GNC 2011 Annual Report Download - page 41

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 an approximately 217,000
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 three small regional sales offices in Fort Lauderdale, Florida; Tustin, California; and Mississauga, Ontario. None of the regional sales offices
is larger than 6,500 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 we are 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 us, are all encumbered by a mortgage in the original
principal amount of $17.9 million, with an outstanding balance of $5.7 million as of December 31, 2010. This partnership is included in our consolidated
financial statements.
Item 3. Legal Proceedings.
We are engaged in various legal actions, claims and proceedings arising in the normal course of business, including claims related to breach of
contracts, products liabilities, intellectual property matters and employment-related matters resulting from our business activities. As with most actions such
as these, an estimation of any possible and/or ultimate liability cannot always be determined. We continue to assess the requirement to account for additional
contingencies in accordance with the standard on contingencies. 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 $3.0 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 an 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 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.
Hydroxycut Claims. On May 1, 2009, the FDA issued a warning on several Hydroxycut-branded products manufactured by 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. Following the recall, GNC was
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