Attached files
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EX-32.1 - EX-32.1 - GENERAL NUTRITION CENTERS, INC. | l40472exv32w1.htm |
EX-31.2 - EX-31.2 - GENERAL NUTRITION CENTERS, INC. | l40472exv31w2.htm |
EX-31.1 - EX-31.1 - GENERAL NUTRITION CENTERS, INC. | l40472exv31w1.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 June 30, 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 | 72-1575168 | |
(State or other jurisdiction of | (I.R.S. Employer | |
Incorporation or organization) | Identification No.) | |
300 Sixth Avenue | 15222 | |
Pittsburgh, Pennsylvania | (Zip Code) | |
(Address of principal executive offices) |
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.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ
(Do not check if a smaller reporting company) |
Smaller reporting company o |
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 August 10, 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
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PART I FINANCIAL INFORMATION |
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Explanatory Note |
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PART II OTHER INFORMATION |
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EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
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)
June 30, | December 31, | |||||||
2010 | 2009 * | |||||||
(unaudited) | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 118,515 | $ | 75,089 | ||||
Receivables, net |
92,862 | 94,355 | ||||||
Inventories, net (Note 3) |
395,669 | 370,492 | ||||||
Prepaids and other current assets |
37,276 | 42,219 | ||||||
Total current assets |
644,322 | 582,155 | ||||||
Long-term assets: |
||||||||
Goodwill (Note 4) |
624,910 | 624,753 | ||||||
Brands (Note 4) |
720,000 | 720,000 | ||||||
Other intangible assets, net (Note 4) |
150,607 | 154,370 | ||||||
Property, plant and equipment, net |
194,328 | 199,581 | ||||||
Deferred financing fees, net |
16,287 | 18,411 | ||||||
Other long-term assets |
4,458 | 4,332 | ||||||
Total long-term assets |
1,710,590 | 1,721,447 | ||||||
Total assets |
$ | 2,354,912 | $ | 2,303,602 | ||||
Current liabilities: |
||||||||
Accounts payable |
$ | 119,893 | $ | 95,904 | ||||
Accrued payroll and related liabilities |
19,973 | 22,277 | ||||||
Accrued interest (Note 5) |
13,289 | 14,552 | ||||||
Current portion, long-term debt (Note 5) |
1,539 | 1,724 | ||||||
Deferred revenue and other current liabilities |
74,526 | 65,130 | ||||||
Total current liabilities |
229,220 | 199,587 | ||||||
Long-term liabilities: |
||||||||
Long-term debt (Note 5) |
1,057,505 | 1,058,085 | ||||||
Deferred tax liabilities, net |
291,871 | 288,894 | ||||||
Other long-term liabilities |
32,968 | 39,520 | ||||||
Total long-term liabilities |
1,382,344 | 1,386,499 | ||||||
Total liabilities |
1,611,564 | 1,586,086 | ||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value,
1,000 shares authorized, 100 shares issued and
outstanding |
| | ||||||
Paid-in-capital |
596,508 | 594,932 | ||||||
Retained earnings |
152,959 | 129,783 | ||||||
Accumulated other comprehensive loss |
(6,119 | ) | (7,199 | ) | ||||
Total stockholders equity |
743,348 | 717,516 | ||||||
Total liabilities and stockholders equity |
$ | 2,354,912 | $ | 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)
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue |
$ | 455,903 | $ | 432,416 | $ | 920,922 | $ | 872,313 | ||||||||
Cost of sales, including costs of warehousing,
distribution and occupancy |
292,251 | 280,906 | 591,368 | 566,635 | ||||||||||||
Gross profit |
163,652 | 151,510 | 329,554 | 305,678 | ||||||||||||
Compensation and related benefits |
67,633 | 65,526 | 135,391 | 130,851 | ||||||||||||
Advertising and promotion |
14,122 | 14,395 | 29,576 | 29,134 | ||||||||||||
Other selling, general and administrative |
25,164 | 25,881 | 50,258 | 49,734 | ||||||||||||
Foreign currency (gain) loss |
19 | (130 | ) | (57 | ) | (33 | ) | |||||||||
Operating income |
56,714 | 45,838 | 114,386 | 95,992 | ||||||||||||
Interest expense, net (Note 5) |
16,317 | 17,081 | 32,946 | 36,143 | ||||||||||||
Income before income taxes |
40,397 | 28,757 | 81,440 | 59,849 | ||||||||||||
Income tax expense (Note 11) |
14,796 | 10,791 | 29,880 | 22,437 | ||||||||||||
Net income |
$ | 25,601 | $ | 17,966 | $ | 51,560 | $ | 37,412 | ||||||||
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)
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 |
| | | 51,560 | | 51,560 | ||||||||||||||||||
Unrealized gain on derivatives designated and qualified
as cash flow hedges, net of tax of $874 |
| | | | 1,526 | 1,526 | ||||||||||||||||||
Foreign currency translation adjustments |
| | | | (446 | ) | (446 | ) | ||||||||||||||||
Comprehensive income |
| | | | 52,640 | |||||||||||||||||||
Non-cash stock-based compensation |
| | 1,576 | | | 1,576 | ||||||||||||||||||
Dividend payment |
| | | (28,384 | ) | | (28,384 | ) | ||||||||||||||||
Balance at June 30, 2010 (unaudited) |
100 | $ | | $ | 596,508 | $ | 152,959 | $ | (6,119 | ) | $ | 743,348 | ||||||||||||
Balance at December 31, 2008 |
100 | $ | | $ | 592,355 | $ | 73,764 | $ | (14,057 | ) | $ | 652,062 | ||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
| | | 37,412 | | 37,412 | ||||||||||||||||||
Unrealized gain on derivatives designated and qualified
as cash flow hedges, net of tax of $1,422 |
| | | | 2,485 | 2,485 | ||||||||||||||||||
Foreign currency translation adjustments |
| | | | 1,267 | 1,267 | ||||||||||||||||||
Comprehensive income |
| | | | 41,164 | |||||||||||||||||||
Return of capital to GNC Corporation |
| | (278 | ) | | | (278 | ) | ||||||||||||||||
Non-cash stock-based compensation |
| | 1,343 | | | 1,343 | ||||||||||||||||||
Dividend payment |
| | | | | | ||||||||||||||||||
Balance at June 30, 2009 (unaudited) |
100 | $ | | $ | 593,420 | $ | 111,176 | $ | (10,305 | ) | $ | 694,291 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
3
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Six months ended | ||||||||
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 51,560 | $ | 37,412 | ||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||
Depreciation expense |
18,821 | 18,059 | ||||||
Amortization of intangible assets |
4,051 | 4,950 | ||||||
Amortization of deferred financing fees |
2,124 | 2,026 | ||||||
Amortization of original issue discount |
201 | 182 | ||||||
Increase in provision for inventory losses |
5,943 | 5,779 | ||||||
Non-cash stock-based compensation |
1,576 | 1,343 | ||||||
Decrease in provision for losses on accounts receivable |
(662 | ) | (1,503 | ) | ||||
Decrease (increase) in net deferred
taxes |
| 82 | ||||||
Changes in assets and liabilities: |
||||||||
Decrease (increase) in
receivables |
2,043 | (517 | ) | |||||
Increase in inventory,
net |
(31,556 | ) | (26,988 | ) | ||||
Increase in franchise note receivables,
net |
(30 | ) | (178 | ) | ||||
Increase in accrued income
taxes |
5,498 | 9,783 | ||||||
Decrease in other
assets |
152 | 5,187 | ||||||
Increase (decrease) in accounts
payable |
24,052 | (4,754 | ) | |||||
Decrease in interest
payable |
(1,264 | ) | (1,786 | ) | ||||
Increase in accrued
liabilities |
4,045 | 7,265 | ||||||
Net cash provided by operating activities |
86,554 | 56,342 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Capital
expenditures |
(13,675 | ) | (11,303 | ) | ||||
Franchise store
conversions |
65 | 158 | ||||||
Store acquisition
costs |
(240 | ) | (1,050 | ) | ||||
Net cash used in investing activities |
(13,850 | ) | (12,195 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Return of capital to Parent company |
| (278 | ) | |||||
Dividend payment |
(28,384 | ) | (45 | ) | ||||
Payments on long-term
debt |
(966 | ) | (19,623 | ) | ||||
Net cash used in financing activities |
(29,350 | ) | (19,946 | ) | ||||
Effect of exchange rate on cash |
72 | 67 | ||||||
Net increase in cash |
43,426 | 24,268 | ||||||
Beginning balance, cash |
75,089 | 42,307 | ||||||
Ending balance, cash |
$ | 118,515 | $ | 66,575 | ||||
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
50 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 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 option holders 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 six months ended June 30, 2010 or June 30, 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 $2.1
million at both June 30, 2010 and December 31, 2009.
Book overdrafts of $4.9 million and $0.7 million as of June 30, 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 June 30, 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 to 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 June 30, 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:
Balance Sheet Location | June 30, 2010 | December 31, 2009 | ||||||||||
(unaudited) | ||||||||||||
(in thousands) | ||||||||||||
Interest Rate Products |
Deferred revenue and other current liabilities | $ | (5,780 | ) | $ | | ||||||
Interest Rate Products |
Other long-term liabilities | $ | (6,499 | ) | $ | (14,679 | ) | |||||
The Company has interest rate swap agreements outstanding that effectively convert an
aggregate $550.0 million of debt from floating to fixed interest rates. One of these agreements
includes an embedded derivative contract with a purchased interest rate floor that effectively
converts $150.0 million of the Senior Toggle Notes from a floating to a fixed rate. 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 six months of 2010. Each of the four outstanding agreements matures between April
2011 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 next twelve months, the Company estimates that an additional $10.5 million will be
reclassified as an increase to interest expense.
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)
Components of gains and losses for the three months ended June 30, 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) | |||||||
(unaudited) | ||||||||||
(in thousands) | ||||||||||
2010 |
||||||||||
Interest Rate Products |
$ | (1,616 | ) | Interest income (expense) | $ | (3,577 | ) | |||
2009 |
||||||||||
Interest Rate Products |
$ | 409 | Interest income (expense) | $ | (2,650 | ) |
Components of gains and losses for the six months ended June 30, 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) | |||||||
(unaudited) | ||||||||||
(in thousands) | ||||||||||
2010 |
||||||||||
Interest Rate Products |
$ | (5,275 | ) | Interest income (expense) | $ | (7,675 | ) | |||
2009 |
||||||||||
Interest Rate Products |
$ | (1,796 | ) | Interest income (expense) | $ | (5,703 | ) |
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 June 30, 2010, the fair value of derivatives in a net liability position related to
these agreements was $15.6 million, including accrued interest of $2.8 million but excluding
adjustments for nonperformance risk.
Recently Issued Accounting Pronouncements
As of June 30, 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.
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 3. INVENTORIES, NET
Inventories at each respective period consisted of the following:
June 30, 2010 | ||||||||||||
Net Carrying | ||||||||||||
Gross cost | Reserves (a) | Value | ||||||||||
(unaudited) | ||||||||||||
(in thousands) | ||||||||||||
Finished product ready for sale |
$ | 329,310 | $ | (7,253 | ) | $ | 322,057 | |||||
Work-in-process, bulk product and raw
materials |
68,612 | (1,439 | ) | 67,173 | ||||||||
Packaging
supplies |
6,439 | | 6,439 | |||||||||
$ | 404,361 | $ | (8,692 | ) | $ | 395,669 | ||||||
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. |
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 six months ended June 30, 2010, the Company acquired 13 franchise stores. These
acquisitions were accounted for utilizing the acquisition 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
$1.1 million, of which $0.2 million was paid in cash.
The following table summarizes the Companys goodwill activity from December 31, 2009 to June
30, 2010:
Manufacturing/ | ||||||||||||||||
Retail | Franchising | Wholesale | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Balance at December 31, 2009 |
$ | 304,609 | $ | 117,303 | $ | 202,841 | $ | 624,753 | ||||||||
Acquired franchise stores |
157 | | | 157 | ||||||||||||
Balance at June 30, 2010
(unaudited) |
$ | 304,766 | $ | 117,303 | $ | 202,841 | $ | 624,910 | ||||||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes the Companys intangible asset activity from December 31,
2009 to June 30, 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 |
| | | | 288 | 288 | ||||||||||||||||||
Amortization expense |
(375 | ) | | | (3,426 | ) | (250 | ) | (4,051 | ) | ||||||||||||||
Balance at June 30, 2010
(unaudited) |
$ | | $ | 500,000 | $ | 220,000 | $ | 149,650 | $ | 957 | $ | 870,607 | ||||||||||||
The following table reflects the gross carrying amount and accumulated amortization for
each major intangible asset:
Estimated | June 30, 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 | (3,616 | ) | 27,384 | 31,000 | (3,090 | ) | 27,910 | |||||||||||||||||||
Franchise
agreements |
25 | 70,000 | (9,217 | ) | 60,783 | 70,000 | (7,817 | ) | 62,183 | |||||||||||||||||||
Manufacturing agreements |
25 | 70,000 | (9,217 | ) | 60,783 | 70,000 | (7,817 | ) | 62,183 | |||||||||||||||||||
Other intangibles |
5 | 1,150 | (450 | ) | 700 | 1,150 | (350 | ) | 800 | |||||||||||||||||||
Franchise rights |
1-5 | 3,349 | (2,392 | ) | 957 | 3,061 | (2,142 | ) | 919 | |||||||||||||||||||
$ | 904,499 | $ | (33,892 | ) | $ | 870,607 | $ | 904,211 | $ | (29,841 | ) | $ | 874,370 | |||||||||||||||
The following table represents future estimated amortization expense of other intangible
assets, net, with definite lives at June 30, 2010:
Estimated | ||||
amortization | ||||
Years ending December 31, | expense | |||
(unaudited) | ||||
(in thousands) | ||||
2010 |
3,692 | |||
2011 |
7,208 | |||
2012 |
7,048 | |||
2013 |
6,953 | |||
2014 |
6,696 | |||
Thereafter |
119,010 | |||
Total |
$ | 150,607 | ||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5. LONG-TERM DEBT / INTEREST EXPENSE
Long-term debt at each respective period consisted of the following:
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
(in thousands) | ||||||||
2007 Senior Credit Facility |
$ | 644,382 | $ | 644,619 | ||||
Senior Toggle Notes |
298,160 | 297,959 | ||||||
10.75% Senior Subordinated Notes |
110,000 | 110,000 | ||||||
Mortgage |
6,461 | 7,184 | ||||||
Capital
leases |
41 | 47 | ||||||
Less: current maturities |
(1,539 | ) | (1,724 | ) | ||||
Total |
$ | 1,057,505 | $ | 1,058,085 | ||||
The Companys net interest expense for each respective period is as follows:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(unaudited) | ||||||||||||||||
(in thousands) | ||||||||||||||||
2007 Senior Credit Facility |
||||||||||||||||
Term Loan |
$ | 7,228 | $ | 7,943 | $ | 14,783 | $ | 17,148 | ||||||||
Revolver |
112 | 129 | 224 | 265 | ||||||||||||
Senior Toggle Notes |
4,853 | 4,803 | 9,709 | 10,334 | ||||||||||||
10.75% Senior Subordinated Notes |
2,956 | 2,956 | 5,912 | 5,912 | ||||||||||||
Deferred financing fees |
1,068 | 1,025 | 2,124 | 2,026 | ||||||||||||
Mortgage |
116 | 141 | 231 | 288 | ||||||||||||
OID amortization |
102 | 93 | 201 | 182 | ||||||||||||
Interest income-other |
(118 | ) | (9 | ) | (238 | ) | (12 | ) | ||||||||
Interest expense, net |
$ | 16,317 | $ | 17,081 | $ | 32,946 | $ | 36,143 | ||||||||
Accrued interest at each respective period consisted of the following:
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
(in thousands) | ||||||||
2007 Senior Credit Facility |
$ | 4,082 | $ | 5,350 | ||||
Senior Toggle Notes |
5,725 | 5,720 | ||||||
10.75% Senior Subordinated
Notes |
3,482 | 3,482 | ||||||
Total |
$ | 13,289 | $ | 14,552 | ||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Interest on the 2007 Senior Credit Facility and the Senior Toggle Notes is based on
variable rates. At June 30, 2010 and December 31, 2009 the interest rate for the 2007 Senior
Credit Facility was 2.6% and 2.5%, respectively. At June 30, 2010 and December 31, 2009 the
interest rate for the Senior Toggle Notes was 5.8%.
NOTE 6. FINANCIAL INSTRUMENTS
At June 30, 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 amounts of cash and cash equivalents, receivables,
accounts payable and accrued liabilities approximate 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 approximate 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:
June 30, | December 31, | ||||||||||||||||
2010 | 2009 | ||||||||||||||||
Carrying | Fair | Carrying | Fair | ||||||||||||||
Amount | Value | Amount | Value | ||||||||||||||
(unaudited) | |||||||||||||||||
(in thousands) | |||||||||||||||||
Cash and cash equivalents |
$ | 118,515 | $ | 118,515 | $ | 75,089 | $ | 75,089 | |||||||||
Receivables |
92,862 | 92,862 | 94,355 | 94,355 | |||||||||||||
Franchise notes receivable |
3,260 | 3,260 | 3,364 | 3,364 | |||||||||||||
Accounts payable |
119,893 | 119,893 | 95,904 | 95,904 | |||||||||||||
Long term debt (including current portion) |
1,059,044 | 978,768 | 1,059,809 | 977,718 |
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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, product liabilities,
intellectual property matters and employment-related matters resulting from the Companys business
activities. As with many 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. An adverse outcome
in these matters could have a material impact on the Companys 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.
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. As described in
the Companys Annual Report on Form 10-K for the year ended December 31, 2009, following the
recall, GNC was named, among other defendants, in several lawsuits related to Hydroxycut (note that
prior to May 1, 2009, GNC was a co-defendant in one Hydroxycut case (see the Ciavarra
Claim described in the Companys Annual Report on Form 10-K for the year ended December 31,
2009)). 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.
As
of July 31, 2010, GNC has been named in approximately 40 personal injury actions in
13 states claiming injuries from use and consumption of Hydroxycut-branded products.
During the second quarter of 2010, 15 such personal injury actions naming GNC were filed. In
addition, as described in the Companys Annual Report on Form 10-K for the year ended December 31,
2009, GNC has been named in six active putative class actions that generally include claims of
consumer fraud, misrepresentation, strict liability, and breach of warranty related to
Hydroxycut-branded products. 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 GNC class actions). Any liabilities that may arise from these matters are not
probable or reasonably estimable at this time.
Pro-Hormone/Androstenedione Cases. As described in the Companys Annual Report on Form 10-K
for the year ended December 31, 2009, the Company is currently defending six lawsuits 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). 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. Any liabilities that may arise from these matters are not probable or reasonably
estimable at this time.
California Wage and Break Claim. As described in the Companys Annual Report on Form 10-K for
the year ended December 31, 2009, on November 4, 2008, 98 plaintiffs filed individual claims
against the Company. Each of
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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. Any liabilities that may arise from these matters are not
probable or reasonably estimable at this time.
Other cases. The Company is currently defending other lawsuits relating to personal injury
claims, product labeling and employee-related matters. 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 operating 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 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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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 the 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 June 30, 2010, the net unrecognized
compensation cost was $7.7 million and is expected to be recognized over a weighted average period
of approximately 2.3 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 |
380,000 | 11.57 | ||||||
Exercised |
| | ||||||
Forfeited |
(377,325 | ) | 7.64 | |||||
Expired |
(28,502 | ) | 6.25 | |||||
Outstanding at June 30, 2010 |
9,237,813 | $ | 7.44 | |||||
Exercisable at June 30, 2010 |
4,825,576 | $ | 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 six months ended June 30, 2010 and 2009 was $1.6 million and $1.3 million, respectively.
As of June 30, 2010, the weighted average remaining contractual life of outstanding options
was 7.1 years. At June 30, 2010, the weighted average remaining contractual life of exercisable
options was 6.5 years. The weighted average fair value of options granted during 2010 was $1.99.
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 four or 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 six months ended June 30,
2010 were as follows:
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, | ||||
2010 | ||||
(unaudited) | ||||
Dividend yield |
0.00 | % | ||
Expected option life |
7.5 years | |||
Volatility factor percentage of market price |
31.5 | % | ||
Discount rate |
2.98 - 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.
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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(unaudited) | ||||||||||||||||
(in thousands) | ||||||||||||||||
Revenue: |
||||||||||||||||
Retail |
$ | 342,834 | $ | 316,942 | $ | 693,668 | $ | 650,654 | ||||||||
Franchise |
73,043 | 69,225 | 145,645 | 133,708 | ||||||||||||
Manufacturing/Wholesale: |
||||||||||||||||
Intersegment (1) |
51,262 | 50,267 | 98,607 | 98,018 | ||||||||||||
Third Party |
40,026 | 46,249 | 81,609 | 87,951 | ||||||||||||
Sub total Manufacturing/Wholesale |
91,288 | 96,516 | 180,216 | 185,969 | ||||||||||||
Sub total segment revenues |
507,165 | 482,683 | 1,019,529 | 970,331 | ||||||||||||
Intersegment elimination (1) |
(51,262 | ) | (50,267 | ) | (98,607 | ) | (98,018 | ) | ||||||||
Total revenue |
$ | 455,903 | $ | 432,416 | $ | 920,922 | $ | 872,313 | ||||||||
Operating income: |
||||||||||||||||
Retail |
$ | 49,382 | $ | 41,583 | $ | 99,578 | $ | 86,026 | ||||||||
Franchise |
22,930 | 19,550 | 45,331 | 38,757 | ||||||||||||
Manufacturing/Wholesale |
16,367 | 17,337 | 33,239 | 35,218 | ||||||||||||
Unallocated corporate and other costs: |
||||||||||||||||
Warehousing and distribution costs |
(13,773 | ) | (13,700 | ) | (27,665 | ) | (27,017 | ) | ||||||||
Corporate costs |
(18,192 | ) | (18,932 | ) | (36,097 | ) | (36,992 | ) | ||||||||
Sub total unallocated corporate and
other costs |
(31,965 | ) | (32,632 | ) | (63,762 | ) | (64,009 | ) | ||||||||
Total operating income |
$ | 56,714 | $ | 45,838 | $ | 114,386 | $ | 95,992 | ||||||||
(1) | Intersegment revenues are eliminated from consolidated revenue. |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 10. SUPPLEMENTAL GUARANTOR INFORMATION
As of June 30, 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 June 30, 2010,
December 31, 2009, and the three and six months ended June 30, 2010 and 2009. Intercompany
balances and transactions have been eliminated.
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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 | ||||||||||||||||||
June 30, 2010 | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
(unaudited) | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Current assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 110,581 | $ | 2,965 | $ | 4,969 | $ | | $ | 118,515 | ||||||||||
Receivables, net |
493 | 91,625 | 744 | | 92,862 | |||||||||||||||
Intercompany receivables |
80,223 | | | (80,223 | ) | | ||||||||||||||
Inventories, net |
| 365,756 | 29,913 | | 395,669 | |||||||||||||||
Prepaids and other current assets |
14,466 | 18,224 | 4,586 | | 37,276 | |||||||||||||||
Total current assets |
205,763 | 478,570 | 40,212 | (80,223 | ) | 644,322 | ||||||||||||||
Goodwill |
| 624,442 | 468 | | 624,910 | |||||||||||||||
Brands |
| 720,000 | | | 720,000 | |||||||||||||||
Property, plant and equipment, net |
6,545 | 159,729 | 28,054 | | 194,328 | |||||||||||||||
Investment in subsidiaries |
1,604,858 | (7,903 | ) | | (1,596,955 | ) | | |||||||||||||
Other assets |
26,971 | 153,162 | | (8,781 | ) | 171,352 | ||||||||||||||
Total assets |
$ | 1,844,137 | $ | 2,128,000 | $ | 68,734 | $ | (1,685,959 | ) | $ | 2,354,912 | |||||||||
Current liabilities |
||||||||||||||||||||
Current liabilities |
$ | 32,175 | $ | 183,559 | $ | 13,486 | $ | | $ | 229,220 | ||||||||||
Intercompany payables |
| 60,787 | 19,436 | (80,223 | ) | | ||||||||||||||
Total current liabilities |
32,175 | 244,346 | 32,922 | (80,223 | ) | 229,220 | ||||||||||||||
Long-term debt |
1,052,542 | 26 | 13,718 | (8,781 | ) | 1,057,505 | ||||||||||||||
Deferred tax liabilities |
(1,776 | ) | 294,086 | (439 | ) | | 291,871 | |||||||||||||
Other long-term liabilities |
17,848 | 13,327 | 1,793 | | 32,968 | |||||||||||||||
Total liabilities |
1,100,789 | 551,785 | 47,994 | (89,004 | ) | 1,611,564 | ||||||||||||||
Total stockholders equity
(deficit) |
743,348 | 1,576,215 | 20,740 | (1,596,955 | ) | 743,348 | ||||||||||||||
Total liabilities and stockholders
equity (deficit) |
$ | 1,844,137 | $ | 2,128,000 | $ | 68,734 | $ | (1,685,959 | ) | $ | 2,354,912 | |||||||||
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)
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 | |||||||||
20
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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 June 30, 2010 | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
(unaudited) | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenue |
$ | | $ | 431,575 | $ | 27,887 | $ | (3,559 | ) | $ | 455,903 | |||||||||
Cost of sales, including costs of warehousing,
distribution and occupancy |
| 275,228 | 20,582 | (3,559 | ) | 292,251 | ||||||||||||||
Gross profit |
| 156,347 | 7,305 | | 163,652 | |||||||||||||||
Compensation and related benefits |
10,932 | 52,276 | 4,425 | | 67,633 | |||||||||||||||
Advertising and promotion |
| 13,781 | 341 | | 14,122 | |||||||||||||||
Other selling, general and administrative |
7,783 | 17,245 | 136 | | 25,164 | |||||||||||||||
Subsidiary (income) expense |
(27,532 | ) | 154 | | 27,378 | | ||||||||||||||
Other (income) expense |
(17,674 | ) | 16,504 | 1,189 | | 19 | ||||||||||||||
Operating income
(loss) |
26,491 | 56,387 | 1,214 | (27,378 | ) | 56,714 | ||||||||||||||
Interest expense, net |
890 | 15,150 | 277 | | 16,317 | |||||||||||||||
Income (loss) before income taxes |
25,601 | 41,237 | 937 | (27,378 | ) | 40,397 | ||||||||||||||
Income tax (benefit) expense |
| 14,510 | 286 | | 14,796 | |||||||||||||||
Net income (loss) |
$ | 25,601 | $ | 26,727 | $ | 651 | $ | (27,378 | ) | $ | 25,601 | |||||||||
Supplemental Condensed Consolidating Statements of Operations
Combined | Combined | |||||||||||||||||||
Parent/ | Guarantor | Non-Guarantor | ||||||||||||||||||
Six months ended June 30, 2010 | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
(unaudited) | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenue |
$ | | $ | 871,355 | $ | 56,318 | $ | (6,751 | ) | $ | 920,922 | |||||||||
Cost of sales, including costs of warehousing,
distribution and occupancy |
| 557,129 | 40,990 | (6,751 | ) | 591,368 | ||||||||||||||
Gross profit |
| 314,226 | 15,328 | | 329,554 | |||||||||||||||
Compensation and related benefits |
21,101 | 105,606 | 8,684 | | 135,391 | |||||||||||||||
Advertising and promotion |
| 28,948 | 628 | | 29,576 | |||||||||||||||
Other selling, general and administrative |
15,886 | 33,980 | 392 | | 50,258 | |||||||||||||||
Subsidiary (income) expense |
(54,598 | ) | 217 | | 54,381 | | ||||||||||||||
Other (income) expense |
(35,017 | ) | 31,987 | 2,973 | | (57 | ) | |||||||||||||
Operating income
(loss) |
52,628 | 113,488 | 2,651 | (54,381 | ) | 114,386 | ||||||||||||||
Interest expense, net |
1,739 | 30,657 | 550 | | 32,946 | |||||||||||||||
Income (loss) before income taxes |
50,889 | 82,831 | 2,101 | (54,381 | ) | 81,440 | ||||||||||||||
Income tax (benefit) expense |
(671 | ) | 29,928 | 623 | | 29,880 | ||||||||||||||
Net income (loss) |
$ | 51,560 | $ | 52,903 | $ | 1,478 | $ | (54,381 | ) | $ | 51,560 | |||||||||
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 Statements of Operations
Combined | Combined | |||||||||||||||||||
Parent/ | Guarantor | Non-Guarantor | ||||||||||||||||||
Three months ended June 30, 2009 | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
(unaudited) | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenue |
$ | | $ | 410,575 | $ | 25,029 | $ | (3,188 | ) | $ | 432,416 | |||||||||
Cost of sales, including costs of warehousing,
distribution and occupancy |
| 266,292 | 17,802 | (3,188 | ) | 280,906 | ||||||||||||||
Gross profit |
| 144,283 | 7,227 | | 151,510 | |||||||||||||||
Compensation and related benefits |
10,658 | 50,841 | 4,027 | | 65,526 | |||||||||||||||
Advertising and promotion |
| 14,173 | 222 | | 14,395 | |||||||||||||||
Other selling, general and administrative |
8,910 | 17,049 | (78 | ) | | 25,881 | ||||||||||||||
Subsidiary (income) expense |
(19,207 | ) | (1,509 | ) | | 20,716 | | |||||||||||||
Other (income) expense |
(18,547 | ) | 17,543 | 874 | | (130 | ) | |||||||||||||
Operating income
(loss) |
18,186 | 46,186 | 2,182 | (20,716 | ) | 45,838 | ||||||||||||||
Interest expense, net |
889 | 15,894 | 298 | | 17,081 | |||||||||||||||
Income (loss) before income taxes |
17,297 | 30,292 | 1,884 | (20,716 | ) | 28,757 | ||||||||||||||
Income tax (benefit) expense |
(669 | ) | 11,085 | 375 | | 10,791 | ||||||||||||||
Net income (loss) |
$ | 17,966 | $ | 19,207 | $ | 1,509 | $ | (20,716 | ) | $ | 17,966 | |||||||||
Supplemental Condensed Consolidating Statements of Operations
Combined | Combined | |||||||||||||||||||
Parent/ | Guarantor | Non-Guarantor | ||||||||||||||||||
Six months ended June 30, 2009 | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
(unaudited) | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenue |
$ | | $ | 829,157 | $ | 49,441 | $ | (6,285 | ) | $ | 872,313 | |||||||||
Cost of sales, including costs of warehousing,
distribution and occupancy |
| 538,469 | 34,451 | (6,285 | ) | 566,635 | ||||||||||||||
Gross profit |
| 290,688 | 14,990 | | 305,678 | |||||||||||||||
Compensation and related benefits |
20,742 | 102,376 | 7,733 | | 130,851 | |||||||||||||||
Advertising and promotion |
| 28,646 | 488 | | 29,134 | |||||||||||||||
Other selling, general and administrative |
17,134 | 32,460 | 140 | | 49,734 | |||||||||||||||
Subsidiary (income) expense |
(39,645 | ) | (2,954 | ) | | 42,599 | | |||||||||||||
Other (income) expense |
(36,139 | ) | 34,250 | 1,856 | | (33 | ) | |||||||||||||
Operating income
(loss) |
37,908 | 95,910 | 4,773 | (42,599 | ) | 95,992 | ||||||||||||||
Interest expense, net |
1,764 | 33,789 | 590 | | 36,143 | |||||||||||||||
Income (loss) before income taxes |
36,144 | 62,121 | 4,183 | (42,599 | ) | 59,849 | ||||||||||||||
Income tax (benefit) expense |
(1,268 | ) | 22,476 | 1,229 | | 22,437 | ||||||||||||||
Net income (loss) |
$ | 37,412 | $ | 39,645 | $ | 2,954 | $ | (42,599 | ) | $ | 37,412 | |||||||||
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 Cash Flows
Combined | Combined | |||||||||||||||
Parent/ | Guarantor | Non-Guarantor | ||||||||||||||
Six months ended June 30, 2010 | Issuer | Subsidiaries | Subsidiaries | Consolidated | ||||||||||||
(unaudited) | ||||||||||||||||
(in thousands) | ||||||||||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES: |
$ | | $ | 81,712 | $ | 4,842 | $ | 86,554 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||
Capital expenditures |
(1,246 | ) | (11,114 | ) | (1,315 | ) | (13,675 | ) | ||||||||
Investment/distribution |
62,651 | (62,651 | ) | | | |||||||||||
Other investing |
| (175 | ) | | (175 | ) | ||||||||||
Net cash provided by (used in) investing activities |
61,405 | (73,940 | ) | (1,315 | ) | (13,850 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
Dividend payment |
(28,384 | ) | | | (28,384 | ) | ||||||||||
Other financing |
(237 | ) | (6 | ) | (723 | ) | (966 | ) | ||||||||
Net cash used in financing activities |
(28,621 | ) | (6 | ) | (723 | ) | (29,350 | ) | ||||||||
Effect of exchange rate on cash |
| | 72 | 72 | ||||||||||||
Net increase in
cash |
32,784 | 7,766 | 2,876 | 43,426 | ||||||||||||
Beginning balance, cash |
77,797 | (4,801 | ) | 2,093 | 75,089 | |||||||||||
Ending balance,
cash |
$ | 110,581 | $ | 2,965 | $ | 4,969 | $ | 118,515 | ||||||||
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)
Combined | Combined | |||||||||||||||
Parent/ | Guarantor | Non-Guarantor | ||||||||||||||
Six months ended June 30, 2009 | Issuer | Subsidiaries | Subsidiaries | Consolidated | ||||||||||||
(unaudited) | ||||||||||||||||
(in thousands) | ||||||||||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES: |
$ | | $ | 53,496 | $ | 2,846 | $ | 56,342 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||
Capital expenditures |
(1,359 | ) | (8,230 | ) | (1,714 | ) | (11,303 | ) | ||||||||
Investment/distribution |
85,810 | (85,810 | ) | | | |||||||||||
Other investing |
| (892 | ) | | (892 | ) | ||||||||||
Net cash provided by (used in) investing activities |
84,451 | (94,932 | ) | (1,714 | ) | (12,195 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
GNC Corporation investment in
General Nutrition Centers, Inc. |
(278 | ) | | | (278 | ) | ||||||||||
Financing fees |
(45 | ) | | | (45 | ) | ||||||||||
Other financing |
(18,944 | ) | (4 | ) | (675 | ) | (19,623 | ) | ||||||||
Net cash used in financing activities |
(19,267 | ) | (4 | ) | (675 | ) | (19,946 | ) | ||||||||
Effect of exchange rate on cash |
| | 67 | 67 | ||||||||||||
Net increase (decrease) in cash |
65,184 | (41,440 | ) | 524 | 24,268 | |||||||||||
Beginning balance, cash |
| 40,077 | 2,230 | 42,307 | ||||||||||||
Ending balance, cash |
$ | 65,184 | $ | (1,363 | ) | $ | 2,754 | $ | 66,575 | |||||||
NOTE 11. INCOME TAXES
The Company files a consolidated U.S. federal tax return and various consolidated and separate
tax returns as prescribed by the tax laws of the state, local, and international 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, local, and
international 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 June 30, 2010, the
Company believes that it has appropriately reserved for any potential federal, state, local, and
international income tax exposures.
The Company recorded additional unrecognized tax benefits of approximately $0.6 million during
the six months ended June 30, 2010, exclusive of $0.9 million settled. The additional unrecognized
tax benefits recorded during the six months ended June 30, 2010 are principally related to the
continuation of previously taken tax positions. As of June 30, 2010 and December 31, 2009, the
Company had $6.4 million and $6.8 million, respectively, of unrecognized tax benefits. As of June
30, 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 $6.4 million. The Company recognizes accrued interest and penalties related to
unrecognized tax benefits in income tax expense. The Company had accrued approximately $2.3 million
and $2.2 million, respectively, for June 30, 2010 and December 31, 2009 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.
24
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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 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. |
The following table presents the Companys financial assets and liabilities that were
accounted for at fair value on a recurring basis as of June 30, 2010 by level within the fair value
hierarchy:
Fair Value Measurements Using | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
(unaudited) | ||||||||||||
(in thousands) | ||||||||||||
Other current liabilities |
$ | | $ | 5,780 | $ | | ||||||
Other long-term liabilities |
$ | 2,512 | $ | 6,499 | $ | |
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 current liabilities |
$ | | $ | | $ | | ||||||
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:
25
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Other Current Liabilities and 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 this plan 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 Level 1 on the fair value hierarchy. Other current liabilities and
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.
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 six months ended June 30, 2010 and 2009,
$0.8 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 June 30, 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 six months ended June 30, 2010 and 2009, the Company paid $1.5 million and $1.2
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 six months ended June 30, 2010 and 2009, the Company made $1.4 million and $2.6 million,
respectively, in product purchases from Lifelong, excluding purchases pursuant to the Lifelong
Agreement (as defined below).
Product Development and Distribution Agreement. On June 3, 2010, General Nutrition
Corporation, a wholly owned subsidiary of the Company, and Lifelong entered into a Product
Development and Distribution Agreement (the Lifelong Agreement), pursuant to which General
Nutrition Corporation and Lifelong will develop a branded line of supplements to be manufactured by
Lifelong. As described above, Mr. Fortino is the Managing Director, a member of the Board of
Directors and a stockholder of Lifelong. Products manufactured under the Lifelong Agreement and
sold in the Companys stores will be purchased by the Company from Lifelong; products sold outside
of the Companys stores will be subject to certain revenue sharing arrangements. For the six
months ended June 30, 2010, the Company made $1.2 million in product purchases from Lifelong under
the Lifelong Agreement, and the Company did not receive any proceeds pursuant to the revenue
sharing agreement.
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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 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 including, but not limited to, tax 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.
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You should not place undue reliance on forward-looking statements. We cannot guarantee future
results, 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 regulations including, but not limited to, tax regulations; and | ||
| a change in disposable income available to consumers, as a result of current economic conditions. |
Executive Overview
The first six months of 2010 resulted in revenue growth of 5.6%, operating income growth of
19.2%, and net income growth of 38.0% compared to the same period in 2009. Operating income growth
resulted from higher sales and margins in our retail and franchise segments and effective cost
controls on unallocated expenses. Net income growth resulted primarily from higher operating income
and lower interest expense, a result of lower debt levels.
Revenue growth occurred primarily in the retail segment, as domestic retail comparable store
sales increased 4.7% in the first six months of 2010 as compared to the same period in 2009.
Included in this increase is a 25.9% 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 15.8%.
In the first six months 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 74 international stores in the first six months of 2010. The
combined franchise segment revenue grew 8.9%, and operating income grew 17.0% in the first six
months of 2010 over the same period in 2009.
In the first six months of 2010, our manufacturing segment showed a reduction in our contract
manufacturing business compared with the first six months 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 (Gatorade),
a division of PepsiCo, to launch G Series Pro a new sports drink variant of Gatorades recently
launched G Series. In the second quarter of 2010, G Series Pro was distributed through an
exclusive co-marketing and co-distribution collaboration between Gatorade and us, utilizing our
network of more than 5,400 outlets nationwide.
In the second quarter, GNC and PetSmart announced the launch of a line of dietary supplements
designed for dogs and cats. This new line, which recognizes the unique dietary needs of pets, will
be made exclusively for PetSmart and available at PetSmart and www.petsmart.com beginning in the
fall of 2010.
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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.
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.
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 of 2009, 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 revenue growth. |
We will continue to seek improvements in each of the business segments and position ourselves
for long term growth.
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Related Parties
For the six months ended June 30, 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.
Results of Operations
The following information presented for the three and six months ended June 30, 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 | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||||||||||
Retail |
$ | 342.8 | 75.2 | % | $ | 316.9 | 73.3 | % | $ | 693.7 | 75.3 | % | $ | 650.6 | 74.6 | % | ||||||||||||||||
Franchise |
73.1 | 16.0 | % | 69.2 | 16.0 | % | 145.6 | 15.8 | % | 133.7 | 15.3 | % | ||||||||||||||||||||
Manufacturing / Wholesale |
40.0 | 8.8 | % | 46.3 | 10.7 | % | 81.6 | 8.9 | % | 88.0 | 10.1 | % | ||||||||||||||||||||
Total net revenues |
455.9 | 100.0 | % | 432.4 | 100.0 | % | 920.9 | 100.0 | % | 872.3 | 100.0 | % | ||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||||||
Cost of sales, including warehousing,
distribution and occupancy costs |
292.3 | 64.1 | % | 280.9 | 65.0 | % | 591.4 | 64.2 | % | 566.6 | 65.0 | % | ||||||||||||||||||||
Compensation and related benefits |
67.6 | 14.9 | % | 65.5 | 15.2 | % | 135.4 | 14.7 | % | 130.8 | 15.0 | % | ||||||||||||||||||||
Advertising and promotion |
14.1 | 3.1 | % | 14.4 | 3.3 | % | 29.5 | 3.2 | % | 29.1 | 3.3 | % | ||||||||||||||||||||
Other selling, general and administrative
expenses |
23.3 | 5.1 | % | 23.6 | 5.5 | % | 46.2 | 5.0 | % | 44.9 | 5.1 | % | ||||||||||||||||||||
Amortization expense |
1.9 | 0.4 | % | 2.3 | 0.4 | % | 4.1 | 0.5 | % | 4.9 | 0.6 | % | ||||||||||||||||||||
Foreign currency (gain) loss |
| 0.0 | % | (0.1 | ) | 0.0 | % | (0.1 | ) | 0.0 | % | | 0.0 | % | ||||||||||||||||||
Total operating expenses |
399.2 | 87.6 | % | 386.6 | 89.4 | % | 806.5 | 87.6 | % | 776.3 | 89.0 | % | ||||||||||||||||||||
Operating income: |
||||||||||||||||||||||||||||||||
Retail |
49.4 | 10.8 | % | 41.6 | 9.6 | % | 99.6 | 10.8 | % | 86.0 | 9.9 | % | ||||||||||||||||||||
Franchise |
22.9 | 5.0 | % | 19.5 | 4.6 | % | 45.3 | 4.9 | % | 38.7 | 4.4 | % | ||||||||||||||||||||
Manufacturing / Wholesale |
16.4 | 3.6 | % | 17.3 | 4.0 | % | 33.3 | 3.6 | % | 35.2 | 4.0 | % | ||||||||||||||||||||
Unallocated corporate and other
costs: |
||||||||||||||||||||||||||||||||
Warehousing and distribution costs |
(13.8 | ) | -3.0 | % | (13.7 | ) | -3.2 | % | (27.7 | ) | -3.0 | % | (27.0 | ) | -3.1 | % | ||||||||||||||||
Corporate costs |
(18.2 | ) | -4.0 | % | (18.9 | ) | -4.4 | % | (36.1 | ) | -3.9 | % | (36.9 | ) | -4.2 | % | ||||||||||||||||
Subtotal unallocated corporate and
other costs, net |
(32.0 | ) | -7.0 | % | (32.6 | ) | -7.6 | % | (63.8 | ) | -6.9 | % | (63.9 | ) | -7.3 | % | ||||||||||||||||
Total operating income |
56.7 | 12.4 | % | 45.8 | 10.6 | % | 114.4 | 12.4 | % | 96.0 | 11.0 | % | ||||||||||||||||||||
Interest expense, net |
16.3 | 17.1 | 32.9 | 36.2 | ||||||||||||||||||||||||||||
Income before income taxes |
40.4 | 28.7 | 81.5 | 59.8 | ||||||||||||||||||||||||||||
Income tax expense |
14.8 | 10.7 | 29.9 | 22.4 | ||||||||||||||||||||||||||||
Net income |
$ | 25.6 | $ | 18.0 | $ | 51.6 | $ | 37.4 | ||||||||||||||||||||||||
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 June 30, 2010 and 2009
Revenues
Our consolidated net revenues increased $23.5 million, or 5.4%, to $455.9 million for the
three months ended June 30, 2010 compared to $432.4 million for the same period in 2009. The
increase was the result of increased sales in our Retail and Franchise segments, partially offset
by a decline in our Manufacturing/Wholesale segment.
Retail. Revenues in our Retail segment increased $25.9 million, or 8.2%, to $342.8 million for
the three months ended June 30, 2010 compared to $316.9 million for the same period in 2009. The
increase from 2009 to 2010 included an increase of $2.5 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 6.5%. In the second quarter of 2010,
our Canadian company-owned stores had a same store sales decline of 5.1%, 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 62 domestic stores to 2,687 compared to 2,625 at June 30,
2009, primarily due to new store openings and franchise store acquisitions, and by seven Canadian
stores to 171 at June 30, 2010 compared to 164 at June 30, 2009.
Franchise. Revenues in our Franchise segment increased $3.9 million, or 5.5%, to $73.1 million
for the three months ended June 30, 2010 compared to $69.2 million for the same period in 2009.
Domestic franchise revenue decreased by $0.1 million compared to the same period in 2009. Domestic
royalty income increased by $0.1 million for the quarter despite operating 44 fewer stores in the
second quarter of 2010 compared to the same period in 2009. There were 892 stores at June 30, 2010
compared to 936 stores at June 30, 2009. International franchise revenue increased by $4.0
million, primarily the result of increases in product sales and franchise fees. International
royalty income increased $0.8 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 157 stores to 1,381 at June 30, 2010 compared to
1,224 at June 30, 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 $6.3 million, or 13.5%, to $40.0 million for the three
months ended June 30, 2010 compared to $46.3 million for the same period in 2009. Sales from the
South Carolina plant decreased by $7.3 million, and revenues associated with Rite Aid increased by
$1.2 million. Rite Aid product sales grew by $1.0 million and license fee revenue increased by $0.2
million as a result of Rite Aid opening 13 more franchise store-within-a-stores in the second
quarter of 2010 as compared to the second quarter of 2009.
Cost of Sales
Consolidated cost of sales, which includes product costs, costs of warehousing and
distribution and occupancy costs, increased $11.4 million, or 4.0%, to $292.3 million for the three
months ended June 30, 2010 compared to $280.9 million for the same period in 2009. Consolidated
cost of sales, as a percentage of net revenue, was 64.1% and 65.0% for the three months ended June
30, 2010 and 2009, respectively. Increase in cost of sales was primarily due to higher sales
volumes and store counts.
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 $1.1 million, or 1.1%, to $106.9 million, for the three months ended June 30, 2010
compared to $105.8 million for the same period in 2009. These expenses, as a percentage of net
revenue, were 23.5% for the three months ended June 30, 2010 compared to 24.5% for the three months
ended June 30, 2009.
Compensation and related benefits. Compensation and related benefits increased $2.1 million,
or 3.2%, to $67.6 million for the three months ended June 30, 2010 compared to $65.5 million for
the same period in 2009. Increases occurred in (1) base wages of $1.8 million to support our
increased store base and sales volume; (2) health insurance expenses of $0.5 million; and (3) other
compensation expenses of $0.5 million. These increases were offset by declines in incentive and
commission expenses of $0.7 million.
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Advertising and promotion. Advertising and promotion expenses decreased $0.3 million, or
1.9%, to $14.1 million for the three months ended June 30, 2010 compared to $14.4 million during
the same period in 2009. Advertising expense decreased primarily as a result of decreases in
visual merchandising costs of $0.8 million and print advertising expenses of $0.8 million offset by
an increase in media costs of $1.1 million. Other advertising costs accounted for the remaining
$0.2 million increase.
Other SG&A. Other SG&A expenses, including amortization expense, decreased $0.7 million, or
2.8%, to $25.2 million for the three months ended June 30, 2010 compared to $25.9 million for the
same period in 2009. This decrease was due to decreases in bad debt expenses of $0.6 million and
depreciation and amortization expense of $0.8 million. These were offset by increases in
third-party sales commissions of $0.6 million and other selling costs of $0.1 million.
Foreign Currency (Gain) Loss
Foreign currency (gain) loss for the three months ended June 30, 2010 and 2009 resulted
primarily from accounts payable activity with our Canadian subsidiary. We recognized an immaterial
loss for the three months ended June 30, 2010 and a gain of $0.1 million for the three months ended
June 30, 2009.
Operating Income
As a result of the foregoing, consolidated operating income increased $10.9 million, or 23.7%,
to $56.7 million for the three months ended June 30, 2010 compared to $45.8 million for the same
period in 2009. Operating income, as a percentage of net revenue, was 12.4% and 10.6% for the
three months ended June 30, 2010 and 2009, respectively.
Retail. Operating income increased $7.8 million, or 18.8%, to $49.4 million for the three
months ended June 30, 2010 compared to $41.6 million for the same period in 2009. The increase was
due to higher dollar margins on increased sales offset by increases in occupancy and other selling
expenses.
Franchise. Operating income increased $3.4 million, or 17.3%, to $22.9 million for the three
months ended June 30, 2010 compared to $19.5 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 $0.9 million, or 5.6%, to $16.4 million
for the three months ended June 30, 2010 compared to $17.3 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 to and license fee revenue from Rite Aid.
Warehousing and Distribution Costs. Unallocated warehousing and distribution costs increased
$0.1 million, or 0.5%, to $13.8 million for the three months ended June 30, 2010 compared to $13.7
million for the three months ended June 30, 2009.
Corporate Costs. Corporate overhead costs decreased $0.7 million, or 3.9%, to $18.2 million
for the three months ended June 30, 2010 compared to $18.9 million for the same period in 2009.
This decrease was due to decreases in other selling, general and administrative offset by increases
in compensation expenses.
Interest Expense
Interest expense decreased $0.8 million, or 4.5%, to $16.3 million for the three months ended
June 30, 2010 compared to $17.1 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 $21.0 million from the prior year
period.
Income Tax Expense
We recognized $14.8 million of income tax expense (or 36.6% of pre-tax income) during the
three months ended June 30, 2010 compared to $10.7 million (or 37.5% of pre-tax income) for the
same period of 2009.
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Net Income
As a result of the foregoing, consolidated net income increased $7.6 million to $25.6 million
for the three months ended June 30, 2010 compared to $18.0 million for the same period in 2009.
Comparison of the Six Months Ended June 30, 2010 and 2009
Revenues
Our consolidated net revenues increased $48.6 million, or 5.6%, to $920.9 million for the six
months ended June 30, 2010 compared to $872.3 million for the same period in 2009. The increase
was the result of increased sales in our Retail and Franchise segments, partially offset by a
decline in our Manufacturing/Wholesale segment.
Retail. Revenues in our Retail segment increased $43.1 million, or 6.6%, to $693.7 million for
the six months ended June 30, 2010 compared to $650.6 million for the same period in 2009. The
increase from 2009 to 2010 included an increase of $5.9 million of sales through www.gnc.com. Sales
increases occurred primarily in the sports nutrition category. Our domestic company-owned same
store sales, including our internet sales, improved by 4.7% for the six months ended June 30, 2010
compared to the same period in 2009. Our Canadian company-owned same store sales declined by 4.5%,
in local currency, for the six months ended June 30, 2010 compared to the same period in 2009. 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 62 domestic stores to 2,687 at June 30, 2010 compared to
2,625 at June 30, 2009, primarily due to new store openings and franchise store acquisitions, and
by seven Canadian stores to 171 at June 30, 2010 compared to 164 at June 30, 2009.
Franchise. Revenues in our Franchise segment increased $11.9 million, or 8.9%, to $145.6
million for the six months ended June 30, 2010 compared to $133.7 million for the same period in
2009. Domestic franchise revenue increased by $1.8 million for the six months ended June 30, 2010
compared to the same period in 2009 due to increased product sales and franchise fee revenues.
Domestic royalty income increased $0.1 million despite operating 44 fewer stores in the first six
months of 2010 compared to the same period in 2009. There were 892 stores at June 30, 2010
compared to 936 stores at June 30, 2009. International franchise revenue increased by $10.1
million for the first six months of 2010 compared to the same period in 2009 primarily as a result
of increases in product sales. International royalty income increased $1.6 million for the first
six months of 2010 as 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 157 stores to 1,381 at June 30, 2010 compared to 1,224 at June 30, 2009.
Manufacturing/Wholesale. Revenues in our Manufacturing/Wholesale segment, which includes
third-party sales from our manufacturing facility in South Carolina, as well as wholesale sales to
Rite Aid and www.drugstore.com, decreased $6.4 million, or 7.2%, to $81.6 million for the six
months ended June 30, 2010 compared to $88.0 million for the same period in 2009. Sales decreased
in the South Carolina plant by $11.5 million, and revenues associated with Rite Aid increased by
$4.9 million. This increase was due to increases in
product sales to Rite Aid of $3.9 million and increased license fee revenue of $1.0 million as a
result of Rite Aid opening 49 more franchise store-within-a-stores in the first six months of 2010
as compared to the same period in 2009.
Cost of Sales
Consolidated cost of sales, which includes product costs, costs of warehousing and
distribution and occupancy costs, increased $24.8 million, or 4.4%, to $591.4 million for the six
months ended June 30, 2010 compared to $566.6 million for the same period in 2009. Consolidated
cost of sales, as a percentage of net revenue, was 64.2% and 65.0% for the six months ended June
30, 2010 and 2009, respectively. Increase in cost of sales was primarily due to higher sales
volumes and store counts.
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 $5.5 million, or 2.6%, to $215.2 million, for the six months ended June 30, 2010 compared
to $209.7 million for the same period in 2009. These expenses, as a percentage of net revenue,
were 23.4% for the six months ended June 30, 2010 compared to 24.0% for the six months ended June
30, 2009.
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Compensation and related benefits. Compensation and related benefits increased $4.6 million,
or 3.5%, to $135.4 million for the six months ended June 30, 2010 compared to $130.8 million for
the same period in 2009. Increases occurred in (1) base wages of $4.5 million to support our
increased store base and sales volume; (2) health insurance expenses of $0.4 million; and (3) other
compensation expense of $0.7 million. These increases were offset by declines in incentive and
commission expenses of $1.0 million.
Advertising and promotion. Advertising and promotion expenses increased $0.4 million, or
1.5%, to $29.5 million for the six months ended June 30, 2010 compared to $29.1 million during the
same period in 2009. Advertising expense increased primarily as a result of increases in media
costs of $1.1 million and other advertising expenses of $0.5 million, offset by decreases in print
advertising costs of $1.2 million.
Other SG&A. Other SG&A expenses, including amortization expense, increased by $0.5 million,
or 1.1%, to $50.3 million for the six months ended June 30, 2010 compared to $49.8 million for the
six months ended June 30, 2009. Increases in other SG&A included third-party sales commissions of
$1.3 million and banking fees of $0.6 million. These were partially offset by decreases in
amortization expense of $0.9 million and other selling expenses of $0.5 million.
Foreign Currency (Gain) Loss
Foreign currency (gain) loss for the six months ended June 30, 2010 and 2009 resulted
primarily from accounts payable activity with our Canadian subsidiary. We incurred a gain of $0.1
million for the six months ended June 30, 2010 and an immaterial gain for the six months ended June
30, 2009.
Operating Income
As a result of the foregoing, consolidated operating income increased $18.4 million or 19.2%
to $114.4 million for the six months ended June 30, 2010 compared to $96.0 million for the same
period in 2009. Operating income, as a percentage of net revenue, was 12.4% for the six months
ended June 30, 2010 and 11.0% for the six months ended June 30, 2009.
Retail. Operating income increased $13.6 million, or 15.8%, to $99.6 million for the six
months ended June 30, 2010 compared to $86.0 million for the same period in 2009. The increase was
primarily the result of higher dollar margins on increased sales volumes offset by increases in
occupancy costs, compensation costs and other SG&A expenses.
Franchise. Operating income increased $6.6 million, or 17.0%, to $45.3 million for the six
months ended June 30, 2010 compared to $38.7 million for the same period in 2009. This increase
was due to increases in royalty income, higher dollar margins on increased product sales to
franchisees and reductions in bad debt expenses and amortization expenses.
Manufacturing/Wholesale. Operating income decreased $1.9 million, or 5.6%, to $33.3 million
for the six months ended June 30, 2010 compared to $35.2 million for the same period in 2009. This
increase was primarily the result of decreased margins from our South Carolina manufacturing
facility, offset by increases in product sales to Rite Aid and in Rite Aid license fee revenue.
Warehousing and Distribution Costs. Unallocated warehousing and distribution costs increased
$0.7 million, or 2.4%, to $27.7 million for the six months ended June 30, 2010 compared to $27.0
million for the same period in 2009. The increase in costs was primarily due to increases in fuel
costs.
Corporate Costs. Corporate overhead costs decreased $0.8 million, or 2.4%, to $36.1 million
for the six months ended June 30, 2010 compared to $36.9 million for the same period in 2009. This
decrease was due to decreases in other selling, general and administrative offset by increases in
compensation expenses.
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Interest Expense
Interest expense decreased $3.3 million, or 8.8%, to $32.9 million for the six months ended
June 30, 2010 compared to $36.2 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.
Income Tax Expense
We recognized $29.9 million (or 36.7% of pre-tax income) of consolidated income tax expense
during the six months ended June 30, 2010 compared to $22.4 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 $14.1 million to $51.6 million
for the six months ended June 30, 2010 compared to $37.4 million for the same period in 2009.
Liquidity and Capital Resources
At June 30, 2010, we had $118.5 million in cash and cash equivalents and $415.1 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 $32.5 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
June 30, 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. Those funds were then
dividended to and are currently held by GNC Acquisition Holdings Inc., our ultimate parent company.
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.
The following table summarizes our cash flows for the six months ended June 30, 2010 and 2009:
Six months | Six months | |||||||
ended June 30, | ended June 30, | |||||||
(Dollars in millions) | 2010 | 2009 | ||||||
Cash provided by operating activities |
$ | 86.6 | $ | 56.3 | ||||
Cash used in investing activities |
(13.9 | ) | (12.2 | ) | ||||
Cash used in financing activities |
(29.4 | ) | (19.9 | ) |
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Cash Provided by Operating Activities
Cash provided by operating activities was $86.6 million for the six months ended June 30, 2010
and $56.3 million for the six months ended June 30, 2009. A primary reason for the increase in cash
provided by operating activities was the increase in net income of $14.1 million for the six months
ended June 30, 2010 compared to the six months ended June 30, 2009. Our inventory increased by
$25.6 million in support of the higher sales volumes and purchases for new product introductions.
Accounts payable increased by $24.1 million due to the timing of disbursements and related
inventory growth. The above were supplemented by an increase in our accrued liabilities and a
reduction in our prepaid income taxes.
For the six months ended June 30, 2009, our inventory increased by $21.2 million in support of
the higher sales volume at our stores. Accounts payable decreased by $4.8 million due to the timing
of disbursements; in addition, accrued interest decreased by $1.8 million, a result of the
semi-annual interest payments on our Senior Toggle Notes and 10.75% Senior Subordinated Notes.
These were offset by increases in our accrued liabilities and accrued income taxes.
Cash Used in Investing Activities
We used cash for investing activities of $13.9 million and $12.2 million for the six months
ended June 30, 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
$13.7 million and $11.3 million for the six months ended June 30, 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 six months ended June 30, 2010 we used cash of $29.4 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 $1.0 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 $19.9 million for the six months ended June 30, 2009
primarily for the following long-term debt payments: (1) $3.8 million for an excess cash payment in
March 2009 under the requirements of the 2007 Senior Credit Facility; (2) $5.4 million for the
outstanding balance on the Revolving Credit Facility in May 2009; and (3) a $9.0 million optional
prepayment on the 2007 Senior Credit Facility in June 2009. The following is a summary of our debt:
$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 2.6% at June 30, 2010. As
of June 30, 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.
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 June 30, 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.
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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 June 30, 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 June 30, 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.
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 June 30, 2010, we had fixed rate
debt of $116.5 million and variable rate debt of $942.5 million.
To manage this risk, we have entered into interest rate swap agreements. These agreements are
summarized in the following table:
Derivative | Total Notional Amount | Term | Counterparty Pays | Company Pays | ||||
Interest Rate Swap |
$150.0 million | April 2009-April 2011 | 3 month LIBOR | 3.07% | ||||
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% |
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Based on our variable rate debt balance as of June 30, 2010 a 1% change in interest rates
would increase or decrease our annual interest cost by $3.9 million. At June 30, 2010 there were
no other material changes in our market risks relating to interest and foreign exchange rates as of
December 31, 2009.
We do not enter into derivative transactions for speculative purposes and hold no derivative
instruments for trading purposes.
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 June 30, 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. Removed and Reserved.
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) |
||||
August 10, 2010 | /s/ Joseph M. Fortunato | |||
Joseph M. Fortunato | ||||
Chief Executive Officer (Principal Executive Officer) |
||||
August 10, 2010 | /s/ Michael M. Nuzzo | |||
Michael M. Nuzzo | ||||
Chief Financial Officer (Principal Financial Officer) |
||||
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