GNC 2008 Annual Report Download - page 33

Table of Contents
In our Manufacturing/Wholesale segment, we lease facilities for manufacturing, packaging, warehousing, and distribution operations. We
manufacture a majority of our proprietary products at an approximately 300,000 square-foot facility in Greenville, South Carolina. We also lease
an approximately 630,000 square-foot complex located in Anderson, South Carolina, for packaging, materials receipt, lab testing, warehousing,
and distribution. Both the Greenville and Anderson facilities are leased on a long-term basis pursuant to "fee-in-lieu-of-taxes" arrangements with
the counties in which the facilities are located, but we retain the right to purchase each of the facilities at any time during the lease for $1.00,
subject to a loss of tax benefits. We lease a 210,000 square-foot distribution center in Leetsdale, Pennsylvania and a 112,000 square-foot
distribution center in Phoenix, Arizona. We also lease space at a distribution center in Canada.
We lease four small regional sales offices in Clearwater, Florida; Fort Lauderdale, Florida; Tustin, California; and Mississauga, Ontario.
None of the regional sales offices is larger than 5,000 square feet. Our 253,000 square-foot corporate headquarters in Pittsburgh,
Pennsylvania, is owned by Gustine Sixth Avenue Associates, Ltd., a Pennsylvania limited partnership, of which General Nutrition Incorporated,
one of our subsidiaries, is a limited partner entitled to share in 75% of the partnership's profits or losses. The partnership's ownership of the
land and buildings, and the partnership's interest in the ground lease to General Nutrition Incorporated, are all encumbered by a mortgage in
the original principal amount of $17.9 million, with an outstanding balance of $9.8 million as of December 31, 2007. This partnership is included
in our consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS.
We are engaged in various legal actions, claims, and proceedings arising out of the normal course of business, including claims related
to breach of contracts, product liabilities, intellectual property matters, and employment-related matters resulting from our business activities. As
is inherent with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. We continue to
assess our requirement to account for additional contingencies in accordance with SFAS No. 5, "Accounting for Contingencies." We believe
that the amount of any potential liability resulting from these actions, when taking into consideration our general and product liability coverage,
including indemnification obligations of third-party manufacturers, and the indemnification provided by Numico under the purchase agreement
entered into in connection with the Numico Acquisition, will not have a material adverse impact on our business or financial, condition. However,
if we are required to make a payment in connection with an adverse outcome in these matters, it could have a material impact on our 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, we have been and are currently subjected to various product liability claims. Although the effects of these claims to date have not been
material to us, it is possible that current and future product liability claims could have a material adverse impact on our business or financial
condition. We currently maintain product liability insurance with a deductible/retention of $2.0 million per claim with an aggregate cap on
retained loss of $10.0 million. We typically seek and have obtained contractual indemnification from most parties that supply raw materials for
our products or that manufacture or market products we sell. We also typically seek to be added, and have been added, as additional insured
under most of such parties' insurance policies. We are 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 by the
absence of significant defenses by the insurers. We may incur material products liability claims, which could increase our costs and adversely
affect our reputation, revenues, and operating income.
Ephedra (Ephedrine Alkaloids). As of February 29, 2008, we had been named as a defendant in 2 pending cases involving the sale of
third-party products that contain ephedra. Of those cases, one involves a proprietary GNC product. Ephedra products have been the subject of
adverse publicity and regulatory scrutiny in the United States and other countries relating to alleged harmful effects, including
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