GNC 2008 Annual Report Download - page 80

Table of Contents
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company leases a 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 the Company retains the right to purchase each of the facilities at any
time during the lease for $1.00, subject to a loss of tax benefits. As part of a tax incentive arrangement, the Company assigned the facilities to
the counties and leases them back under operating leases. The Company leases the facilities from the counties where located, in lieu of paying
local property taxes. Upon exercising its right to purchase the facilities back from the counties, the Company will be subject to the applicable
taxes levied by the counties. In accordance with SFAS No. 98, Accounting for Leases,'' the purchase option in the lease agreements prevent
sale-leaseback accounting treatment. As a result, the original cost basis of the facilities remains on the balance sheet and continues to be
depreciated.
The Company leases a 210,000 square foot distribution center in Leetsdale, Pennsylvania and a 112,000 square foot distribution center in
Phoenix, Arizona. The Company conducts additional manufacturing that it performs for wholesalers or retailers of third-party products, and until
the sale of the Australia facility, had additional warehousing at leased facilities located in New South Wales, Australia. The Company also has
operating leases for its fleet of distribution tractors and trailers and fleet of field management vehicles. In addition, the Company also has a
minimal amount of leased office space in California, Florida, Delaware and Illinois. The expense associated with leases that have escalating
payment terms is recognized on a straight-line basis over the life of the lease. See the footnote, "Long-Term Lease Obligations."
Contingencies. In Accordance with SFAS No. 5, "Accounting for Contingencies" the Company accrues a loss contingency if it is probable
and can be reasonably estimated that an asset had been impaired or a liability had been incurred at the date of the financial statements if those
financial statements have not been issued. If both of the conditions above are not met, or if an exposure to loss exists in excess of the amount
accrued, disclosure of the contingency shall be made when there is at least a reasonable possibility that a loss or an additional loss may have
been incurred. The Company accrues costs that are part of legal settlements when the settlement is determined by the court or is probable.
Pre-Opening Expenditures. The Company recognizes the cost associated with the opening of new stores as incurred. These costs are
charged to expense and are not material for the periods presented. Franchise store pre-opening costs are incurred by the franchisees.
Deferred Financing Fees. Costs related to the financing of the Senior Subordinated Notes issued in December 2003, 8 5/8% Senior Notes
and the December 2003 senior credit facility were capitalized and were being amortized over the term of the respective debt. As of March 15,
2007, the remaining deferred financing fees were written off as the debt was extinguished as a part of the Merger. In conjunction with the
Merger, $29.3 million in costs related to the financing of new debt were capitalized and are being amortized over the life of the new debt.
Accumulated amortization as of December 31, 2007 was $2.9 million.
Income Taxes. The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes", ("SFAS 109").
As prescribed by SFAS 109, the Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the
financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. See the
footnote, "Income Taxes."
For the year ended December 31, 2007 the Company will file a consolidated federal income tax return. For state income tax purposes, the
Company will file on both a consolidated and separate return 76