GNC 2012 Annual Report Download - page 33

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Table of Contents
Franchisee support of our marketing and advertising programs is critical to our success.
The support of our franchisees is critical for the success of our marketing programs and other strategic initiatives we seek to undertake, and the
successful execution of these initiatives will depend on our ability to maintain alignment with our franchisees. While we can mandate certain strategic
initiatives through enforcement of our franchise agreements, we need the active support of our franchisees if the implementation of these initiatives is to be
successful. In addition, our efforts to build alignment with franchisees may result in a delay in the implementation of our marketing and advertising programs
and other key initiatives. Although we believe that our current relationships with our franchisees are generally good, there can be no assurance that our
franchisees will continue to support our marketing programs and strategic initiatives. The failure of our franchisees to support our marketing programs and
strategic initiatives could adversely affect our ability to implement our business strategy and could materially harm our business, results of operations and
financial condition.
Our franchisees are independent operators and we have limited influence over their operations.
Our revenues substantially depend upon our franchisees' sales volumes, profitability and financial viability. However, our franchisees are independent
operators and we cannot control many factors that impact the profitability of their stores. Pursuant to the franchise agreements, we can, among other things,
mandate signage, equipment and hours of operation, establish operating procedures and approve suppliers, distributors and products. However, the quality of
franchise store operations may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate stores in a
manner consistent with our standards and requirements or standards set by federal, state and local governmental laws and regulations. In addition, franchisees
may not hire and train qualified managers and other personnel. While we ultimately can take action to terminate franchisees that do not comply with the
standards contained in our franchise agreements, any delay in identifying and addressing problems could harm our image and reputation, and our franchise
revenues and results of operations could decline.
Franchise regulations could limit our ability to terminate or replace underperforming franchises, which could adversely impact franchise revenues.
Our franchise activities are subject to federal, state and international laws regulating the offer and sale of franchises and the governance of our franchise
relationships. These laws impose registration, extensive disclosure requirements and bonding requirements on the offer and sale of franchises. In some
jurisdictions, the laws relating to the governance of our franchise relationship impose fair dealing standards during the term of the franchise relationship and
limitations on our ability to terminate or refuse to renew a franchise. We may, therefore, be required to retain an under performing franchise and may be
unable to replace the franchisee, which could adversely impact franchise revenues. In addition, we cannot predict the nature and effect of any future
legislation or regulation on our franchise operations.
We have limited influence over the decision of franchisees to invest in other businesses or incur excessive indebtedness.
Our franchisees are independent operators and, therefore, we have limited influence over their ability to invest in other businesses or incur excessive
indebtedness. In some cases, these franchisees have used the cash generated by their stores to expand their other businesses or to subsidize losses incurred by
such businesses. Additionally, as independent operators, franchisees do not require our consent to incur indebtedness. Consequently, our franchisees have in
the past, and may in the future, experience financial distress as a result of over leveraging. To the extent that our franchisees use the cash from their stores to
subsidize their other businesses or experience financial distress, due to over-leverage or otherwise, it could negatively affect (1) our operating results as a
result of delayed or reduced payments of royalties, advertising fund contributions and rents for properties we lease to them, (2) our future revenue, earnings
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