dollar relative to our franchisees local currency may offset some of the
growth in royalty revenue.
| Manufacturing/wholesale revenues are generated through sales of manufactured products to third parties, generally for third-party private label brands, and the sale of our proprietary and third-party products to and through Rite Aid and www.drugstore.com. License fee revenue from the opening of GNC franchised store-within-a-store locations within Rite Aid stores is also recorded in this segment. Our revenues generated by our manufacturing and wholesale operations are subject to our available manufacturing capacity, and we anticipate that these revenues will remain stable over the next five years. | ||
| A significant portion of our business infrastructure is comprised of fixed operating costs. Our vertically integrated distribution network and manufacturing capacity can support higher sales volume without significant incremental costs. We therefore expect our operating expenses to grow at a lesser rate than our revenues, resulting in significant operating leverage in our business. |
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The following trends and uncertainties in our industry could positively or negatively affect
our operating performance:
| broader consumer awareness of health and wellness issues and rising healthcare costs; | ||
| interest in, and demand for, condition-specific products based on scientific research; | ||
| significant effects of favorable and unfavorable publicity on consumer demand; | ||
| lack of a single product or group of products dominating any one product category; | ||
| lack of long-term experience with human consumption of ingredients of some of our products; | ||
| volatility in the diet category; | ||
| rapidly evolving consumer preferences and demand for new products; | ||
| costs associated with complying with new and existing governmental regulation; and | ||
| a change in disposable income available to consumers, as a result of current economic conditions. |
Executive Overview
The
first quarter of 2010 resulted in revenue growth of 5.7% and net income growth of
33.5% compared to the same period in 2009. This growth occurred primarily in the retail segment,
as domestic retail comparable store sales increased 3.1% in the first
quarter of 2010 as compared to the same period in 2009. Included in this increase is a 29.4%
increase in our www.gnc.com business. The increase in retail sales revenue was driven primarily by
increases in our sports nutrition category, in both our proprietary and third-party products,
fueled by new product introductions. This sales increase, along with increased margins, resulted
in a retail segment operating income increase of 12.9%.
In the first quarter of 2010, our franchise segment continued to demonstrate the trends
observable in 2009, with the domestic franchise business experiencing increasing product sales on a
lower store base. The international franchise business continued to grow, and reflected higher
wholesale product sales as a result of improved period to period comparisons in the existing store
base and new growth. We added 31 international stores in the first quarter of 2010. The
combined franchise segment revenue grew 12.6%, and operating income grew 16.6% in the first quarter
of 2010 over the same period in 2009.
In the first quarter of 2010, our manufacturing segment showed a reduction in our contract
manufacturing business compared with the first quarter of 2009, partially offset by higher product
sales to the Rite Aid and drugstore.com businesses.
In the first quarter of 2010, we announced an alliance with The Gatorade Company, a division
of PepsiCo, to launch G Series Pro a new sports drink variant of Gatorades recently launched G
Series. Through this alliance, G Series Pro will be distributed initially through an exclusive
co-marketing and co-distribution collaboration with us and our
network of more than 3,500 company-owned and franchised GNC stores
across the country.
We believe that the strength of our company and its leadership position in the health and
wellness sector provide significant future opportunities to capitalize on favorable demographics
and consumer trends. In our experience, and as our results in recent months show, our customers
have continued to focus on their
personal health and well-being during economic downturns; nonetheless, a continued downturn or
an uncertain outlook in the economy may materially and adversely affect our business and financial
results.
While our recent results do not reflect a negative impact due to the general downturn of the
economy, the downturn could affect our business and operating results in the future. Our results
depend on a number of factors impacting consumer spending, including, but not limited to, general
economic and business conditions, consumer confidence, consumer debt levels, availability of
consumer credit, and the level of customer traffic within malls and other shopping environments.
Consumer purchases of products, including ours and those of our partners, may decline during
recessionary periods.
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If consumer purchases of products decline, we could be impacted in the following ways:
| retail sales at our company stores and through our website could decline; | ||
| demand for our branded products produced at our manufacturing plant could decline; | ||
| demand for products produced for distributors and other retailers / wholesalers could diminish; | ||
| our domestic franchisees may choose not to renew their franchise licenses, which in turn would lower our franchise product revenue; and | ||
| our international franchisees may experience decreased revenue resulting in lower royalties and product revenue to us; additionally, a strengthening of the U.S. dollar may impact us, as our international franchisees purchase inventory from and pay royalties to us in U.S. dollars. |
In May 2009, the FDA warned consumers to stop using certain Hydroxycut products, produced by
Iovate Health Sciences, Inc., which were sold in our stores. Iovate issued a voluntary recall,
with which we immediately fully complied. Sales of the recalled Hydroxycut products amounted to
approximately $57.8 million, or 4.7% of our retail sales in 2008 and $18.8 million, or 4.2% of our
retail sales in the first four months of 2009. We provided refunds or gift cards to consumers who
returned these products to our stores. In the second quarter, we experienced a reduction in sales
and margin due to the recall as a result of accepting returns of products from customers and a loss
of sales as a Hydroxycut replacement product was not available. Through December 31, 2009, we had
refunded approximately $3.5 million to our retail customers and approximately $1.6 million to our
wholesale customers for Hydroxycut product returns. A significant majority of the retail refunds
occurred in our second quarter of 2009; the wholesale refunds were recognized in the early part of
the third quarter of 2009. All returns of product by our customers were recognized as a reduction
in sales in the period when the return occurred. At the end of June 2009, Iovate launched new
reformulated Hydroxycut products that we began to sell in our stores. Although post-recall sales
of the new reformulated Hydroxycut have trailed pre-recall levels, strong sales in our core sports,
vitamins and herbs products, along with other new third party diet products, helped to mitigate the
decrease in sales from the Hydroxycut product line.
In light of these matters, we continue to focus on our core strategies. In the near term, we
expect to concentrate on our primary strategies, in particular focusing on:
| driving top-line performance in each of our business segments by attracting new customers through product innovation and the introduction of new, scientifically backed products, improved product assortment, effective marketing campaigns designed to increase traffic at our and our franchisees stores and awareness of the GNC brand, and price competitiveness; | ||
| investing in key infrastructure areas for future growth, including e-commerce and international development; and | ||
| generating efficiencies and cost savings in the everyday operations of the business that will allow us to leverage profit margins on modest revenue growth. |
We will continue to seek improvements in each of the business segments and position ourselves
for long term growth.
Related Parties
For the three months ended March 31, 2010 and 2009, we had related party transactions with
Ares and OTPP and their affiliates. For further discussion of these transactions, see Item 13,
Certain Relationships and Related Transactions and Director Independence and the Related Party
Transactions note in our Annual Report on Form 10-K for the year ended December 31, 2009.
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Results of Operations
The following information presented for the three months ended March 31, 2010 and 2009 was
prepared by management and is unaudited. In the opinion of management, all adjustments necessary
for a fair statement of our financial position and operating results for such periods and as of
such dates have been included.
As discussed in the Segments note to our consolidated financial statements, we evaluate
segment operating results based on several indicators. The primary key performance indicators are
revenues and operating income or loss for each segment. Revenues and operating income or loss, as
evaluated by management, exclude certain items that are managed at the consolidated level, such as
warehousing and transportation costs, impairments, and other corporate costs. The following
discussion compares the revenues and the operating income or loss by segment, as well as those
items excluded from the segment totals.
Results of Operations
(Dollars in millions and percentages expressed as a percentage of total net revenues)
(Dollars in millions and percentages expressed as a percentage of total net revenues)
Three Months Ended | |||||||||||||||||
March 31, | March 31, | ||||||||||||||||
2010 | 2009 | ||||||||||||||||
(unaudited) | |||||||||||||||||
Revenues: |
|||||||||||||||||
Retail |
$ | 350.8 | 75.5 | % | $ | 333.7 | 75.8 | % | |||||||||
Franchise |
72.6 | 15.6 | % | 64.5 | 14.7 | % | |||||||||||
Manufacturing / Wholesale |
41.6 | 8.9 | % | 41.7 | 9.5 | % | |||||||||||
Total net revenues |
465.0 | 100.0 | % | 439.9 | 100.0 | % | |||||||||||
Operating expenses: |
|||||||||||||||||
Cost of sales, including warehousing, distribution and occupancy costs |
299.1 | 64.3 | % | 285.7 | 64.9 | % | |||||||||||
Compensation and related benefits |
67.8 | 14.6 | % | 65.3 | 14.9 | % | |||||||||||
Advertising and promotion |
15.4 | 3.3 | % | 14.7 | 3.4 | % | |||||||||||
Other selling, general and administrative expenses |
22.9 | 4.9 | % | 21.3 | 4.8 | % | |||||||||||
Amortization expense |
2.2 | 0.5 | % | 2.6 | 0.6 | % | |||||||||||
Foreign currency (gain) loss |
(0.1 | ) | 0.0 | % | 0.1 | 0.0 | % | ||||||||||
Total operating expenses |
407.3 | 87.6 | % | 389.7 | 88.6 | % | |||||||||||
Operating income: |
|||||||||||||||||
Retail |
50.2 | 10.8 | % | 44.4 | 10.1 | % | |||||||||||
Franchise |
22.4 | 4.8 | % | 19.2 | 4.4 | % | |||||||||||
Manufacturing / Wholesale |
16.9 | 3.6 | % | 17.9 | 4.0 | % | |||||||||||
Unallocated corporate and other costs: |
|||||||||||||||||
Warehousing and distribution costs |
(13.9 | ) | -3.0 | % | (13.3 | ) | -3.0 | % | |||||||||
Corporate costs |
(17.9 | ) | -3.8 | % | (18.0 | ) | -4.1 | % | |||||||||
Subtotal unallocated corporate and |
|||||||||||||||||
other costs, net |
(31.8 | ) | -6.8 | % | (31.3 | ) | -7.1 | % | |||||||||
Total operating income |
57.7 | 12.4 | % | 50.2 | 11.4 | % | |||||||||||
Interest expense, net |
16.6 | 19.1 | |||||||||||||||
Income before income taxes |
41.1 | 31.1 | |||||||||||||||
Income tax expense |
15.1 | 11.7 | |||||||||||||||
Net income |
$ | 26.0 | $ | 19.4 | |||||||||||||
Note: The numbers in the above table have been rounded to millions. All calculations related
to the Results of Operations for the year-over-year comparisons were derived from unrounded data
and could occasionally differ immaterially if you were to use the table above for these
calculations.
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Comparison of the Three Months Ended March 31, 2010 and 2009
Revenues
Our consolidated net revenues increased $25.1 million, or 5.7%, to $465.0 million for the
three months ended March 31, 2010 compared to $439.9 million for the same period in 2009. The
increase was the result of increased sales in both of our Retail and Franchising segments.
Retail. Revenues in our Retail segment increased $17.1 million, or 5.1%, to $350.8 million for
the three months ended March 31, 2010 compared to $333.7 million for the same period in 2009. The
increase from 2009 to 2010 included an increase of $3.4 million for sales through www.gnc.com.
Sales increases occurred primarily in the sports nutrition product category. Our domestic
company-owned same store sales improved for the quarter by 3.1%. In
the first quarter of 2010, our Canadian company-owned stores had a same store sales decline of
3.9%, in local currency. This decline was more than offset by the weakening of the U.S. dollar
from 2009 to 2010. Our company-owned store base increased by 52 domestic stores to 2,674 compared
to 2,622 at March 31, 2009, primarily due to new store openings and franchise store acquisitions,
and by nine Canadian stores to 170 at March 31, 2010 compared to 161 at March 31, 2009.
Franchise. Revenues in our Franchise segment increased $8.1 million, or 12.6%, to $72.6
million for the three months ended March 31, 2010 compared to $64.5 million for the same period in
2009. Domestic franchise revenue increased by $1.9 million, primarily due to increased product
sales as compared to the same period in 2009. Domestic royalty income was flat for the quarter
despite operating 43 fewer stores in the first quarter of 2010 compared to the same period in 2009.
There were 901 stores at March 31, 2010 compared to 944 stores at March 31, 2009. International
franchise revenue increased by $6.2 million, primarily the result of increases in product sales.
International royalty income increased $0.9 million as retail sales increases in our franchisees
respective local currencies were impacted by the weakening of the U.S. dollar from 2009 to 2010.
Our international franchise store base increased by 138 stores to 1,338 at March 31, 2010 compared
to 1,200 at March 31, 2009.
Manufacturing/Wholesale. Revenues in our Manufacturing/Wholesale segment, which includes
third-party sales from our manufacturing facilities in South Carolina, as well as wholesale sales
to Rite Aid and www.drugstore.com, decreased $0.1 million, or 0.3%, to $41.6 million for the three
months ended March 31, 2010 compared to $41.7 million for the same period in 2009. Sales from the
South Carolina plant decreased by $4.3 million, and revenues associated with Rite Aid increased by
$3.8 million. This increase was due to increases in product sales to Rite Aid of $3.1 million and
increased license fee revenue of $0.7 million as a result of Rite Aid opening 36 more franchise
store-within-a-stores in the first quarter of 2010 as compared to the first quarter of 2009.
Cost of Sales
Consolidated cost of sales, which includes product costs, costs of warehousing and
distribution and occupancy costs, increased $13.4 million, or 4.7%, to $299.1 million for the three
months ended March 31, 2010 compared to $285.7 million for the same period in 2009. Consolidated
cost of sales, as a percentage of net revenue, was 64.3% and 64.9% for the three months ended March
31, 2010 and 2009, respectively.
Product costs. Product costs increased $9.5 million, or 4.4%, to $226.4 million for the three
months ended March 31, 2010 compared to $216.9 million for the same period in 2009 as a result of
increased sales volumes and rising product costs. Consolidated product costs, as a percentage of
net revenue, were 48.7% and 49.3% for the three months ended March 31, 2010 and 2009, respectively.
Warehousing and distribution costs. Warehousing and distribution costs increased $1.0 million,
or 6.6%, to $15.2 million for the three months ended March 31, 2010 compared to $14.2 million for
the same period in 2009. The increase was primarily due to increases in wages and fuel costs in
2010 as compared to 2009. Consolidated warehousing and distribution costs, as a percentage of net
revenue, were 3.3% and 3.2% for the three months ended March 31, 2010 and 2009, respectively.
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Occupancy costs. Occupancy costs increased $2.9 million, or 5.3%, to $57.5 million for the
three months ended March 31, 2010 compared to $54.6 million for the same period in 2009. This
increase was the result of increases in lease-related costs of $2.1 million, partially the result
of operating 61 more stores in the first quarter 2010 compared to 2009, and other occupancy related
expenses of $0.8 million. Consolidated occupancy costs, as a percentage of net revenue, were 12.3%
and 12.4% for the three months ended March 31, 2010 and 2009, respectively.
Selling, General and Administrative (SG&A) Expenses
Our consolidated SG&A expenses, including compensation and related benefits, advertising and
promotion expense, other selling, general and administrative expenses, and amortization expense,
increased $4.4 million, or 4.2%, to $108.3 million, for the three months ended March 31, 2010
compared to $103.9 million for the same period in 2009. These expenses, as a percentage of net
revenue, were 23.3% for the three months ended March 31, 2010 compared to 23.7% for the three
months ended March 31, 2009.
Compensation and related benefits. Compensation and related benefits increased $2.5 million,
or 3.7%, to $67.8 million for the three months ended March 31, 2010 compared to $65.3 million for
the same period in 2009. Increases in base wages of $2.7 million to support our increased store
base and sales volume were offset by declines in other compensation expenses of $0.2 million.
Advertising and promotion. Advertising and promotion expenses increased $0.7 million, or
4.8%, to $15.4 million for the three months ended March 31, 2010 compared to $14.7 million during
the same period in 2009. Advertising expense increased primarily as a result of increases in
visual merchandising costs of $0.7 million and online marketing of $0.3 million offset by a
decrease in print advertising expenses of $0.5 million. Other advertising costs accounted for the
remaining $0.2 million increase.
Other SG&A. Other SG&A expenses, including amortization expense, increased $1.2 million, or
5.2%, to $25.1 million for the three months ended March 31, 2010 compared to $23.9 million for the
same period in 2009. This increase was due to an increase in bad debt expenses of $1.0 million and
third-party sales commissions of $0.7 million offset by a decrease in amortization expense of $0.4
million and decreases in other selling expenses of $0.1 million.
Foreign Currency (Gain) Loss
Foreign currency (gain) loss for the three months ended March 31, 2010 and 2009 resulted
primarily from accounts payable activity with our Canadian subsidiary. We recognized a gain of $0.1
million for the three months ended March 31, 2010 and a loss of $0.1 million for the three months
ended March 31, 2009.
Operating Income
As a result of the foregoing, consolidated operating income increased $7.5 million, or 15.0%,
to $57.7 million for the three months ended March 31, 2010 compared to $50.2 million for the same
period in 2009. Operating income, as a percentage of net revenue, was 12.4% and 11.4% for the
three months ended March 31, 2010 and 2009, respectively.
Retail. Operating income increased $5.8 million, or 12.9%, to $50.2 million for the three
months ended March 31, 2010 compared to $44.4 million for the same period in 2009. The increase was
due to higher dollar margins on increased sales offset by increases in occupancy and advertising
expenses.
Franchise. Operating income increased $3.2 million, or 16.6%, to $22.4 million for the three
months ended March 31, 2010 compared to $19.2 million for the same period in 2009. The increase
was due to increased wholesale product sales and international franchise royalty income.
Manufacturing/Wholesale. Operating income decreased $1.0 million, or 5.6%, to $16.9 million
for the three months ended March 31, 2010 compared to $17.9 million for the same period in 2009 as
declines in third-party sales from our South Carolina manufacturing operations were offset by
increased wholesale sales and license fee revenue to Rite Aid.
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Warehousing and Distribution Costs. Unallocated warehousing and distribution costs increased
$0.6 million, or 4.3%, to $13.9 million for the three months ended March 31, 2010 compared to $13.3
million for the three months ended March 31, 2009. The increase was due to increases in fuel costs
and distribution wages.
Corporate Costs. Corporate overhead costs decreased $0.1 million, or 0.9%, to $17.9 million
for the three months ended March 31, 2010 compared to $18.0 million for the same period in 2009.
Interest Expense
Interest expense decreased $2.5 million, or 12.8%, to $16.6 million for the three months ended
March 31, 2010 compared to $19.1 million for the same period in 2009. This decrease was primarily
attributable to decreases in interest rates on our variable rate debt in 2010 as compared to 2009
along with a reduction in outstanding debt of approximately $25.0 million.
Income Tax Expense
We recognized $15.1 million of income tax expense (or 36.8% of pre-tax income) during the
three months ended March 31, 2010 compared to $11.7 million (or 37.5% of pre-tax income) for the
same period of 2009.
Net Income
As
a result of the foregoing, consolidated net income increased
$6.5 million, or 33.5%, to $26.0 million
for the three months ended March 31, 2010 compared to $19.4 million for the same period in 2009.
Liquidity and Capital Resources
At March 31, 2010, we had $110.6 million in cash and cash equivalents and $387.2 million in
working capital, compared with $75.1 million in cash and cash equivalents and $382.6 million in
working capital at December 31, 2009. The $4.6 million increase in our working capital was driven
by increases in our inventory and cash and a decrease in our accrued interest and accrued payroll.
This was offset by an increase in our accounts payable and a reduction in our prepaid income taxes.
We expect to fund our operations through internally generated cash and, if necessary, from
borrowings under our $60.0 million revolving credit facility (the Revolving Credit Facility). At
March 31, 2010, we had $44.7 million available under the Revolving Credit Facility, after giving
effect to $9.0 million utilized to secure letters of credit and a $6.3 million commitment from
subsidiaries of Lehman Brothers Holdings Inc. (collectively, Lehman) that we do not expect Lehman
will fund.
We expect our primary uses of cash in the near future will be debt service requirements,
capital expenditures and working capital requirements. In March 2010, our board of directors
declared and paid a $28.4 million dividend to our direct parent company, GNC Corporation. GNC
Acquisition Holdings, Inc., our ultimate parent company, was the final recipient of this dividend.
The dividend was paid with cash generated from operations.
We currently anticipate that cash generated from operations, together with amounts available
under the Revolving Credit Facility, will be sufficient for the term of the facility, which matures
on March 15, 2012, to meet our operating expenses, capital expenditures and debt service
obligations as they become due. However, our ability to make scheduled payments of principal on,
to pay interest on, or to refinance our debt and to satisfy our other debt obligations will depend
on our future operating performance, which will be affected by general economic, financial and
other factors beyond our control. We are currently in compliance with our debt covenant reporting
and compliance obligations under the Revolving Credit Facility.
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The following table summarizes our cash flows for the three months ended March 31, 2010 and
2009:
Three months | Three months | |||||||
ended March 31, | ended March 31, | |||||||
(Dollars in millions) | 2010 | 2009 | ||||||
Cash provided by operating activities |
$ | 72.1 | $ | 34.3 | ||||
Cash used in investing activities |
(7.5 | ) | (5.8 | ) | ||||
Cash used in financing activities |
(29.0 | ) | (5.2 | ) |
Cash Provided by Operating Activities
Cash provided by operating activities was $72.1 million for the three months ended March 31,
2010 and $34.3 million for the three months ended March 31, 2009. A primary reason for the increase
in cash provided by operating activities was the increase in net income of $6.5 million for the
three months ended March 31, 2010 compared to the three months ended March 31, 2009. Our inventory
increased by $18.9 million in support of the higher sales volumes and purchases for new product
introductions. Accounts payable increased by $47.1 million due to the timing of disbursements and
related inventory growth. Accrued interest decreased by $8.5 million, a result of the semi-annual
interest payments on our Senior Toggle Notes and 10.75% Senior Subordinated Notes (each as defined
below). The above were offset by an increase in our accrued liabilities and a reduction in our
accrued income taxes.
For the three months ended March 31, 2009, accrued liabilities decreased by $2.7 million
primarily due to a $3.0 million legal settlement payment that was accrued at December 31, 2008. In
addition, accrued interest decreased by $8.9 million, a result of the semi-annual interest payments
on our Senior Toggle Notes and 10.75% Senior Subordinated Notes and our inventory increased by
$14.6 million in support of the higher sales volume at the stores and manufacturing plant. The
above were partially offset by increases in our accounts payable and accrued income taxes.
Cash Used in Investing Activities
We used cash for investing activities of $7.5 million and $5.8 million for the three months
ended March 31, 2010 and 2009, respectively. Capital expenditures, which were primarily for new
stores, and improvements to our retail stores and our South Carolina manufacturing facility, were
$7.3 million and $5.5 million for the three months ended March 31, 2010 and 2009, respectively.
We currently have no material capital commitments for the remainder of 2010. Our capital
expenditures typically consist of certain periodic updates in our company-owned stores and ongoing
upgrades and improvements to our manufacturing facilities.
Cash Used in Financing Activities
For the three months ended March 31, 2010 we used cash of $29.0 million, primarily for a $28.4
million dividend that was declared and paid in March 2010 to GNC Corporation, our direct
parent. In addition, we made payments of $0.6 million on long-term debt, including $0.2 million for
an excess cash payment in March 2010 under the requirements of the Senior Credit Facility. This
payment was calculated based on 2009 financial results as defined by the Senior Credit Facility.
We used cash from financing activities of $5.2 million for the three months ended March 31, 2009
primarily for required payments on long-term debt. A summary of this debt is as follows:
$735.0 Million Senior Credit Facility. The 2007 Senior Credit Facility consists of a $675.0
million term loan facility and the $60.0 million Revolving Credit Facility. The term loan facility
will mature in September 2013. The Revolving Credit Facility will mature in March 2012. Interest
on the 2007 Senior Credit Facility accrues at a variable rate and was 2.5% at March 31, 2010. As
of March 31, 2010 and December 31, 2009, $9.0 million and $7.9 million, respectively, of the
Revolving Credit Facility were pledged to secure letters of credit.
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Senior Toggle Notes. We have outstanding $300.0 million of Senior Floating Rate Toggle Notes
due 2014 at 99% of par value (the Senior Toggle Notes). Interest on the Senior Toggle Notes is
payable semi-annually in arrears on March 15 and September 15 of each year. Interest on the Senior Toggle
Notes accrues at a variable rate and was 5.8% at March 31, 2010. To date, we have elected to make
interest payments in cash.
10.75% Senior Subordinated Notes. We have outstanding $110.0 million of 10.75% Senior
Subordinated Notes due 2015 (10.75% Senior Subordinated Notes). Interest on the 10.75% Senior
Subordinated Notes accrues at the rate of 10.75% per year and is payable semi-annually in arrears
on March 15 and September 15 of each year.
Contractual Obligations
There are no material changes in our contractual obligations as disclosed in our Annual Report
on Form 10-K for the year ended December 31, 2009.
Off Balance Sheet Arrangements
As of March 31, 2010, we had no relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off balance sheet arrangements or
other contractually narrow or limited purposes. We are, therefore, not materially exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged in such
relationships.
Effect of Inflation
Inflation generally affects us by increasing costs of raw materials, labor and equipment. We
do not believe that inflation had any material effect on our results of operations in the periods
presented in our consolidated financial statements.
Critical Accounting Estimates
Our significant accounting policies are described in the notes to our consolidated financial
statements under the heading Basis of Presentation and Summary of Significant Accounting Policies
included elsewhere in this report.
Recently Issued Accounting Pronouncements
As of March 31, 2010, there were no developments related to recently issued accounting
standards, including the expected dates of adoption and estimated effects on the Companys
consolidated financial statements, in addition to those disclosed in the Companys Annual Report on
Form 10-K for the year ended December 31, 2009.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Market risk represents the risk of changes in the value of market risk sensitive instruments
caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in
these factors could cause fluctuations in the results of our operations and cash flows. In the
ordinary course of business, we are primarily exposed to foreign currency and interest rate risks.
We do not use derivative financial instruments in connection with commodity or foreign exchange
risks.
We are exposed to market risks from interest rate changes on our variable rate debt. Although
changes in interest rates do not impact our operating income the changes could affect the fair
value of our interest rate swaps and interest payments. As of March 31, 2010, we had fixed rate
debt of $116.9 million and variable rate debt of $942.4 million.
To manage this risk, we have entered into interest rate swap agreements. These agreements are
summarized in the following table:
Total Notional | ||||||||||
Derivative | Amount | Term | Counterparty Pays | Company Pays | ||||||
Interest Rate Swap
|
$150.0 million | April 2007-April 2010 | 3 month LIBOR | 4.90 | % | |||||
Interest Rate Swap
|
$150.0 million | April 2009-April 2011 | 3 month LIBOR | 3.07 | % | |||||
Forward Interest Rate Swap
|
$150.0 million | April 2010-April 2011 | 3 month LIBOR | 3.41 | % | |||||
Interest Rate Swap
|
$100.0 million | September 2008-September 2011 | 3 month LIBOR | 3.31 | % | |||||
Interest Rate Swap
|
$150.0 million | September 2009-September 2012 | 6 month LIBOR | 2.68 | % |
Based on our variable rate debt balance as of March 31, 2010 a 1% change in interest
rates would increase or decrease our annual interest cost by $3.9 million. At March 31, 2010 there
were no other material changes in our market risks relating to interest and foreign exchange rates
as of December 31, 2009.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), has evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
the end of the period covered by this report. Disclosure controls and procedures are designed to
provide reasonable assurance that the information required to be disclosed in the reports that we
file or submit under the Exchange Act has been appropriately recorded, processed, summarized and
reported on a timely basis and are effective in ensuring that such information is accumulated and
communicated to the Companys management, including our CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure. Based on such evaluation, our CEO and CFO have concluded
that, as of March 31, 2010, our disclosure controls and procedures are effective at the reasonable
assurance level.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal controls over financial reporting that
occurred during the last fiscal quarter, which have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
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Part II OTHER INFORMATION
Item 1. Legal Proceedings.
Please see Note 7, Commitments and Contingencies, to the consolidated financial statements
included in Part I, Item 1 of this Report, which is incorporated into Item 1 of Part II by this
reference.
Item 1A. Risk Factors.
Risk factors that affect our business and financial results are discussed within Part I, Item 1A of
our Annual Report on Form 10-K for the year ended December 31, 2009. There have been no material
changes to the disclosures relating to this item from those set forth in our Annual Report on Form
10-K for the year ended December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no sales of the Companys equity securities.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
In the first quarter of 2010, GNC Acquisition Holdings Inc., our ultimate parent (Parent),
entered into a memorandum of understanding to form a strategic partnership with Bright Food (Group)
Co., LTD to participate in Chinas nutritional products market (GNC China). GNC China is
expected to be an indirect subsidiary of Parent but not be a direct or indirect parent or
subsidiary of the Company. Consequently, its results of operations are not expected to be
consolidated with those of the Company. We expect that GNC China will begin operations in China by
the end of 2010.
Item 6. Exhibits.
Exhibit | ||||
No. | Description | |||
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
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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 persons undersigned thereunto duly authorized.
GENERAL NUTRITION CENTERS, INC. (Registrant) |
||||
May 6, 2010 | /s/ Joseph M. Fortunato | |||
Joseph M. Fortunato | ||||
Chief Executive Officer (Principal Executive Officer) | ||||
May 6, 2010 | /s/ Michael M. Nuzzo | |||
Michael M. Nuzzo | ||||
Chief Financial Officer (Principal Financial Officer) | ||||
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