GNC 2008 Annual Report Download - page 103

Table of Contents
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
that may arise from these cases are not probable or reasonably estimable at this time, no liability has been accrued in the accompanying
financial statements.
Class Action Settlement. Five class action lawsuits were filed against us in the state courts of Alabama, California, Illinois, and Texas with
respect to claims that the labeling, packaging, and advertising with respect to a third-party product sold by the Company were misleading and
deceptive. The Company denied any wrongdoing and is pursuing indemnification claims against the manufacturer. As a result of mediation, the
parties agreed to a national settlement of the lawsuits, which has been approved by the court. Notice to the class has been published in mass
advertising media publications. In addition, notice has been mailed to approximately 2.4 million GNC Gold Card members. Each person who
purchased the third-party product and who is part of the class and who presented a cash register receipt or original product packaging will
receive a cash reimbursement equal to the retail price paid, net of sales tax. Class members who purchased the product, but who do not have a
cash register receipt or original product packaging, were given an opportunity to submit a signed affidavit that would then entitle them to receive
one or more coupons. The deadline for submission of register receipts, original product packaging, or signed affidavits, was January 5, 2007.
The number of coupons will be based on the total amount of purchases of the product subject to a maximum of five coupons per purchaser.
Each coupon will have a cash value of $10.00 valid toward any purchase of $25.00 or more at a GNC store. The coupons will not be
redeemable by any GNC Gold Card member during Gold Card Week and will not be redeemable for products subject to any other price
discount. The coupons are to be redeemed at point of sale and are not mail-in rebates. They will be redeemable for a 90-day period from the
date of issuance. The Company also agreed to donate 100,000 coupons to the United Way. In addition to the cash reimbursements and
coupons, as part of the settlement the Company paid legal fees of approximately $1.0 million and incurred advertising and postage costs of
approximately $0.4 million in 2006. Additionally, as of June 30, 2007, an accrual of $0.3 million existed for additional advertising and postage
costs related to the notification letters. The deadline for class members to opt out of the settlement class or object to the terms of the settlement
was July 6, 2006. A final fairness hearing took place on January 27, 2007. As of February 29, 2008, there had been 651 claims forms
submitted. Due to the uncertainty that exists as to the extent of future sales to the purchasers, the coupons are an incentive for the purchasers
to buy products or services from the Company (at a reduced gross margin). Accordingly, the Company will recognize the settlement by reducing
revenue in future periods when the purchasers utilize the coupons.
Franklin Publications. On October 26, 2005, General Nutrition Corporation, a wholly owned subsidiary of the Company was sued in the
Common Pleas Court of Franklin County, Ohio by Franklin Publications, Inc. ("Franklin"). The case was subsequently removed to the United
States District Court for the Southern District of Ohio, Eastern Division. At the end of February 2008, the case was settled. The lawsuit is based
upon the GNC subsidiary's termination, effective as of December 31, 2005, of two contracts for the publication of two monthly magazines
mailed to certain GNC customers. Franklin was seeking a declaratory judgment as to its rights and obligations under the contracts and
monetary damages for the GNC subsidiary's alleged breach of the contracts. Franklin also alleges that the GNC subsidiary had interfered with
Franklin's business relationships with the advertisers in the publications, who were primarily GNC vendors, and has been unjustly enriched. The
Company believes that the settlement will not have a material adverse affect on their business or financial condition.
Wage and Hour Claim. On August 11, 2006, the Company and General Nutrition Corporation, one of the Company's wholly owned
subsidiaries, were sued in federal district court for the District of Kansas by Michelle L. Most and Mark A. Kelso, on behalf of themselves and all
others similarly situated. The lawsuit purports to certify a nationwide class of GNC store managers and assistant managers and alleges that
GNC failed to pay time and a half for working more than 40 hours per week. Counsel for the plaintiffs contends that the Company and General
Nutrition Corporation improperly applied fluctuating work week calculations and procedures for docking pay for working less than 40 hours per
week under a fluctuating work week. In May 2007, the parties entered in to a settlement of the claims, which is subject to court approval. On or
about July 3, 2007, the Company sent a notice to all potential claimants, who may then elect to opt in to the settlement. While the actual
settlement amount will be based on the number of claimants who actually opt in to participate in the settlement, if approved by the court, the
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