GNC 2008 Annual Report Download - page 79

Table of Contents
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Issue No. 02-16, "Accounting by a Reseller for Cash Consideration Received from a Vendor". For volume rebates, the appropriate level of such
income is derived from the level of actual purchases made by GNC from suppliers. The amount recorded as a reduction to cost of goods sold
was $6.6 million for the period from January 1 to March 15, 2007, $20.9 million for the period from March 16 to December 31, 2007,
$23.8 million and $19.9 million for the years ended December 31, 2006 and 2005.
Distribution and Shipping Costs. The Company bills franchisees and third-party customers shipping and transportation costs and reflects
these charges in revenue. The unreimbursed costs that are associated with these costs are included in cost of sales.
Research and Development. Research and development costs arising from internally generated projects are expensed by the Company as
incurred. The Company recognized $0.1 million for the period January 1 to March 15, 2007, $ 0.5 million for the period from March 16 to
December 31, 2007, and $0.8 million in research and development costs for the years ended December 31, 2006, and 2005. These costs are
included in Other SG&A costs in the accompanying financial statements.
Advertising Expenditures. The Company recognizes advertising, promotion and marketing program costs the first time the advertising
takes place with exception to the costs of producing advertising, which are expensed as incurred during production. The Company administers
national advertising funds on behalf of its franchisees. In accordance with the franchisee contracts, the Company collects advertising fees from
the franchisees and utilizes the proceeds to coordinate various advertising and marketing campaigns. The Company recognized $20.5 million
for the period January 1 to March 15, 2007, $35.0 million of the period March 16 to December 31, 2007 and $50.7 million and $44.7 million in
advertising expense for the years ended December 31, 2006, and 2005.
The Company has a balance of unused barter credits on account with a third-party barter agency. The Company generated these barter
credits by exchanging inventory with a third-party barter vendor. In exchange, the barter vendor supplied us with barter credits. We did not
record a sale on the transaction as the inventory sold was for expiring products that were previously fully reserved for on our balance sheet. In
accordance with the SFAS No. 153, "Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29", a sale is recorded based on
either the value given up or the value received, whichever is more easily determinable. The value of the inventory was determined to be zero,
as the inventory was fully reserved. Therefore, these credits were not recognized on the balance sheet and are only realized when we purchase
services or products through the bartering company. The credits can be used to offset the cost of purchasing services or products. As of
December 31, 2007 and 2006, the available credit balance was $8.5 million. The barter credits are available for use through March 31, 2009.
Other expense/income. Other expense for the year ended December 31, 2006 was $1.2 million, as a result of the loss on the sale of our
Australian subsidiary. Other income for the year ended December 31, 2005 was $2.5 million, which was the recognition of transaction fee
income related to the transfer of our Australian franchise rights.
Merger Related Costs. For the period January 1 to March 15, 2007, Merger related costs of $34.6 million includes costs incurred by our
parent, and recognized by us, in relation to the Merger. These costs were comprised of selling-related expenses of $26.4 million, a contract
termination fee paid to our previous owner of $7.5 million and other costs of $0.7 million.
Leases. The Company has various operating leases for company-owned and franchised store locations and equipment. Store leases
generally include amounts relating to base rental, percent rent and other charges such as common area maintenance fees and real estate
taxes. Periodically, the Company receives varying amounts of reimbursements from landlords to compensate the Company for costs incurred in
the construction of stores. These reimbursements are amortized by the Company as an offset to rent expense over the life of the related lease.
The Company determines the period used for the straight-line rent expense for leases with option periods and conforms it to the term used for
amortizing improvements. 75