AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 2004
REGISTRATION STATEMENT NO. 333- --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
GENERAL NUTRITION CENTERS, INC.
*AND THE SUBSIDIARY GUARANTORS LISTED BELOW
(Exact name of registrant as specified in its charter)
---------------------
<Table>
DELAWARE 5499 72-1575168
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</Table>
300 SIXTH AVENUE
PITTSBURGH, PENNSYLVANIA 15222
(412) 288-4600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
JAMES M. SANDER, ESQ.
SENIOR VICE PRESIDENT, CHIEF LEGAL OFFICER AND SECRETARY
GENERAL NUTRITION CENTERS, INC.
300 SIXTH AVENUE
PITTSBURGH, PENNSYLVANIA 15222
(412) 288-4600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES OF ALL COMMUNICATIONS TO:
JEFFREY H. COHEN, ESQ.
JENNIFER A. BENSCH, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
300 SOUTH GRAND AVENUE, SUITE 3400
LOS ANGELES, CALIFORNIA 90071
(213) 687-5000
(213) 687-5600 (FACSIMILE)
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
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- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SECURITY PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
8 1/2% Senior Subordinated Notes due 2010.... $215,000,000 100% $215,000,000(1) $27,240.50
- ---------------------------------------------------------------------------------------------------------------------------------
Guarantees related to the 8 1/2% Senior
Subordinated Notes due 2010................ N/A N/A N/A N/A(2)
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- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f) promulgated under the Securities Act of 1933, as
amended.
(2) No separate consideration is received for the guarantees, and therefore, no
additional fee is required.
---------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATE AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
(continued on next page)
TABLE OF ADDITIONAL REGISTRANTS
<Table>
<Caption>
STATE OR OTHER PRIMARY STANDARD
JURISDICTION OF INDUSTRIAL
INCORPORATION OR CLASSIFICATION I.R.S. EMPLOYER
NAME OF ADDITIONAL REGISTRANT* FORMATION CODE NUMBER IDENTIFICATION NO.
- ------------------------------ ---------------- ------------------- ------------------
General Nutrition Companies, Inc. Delaware 5499 04-3056351
General Nutrition Corporation Pennsylvania 5499 25-1124574
General Nutrition Distribution Company Delaware 5122 51-0343436
General Nutrition Distribution, L.P. Pennsylvania 5122 23-2946511
General Nutrition Government Services, Inc. Delaware 5499 25-1797015
General Nutrition, Incorporated Pennsylvania 5499 25-1027307
General Nutrition Investment Company Arizona 6794 51-0313878
General Nutrition International, Inc. Delaware 6794 51-0314976
General Nutrition Sales Corporation Arizona 5499 52-2103619
General Nutrition Systems, Inc. Delaware 5499 51-0393924
GNC (Canada) Holding Company Delaware 5499 25-1787452
GNC Franchising, LLC
(f/k/a GNC Franchising, Inc.) Pennsylvania 6794 25-1560212
GNC, Limited Delaware 5499 25-1787453
GNC US Delaware, Inc. Delaware 6794 36-4345801
GN Investment, Inc. Delaware 5499 52-2081543
Informed Nutrition, Inc. Florida 5499 52-2005781
Nutra Manufacturing, Inc. (f/k/a Nutricia
Manufacturing USA, Inc.) South Carolina 2834 52-1456779
</Table>
- ---------------
* Address and telephone number of principal executive offices are the same as
General Nutrition Centers, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 15, 2004
PROSPECTUS
(GNC LOGO)
GENERAL NUTRITION CENTERS, INC.
OFFER TO EXCHANGE $215,000,000 OF ITS OUTSTANDING
8 1/2% SENIOR SUBORDINATED NOTES DUE 2010
FOR
8 1/2% SENIOR SUBORDINATED NOTES DUE 2010
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
-- , 2004, UNLESS WE EXTEND THE EXCHANGE OFFER IN OUR SOLE AND ABSOLUTE
DISCRETION.
Terms of the exchange offer:
- We will exchange the new notes for all outstanding old notes that
are validly tendered and not withdrawn pursuant to the exchange
offer.
- You may withdraw tenders of old notes at any time prior to the
expiration of the exchange offer.
- The terms of the new notes are substantially identical to those of
the outstanding old notes, except that the transfer restrictions and
registration rights relating to the old notes will not apply to the
new notes.
- The exchange of old notes for new notes will not be a taxable
transaction for U.S. federal income tax purposes. You should see the
discussion under the heading "Material United Stated Federal Income
Tax Considerations" for more information.
- We will not receive any cash proceeds from the exchange offer.
- We issued the old notes in a transaction not requiring registration
under the Securities Act, and as a result, transfer of the old notes
is restricted. We are making the exchange offer to satisfy your
registration rights, as a holder of the old notes.
There is no established trading market for the new notes or the old notes.
Each broker-dealer that receives new notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of these new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for old notes where the old notes
were acquired as a result of market-making activities or other trading
activities. We have agreed, that for a period of 180 days after the consummation
of the exchange offer, we will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any resale.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF RISKS YOU
SHOULD CONSIDER PRIOR TO TENDERING YOUR OUTSTANDING OLD NOTES FOR EXCHANGE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is -- , 2004
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Where You Can Find More Information......... i
Industry and Market Data.................... ii
Trademarks.................................. ii
Forward-Looking Statements.................. ii
Summary..................................... 1
Risk Factors................................ 15
Use of Proceeds............................. 28
Ratio of Earnings to Fixed Charges.......... 28
Capitalization.............................. 29
Selected Consolidated Financial Data........ 30
Unaudited Pro Forma Consolidated Financial
Data...................................... 34
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 36
Business.................................... 52
Management.................................. 70
</Table>
<Table>
<Caption>
PAGE
----
Executive Compensation...................... 76
Security Ownership of Certain Beneficial
Owners and Management..................... 80
Certain Relationships and Related Party
Transactions.............................. 82
The Exchange Offer.......................... 83
Description of Senior Credit Facility....... 90
Description of the New Notes................ 91
Material United States Federal Income Tax
Considerations............................ 136
Material ERISA Considerations............... 137
Plan of Distribution........................ 138
Legal Matters............................... 139
Experts..................................... 139
Index to Consolidated Financial
Statements................................ F-1
</Table>
---------------------
In this prospectus, unless the context requires otherwise, "we," "us,"
"our" or "GNC" refer to General Nutrition Centers, Inc. and its consolidated
subsidiaries, and "guarantors" or "subsidiary guarantors" means our subsidiaries
that will guarantee the payments due under the new notes as described under the
caption "Description of the New Notes." References to "our stores" refer to our
company-owned stores and our franchised stores. References to "our locations"
refer to our stores and our "store-within-a-store" locations at Rite Aid(R).
References to "fiscal" and a particular year herein refer to our fiscal year
ended on the last day of December of such year. On December 5, 2003, we acquired
100% of the outstanding equity interests of General Nutrition Companies, Inc.
from Numico USA, Inc., a subsidiary of Royal Numico N.V., and merged General
Nutrition Companies, Inc. with and into us. The selected financial data for the
period from January 1, 2003 to December 4, 2003 represents the period in 2003
that General Nutrition Companies, Inc. was owned by Royal Numico, N.V. The
selected financial data for the 27 days ended December 31, 2003 represents the
period of operations in 2003 subsequent to the Acquisition.
The "old notes" consisting of the 8 1/2% Senior Subordinated Notes due 2010
that were issued on December 5, 2003 and the "new notes" consisting of the
8 1/2% Senior Subordinated Notes due 2010 offered pursuant to this prospectus
are sometimes collectively referred to in this prospectus as the "notes."
---------------------
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-4 that we
have filed with the SEC under the Securities Act. This prospectus does not
contain all of the information set forth in the registration statement. For
further information about us and the new notes, you should refer to the
registration statement. This prospectus summarizes material provisions of
contracts and other documents to which we refer you. Since this prospectus may
not contain all of the information that you may find important, you should
review the full text of these documents. We have filed these documents as
exhibits to our registration statement.
We are not currently subject to the periodic reporting and other
informational requirements of the Exchange Act. The indenture governing the
notes requires that we file reports under the Exchange Act with the SEC and
furnish information to the trustee and holders of the notes. See "Description of
the New Notes -- Covenants -- SEC Reports and Reports to Holders." Information
may be obtained from us at 300 Sixth Avenue, Pittsburgh, Pennsylvania 15222,
Attention: Chief Legal Officer. To ensure timely delivery, please make your
request as soon as practicable and, in any event, no later than five business
days prior to the expiration of the exchange offer.
Upon the effectiveness of the registration statement, we will become
subject to the information and periodic reporting requirements of the Exchange
Act and, accordingly, will file periodic reports and other information with the
SEC. Such periodic reports and other information will be available for
inspection and copying at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549 and through the SEC's Internet site at
http://www.sec.gov. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330.
---------------------
i
INDUSTRY AND MARKET DATA
This prospectus includes market and industry data that we obtained from
industry publications and surveys. Industry publications and surveys generally
state that the information contained therein has been obtained from sources
believed to be reliable, but there can be no assurance as to the accuracy or
completeness of included information. We have not independently verified any of
the data from third-party sources nor have we ascertained the underlying
economic assumptions relied upon therein.
---------------------
TRADEMARKS
We own or have rights to trademarks or trade names that we use in
conjunction with the operation of our business. Our service marks and trademarks
include the GNC(R) name. Each trademark, trade name or service mark of any other
company appearing in this prospectus belongs to its holder. Use or display by us
of other parties' trademarks, trade names or service marks is not intended to
and does not imply a relationship with, or endorsement or sponsorship by us of,
the trademark, trade name or service mark owner.
---------------------
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. Forward-looking
statements include statements concerning our plans, objectives, goals,
strategies, future events, future revenues or performance, capital expenditures,
financing needs, and other information that is not historical information. Many
of these statements appear, in particular, under the headings "Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." When used in this prospectus, the words
"believes," "anticipates," "plans," "expects," "intends," "estimates,"
"projects" and variations of such words or similar expressions are intended to
identify forward-looking statements. All forward-looking statements, including,
without limitation, our examination of historical operating trends, are based
upon our current expectations and various assumptions. We believe there is a
reasonable basis for our expectations and beliefs, but we may not realize our
expectations and our beliefs may not prove correct. Important factors that could
cause our actual results to differ materially from the forward-looking
statements are set forth in this prospectus, including under the heading "Risk
Factors" and include, among others:
- the incurrence of material products liability and products recall costs;
- significant competition in our industry;
- unfavorable publicity or consumer perception of our products;
- costs of compliance with governmental regulations;
- our failure to keep pace with the demands of our customers for new
products and services;
- the lack of long-term experience with human consumption of some of our
products with innovative ingredients;
- increases in the frequency and severity of insurance claims, particularly
claims for which we are self-insured;
- the failure of our franchisees to conduct their operations profitably;
- our inability to attract new franchisees or limitations from franchise
regulations; and
- economic, political and other risks associated with our international
operations.
All forward-looking statements included in this prospectus are based on
information available to us on the date of this prospectus. We undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise. All subsequent
written and oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary
statements contained throughout this prospectus.
ii
SUMMARY
This summary highlights the information contained elsewhere in this
prospectus. Because this is only a summary, it does not contain all of the
information that may be important to you. For a more complete understanding of
the information that you may consider important in making your investment
decision, we encourage you to read this entire prospectus, and the documents to
which we refer you. Before making an investment decision, you should carefully
consider the information set forth under the heading "Risk Factors" and our
consolidated financial statements and accompanying notes included elsewhere in
this prospectus.
GENERAL NUTRITION CENTERS, INC.
We are the largest global specialty retailer of nutritional supplements,
which include sports nutrition products, diet products, vitamins, minerals and
herbal supplements (VMHS) and specialty supplements. We derive our revenues
principally from product sales through our company-owned stores, franchise
activities and sales of products manufactured in our facilities to third
parties. We sell products through a worldwide network of 5,745 locations
operating under the GNC(R) brand name. The GNC brand name is one of the most
widely recognized brands in the nutritional supplements industry. An estimated
84% of the U.S. population recognizes GNC as a source of health and wellness
products. Our product mix, which is focused on high-margin, value-added
nutritional products, is sold under our GNC proprietary brands, including Pro
Performance(R), Total Lean(TM) and Preventive Nutrition(R), and under nationally
recognized third-party brands, including Atkins(R), Muscletech(R) and EAS(R).
The following charts illustrate, for the year ended December 31, 2003, the
percentage of our net revenues generated by our three business segments and the
percentage of our net U.S. retail supplement revenues generated by our four
product categories:
<Table>
NET REVENUES BY SEGMENT NET U.S. RETAIL SUPPLEMENT REVENUES
BY PRODUCT CATEGORY
(PIE CHART) (PIE CHART)
</Table>
BUSINESS OVERVIEW
Retail Locations
Our retail network represents the largest specialty retail store network in
the nutritional supplements industry. As of December 31, 2003, there were 5,098
GNC locations in the United States and Canada and 647 franchised stores
operating in other international locations under the GNC name. Of our U.S. and
Canadian locations, 2,748 were company-owned stores, 1,362 were franchised
stores and 988 were GNC "store-within-a-store" locations under our strategic
alliance with Rite Aid(R). Our retail network in the United States was over nine
times larger than that of our nearest specialty retail competitor as of December
31, 2003. Most of our U.S. stores are between 1,000 and 2,000 square feet and
are located in shopping malls and strip shopping centers. In the fourth quarter
of 2002, we completed a $23.5 million store reset and upgrade program, $6.1
million of which was funded by our franchisees. As a result, many of our stores
have a modern and customer-friendly layout and promote our GNC Live Well theme.
1
Franchise Activities
As of December 31, 2003, we had 1,362 franchised stores in the United
States and Canada and 647 international franchised stores. We generate income
from franchise activities primarily through product sales to franchisees,
royalties on franchise retail sales and franchise fees. To assist our
franchisees in the successful operation of their stores and to protect our brand
image, we offer a number of services to franchisees including training, site
selection, construction assistance and accounting services. We believe that our
franchise program enhances our brand awareness and market presence and will
enable us to expand our store base internationally with limited capital
expenditures by us. We enjoy strong relationships with our franchisees, as
evidenced by our franchisee renewal rate of over 98% between 2000 and 2003. Our
franchise program has been recognized numerous times by several publications as
one of the top franchise programs in the country.
"Store-Within-a-Store" Locations
To increase brand awareness and promote access to customers who may not
frequent specialty nutrition stores, we entered into a strategic alliance with
Rite Aid to open our GNC "store-within-a-store" locations. As of December 31,
2003, we had 988 stores-within-a-store locations. Through this strategic
alliance, we generate revenues from sales to Rite Aid of our products at
wholesale prices, the manufacture of Rite Aid private label products and retail
sales of consignment inventory. We are Rite Aid's sole supplier for the
PharmAssure(R) vitamin brand and a number of Rite Aid private label supplements.
Products
We offer a wide range of high-quality nutritional supplements sold under
our GNC proprietary brand names, including Pro Performance, Total Lean and
Preventive Nutrition, and under nationally recognized third-party brand names,
including Atkins, Muscletech and EAS. Sales of our proprietary brands at our
company-owned stores represented approximately 42% of our net retail product
revenues for the year ended December 31, 2003. We develop our proprietary
products independently at our own facilities and through collaborative efforts
with our suppliers. We believe that new products are a key driver of customer
traffic and purchases, and we are committed to developing new and innovative
products for the nutritional supplements industry. During the year ended
December 31, 2003, we launched 37 new proprietary products, and we currently
have over 50 new products under development for launch during 2004.
Marketing
We market our proprietary brands of nutritional products through an
integrated marketing program that includes television, print and radio media,
storefront graphics, direct mailings to members of our Gold Card program and
point of purchase materials. Our Gold Card program is a key component of our
marketing strategy and entitles members to discount offers and other benefits.
With 4.8 million Gold Card members as of December 31, 2003, we believe that our
Gold Card program builds customer loyalty and serves to make us a destination
retailer. We also benefit from product advertising paid for entirely by
third-party vendors that promotes their products and identifies our stores as a
place to purchase their products.
Manufacturing and Distribution
With our state-of-the-art manufacturing and distribution facilities
supporting our retail stores, we are a low-cost, vertically integrated producer
and supplier of high-quality nutritional supplements. We operate two
manufacturing facilities in South Carolina and three distribution centers
located in Pennsylvania, South Carolina and Arizona. Although we utilize our
facilities primarily for the production of our proprietary products that are
sold at GNC locations, we have available capacity to produce products for sale
to third-party customers. By controlling the production and distribution of our
proprietary products, we can protect product quality, monitor delivery times and
maintain appropriate inventory levels.
2
INDUSTRY OVERVIEW
The U.S. nutritional supplements retail industry is large and highly
fragmented, with no single industry participant accounting for more than 10% of
total industry retail sales in 2002. Participants include specialty retailers,
supermarkets, drugstores, mass merchants, multi-level marketing organizations,
mail order and a variety of other smaller channels. The nutritional supplements
sold through these channels are divided into four major product categories:
sports nutrition products, diet products, VMHS and specialty supplements. Most
supermarkets, drugstores and mass merchants have narrow product offerings
limited primarily to simple vitamins and herbs, and their share of the
nutritional supplements market over the last five years has remained relatively
constant.
During the 1990s, our industry underwent a period of rapid expansion. From
1990 to 2002, industry retail sales grew at a compound annual growth rate of
10.0%, with the most rapid growth in the early 1990s. Total retail sales in the
industry reached approximately $18.8 billion in 2002 and are estimated to grow
at a compound annual growth rate of 3.7% between 2002 and 2008. During this same
period, the diet products and specialty supplements categories are estimated to
grow at compound annual growth rates of 8.8% and 5.9%, respectively, driving
overall industry growth. Additionally, several demographic, healthcare and
lifestyle trends are expected to drive the continued growth of the nutritional
supplements industry. These trends include:
- Increasing Focus on Fitness: The number of Americans belonging to health
clubs has grown 23% from 29.5 million in 1998 to 36.3 million in 2002,
according to a 2002 trend report published by the International Health,
Racquet & Sportsclub Association. We believe that fitness-oriented
consumers are interested in taking sports nutrition products to increase
energy, endurance and strength during exercise.
- Increasing Incidence of Obesity: Diet products are growing in
popularity. According to a 2002 study by the National Heart, Lung and
Blood Institute, 61% of adults ages 20-74 are either overweight or obese.
An estimated 46% of adults in the United States are currently dieting,
according to a 2003 Gallup Study of Dieting and the Market for Diet
Products and Services.
- Aging Population: The average age of the U.S. population is increasing.
U.S. Census Bureau data indicates that the number of Americans age 55 or
older is expected to increase by 19% from 2003 to 2010. According to a
2001 Simmon Market Research Bureau data report, consumers over the age of
55 are significantly more likely to use VMHS products than younger
persons.
- Rising Healthcare Costs and Use of Preventive Measures: Healthcare
related costs have increased substantially in the United States.
According to a leading healthcare provider, private health insurance
premiums increased an average of 13.9% from 2002 to 2003, with an average
premium for family coverage of $9,068 in 2003. To reduce medical costs
and avoid the complexities of dealing with the healthcare system, many
consumers take preventive measures, including alternative medicines and
nutritional supplements.
COMPETITIVE STRENGTHS
Our strengths include:
UNMATCHED SPECIALTY RETAIL FOOTPRINT. Our retail network in the United
States was over nine times larger than that of our nearest specialty retail
competitor at December 31, 2003. The size of our retail network provides us with
advantages within the fragmented nutritional supplements industry. For instance,
our scale helps us to attract industry-leading vendors to sell their products in
our locations, often on a preferred basis. Our extensive retail footprint in
established territories also provides us with broad distribution capabilities
that are difficult to replicate. Through our multiple store formats located
across the United States, large franchise operations and extensive international
store base, we are not dependent on any single format or geographic location.
3
STRONG BRAND RECOGNITION. We have strong brand recognition within the
nutritional supplements industry. According to a September 2003 Parker Awareness
Tracking Study Report, an estimated 84% of the U.S. population recognized the
GNC brand name as a source of health and wellness products. We utilize extensive
marketing and advertising campaigns through television, print and radio media,
storefront graphics, Gold Card membership communications and point of purchase
materials to strengthen our established brand name and reinforce our broad
consumer recognition.
EXTENSIVE PRODUCT SELECTION. We offer an extensive mix of brands and
products, including approximately 2,100 SKUs across multiple categories. This
variety provides our customers with a vast selection of products to fit their
specific needs and provides us with an advantage over drugstores, supermarkets
and mass merchants who offer a more limited product selection. Our products
include powders, bars, tablets, meal replacements, shakes and teas. With a broad
range of products, our success does not depend on any one specific product or
vendor. During the year ended December 31, 2003, no single product accounted for
more than 4.7% of our company-owned store sales.
WELL POSITIONED IN HIGH-GROWTH CATEGORIES. We believe that we are well
positioned in the diet products and specialty supplements categories, the two
fastest growing categories within the nutritional supplements industry. Although
the diet products and specialty supplements categories represent only 26% of the
nutritional supplements industry's 2002 retail sales, our sales of products
within these categories represented 42% of our net U.S. retail product revenues
in 2002. Industry sales of these categories are expected to grow at compound
annual growth rates of 8.8% and 5.9%, respectively, from 2002 to 2008, exceeding
the overall industry's estimated compound annual growth rate of 3.7% for the
same period.
INNOVATIVE NEW PRODUCT DEVELOPMENT. We believe that new products are a key
driver of customer traffic and purchases. Interactions with our customers and
raw materials vendors help us identify changes in consumer trends that, in turn,
influence our development, manufacturing and marketing of new products. Our
dedicated development teams conduct extensive market research and formulate new
products utilizing scientific methods and third-party product testing. The key
areas of our development focus are the diet products category and the specialty
supplements category, which includes products that are geared to specific
nutritional concerns. During the year ended December 31, 2003, we launched 37
new proprietary products, which generated $38.0 million of our net revenues
during this period. We currently have over 50 new products under development for
launch during 2004, of which 27 are expected to be diet products or specialty
supplements.
GOLD CARD PROGRAM CUSTOMER BASE. Our Gold Card program, with 4.8 million
members as of December 31, 2003, has been a core promotional program for over
ten years and continues to be a key driver of customer sales. During the year
ended December 31, 2003, 56% of U.S. company-owned store sales were generated
from purchases by customers using Gold Cards. The Gold Card program also gives
us access to a large database of nutritional supplement consumers and allows us
to match and analyze consumers' product buying patterns. We cultivate customer
loyalty through a combination of discount offers and targeted marketing efforts
aimed toward our Gold Card members. We believe that our Gold Card program serves
to make us a destination retailer.
VALUE-ADDED CUSTOMER SERVICE. Our sales associates are trained to provide
guidance to customers with respect to the broad selection of products sold in
GNC stores. We believe this level of customer service provides us with an
advantage over supermarkets, drugstores and mass merchants. Our sales associates
are prepared to educate customers about product features and direct them to
products that will address their specific requests. In 2002, we instituted the
"GNC University," an online training program for our sales associates at our
company-owned stores and for sales associates at participating franchised
locations. We provide additional education and training materials through a
monthly newsletter detailing new products and through interactive training
modules. We also provide a wide range of nutritional information in numerous
forms, including signage, brochures, and touch screen computers enabling
customers to make informed purchases.
VERTICALLY INTEGRATED OPERATIONAL CAPABILITIES. Our vertically integrated
manufacturing, distribution and retail capabilities differentiate us from many
of our competitors. Our state-of-the-art manufacturing facilities
4
and distribution centers, combined with our retail footprint, enable us to
better control costs and protect product quality. We are also able to monitor
delivery times and to maintain appropriate inventory levels for our proprietary
products by controlling production scheduling and distribution.
EXPERIENCED MANAGEMENT TEAM AND EQUITY SPONSOR. Our senior management team
is comprised of experienced retail executives who have, on average, been
employed with us for over 15 years. Our equity sponsor is an affiliate of Apollo
Management, L.P., which is among the most active private investment firms in the
United States and has considerable experience investing in retail companies. In
addition, our board of directors is comprised of executives with significant
experience in the retail industry. As of February 10, 2004, our senior
management and our directors owned approximately 2.3% in the aggregate, and have
options to purchase an additional 5.6%, in the aggregate, of the fully diluted
common equity of our parent company.
BUSINESS STRATEGY
We have implemented a series of initiatives geared toward improving our
operating and financial performance. As part of these initiatives, we have:
- revised pricing through the elimination of BOGO (Buy One Get One half
price) and created an every day competitively priced structure to drive
customer traffic;
- re-established an independent research and development effort to improve
our proprietary product offerings;
- reset and upgraded our stores, creating a more modern and
customer-friendly layout;
- improved efficiencies through fixed operating cost reductions and
rationalization of our store base; and
- launched ephedra-free products such as Total Lean to capitalize on
opportunities in the rapidly growing diet products category.
We believe these initiatives have helped to improve our recent business
performance. Our company-owned same store sales increased by 0.1% for the year
ended December 31, 2003 and by 11.0% for the three-months ended December 31,
2003. Similarly, U.S. franchised same store sales increased by 0.8% for the year
ended December 31, 2003 and by 10.0% for the three-months ended December 31,
2003. We cannot assure you that we will continue to achieve same store sales
growth at the levels experienced in the fourth quarter of 2003.
To increase our future revenues and to drive profitability and cash flow
generation, we intend to continue to:
- focus on higher-growth categories, such as diet products and specialty
supplements;
- forge direct relationships with raw material suppliers and third-party
product vendors in order to position ourselves to be first-to-market with
new and innovative proprietary and third-party products;
- utilize our extensive customer database to improve customer loyalty,
facilitate direct marketing, and increase cross-sell and up-sell
opportunities;
- shift our product mix to emphasize higher-margin proprietary products,
particularly diet products and specialty supplements;
- close approximately 104 underperforming stores (68 of which have been
closed as of March 31, 2004) and aggressively promote nearby stores to
maximize revenue transfer;
- increase third-party manufacturing to improve capacity utilization;
- improve inventory management to reduce levels of discontinued inventory
and increase inventory turns at both the store and distribution center
levels; and
- leverage our strong franchise operations by expanding internationally,
which will require limited capital expenditures by us.
5
THE ACQUISITION
On December 5, 2003, we acquired 100% of the outstanding equity interests
of General Nutrition Companies, Inc. from Numico USA, Inc., a subsidiary of
Royal Numico N.V., and merged General Nutrition Companies, Inc. with and into
us. The aggregate purchase price for the acquisition was $747.4 million,
consisting of $733.2 million in cash payable at closing and the assumption of
$14.2 million of mortgage indebtedness. Subject to certain limitations, Royal
Numico N.V. and Numico USA agreed to indemnify us for losses arising from, among
other things, breaches of representations and warranties, breaches of covenants
and certain liabilities relating to the business of General Nutrition Companies,
Inc. arising prior to the closing date as well as certain losses payable in
connection with certain litigation, including claims related to products
containing ephedra or Kava Kava sold prior to December 5, 2003. Simultaneously
with the closing of the acquisition, we entered into a new senior credit
facility with a syndicate of lenders. The senior credit facility consists of a
$285.0 million term loan facility and a $75.0 million revolving credit facility.
We borrowed the full $285.0 million under the term loan facility to fund a
portion of the acquisition purchase price, but made no borrowings under the
revolving credit facility. Our obligations under the senior credit facility are
guaranteed by our parent company, General Nutrition Centers Holding Company, and
our domestic subsidiaries. See "Description of Senior Credit Facility" for a
more detailed description of our senior credit facility. We also used the net
proceeds from the offering of the old notes to fund a portion of the acquisition
purchase price. In addition, our parent company received an equity contribution
of $277.5 million in exchange for the issuance of its common and preferred stock
and contributed the full amount of the equity contribution to us to fund a
portion of the acquisition. Our parent initially issued all of its common stock
and preferred stock to GNC Investors, LLC, which we refer to in this prospectus
as our equity sponsor, and certain members of our management. Apollo Management
V, L.P., an affiliate of Apollo Management, L.P., and other institutional
investors own all of the equity interests of our equity sponsor, with Apollo as
the controlling holder. GNC Investors subsequently resold all of our parent's
preferred stock to other institutional investors. The preferred stock is
nonvoting and exchangeable at our parent's option under specified circumstances
for its senior subordinated indebtedness, the terms of which are similar to the
old notes. In addition, subsequent to the acquisition, our parent sold
additional shares of its common stock to certain of our directors and members of
our management.
In connection with the acquisition, we closed 68 underperforming stores as
of March 31, 2004 and plan to close approximately 36 additional underperforming
stores during 2004. The acquisition and related fees and expenses were, and the
expenses expected as a result of the store closures will be, financed with the
net proceeds from the old notes offering, the initial borrowings under our
senior credit facility and the initial equity contribution by our equity
sponsor, certain of our directors and members of our management, as described
above.
As used in this prospectus, the "Acquisition" refers to the acquisition of
General Nutrition Companies, Inc. from Numico USA, Inc. in December 2003
described above.
EQUITY SPONSOR
Our equity sponsor is an affiliate of Apollo Management, L.P. Apollo was
founded in 1990 and is among the most active private investment firms in the
United States in terms of both number of investment transactions completed and
aggregate dollars invested. Since its inception, Apollo has managed the
investment of an aggregate of approximately $14 billion in equity capital in a
wide variety of industries, both domestically and internationally, and has
considerable experience investing in retail companies. As of December 31, 2003,
Apollo indirectly owned 73% of the equity interests of our equity sponsor, and
other institutional investors and members of our management own the remaining
equity interests.
6
THE EXCHANGE OFFER
Old Notes..................... 8 1/2% Senior Subordinated Notes due 2010,
which we issued December 5, 2003.
New Notes..................... 8 1/2% Senior Subordinated Notes due 2010, the
issuance of which has been registered under the
Securities Act of 1933. The form and the terms
of the new notes are identical in all material
respects to those of the old notes, except that
the transfer restrictions and registration
rights relating to the old notes do not apply
to the new notes.
Exchange Offer................ We are offering to issue up to $215,000,000
aggregate principal amount of the new notes in
exchange for a like principal amount of the old
notes to satisfy our obligations under the
registration rights agreement that we entered
into when the old notes were issued in a
transaction consummated in reliance upon the
exemption from registration provided by Rule
144A under the Securities Act.
Expiration Date; Tenders...... The exchange offer will expire at 5:00 p.m.,
New York City time, on , 2004, unless
extended in our sole and absolute discretion.
By tendering your old notes, you represent to
us that:
- you are not our "affiliate," as defined in
Rule 405 under the Securities Act;
- any new notes you receive in the exchange
offer are being acquired by you in the
ordinary course of your business;
- at the time of the commencement of the
exchange offer, neither you nor, to your
knowledge, anyone receiving new notes from
you, has any arrangement or understanding
with any person to participate in the
distribution, as defined in the Securities
Act, of the new notes in violation of the
Securities Act;
- if you are a broker-dealer, you will receive
the new notes for your own account in
exchange for old notes that were acquired by
you as a result of your market making or
other trading activities and that you will
deliver a prospectus in connection with any
resale of the new notes you receive. For
further information regarding resales of the
new notes by participating broker-dealers,
see the discussion under the caption "Plan of
Distribution"; and
- if you are not a participating broker-dealer,
you are not engaged in, and do not intend to
engage in, the distribution of the new notes,
as defined in the Securities Act.
Withdrawal; Non-Acceptance.... You may withdraw any old notes tendered in the
exchange offer at any time prior to 5:00 p.m.,
New York City time, on , 2004. If we
decide for any reason not to accept any old
notes tendered for exchange, the old notes will
be returned to the registered holder at our
expense promptly after the expiration or
termination of the exchange offer. In the case
of the old notes tendered by book-entry
transfer into the exchange agent's account at
The Depository Trust Company, which we
sometimes refer to in this prospectus as DTC,
any withdrawn or unaccepted old notes
7
will be credited to the tendering holders'
account at DTC. For further information
regarding the withdrawal of the tendered old
notes, see "The Exchange Offer -- Terms of the
Exchange Offer; Period for Tendering Old Notes"
and "The Exchange Offer -- Withdrawal Rights."
Conditions to the Exchange
Offer......................... We are not required to accept for exchange or
to issue new notes in exchange for any old
notes, and we may terminate or amend the
exchange offer if any of the following events
occur prior to our acceptance of the old notes:
- the exchange offer violates any applicable
law or applicable interpretation of the staff
of the Securities and Exchange Commission;
- an action or proceeding shall have been
instituted or threatened in any court or by
any governmental agency that might materially
impair our or our guarantors' ability to
proceed with the exchange offer;
- we do not receive all the governmental
approvals that we believe are necessary to
consummate the exchange offer; or
- there has been proposed, adopted, or enacted
any law, statute, rule or regulation that, in
our reasonable judgment, would materially
impair our ability to consummate the exchange
offer.
We may waive any of the above conditions in our
reasonable discretion. See the discussion below
under the caption "The Exchange
Offer -- Conditions to the Exchange Offer" for
more information regarding the conditions to
the exchange offer.
Procedures for Tendering Old
Notes......................... Unless you comply with the procedure described
below under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures," you
must do one of the following on or prior to the
expiration or termination of the exchange offer
to participate in the exchange offer:
- tender your old notes by sending the
certificates for your old notes, in proper
form for transfer, a properly completed and
duly executed letter of transmittal and all
other documents required by the letter of
transmittal, to U.S. Bank National
Association, as exchange agent, at one of the
addresses listed below under the caption "The
Exchange Offer -- Exchange Agent"; or
- tender your old notes by using the book-entry
transfer procedures described below and
transmitting a properly completed and duly
executed letter of transmittal, or an agent's
message instead of the letter of transmittal,
to the exchange agent. In order for a
book-entry transfer to constitute a valid
tender of your old notes in the exchange
offer, U.S. Bank National Association, as
exchange agent, must receive a confirmation
of book-entry transfer of your old notes into
the exchange agent's account at DTC prior to
the expiration or termination of the exchange
offer. For more information regarding the use
of book-entry transfer procedures, including
a description of the required
8
agent's message, see the discussion below
under the caption "The Exchange
Offer -- Book-Entry Transfers."
Guaranteed Delivery
Procedures.................... If you are a registered holder of old notes and
wish to tender your old notes in the exchange
offer, but
- the old notes are not immediately available;
- time will not permit your old notes or other
required documents to reach the exchange
agent before the expiration or termination of
the exchange offer; or
- the procedure for book-entry transfer cannot
be completed prior to the expiration or
termination of the exchange offer;
then you may tender old notes by following
the procedures described below under the
caption "The Exchange Offer -- Guaranteed
Delivery Procedures."
Special Procedures for
Beneficial Owners............. If you are a beneficial owner whose old notes
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and you wish to tender your old notes in the
exchange offer, you should promptly contact the
person in whose name the old notes are
registered and instruct that person to tender
them on your behalf. If you wish to tender in
the exchange offer on your own behalf, prior to
completing and executing the letter of
transmittal and delivering your old notes, you
must either make appropriate arrangements to
register ownership of the old notes in your
name, or obtain a properly completed bond power
from the person in whose name the old notes are
registered.
Material United States Federal
Income Tax Considerations..... The exchange of the old notes for new notes in
the exchange offer will not be a taxable
transaction for United States federal income
tax purposes. See the discussion below under
the caption "Material United States Federal
Income Tax Considerations," for more
information regarding the United States federal
income tax consequences to you of the exchange
offer.
Use of Proceeds............... We will not receive any cash proceeds from the
exchange offer.
Exchange Agent................ U.S. Bank National Association is the exchange
agent for the exchange offer. You can find the
address and telephone number of the exchange
agent below under the caption, "The Exchange
Offer -- Exchange Agent."
Resales....................... Based on interpretations by the staff of the
SEC, as set forth in no-action letters issued
to third parties, we believe that the new notes
issued in the exchange offer may be offered for
resale, resold or otherwise transferred by you
without compliance with the registration and
prospectus delivery requirements of the
Securities Act as long as:
- you are acquiring the new notes in the
ordinary course of your business;
9
- you are not participating, do not intend to
participate and have no arrangement or
understanding with any person to participate,
in a distribution of the new notes; and
- you are not an affiliate of ours.
If you are an affiliate of ours, are engaged in
or intend to engage in or have any arrangement
or understanding with any person to participate
in the distribution of the new notes:
(1) you cannot rely on the applicable
interpretations of the staff of the SEC;
and
(2) you must comply with the registration
requirements of the Securities Act in
connection with any resale transaction.
Each broker or dealer that receives new notes
for its own account in exchange for old notes
that were acquired as a result of market-
making or other trading activities must
acknowledge that it will comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with any offer, resale, or other
transfer of the new notes issued in the
exchange offer, including information with
respect to any selling holder required by the
Securities Act in connection with any resale of
the new notes.
Furthermore, any broker-dealer that acquired
any of its old notes directly from us:
- may not rely on the applicable interpretation
of the staff of the SEC's position contained
in Exxon Capital Holdings Corp., SEC
no-action letter (April 13, 1988), Morgan,
Stanley Co. Inc., SEC no-action letter (June
5, 1991) and Shearman Sterling, SEC no-
action letter (July 2, 1983); and
- must also be named as a selling noteholder in
connection with the registration and
prospectus delivery requirements of the
Securities Act relating to any resale
transaction.
Broker-Dealers................ Each broker-dealer that receives new notes for
its own account pursuant to the exchange offer
must acknowledge that it will deliver a
prospectus in connection with any resale of
such new notes. The letter of transmittal
states that by so acknowledging and delivering
a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. This
prospectus, as it may be amended or
supplemented from time to time, may be used by
a broker-dealer in connection with resales of
new notes received in exchange for old notes
which were received by the broker-dealer as a
result of market making or other trading
activities. We have agreed that for a period of
up to 180 days after the consummation of this
exchange offer, we will make this prospectus
available to any broker-dealer for use in
connection with any such resale. See "Plan of
Distribution" beginning on page 137 for more
information.
Registration Rights
Agreement..................... When we issued the old notes in December 2003,
we entered into a registration rights agreement
with the initial purchasers of the
10
old notes. Under the terms of the registration
rights agreement, we agreed to:
- cause the exchange offer registration
statement to be filed with the Securities and
Exchange Commission on or prior to 150 days
after the closing date of the offering of the
old notes;
- use all commercially reasonable efforts to
have the exchange offer registration
statement declared effective no later than
250 days after the closing date of the
offering;
- use all commercially reasonable efforts to
consummate the exchange offer within 30
business days after the date on which the
exchange offer registration statement is
declared effective;
- use all commercially reasonable efforts to
file a shelf registration statement for the
resale of the old notes if we cannot effect
an exchange offer within the time periods
listed above and in certain other
circumstances; and
- if we fail to meet our registration
obligations, we will pay liquidated damages
in an amount equal to 0.25% per annum of the
principal amount of old notes held by a
holder for each day that we default on our
registration obligations, increasing by an
additional 0.25% per annum of the principal
amount of old notes for each subsequent
90-day period our registration obligations
are not met, up to a maximum of liquidated
damages equal to 1.00% per annum of the
principal amount of old notes.
RISK FACTORS
Investing in the notes involves a number of material risks. For a
discussion of certain risks that should be considered in connection with an
investment in the notes, see "Risk Factors" included elsewhere in this
prospectus.
ADDRESS AND TELEPHONE NUMBER
Our principal executive office is located at 300 Sixth Avenue, Pittsburgh,
Pennsylvania 15222, and our telephone number is (412) 288-4600.
11
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
If you do not exchange your old notes in the exchange offer, you will
continue to be subject to the restrictions on transfer described in the legend
on the certificate for your old notes. In general, you may offer or sell your
old notes only:
- if they are registered under the Securities Act and applicable state
securities laws;
- if they are offered or sold under an exemption from registration under
the Securities Act and applicable state securities laws; or
- if they are offered or sold in a transaction not subject to the
Securities Act and applicable state securities laws.
We do not currently intend to register the old notes under the Securities
Act. Under some circumstances, however, holders of the old notes, including
holders who are not permitted to participate in the exchange offer or who may
not freely sell new notes received in the exchange offer, may require us to
file, and to cause to become effective, a shelf registration statement covering
resales of the old notes by these holders. For more information regarding the
consequences of not tendering your old notes and our obligations to file a shelf
registration statement, see "The Exchange Offer -- Consequences of Exchanging or
Failing to Exchange Old Notes" and "Description of New Notes -- Registration
Rights."
12
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the new notes and those of the outstanding old notes are
substantially identical, except that the transfer restrictions and registration
rights relating to the old notes do not apply to the new notes. For a more
complete understanding of the new notes, see "Description of New Notes" in this
prospectus.
Issuer........................ General Nutrition Centers, Inc.
Securities Offered............ $215,000,000 in aggregate principal amount of
8 1/2% Senior Subordinated Notes due 2010.
Maturity Date................. December 1, 2010.
Interest Payment Dates........ June 1 and December 1 of each year, commencing
June 1, 2004.
Guarantees.................... The new notes will be fully and unconditionally
guaranteed on a senior subordinated basis by
all of our existing and future material
domestic subsidiaries. Our foreign subsidiaries
and our immaterial domestic subsidiaries have
not guaranteed the old notes and will not
guarantee the new notes. Our non-guarantor
subsidiaries accounted for less than 4.6% of
our net revenues for the year ended December
31, 2003, and less than 5.2% of our total
assets as of December 31, 2003. See
"Description of the New Notes -- Guarantees."
Ranking....................... The old notes are, and the new notes will be,
unsecured senior subordinated obligations.
Accordingly, they will be:
- subordinated in right of payment to all of
our and the guarantors' existing and future
senior debt, including indebtedness under our
senior credit facility;
- equal in right of payment to our and the
guarantors' existing and future senior
subordinated debt;
- senior in right of payment to all of our and
the guarantors' existing and future
subordinated debt; and
- structurally subordinated to all obligations
of our non-guarantor subsidiaries.
In addition, as of December 31, 2003, we and
our subsidiaries had an aggregate of $299.2
million of secured indebtedness outstanding
(excluding $5.4 million of letters of credit,
$4.4 million of which were cash collateralized)
and an additional $74.0 million available for
borrowing on a secured basis under our senior
credit facility, after giving effect to the use
of $1.0 million of the revolving credit
facility to secure letters of credit. In the
event that our secured creditors exercise their
rights with respect to our pledged assets, the
proceeds of the liquidation of those assets
will first be applied to repay obligations
secured by the first priority liens and then to
repay other secured indebtedness before any
unsecured indebtedness, including the notes, is
repaid. For more information on the ranking of
the new notes, see "Description of the New
Notes -- Ranking."
13
Optional Redemption........... On or after December 1, 2007, we may redeem
some or all of the notes at the redemption
prices set forth under "Description of the New
Notes -- Optional Redemption."
Prior to December 1, 2006, we may redeem up to
35% of the aggregate principal amount of the
notes issued in this offering with the net
proceeds of certain equity offerings at the
redemption price set forth under "Description
of the New Notes -- Optional Redemption."
Offer to Purchase............. If we experience a change of control or we or
any of our restricted subsidiaries sell certain
assets, we may be required to offer to purchase
the notes at the prices set forth under
"Description of the New Notes -- Certain
Covenants -- Change of Control" and
"-- Limitation on Sales of Assets."
Covenants..................... The indenture governing the old notes will also
govern the new notes. The indenture limits our
ability and the ability of the guarantors to:
- incur additional indebtedness and issue
preferred stock;
- make restricted payments;
- allow restrictions on the ability of certain
subsidiaries to make distributions;
- sell assets;
- enter into certain transactions with
affiliates; and
- create liens.
Each of the covenants is subject to a number of
important exceptions and qualifications. See
"Description of the New Notes -- Certain
Covenants."
14
RISK FACTORS
You should carefully consider the risk factors set forth below as well as
the other information contained in this prospectus before tendering your old
notes in the exchange offer. The risks described below are not the only risks
facing us. Additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial may also materially and adversely affect our
business operations. Any of the following risks could materially adversely
affect our business, financial condition or results of operations. In such case,
you may lose all or part of your original investment.
RISKS RELATING TO THE NOTES
SOME HOLDERS WHO EXCHANGE THEIR OLD NOTES MAY BE DEEMED TO BE UNDERWRITERS, AND
THESE HOLDERS WILL BE REQUIRED TO COMPLY WITH THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS IN CONNECTION WITH ANY RESALE TRANSACTION.
If you exchange your old notes in the exchange offer for the purpose of
participating in a distribution of the new notes, you may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
THERE IS NO ESTABLISHED TRADING MARKET FOR THE NEW NOTES, AND YOU MAY FIND IT
DIFFICULT TO SELL YOUR NEW NOTES.
There is no existing trading market for the new notes. We do not intend to
apply for listing or quotation of the new notes on any exchange. Therefore, we
do not know the extent to which investor interest will lead to the development
of a trading market or how liquid that market might be, nor can we make any
assurances regarding the ability of new note holders to sell their new notes,
the amount of new notes to be outstanding following the exchange offer or the
price at which the new notes might be sold. As a result, the market price of the
new notes could be adversely affected.
HOLDERS WHO FAIL TO EXCHANGE THEIR OLD NOTES WILL CONTINUE TO BE SUBJECT TO
RESTRICTIONS ON TRANSFER.
If you do not exchange your old notes for new notes in the exchange offer,
you will continue to be subject to the restrictions on transfer of your old
notes described in the legend on the certificates for your old notes. The
restrictions on transfer of your old notes arise because we issued the old notes
under exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, you may only offer or sell the old notes if they are registered under
the Securities Act and applicable state securities laws, or are offered and sold
under an exemption from these requirements. We do not plan to register the old
notes under the Securities Act. Furthermore, we have not conditioned the
exchange offer on receipt of any minimum or maximum principal amount of old
notes. As old notes are tendered and accepted in the exchange offer, the
principal amount of remaining outstanding old notes will decrease. This decrease
will reduce the liquidity of the trading market of the old notes. We cannot
assure you of the liquidity, or even the continuation, of the trading market for
the outstanding notes following the exchange offer. For further information
regarding the consequences of tendering your old notes in the exchange offer,
see the discussions below under the captions "The Exchange Offer -- Consequences
of Exchanging or Failing to Exchange Old Notes" and "Material United States
Federal Income Tax Considerations."
YOU MUST COMPLY WITH THE EXCHANGE OFFER PROCEDURES IN ORDER TO RECEIVE NEW,
FREELY TRADABLE NOTES.
Delivery of new notes in exchange for old notes tendered and accepted for
exchange pursuant to the exchange offer will be made only after timely receipt
by the exchange agent of the following:
- certificates for old notes or a book-entry confirmation of a book-entry
transfer of old notes into the exchange agent's account at DTC, New York,
New York as a depository, including an agent's message if the tendering
holder does not deliver a letter of transmittal;
15
- a completed and signed letter of transmittal (or facsimile thereof), with
any required signature guarantees, or, in the case of a book-entry
transfer, an agent's message in lieu of the letter of transmittal; and
- any other documents required by the letter of transmittal.
Therefore, holders of old notes who would like to tender old notes in
exchange for new notes should be sure to allow enough time for the old notes to
be delivered on time or the procedure for book entry transfer to be completed
prior to the expiration or termination of the exchange offer. We are not
required to notify you of defects or irregularities in tenders of old notes for
exchange. Old notes that are not tendered or that are tendered but we do not
accept for exchange will, following consummation of the exchange offer, continue
to be subject to the existing transfer restrictions under the Securities Act
and, upon consummation of the exchange offer, certain registration and other
rights under the Registration Rights Agreement will terminate. See "The Exchange
Offer -- Procedures for Tendering Old Notes" and "The Exchange Offer --
Consequences of Exchanging or Failing to Exchange Old Notes."
As used in this prospectus, the term "agent's message" means a message,
transmitted by DTC to and received by the exchange agent and forming a part of a
book-entry confirmation, which states that DTC has received an express
acknowledgment from the tendering participant stating that such participant has
received and agrees to be bound by the letter of transmittal and that we may
enforce such letter of transmittal against such participant.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
ABILITY TO FULFILL OUR OBLIGATIONS UNDER THE NOTES AND OTHERWISE ADVERSELY
IMPACT OUR BUSINESS AND GROWTH PROSPECTS.
As of December 31, 2003, our total indebtedness was approximately $514.2
million (of which $215.0 million consisted of the old notes, $285.0 million
consisted of borrowings under our senior credit facility (excluding $5.4 million
of letters of credit, $4.4 million of which were cash collateralized) and
approximately $14.2 million consisted of other secured indebtedness) and we had
an additional $74.0 million available for borrowing on a secured basis under our
senior credit facility after giving effect to the use of $1.0 million of the
revolving credit facility to secure letters of credit.
Our substantial indebtedness could have important consequences to you. For
example, it could:
- require us to use all or a large portion of our cash to pay principal and
interest on the notes, our senior credit facility and our other
indebtedness, which could reduce the availability of our cash to fund
working capital, capital expenditures and other business activities;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- restrict us from making strategic acquisitions or exploiting business
opportunities;
- make it more difficult for us to satisfy our obligations with respect to
the notes;
- place us at a competitive disadvantage compared to our competitors that
have less debt; and
- limit our ability to borrow additional funds, dispose of assets or pay
cash dividends.
Furthermore, all of our indebtedness under our senior credit facility bears
interest at variable rates. If these rates were to increase significantly, our
ability to borrow additional funds may be reduced and the risks related to our
substantial indebtedness would intensify. See "Description of Senior Credit
Facility."
If we are unable to meet our indebtedness obligations, we could be forced
to restructure or refinance our obligations, seek equity financing or sell
assets. We may be unable to restructure or refinance these obligations, obtain
equity financing or sell assets in a timely manner on terms satisfactory to us
or at all. If we are unable to restructure or refinance our obligations, we may
default under our obligations. Upon an
16
acceleration of such indebtedness, we may not be able to make payments under our
indebtedness, including the notes.
ABILITY TO SERVICE DEBT -- WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO
SERVICE OUR INDEBTEDNESS. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS
BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness,
including the notes, and to fund planned capital expenditures, product
development efforts and other business activities, will depend on our ability to
generate cash in the future. This is subject, to a certain extent, to general
economic, financial, competitive, legislative, regulatory and other factors,
many of which are beyond our control.
We cannot assure you that our business will generate sufficient cash flow
from operations, that currently anticipated cost savings and operating
improvements will be realized on schedule, or that future borrowings will be
available to us under our senior credit facility or otherwise in an amount
sufficient to enable us to pay our indebtedness, including the notes, or to fund
our other liquidity needs. If we do not have sufficient liquidity, we may need
to refinance or restructure all or a portion of our indebtedness, including the
notes, on or before maturity, sell assets or borrow more money. We may not be
able to do so on terms satisfactory to us, or at all.
ABILITY TO INCUR ADDITIONAL INDEBTEDNESS -- DESPITE OUR AND OUR SUBSIDIARIES'
CURRENT SIGNIFICANT LEVEL OF INDEBTEDNESS, WE MAY STILL BE ABLE TO INCUR MORE
INDEBTEDNESS.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. Although our senior credit facility and the
indenture governing the notes each contain restrictions on the incurrence of
additional indebtedness, these restrictions are subject to a number of
qualifications and exceptions and, under certain circumstances, indebtedness
incurred in compliance with these restrictions could be substantial. For
example, as of December 31, 2003, approximately $74.0 million was available for
additional borrowings under our senior credit facility, after giving effect to
the use of $1.0 million of the revolving credit facility to secure letters of
credit, all of which were secured and senior to the notes. If additional
indebtedness is added to our or our subsidiaries' current levels of
indebtedness, the substantial risks described above would intensify.
THE NOTES ARE UNSECURED -- THE NOTES AND THE GUARANTEES ARE OUR AND THE
GUARANTORS' GENERAL UNSECURED OBLIGATIONS. IF OUR OR THE GUARANTORS' SECURED
CREDITORS EXERCISE THEIR RIGHTS WITH RESPECT TO OUR PLEDGED ASSETS, THE PROCEEDS
OF THE LIQUIDATION OF THOSE ASSETS WILL FIRST BE APPLIED TO REPAY OBLIGATIONS
SECURED BY THE FIRST PRIORITY LIENS AND THEN TO REPAY OTHER SECURED INDEBTEDNESS
BEFORE ANY UNSECURED INDEBTEDNESS, INCLUDING THE NOTES, IS REPAID.
The notes and the guarantees are general unsecured obligations. As of
December 31, 2003, we and our subsidiaries had an aggregate of $299.2 million of
secured indebtedness outstanding (excluding $5.4 million of letters of credit,
$4.4 million of which were cash collateralized), including indebtedness
outstanding under our senior credit facility, which was secured by liens on
substantially all of our assets and the assets of the guarantors. In the event
that our secured creditors exercise their rights with respect to the pledged
assets, the proceeds of the liquidation of those assets will first be applied to
repay obligations secured by first priority liens and then to repay other
secured indebtedness before any unsecured indebtedness, including the notes, is
repaid. Holders of the notes will participate ratably in our remaining assets
with all holders of our unsecured indebtedness deemed to be of the same class as
the notes, and potentially with all of our other general creditors, based upon
the respective amounts owed to each holder or creditor. In any of the foregoing
events, we cannot assure you that there will be sufficient assets to pay amounts
due on the notes. As a result, holders of notes may receive less, ratably, than
holders of secured indebtedness. In addition, we and the guarantors may incur
additional secured indebtedness in the future. Depending on the amount of our
future secured indebtedness, including borrowings under our senior credit
facility, the availability of our assets to satisfy our payment obligations on
the notes may be further limited.
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NOTES AND GUARANTEES ARE JUNIOR TO EXISTING DEBT -- YOUR RIGHT TO RECEIVE
PAYMENTS ON THE NOTES IS JUNIOR TO OUR EXISTING INDEBTEDNESS AND POSSIBLY ALL OF
OUR FUTURE BORROWINGS. FURTHER, THE GUARANTEES OF THE NOTES ARE JUNIOR TO ALL OF
OUR GUARANTORS' EXISTING INDEBTEDNESS AND POSSIBLY TO ALL OF THEIR FUTURE
BORROWINGS.
The notes and the guarantees rank behind all of our and the guarantors'
existing indebtedness (other than trade payables) and all of our and their
future borrowings (other than trade payables), except any future indebtedness
that expressly provides that it ranks equal with, or subordinated in right of
payment to, the notes and the guarantees. As a result, upon any distribution to
our creditors or the creditors of the guarantors in a bankruptcy, liquidation or
reorganization or similar proceeding relating to us or the guarantors or our or
their property, the holders of our senior indebtedness and of the guarantors'
senior indebtedness will be entitled to be paid in full before any payment may
be made with respect to the notes or the guarantees.
In addition, all payments on the notes and the guarantees will be blocked
in the event of a payment default on senior indebtedness and may be blocked for
up to 179 of 360 consecutive days in the event of certain non-payment defaults
on senior indebtedness.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the guarantors, holders of the notes will
participate with trade creditors and all other holders of our and the
guarantors' subordinated indebtedness in the assets remaining after we and the
guarantors have paid all of our senior indebtedness in full. However, because
the indenture governing the notes requires that amounts otherwise payable to
holders of the notes in a bankruptcy or similar proceeding be paid to holders of
senior indebtedness instead, holders of the notes may receive less, ratably,
than holders of trade payables in any such proceeding. In any of these cases, we
and the guarantors may not have sufficient funds to pay all of our creditors,
and holders of notes may receive less, ratably, than the holders of our senior
indebtedness.
As of December 31, 2003, the old notes and the guarantees were subordinated
to $299.2 million of senior indebtedness (excluding $5.4 million of letters of
credit, $4.4 million of which were cash collateralized) and approximately $74.0
million of senior indebtedness was available for borrowing under our senior
credit facility, after giving effect to the use of $1.0 million of the revolving
credit facility to secure letters of credit. We will be permitted to borrow
substantial additional indebtedness, including senior indebtedness, in the
future under the terms of the indenture.
NOT ALL SUBSIDIARIES ARE GUARANTORS -- BECAUSE THE NOTES ARE STRUCTURALLY
SUBORDINATED TO THE INDEBTEDNESS OF OUR NON-GUARANTOR SUBSIDIARIES, YOUR RIGHT
TO RECEIVE PAYMENTS ON THE NOTES COULD BE ADVERSELY AFFECTED IF ANY OF OUR
NON-GUARANTOR SUBSIDIARIES DECLARE BANKRUPTCY, LIQUIDATE, OR REORGANIZE.
Holders of notes do not have any claim as creditors of our subsidiaries
that are not guarantors of the notes. None of our foreign subsidiaries or future
immaterial subsidiaries will guarantee the notes. The notes are structurally
subordinated to any existing and future preferred stock, indebtedness and other
liabilities of any of our subsidiaries that do not guarantee the notes. This is
so even if such obligations do not constitute senior indebtedness. In addition,
subject to limitations, the indenture permits our non-guarantor subsidiaries to
incur additional indebtedness and does not contain any limitation on the amount
of other liabilities that may be incurred by these subsidiaries. In the event of
a bankruptcy, liquidation or reorganization of any of the non-guarantor
subsidiaries, holders of preferred stock, indebtedness and other liabilities
will generally be entitled to payment of their claims from the assets of those
subsidiaries before any assets are made available for distribution to us. In
addition, the ability of the non-guarantor subsidiaries to pay dividends or
distributions to us is subject to applicable local laws, tax laws and other
restrictions.
HOLDING COMPANY -- WE ARE A HOLDING COMPANY AND THEREFORE DEPEND ON OUR
SUBSIDIARIES TO SERVICE OUR DEBT.
We have no direct operations and no significant assets other than the stock
of our subsidiaries. Because we conduct our operations through our operating
subsidiaries, we depend on those entities for dividends and other payments to
generate the funds necessary to meet our financial obligations, including
payments on the notes. Under certain circumstances, legal and contractual
restrictions, as well as the financial condition and operating requirements of
our subsidiaries, may limit our ability to obtain cash from our subsidiaries.
The
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earnings from, or other available assets of, these operating subsidiaries may
not be sufficient to make distributions to enable us to pay interest on our debt
obligations, including the notes, when due or the principal of such debt at
maturity.
LIMITATIONS UNDER OUR INDEBTEDNESS -- OUR INDEBTEDNESS IMPOSES RESTRICTIONS ON
US THAT MAY AFFECT OUR ABILITY TO SUCCESSFULLY OPERATE OUR BUSINESS AND OUR
ABILITY TO MAKE PAYMENTS ON THE NOTES.
The senior credit facility and the indenture governing the notes include
certain covenants that, among other things, restrict our ability to:
- incur additional indebtedness and issue preferred stock;
- make restricted payments;
- allow restrictions on the ability of certain subsidiaries to make
distributions;
- sell assets;
- enter into certain transactions with affiliates; and
- create liens.
We are also required by our senior credit facility to maintain certain
financial ratios, including, but not limited to, fixed charge coverage and
maximum total leverage ratios. All of these covenants may restrict our ability
to expand or to fully pursue our business strategies. Our ability to comply with
these and other provisions of the indenture and the senior credit facility may
be affected by changes in our operating and financial performance, changes in
general business and economic conditions, adverse regulatory developments or
other events beyond our control. The breach of any of these covenants could
result in a default under our indebtedness, which could cause those and other
obligations to become due and payable. If we default under indebtedness that is
senior to the notes, we could be prohibited from making payments with respect to
the notes until the default is cured or all indebtedness that is senior to the
notes is paid in full. If any of our indebtedness is accelerated, we may not be
able to repay it.
FUNDING CHANGE OF CONTROL OFFER -- WE MAY NOT HAVE THE ABILITY TO RAISE THE
FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE
INDENTURE.
Upon certain "change of control" events, as that term is defined in the
indenture, we will be required to make an offer to repurchase all or any part of
each holder's notes at a price equal to 101% of the principal thereof, plus
accrued interest and liquidated damages, if any, to the date of repurchase. The
source of funds for any such repurchase would be our available cash or cash
generated from operations or other sources, including borrowings, sales of
equity or funds provided by a new controlling person or entity. We cannot assure
you that sufficient funds will be available at the time of any change of control
event to repurchase all tendered notes pursuant to this requirement. Our failure
to offer to repurchase notes or to repurchase notes tendered following a change
of control would result in a default under the indenture, which could lead to a
cross-default under the terms of our senior credit facility and our other
indebtedness. In addition, our senior credit facility will prohibit us from
making any such required repurchases, and any future senior indebtedness may
contain similar prohibitions. Accordingly, prior to repurchasing the notes upon
a change of control event, we must either repay outstanding indebtedness under
our senior credit facility and such future indebtedness or obtain the consent of
the lenders thereunder. If we were unable to obtain the required consents or
repay our outstanding indebtedness that is senior to the notes, we would remain
effectively prohibited from offering to repurchase the notes. See "Description
of the New Notes -- Change of Control." We cannot assure you that we would be
able to refinance or obtain consents on terms acceptable to us or at all.
FRAUDULENT TRANSFER MATTERS -- UNDER CERTAIN CIRCUMSTANCES, A COURT COULD CANCEL
THE NOTES OR THE GUARANTEES OF OUR SUBSIDIARIES. THE SUBSIDIARY GUARANTEES MAY
NOT BE ENFORCEABLE.
Our issuance of the notes and the issuance of the guarantees by certain of
our subsidiaries may be subject to review under federal or state fraudulent
transfer law. If we become a debtor in a case under the
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United States Bankruptcy Code or encounter other financial difficulty, a court
might avoid (that is, cancel) our obligations under the notes. The court might
do so if it found that, when we issued the notes, (a) we received less than
reasonably equivalent value or fair consideration, and (b) we either (i) were or
were rendered insolvent, (ii) were left with inadequate capital to conduct our
business, or (iii) believed or reasonably should have believed that we would
incur debts beyond our ability to pay. The court might also avoid the notes,
without regard to factors (a) and (b), if it found that we issued the notes with
actual intent to hinder, delay, or defraud our creditors.
Similarly, if one of our subsidiaries who guarantees the notes becomes a
debtor in a case under the Bankruptcy Code or encounters other financial
difficulty, a court might cancel its guarantee, if it found that when the
subsidiary issued its guarantee (or in some jurisdictions, when payments became
due under the guarantee), factors (a) and (b) above applied to the subsidiary,
or if it found that the subsidiary issued its guarantee with actual intent to
hinder, delay, or defraud its creditors.
A court would likely find that neither we nor any subsidiary guarantor
received reasonably equivalent value or fair consideration for incurring our
obligations under the notes and guarantees unless we or the subsidiary guarantor
benefited directly or indirectly from the notes' issuance. In other instances,
courts have found that an issuer did not receive reasonably equivalent value or
fair consideration if the proceeds of the issuance were used (as here) to
finance the Acquisition, although we cannot predict how a court would rule in
this case.
The test for determining solvency for purposes of the foregoing will vary
depending on the law of the jurisdiction being applied. In general, a court
would consider an entity insolvent either if the sum of its existing debts
exceeds the fair value of all its property, or if its assets' present fair
saleable value is less than the amount required to pay the probable liability on
its existing debts as they become due. For this analysis, "debts" includes
contingent and unliquidated debts.
The indenture limits the liability of each subsidiary guarantor on its
guarantee to the maximum amount that the subsidiary can incur without risk that
the guarantee will be subject to avoidance as a fraudulent transfer. We cannot
assure you that this limitation will protect the guarantees from fraudulent
transfer attack or, if it does, that the remaining amount due and collectible
under the guarantees would suffice, if necessary, to pay the notes when due.
If a court avoided our obligations under the notes and the obligations of
all the subsidiary guarantors under their guarantees, you would cease to be our
creditors or creditors of the guarantors and likely have no source from which to
recover amounts due under the notes.
Even if the guarantee of a subsidiary guarantor is not avoided as a
fraudulent transfer, a court may subordinate the guarantee to that subsidiary
guarantor's other debt. In that event, the guarantees would be structurally
subordinated to all the subsidiary guarantor's other debt.
VOLATILITY -- THE TRADING PRICE OF THE NOTES MAY BE VOLATILE.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the notes. Any such disruptions could adversely affect the prices at
which you may sell your notes. In addition, the new notes may trade at a
discount from the initial offering price of the old notes, depending on
prevailing interest rates, the market for similar notes, our performance and
other factors.
RISKS RELATING TO OUR BUSINESS AND OPERATIONS
PRODUCTS LIABILITY -- WE MAY INCUR MATERIAL PRODUCTS LIABILITY AND PRODUCTS
RECALL COSTS.
As a retailer, distributor and manufacturer of products designed for human
consumption, we are subject to product liability claims if the use of our
products is alleged to have resulted in injury. Our products consist of
vitamins, minerals, herbs and other ingredients that are classified as foods or
dietary supplements and are not subject to pre-market regulatory approval in the
United States. We have in the past, and may in the future
20
be, subject to various product liability claims, including, among others, that
our products include inadequate instructions for use or inadequate warnings
concerning possible side effects and interactions with other substances. For
example, as of March 15, 2004, we have been named as a defendant in 100 cases
involving the sale of products that contain ephedra. In early 2003, we
instructed all of our locations to stop selling products containing ephedra that
were manufactured by GNC or one of our affiliates. Subsequently, we instructed
all of our locations to stop selling any products containing ephedra by June 30,
2003. Sales of products containing ephedra amounted to approximately $35.2
million, or 3.3% of our retail sales, in 2003 and approximately $182.9 million,
or 17.1% of our retail sales, in 2002. In addition, although we maintain quality
controls and procedures with respect to products we manufacture, our products
could contain contaminated substances. Many of the products we sell are produced
by third-party manufacturers. As a distributor of products manufactured by third
parties, we may also be liable for various products liability claims for
products we do not manufacture even though we have no control over the
manufacturing procedures used in connection with the production of these
third-party products.
We maintain products liability insurance. However, such insurance may not
continue to be available at a reasonable cost, or, if available, may not be
adequate to cover liabilities. We generally seek to obtain contractual
indemnification from parties that supply raw materials for our products or
manufacture or market products we sell, and to be added as an additional insured
under such parties' insurance policies. In connection with the Acquisition, we
are also entitled to indemnification by Royal Numico, N.V. and Numico USA, Inc.
for certain losses arising from all claims related to products containing
ephedra or Kava Kava. 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. If we do not have
adequate insurance or contractual indemnification, product liabilities relating
to our products could have a material adverse effect on our business, financial
condition and results of operations. See "Business -- Legal Proceedings."
In addition, the Food and Drug Administration ("FDA") may take action with
respect to any of our products that it deems fall within its jurisdiction. These
actions could require us to change our product labeling or remove a particular
product from the market. Any future recall or removal would result in additional
costs to us, including lost revenues from any products that we are required to
remove from the market, any of which could be material. We cannot predict
whether the FDA will take action with respect to any of our products and any
such product recalls or removals could adversely affect our business, financial
condition and results of operations.
COMPETITION -- WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY.
The U.S. nutritional supplements retail industry is a large, highly
fragmented and growing industry, with no single industry participant accounting
for more than 10% of total industry retail sales. Participants include specialty
retailers, supermarkets, drugstores, mass merchants, multi-level marketing
organizations and a variety of other smaller channels. In addition, the market
is highly sensitive to the introduction of new products, including various
prescription drugs, which may rapidly capture a significant share of the market.
In the United States, our VMHS products compete for sales with supermarkets,
drugstores and mass merchants and with heavily advertised national brands
manufactured by large pharmaceutical companies, as well as the Nature's
Bounty(R) and Nature's Wealth brands, sold by Vitamin World(R). Our
international competitors also include large international pharmacy chains,
major international supermarket chains and other large U.S.-based companies with
international operations. Our wholesale and manufacturing operations also
compete with other wholesalers and manufacturers of third-party nutritional
supplements.
Increased competition from companies that distribute through retail or
wholesale channels could have a material adverse effect on our financial
condition and results of operations. Such companies may have greater financial
and other resources available to them and possess manufacturing, distribution
and marketing capabilities greater than ours. Certain of our competitors may
have significantly greater financial, technical and marketing resources than we
do. In addition, our competitors may be more effective and efficient in
integrating new products. We may not be able to compete effectively and any of
the factors listed above may cause price reductions, reduced margins and losses
of our market share.
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EFFECT OF UNFAVORABLE PUBLICITY -- UNFAVORABLE PUBLICITY OR CONSUMER PERCEPTION
OF OUR PRODUCTS AND ANY SIMILAR PRODUCTS DISTRIBUTED BY OTHER COMPANIES COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We are highly dependent upon consumer perception regarding the safety and
quality of our products, as well as similar products distributed by other
companies. Consumer perception of products can be significantly influenced by
scientific research or findings, national media attention and other publicity
about product use. Future scientific research or publicity could be unfavorable
to our industry or any of our particular products and may not be consistent with
earlier favorable research or publicity. A future research report or publicity
that is perceived by our consumers as less favorable or that questions such
earlier research or publicity could have a material adverse effect on our
ability to generate revenues. Adverse publicity in the form of published
scientific research or otherwise, whether or not accurate, that associates
consumption of our products or any other similar products with illness or other
adverse effects, that questions the benefits of our or similar products or that
claims that any such products are ineffective could have a material adverse
effect on our financial condition and results of operations. Adverse publicity
could arise even if the adverse effects associated with such products resulted
from consumers' failure to consume such products appropriately.
GOVERNMENT REGULATION -- COMPLIANCE WITH GOVERNMENTAL REGULATIONS MAY IMPOSE
ADDITIONAL COSTS.
The processing, formulation, manufacturing, packaging, labeling,
advertising and distribution of our products may be subject to regulation by one
or more federal agencies, including the FDA, the Federal Trade Commission
("FTC"), the Consumer Product Safety Commission, the United States Department of
Agriculture and the Environmental Protection Agency. These activities are also
regulated by various agencies of the states and localities in which our products
are sold. The FDA may attempt to regulate any of our products that it deems fall
within its jurisdiction. The FDA may not accept the evidence of safety for any
new ingredients that we may want to market, may determine that a particular
product or product ingredient presents an unacceptable health risk, may
determine that a particular statement of nutritional support that we want to use
is an unacceptable drug claim or an unauthorized version of a "health claim," or
the FDA or the FTC may determine that particular claims are not adequately
supported by available scientific evidence. See "Business -- Government
Regulation -- Product Regulation." Such a determination might prevent us from
marketing particular products or using certain statements of nutritional support
on our products. One of the key areas of our development focus is the specialty
supplements category, which includes products that are directed at particular
nutritional concerns. The FDA may not agree with our statements of nutritional
support as to a particular specialty supplement or permit us to promote our
specialty supplements directed at particular nutritional concerns. In addition,
we may be unable to disseminate third-party literature in connection with our
products if the third-party literature fails to satisfy certain requirements.
Although the regulation of dietary supplements is in some respects less
restrictive than the regulation of drugs, dietary supplements may not continue
to be subject to less restrictive regulation. Further, if more stringent
statutes are enacted for dietary supplements, or if more stringent regulations
are promulgated, we may not be able to comply with such statutes or regulations
without incurring substantial expense, or at all.
In addition, we expect that the FDA soon will adopt the proposed rules on
good manufacturing practice in manufacturing, packaging, or holding dietary
ingredients and dietary supplements, which may apply to the products we
manufacture. These regulations would require dietary supplements to be prepared,
packaged and held in compliance with certain rules, and may require quality
control provisions similar to those in the good manufacturing practice
regulations for drugs. If the FDA adopts the good manufacturing practice
regulations, we may not be able to comply with the new rules without incurring
additional expenses.
The FTC exercises jurisdiction over the advertising of dietary supplements.
In the past, the FTC has instituted numerous enforcement actions against dietary
supplement companies, including us, for failure to have adequate substantiation
for claims made in advertising or for the use of false or misleading advertising
claims. These enforcement actions have often resulted in consent decrees and the
payment of civil penalties by the companies involved. We are currently subject
to three consent decrees that limit our ability to make certain claims with
respect to our products and required us to pay civil penalties. See "Business --
Government Regulation -- Product Regulation." Our policy is to use advertising
that complies with the consent decrees and applicable regulations. Nevertheless,
inadvertent failures to comply with the consent
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decrees and applicable regulations may occur from time to time. Violations of
these orders could result in substantial monetary penalties, which could have a
material adverse effect on our financial condition or results of operations.
We are also subject to regulation under various state, local, and
international laws that include provisions governing, among other things, the
formulation, manufacturing, packaging, labeling, advertising and distribution of
our products that are deemed "dietary supplements" or "over-the-counter drugs."
Government regulations in foreign countries may prevent or delay the
introduction, or require the reformulation, of certain of our products.
In addition, from time to time in the future, Congress, the FDA, the FTC or
other federal, state, local or foreign legislative and regulatory authorities
may impose additional laws or regulations that apply to us, repeal laws or
regulations that we consider favorable to us or impose more stringent
interpretations of current laws or regulations. We are not able to predict the
nature of such future laws, regulations, repeals or interpretations or to
predict the effect additional governmental regulation, when and if it occurs,
would have on our business in the future. Such developments could, however,
require reformulation of certain products to meet new standards, recalls or
discontinuance of certain products not able to be reformulated, additional
record-keeping requirements, increased documentation of the properties of
certain products, additional or different labeling, additional scientific
substantiation, or other new requirements. Any such developments could have a
material adverse effect on our business, financial condition and results of
operations.
DEMAND FOR NEW PRODUCTS -- OUR FAILURE TO KEEP PACE WITH THE DEMANDS OF OUR
CUSTOMERS FOR NEW PRODUCTS AND SERVICES COULD SIGNIFICANTLY HARM OUR BUSINESS.
The nutritional supplement industry we serve is characterized by rapid and
frequent changes in demand for products and new product introductions. Some of
our competitors may invest more heavily in research and/or product development
than we do. The success of our new product offerings depends upon a number of
factors, including our ability to:
- accurately anticipate customer needs;
- innovate and develop new products;
- successfully commercialize new products in a timely manner;
- price our products competitively and manufacture and deliver our products
in sufficient volumes and on time; and
- differentiate our product offerings from those of our competitors.
If we do not introduce new products or make enhancements to meet the
changing needs of our customers in a timely manner, some of our products could
become obsolete, in which case our customer relationships, revenues, and
operating results would suffer.
LIMITED HUMAN EXPERIENCE -- SOME OF OUR PRODUCTS CONTAIN INNOVATIVE INGREDIENTS
FOR WHICH THERE IS LITTLE LONG-TERM EXPERIENCE WITH HUMAN CONSUMPTION.
Some of our products contain innovative ingredients which do not have long
histories of human consumption. There may be little long-term experience with
human consumption of certain of these innovative product ingredients. Our
products may not have the effects intended. Previously unknown adverse reactions
resulting from the long-term human consumption of these ingredients could occur.
Any negative effect alleged to result from use of one of our products could
result in decreased sales and product liability claims, any of which could have
a material adverse effect on our business, financial condition and results of
operations.
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INSURANCE -- WE SELF-INSURE FOR A SIGNIFICANT PORTION OF OUR CLAIMS EXPOSURE,
WHICH COULD MATERIALLY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Our future insurance and claims expense could materially adversely affect
our results of operations. We face an inherent risk of exposure to product
liability claims in the event that, among other things, the use of our products
results in injury. We carry product liability insurance coverage that involves
self-insured retentions with primary and excess liability coverage above the
retention amount. We also self insure certain property and casualty risks due to
the frequency and severity of a loss, the cost of insurance, the availability of
the insurance in the market, and the overall risk analysis. Because of our
self-insured retention amounts, we have significant exposure to fluctuations in
the number and severity of claims. If there is an increase in the frequency and
severity of claims, or if we are required to accrue or pay additional amounts
because the claims prove to be more severe than originally assessed, our
profitability would be adversely affected.
We maintain insurance with licensed insurance carriers above the amounts
for which we self-insure. Since September 2001, insurance carriers have been
raising premiums for many businesses, including nutritional supplement
retailers. Prior to the Acquisition, we received insurance coverage for many of
our insurance policies from Numico USA, Inc. As a result of the consummation of
the Acquisition, we were required to obtain our own insurance policies including
policies for general products liability. While our deductibles for products
liability were historically $50,000, our deductibles/retentions have increased
to $1 million per claim. As a result, our insurance and claims expense could
increase in the future. Alternatively, we could raise our deductible/retention,
which would increase our already significant exposure to expense from claims. If
these expenses increase, our financial condition and results of operations could
be materially adversely affected.
If any claim were to exceed our coverage, we would bear the excess, in
addition to our other self-insured amounts. Any such claim could materially and
adversely affect our financial condition and results of operations.
DEPENDENCE ON PROFITABLE FRANCHISE OPERATIONS -- A SUBSTANTIAL AMOUNT OF OUR
REVENUES ARE GENERATED FROM OUR FRANCHISEES AND OUR REVENUES COULD DECREASE
SIGNIFICANTLY IF OUR FRANCHISEES DO NOT CONDUCT THEIR OPERATIONS PROFITABLY OR
WE FAIL TO ATTRACT NEW FRANCHISEES.
As of December 31, 2003, approximately 35% of our retail locations were
operated by franchisees. Our revenues from franchised stores depend on the
franchisees' ability to operate their stores profitably and adhere to our
franchise standards. The closing of unprofitable stores or the failure of
franchisees to comply with our policies could adversely affect our reputation
and could reduce the amount of our franchise revenues. This could have a
material adverse effect on our financial condition and results of operations.
If we are unable to attract new franchisees or to convince existing
franchisees to open additional stores, any growth in royalties from franchised
stores will depend solely upon increases in revenues at existing franchised
stores, which could be minimal. In addition, our ability to open additional
franchised locations is limited by the territorial restrictions in our existing
franchise agreements as well as our ability to identify additional markets in
the United States and Canada that are not currently saturated with the products
we offer. If we are unable to open additional franchised locations, we will have
to sustain additional growth internally by attracting new and repeat customers
to our existing locations. If we are unable to do so, our revenues may decline
significantly and have a material adverse effect on our business, financial
condition and results of operations.
FRANCHISE REGULATION -- WE ARE SUBJECT TO FRANCHISE REGULATION.
We are subject to federal and state laws regulating the offer and sale of
franchises. These laws impose registration and extensive disclosure requirements
on the offer and sale of franchises. These laws frequently apply substantive
standards to the relationship between franchisor and franchisee and limit the
ability of a franchisor to terminate or refuse to renew a franchise. State
franchise laws may delay or prevent us from terminating a franchise or
withholding consent to renew or transfer a franchise. We may, therefore, be
required to retain an underperforming franchise and may be unable to replace the
franchisee, which could
24
have an adverse effect on franchise revenues. In addition, the nature and effect
of any future legislation or regulation on our franchise operations cannot be
predicted.
INTERNATIONAL RISKS -- ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH OUR
INTERNATIONAL OPERATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
As of December 31, 2003, 6.2% of our revenues was derived from our
international operations. Our international operations are subject to a number
of risks inherent to operating in foreign countries. These risks include, among
others:
- political and economic instability of foreign markets;
- foreign governments' restrictive trade policies;
- inconsistent product regulation or sudden policy changes by foreign
agencies or governments;
- the imposition of, or increase in, duties, taxes, government royalties or
non-tariff trade barriers;
- difficulty in collecting international accounts receivable and
potentially longer payment cycles;
- increased costs in maintaining international franchise and marketing
efforts;
- exchange controls;
- problems entering international markets with different cultural bases and
consumer preferences; and
- fluctuations in foreign currency exchange rates.
All of these risks are beyond our control. We cannot predict the nature and
the likelihood of any such events. However, if such an event should occur, it
could have a material adverse effect on our business, financial condition and
results of operations.
DEPENDENCE ON KEY PERSONNEL -- THE SUCCESS OF OUR BUSINESS DEPENDS ON THE
SERVICES OF OUR KEY PERSONNEL.
We depend on the continued services of our key executive officers. The loss
of any of these officers or other management personnel could result in
inefficiencies in our operations, lost business opportunities or the loss of one
or more customers.
RELIANCE ON SUPPLIERS -- WE RELY ON CERTAIN SUPPLIERS FOR RAW MATERIALS AND
OTHER PRODUCTS AND ARE VULNERABLE TO FLUCTUATIONS IN THE AVAILABILITY AND PRICE
OF SUCH RAW MATERIALS AND PRODUCTS.
We purchase certain raw materials and third-party products from third-party
suppliers and vendors. Our suppliers and vendors may not provide the raw
materials or third-party products needed by us in the quantities requested, in a
timely manner, or at a price we are willing to pay. In the event any of our
third-party suppliers or vendors were to become unable or unwilling to continue
to provide the important raw materials and third-party products in the required
volumes and quality levels or in a timely manner, we would be required to
identify and obtain acceptable replacement supply sources. We may not be able to
obtain alternative suppliers and vendors on a timely basis, or at all, which
could result in lost sales because of our inability to manufacture products
containing such raw materials or deliver products we sell from certain
suppliers. If such an event should occur, it could have a material adverse
effect on our business, financial condition and results of operations. In
addition, we expect that the FDA may soon adopt the good manufacturing practice
regulations. Our suppliers and vendors may be subject to, and may not be able to
comply with, these regulations. Even if they are able to comply with these
regulations, their compliance may increase the cost of certain raw materials and
third-party products.
25
CLOSELY HELD COMPANY -- WE ARE CONTROLLED BY OUR EQUITY SPONSOR, AN AFFILIATE OF
APOLLO MANAGEMENT, L.P., AND CERTAIN OF OUR DIRECTORS AND MEMBERS OF OUR
MANAGEMENT, WHOSE INTERESTS MAY NOT BE ALIGNED WITH YOURS.
Our equity sponsor, an affiliate of Apollo Management, L.P., and certain of
our directors and members of our management beneficially own all of the
outstanding common equity on a fully diluted basis of our parent, General
Nutrition Centers Holding Company, and as a result, are in a position to control
all matters affecting us. The interests of our equity sponsor, its respective
affiliates and certain of our directors and members of our management could
conflict with your interests. For example, if we encounter financial
difficulties or are unable to pay our debts as they mature, the interests of our
equity holders might conflict with your interests as a noteholder. Equity
holders may also have an interest in pursuing acquisitions, divestitures,
financings or other transactions that, in their judgment, could enhance their
equity investments even though such transactions might involve risks to you as a
noteholder.
RELIANCE ON MANUFACTURING OPERATIONS -- WE RELY ON OUR MANUFACTURING OPERATIONS
TO PRODUCE THE PRODUCTS WE SELL, AND WE COULD BE ADVERSELY AFFECTED BY
DISRUPTIONS IN OUR MANUFACTURING SYSTEM.
During the year ended December 31, 2003, our manufacturing operations
produced approximately 32% of the products we sold. Other than powders and
liquids, nearly all of our proprietary products are produced in our
manufacturing facilities. Any significant disruption in those operations for any
reason, such as power interruptions, fires, hurricanes, war or other force
majeure, could adversely affect our sales and customer relationships and
therefore adversely affect our business.
INTELLECTUAL PROPERTY -- IF WE FAIL TO ADEQUATELY PROTECT OR ENFORCE OUR
INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY PRODUCE AND MARKET PRODUCTS
SIMILAR TO OURS. IN ADDITION, WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY
LITIGATION AND INFRINGEMENT CLAIMS BY THIRD PARTIES.
Our ability to compete effectively is dependent upon the proprietary nature
of the trademarks, designs, processes, technologies and materials owned by, used
by or licensed to us. Although we attempt to protect such trademarks and other
proprietary properties, both in the United States and in foreign countries
through a combination of trademark, patent and trade secret laws and
non-disclosure agreements, these may be insufficient. In addition, because of
the differences in foreign trademark, patent and other laws concerning
proprietary rights, our products may not receive the same degree of protection
in foreign countries as they would in the United States. Although we have
trademarks and patents issued or licensed to us for our products, we may not
always be able to successfully protect or enforce our trademarks and patents
against competitors, or against challenges by others. For example, a third party
is currently challenging our right to register in the United States certain
marks that incorporate our GNC Live Well trademark. Also, some of our products
are covered by patents to which we have a non-exclusive license from Royal
Numico, N.V. These patents have also been licensed to two of our competitors. We
cannot guarantee that these competitors will not introduce competitive products.
In addition, we may be subject to intellectual property litigation and
infringement claims, which could cause us to incur significant expenses or
prevent us from selling our products. A successful claim of trademark, patent or
other intellectual property infringement against us could adversely affect our
growth and profitability, in some cases materially. Others may claim that our
proprietary or licensed products are infringing their intellectual property
rights, and our products may infringe those intellectual property rights. From
time to time, we receive notices from third parties of potential infringement
and receive claims of potential infringement. We may be unaware of intellectual
property rights of others that may cover some of our technology or products. If
someone claims that our technology or products infringe their intellectual
property rights, any resulting litigation could be costly and time consuming and
would divert the attention of management and key personnel from other business
issues. The complexity of the technology involved and the uncertainty of
intellectual property litigation increase these risks. Claims of intellectual
property infringement also may require us to enter into costly royalty or
license agreements. However, we may be unable to obtain royalty or license
agreements on terms acceptable to us or at all. We also may be subject to
significant damages or injunctions preventing us from manufacturing, selling or
using some aspect of our
26
products in the event of a successful claim of patent or other intellectual
property infringement. Any of these adverse consequences could have a material
adverse effect on our business and profitability.
RISKS RELATED TO THE ACQUISITION
ACQUISITION RISKS -- WE MAY INCUR ADDITIONAL EXPENSES AS A STAND-ALONE ENTITY AS
A RESULT OF THE ACQUISITION AND DID NOT SEEK CERTAIN CONSENTS THAT WERE REQUIRED
TO BE GIVEN IN CONNECTION WITH THE ACQUISITION.
We now operate as a stand-alone entity. We had not previously operated as a
stand alone entity since our acquisition by Numico in 1999. As a result, we may
incur additional expenses. If we are not able to transition into a stand-alone
entity successfully or if we significantly underestimate these expenses, our
business may be adversely affected.
In connection with the Acquisition, many of the consents that were required
to be obtained and notices that were required to be given under the terms of our
commercial and other contracts were not sought, obtained or given. Our failure
to obtain such consents or give such notices could have a material adverse
effect on our financial condition and results of operations.
POTENTIAL GOODWILL WRITEDOWN -- IF WE WERE REQUIRED TO WRITE DOWN ALL OR PART OF
OUR GOODWILL, OUR NET INCOME AND NET WORTH COULD BE MATERIALLY ADVERSELY
AFFECTED.
As a result of the Acquisition, we have $83.1 million of goodwill recorded
on our consolidated balance sheet as of December 31, 2003. Under accounting
principles generally accepted in the United States of America, we are not
permitted to amortize goodwill. Instead, we are required to periodically
determine if our goodwill has become impaired, in which case we would write down
the impaired portion of our goodwill. If we are required to write down all or
part of our goodwill, our consolidated income and stockholders' equity could be
materially adversely affected.
27
USE OF PROCEEDS
We will not receive any cash proceeds from the exchange offer. Any old
notes that are properly tendered and exchanged pursuant to the exchange offer
will be retired and cancelled.
RATIO OF EARNINGS TO FIXED CHARGES
We have calculated the ratio of earnings to fixed charges by dividing
earnings by fixed charges. For the purpose of computing the ratio of earnings to
fixed charges, "earnings" is defined as (loss) income before income taxes and
fixed charges. "Fixed charges" consist of interest cost whether expensed or
capitalized, amortization of debt expense and the portion of rental expense
(approximately one-third) that we believe to be representative of the interest
factor in those rentals.
<Table>
<Caption>
PERIOD FROM 27 DAYS
YEAR ENDED DECEMBER 31, JANUARY 1, 2003 ENDED
- ------------------------------------------------------------------------ TO DECEMBER 4, DECEMBER 31,
1999 2000 2001 2002 2003 2003
- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
--(1) --(1) --(1) --(1) --(1) 1.11
</Table>
- ---------------
(1) Earnings were insufficient to cover fixed charges by $12.8 million in the
period ended August 7, 1999, $20.8 million in the period ended December 31,
1999, and by $175.4 million, $70.0 million, $70.2 million and $759.4 million
for the years ended December 31, 2000, 2001, 2002 and the period ended
December 4, 2003, respectively.
28
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2003.
The table below should be read in conjunction with "Unaudited Pro Forma
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Description of Senior Credit Facility"
and our consolidated financial statements and related notes included elsewhere
in this prospectus.
<Table>
<Caption>
AS OF
DECEMBER 31,
2003
(IN MILLIONS) ------------
Debt:
Revolving credit facility(1)................................ $ 0.0
Term loan facility.......................................... 285.0
Assumed mortgage debt(2).................................... 14.2
------
Total senior debt(3)..................................... 299.2
Senior subordinated notes................................... 215.0
------
Total debt........................................... 514.2
Stockholders' equity:
Common stock, $0.01 par value, 1,000 shares authorized,
100 shares issued and outstanding...................... --
Paid-in-capital........................................... 277.5
Retained earnings......................................... 0.4
Accumulated other comprehensive income.................... 0.3
------
Total stockholders' equity........................... 278.2
------
Total capitalization............................ $792.4
======
</Table>
- ---------------
(1) As of December 31, 2003, the total availability under our revolving credit
facility was $74.0 million, after giving effect to $1.0 million of the
revolving credit facility that was utilized to secure letters of credit.
(2) In connection with the Acquisition, we assumed a $14.2 million loan that is
secured by a mortgage on our corporate headquarters.
(3) Excludes $5.4 million of letters of credit outstanding as of December 31,
2003 under existing facilities, of which $4.4 million is cash
collateralized. $1.0 million of the revolving credit facility was utilized
to secure $1.0 million of letters of credit. See note 9 to the consolidated
financial statements included elsewhere in this prospectus.
29
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the period
from: (i) February 7, 1999 to August 7, 1999 and as of August 7, 1999, and (ii)
August 8, 1999 to December 31, 1999 and as of December 31, 1999 is derived from
our unaudited consolidated financial statements not included in this prospectus.
The selected financial data for the period from February 7, 1999 to August 7,
1999 represents the period in 1999 prior to the purchase of General Nutrition
Companies, Inc. by Royal Numico, N.V. The selected financial data for the period
from August 8, 1999 to December 31, 1999 represents the period in 1999 that
General Nutrition Companies, Inc. was owned by Royal Numico, N.V.
The selected consolidated financial data presented below as of and for the
year ended December 31, 2000 is derived from our audited consolidated financial
statements and accompanying notes not included in this prospectus. The selected
consolidated financial data presented below as of and for the years ended
December 31, 2001 and 2002 is derived from our audited consolidated financial
statements and accompanying notes included elsewhere in this prospectus. The
selected financial data as of and for the years ended December 31, 2000, 2001
and 2002 represents calendar years during which General Nutrition Companies,
Inc. was owned by Royal Numico, N.V.
The selected consolidated financial data presented below for (i) the period
from January 1, 2003 to December 4, 2003 and as of December 4, 2003, and (ii)
the 27 days ended December 31, 2003 and as of December 31, 2003 is derived from
our audited consolidated financial statements and accompanying notes that are
included elsewhere in this prospectus. The selected financial data for the
period from January 1, 2003 to December 4, 2003 represents the period in 2003
that General Nutrition Companies, Inc. was owned by Royal Numico, N.V. The
selected financial data for the 27 days ended December 31, 2003 represents the
period of operations in 2003 subsequent to the Acquisition.
You should read the following information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and accompanying notes included elsewhere
in this prospectus.
<Table>
<Caption>
PREDECESSOR SUCCESSOR
PERIOD ----------------------------------------------------------- ------------
FROM PERIOD FROM PERIOD FROM
FEBRUARY 7, AUGUST 8, JANUARY 1, 27 DAYS
1999 TO 1999 TO YEAR ENDED DECEMBER 31, 2003 TO ENDED
AUGUST 7, DECEMBER 31, ------------------------------ DECEMBER 4, DECEMBER 31,
1999 1999 2000 2001 2002 2003 2003
(DOLLARS IN MILLIONS) ----------- ------------ -------- -------- -------- ----------- ------------
STATEMENT OF INCOME DATA:
Revenue:
Retail......................... $ 513.1 $ 376.3 $1,075.7 $1,123.1 $1,068.6 $ 993.3 $ 66.2
Franchising.................... 134.0 98.4 273.4 273.1 256.1 241.3 14.2
Manufacturing/Wholesale (Third
Party)....................... 62.8 51.3 96.3 112.9 100.3 105.6 8.9
-------- -------- -------- -------- -------- --------- --------
Total revenues............... 709.9 526.0 1,445.4 1,509.1 1,425.0 1,340.2 89.3
Cost of sales, including costs of
warehousing, distribution and
occupancy...................... 525.5 361.8 953.2 1,013.4 969.9 934.9 63.6
-------- -------- -------- -------- -------- --------- --------
Gross profit................. 184.4 164.2 492.2 495.7 455.1 405.3 25.7
Compensation and related
benefits....................... 117.0 67.6 231.8 246.6 245.2 235.0 16.7
Advertising and promotion........ 31.6 21.9 47.2 41.9 52.0 38.4 0.5
Other selling, general and
administrative................. 23.8 40.7 146.1 140.7 86.0 70.9 5.1
Other expense (income)(1)........ -- -- 99.9 (3.4) (216.3) (10.1) --
Impairment of goodwill and
intangible assets(2)........... -- -- -- -- 222.0 709.4 --
-------- -------- -------- -------- -------- --------- --------
Operating income (loss)........ 12.0 34.0 (32.8) 69.9 66.2 (638.3) 3.4
Interest expense, net............ (24.8) (54.8) (142.6) (139.9) (136.4) (121.1) (2.8)
-------- -------- -------- -------- -------- --------- --------
(Loss) income before income
taxes.......................... (12.8) (20.8) (175.4) (70.0) (70.2) (759.4) 0.6
Income tax benefit (expense)..... 16.7 4.5 25.3 14.1 (1.0) 174.5 (0.2)
-------- -------- -------- -------- -------- --------- --------
Net income (loss) before
cumulative effect of accounting
change......................... 3.9 (16.3) (150.1) (55.9) (71.2) (584.9) 0.4
Loss from cumulative effect of
accounting change, net of
tax(3)......................... -- -- -- -- (889.6) -- --
-------- -------- -------- -------- -------- --------- --------
Net income (loss)(4)............. $ 3.9 $ (16.3) $ (150.1) $ (55.9) $ (960.8) $ (584.9) $ 0.4
======== ======== ======== ======== ======== ========= ========
</Table>
30
<Table>
<Caption>
PREDECESSOR SUCCESSOR
PERIOD ----------------------------------------------------------- ------------
FROM PERIOD FROM PERIOD FROM
FEBRUARY 7, AUGUST 8, JANUARY 1, 27 DAYS
1999 TO 1999 TO YEAR ENDED DECEMBER 31, 2003 TO ENDED
AUGUST 7, DECEMBER 31, ------------------------------ DECEMBER 4, DECEMBER 31,
1999 1999 2000 2001 2002 2003 2003
(DOLLARS IN MILLIONS) ----------- ------------ -------- -------- -------- ----------- ------------
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 2.1 $ 20.3 $ 10.5 $ 16.3 $ 38.8 $ 9.4 $ 33.2
Working capital(5)............... 178.1 365.5 215.2 140.8 153.6 96.2 200.0
Total assets..................... 1,151.8 3,357.9 3,216.5 3,071.8 1,878.3 1,038.1 1,018.9
Total debt....................... 851.2 1,968.4 1,892.1 1,883.3 1,840.1 1,747.4 514.2
Stockholder's equity and
deficit........................ 112.9 667.1 523.1 469.0 (493.8) (1,077.1) 278.2
STATEMENT OF CASH FLOW DATA:
Net cash provided by operating
activities..................... 100.0 75.8 111.0 92.9 4.7
Net cash used in investing
activities..................... (42.0) (48.1) (44.5) (31.5) (740.0)
Net cash (used in) provided by
financing activities........... (66.9) (21.6) (44.3) (90.8) 759.2
OTHER DATA:
Number of stores (at end of
period):
Company-owned stores(6)........ 2,721 2,793 2,842 2,960 2,898 2,757 2,748
Franchised stores(6)........... 1,522 1,584 1,718 1,821 1,909 1,978 2,009
Licensed stores(6)............. 157 311 544 780 900 988 988
Domestic Company-owned "same
store" sales growth(7)....... (1.1)% 1.8% 6.5% 1.7% (6.6)% (0.4)% 9.2%
International Company-owned
"same store" sales
growth(8).................... 11.4%(8) 11.5%(8) 18.2% 24.7% 1.2% (0.4)% 8.8%
Domestic Franchised "same
store" sales growth(9)....... 4.3% 5.4% 3.9% 3.4% (3.2)% 0.2% 10.5%
EBITDA(10)....................... $ 52.1 $ 55.0 $ 91.8 $ 192.0 $ (765.4) $ (579.2) $ 5.7
Capital expenditures(11)......... $ 63.6 $ 38.4 $ 31.6 $ 29.2 $ 51.9 $ 31.0 $ 1.8
</Table>
- ---------------
(1) Other expense for 2000 represents an expense associated with the reduction
of the market value of certain equity investments. Other income for 2001,
2002 and the period ending December 4, 2003 includes $3.6 million, $214.4
million, and $7.2 million respectively, received from legal settlement
proceeds that we collected from a raw material pricing settlement.
(2) On January 1, 2002, we adopted SFAS No. 142, which requires that goodwill
and other intangible assets with indefinite lives no longer be subject to
amortization, but instead are to be tested at least annually for
impairment. For the fiscal period ending December 31, 2002 and December 4,
2003, we recorded impairment charges of $222.0 million (pre-tax), and
$709.4 million (pre-tax), respectively, for goodwill and other intangibles
as a result of decreases in expectations regarding growth and
profitability, and, in 2003, due to increased competition from the mass
market, negative publicity by the media on certain supplements, and
increasing pressure from the Federal Drug Administration on the industry as
a whole each of which were identified in connection with a valuation
related to the acquisition.
(3) Upon adoption of SFAS No. 142, we recorded a one-time, impairment charge of
$889.6 million, net of taxes of $170.6 million to reduce the carrying
amount of goodwill and other intangibles to their implied fair value.
(4) A table outlining the impact of the adoption of SFAS No. 142 on the
reported net loss as a result of the non-amortization of goodwill beginning
on January 1, 2002 is included in note 5 to the consolidated financial
statements included elsewhere in this prospectus.
(5) Working capital represents current assets less current liabilities.
31
(6) The following table summarizes our stores for the periods indicated:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------------------------------------------------------------ -------------
PERIOD
FROM
FEBRUARY 7, PERIOD FROM PERIOD FROM
1999 TO AUGUST 8, TO JANUARY 1, TO 27 DAYS ENDED
AUGUST 7, DECEMBER 31, DECEMBER 4, DECEMBER 31,
1999 1999 2000 2001 2002 2003 2003
----------- ------------ ----- ----- ----- ------------- -------------
COMPANY-OWNED STORES
Beginning of period balance............. 2,608 2,721 2,793 2,842 2,960 2,898 2,757
Store openings.......................... 133 89 160 220 117 80 4
Store closings.......................... (20) (17) (111) (102) (179) (221) (13)
----- ----- ----- ----- ----- ----- -----
End of period balance................... 2,721 2,793 2,842 2,960 2,898 2,757 2,748
===== ===== ===== ===== ===== ===== =====
FRANCHISED STORES
Beginning of period balance............. 1,422 1,522 1,584 1,718 1,821 1,909 1,978
Store openings.......................... 145 93 257 291 182 186 33
Store closings.......................... (45) (31) (123) (188) (94) (117) (2)
----- ----- ----- ----- ----- ----- -----
End of period balance................... 1,522 1,584 1,718 1,821 1,909 1,978 2,009
===== ===== ===== ===== ===== ===== =====
LICENSED STORES
Beginning of period balance............. -- 157 311 544 780 900 988
Store openings.......................... 157 154 233 237 131 93 --
Store closings.......................... -- -- -- (1) (11) (5) --
----- ----- ----- ----- ----- ----- -----
End of period balance................... 157 311 544 780 900 988 988
===== ===== ===== ===== ===== ===== =====
</Table>
(7) Company-owned "same store" sales growth is for our company-owned stores
only. "Same store" sales are calculated on a calendar year basis. The
calculation of "same store" sales growth excludes the net sales of a store
for any period if the store was not open during the same period of the
prior year. When a store's square footage has been changed as a result of
expansion or relocation in the same mall, the store continues to be treated
as a "same store." Company-owned "same store" sales were calculated on a 13
four-week period basis in 1999 and 2000 and on a calendar basis for 2001,
2002 and 2003.
(8) International company-owned "same store" sales were calculated on a 13
four-week period basis in 1999 based on sales generated in Canadian
dollars.
(9) Domestic franchised "same store" sales growth is calculated to exclude the
net sales of a store for any period if the store was not open during the
same period of the prior year. When a store's square footage has been
changed as a result of reconfiguration or relocation in the same mall, the
store continues to be treated as a "same store." Domestic franchised "same
store" sales growth is for our domestic franchised stores only. Domestic
franchised "same store" sales were calculated on a 13 four-week period
basis in 1999 and 2000 and on a calendar basis for 2001, 2002 and 2003.
(10) EBITDA as used herein represents net income (loss) before interest expense
(net), income tax (benefit) expense, depreciation and amortization. EBITDA
includes (a) non-cash goodwill and intangible impairment losses of $222.0
million (pre-tax) and $709.4 million (pre-tax) incurred in the year ended
December 31, 2002 and for the period January 1, 2003 to December 4, 2003,
respectively and (b) a loss from the cumulative effect of an accounting
change of $889.6 million, net of taxes of $170.6 million, for the year
ended December 31, 2002. We present EBITDA because we consider it a useful
analytical tool for measuring our ability to service our debt and generate
cash for other purposes. EBITDA is not a measurement of our financial
performance under GAAP and should not be considered as an alternative to
net income, operating income or any other performance measures derived in
accordance with GAAP or as an alternative to cash flow from operating
activities as a measure of our profitability or liquidity. We understand
that although EBITDA is frequently used by securities analysts, lenders and
others in their evaluation of companies, our calculation of EBITDA may not
be comparable to other similarly titled measures of other companies. In
addition, the calculation of
32
EBITDA as presented below is different than that used for purposes of the
covenants under the indenture governing the notes. The following table
reconciles EBITDA to net income (loss) as determined in accordance with
GAAP for the periods indicated:
<Table>
<Caption>
PRE-ACQUISITION PREDECESSOR SUCCESSOR
---------------- ------------------------------------------------------- -------------
PERIOD FROM
PERIOD FROM PERIOD FROM JANUARY 1,
FEBRUARY 7, 1999 AUGUST 8, TO YEAR ENDED DECEMBER 31, 2003 TO 27 DAYS ENDED
TO AUGUST 7, DECEMBER 31, -------------------------- DECEMBER 4, DECEMBER 31,
1999 1999 2000 2001 2002 2003 2003
(IN MILLIONS) ---------------- ------------ ------- ------ ------- ----------- -------------
Net (loss) income............... $ 3.9 $(16.3) $(150.1) $(55.9) $(960.8) $(584.9) $0.4
Interest expense, net......... 24.8 54.8 142.6 139.9 136.4 121.1 2.8
Income tax
(benefit)/expense........... (16.7) (4.5) (25.3) (14.1) 1.0 (174.5) 0.2
Depreciation and
amortization................ 40.1 21.0 124.6 122.1 58.0 59.1 2.3
------ ------ ------- ------ ------- ------- ----
EBITDA(a)....................... $ 52.1 $ 55.0 $ 91.8 $192.0 $(765.4) $(579.2) $5.7
====== ====== ======= ====== ======= ======= ====
</Table>
- ---------------
(a) Included in EBITDA are: (1) non-cash goodwill and other intangible
impairment losses of $222.0 million (pre-tax) and $709.4 million
(pre-tax) incurred in the year ended December 31, 2002, and the period
from January 1, 2003 to December 4, 2003, respectively, and (2) a loss
from the cumulative effect of an accounting change of $889.6 million,
net of tax, for the year ended December 31, 2002. The impairment
charges were incurred upon the testing of goodwill and other
intangibles, in accordance with SFAS No. 142. Impairment resulted from
decreases in expectations regarding growth and profitability due to
increased competition from the mass market, negative publicity by the
media on certain supplements, and increasing pressure from the Federal
Drug Administration on the industry as a whole.
(11) Capital expenditures for 2002 included approximately $13.9 million incurred
in connection with our store reset and upgrade program and approximately
$74.7 million of capital expenditures in 1999 to construct our
manufacturing facility in Anderson, South Carolina.
33
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
We derived the unaudited pro forma consolidated financial data set forth
below by applying pro forma adjustments attributable to the Acquisition to our
historical consolidated financial statements appearing elsewhere in this
offering memorandum.
The unaudited pro forma consolidated statement of operations and
comprehensive income for the year ended December 31, 2003 gives effect to the
Acquisition as if it was consummated on January 1, 2003. The unaudited pro forma
consolidated financial data does not purport to represent what our results of
operations would have been if the Acquisition had occurred on or as of the dates
indicated, nor is it indicative of results for any future periods. The unaudited
pro forma consolidated financial data has been prepared giving effect to the
Acquisition, which was accounted for as a purchase in accordance with SFAS No.
141, "Business Combinations."
The unaudited pro forma consolidated financial data is presented for
informational purposes only and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our historical consolidated financial statements including the notes thereto.
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<Table>
<Caption>
COMBINED TWELVE PRO FORMA TWELVE
MONTHS ENDED PRO FORMA MONTHS ENDED
DECEMBER 31, ADJUSTMENTS DECEMBER 31,
2003 2003 2003
--------------- ----------- ----------------
Revenue................................................ $1,429,497 $1,429,497
Cost of sales, including costs of warehousing,
distribution and occupancy........................... 998,440 (430)(2) 998,010
---------- -------- ----------
Gross profit........................................... 431,057 (430) 431,487
Compensation and related benefits...................... 251,709 251,709
Advertising and promotion.............................. 38,927 38,927
Other selling, general and administrative.............. 76,036 (33,347)(3) 42,689
Other (income) expense................................. (10,063) (10,063)
Impairment of goodwill and intangible assets........... 709,367 709,367
---------- -------- ----------
Operating income (loss)................................ (634,919) 33,777 (601,142)
Interest expense, net.................................. (123,898) 91,959(4) (31,939)
(Loss) income before income taxes...................... (758,817) 125,736 (633,081)
Income tax benefit/(expense)........................... 174,250 45,894(5) 128,356
---------- -------- ----------
Net (loss) income...................................... $ (584,567) $ 79,842 $ (504,725)
========== ======== ==========
</Table>
- ---------------
(1) The Combined twelve months ended December 31, 2003 amounts represent the
periods ended December 4, 2003 and the 27 day period ended December 31,
2003. See the Results of Operations discussion paragraph in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section in this document.
(2) Represents adjustment to eliminate inventory basis differences resulting
from the fair valuation adjustments recorded at December 5, 2003.
(3) Represents the following adjustments to selling, general and administrative
expenses:
<Table>
<Caption>
TWELVE MONTHS
ENDED
DECEMBER 31, 2003
-----------------
Income/(expense)
Depreciation(a)........................................ $ 26,469
Amortization(a)........................................ 1,574
Management fees(b)..................................... (1,500)
Research and development(c)............................ 4,978
Transaction fees(d).................................... 2,229
Directors fees(e)...................................... (403)
--------
$ 33,347
========
</Table>
34
(a) Represents adjustments to reflect differences in depreciation and
amortization expense resulting from the fair valuation adjustments
recorded at December 5, 2003.
<Table>
<Caption>
TWELVE MONTHS
ENDED
DECEMBER 31, 2003
-----------------
Depreciation and amortization--historical basis......... $ 59,051
Depreciation and amortization--new basis................ (31,008)
--------
Pro forma depreciation and amortization................. $ 28,043
========
</Table>
(b) Represents adjustments to reflect differences in management fees paid
to Numico and what would have been paid to Apollo for the twelve months
ended December 31, 2003.
<Table>
<Caption>
TWELVE MONTHS
ENDED
DECEMBER 31, 2003
-----------------
Historical management fee............................... $ -0-
Apollo management fee................................... (1,500)
--------
Pro forma management fee................................ $ (1,500)
========
</Table>
(c) Represents adjustments to eliminate expenses charged to us from Numico.
We have not assumed these obligations subsequent to the Acquisition.
(d) Represents adjustments to eliminate fees and expenses directly related
to the Acquisition.
(e) Represents adjustments to reflect differences in fees we have
historically paid to our directors and what we would have paid to our
directors for the twelve months ended December 31, 2003.
<Table>
<Caption>
TWELVE MONTHS
ENDED
DECEMBER 31, 2003
-----------------
Historical director fees................................ $ 97
Apollo director fees.................................... 500
--------
Pro forma director fees................................. $ (403)
========
</Table>
(4) Reflects adjustments to interest expense as a result of the financing
arrangements to fund the Acquisition. A portion of the debt is based on a
variable interest rate. A 1/8% change in interest rates would increase or
decrease our annual interest cost by $350 thousand.
(5) Reflects pro forma tax effect of above adjustments at an estimated combined
statutory rate of 36.5%.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Consolidated Financial Data" and our consolidated financial statements and
related notes included elsewhere in this prospectus. The discussion in this
section contains forward-looking statements that involve risks and
uncertainties. See "Risk Factors" included elsewhere in this prospectus for a
discussion of important factors that could cause actual results to differ
materially from those described or implied by the forward-looking statements
contained herein.
The discussion includes the following sections:
- Overview -- a general description of our business.
- Purchase Accounting -- a discussion of the accounting for the
Acquisition.
- Critical Accounting Policies -- a discussion of accounting policies that
require critical judgments and estimates.
- Results of Operations -- a summary and analysis of our consolidated
results of operations for the most recent three years presented in our
financial statements.
- Liquidity and Capital Resources -- an analysis of cash flows, sources,
and uses of cash.
- Contractual Cash Obligations -- a summary of our future minimum
non-cancelable contractual obligations.
- Forward-Looking Information -- cautionary information about
forward-looking statements and a description of certain risks and
uncertainties that could cause our actual results to differ materially
from our historical results or our current expectations or projections.
- Off Balance Sheet Arrangements -- a discussion of any material
relationships that exist that are not included in our financial
statements.
- Recently Issued Accounting Pronouncements -- a discussion of the effects
that recent pronouncements have on our results of operations.
OVERVIEW
We are the largest global specialty retailer of nutritional supplements,
which include sports nutrition products, diet products, VMHS (vitamins, minerals
and herbal supplements) and specialty supplements. We derive our revenues
principally from product sales through our company-owned stores, franchise
activities and sales of products manufactured in our facilities to third
parties. We sell products through a worldwide network of 5,745 locations
operating under the GNC(R) brand name.
Revenues are derived from our three business segments, Retail, Franchise
and Manufacturing/Wholesale, primarily as follows:
- Retail revenues are generated by sales to consumers at our company-owned
stores.
- Franchise revenues are generated primarily from:
(1) product sales to our franchisees;
(2) royalties on franchise retail sales;
(3) franchise fees, which are charged for initial franchise awards,
renewals and transfers of franchises; and
(4) sale of company-owned stores to franchisees.
- Manufacturing/Wholesale revenues are generated through sales of
manufactured products to third parties, generally for third-party private
label brands, and the sale of our proprietary and third-party products to
Rite Aid and drugstore.com.
We calculate our "same store" sales growth to exclude the net sales of a
store for any period if the store was not open during the same period of the
prior year. When a store's square footage has been changed
36
as a result of reconfiguration or relocation in the same mall, the store
continues to be treated as a "same store." Company-owned "same store" sales are
calculated on a calendar year basis. Domestic franchised "same store" sales are
calculated on a calendar basis for 2001, 2002 and 2003.
PURCHASE ACCOUNTING
The Acquisition was accounted for using the purchase method of accounting.
As a result, the Acquisition affected our results of operations in certain
significant respects. The aggregate acquisition consideration was allocated to
the tangible and intangible assets acquired and liabilities assumed by us based
upon their respective fair values as of the date of the Acquisition and resulted
in a significant change in our annual depreciation and amortization expenses.
CRITICAL ACCOUNTING POLICIES
You should review the significant accounting policies described in the
notes to our consolidated financial statements under the heading "Summary of
Significant Accounting Policies" included elsewhere in this prospectus, in
particular:
USE OF ESTIMATES. Certain amounts in our financial statements require
management to use estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented. Our
accounting policies are described in the notes to financial statements under the
heading "Summary of Significant Accounting Policies" included elsewhere in this
prospectus. Our critical accounting policies and estimates are described in this
section. An accounting estimate is considered critical if:
- the estimate requires management to make assumptions about matters that
were uncertain at the time the estimate was made;
- different estimates reasonably could have been used; or
- changes in the estimate that would have a material impact on our
financial condition or our results of operations are likely to occur from
period to period.
Management believes that the accounting estimates used are appropriate and the
resulting balances are reasonable. However, actual results could differ from the
original estimates, requiring adjustments to these balances in future periods.
See "Risk Factors" for a discussion of some of the risks that could affect us in
the future.
REVENUE RECOGNITION. We operate primarily as a retailer, through
company-owned and franchised stores, and to a lesser extent, as a wholesaler. We
apply the provisions of Staff Accounting Bulletin No. 104, "Revenue
Recognition." We recognize revenues in our Retail segment at the moment a sale
to a customer is recorded. Gross revenues are reduced by customer returns. We
recognize revenues on product sales to franchisees and other third parties when
the risk of loss, title and insurable risks have transferred to the franchisee
or third party. We recognize revenues from franchise fees at the time a
franchised store opens or at the time of franchise renewal or transfer, as
applicable. The majority of our retail revenues are received as cash or cash
equivalents. The majority of our franchise revenues are billed to the
franchisees with varying terms for payment. An allowance for receivables due
from third parties is recorded, as necessary, based on facts and circumstances.
INVENTORIES. Where necessary, we provide estimated allowances to adjust
the carrying value of our inventory to the lower of cost or net realizable
value. These estimates require us to make approximations about the future demand
for our products in order to categorize the status of such inventory items as
slow moving, obsolete or in excess of need. These future estimates are subject
to the ongoing accuracy of management's forecasts of market conditions, industry
trends and competition. We are also subject to volatile changes in specific
product demand as a result of unfavorable publicity, government regulation and
rapid changes in demand for new and improved products or services.
ACCOUNTS RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. We offer
financing to qualified domestic franchisees with the initial purchase of a
franchise location. The notes are demand notes, payable monthly over periods of
five to seven years. We also generate a significant portion of our revenue from
ongoing
37
product sales to franchisees and third-party customers. An allowance for
doubtful accounts is established based on regular evaluations of our
franchisees' and third-party customers' financial health, the current status of
trade receivables and any historical write-off experience. We maintain both
specific and general reserves for doubtful accounts. General reserves are based
upon our historical bad debt experience, overall review of our aging of accounts
receivable balances, general economic conditions of our industry or the
geographical regions and regulatory environments of our third-party customers
and franchisees.
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets, including fixed assets
and intangible assets with finite useful lives, are evaluated periodically by us
for impairment whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable. If the sum of the
undiscounted future cash flows is less than the carrying value, we recognize an
impairment loss, measured as the amount by which the carrying value exceeds the
fair value of the asset. These estimates of cash flow require significant
management judgment and certain assumptions about future volume, revenue and
expense growth rates, foreign exchange rates, devaluation and inflation. As
such, this estimate may differ from actual cash flows.
SELF-INSURANCE. Prior to the Acquisition, General Nutrition Companies,
Inc. was included as an insured under several of Numico's global insurance
policies. Subsequent to the Acquisition, we procured insurance independently for
such areas as general liability, product liability, directors and officers
liability, property insurance, and ocean marine insurance. We are self-insured
with respect to our medical benefits. As part of this coverage, we contract with
national service providers to provide benefits to our employees for all medical,
dental, vision and prescription drug services. We then reimburse these service
providers as claims are processed from our employees. We maintain a specific
stop loss provision of $200,000 per incident. Our liability for medical claims
is included as a component of accrued payroll and related liabilities and was
$3.0 million and $3.5 million as of December 31, 2003 and December 31, 2002,
respectively. We are also self-insured for worker's compensation coverage in the
State of New York with a stop loss of $250,000. Our liability for worker's
compensation in New York was not significant as of December 31, 2003 and
December 31, 2002. We are also self-insured for physical damage to our tractors,
trailers and fleet vehicles for field personnel use. We also are self-insured
for any physical damages that may occur at the corporate store locations. Our
associated liability for this self-insurance was not significant as of December
31, 2003 and December 31, 2002.
GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS. On an annual basis, we
perform a valuation of the goodwill and indefinite lived intangible assets
associated with our operating segments. To the extent that the fair value
associated with the goodwill and indefinite-lived intangible assets is less than
the recorded value, we write down the value of the asset. The valuation of the
goodwill and indefinite-lived intangible assets is affected by, among other
things, our business plan for the future, and estimated results of future
operations. Changes in the business plan or operating results that are different
than the estimates used to develop the valuation of the assets result in an
impact on their valuation.
BASIS OF PRESENTATION. Our consolidated financial statements for the 27
days ended December 31, 2003 include the accounts of General Nutrition Centers,
Inc. and its wholly owned subsidiaries. Included in this period are fair value
adjustments to assets and liabilities, including inventory, goodwill, other
intangible assets and property, plant and equipment. Also included is the
corresponding effect these adjustments had to cost of sales, depreciation, and
amortization expenses.
Our consolidated financial statements for the period ending December 4,
2003, and the periods ending December 31, 2002 and 2001 presented herein have
been prepared on a carve-out basis and reflect our consolidated financial
position, results of operations and cash flows in accordance with GAAP. In order
to depict our financial position, results of operations and cash flows on a
stand-alone basis, our financial statements reflect amounts that have been
pushed down from Numico USA, Inc. (together with its parent company, Royal
Numico N.V., "Numico"), our parent company prior to the sale of the company. As
a result of recording these amounts, our consolidated financial statements for
these periods may not be indicative of the results that would be presented if we
had operated as an independent, stand-alone entity.
38
In the accompanying discussion of results of operations, the period ended
December 4, 2003 and the 27 days ended December 31, 2003 have been combined for
comparability to the year ending December 31, 2002.
The following is a discussion of our related party transactions with Numico
and other affiliates during the periods presented:
We sell products to formerly affiliated companies, including Rexall
Sundown, Inc., through our Manufacturing/Wholesale segment. Numico acquired
Rexall in June 2000 and sold it July 2003. During this period, our sales to
Rexall constituted sales to a related party and are included in revenue in our
Manufacturing/Wholesale segment. We have continued to sell products to Rexall
after the disposition pursuant to an agreement with them expiring in July 2005,
subject to early termination provisions. The appropriate cost of sales related
to affiliate sales is also included in our consolidated financial statements.
Also included in the cost of sales is a significant portion of raw materials and
packaging materials purchased from Rexall and Numico's subsidiary, Nutraco S.A.
We operate a fleet of distribution vehicles that deliver products to our
company-owned and franchised stores and delivers products for certain other
third party customers and vendors. The revenues associated with third party
deliveries are recognized as a reduction of transportation costs in our
consolidated financial statements. From 2002 through December 4, 2003, we had a
management service agreement with Numico. This management agreement included
charges for strategic planning, certain information technology expenses, product
and material management, group business process, human resources, legal, tax,
regulatory and management reporting. Upon the sale of the company to Apollo,
this agreement was terminated.
Numico also allocated a portion of its research and development charges to
us under a research activities agreement. These research and development
activities included ongoing specific and medical research, support and advice on
strategic research objectives, design and development of new products,
organization and management of clinical trials, updates on the latest
technological and scientific developments and updates on regulatory issues. Upon
the Acquisition, this agreement was terminated.
Numico purchased certain global insurance policies covering several types
of insurance, and allocated these charges to us. Upon the sale of the company to
Apollo, we obtained stand-alone insurance policies with coverage appropriate for
our business.
RESULTS OF OPERATIONS
The information presented below as of and for the 27 days ended December
31, 2003, the period ended December 4, 2003 and the years ended December 31,
2003, 2002 and 2001 was derived from our audited consolidated financial
statements and accompanying notes. In the table below and in the accompanying
discussion, the 27 days ended December 31, 2003 and the period ended December 4,
2003 have been combined for discussion purposes.
39
RESULTS OF OPERATIONS
<Table>
<Caption>
PREDECESSOR SUCCESSOR
-------------------------------------------------------------------------
PERIOD FROM 27 DAYS
JAN 1, 2003 TO ENDED
(DOLLARS IN MILLIONS AND
YEAR ENDED DECEMBER 31,
------------------------------------ DEC 4, DEC 31,
PERCENTAGES EXPRESSED AS A PERCENTAGE OF 2001 2002 2003 2003
NET REVENUES) ---------------- ---------------- ---------------- -------------
Revenues:
Retail................. $1,123.1 74.4% $1,068.6 75.0% $ 993.3 74.1% $66.2 74.1%
Franchise.............. 273.1 18.1% 256.1 18.0% 241.3 18.0% 14.2 15.9%
Manufacturing/Wholesale (Third Party)... 112.9 7.5% 100.3 7.0% 105.6 7.9% 8.9 10.0%
-------- ----- -------- ----- -------- ----- ----- -----
Total net revenues..... 1,509.1 100.0% 1,425.0 100.0% 1,340.2 100.0% 89.3 100.0%
Operating expenses:
Cost of sales, including costs of
warehousing, distribution and
occupancy............ 1,013.4 67.2% 969.9 68.1% 934.9 69.8% 63.6 71.2%
Compensation and related benefits... 246.6 16.3% 245.2 17.2% 235.0 17.5% 16.7 18.7%
Advertising and promotion... 41.9 2.8% 52.0 3.6% 38.4 2.9% 0.5 0.6%
Other selling, general and
administrative expenses... 66.2 4.4% 75.9 5.3% 62.8 4.7% 4.8 5.4%
Amortization expense... 74.5 4.9% 10.1 0.7% 8.1 0.6% 0.3 0.3%
Other (income) expense... (3.4) (0.2)% (216.3) (15.2)% (10.1) (0.8)% 0.0 0.0%
Impairment of goodwill and intangible
assets............... -- 0.0% 222.0 15.6% 709.4 52.9% -- 0.0%
-------- ----- -------- ----- -------- ----- ----- -----
Total operating expenses... 1,439.2 95.4% 1,358.8 95.4% 1,978.5 147.6% 85.9 96.2%
Operating income (loss)
Retail............... 89.2 7.9% 86.8 8.1% 79.1 8.0% 6.6 10.0%
Franchise............ 46.3 17.0% 65.4 25.5% 63.7 26.4% 2.4 16.9%
Manufacturing/Wholesale... 29.9 26.5% 25.8 25.7% 24.3 23.0% 1.4 15.7%
-------- -------- -------- -----
Sub total segment operating
income........... 165.4 11.0% 178.0 12.5% 167.1 12.5% 10.4 11.6%
Unallocated corporate and other costs:
Warehousing & distribution costs... 40.9 40.3 40.7 3.4
Corporate overhead costs... 54.6 63.9 66.8 3.6
Other costs........ -- 7.6 697.9 --
-------- -------- -------- -----
Sub total unallocated corporate and
other costs...... 95.5 111.8 805.4 7.0
-------- -------- -------- -----
Total operating income (loss)... 69.9 4.6% 66.2 4.6% (638.3) (47.6)% 3.4 3.8%
Interest expense, net... (139.9) (136.4) (121.1) (2.8)
-------- -------- -------- -----
(Loss) income before income taxes... (70.0) (70.2) (759.4) 0.6
Income tax benefit (expense)... 14.1 (1.0) 174.5 (0.2)
-------- -------- -------- -----
Net (loss) income before cumulative
effect of accounting change... (55.9) (71.2) (584.9) 0.4
Loss from cumulative effect of
accounting change.... -- (889.6) -- --
-------- -------- -------- -----
Net (loss) income...... (55.9) (960.8) (584.9) 0.4
Other comprehensive income (loss)... 1.8 (1.9) 1.6 0.3
-------- -------- -------- -----
Comprehensive (loss) income... $ (54.1) $ (962.7) $ (583.3) $ 0.7
======== ======== ======== =====
<Caption>
COMBINED
(UNAUDITED)
----------------
YEAR ENDED
(DOLLARS IN MILLIONS AND
DEC 31,
PERCENTAGES EXPRESSED AS A PERCENTAGE OF 2003
NET REVENUES) ----------------
Revenues:
Retail................. $1,059.5 74.1%
Franchise.............. 255.5 17.9%
Manufacturing/Wholesale (Third Party)... 114.5 8.0%
-------- -----
Total net revenues..... 1,429.5 100.0%
Operating expenses:
Cost of sales, including costs of
warehousing, distribution and
occupancy............ 998.5 69.8%
Compensation and related benefits... 251.7 17.6%
Advertising and promotion... 38.9 2.7%
Other selling, general and
administrative expenses... 67.6 4.7%
Amortization expense... 8.4 0.6%
Other (income) expense... (10.1) (0.7)%
Impairment of goodwill and intangible
assets............... 709.4 49.6%
-------- -----
Total operating expenses... 2,064.4 144.4%
Operating income (loss)
Retail............... 85.7 8.1%
Franchise............ 66.1 25.9%
Manufacturing/Wholesale... 25.7 22.4%
--------
Sub total segment operating
income........... 177.5 12.4%
Unallocated corporate and other costs:
Warehousing & distribution costs... 44.1
Corporate overhead costs... 70.4
Other costs........ 697.9
--------
Sub total unallocated corporate and
other costs...... 812.4
--------
Total operating income (loss)... (634.9) (44.4)%
Interest expense, net... (123.9)
--------
(Loss) income before income taxes... (758.8)
Income tax benefit (expense)... 174.3
--------
Net (loss) income before cumulative
effect of accounting change... (584.5)
Loss from cumulative effect of
accounting change.... --
--------
Net (loss) income...... (584.5)
Other comprehensive income (loss)... 1.9
--------
Comprehensive (loss) income... $ (582.6)
========
</Table>
40
As discussed in the segments footnote to the financial statements, we
evaluate segment operating results based on several indicators. The primary key
performance indicators are sales and operating income or loss for each segment.
Sales and operating income or loss, as evaluated by management, exclude certain
items that are managed at the consolidated level, such as distribution and
transportation costs, corporate overhead, impairments, and other corporate
costs. The following discussion compares the operating income or loss by
segment, as well as those items excluded from the segment totals.
COMPARISON OF YEAR ENDED DECEMBER 31, 2003 AND 2002
Revenues
Consolidated. Our consolidated net revenues increased $4.5 million, or
0.3%, to $1,429.5 million during the twelve months ended December 31, 2003
compared to $1,425.0 million during the same period in 2002. This increase
occurred in our Manufacturing/Wholesale segment and was offset with decreases in
the Retail and Franchise segments.
Retail. Revenues in our Retail segment decreased $9.1 million, or 0.9%, to
$1,059.5 million during the twelve months ended December 31, 2003 compared to
$1,068.6 million during the same period in 2002. This decrease was primarily
attributable to declines in 2003 sales of products containing ephedra, which we
discontinued selling in June 2003, offset by sales of additional products in the
diet category and the closing of 150 stores, net. For the twelve months ended
December 31, 2003 and December 31, 2002, sales of ephedra products were $35.2
million and $182.9 million, respectively. We thoroughly reviewed our product
pricing in the fourth quarter of 2002 and determined that our single unit
pricing was not competitive with other market participants. A primary reason for
higher single unit pricing was the creation of artificially high single unit
prices to compensate for BOGO (Buy One Get One half price) pricing. At the
beginning of December 2002, we repriced most of our proprietary products and
eliminated BOGO pricing. The effect was to lower prices with the expectation
that customers would buy single units due to the elimination of the incentive to
buy two units. We expected that the decision to buy single units would lead to a
shorter cycle time between customer visits and a corresponding increase in
transaction counts. As a result of eliminating BOGO pricing in December, 2002,
the average ticket price per transaction for company-owned stores decreased by
3.7% during the twelve months ended December 31, 2003 compared to the same
period in 2002. Transaction counts, however, rose by 3.9% during this same
period. Company-owned same store sales growth improved 0.1% during the twelve
months ended December 31, 2003.
Franchise. Revenues in our Franchise segment decreased $0.6 million, or
0.2%, to $255.5 million during the twelve months ended in December 31, 2003
compared to $256.1 million during the same period in 2002. The decrease was
caused by a reduction in product sales to our franchisees of approximately $7.2
million, offset by increases in revenues from sales of company-owned stores to
franchisees of $4.8 million and increases in royalties and franchise fees of
$1.9 million. A portion of the decrease in product sales was attributable to
declines in sales to franchisees of products containing ephedra in 2003. Same
store sales growth for our U.S. franchised stores improved to 0.8% for the
twelve months ended December 31, 2003.
Manufacturing/Wholesale. Revenues in our Manufacturing/Wholesale segment
increased $14.2 million, or 14.2%, to $114.5 million, during the twelve months
ended December 31, 2003 compared to $100.3 million during the same period in
2002. This revenue increase was primarily due to the increased utilization of
available manufacturing capacity for additional third-party customers.
Cost of Sales
Our consolidated cost of sales, which includes product costs, costs of
warehousing and distribution and occupancy costs, increased $28.6 million, or
2.9%, to $998.5 million during the twelve months ended December 31, 2003
compared to $969.9 million during the same period in 2002. Cost of sales, as a
percentage of net revenues, was 69.8% during the twelve months ended December
31, 2003 compared to 68.1% during the same period of the prior year.
Consolidated product costs increased $21.4 million, or 3.0%, to $739.2
million during the twelve months ended December 31, 2003 compared to $717.8
million during the same period in 2002. The increased cost
41
was primarily due to our increasing sales of energy and meal replacement bars in
the diet and sports nutrition products categories. These products carry lower
margins than other products within these categories or within the VMHS category.
Consolidated warehousing and distribution costs increased $4.0 million, or
9.3%, to $46.9 million during the twelve months ended December 31, 2003 compared
to $42.9 million during the same period in 2002. This increase was primarily due
to an increase in the number of tractors, trailers and drivers required to
provide trucking services to an affiliate, Rexall. Due to the sale of the Rexall
business in July 2003 by Numico, the revenue from freight deliveries declined
significantly. In September 2003, we began to reduce the fleet to match these
freight requirements.
Consolidated occupancy costs increased $3.2 million, or 1.5%, to $212.4
million during the twelve months ended December 31, 2003 compared to $209.2
million during the same period in 2002. This increase was primarily due to
increased depreciation of $3.5 million at our company-owned stores related to
our store reset and upgrade program that was completed in the fourth quarter of
2002, and disposal costs of $2.9 million for company-owned stores that were
closed during this same period. Additionally, common area maintenance charges
related to the stores increased. These increases were offset by decreases in
base and percentage rent charges and other occupancy related accounts.
Selling, General and Administrative Expenses
Our consolidated selling, general and administrative expenses, including
compensation and related benefits, advertising and promotion expenses and other
selling, general and administrative expenses, decreased $16.6 million, or 4.3%,
to $366.6 million during the twelve months ended December 31, 2003 from $383.2
million during the same period in 2002. Selling, general and administrative
expenses, as a percentage of net revenues, were 25.6% during the twelve months
ended December 31, 2003, compared to 26.9% for the same period during 2002.
Consolidated compensation and related benefits increased $6.5 million, or
2.7%, to $251.7 million during the twelve months ended December 31, 2003
compared to $245.2 million during the same period in 2002. The increase was
primarily due to increased health insurance and workers' compensation expense of
$1.2 million, change in control and retention bonuses of $8.7 million, non-cash
charges for stock compensation of $6.4 million, and increased incentives and
commissions of $7.4 million. These increases were offset by a reduction in base
wages, severance costs, and other wage related expense of $17.1 million.
Consolidated advertising and promotion expenses decreased $13.1 million, or
25.2%, to $38.9 million during the twelve months ended December 31, 2003
compared to $52.0 million during the same period in 2002. This decrease was
primarily due to decreased direct marketing to our Gold Card members of $21.7
million for the twelve months ended December 31, 2003 compared to $26.9 million
during the same period in 2002. The remaining reduction in advertising was due
to the elimination of our NASCAR sponsorship and a significant reduction in
media spending, as we did not repeat the advertising done in the third and
fourth quarters of 2002, to announce a grand reopening of GNC after the store
reset was completed.
Consolidated other selling, general and administrative expenses, including
amortization expense, decreased $10.0 million, or 11.6%, to $76.0 million during
the twelve months ended December 31, 2003 compared to $86.0 million during the
same period in 2002. The decrease was primarily due to reductions in operational
accounts, a decrease in bad debt expense of $4.3 million, a decrease in charges
for insufficient funds checks presented at the stores of $0.9 million, a
decrease in travel and entertainment expenses of $0.6 million, and a $2.5
million aggregate reduction in all other operating accounts. Additionally, there
was a decrease in amortization expense of $1.7 million, for the twelve months
ended December 31, 2003 compared with the same period in 2002.
Other (Income) Expense
Our consolidated other income decreased $206.2 million, or 95.3%, to $10.1
million during the twelve months ended December 31, 2003 compared to $216.3
million during the same period in 2002. This decrease was primarily due to a
decrease in income from non-recurring legal settlement proceeds that we received
related to raw material pricing litigation of $7.2 million during the twelve
months ended December 31, 2003
42
compared to $214.4 million during the same period in 2002, currency translation
adjustments expense of $2.9 million and income of $1.9 million during these same
periods, respectively, and a recognized gain of $5.0 million on the sale of
marketable securities in the twelve months ended December 31, 2002.
Impairment of Goodwill and Intangible Assets
In October 2003, Numico entered into an agreement to sell the company for a
purchase price that indicated a potential impairment of our long-lived assets.
Accordingly, management initiated an evaluation of the carrying value of
goodwill and indefinite-lived intangible assets as of September 30, 2003. As a
result of this evaluation, an impairment charge of $709.4 million (pre-tax) was
recorded for goodwill and other indefinite-lived intangibles in accordance with
SFAS No. 142.
Operating Income (Loss)
Consolidated. As a result of the foregoing, consolidated operating income
decreased $701.1 million, generating a loss of $634.9 million during the twelve
months ended December 31, 2003 compared with income of $66.2 million during the
same period in 2002. For the 27 days ended December 31, 2003, we generated
operating income of $3.4 million.
Retail. Operating Income decreased $1.1 million, or 1.3%, during the
twelve months ended December 31, 2003 compared to the same period in 2002.
Retail margins were down $15.2 million, primarily due to decreased sales of
products containing ephedra, and sales mix changes. This decrease was offset
with reduced spending in advertising of $12.8 million, reduced selling, general
and administrative expenses of $7.1 million, and increased wages of $5.8
million.
Franchise. Operating income increased $0.7 million, or 1.1%, during the
twelve months ended December 31, 2003 compared to the same period in 2002.
Franchise margins decreased $4.3 million, or 5.0%, as we provided additional
incentives to our franchisees to purchase products at discounted prices. This
margin decrease was offset with a decrease in selling, general and
administrative expenses of $4.7 million, primarily due to a decrease in bad debt
expense related to the franchisee receivables and note portfolio.
Manufacturing/Wholesale. Operating Income decreased $0.1 million, or 0.4%,
during the twelve months ended December 31, 2003 compared to the same period in
2002.
Warehousing & Distribution Costs. As reported in the cost of sales
discussion, unallocated warehousing and distribution costs increased $3.8
million, to $44.1 million from $40.3 million for the twelve months ended
December 31, 2003 compared to the same period in 2002.
Corporate Overhead. Operating Expense increased $6.5 million or 10.2%
during the twelve months ended December 31, 2003 compared to the same period in
2002. The primary reason for this increase was an increase in change in control,
retention, and incentive expense and health insurance costs in 2003.
Other. Other costs increased $690.3 million during the twelve months ended
December 31, 2003, compared to the same period in 2002. Included in these costs
were $709.4 million and $222.0 million impairment charges for 2003 and 2002,
respectively, and $7.2 million and $214.4 million income in 2003 and 2002,
respectively, for settlement income related to a raw material pricing
settlement.
Interest Expense
Consolidated interest expense decreased $12.5 million, or 9.2%, to $123.9
million during the twelve months ended December 31, 2003 compared to $136.4
million during the same period in 2002. This decrease was primarily due to a
reduced outstanding principal balance of $1,750.0 million at December 4, 2003
compared to $1,825.0 million in 2002, and a new debt structure after the
Acquisition. The actual interest expense for the 27 days ended December 31, 2003
was $2.8 million. If the Numico debt remained in place for those 27 days,
interest expense would have been $9.6 million higher for the 27 days ended
December 31, 2003.
Income Tax Benefit (Expense)
We recognized a $174.3 million consolidated income tax benefit during the
twelve months ended December 31, 2003 and a $1.0 million income tax expense
during the twelve months ended December 31, 2002. The increased benefit
recognized was primarily due to the additional impairment of deductible
intangible assets recognized during the period. Additionally, differences
between the federal statutory tax rate
43
and our effective tax rate were primarily due to the impairment charge for
non-deductible goodwill and a valuation allowance against interest expense.
Loss from Cumulative Effect of Accounting Change
We adopted SFAS No. 142 on January 1, 2002, which requires that goodwill
and other intangible assets with indefinite lives no longer be subject to
amortization, but instead are to be tested at least annually for impairment.
Upon adoption of SFAS No. 142, we recorded a one-time, non-cash charge of $889.6
million, net of taxes of $170.6 million, to reduce the carrying amount of
goodwill and other intangibles to their implied fair value. The impairment
resulted from several factors, including the declining performance by us and the
overall industry, increased competition, diminished contract manufacturing
growth, and differences in the methods of determining impairments under SFAS No.
142 compared to the previously applicable accounting guidance.
Net (Loss) Income
As a result of the foregoing, consolidated net loss for the twelve months
ended December 31, 2003 decreased $376.3 million to a net loss of $584.5 million
compared to a net loss of $960.8 million for the twelve months ended December
31, 2002. For the 27 day period subsequent to the Acquisition which ended
December 31, 2003, we generated net income of $0.4 million.
Other Comprehensive Income (Loss)
We recognized $1.9 million in other comprehensive income in the twelve
months ended December 31, 2003 compared to a $1.9 million other comprehensive
loss in the twelve months ended December 31, 2002. The entire $1.9 million of
income during the twelve months ended December 31, 2003 is a result of foreign
currency translation adjustments related to the investment in our Canadian
subsidiary and receivables due from such subsidiary. During the twelve months
ended December 31, 2002, unrealized loss in marketable equity securities of $3.3
million was recognized, net of tax benefit of $1.2 million, and an additional
$0.2 million in currency exchange translation income.
COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND 2001
Revenues
Our net revenues decreased $84.1 million, or 5.6%, to $1,425.0 million
during 2002 compared to $1,509.1 million during 2001. This decrease occurred in
each of our three business segments and was primarily attributable to a decline
in sales of products containing ephedra.
Retail. Revenues in our Retail segment decreased $54.5 million, or 4.9%,
to $1,068.6 million during 2002 compared to $1,123.1 million during 2001. This
decrease was primarily attributable to a decline in sales of products containing
ephedra. Sales of ephedra products at company-owned stores during 2002 and 2001
were $182.9 million and $222.4 million, respectively. Company-owned same store
sales growth decreased to (6.3)% in 2002 as a result of negative publicity
related to ephedra in the second half of 2002 and decreased traffic in
company-owned stores. The decrease in revenues was also attributable to the fact
that we had 62 fewer company-owned stores at the end of 2002 compared to 2001.
Franchise. Revenues in our Franchise segment decreased $17.0 million, or
6.2%, to $256.1 million during 2002 compared to $273.1 million during the same
period in 2001. The decrease was primarily related to a reduction in product
sales to our franchisees of approximately $16.5 million. Part of the reason for
this decrease was additional discounts of $4.7 million offered to the
franchisees in 2002 to reflect the better pricing that we were able to obtain
from our vendors, which in turn helps the franchisees maintain better product
margins. Sales of ephedra products to the franchisees decreased $4.1 million, or
9.0%, to $42.8 million in 2002 compared to $46.9 million in 2001. The remainder
of the decrease was primarily due to reduced levels of retail sales at the
franchised stores. Same store sales growth for our U.S. franchised stores
decreased to (3.2)% in 2002.
Manufacturing/Wholesale. Revenues in our Manufacturing/Wholesale segment
decreased $12.6 million, or 11.2%, to $100.3 million, during 2002 compared to
$112.9 million during 2001. The decrease was primarily the result of Numico's
acquisition of Rexall, which led to a reduction of manufacturing orders by
Rexall competitors. In addition, sales to Rite Aid decreased $6.4 million, or
17.5%, during 2002 compared to
44
2001. This decrease was attributable to our opening fewer Rite Aid
store-within-a-store locations in 2002, which led to fewer orders to initially
fill the store locations and fewer replenishment product orders as Rite Aid
balanced their inventory levels. We opened 131 and 237 GNC store-within-a-store
Rite Aid locations in 2002 and 2001, respectively.
Cost of Sales
Our cost of sales, which includes product costs, costs of warehousing and
distribution and occupancy costs, decreased $43.5 million, or 4.3%, to $969.9
million during 2002 compared to $1,013.4 million during 2001. Cost of sales, as
a percent of net revenues, was 68.1% in 2002 compared to 67.2% in 2001.
Product costs decreased $48.3 million, or 6.3%, to $717.8 million during
2002 compared to $766.1 million during 2001. The decrease was primarily due to
lower revenues.
Warehousing and distribution costs decreased $0.3 million, or 0.7%, to
$42.9 million during 2002 compared to $43.2 million during 2001. This decrease
was attributable to additional revenues generated from Rexall transportation
contracts, which directly offsets transportation expenses. These expenses
otherwise remained constant.
Occupancy costs increased $5.1 million, or 2.5%, to $209.2 million during
2002 compared to $204.1 million during 2001. This increase was primarily
attributable to higher store maintenance costs, increased store lease expense
due to renewals on existing stores, and increased common area maintenance costs.
These increased costs were offset by a decrease in utilities and percentage
rent, which is based upon retail store sales.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses, including compensation
and related benefits, advertising and promotion expenses and other selling,
general and administrative expenses, decreased $46.0 million, or 10.7%, to
$383.2 million during 2002 compared to $429.2 million during 2001. Selling,
general and administrative expenses, as a percentage of net revenues, were 26.9%
during 2002 compared to 28.4% during 2001.
Compensation and related benefits decreased $1.4 million, or 0.6%, to
$245.2 million during 2002 from $246.6 million during 2001. The decrease
includes $16.7 million less in non-cash compensation expense in 2002 compared to
2001. This expense was related to the Numico management stock purchase plan.
When excluded from compensation and benefits, these expenses actually increased
$18.1 million, due primarily to a $13.2 million allocation charge from Numico
for management services, increased severance costs of $3.6 million as a result
of a workforce reduction in 2002 and a $3.3 million increase in healthcare
costs. These increases were offset by reductions in bonus and incentive
payments.
Advertising and promotion expenses increased $10.1 million, or 24.1%, to
$52.0 million during 2002 compared to $41.9 million during 2001. The increase
was primarily due to the elimination of our cooperative advertising program in
2001 that resulted in $8.6 million in refunds of unused advertising monies
contributed by us.
Other selling, general and administrative expenses increased $9.7 million,
or 14.7%, to $75.9 million during 2002 compared to $66.2 million during 2001.
Bad debt expense accounted for an $8.0 million increase for 2002 compared to
2001.
Amortization expense decreased $64.4 million, or 86.4%, to $10.1 million
during 2002 compared to $74.5 million during 2001. In connection with the
adoption of SFAS No. 142 on January 1, 2002, we assigned an indefinite life to
the Brand intangible asset and goodwill, which were both previously amortized
over a 40 year period, resulting in a reduction in amortization expense related
to such assignment of $31.7 million and $27.1 million, respectively. The
remaining decreases in the amortization expense were attributable to our Gold
Card intangible asset, which was fully amortized on a declining scale basis
during 2002, and our third-party customer list intangible asset, which had a
change in estimable life from seven years in 2001 to six years in 2002.
45
Other Income (Expense)
Other income increased $212.9 million to $216.3 million during 2002
compared to $3.4 million in 2001. This increase was primarily due to the
additional receipt of $214.4 million in non-recurring legal settlement proceeds
that we received related to price-fixing litigation, compared to $3.6 million in
legal settlement proceeds that we received in 2001 and a gain of $5.0 million on
the sale of marketable securities in 2002, offset by a currency translation
adjustment in both years.
Impairment of Other Intangible Assets
In 2002, deterioration in market conditions and financial results caused a
decrease in expectations regarding growth and profitability. Accordingly,
management initiated an evaluation of the carrying value of its goodwill and
indefinite-lived intangible assets as of December 31, 2002. As a result of this
evaluation, an impairment charge of $222.0 million (pre-tax) was recorded for
goodwill and other indefinite-lived intangible assets intangibles in accordance
with SFAS No. 142.
Operating Income
Consolidated. As a result of the foregoing, consolidated operating income
decreased $3.7 million to $66.2 million during 2002 compared to $69.9 million
during 2001.
Retail. Operating Income decreased $2.4 million or 2.7% during the twelve
months ended December 31, 2002 compared to the same period in 2001. The primary
reason for the decrease was increased advertising costs due to additional
advertising run in 2002 to promote the grand reopening after the store reset was
completed.
Franchise. Operating Income increased $19.1 million or 41.3% during the
twelve months ended December 31, 2002 compared to the same period in 2001. This
increase was primarily due to higher amortization expense in 2001 related to
intangible assets.
Manufacturing/Wholesale. Operating Income decreased $4.1 million, or 13.7%,
during the twelve months ended December 31, 2002 compared to the same period in
2001. This was due to decreased third party revenue contracts in 2002, as we
focused on supplying the retail and franchised stores, and affiliated parties,
which were acquired by our parent, Numico.
Corporate Overhead. Expenses increased $9.3 million, or 17.0%, during the
twelve months ended December 31, 2002 compared to the same period in 2001. This
increase was primarily due to an internal charge for administrative expenses
from our parent, Numico, and severance costs in 2002 due to a reduction in
workforce at the corporate headquarters.
Other. Other costs increased $7.6 million during the twelve months ended
December 31, 2002, compared to the same period in 2001. Included in these costs
were $222.0 million impairment charges and $157.8 million income for settlement
income related to a raw material pricing settlement.
Interest Expense
Interest expense decreased $3.5 million, or 2.5%, to $136.4 million during
2002 compared to $139.9 million during 2001. This decrease was primarily due to
a lower principal balance outstanding as of the end of 2002 under a loan
agreement entered into by Numico at the time it acquired us. This debt has been
allocated to us for accounting purposes and was eliminated upon consummation of
the Acquisition.
Income Tax Benefit (Expense)
We recognized $1.0 million of income tax expense during 2002 and a $14.1
million income tax benefit during 2001. The additional expense recognized was
primarily related to additional income from the price-fixing litigation
recognized during 2002, and a valuation allowance recognized against interest
expense in 2001. Additionally, differences between the federal statutory rate
and our effective tax rate were primarily due to the amortization of
non-deductible goodwill in both years and a valuation allowance against interest
expense in 2001.
46
Loss from Cumulative Effect of Accounting Change
We adopted SFAS No. 142 on January 1, 2002, which requires that goodwill
and other intangible assets with indefinite lives no longer be subject to
amortization, but instead are to be tested at least annually for impairment.
Upon adoption of SFAS No. 142, we recorded a one-time, non-cash charge of $889.6
million, net of taxes of $170.6 million, to reduce the carrying amount of
goodwill and other intangibles to their implied fair value. The impairment
resulted from several factors including our declining performance, and overall
industry declines, increased competition, and diminished contract manufacturing
growth.
Net Income (Loss)
As a result of the foregoing, net income (loss) increased $904.9 million to
$(960.8) million during 2002 compared to $(55.9) during 2001. When the charge
for the cumulative effect of accounting change of $889.6 million is excluded
from 2002, the net loss increased $15.3 million.
Other Comprehensive (Loss) Income
We recognized a $2.1 million unrealized depreciation in a marketable equity
security during 2002, offset by an unrealized foreign currency gain of $0.3
million, compared to a $2.1 million unrealized appreciation in a marketable
equity security during 2001, offset by an unrealized foreign currency exchange
loss of $0.4 million.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had $33.2 million in cash and cash equivalents and
$200.0 million in working capital compared with $38.8 million in cash and cash
equivalents and $153.6 million in working capital at December 31, 2002. The
$46.4 million increase in working capital was primarily driven by reductions in
current maturities related to our debt as a result of the Acquisition, offset by
a reduction in the settlement receivable of $134.8 million which was collected
in January 2003.
Historically, we have funded our operations through internally generated
cash. Cash provided by operating activities was $97.6 million, $111.0 million
and $75.8 million during the twelve months ended December 31, 2003, 2002, and
2001, respectively. The primary reason for the change in each year was changes
in working capital accounts. Receivables decreased in 2003 due to the receipt of
$134.8 million in January 2003 from legal settlement proceeds relating to raw
material pricing litigation, offset by an increase in receivables of $12.7
million due to the recording of a purchase price adjustment due from Numico
related to the Acquisition, and a decrease in receivables of $70.6 million
related to the settlement at December 4, 2003 of a receivable due from Numico.
Receivables increased $132.6 million in 2002 primarily due to the recording of a
raw material pricing settlement receivable of $134.8 million. Accounts payable
increased in 2002 due to the recording of various amounts due to our parent,
Numico, and an affiliated purchasing subsidiary, Nutraco. We expect to fund our
operations through internally generated cash and, if necessary, from borrowings
under our $75.0 million revolving credit facility. We expect our primary uses of
cash in the near future will be debt service requirements, capital expenditures
and working capital requirements. We anticipate that cash generated from
operations, together with amounts available under our revolving credit facility,
will be sufficient to meet our future operating expenses, capital expenditures
and debt service obligations as they become due. However, our ability to make
scheduled payments of principal on, to pay interest on, or to refinance our
indebtedness and to satisfy our other debt obligations will depend on our future
operating performance which will be affected by general economic, financial and
other factors beyond our control.
We used cash from investing activities of approximately $771.5 million,
$44.5 million, and $48.1 million for the twelve months ended December 31, 2003,
2002, and 2001, respectively. We used $738.1 million to acquire General
Nutrition Companies, Inc. from Numico in 2003. This $738.1 million was reduced
by approximately $12.7 million for a purchase price adjustment received in April
2004, and increased by $7.8 million for other acquisition costs, for a net
purchase price of $733.2 million. Excluding the $738.1 million cash used to
acquire the company in 2003, the primary use of cash in each year was for
improvements to the retail stores, and on-going maintenance and improvements at
our manufacturing facility. The decrease in cash used for investing activities
in the twelve months ended December 31, 2003 compared to the same period in
47
2002 was the result of a decrease of $19.1 million in capital expenditures in
2003 and the receipt of $7.4 million in proceeds from the sale of marketable
securities in 2002. The decrease in cash used for investing activities when
comparing 2002 to 2001 was due to a decrease in franchised store purchases in
2002 compared with 2001, offset by higher capital expenditures. In 2001, we had
an active franchise store buyback program in place, and repurchased or acquired
125 stores, compared with 59 in 2002. The increase in capital expenditures in
2002 was due primarily to a $13.9 million store reset and upgrade program, which
was completed in the third quarter, and $4.3 million for a soft gel
reconfiguration project at our manufacturing facility. Additionally, we used
$2.0 million cash to purchase and install a warehouse management software
system, and $1.8 million cash to purchase a customer relationship software
system. Capital expenditures were $32.8 million, $51.9 million, and $29.2
million during the twelve months ended December 31, 2003, 2002, and 2001,
respectively. We expect our store-related maintenance capital expenditures to be
approximately $18.3 million during 2004. Total capital expenditures are expected
to be $33.0 million in 2004.
In the 27 days ended December 31, 2003, the primary source of cash was from
borrowings under our senior credit facility of $285.0 million, proceeds from the
issuance by our parent, General Nutrition Centers Holding Company, of shares of
its common stock and preferred stock for $277.5 million, and proceeds from the
issuance of the old notes of $215.0 million. We generated cash from financing
activities of approximately $668.4 million for the twelve months ended December
31, 2003, and used cash in financing activities of approximately $44.3 million
and $21.6 million for the twelve months ended December 31, 2002 and 2001,
respectively.
In connection with the Acquisition, we entered into a senior credit
facility, consisting of a $285.0 million term loan facility and a $75.0 million
revolving credit facility. We borrowed the full amount under the term loan
facility in connection with the closing of the Acquisition. Borrowings under the
senior credit facility bear interest at a rate per annum of equal to (1) the
higher of (x) the prime rate and (y) the federal funds effective rate, plus 0.5%
per annum, or (2) the Eurodollar rate, plus in each case, an applicable margin,
and, in the case of revolving loans, such rates per annum may be decreased if
our leverage ratio is decreased. In addition, we are required to pay an unused
commitment fee equal to 0.5% per year. The term loan facility matures on
December 5, 2009 and the revolving credit facility matures on December 5, 2008.
The senior credit facility contains customary covenants, including certain
financial maintenance tests. The revolving credit facility allows for $15.0
million to be used as collateral for outstanding letters of credit, of which
$1.0 million was used at December 31, 2003. At December 31, 2003, $74.0 million
of this facility was available, after giving effect to the use of $1.0 million
of the revolving credit facility to secure letters of credit. This facility
contains normal and customary covenants including financial tests (including
maximum total leverage, minimum fixed charge coverage ratio and maximum capital
expenditures) and places certain other limitations on us concerning our ability
to incur additional debt, guarantee other obligations, grant liens on assets,
make investments, acquisitions or mergers, dispose of assets, make optional
payments or modifications of other debt instruments, and pay dividends or other
payments on capital stock. See note 9 of the consolidated financial statements
included elsewhere in this prospectus.
On December 5, 2003, we issued $215.0 million aggregate principal amount of
old notes in connection with the Acquisition. The notes mature in 2010 and bear
interest at the rate of 8 1/2 per annum. In addition, GNC Investors, LLC, an
affiliate of Apollo Management L.P. made an equity contribution of $277.5
million in exchange for 28,743,333 shares of common stock and 100,000 shares of
Series A preferred stock of our parent company, General Nutrition Centers
Holding Company. The proceeds of the equity contribution were contributed to us
to fund a portion of the acquisition price. In addition, our parent sold shares
of common stock for $200,000 to one of our new outside directors shortly after
consummation of the Acquisition and recently sold shares of its common stock for
approximately $1.7 million to certain members of our management, the proceeds of
all of such sales were contributed to us by our parent company.
The primary use of cash in the period ended December 4, 2003 was principal
payments on debt related to our parent, Nutricia's loan, of which we were a
guarantor. The primary use of cash in the twelve months ended December 31, 2002,
and 2001 was for payments on debt to related parties. The increase in cash used
in financing activities in 2002 is due to additional repayments on short-term
debt due to related parties in 2002. The decrease in cash used in financing
activities in 2001 was the result of our borrowing $62.3 million from related
parties.
48
CAPITAL EXPENDITURES
Capital expenditures were $32.8 million, $51.9 million and $29.2 million in
2003, 2002, and 2001, respectively. The primary use of cash in each year was for
improvements to the retail stores, and on-going maintenance and improvements of
our manufacturing facility. During 2002, we completed a $23.5 million store
reset and upgrade program, $6.1 million of which was funded by our franchisees.
Of the $17.4 million paid by us, $13.9 million was capitalized and $3.5 million
was expensed. We expect our store-related maintenance capital expenditures to be
approximately $15 million during 2004.
CONTRACTUAL OBLIGATIONS
The following table summarizes our future minimum non-cancelable
contractual obligations at December 31, 2003.
<Table>
<Caption>
2009 AND
TOTAL 2004 2005 2006 2007 2008 BEYOND
------ ------ ----- ----- ----- ----- --------
CONTRACTUAL OBLIGATIONS (IN MILLIONS)
Long-term debt obligations........ $514.2 $ 3.8 $ 3.9 $ 4.0 $ 4.1 $ 4.1 $494.3
Operating lease obligations....... 373.0 99.2 80.3 63.5 48.0 33.1 48.9
Purchase obligations(1)........... 33.3 24.9 4.2 4.2 -- -- --
------ ------ ----- ----- ----- ----- ------
$920.5 $127.9 $88.4 $71.7 $52.1 $37.2 $543.2
====== ====== ===== ===== ===== ===== ======
</Table>
- ---------------
(1) Consists of $20.7 million in inventory purchase commitments and $12.6
million in advertising commitments.
FORWARD-LOOKING INFORMATION
In 2003 we identified, as part of an evaluation of individual stores, 117
underperforming stores with store specific expenses exceeding gross profit to be
closed in the near future. The store rationalization plan excluded what we would
consider to be normalized store closings that occur on an ongoing basis. Some of
these 117 stores became cash flow positive by the end of 2003 or were not
eligible for early lease terminations, and are no longer considered for closure.
The remaining 104 stores on this closure list generated approximately $4.0
million of store specific expenses exceeding gross profit in 2003. The estimated
termination cost for these store closures is $7.6 million and has been recorded
in accrued liabilities on the December 31, 2003 balance sheet. As of March 31,
2004, we have closed 68 of these underperforming stores. Also, as of March 31,
2004, we have entered into early termination agreements with respect to 17
leases and we are in the process of negotiating early termination agreements for
the remaining stores. We cannot assure you that these negotiations will result
in early termination or that these 19 stores will be closed prior to their lease
expiration date.
We have identified and recorded valuation allowances that related to tax
assets that were associated with the interest expense on the related party push
down debt. This interest expense was only deductible in future years upon
generation of sufficient taxable income. At December 31, 2002, we did not
believe that the company would generate sufficient taxable income to utilize
these deferred tax assets. Subsequent to the Acquisition, these assets were
adjusted to reflect the new basis of accounting for both book and tax assets. At
December 31, 2003, we believe that, based on available information, it is more
likely than not that future taxable income will be sufficient to utilize the net
deferred tax assets that we have recorded.
OFF BALANCE SHEET ARRANGEMENTS
As of December 31, 2003, 2002 and 2001, we had no relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off balance sheet arrangements,
or other contractually narrow or limited purposes. We are, therefore, not
materially exposed to any financing, liquidity, market or credit risk that could
arise if we had engaged in such relationships.
We have a balance of unused advertising barter credits on account with a
third party advertising agency. These available credits are not recognized as
assets in the accompanying financial statements because their fair value cannot
be reasonably estimated. The credits can be used to offset the cost of cable
advertising. As
49
of December 31, 2003, and December 31, 2002 the available credit balance was
$16.6 and $18.8 million, respectively. However, no value was attributed to these
credits at December 5, 2003.
EFFECTS OF INFLATION
Inflation generally affects us by increasing costs of raw materials, labor
and equipment. We do not believe that inflation had any material effect on our
results of operations, and we do not expect that it will have any material
effect on our results of operations in the foreseeable future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in the value of market risk
sensitive instruments caused by fluctuations in interest rates, foreign exchange
rates and commodity prices. Changes in these factors could cause fluctuations in
the results of our operations and cash flows. In the ordinary course of
business, we are primarily exposed to foreign currency and interest rate risks.
We do not use derivative financial instruments in connection with these market
risks.
FOREIGN EXCHANGE RATE MARKET RISK. We are subject to the risk of foreign
currency exchange rate changes in the conversion from local currencies to the
U.S. dollar of the reported financial position and operating results of our
non-U.S. based subsidiaries. We are also subject to foreign currency exchange
rate changes for purchases and services that are denominated in currencies other
than the U.S. dollar. The primary currencies to which we are exposed to
fluctuations is the Canadian Dollar and the Euro. The fair value of our net
foreign investments and our foreign denominated payables would not be materially
affected by a 10% adverse change in foreign currency exchange rates for the
periods presented.
INTEREST RATE MARKET RISK. A portion of our debt is subject to changing
interest rates. Although changes in interest rates do not impact our results of
operations, the changes could affect the fair value of our debt and related
interest payments. As of December 31, 2003, we had fixed rate debt of $229.2
million and variable rate debt of $285.0 million. Fluctuations in market rates
have not had a significant impact on our results of operations in recent years
because, in general, our contracts with vendors limit our exposure to increases
in product prices. We are not exposed to price risks except with respect to
product purchases. We do not enter into futures or swap contracts at this time.
Based on our variable rate debt balance as of December 31, 2003, a 1% change in
interest rates would increase or decrease our annual interest cost by $2.9
million.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB revised SFAS No. 132. The revised standards
relate to additional disclosures about pension plans and other postretirement
benefit plans. GNCI had previously adopted the disclosure requirements of SFAS
No. 132. The adoption of this revised standard did not have a material impact on
GNCI's consolidated financial position or results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It is effective for reporting
years beginning after June 15, 2002. The adoption of this standard did not have
a material impact on its consolidated financial position or results of
operations. As the operation of our manufacturing facility and distribution
centers constitutes a material portion of our business, other obligations may
arise in the future. Since these operations have indeterminate lives, an asset
retirement obligation cannot be reasonably estimated. Therefore, any additional
liabilities associated with potential obligations cannot be estimated and thus,
have not been accrued for in the accompanying financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". This statement applies to costs associated
with an exit activity that does not involve an entity newly acquired in a
business combination or with a disposal activity covered by SFAS No. 144. It is
effective for transactions
50
after December 31, 2002. The adoption of this standard did not have a material
impact on our consolidated financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This interpretation clarifies
existing guidance relating to a guarantor's accounting for and disclosure of,
the issuance of certain types of guarantees. FIN No. 45 requires that, upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under the guarantee. FIN No. 45 is effective
on a prospective basis for guarantees issued or modified after December 31,
2002, except for the disclosure provisions which were adopted by us for the year
ended December 31, 2002. The adoption of the remaining provisions of FIN No. 45
did not have a material impact on our consolidated financial position or results
of operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities -- an interpretation of ARB No. 51". This interpretation
addresses the consolidation of variable interest entities ("VIEs") and its
intent is to achieve greater consistency and comparability of reporting between
business enterprises. It defines the characteristics of a business enterprise
that qualifies as a primary beneficiary of a variable interest entity. In
December 2003, the FASB issued a modification to FIN 46, titled FIN 46R. FIN 46R
delayed the effective date for certain entities and also provided technical
clarifications related to Implementation Issues. In summary, a primary
beneficiary is a business enterprise that is subject to the majority of the risk
of loss from the VIE, entitled to receive a majority of the VIE's residual
returns, or both. The implementation of FIN No. 46 has been deferred for
non-public entities. For non-public entities, such as us, FIN No. 46 requires
immediate application to all VIEs created after December 31, 2003. For all other
VIEs, we are required to adopt FIN No. 46 by no later than the beginning of the
first period beginning after December 15, 2004. FIN No. 46 also requires certain
disclosures in financial statements regardless of the date on which the VIE was
created if it is reasonably possible that the business enterprise will be
required to disclose the activity of the VIE once the interpretation becomes
effective. We have evaluated the effect of FIN No. 46 for potential VIEs. As a
result, we believe that the adoption of FIN No. 46 will not be material to our
financial statements.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the accounting for and reporting of derivative instruments, including
certain derivative instruments embedded in other contracts and hedging
activities. SFAS No. 149 is effective for contracts entered into after June 30,
2003. As of December 4, 2003, we have not identified any financial instruments
that fall within the scope of SFAS No. 149, thus the adoption of SFAS No. 149
did not have a material impact on the accompanying consolidated financial
statements or results of operations.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
clarifies and defines how certain financial instruments that have both the
characteristics of liabilities and equity be accounted for. Many of these
instruments that were previously classified as equity will now be recorded as
liabilities. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and must be adopted for financial statements issued
after June 15, 2003. As of December 31, 2003, we have not identified any
financial instruments that fall within the scope of SFAS No. 150, thus the
adoption of SFAS No. 150 does not have a material impact on the accompanying
consolidated financial statements or results of operations.
In December 2003, the Securities and Exchange Commission issued SAB No. 104
"Revenue Recognition". This SAB revises or rescinds certain portions of
interpretative guidance included in Topic 13 of the codification of staff
accounting bulletins. These changes make SAB 104 guidance consistent with
current accounting regulations promulgated under U.S. generally accepted
accounting principles. As stated in the Revenue Recognition accounting policy,
we have adopted SAB No. 104 for all periods presented herein. The adoption of
SAB No. 104 did not have a material impact on the accompanying consolidated
financial statements or results of operations.
51
BUSINESS
GENERAL NUTRITION CENTERS, INC.
We are the largest global specialty retailer of nutritional supplements,
which include sports nutrition products, diet products, vitamins, minerals and
herbal supplements (VMHS) and specialty supplements. We derive our revenues
principally from product sales through our company-owned stores, franchise
activities and sales of products manufactured in our facilities to third
parties. We were formed as a Delaware corporation on October 16, 2003. On
December 5, 2003, we acquired from Numico USA, Inc., 100% of the outstanding
equity interests of General Nutrition Companies, Inc., a company that opened its
first health food store in 1935 and today sells products through a worldwide
network of 5,745 locations operating under the GNC(R) brand name. The GNC brand
name is one of the most widely recognized brands in the nutritional supplements
industry. An estimated 84% of the U.S. population recognizes GNC as a source of
health and wellness products. Our product mix, which is focused on high-margin,
value-added nutritional products, is sold under our GNC proprietary brands,
including Pro Performance(R), Total Lean(TM) and Preventive Nutrition(R), and
under nationally recognized third-party brands, including Atkins(R),
Muscletech(R) and EAS(R).
The following charts illustrate, for the year ended December 31, 2003, the
percentage of our net revenues generated by our three business segments and the
percentage of our net U.S. retail supplement revenues generated by our four
product categories:
<Table>
NET REVENUES BY SEGMENT NET U.S. RETAIL SUPPLEMENT REVENUES
BY PRODUCT CATEGORY
(PIE CHART) (PIE CHART)
</Table>
BUSINESS OVERVIEW
Retail Locations
Our retail network represents the largest specialty retail store network in
the nutritional supplements industry. As of December 31, 2003, there were 5,098
GNC locations in the United States and Canada and 647 franchised stores
operating in other international locations under the GNC name. Of our U.S. and
Canadian locations, 2,748 were company-owned stores, 1,362 were franchised
stores and 988 were GNC "store-within-a-store" locations under our strategic
alliance with Rite Aid(R). Our retail network in the United States was over nine
times larger than that of our nearest specialty retail competitor as of December
31, 2003. Most of our U.S. stores are between 1,000 and 2,000 square feet and
are located in shopping malls and strip shopping centers. In the fourth quarter
of 2002 we completed a $23.5 million store reset and upgrade program, $6.1
million of which was funded by our franchisees. As a result, most of our stores
have a modern and customer-friendly layout and promote our GNC Live Well theme.
Franchise Activities
As of December 31, 2003, we had 1,362 franchised stores in the United
States and Canada and 647 other international franchised stores. We generate
income from franchise activities primarily through product sales to franchisees,
royalties on franchise retail sales and franchise fees. To assist our
franchisees in the successful operation of their stores and to protect our brand
image, we offer a number of services to franchisees including training, site
selection, construction assistance and accounting services. We believe that
52
our franchise program enhances our brand awareness and market presence and will
enable us to expand our store base internationally with limited capital
expenditures by us. We enjoy strong relationships with our franchisees, as
evidenced by our franchisee renewal rate of over 98% between 2000 and 2003. Our
franchise program has been recognized numerous times by several publications as
one of the top franchise programs in the country.
"Store-Within-a-Store" Locations
To increase brand awareness and promote access to customers who may not
frequent specialty nutrition stores, we entered into a strategic alliance with
Rite Aid to open our GNC "store-within-a-store" locations. As of December 31,
2003, we had 988 stores-within-a-store locations. Through this strategic
alliance, we generate revenues from sales to Rite Aid of our products at
wholesale prices, the manufacture of Rite Aid private label products and retail
sales of consignment inventory. We are Rite Aid's sole supplier for the
PharmAssure(R) vitamin brand and a number of Rite Aid private label supplements.
Products
We offer a wide range of high-quality nutritional supplements sold under
our GNC proprietary brand names, including Pro Performance, Total Lean and
Preventive Nutrition, and under nationally recognized third-party brand names,
including Atkins, Muscletech and EAS. Sales of our proprietary brands at our
company-owned stores represented approximately 42% of our net retail product
revenues for the year ended December 31, 2003. We develop our proprietary
products independently at our own facilities and through collaborative efforts
with our suppliers. We believe that new products are a key driver of customer
traffic and purchases, and we are committed to developing new and innovative
products for the nutritional supplements industry. During the year ended
December 31, 2003, we launched 37 new proprietary products, and we currently
have over 50 new products under development for launch during 2004.
Marketing
We market our proprietary brands of nutritional products through an
integrated marketing program that includes television, print and radio media,
storefront graphics, direct mailings to members of our Gold Card program and
point of purchase materials. Our Gold Card program is a key component of our
marketing strategy and entitles members to discount offers and other benefits.
With 4.8 million Gold Card members as of December 31, 2003, we believe that our
Gold Card program builds customer loyalty and serves to make us a destination
retailer. We also benefit from product advertising paid for entirely by
third-party vendors that promotes their products and identifies our stores as a
place to purchase their products.
Manufacturing and Distribution
With our state-of-the-art manufacturing and distribution facilities
supporting our retail stores, we are a low-cost, vertically integrated producer
and supplier of high-quality nutritional supplements. We operate two
manufacturing facilities in South Carolina and three distribution centers
located in Pennsylvania, South Carolina and Arizona. Although we utilize our
facilities primarily for the production of our proprietary products that are
sold at GNC locations, we have available capacity to produce products for sale
to third-party customers. By controlling the production and distribution of our
proprietary products, we can protect product quality, monitor delivery times and
maintain appropriate inventory levels.
Industry Overview
The U.S. nutritional supplements retail industry is large and highly
fragmented, with no single industry participant accounting for more than 10% of
total industry retail sales in 2002. Participants include specialty retailers,
supermarkets, drugstores, mass merchants, multi-level marketing organizations,
mail order and a variety of other smaller channels. The nutritional supplements
sold through these channels are divided into four major product categories:
sports nutrition products, diet products, VMHS and specialty supplements. Most
supermarkets, drugstores and mass merchants have narrow product offerings
limited primarily to simple
53
vitamins and herbs, and their share of the nutritional supplements market over
the last five years has remained relatively constant.
During the 1990s, our industry underwent a period of rapid expansion. From
1990 to 2002, industry retail sales grew at a compound annual growth rate of
10.0%, with the most rapid growth in the early 1990s. Total retail sales in the
industry reached approximately $18.8 billion in 2002 and are estimated to grow
at a compound annual growth rate of 3.7% between 2002 and 2008. During this same
period, the diet products and specialty supplements categories are estimated to
grow at compound annual growth rates of 8.8% and 5.9%, respectively, driving
overall industry growth. Additionally, several demographic, healthcare and
lifestyle trends are expected to drive the continued growth of the nutritional
supplements industry. These trends include:
- Increasing Focus on Fitness: The number of Americans belonging to health
clubs has grown 23% from 29.5 million in 1998 to 36.3 million in 2002,
according to a 2002 trend report published by the International Health,
Racquet & Sportsclub Association. We believe that fitness-oriented
consumers are interested in taking sports nutrition products to increase
energy, endurance and strength during exercise.
- Increasing Incidence of Obesity: Diet products are growing in
popularity. According to a 2002 study by the National Heart, Lung and
Blood Institute, 61% of adults ages 20-74 are either overweight or obese.
An estimated 46% of adults in the United States are currently dieting,
according to a 2003 Gallup Study of Dieting and the Market for Diet
Products and Services.
- Aging Population: The average age of the U.S. population is increasing.
U.S. Census Bureau data indicates that the number of Americans age 55 or
older is expected to increase by 19% from 2003 to 2010. According to a
2001 Simmon Market Research Bureau data report, consumers over the age of
55 are significantly more likely to use VMHS products than younger
persons.
- Rising Healthcare Costs and Use of Preventive Measures: Healthcare
related costs have increased substantially in the United States.
According to a leading healthcare provider, private health insurance
premiums increased an average of 13.9% from 2002 to 2003, with an average
premium for family coverage of $9,068 in 2003. To reduce medical costs
and avoid the complexities of dealing with the healthcare system, many
consumers take preventive measures, including alternative medicines and
nutritional supplements.
COMPETITIVE STRENGTHS
Our strengths include:
UNMATCHED SPECIALTY RETAIL FOOTPRINT. Our retail network in the United
States was over nine times larger than that of our nearest specialty retail
competitor at December 31, 2003. The size of our retail network provides us with
advantages within the fragmented nutritional supplements industry. For instance,
our scale helps us to attract industry-leading vendors to sell their products in
our locations, often on a preferred basis. Our extensive retail footprint in
established territories also provides us with broad distribution capabilities
that are difficult to replicate. Through our multiple store formats located
across the United States, large franchise operations and extensive international
store base, we are not dependent on any single format or geographic location.
STRONG BRAND RECOGNITION. We have strong brand recognition within the
nutritional supplements industry. According to a September 2003 Parker Awareness
Tracking Study Report, an estimated 84% of the U.S. population recognized the
GNC brand name as a source of health and wellness products. We utilize extensive
marketing and advertising campaigns through television, print and radio media,
storefront graphics, Gold Card membership communications and point of purchase
materials to strengthen our established brand name and reinforce our broad
consumer recognition.
EXTENSIVE PRODUCT SELECTION. We offer an extensive mix of brands and
products, including approximately 2,100 SKUs across multiple categories. This
variety provides our customers with a vast
54
selection of products to fit their specific needs and provides us with an
advantage over drugstores, supermarkets and mass merchants who offer a more
limited product selection. Our products include powders, bars, tablets, meal
replacements, shakes and teas. With a broad range of products, our success does
not depend on any one specific product or vendor. During the year ended December
31, 2003, no single product accounted for more than 4.7% of our company-owned
store sales.
WELL POSITIONED IN HIGH-GROWTH CATEGORIES. We believe that we are well
positioned in the diet products and specialty supplements categories, the two
fastest growing categories within the nutritional supplements industry. Although
the diet products and specialty supplements categories represent only 26% of the
nutritional supplements industry's 2002 retail sales, our sales of products
within these categories represented 42% of our net U.S. retail product revenues
in 2002. Industry sales of these categories are expected to grow at compound
annual growth rates of 8.8% and 5.9%, respectively from 2002 to 2008, exceeding
the overall industry's estimated compound annual growth rate of 3.7% for the
same period.
INNOVATIVE NEW PRODUCT DEVELOPMENT. We believe that new products are a key
driver of customer traffic and purchases. Interactions with our customers and
raw materials vendors help us identify changes in consumer trends that, in turn,
influence our development, manufacturing and marketing of new products. Our
dedicated development teams conduct extensive market research and formulate new
products utilizing scientific methods and third-party product testing. The key
areas of our development focus are the diet products category and the specialty
supplements category, which includes products that are geared to specific
nutritional concerns. During the year ended December 31, 2003, we launched 37
new proprietary products, which generated $38.0 million of our net revenues
during this period. We currently have over 50 new products under development for
launch during 2004, of which 27 are expected to be diet products or specialty
supplements.
GOLD CARD PROGRAM CUSTOMER BASE. Our Gold Card program, with 4.8 million
members as of December 31, 2003, has been a core promotional program for over
ten years and continues to be a key driver of customer sales. During the year
ended December 31, 2003, 56% of U.S. company-owned store sales were generated
from purchases by our customers using Gold Cards. The Gold Card program also
gives us access to a large database of nutritional supplement consumers and
allows us to match and analyze consumers' product buying patterns. We cultivate
customer loyalty through a combination of discount offers and targeted marketing
efforts aimed toward our Gold Card members. We believe that our Gold Card
program serves to make us a destination retailer.
VALUE-ADDED CUSTOMER SERVICE. Our sales associates are trained to provide
guidance to customers with respect to the broad selection of products sold in
GNC stores. We believe this level of customer service provides us with an
advantage over supermarkets, drugstores and mass merchants. Our sales associates
are prepared to educate customers about product features and direct them to
products that will address their specific requests. In 2002, we instituted the
'GNC University,' an online training program for our sales associates at our
company-owned stores and for sales associates at participating franchised
locations. We provide additional education and training materials through a
monthly newsletter detailing new products and through interactive training
modules. We also provide a wide range of nutritional information in numerous
forms, including signage, brochures, and touch screen computers enabling
customers to make informed purchases.
VERTICALLY INTEGRATED OPERATIONAL CAPABILITIES. Our vertically integrated
manufacturing, distribution and retail capabilities differentiate us from many
of our competitors. Our state-of-the-art manufacturing facilities and
distribution centers, combined with our retail footprint, enable us to better
control costs and protect product quality. We are also able to monitor delivery
times and to maintain appropriate inventory levels for our proprietary products
by controlling production scheduling and distribution.
EXPERIENCED MANAGEMENT TEAM AND EQUITY SPONSOR. Our senior management team
is composed of experienced retail executives who have, on average, been employed
with us for over 15 years. Our equity sponsor is an affiliate of Apollo
Management, L.P., which is among the most active private investment firms in the
United States and has considerable experience investing in retail companies. In
addition, our board of directors is comprised of executives with significant
experience in the retail industry. As of February 10,
55
2004, our senior management and our directors owned approximately 2.3%, in the
aggregate, and have options to purchase an additional 5.6%, in the aggregate of
the fully diluted common equity of our parent company.
BUSINESS STRATEGY
We have implemented a series of initiatives geared toward improving our
operating and financial performance. As part of these initiatives, we have:
- revised pricing through the elimination of BOGO (Buy One Get One half
price) and created an every day competitively priced structure to drive
customer traffic;
- re-established an independent research and development effort to improve
our proprietary product offerings;
- reset and upgraded our stores, creating a more modern and
customer-friendly layout;
- improved efficiencies through fixed operating cost reductions and
rationalization of our store base; and
- launched ephedra-free products such as Total Lean to capitalize on
opportunities in the rapidly growing diet products category.
We believe these initiatives have helped to improve our recent business
performance. Our company-owned same store sales increased by 0.1% for the year
ended December 31, 2003 and by 11.0% for the three months ended December 31,
2003. Similarly, U.S. franchised same store sales increased 0.8% for the year
ended December 31, 2003 and by 10.0% for the three months ended December 31,
2003. We cannot assure you that we will continue to achieve same store sales
growth at the levels experienced in the fourth quarter of 2003.
To increase our future revenues and to drive profitability and cash flow
generation, we intend to continue to:
- focus on higher-growth categories, such as diet products and specialty
supplements;
- forge direct relationships with raw material suppliers and third-party
product vendors in order to position ourselves to be first-to-market with
new and innovative proprietary and third-party products;
- utilize our extensive customer database to improve customer loyalty,
facilitate direct marketing and increase cross-sell and up-sell
opportunities;
- shift our product mix to emphasize higher-margin proprietary products,
particularly diet products and specialty supplements;
- close approximately 104 underperforming stores (68 of which have been
closed as of March 31, 2004) and aggressively promote nearby stores to
maximize revenues transfer;
- increase third-party manufacturing to improve capacity utilization;
- improve inventory management to reduce levels of discontinued inventory
and increase inventory turns at both the store and distribution center
levels; and
- leverage our strong franchise operations by expanding internationally,
which will require limited capital expenditures by us.
BUSINESS SEGMENTS
We generate revenues primarily from our three business segments, Retail,
Franchise and Manufacturing/ Wholesale. The following chart outlines our
business segments and the historical contribution to our consolidated revenues
by those segments, after intercompany eliminations. For a description of
operating income (loss) by business segment, our total assets by business
segment, total revenues by geographic area,
56
and total assets by geographic area, see Note 23, Segments to our consolidated
financial statements included elsewhere in this prospectus.
<Table>
<Caption>
PREDECESSOR SUCCESSOR
-------------------------------------------------------- -------------
YEAR ENDED DECEMBER 31, PERIOD FROM 27 DAYS ENDED
----------------------------------- JANUARY 1, 2003 TO DECEMBER 31,
2001 2002 DECEMBER 4, 2003 2003
(DOLLARS IN MILLIONS) ---------------- ---------------- ------------------ -------------
Retail.................. $1,123.1 74.4% $1,068.6 75.0% $ 993.3 74.1% $66.2 74.1%
Franchise............... 273.1 18.1 256.1 18.0 241.3 18.0% 14.2 15.9
Manufacturing/Wholesale
(Third Party)......... 112.9 7.5 100.3 7.0 105.6 7.9 8.9 10.0
-------- ----- -------- ----- -------- ----- ----- -----
Total................. $1,509.1 100.0% $1,425.0 100.0% $1,340.2 100.0% $89.3 100.0%
======== ===== ======== ===== ======== ===== ===== =====
</Table>
RETAIL
Our Retail segment generates revenues from sales of products to customers
at our company-owned stores in the United States and Canada.
LOCATIONS
As of December 31, 2003, we operated 2,748 company-owned stores across 50
states and in Canada, Puerto Rico and Washington DC. Most of our U.S.
company-owned stores are between 1,000 and 2,000 square feet and are located
primarily in shopping malls and strip shopping centers. Traditional mall and
strip center locations typically generate a large percentage of our total retail
sales. All of our company-owned stores follow one of two consistent formats, one
for mall locations and one for strip shopping center locations. Our store
graphics are periodically redesigned to better identify with our GNC customers
and provide product information to allow the consumer to make educated decisions
regarding product purchases and usage. Our product labeling is consistent within
our product lines and the stores are designed to present a unified approach to
packaging with emphasis on added information for the consumer. In addition, in
the fourth quarter of 2002 we completed a store reset and upgrade program for
all of our company-owned stores to create a more modern and customer-friendly
layout, while promoting our GNC Live Well theme. As part of the store reset and
upgrade program, we redesigned our floor layouts to create one-stop stations
where our customers can locate a variety of products to address their specific
needs.
PRODUCTS
We offer a wide range of high-quality nutritional supplements sold under
our GNC proprietary brand names, including, Pro Performance(R), Total Lean(TM)
and Preventive Nutrition(R), and under nationally recognized third-party brand
names, including Atkins(R), Muscletech(R) and EAS(R). We operate in four major
nutritional supplement categories: sports nutrition products, diet products,
VMHS (vitamins, minerals and herbal supplements) and specialty supplements. We
offer an extensive mix of brands and products, including approximately 2,100
SKUs across multiple categories. This variety is designed to provide our
customers with a vast selection of products to fit their specific needs. Sales
of our proprietary brands at our company-owned stores represented approximately
42% of our net retail product revenues for 2003. Products are delivered to our
retail stores through our distribution operations located in Leetsdale,
Pennsylvania; Anderson, South Carolina; and Phoenix, Arizona. Our distribution
centers support our company-owned stores as well as franchised stores and Rite
Aid locations. Our distribution fleet delivers raw materials and components to
our manufacturing facilities and delivers our finished goods and third-party
products through our distribution centers to our company-owned and domestic
franchised stores on a weekly and biweekly basis, depending on sales volume of
the store. Each of our distribution centers has a quality control department
that monitors products received from our vendors to determine if they meet our
requirements.
57
Based on data collected from our point of sale systems (POS), below is a
comparison of our domestic retail product sales by major product category and
the respective percentage of our retail supplement sales for our last three
years:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,(1)
--------------------------------------------------
2001 2002 2003
(DOLLARS IN MILLIONS) -------------- ---------------- --------------
Sports Nutrition Products.......... $287.5 28.8% $ 288.7 30.4% $300.9 32.3%
Diet Products...................... 289.2 29.0 267.1 28.2 265.5 28.5
VMHS............................... 273.1 27.3 252.8 26.7 238.4 25.6
Specialty Supplements.............. 148.9 14.9 139.8 14.7 126.6 13.6
------ ----- -------- ----- ------ -----
TOTAL.............................. $998.7 100.0% $1,026.0 100.0% $931.4 100.0%
====== ===== ======== ===== ====== =====
</Table>
- ---------------
(1) 2003 data calculated on a combined basis, by adding data for the period from
January 1, 2003 through December 4, 2003 to data for the 27 days ended
December 31, 2003.
Sports Nutrition Products
Sports nutrition products are designed to be taken in conjunction with an
exercise and fitness regimen. Our target consumer for sports nutrition products
is the 18-49 year old male. We typically offer a broad selection of sports
nutrition products, such as protein and weight gain powders, sports drinks,
sports bars, and high potency vitamin formulations, including GNC brands such as
Pro Performance and popular third-party products such as NO2(R).
Diet Products
Diet products consist of various formulas designed to supplement the diet
and exercise plans of weight conscious consumers. Our target consumer for diet
products is the 18-49 year old female. We typically offer a variety of diet
products, including pills, meal replacements, shakes, diet bars and teas. Our
retail stores offer our proprietary and third-party products suitable for
different diet and weight management approaches, including low-carbohydrate
products such as the nationally-recognized Atkins(R) product line and products
designed to increase thermogenesis and metabolism. We also offer several
ephedra-free diet products, including our Total Lean(TM) and our Body
Answers(TM) product lines.
VMHS (Vitamin, Minerals and Herbal Supplements)
We sell vitamins and minerals in single vitamin and multi-vitamin form and
in different potency levels. Our vitamin and mineral products are available in
tablets, soft gelatin and hard-shell capsules and powder forms. Many of our
special vitamin and mineral formulations, such as Mega Men(R) and Ultra Mega(R),
are only available at GNC locations. In addition to our selection of VMHS
products with unique formulations, we also offer the full range of standard
"alphabet" vitamins. We sell herbal supplements in various solid dosage and soft
gelatin capsules, tea and liquid forms. We have consolidated our traditional
herbal offerings under a single umbrella brand, Herbal Plus(R). In addition to
the Herbal Plus line, we offer a full line of whole food-based supplements and
top selling herb and natural remedy products. Our target consumers for VMHS are
women over the age of 35.
Specialty Supplements
Specialty supplements is a catch-all category for nutritional supplements
that do not fit within the bounds of the other nutritional supplement
categories. Specialty supplements include glucosamine and melatonin products, as
well as products that are designed to provide nutritional support to specific
areas of the body. Our target consumers for specialty supplements are women over
the age of 35. Many of our specialty supplements have ingredients unique to our
formulations that are not available at other outlets. Our specialty supplements
particularly emphasize recent third party research and available literature
regarding the positive benefits from certain ingredients. Our comprehensive
Preventive Nutrition product line includes Heart Advance(TM), a product designed
to support healthy heart and blood vessel function, Triple Cleanse(TM), a
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product designed to support healthy digestive function, and Fast Flex, a product
designed to provide comprehensive joint support. Our specialty supplements are
located in designated wall areas that include information and other products
that offer a comprehensive solution to meet a customer's particular nutritional
concerns.
Product Development
We believe a key driver of customer traffic and purchases is the
introduction of new products. According to the 2003 Parker Awareness Tracking
Study, 49% of consumers surveyed rated the availability of "new, innovative
products" as extremely or very important when making purchase decisions and
rated this as one of our competitive strengths. We identify changing customer
trends through interactions with our customers and leading industry vendors to
assist in the development, manufacturing and marketing of our new products. We
develop proprietary products independently and through the collaborative effort
of our dedicated development team. During 2003, we targeted our product
development efforts on sports nutrition products, diverse diet products and
specialty supplements, including ephedra-free and low-carbohydrate weight
management products and new sports formulas and delivery systems. During 2003,
we launched 37 new proprietary products, and we currently have over 50 new
products under development for launch during 2004.
FRANCHISE
Our Franchise segment is comprised of our domestic and international
franchise operations. Our Franchise segment generates revenues from franchise
activities primarily through product sales to franchisees, royalties on
franchise retail sales and franchise fees.
As a means of enhancing our operating performance and building our store
base, we began opening franchised locations in 1988. As of December 31, 2003,
there were 2,009 franchised stores operating, including 1,362 stores in the
United States and Canada and 647 stores operating in other international
locations. Approximately 87% of our franchises in the United States are in strip
shopping centers and are typically between 1,200 and 1,800 square feet. The
international franchised stores are smaller, typically an average of 750 square
feet and, depending upon the country and cultural preferences, are located in
mall, strip shopping center, street or store-within-a-store locations. All of
our franchised stores in the United States were recently reset in the same
manner as our company-owned stores. Typically, our international stores have a
store format and signage similar to our U.S. franchised stores. To assist our
franchisees in the successful operation of their stores and to protect our brand
image, we offer site selection, construction assistance, accounting services and
a three-part training program, which consists of classroom instruction, training
in a company-owned location and actual on-site training after the franchised
store opens. We enjoy strong relationships with our franchisees, as evidenced by
our franchisee renewal rate of over 98% between 2000 and 2003. In addition, we
do not have heavy reliance on any single franchise operator in the United
States, as the largest franchisee owns and/or operates 11 store locations.
All of our franchised stores in the United States offer both our
proprietary products and third-party products, with a product selection similar
to that of our company-owned stores. Our international franchised stores offer a
more limited product selection than our franchised stores in the United States.
Products are distributed to our franchised stores in the United States through
our distribution centers and transportation fleet in the same manner as our
company-owned stores.
FRANCHISES IN THE UNITED STATES
Franchise revenues from our franchisees in the United States accounted for
approximately 87% of our franchise revenues for the year ended December 31,
2003. In 2004, new franchisees in the United States are required to pay an
initial fee of $40,000 for a franchise license. Existing GNC franchise operators
may purchase an additional franchise license at the rate of $30,000. We
typically offer limited financing to qualified franchisees in the United States
for terms up to five years. Once a store is established, franchisees are
required to pay us a continuing royalty of 6% of sales and contribute 3% of
sales to a national advertising fund. Our standard franchise agreements for the
United States are effective for a ten-year period with two
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five-year renewal options. At the end of the initial term, the franchisee has
the option to renew the agreement at 33% of the franchisee fee that is then in
effect. Our franchisees in the United States receive limited geographical
exclusivity and are required to follow the GNC store format.
Franchisees must meet certain minimum standards and duties prescribed by
our franchise operations manual and we conduct periodic field visit reports to
ensure our minimum standards are maintained. Generally, we enter into a
five-year lease with two five-year renewal options with landlords for our
franchised locations in the United States. This allows us to secure space at
cost-effective rates, which we sublease to our franchisees at cost. By
subleasing to our franchisees, we have greater control over the location and
have greater bargaining power for lease negotiations than an individual
franchisee typically would have, and we can elect not to renew subleases for
underperforming locations. If a franchisee does not meet specified performance
and appearance criteria, the franchise agreement specifies the procedures under
which we are permitted to terminate the franchise agreement. In these
situations, we may take possession of the location, inventory, and equipment,
and operate the store as a company-owned store or re-franchise the location. Our
U.S. franchise agreements and operations in the United States are regulated by
the FTC. See "-- Government Regulation -- Franchise Regulation."
INTERNATIONAL FRANCHISES
Franchise revenues from our international franchises accounted for
approximately 13% of our franchise revenues for the year ended December 31,
2003. In 2004, new international franchisees were required to pay an initial fee
of $20,000 for a franchise license for each store and continuing royalty fees of
5% of sales. Our franchise program has enabled us to expand into international
markets with limited capital expenditures. We expanded our international
presence from 457 international franchised locations at the end of 2001 to 647
international locations as of December 31, 2003, without incurring any capital
expenditures related to such expansion. Our international franchised stores
generate sales per square foot of store space comparable to domestic store
locations. However, we typically generate less revenues from franchises outside
the United States due to lower international royalty rates and a smaller
percentage of products that are purchased by the franchisees from us.
Franchisees in international locations enter into development agreements
with us for either full size stores or a store-within-a-store at a host
location. The development agreement grants the franchisee the right to develop a
specific number of stores in a territory, often the entire country. The
international franchisee then enters into a franchise agreement for each
location. The full-size store franchise agreement has an initial ten-year term
with two five-year renewal options. At the end of the initial term, the
international franchisee has the option to renew the agreement at 33% of the
franchise fee that is then in effect. Franchise agreements for international
store-within-a-store locations have an initial term of five years, with two
five-year renewal options. At the end of the initial term, the international
franchisee of a store-within-a-store location has the option to renew the
agreement for 50% of the franchise fee that is then in effect. Our international
franchisees often receive exclusive franchising rights to the entire country
franchised, excluding military bases. Our international franchisee must meet
minimum standards and duties similar to our U.S. franchisees and our
international franchise agreements and international operations may be regulated
by various state, local and international laws. See "-- Government Regulation --
Franchise Regulation."
MANUFACTURING/WHOLESALE
Our Manufacturing/Wholesale segment is comprised of our manufacturing
operations in South Carolina and our wholesale sales business. This segment
supplies our Retail and Franchise segments as well as various third parties with
finished products. Our Manufacturing/Wholesale segment generates revenues
through sales of manufactured products to third parties, generally for
third-party private label brands, and the sale of our proprietary and
third-party brand products to Rite Aid and drugstore.com.
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MANUFACTURING
Our state-of-the-art manufacturing and distribution facilities support our
Retail and Franchise segments and enable us to control the production and
distribution of our proprietary products, protect product quality, monitor
delivery times and maintain appropriate inventory levels. We operate two main
manufacturing facilities, one in Greenville, South Carolina and one in Anderson,
South Carolina. We utilize our plants primarily for the production of
proprietary products. Our manufacturing operations are designed to allow low-
cost production of a variety of products of different quantities, sizes and
packaging configurations while maintaining strict levels of quality control. Our
manufacturing procedures are designed to promote consistency and quality in our
finished goods. We conduct sample testing on raw materials and finished
products, including weight, purity and micro-bacterial testing. Our
manufacturing facilities also service our wholesale operations, including the
manufacture and supply of Rite Aid private label products for distribution to
Rite Aid locations. We also use our available capacity at these facilities to
produce products for sale to third-party customers. Our distribution fleet
delivers raw materials and components to our manufacturing facilities and
delivers our finished goods and third-party products to our distribution
centers.
WHOLESALE
"Store-Within-a-Store" Locations
To increase brand awareness and promote access to customers who may not
frequent specialty nutrition stores, we entered into a strategic alliance with
Rite Aid to open GNC "store-within-a-store" locations. We are Rite Aid's sole
supplier for the PharmAssure(R) vitamin brand and a number of Rite Aid private
label supplements. The initial term of our agreement with Rite Aid expires in
March 2009, subject to early termination provisions. A calculation of the
average net sales of products sold in each "store-within-a-store" open for at
least one year will be made prior to April 30, 2004. If the resulting per store
average is less than $80,000 per store, Rite Aid will have the option to
terminate the agreement. In addition, if the resulting per store average is less
than $100,000 per store, GNC will have the option to terminate the agreement.
The initial term may be extended for five additional five-year terms at Rite
Aid's option. The parties are currently involved in negotiations relating to the
modification or termination of the agreement. We cannot assure you that the
agreement will be modified or that the agreement will not be terminated. As of
December 31, 2003, we had 988 GNC stores-within-a-store. Through this strategic
alliance, we generate revenues from sales to Rite Aid of our products at
wholesale prices, the manufacture of Rite Aid private label products and retail
sales of consignment inventory.
Distribution Agreement with drugstore.com
We have an Internet distribution agreement with drugstore.com, inc. Through
this strategic alliance, drugstore.com became the exclusive Internet retailer of
our proprietary products, the PharmAssure vitamin brand and certain other
nutritional supplements. The initial term of the agreement expires in July 2009,
subject to early termination provisions, and the exclusivity period expires in
June 2005. This alliance allows us to access a larger customer base, who may not
otherwise live close to, or have the time to visit, a GNC store. We generate
revenues from the distribution agreement with drugstore.com through sales of our
proprietary and third-party products on a wholesale basis and through retail
sales of certain other products on a consignment basis.
Our wholesale operations, including our Rite Aid and drugstore.com
wholesale operations, are supported by our Anderson distribution center.
Products are delivered to our store-within-a-store locations in a manner similar
to our company-owned stores.
COMPETITION
The U.S. nutritional supplements retail industry is a large, highly
fragmented and growing industry, with no single industry participant accounting
for more than 10% of total industry retail sales. Competition is based primarily
on price, quality and assortment of products, customer service, marketing
support and
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availability of new products. In addition, the market is highly sensitive to the
introduction of new products, including various prescription drugs, which may
rapidly capture a significant share of the market.
We compete with publicly owned and privately owned companies, which are
highly fragmented in terms of geographical market coverage and product
categories. We compete with other specialty retailers, including Vitamin
World(R) and Vitamin Shoppe(R), supermarkets, drugstores, mass merchants,
multi-level marketing organizations and a variety of other smaller channels. In
the United States, our VMHS products compete with heavily advertised national
brands manufactured by large pharmaceutical companies sold at supermarkets and
drugstores, as well as with the Nature's Bounty(R) and Nature's Wealth(R)
brands, sold by Vitamin World. Most supermarkets, drugstores and mass merchants
have narrow product offerings limited primarily to simple vitamins and herbs.
Our international competitors also include large international pharmacy chains
and major international supermarket chains as well as other large U.S.-based
companies with international operations. Our wholesale and manufacturing
operations also compete with other wholesalers and manufacturers of third-party
nutritional supplements.
TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
We believe trademark protection is particularly important to the
maintenance of the recognized brand names under which we market our products. We
own or have rights to material trademarks or trade names that we use in
conjunction with the sale of our products, including the GNC brand name. We also
rely upon trade secrets, know-how, continuing technological innovations and
licensing opportunities to develop and maintain our competitive position. We
protect our intellectual property rights through a variety of methods, including
trademark, patent and trade secret laws, as well as confidentiality agreements
and proprietary information agreements with vendors, employees, consultants and
others who have access to our proprietary information. Protection of our
intellectual property often affords us the opportunity to enhance our position
in the marketplace by precluding our competitors from using or otherwise
exploiting our technology and brands. We are also a party to several
intellectual property license agreements relating to certain of our products.
For example, several of our products are covered by patents which we license
from Royal Numico, N.V. The scope and duration of our intellectual property
protection varies throughout the world by jurisdiction and by individual
product.
INSURANCE AND RISK MANAGEMENT
We purchase insurance to cover standard risks in the nutritional
supplements industry, including policies to cover general products liability,
workers compensation, auto liability and other casualty and property risks. Our
insurance rates are based on our safety record as well as trends in the
insurance industry. We also maintain workers compensation insurance and auto
insurance policies that are retrospective in that the cost per year will vary
depending on the frequency and severity of claims in the policy year. Prior to
the Acquisition, we were covered by certain of Numico USA, Inc.'s insurance
policies. Following the consummation of the Acquisition, we obtained our own
insurance policies to replace those policies that were covered by Numico USA,
Inc.'s policies, including policies for general products liability. We currently
maintain products liability insurance with a deductible/retention of $1 million
per claim with an aggregate cap on retained losses of $10.0 million.
We face an inherent risk of exposure to product liability claims in the
event that, among other things, the use of our products results in injury. With
respect to product liability coverage, we expect to carry insurance coverage
typical of our industry and product lines. Our coverage involves self-insured
retentions with primary and excess liability coverage above the retention
amount. We have the ability to refer claims to our vendors and their insurers to
pay the costs associated with any claims arising from such vendors' products.
Our insurance covers such claims that are not adequately covered by a vendor's
insurance and provides for excess secondary coverage above the limits provided
by our product vendors.
We self-insure certain property and casualty risks due to our analysis of
the risk, the frequency and severity of a loss, and the cost of insurance for
the risk. We believe that the amount of self-insurance is not significant and
will not have an adverse impact on our performance.
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EMPLOYEES
As of December 31, 2003, we had a total of 5,267 full-time and 8,923
part-time employees, of whom approximately 12,348 were employed in our Retail
segment; 38 were employed in our Franchise segment; 1,282 were employed in our
Manufacturing/Wholesale segment; 522 were employed in corporate support
functions. None of our employees belongs to a union or is a party to any
collective bargaining or similar agreement. We consider our relationships with
our employees to be good.
PROPERTIES
In our Retail segment, there were 2,748 company-owned stores operating in
the United States and Canada as of December 31, 2003. All but one of our stores
are located on leased premises that typically range in size from 1,000 to 2,000
square feet. In our Franchise segment, substantially all of our 1,362 franchised
stores in the United States and Canada are located on premises we lease, and
then sublease to our respective franchisees. All of our 647 franchised stores in
other international locations are owned or leased directly by our franchisees.
No single store is material to our operations.
As of December 31, 2003, our company-owned and franchised stores in the
United States and Canada (excluding store-within-a-store locations) and our
other international franchised stores consisted of:
<Table>
<Caption>
COMPANY-
OWNED
UNITED STATES AND CANADA RETAIL FRANCHISE INTERNATIONAL FRANCHISE
- ------------------------ -------- --------- ------------- ---------
Alabama........................... 34 14 Aruba............................. 2
Alaska............................ 6 5 Australia......................... 35
Arizona........................... 45 15 Bahamas........................... 3
Arkansas.......................... 19 6 Brazil............................ 11
California........................ 211 181 Brune............................. 1
Colorado.......................... 50 29 Cayman Islands.................... 1
Connecticut....................... 40 9 Chile............................. 45
Delaware.......................... 9 10 Costa Rica........................ 5
District of Columbia.............. 7 3 Dominican Republic................ 12
Florida........................... 231 128 Ecuador........................... 12
Georgia........................... 87 65 El Salvador....................... 8
Hawaii............................ 20 2 Guam.............................. 5
Idaho............................. 9 5 Guatemala......................... 12
Illinois.......................... 93 76 Honduras.......................... 1
Indiana........................... 49 35 Hong Kong......................... 2
Iowa.............................. 27 8 Indonesia......................... 22
Kansas............................ 19 14 Israel............................ 15
Kentucky.......................... 39 11 Japan............................. 8
Louisiana......................... 37 8 Korea............................. 9
Maine............................. 9 0 Kuwait............................ 4
Maryland.......................... 59 30 Lebanon........................... 5
Massachusetts..................... 55 12 Malaysia.......................... 16
Michigan.......................... 85 49 Mexico............................ 161
Minnesota......................... 61 17 Panama............................ 5
Mississippi....................... 20 9 Peru.............................. 12
Missouri.......................... 47 23 Philippines....................... 42
Montana........................... 6 3 Saudi Arabia...................... 32
Nebraska.......................... 5 20 Singapore......................... 60
Nevada............................ 12 10 South Africa...................... 8
New Hampshire..................... 17 5 Taiwan............................ 14
New Jersey........................ 76 60 Thailand.......................... 29
New Mexico........................ 22 2 Turkey............................ 17
New York.......................... 158 63 U.S. Virgin Islands............... 2
North Carolina.................... 86 48 Venezuela......................... 31
North Dakota...................... 6 0
Ohio.............................. 105 66
Oklahoma.......................... 31 7
Oregon............................ 24 11
Pennsylvania...................... 136 55
</Table>
63
<Table>
<Caption>
COMPANY-
OWNED
UNITED STATES AND CANADA RETAIL FRANCHISE INTERNATIONAL FRANCHISE
- ------------------------ -------- --------- ------------- ---------
Puerto Rico....................... 26 0
Rhode Island...................... 12 1
South Carolina.................... 31 27
South Dakota...................... 5 0
Tennessee......................... 43 38
Texas............................. 199 98
Utah.............................. 22 8
Vermont........................... 5 0
Virginia.......................... 91 31
Washington........................ 51 23
West Virginia..................... 25 3
Wisconsin......................... 47 11
Wyoming........................... 4 1
Canada............................ 135 7
----- ----- ---
TOTAL........................... 2,748 1,362 TOTAL 647
===== ===== ===
</Table>
In our Manufacturing/Wholesale segment, we lease facilities for
manufacturing, packaging, warehousing, and distribution operations. The majority
of our manufacturing of GNC proprietary products occurs at a 230,000 square foot
facility in Greenville, South Carolina. We also lease 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 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 also lease a 210,000 square
foot distribution center in Leetsdale, Pennsylvania and a 112,000 square foot
distribution center in Phoenix, Arizona. We conduct additional manufacturing
that we perform for wholesalers or retailers of third-party products, as well as
certain additional warehousing at a leased facility located in New South Wales,
Australia.
We also lease four small regional sales offices in Clearwater, Florida;
Fort Lauderdale, Florida; Laguna Hills, 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 50% limited
partner. 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 $14.2 million as of December 31, 2003.
ENVIRONMENTAL
We are subject to numerous federal, state, local and foreign environmental
laws and regulations governing our operations, including the handling,
transportation and disposal of our products, and our non-hazardous and hazardous
substances and wastes, as well as emissions and discharges into the environment,
including discharges to air, surface water and groundwater. Failure to comply
with such laws and regulations could result in costs for corrective action,
penalties or the imposition of other liabilities. Changes in laws or the
interpretation thereof or the development of new facts could also cause us to
incur additional capital and operation expenditures to maintain compliance with
environmental laws and regulations. We also are subject to laws and regulations
that impose liability and cleanup responsibility for releases of hazardous
substances into the environment without regard to fault or knowledge about the
condition or action causing the liability. Under certain of these laws and
regulations, such liabilities can be imposed for cleanup of previously owned or
operated properties, or properties to which substances or wastes were sent by
current or former operations at our facilities. The presence of contamination
from such substances or wastes could also adversely affect our ability to sell
or lease our properties, or to use them as collateral for financing. From time
to time, we have incurred and are incurring costs and obligations for correcting
environmental noncompliance matters and
64
for remediation at or relating to certain of our properties. We believe we have
complied with, or are currently complying with, our environmental obligations to
date and that such liabilities will not have a material adverse effect on our
business or financial performance. However, we cannot assure you that future
liabilities and obligations will not have a material adverse effect on our
business operations or financial condition.
LEGAL PROCEEDINGS
We are from time to time engaged in litigation. We regularly review all
pending litigation matters in which we are involved and establish reserves
deemed appropriate by management for these litigation matters. However, some of
these matters are material and an adverse outcome in these matters could have a
material impact on our financial condition and operating results.
As a manufacturer and retailer of nutritional supplements 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
financial condition and operating results. We currently maintain product
liability insurance with a deductible/retention of $1.0 million per claim with
an aggregate cap on retained loss of $10 million per claim. We generally seek to
obtain contractual indemnification from parties that supply raw materials for
our products or that manufacture or market products we sell, and to be added as
additional insured under these parties' insurance policies. We are also entitled
to indemnification by Royal Numico, N.V. and Numico USA, Inc. for certain losses
arising from claims related to products containing ephedra or Kava Kava sold
prior to December 5, 2003. 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. See "Risk
Factor -- Risks Relating to Our Business and Operations -- Products
Liability -- We may incur material products liability and products recall
costs."
EPHEDRA. As of March 15, 2004, we have been named as a defendant in 100
cases involving the sale of third-party products that contain ephedra. 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 the deaths of several individuals. In early 2003, we instructed all of
our locations to stop selling products containing ephedra that were manufactured
by GNC or one of our affiliates. Subsequently, we instructed all of our
locations to stop selling any products containing ephedra by June 30, 2003. All
claims to date have been tendered to the third-party manufacturer or to our
insurer and we have incurred no expense to date with respect to litigation
involving ephedra products. Furthermore, we are entitled to indemnification by
Royal Numico N.V. and Numico USA, Inc. for certain losses arising from claims
related to products containing ephedra sold prior to December 5, 2003.
PRO-HORMONE/ANDROSTENDIONE. On July 29, 2001, substantially identical
class action lawsuits were filed in the state courts of the States of Florida,
New York, New Jersey, Pennsylvania and Illinois against us and various
manufacturers of products containing pro-hormones, including androstendione.
Plaintiffs allege that we have distributed or published periodicals that contain
advertisements claiming that the various pro-hormone products promote muscle
growth. The complaint alleges that we knew the advertisements and label claims
promoting muscle growth were false, but nonetheless continued to sell the
products to consumers. We have tendered these cases to the various manufacturers
for defense and indemnification. Based upon the information available to us at
the present time, we believe that these matters will not have a material adverse
effect upon our liquidity, financial condition or results of operations.
"BEST BY" LITIGATION. In November 2001, substantially identical class
action lawsuits were filed in the state courts of the States of Florida,
Connecticut and Pennsylvania alleging that we have engaged in a continuous
practice of including false and misleading "best by" dates on our product labels
and/or selling products after the expiration of the purported "best by" dates.
By agreement of the parties, the Connecticut and Pennsylvania actions have been
stayed pending the outcome of the Florida case. The Florida case was submitted
to mediation but no resolution was obtained. The plaintiffs have not taken any
subsequent action to move the case forward. Furthermore, we are entitled to
indemnification by Royal Numico N.V. and Numico USA, Inc. for certain losses
arising from all claims related to this litigation. Based upon the information
65
available to us at the present time, we believe that these matters will not have
a material adverse effect upon our liquidity, financial condition or results of
operations.
CALIFORNIA WAGE CLAIMS. On November 2, 2001, Matthew Capelouto, a former
store manager in California, filed a lawsuit in the Superior Court of
California, Orange County, initially claiming that we misclassified store
managers at our company-owned stores as exempt from overtime requirements and
failed to pay them overtime, in violation of California's wage and hour laws.
The plaintiff is seeking to certify the case as a class action lawsuit. We
intend to vigorously oppose class certification. On October 23, 2003, an amended
complaint was filed, adding another named plaintiff, as well as claims for
failure to provide required meal periods and rest periods for GNC managers at
our company-owned stores. Based upon the information available to us at the
present time, we believe that these matters will not have a material adverse
effect upon our liquidity, financial condition or results of operations.
GOVERNMENT REGULATION
PRODUCT REGULATION
Domestic
The processing, formulation, manufacturing, packaging, labeling,
advertising and distribution of our products are subject to regulation by one or
more federal agencies, including the Food and Drug Administration ("FDA"), the
Federal Trade Commission ("FTC"), the Consumer Product Safety Commission, the
United States Department of Agriculture and the Environmental Protection Agency.
These activities are also regulated by various agencies of the states and
localities in which our products are sold. Pursuant to the Federal Food, Drug,
and Cosmetic Act ("FDCA"), the FDA regulates the formulation, safety,
manufacture, packaging, labeling and distribution of dietary supplements,
(including vitamins, minerals, herbs) and over-the-counter drugs. The FTC has
jurisdiction to regulate the advertising of these products.
The FDCA has been amended several times with respect to dietary
supplements, in particular by the Dietary Supplement Health and Education Act of
1994 ("DSHEA"). DSHEA established a new framework governing the composition,
safety, labeling and marketing of dietary supplements. "Dietary supplements" are
defined as vitamins, minerals, herbs, other botanicals, amino acids and other
dietary substances for human use to supplement the diet, as well as
concentrates, metabolites, constituents, extracts or combinations of such
dietary ingredients. Generally, under DSHEA, dietary ingredients that were on
the market prior to October 15, 1994 may be used in dietary supplements without
notifying the FDA. "New" dietary ingredients (i.e., dietary ingredients that
were "not marketed in the United States before October 15, 1994") must be the
subject of a new dietary ingredient notification submitted to the FDA unless the
ingredient has been "present in the food supply as an article used for food"
without being "chemically altered." A new dietary ingredient notification must
provide the FDA evidence of a "history of use or other evidence of safety"
establishing that use of the dietary ingredient "will reasonably be expected to
be safe." A new dietary ingredient notification must be submitted to the FDA at
least 75 days before the initial marketing of the new dietary ingredient. There
is no certainty that the FDA will accept any particular evidence of safety for
any new dietary ingredient. The FDA's refusal to accept such evidence could
prevent the marketing of such dietary ingredients.
The FDA issued a consumer warning in 1996, followed by proposed regulations
in 1997, covering dietary supplements that contain ephedra or its active
substance, ephedrine. In February 2003, the Department of Health and Human
Services, announced a series of actions that the Department of Health and Human
Services and the FDA plan to execute with respect to products containing ephedra
or ephedrine, including the solicitation of evidence regarding the significant
or unreasonable risk of illness or injury from dietary supplements containing
ephedra and the immediate execution of a series of actions against ephedra or
ephedrine products making unsubstantiated claims about sports performance
enhancement. In addition, many states proposed regulations and three states
enacted laws restricting the promotion and distribution of ephedra-containing
dietary supplements. The botanical ingredient ephedra was formerly used in
several third party and private label dietary supplement products. In January
2003, we began focusing our diet category on products that would replace ephedra
products. In early 2003, we instructed all of our locations to stop selling
products
66
containing ephedra that were manufactured by GNC(R) or one of our affiliates.
Subsequently, we instructed all of our locations to stop selling any products
containing ephedra by June 30, 2003. Sales of products containing ephedra
amounted to approximately $35.2 million, or 3.3% of our retail sales, in 2003
and approximately $182.9 million, or 17.1% of our retail sales, in 2002. In
February 2004, the FDA issued a final regulation declaring dietary supplements
containing ephedrine alkaloids illegal under the FDCA because they present an
unreasonable risk of illness or injury under the conditions of use recommended
or suggested in labeling, or if no conditions of use are suggested or
recommended in labeling, under ordinary conditions of use. The rule took effect
on April 12, 2004 and bans the sale of dietary supplement products containing
ephedra or ephedrine. Similarly, the FDA issued a consumer advisory in 2002 with
respect to dietary supplements that contain the ingredient Kava, and the FDA is
currently investigating adverse effects associated with ingestion of this
ingredient. One of our subsidiaries, Nutra Manufacturing, Inc. (f/k/a Nutricia
Manufacturing USA, Inc.), manufactured products containing Kava Kava from
December 1995 until August 2002. All stores were instructed to stop selling
products containing Kava Kava in December 2002. The FDA could take similar
actions against other products or product ingredients which it determines
present an unreasonable health risk to consumers.
DSHEA permits "statements of nutritional support" to be included in
labeling for dietary supplements without FDA premarket approval. Such statements
must be submitted to FDA within thirty days of marketing and must bear a label
disclosure that "This statement has not been evaluated by the Food and Drug
Administration. This product is not intended to diagnose, treat, cure, or
prevent any disease." Such statements may describe how a particular dietary
ingredient affects the structure, function or general well-being of the body, or
the mechanism of action by which a dietary ingredient may affect body structure,
function or well-being, but may not expressly or implicitly represent that a
dietary supplement will diagnose, cure, mitigate, treat, or prevent a disease. A
company that uses a statement of nutritional support in labeling must possess
scientific evidence substantiating that the statement is truthful and not
misleading. If the FDA determines that a particular statement of nutritional
support is an unacceptable drug claim or an unauthorized version of a disease
claim for a food product, or, if the FDA determines that a particular claim is
not adequately supported by existing scientific data or is false or misleading,
we would be prevented from using the claim.
In addition, DSHEA provides that so-called "third-party literature," e.g.,
a reprint of a peer-reviewed scientific publication linking a particular dietary
ingredient with health benefits, may be used "in connection with the sale of a
dietary supplement to consumers" without the literature being subject to
regulation as labeling. Such literature must not be false or misleading; the
literature may not "promote" a particular manufacturer or brand of dietary
supplement; and a balanced view of the available scientific information on the
subject matter must be presented. If the literature fails to satisfy each of
these requirements, we may be prevented from disseminating such literature with
our products, and any dissemination could subject our product to regulatory
action as an illegal drug.
We expect that the FDA will adopt in the near future the final regulations,
proposed on March 13, 2003, regarding good manufacturing practice in
manufacturing, packing, or holding dietary ingredients and dietary supplements,
authorized by DSHEA. Good manufacturing practice regulations would require
dietary supplements to be prepared, packaged and held in compliance with strict
rules, and might require quality control provisions similar to those in the good
manufacturing practice regulations for drugs. There can be no assurance that, if
the FDA adopts good manufacturing practice regulations for dietary supplements,
we or our third-party supplier or vendors will be able to comply with the new
rules without incurring substantial additional expenses.
The FDA has broad authority to enforce the provisions of the FDCA
applicable to dietary supplements, including powers to issue a public warning
letter to a company, to publicize information about illegal products, to request
a recall of illegal products from the market, and to request the Department of
Justice to initiate a seizure action, an injunction action, or a criminal
prosecution in the United States courts. The regulation of dietary supplements
may increase or become more restrictive in the future.
Legislation has been introduced in Congress to impose substantial new
regulatory requirements for dietary supplements, e.g., S.722, S.1538, S.1780,
H.R. 3377 and H.R. 3866, S.722 would impose adverse
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event reporting, postmarket surveillance requirements, FDA reviews of dietary
supplement ingredients, and other requirements. H.R. 3377 would impose similar
requirements as well as safety testing and records inspection. S.1538 would
increase FDA appropriations to allow full implementation and enforcement of
DSHEA. S.1780 and H.R. 3866 would subject specified anabolic steroid substances
currently used in some dietary supplements, such as "andro," to the requirements
of the Controlled Substances Act. The dietary supplement industry supports
S.1538, S.1780, and H.R. 3866. If enacted, S.722 and H.R. 3377 could raise our
costs and hinder our business.
The FTC exercises jurisdiction over the advertising of dietary supplements.
In recent years, the FTC has instituted numerous enforcement actions against
dietary supplement companies for failure to have adequate substantiation for
claims made in advertising or for the use of false or misleading advertising
claims. We continue to be subject to three consent orders issued by the FTC. In
1984, the FTC instituted an investigation of General Nutrition, Incorporated,
one of our subsidiaries, alleging deceptive acts and practices in connection
with the advertising and marketing of certain of its products. General
Nutrition, Incorporated accepted a proposed consent order which was finalized in
1989, under which it agreed to refrain from, among other things, making certain
claims with respect to certain of its products unless the claims are based on
and substantiated by reliable and competent scientific evidence. We also entered
into a consent order in 1970 with the FTC, which generally addressed "iron
deficiency anemia" type products. As a result of routine monitoring by the FTC,
disputes arose concerning its compliance with these orders, and with regard to
advertising for certain hair care products. While General Nutrition,
Incorporated believes that, at all times, it operated in material compliance
with the orders, it entered into a settlement in 1994 with the FTC to avoid
protracted litigation. As a part of this settlement, General Nutrition,
Incorporated entered into a consent decree and paid, without admitting
liability, a civil penalty in the amount of $2.4 million and agreed to adhere to
the terms of the 1970 and 1989 consent orders and to abide by the provisions of
the settlement document concerning hair care products. We do not believe that
future compliance with the outstanding consent decrees will materially affect
our business operations. In 2000, the FTC amended the 1970 order to clarify
language in the 1970 order that was believed to be ambiguous and outmoded.
The FTC continues to monitor our advertising and, from time to time,
requests substantiation with respect to such advertising to assess compliance
with the various outstanding consent decrees and with the Federal Trade
Commission Act. Our policy is to use advertising that complies with the consent
decrees and applicable regulations. We review all products brought into our
distribution centers to assure that such products and their labels comply with
the consent decrees. We also review the use of third-party point of purchase
materials such as store signs and promotional brochures. Nevertheless, there can
be no assurance that inadvertent failures to comply with the consent decrees and
applicable regulations will not occur. Approximately 20% of the products sold by
franchised stores are purchased by franchisees directly from other vendors and
these products do not flow through our distribution centers. Although franchise
contracts contain strict requirements for store operations, including compliance
with federal, state, and local laws and regulations, we cannot exercise the same
degree of control over franchisees as we do over our company-owned stores. As a
result of our efforts to comply with applicable statutes and regulations, we
have from time to time reformulated, eliminated or relabeled certain of our
products and revised certain provisions of our sales and marketing program. We
believe we are in material compliance with the various consent decrees and with
applicable federal, state and local rules and regulations concerning our
products and marketing program. Compliance with the provisions of national,
state and local environmental laws and regulations has not had a material effect
upon our capital expenditures, earnings, financial position, liquidity or
competitive position.
Foreign
Our products sold in foreign countries are also subject to regulation under
various national, local, and international laws that include provisions
governing, among other things, the formulation, manufacturing, packaging,
labeling, advertising and distribution of dietary supplements and
over-the-counter drugs. Government regulations in foreign countries may prevent
or delay the introduction, or require the reformulation, of certain of our
products.
68
We cannot determine what effect additional domestic or international
governmental legislation, regulations or administrative orders, when and if
promulgated, would have on our business in the future. New legislation or
regulations may require the reformulation of certain products to meet new
standards, require the recall or discontinuance of certain products not capable
of reformulation, impose additional record keeping or require expanded
documentation of the properties of certain products, expanded or different
labeling, or scientific substantiation.
FRANCHISE REGULATION
We must comply with regulations adopted by the FTC and with several state
laws that regulate the offer and sale of franchises. The FTC's Trade Regulation
Rule on Franchising and certain state laws require that we furnish prospective
franchisees with a franchise offering circular containing information prescribed
by the Trade Regulation Rule on Franchising and applicable state laws and
regulations.
We also must comply with a number of state laws that regulate some
substantive aspects of the franchisor-franchisee relationship. These laws may
limit a franchisor's business practices in a number of ways, including limiting
the ability to:
- terminate or not renew a franchise without good cause;
- interfere with the right of free association among franchisees;
- disapprove the transfer of a franchise;
- discriminate among franchisees with regard to charges, royalties and
other fees; and
- place new stores near existing franchises.
To date, these laws have not precluded us from seeking franchisees in any
given area and have not had a material adverse effect on our operations. Bills
intended to regulate certain aspects of franchise relationships have been
introduced into Congress on several occasions during the last decade, but none
have been enacted.
Our international franchise agreements and franchise operations are
regulated by various foreign laws, rules and regulations. To date, these laws
have not precluded us from seeking franchisees in any given area and have not
had a material adverse effect on our operations.
69
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding directors and
executive officers of GNC and the other registrants of March 30, 2004.
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
Louis Mancini............... 58 Chief Executive Officer and Director -- General Nutrition
Centers, Inc.(1)
David Heilman............... 51 Executive Vice President and Chief Financial
Officer -- General Nutrition Centers, Inc.(2)
Joseph Fortunato............ 51 Executive Vice President and Chief Operating
Officer -- General Nutrition Centers, Inc.
James M. Sander............. 47 Senior Vice President, Chief Legal Officer and
Secretary -- General Nutrition Centers, Inc.(3)
Curt Larrimer............... 48 Senior Vice President of Finance and Corporate
Controller -- General Nutrition Centers, Inc.
Michael Locke............... 58 Senior Vice President of Manufacturing -- General Nutrition
Centers, Inc.
J.J. Sorrenti............... 38 Senior Vice President and General Manager of
Franchising -- General Nutrition Centers, Inc.
Reginald Steele............. 58 Senior Vice President of International
Franchising -- General Nutrition Centers, Inc.
Susan Trimbo................ 48 Senior Vice President of Scientific Affairs -- General
Nutrition Centers, Inc.
Margaret Peet............... 41 Senior Vice President and National Sales Director
Tom Dowd.................... 40 Senior Vice President of Stores
Lee Karayusuf............... 54 Senior Vice President of Distribution and Transportation
Eileen Scott................ 50 Senior Vice President, Human Resources & Customer Service
Peter P. Copses............. 44 Chairman of the Board of Directors -- General Nutrition
Centers, Inc.(4)
Andrew S. Jhawar............ 32 Director -- General Nutrition Centers, Inc.(5)
George G. Golleher.......... 54 Director -- General Nutrition Centers, Inc.(4)
Mary Elizabeth Burton....... 51 Director -- General Nutrition Centers, Inc.
Robert J. DiNicola.......... 56 Director -- General Nutrition Centers, Inc.(4)
Edgardo A. Mercadante....... 48 Director -- General Nutrition Centers, Inc.(5)
Joshua J. Harris............ 38 Director -- General Nutrition Centers, Inc.
Joseph W. Harch............. 50 Director -- General Nutrition Centers, Inc.(5)
</Table>
- ---------------
(1) Holds same position(s) with General Nutrition Companies, Inc., General
Nutrition Corporation, General Nutrition Distribution Company, General
Nutrition Distribution, L.P., General Nutrition Government Services, Inc.,
General Nutrition, Incorporated, General Nutrition Investment Company,
General Nutrition International, Inc., General Nutrition Sales Corporation,
General Nutrition Systems, Inc., GNC (Canada) Holding Company, GNC
Franchising, LLC, GNC, Limited, GNC US Delaware, Inc., GN Investment, Inc.,
Informed Nutrition, Inc. and Nutra Manufacturing, Inc.
(2) Also Executive Vice President, Chief Financial Officer and Director of
General Nutrition Companies, Inc., General Nutrition Corporation, General
Nutrition Distribution Company, General Nutrition Distribution, L.P.,
General Nutrition Government Services, Inc., General Nutrition,
Incorporated, General Nutrition Investment Company, General Nutrition
International, Inc., General Nutrition Sales Corporation, General Nutrition
Systems, Inc., GNC (Canada) Holding Company, GNC Franchising, LLC, GNC,
Limited, GNC US Delaware, Inc., GN Investment, Inc., Informed Nutrition,
Inc. and Nutra Manufacturing, Inc.
(3) See footnote 1.
(4) Member of Compensation Committee of General Nutrition Centers, Inc.
(5) Member of Audit Committee of General Nutrition Centers, Inc.
LOUIS MANCINI became GNC's Chief Executive Officer in November 2003 and is
one of GNC's directors. Mr. Mancini also serves as Chief Executive Officer and
as a director for each of our subsidiaries. In
70
January 2003, Mr. Mancini returned to General Nutrition Companies, Inc. as
Executive Vice President and Chief Marketing Officer. Prior to 2003, Mr. Mancini
was President and Chief Executive Officer of Nutraceuticals Enterprises, LLC
from March 2000 to January 2003. He was Chief Executive Officer of Omni
Nutraceuticals from April 1999 to March 2000 and was its President and Chief
Operating Officer from October 1998 to April 1999. Mr. Mancini was with us from
February 1977 until October 1998 and served in various positions during that
time, including President from December 1995 until October 1998, Senior Vice
President and General Manager from September 1988 until December 1995, Division
Manager from June 1985 to October 1986 and Regional Sales Manager from July 1984
to June 1985.
DAVID HEILMAN became GNC's Executive Vice President and Chief Financial
Officer in November 2000. Mr. Heilman also serves as Executive Vice President
and Chief Financial Officer and as a director for each of our subsidiaries. Mr.
Heilman joined General Nutrition Companies, Inc. in December 1994 and served as
our Vice President of Strategic Planning and Corporate Development from February
1995 until November 2000. During 1994, Mr. Heilman was a consultant with
Meridian Group, a private investment banking concern, and from January 1990 to
December 1993, Mr. Heilman served as the President of First Westinghouse Capital
Corporation, a subsidiary of Westinghouse Financial Services. Mr. Heilman serves
on the board of directors of the National Nutritional Foods Association.
JOSEPH FORTUNATO became GNC's Executive Vice President and Chief Operating
Officer in November 2001. From October 2000 until November 2001, Mr. Fortunato
served as our Executive Vice President of Retail Operations and Store
Development. Mr. Fortunato began his employment with General Nutrition
Companies, Inc. in October 1990 and has held various positions, including Senior
Vice President of Store Development and Operations from 1998 until 2000, Vice
President of Financial Operations from 1997 until 1998 and Director of Financial
Operations from 1990 until 1997.
JAMES M. SANDER became GNC's Senior Vice President in November 2001. Mr.
Sander has been GNC's Vice President, Chief Legal Officer and Secretary of
General Nutrition Companies, Inc. and each of our subsidiaries and as a director
of each of our subsidiaries since February 1993. From February 1989 until
February 1993, Mr. Sander served as our Assistant General Counsel and Assistant
Secretary. Prior to working at General Nutrition Companies, Inc., Mr. Sander was
the Assistant Vice President and Corporate and Securities Counsel for Equimark
Corporation from 1985 until 1988.
CURT LARRIMER became GNC's Senior Vice President of Finance and Corporate
Controller in August 2001. From January 1995 until August 2001, Mr. Larrimer
served as GNC's Vice President and Controller since January 1995. He began his
employment with General Nutrition, Incorporated in the Budgets and Taxes
department in 1980 and has held various positions, including Controller of the
Retail and Manufacturing/ Wholesale divisions and Assistant Corporate
Controller, Vice President and Controller.
MICHAEL LOCKE became GNC's Senior Vice President of Manufacturing in June
2003. Prior to that he was GNC's Senior Vice President of Operations. He served
as GNC's Director of Distribution from 1986 until 1991. From 1991 until 1993, he
served as GNC's Vice President of Distribution. Mr. Locke had served as GNC's
Senior Vice President of Manufacturing from 1994 until 1999. From 1999 until
2003, Mr. Locke served as the head of North American manufacturing operations
for GNC's former parent company, Numico.
J.J. SORRENTI became GNC's Senior Vice President and General Manager of
Franchising in April 2003. From December 2000 until April 2003, Mr. Sorrenti
served as GNC's Senior Vice President of Retail Stores. In October 2000, Mr.
Sorrenti returned to GNC Franchising, Inc. (n/k/a GNC Franchising, LLC), and
served as GNC's Vice President for Franchise Operations until December 2000.
From October 1999 through October 2000, Mr. Sorrenti was the Chief Operating
Officer of the franchise division of Nevada Bob's Golf in Dallas, Texas. From
January 1994 through October 1999, Mr. Sorrenti was Director of Operations of
GNC Franchising, Inc.
REGINALD STEELE became GNC's Senior Vice President of International
Franchising in April 2001. Mr. Steele started as a Vice President of General
Nutrition International Inc. in March 1994. From 1992 through March 1994, Mr.
Steele was Executive Vice President and Chief Operating Officer of the Coffee
Beanery, Ltd., a 300-unit gourmet coffee store retailer. From 1989 to 1992, Mr.
Steele was employed as
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Senior Vice President of Franchising for Shoney's Restaurants Inc., a casual
dining restaurant company. From 1985 to 1989 Mr. Steele was the Vice President
and Executive Vice President of Franchise Operations for Arby's, Inc., a
2,600-unit fast food chain.
SUSAN TRIMBO, PH.D. became GNC's Senior Vice President of Scientific
Affairs in August 2001. Dr. Trimbo joined GNC in 1999 as Vice President of
Scientific Affairs and, between 2000 and 2003, she also provided oversight for
all of our former parent company, Numico USA, Inc.'s North American nutritional
supplement businesses. Prior to joining GNC, Dr. Trimbo worked for Wyeth
Consumer Healthcare on its Centrum vitamin business from 1997 until 1999 and for
Clintec, a Nestle S.A./Baxter Healthcare Medical Nutrition venture, from 1986
until 1997.
MARGARET PEET became GNC's Senior Vice President and National Sales
Director in January 2004. Margaret was formerly founder and Managing Director of
Health and Diet Centre Limited, a UK-based nutritional supplements chain, which
was acquired by GNC in 1995. Ms. Peet remained Managing Director under GNC's
ownership until March 2003 when Diet Centre Limited was sold. At that time Ms.
Peet founded Healthy Inspirations Limited, a consulting firm that worked with
retailers and manufacturers to formulate initiatives designed to increase market
share; until she rejoined GNC in January 2004.
TOM DOWD became GNC's Senior Vice President of Stores in March 2003. From
March 2001 until March 2003 Mr. Dowd was President of Contract Supplement
Manufacturing Company, a product consulting company. From 1997 until 1999, Mr.
Dowd was one of GNC's Divisional Vice Presidents. From 1994 until 1997 Mr. Dowd
held Divisional Sales Director position in Division Two, and from 1989 until
1994 Mr. Dowd was a Regional Sales Director.
LEE KARAYUSUF became GNC's Senior Vice President of Distribution and
Transportation in December 2000 with additional responsibility for GNC's then
affiliates, Rexall Sundown and Unicity. Mr. Karayusuf started as our Director of
Transportation from December 1991 until March 1994 and Vice President of
Transportation and Distribution from 1994 until December 2000. Prior to working
at GNC in 1991, Mr. Karayusuf was responsible for transportation operations for
Daily Juice Company until he began his career with GNC.
EILEEN D. SCOTT became Senior Vice President in January 2001; has been our
Vice President of Human Resources since May 1996 and Director of Human Resources
since October 1989. Ms. Scott joined GNC in August 1988 as Assistant Director,
Human Resources. Prior to working at GNC, Ms. Scott was the Director of
Compensation and Benefits at the Joseph Horne Company, a department store chain,
and had held a variety of finance and human resources positions there from 1978
to 1988.
PETER P. COPSES has been the Chairman of the Board of Directors of GNC
since October 2003. Mr. Copses is a founding Senior Partner at Apollo, a private
securities investment fund, and has served as an officer of certain affiliates
of Apollo since 1990. Prior to that time, from 1986 to 1990, Mr. Copses was
initially an investment banker at Drexel Burnham Lambert Incorporated, and
subsequently at Donaldson, Lufkin & Jenrette Securities Corporation, an
investment bank. Mr. Copses is also a Director of Rent-A-Center, Inc., Zale
Corporation, Compass Minerals International, Inc. and Resolution Performance
Products Inc.
ANDREW S. JHAWAR has been a member of GNC's Board of Directors since
October 2003. Mr. Jhawar is a Partner at Apollo, where he has been employed
since February 2000. Prior to joining Apollo, Mr. Jhawar was an investment
banker at Donaldson, Lufkin & Jenrette Securities Corporation from July 1999
until January 2000 and at Jefferies & Company, Inc. from August 1993 until
December 1997. Mr. Jhawar is also a Director of Rent-A-Center, Inc.
GEORGE G. GOLLEHER has been a member of GNC's Board of Directors since
December 2003. Mr. Golleher is a business consultant and private equity
investor. From March 1998 to May 1999, Mr. Golleher served as President, Chief
Operating Officer and director of Fred Meyer, Inc. a food and drug retailer. In
May 1999, Fred Meyer, Inc. merged with Kroger Company. Prior to joining Fred
Meyer, Inc., Mr. Golleher served for 15 years with Ralphs Grocery Company until
March 1998, ultimately as the Chief Executive Officer and Vice Chairman of the
Board. Mr. Golleher is currently also Chairman of the Board of
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American Restaurant Group, Inc., and is a director of Rite Aid Corporation and
director and Chief Executive Officer of Simon Worldwide, Inc.
MARY ELIZABETH BURTON has been a member of GNC's Board of Directors since
December 2003. Since July 1992, Ms. Burton has also served as the Chairman and
Chief Executive Officer of BB Capital, Inc., a management services and advisory
company, which she owns. From June 1998 until April 1999, Ms. Burton served as
the Chief Executive Officer of The Cosmetic Center, Inc., a specialty retailer
of cosmetics and fragrances. From July 1991 to June 1992, Ms. Burton also served
as the Chief Executive Officer of PIP Printing, Inc., a leading business
printing franchise chain. In addition, Ms. Burton was the Chief Executive
Officer of Supercuts, Inc. from September 1987 until May 1991, as well as having
served in various other senior executive level capacities in the retailing
industry. Ms. Burton currently also serves on the Board of Directors of Staples,
Inc., The Sports Authority, Inc., Rent-A-Center, Inc., Zale Corporation and
Aeropostale, Inc.
ROBERT J. DINICOLA has been a member of GNC's Board of Directors since
December 2003. Mr. DiNicola is a 32-year veteran of the retail industry. He
currently serves as the Chairman of the Board of Zale Corporation since December
2003. Mr. DiNicola was previously the Chairman and Chief Executive Officer of
Zale Corporation from February 2001 through July 2002 and from April 1994
through July 1999. From 1991 to 1994, prior to joining Zale Corporation, Mr.
DiNicola served as the Chairman and Chief Executive Officer of the Bon Marche, a
division of Federated Department Stores. From 1989 to 1991, Mr. DiNicola was a
general merchandising manager of Rich's, a division of Federated Department
Stores.
EDGARDO A. MERCADANTE has been a member of GNC's Board of Directors since
December 2003. Mr. Mercadante is currently Chairman and Chief Executive Officer
of Familymeds Group, Inc., a company that operates specialty clinic-based
pharmacies and vitamin centers. Prior to joining Familymeds, Mr. Mercadante was
President and Chief Executive Officer of APP, Inc., a pharmacy benefit
management company, which he co-founded in 1991. Additionally from 1987 to 1996,
Mr. Mercadante was President of Arrow Corp., a franchise pharmacy retailer.
Prior to joining Arrow, Mr. Mercadante was Chief Operating Officer of Appell
Management Corp., a company that established licensed pharmacy outlets in
supermarkets. From 1980 to 1986, Mr. Mercadante was a Division Manager at Rite
Aid Corporation.
JOSHUA J. HARRIS has been a member of GNC's Board of Directors since
December 2003. Mr. Harris is a founding Senior Partner at Apollo and has served
as an officer of certain affiliates of Apollo since 1990. Prior to that time,
Mr. Harris was a member of the Mergers and Acquisitions Department of Drexel
Burnham Lambert Incorporated, an investment bank. Mr. Harris is also a Director
of Breuners Home Furnishings Corporation, Compass Minerals International, Inc.,
Pacer International, Inc., Quality Distribution Inc., Resolution Performance
Products Inc. and Nalco Company.
JOSEPH W. HARCH has been a member of GNC's Board of Directors since
February 2004. Mr. Harch is a Certified Public Accountant and has been in the
securities business since 1979. Mr. Harch founded Harch Capital Management, Inc.
(HCM) in 1991. At HCM, Mr. Harch has worked as a research analyst, investment
strategist and portfolio manager for HCM's high yield fixed income and equity
accounts. Between 1979 and 1991, Mr. Harch was a senior investment banker with
the firms of Bateman Eichler, Hill Richards, Prudential Bache Securities, Drexel
Burnham Lambert, Inc. ("Drexel Burnham") and Donaldson, Lufkin & Jenrette, Inc.
From October 1988 through February 1990, Mr. Harch was the National High Yield
Sales Manager at Drexel Burnham, where he managed its high yield sales force and
syndicate and was responsible for new account development and origination.
BOARD COMPOSITION
As of February 5, 2004, GNC's Board of Directors was composed of nine
directors and the Board of Directors of each of General Nutrition Companies,
Inc., General Nutrition Corporation, General Nutrition Distribution Company,
General Nutrition Government Services, Inc., General Nutrition, Incorporated,
General Nutrition Investment Company, General Nutrition International, Inc.,
General Nutrition Sales Corporation, General Nutrition Systems, Inc., GNC
(Canada) Holding Company, GNC, Limited, GNC US Delaware, Inc.,
73
GN Investment, Inc., Informed Nutrition, Inc. and Nutra Manufacturing, Inc. was
composed of three directors and in the case of GNC Franchising, LLC, the
Management Committee was comprised of three managers.
Each director of each of the registrants serves for annual terms and until
his or her successor is elected and qualified and in the case of GNC
Franchising, LLC, each manager serves until removal or resignation. The annual
stockholders meeting for General Nutrition Centers, Inc. is held at such date
and at such time as designated by the Board of Directors from time to time, at
which the directors are elected. The annual stockholders meetings for General
Nutrition Corporation, General Nutrition, Incorporated, General Nutrition
Companies, Inc., GNC US Delaware, Inc., GN Investment, Inc., General Nutrition
Investment Company, General Nutrition Sales Corporation and Nutra Manufacturing,
Inc. (f/k/a Nutricia Manufacturing USA, Inc.) are scheduled to be held on the
first Monday in July. The annual stockholders meetings for General Nutrition
Distribution Company, General Nutrition Government Services, Inc., General
Nutrition International, Inc., General Nutrition Systems, Inc., GNC (Canada)
Holding Company, GNC, Limited and Informed Nutrition, Inc. are scheduled to be
held on the second Thursday in June. Apollo indirectly controls a majority of
the common stock of General Nutrition Centers Holding Company, our parent
company. Our parent company, as our sole stockholder, has the power to name and
replace all of our directors.
COMPENSATION OF DIRECTORS
The non-employee individual members of GNC's Board of Directors receive a
one-time grant of 25,000 fully vested options to purchase shares of common stock
of our parent company for their service on GNC and its parent company's Boards
of Directors. Each non-employee member of the Board of Directors receives a
stipend of $2,000 for each board meeting attended. Additionally, each member of
our Audit Committee and Compensation Committee receives a stipend of $1,000 for
each meeting attended in person or $500 for each meeting attended
telephonically.
AUDIT COMMITTEE
The responsibilities of the Board of Directors of GNC, Inc. include
oversight of the systems of internal control, preparation and presentation of
financial reports and compliance with applicable laws, regulations and company
policies. The Board of Directors of GNC delegates certain responsibilities to
the Audit Committee to assist the Board of Directors in the fulfillment of its
duties to GNC and its stockholders. The Audit Committee currently consists of
Messrs. Jhawar, Mercadante and Harch. The Audit Committee assists the Board of
Directors in its oversight of:
- the integrity of the financial statements;
- compliance with legal and regulatory requirements;
- the qualification and independence of independent auditors; and
- the performance of the independent auditors and of GNC's internal audit
function.
COMPENSATION COMMITTEE
The board of directors of GNC and our parent company have formed
Compensation Committees which have identical membership and are each currently
comprised of Messrs. Copses, DiNicola and Golleher. Our Compensation Committee
reviews and makes recommendations to our board of directors regarding senior
officers' salaries and bonuses and to our parent company regarding grants of
stock options and other forms of equity compensation. The Compensation Committee
of our parent company assists its board of directors in the administration of
the parent company's stock option and other equity incentive plans.
ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
Mr. Copses, the Chairman of the Compensation Committee of GNC, was an
executive officer of GNC from its inception in October 2003 and of its parent
company, General Nutrition Centers Holding Company,
74
from its inception in November 2003, in each case until his resignation as an
executive officer in February 2004 following consummation of the Acquisition.
Mr. Copses is also a founding Senior Partner at Apollo Management, L.P., an
affiliate of our equity sponsor. He serves as Chairman of the Board of Directors
and the Compensation Committee for GNC and its parent company, General Nutrition
Centers Holding Company. Except as described above, no member of the
Compensation Committee has ever been an executive officer of GNC or its
subsidiaries or been an affiliate of GNC or one of its affiliates. In the year
ended December 31, 2003, no other executive officer of GNC served on the Board
of Directors or Compensation Committee of another entity.
75
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning compensation
paid by GNC to its chief executive officer and its four most highly compensated
executive officers (collectively, the "named executive officers") for services
rendered in all capacities to GNC during the year ended December 31, 2003:
<Table>
<Caption>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------- ------------------------------------------------
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS/SARS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS(1) COMPENSATION(2) (#)(3) COMPENSATION(4)
- --------------------------- ---- ---------- -------- --------------- ------------ ---------------
Louis Mancini............ 2003 $285,577 $201,308 $99,009 458,000 $ 450,000
President and Chief
Executive Officer and
Director
David Heilman............ 2003 $284,231 $179,396 $44,380 310,333 $1,048,777
Executive Vice President
and Chief Financial
Officer
Joseph Fortunato......... 2003 $308,846 $195,705 $52,853 310,333 $ 899,999
Executive Vice President
and Chief Operating
Officer
Susan Trimbo............. 2003 $208,494 $ 99,022 $36,994 54,300 $ 528,476
Senior Vice President of
Scientific Affairs
Reginald Steele.......... 2003 $199,504 $ 95,328 $38,297 54,300 $ 601,504
Senior Vice President of
International Franchising
Michael Meyers........... 2003 $525,000 $933,175 $54,118 35,000 $4,149,973
Former President and Former
Chief Executive
Officer(5)
</Table>
- ---------------
(1) Incentive compensation is based on performance in the year shown but
determined and paid the following year. For Mr. Mancini and Mr. Meyers,
respectively, the amounts also include incentives of $30,000 and $516,615,
determined and paid in year 2003.
(2) Includes cash amounts received by the persons listed in this table for (a)
supplemental retirement purposes in the following amounts:Mr. Mancini
$21,125; Mr. Heilman $14,138; Mr. Fortunato $14,138; Ms. Trimbo $13,596; Mr.
Steele $13,596; and Mr. Meyers $14,138; (b) professional assistance and
personal life and disability insurance in the following amounts. Mr. Mancini
$15,503; Mr. Heilman $14,845; Mr. Fortunato $14,845; Ms. Trimbo $4,759; Mr.
Steele $4,759; and Mr. Meyers $14,845; and (c) relocation expenses in the
following amount for Lou Mancini $38,399.
(3) Includes stock appreciation rights ("SAR's") granted by the former owner,
Royal Numico, NV in the following amounts: Mr. Mancini 15,000; Mr. Heilman
15,000; Mr. Fortunato 15,000; Ms. Trimbo 10,000; Mr. Steele 10,000 and Mr.
Meyers 35,000. The SAR's have an exercise price of E 10.71 and are based
upon the market price of Royal Numico N.V. common stock.
(4) Includes payments received by the individuals listed in this table in
connection with the sale of the company in 2003 for (a) retention bonuses in
the following amounts: Mr. Mancini $150,000; Mr. Heilman $151,250; Mr.
Fortunato $165,000; and Mr. Meyers $2,100,000; (b) change in control bonuses
in the following amounts: Mr. Mancini $300,000; Mr. Heilman $302,500; Mr.
Fortunato $330,000; Ms. Trimbo $208,494; Mr. Steele $201,536 and Mr. Meyers
$1,050,000; (c) Numico stock purchase plan loan forgiveness under the Numico
1999 Management Stock Purchase Plan in the following amounts: Mr.
Heilman -- $595,027; Mr. Fortunato -- $404,999; Ms. Trimbo -- $319,982; Mr.
Steele -- $399,968; and Mr. Meyers -- $899,973; and (d) a success bonus of
$100,000 for Mr. Meyers.
(5) Mr. Meyers served as President and Chief Executive Officer and Director of
General Nutrition Companies, Inc., the predecessor company to GNC, prior to
the consummation of the Acquisition. Concurrently with the consummation of
the Acquisition, Mr. Meyers resigned as Chief Executive Officer and Director
of General Nutrition Companies, Inc. and its affiliates.
76
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<Table>
<Caption>
POTENTIAL REALIZABLE VALUE
AT ASSUMED RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(2)
- ------------------------------------------------------------------------------ ---------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/ GRANTED TO EXERCISE OF
SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR(1) ($/SHARE) DATE 5% 10%
- ---- ---------- -------------- ----------- ---------- ------------ ------------
Louis Mancini......... 443,000 17 $6.00/share 12/5/2010 $1,082,073 $2,521,690
David Heilman......... 295,333 11.3 $6.00/share 12/5/2010 $ 721,381 $1,681,125
Joseph Fortunato...... 295,333 11.3 $6.00/share 12/5/2010 $ 721,381 $1,681,125
Susan Trimbo.......... 53,160 1.7 $6.00/share 12/5/2010 $ 108,207 $ 252,169
Reginald Steele....... 44,300 1.7 $6.00/share 12/5/2010 $ 108,207 $ 252,169
Michael Meyers........ 0 0 N/A N/A -- --
</Table>
Based on 2,604,974 options granted as of December 5, 2003 to employees and
directors under the General Nutrition Centers Holding Company 2003 Omnibus Stock
Incentive Plan. Under the terms of the option agreements, options vest 25%
annually. None of the options were exercised in 2003.
- ---------------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the SEC. Our actual stock price appreciation
over the 7 year option term will likely differ from these assumed rates.
In addition, we may from time to time give our executive officers
additional benefits, none of which we believe to be material.
EMPLOYMENT AGREEMENTS
We entered into employment agreements with Messrs, Mancini, Heilman,
Fortunato and Steele and Ms. Trimbo in connection with the Acquisition. The
agreements provide for an employment term up to December 31, 2005, subject to
automatic annual one-year renewals commencing on October 31, 2004 and each
October 31st thereafter, unless GNC or the executive provides 30 days' advance
notice of termination. The agreements also provide for an annual base salary of
$525,000 for Mr. Mancini, $350,000 for each of Messrs. Heilman and Fortunato,
$201,536 for Mr. Steele and $208,000 for Ms. Trimbo. Such salary is subject to
annual review by the Board of Directors or Compensation Committee.
The executives are entitled to certain annual performance bonus payments
pursuant to the terms of their employment agreements. The bonus payments for
Messrs. Mancini, Heilman and Fortunato are based upon a range of annual target
levels of EBITDA and cash flow generation goals set by the Board of Directors or
Compensation Committee. Such bonus is payable in an amount within a range of 50%
to 120% of Mr. Mancini's annual base salary and 40% to 100% of Mr. Heilman's and
Mr. Fortunato's annual base salaries, all of which are dependent upon meeting or
exceeding EBITDA and cash flow generation goals for the applicable year. Such
bonus is payable only if the executive is employed by GNC on the last day of the
bonus period. The bonus payments for Mr. Steele and Ms. Trimbo are in an amount
to be determined by the Compensation Committee in its discretion.
Pursuant to the terms of the employment agreements and the General
Nutrition Centers Holding Company 2003 Omnibus Stock Option Plan, Messrs.
Heilman and Fortunato were each granted an option to purchase 295,333 shares of
Common Stock, Mr. Mancini was granted on option to purchase 443,000 shares, Ms.
Trimbo was granted an option to purchase 53,160 shares and Mr. Steele was
granted an option to purchase 44,300 shares, all at an exercise price of $6 per
share. The options vest in equal parts, annually, over a four year period on
each anniversary of the effective date of the Acquisition. In the event of a
change of control of GNC, all options granted to Messrs. Mancini, Heilman,
Fortunato and Steele and Ms. Trimbo shall accelerate and become fully vested and
exercisable. Change of control is defined under the employment agreements to
mean (i) the occurrence of an event including a merger or consolidation of GNC,
if following
77
the transaction, any person or group becomes the beneficial owner (directly or
indirectly) of more than 50% of the voting power of the equity interests of GNC
or any successor company provided that Apollo and certain related parties do not
have the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors and further provided
that the transfer of 100% of the voting stock of GNC to an entity that has an
ownership structure identical to GNC prior to such transfer, such that GNC
becomes a wholly owned subsidiary of such entity, shall not be treated as a
change of control, (ii) the sale, lease, transfer, conveyance or other
disposition of substantially all of the assets of GNC and its subsidiaries taken
as a whole, (iii) after an initial public offering of capital stock of GNC,
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Board of Directors, together with any new directors
whose election by such Board of Directors or whose nomination for election by
the stockholders of GNC was approved by a vote of a majority of the directors of
GNC then still in office who were either directors at the beginning of such
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority of the Board of Directors then in
office; or (iv) GNC dissolves or adopts a plan of complete liquidation.
The employment agreements also provide for certain benefits upon
termination of the executive's employment. Upon death or disability, the
executive (or his or her estate) shall be entitled to the executive's current
base salary (less any payments made under Company-sponsored disability benefit
plans) for the remainder of his or her employment period, plus a pro rata share
of his or her annual bonus based on actual employment. With respect to Messrs.
Mancini, Heilman and Fortuanto the bonus payment will be made provided that
bonus targets are met for the year of such termination. With respect to Mr.
Steel and Ms. Trimbo, such bonus payments are subject to the discretion of the
Compensation Committee. Upon termination of employment by GNC without cause or
voluntarily by the executive for good reason, the executive is entitled to
salary continuation for the remainder of his employment period, a pro rata share
of bonus based on actual employment (provided that bonus targets are met for the
year of such termination or subject to the discretion of the Compensation
Committee, as the case may be) and continuation of certain welfare benefits and
perquisites through the remainder of the employment term or during the
continuation of base salary for the 2-year period following a change of control
(further described as follows). If such termination occurs upon or within 6
months following a change of control, we will continue to pay the executive's
base salary for a 2 year period following such date of termination. The
executive may, in such circumstances, elect a lump sum payment based upon a
present value discount rate equal to 6% per year. Payment of benefits following
termination by the Company without cause or voluntarily by the executive for
good reason will be contingent upon execution of a written release by the
executive. "Good Reason" is defined in the employment agreements to mean (i) the
failure of the Company to comply with a material obligation imposed by the
employment agreement, (ii) assignment of duties or responsibilities to the
executive which are materially inconsistent with his positions, duties,
responsibilities, titles or offices in effect on the date of the Acquisition,
(iii) reduction in base salary, or (iv) requiring the executive to be based at
any office or location more than 75 miles from the principal office of the
Company. "Cause" is defined in the employment agreements to mean (i) a material
failure by the executive to comply with any material obligation under the
employment agreement (ii) conviction of, or pleading guilty or nolo contendere
to, or being indicted for any felony (iii) theft, embezzlement, or fraud, (iv)
engaging in an activity that gives rise to a material conflict of interest that
is not cured within 10 days of written notice and a demand to cure, or (v) the
misappropriation of any material business interest.
The employment agreements provide that, upon termination for cause or
voluntary resignation by the executive, the executive shall be entitled to all
unpaid salary and benefits accrued to the date of such termination. Such
termination is subject to 30 days' advance notice to the other party and, in the
case of termination for cause, provides the executive with an opportunity to
cure within a 30-day period following receipt of such notice.
The employment agreements and stock option agreements provide that stock
options which are not exercisable as of the date of termination of employment
shall expire and options which are exercisable as of such date will remain
exercisable for a 90-day period (180 days in the event of the executive's
death). Stock of GNC held by the executive is subject to a call right by GNC for
a period of 180 days (270 days in the
78
case of death) from the date of termination. Such call right is for an amount
equal to the product of (x) all shares held by such executive and (y) the fair
market value of the stock, as determined by our Board of Directors. Messrs.
Mancini, Heilman and Fortunato have the right under their employment agreements
to request that the Board of Directors obtain a fairness opinion from a
nationally recognized accounting firm or investment bank chosen by the Company,
to review the Board's fair market value determination of the Common Stock. If
such fairness opinion validates the fair market determination of the Board, the
gross purchase price paid to the executive for such shares shall be reduced by
10% (excluding such other tax or withholding as may be required by applicable
law).
The employment agreements further provide that if any payment to the
executive would be subject to or result in the imposition of the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, then the amount of
such payments shall be reduced to the highest amount that may be paid by the
Company without subjecting such payment to the excise tax. The executive shall
have the right to designate those payments or benefits that shall be reduced or
eliminated. Notwithstanding the foregoing, in the employment agreements for
Messrs. Mancini, Heilman and Fortunato, the reduction shall not apply if the
executive would, on a net after-tax basis, receive less compensation than if the
payment were not so reduced. All determinations with regard to such excise tax
and any reduction in connection with payments to the executive shall be made by
any nationally recognized accounting firm that acts as the Company's outside
auditors at the time of such determination.
The employment agreements set forth certain terms of confidentiality
concerning trade secrets and confidential or proprietary information which may
not be disclosed by the executive except as required by court order or
applicable law. The agreements further provide certain non-competition and
non-solicitation provisions which restrict the executive and certain relatives
from engaging in activities which compete against the interests of GNC during
the term of his employment and for the longer of the first anniversary of the
date of termination of employment or the period during which the executive
receives termination payments.
79
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Our parent company, General Nutrition Centers Holding Company, owns all of
our issued and outstanding capital stock. GNC directly or indirectly owns all of
the outstanding capital stock of each of the other registrants.
The table below sets forth the security ownership of the directors and
officers of GNC and certain individuals and entities that beneficially own more
than 5% of the outstanding common stock of our parent company, General Nutrition
Centers Holding Company at February 10, 2004:
<Table>
<Caption>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
----------------------------
NAME OF OFFICER OR DIRECTOR NUMBER PERCENTAGE
- --------------------------- ---------- ----------
GNC Investors, LLC(1)....................................... 28,743,333(3)(4) 95.24%
Mary Elizabeth Burton(1).................................... 158,333(4)(5) *
Peter P. Copses(1).......................................... 28,768,333(3)(4)(6) 95.32%
Robert J. DiNicola(1)....................................... 91,667(4)(7) *
Joseph Fortunato(2)......................................... 62,500(4) *
George G. Golleher(1)....................................... 105,000(4)(8) *
Joshua J. Harris(1)......................................... 28,768,333(3)(4)(9) 95.32%
David Heilman(2)............................................ 62,500(4) *
Andrew S. Jhawar(1)......................................... 28,813,333(3)(4)(10) 95.47%
Louis Mancini(2)............................................ 100,000(4) *
Edgardo A. Mercadante(2).................................... 78,333(4)(11) *
Joseph W. Harch(2).......................................... 25,000(12) *
Reginald Steele(2).......................................... 18,750(4) *
Susan Trimbo(2)............................................. 11,250(4) *
ALL OFFICERS AND DIRECTORS AS A GROUP(3)(13)................ 29,574,166 97.99%
</Table>
- ---------------
* Less than 1% of the outstanding shares.
(1) c/o Apollo Management, L.P., Two Manhattanville Road, Purchase, New York
10577.
(2) c/o General Nutrition Centers, Inc., 300 Sixth Avenue, Pittsburgh,
Pennsylvania 15222.
(3) GNC Investors, LLC is the equity sponsor of General Nutrition Centers
Holding Company. GNC Investors, LLC is controlled by its manager, Apollo
Management V, L.P. Peter P. Copses, Joshua J. Harris and Andrew S. Jhawar,
three of our directors, are partners of Apollo Management V, L.P. Mr.
Copses, Mr. Harris and Mr. Jhawar disclaim beneficial ownership of the
shares held by GNC Investors, LLC.
(4) On December 5, 2003, in connection with the Acquisition, General Nutrition
Centers Holding Company entered into a stockholders' agreement with each of
its stockholders. Pursuant to the stockholders' agreement, each stockholder
agreed to give Apollo Investment Fund V, L.P. a voting proxy to vote with
respect to certain matters as set forth in the stockholders' agreement. As
a result, Apollo Investment Fund V, L.P. may be deemed to be the beneficial
owner of the shares of common stock held by the parties to the
stockholders' agreement. Apollo Investment Fund V, L.P. expressly disclaims
beneficial ownership of such shares of common stock held by each of the
parties to the stockholders' agreement, except to the extent of its
pecuniary interest in GNC Investors, LLC.
(5) Ms. Burton was granted 75,000 options to purchase common stock on December
5, 2003. Pursuant to the terms of her amended and restated stock option
agreement, all 75,000 of these options vested on February 5, 2004.
(6) Mr. Copses was granted 25,000 options to purchase common stock on December
5, 2003. Pursuant to the terms of his amended and restated stock option
agreement, all 25,000 of these options vested on February 5, 2004.
(7) Mr. DiNicola was granted 50,000 options to purchase common stock on
December 5, 2003. Pursuant to the terms of his amended and restated stock
option agreement, all 50,000 of these options vested on February 5, 2004.
(8) Mr. Golleher was granted 55,000 options to purchase common stock on
December 5, 2003. Pursuant to the terms of his amended and restated stock
option agreement, all 55,000 of these options vested on February 5, 2004.
(9) Mr. Harris was granted 25,000 options to purchase common stock on December
5, 2003. Pursuant to the terms of his amended and restated stock option
agreement, all 25,000 of these options vested on February 5, 2004.
80
(10) Mr. Jhawar was granted 25,000 options to purchase common stock on December
5, 2003. Pursuant to the terms of his amended and restated stock option
agreement, all 25,000 of these options vested on February 5, 2004.
(11) Mr. Mercadante was granted 45,000 options to purchase common stock on
December 5, 2003. Pursuant to the terms of his amended and restated stock
option agreement, all 45,000 of these options vested on February 5, 2004.
(12) Mr. Harch was granted 25,000 options to purchase common stock on December
5, 2003. Pursuant to the terms of his stock option agreement, all 25,000 of
these options vested on February 5, 2004.
(13) Includes 28,743,333 shares held by GNC Investors, LLC.
81
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Management and Advisory Services
Immediately prior to the consummation of the Acquisition, we entered into a
management agreement with Apollo Management V, L.P., which controls GNC
Investors, LLC, our equity sponsor. Three of our directors, Peter P. Copses,
Joshua J. Harris and Andrew S. Jhawar, are partners of Apollo Management V, L.P.
Under this management agreement, Apollo Management agreed to provide certain
management services to us in exchange for a fee of $1.5 million per year, plus
reimbursement of expenses. Apollo Management may provide additional services to
us from time to time pursuant to the management agreement, including financial
advisory and investment banking services in connection with certain transactions
for which we will pay customary fees and expenses. Under the management
agreement, we agreed to provide customary indemnification. In addition, on
December 5, 2003, we incurred a transaction fee of $7.5 million (plus
reimbursement of expenses) to Apollo Management for financial advisory services
rendered in connection with the Acquisition, which was paid in January 2004.
Stockholders' Agreement
Upon consummation of the Acquisition, our parent company, General Nutrition
Centers Holding Company, entered into a stockholders' agreement with each of its
stockholders, which includes certain of our directors and members of our
management and our equity sponsor. The stockholders' agreement gives Apollo
Investment V, L.P., an affiliate of Apollo Management, the right to appoint all
of the members of our board of directors and, until the occurrence of certain
events, the right to vote all shares of our parent's common stock and preferred
stock subject to the stockholders' agreement on all matters. In addition, the
stockholders' agreement contains customary drag rights, tag along rights and
rights of first refusal with respect to transfers of our parent's common stock.
82
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Subject to terms and conditions detailed in this prospectus, we will accept
for exchange old notes that are properly tendered on or prior to the expiration
date and not withdrawn as permitted below. When we refer to the term expiration
date, we mean 5:00 p.m., New York City time, , 2004, the 21st business
day following the date of this prospectus. We may, however, in our sole
discretion, extend the period of time that the exchange offer is open. In such
event, the term expiration date means the latest time and date to which the
exchange offer is extended.
As of the date of this prospectus, $215,000,000 principal amount of old
notes are outstanding. We are sending this prospectus, together with the letter
of transmittal, to all holders of old notes that we are aware of on the date of
this prospectus.
We expressly reserve the right, at any time, to extend the period of time
that the exchange offer is open, and delay acceptance for exchange of any old
notes, by giving oral or written notice of an extension to the holders of the
old notes as described below. During any extension, all old notes previously
tendered will remain subject to the exchange offer and may be accepted for
exchange by us. Any old notes not accepted for exchange for any reason will be
returned without expense to the tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
Old notes tendered in the exchange offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
We expressly reserve the right to amend or terminate the exchange offer,
and not to exchange any old notes, upon the occurrence of any of the conditions
of the exchange offer specified under "-- Conditions to the Exchange Offer." We
will give oral or written notice of any extension, amendment, non-acceptance or
termination to the holders of the old notes as promptly as practicable. In the
case of any extension, we will issue a notice by means of a press release or
other public announcement no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration date.
PROCEDURES FOR TENDERING OLD NOTES
Your tender to us of old notes as set forth below and our acceptance of old
notes will constitute a binding agreement between us and you upon the terms and
subject to the conditions detailed in this prospectus and in the accompanying
letter of transmittal. Except as set forth below, to tender old notes for
exchange in the exchange offer, you must transmit a properly completed and duly
executed letter of transmittal, including all other documents required by the
letter of transmittal or, in the case of a book-entry transfer, an agent's
message in place of the letter of transmittal, to U.S. Bank National
Association, as exchange agent, at the address set forth below under
"-- Exchange Agent" on or prior to the expiration date. In addition, either:
- certificates for old notes must be received by the exchange agent along
with the letter of transmittal, or
- a timely confirmation of a book-entry transfer, which we refer to in this
prospectus as a book-entry confirmation, of old notes, if this procedure
is available, into the exchange agent's account at DTC pursuant to the
procedure for book-entry transfer described beginning on page 84 must be
received by the exchange agent prior to the expiration date, with the
letter of transmittal or an agent's message in place of the letter of
transmittal, or the holder must comply with the guaranteed delivery
procedures described below.
The term "agent's message" means a message, transmitted by DTC to and
received by the exchange agent and forming a part of a book-entry confirmation,
which states that DTC has received an express acknowledgment from the tendering
participant stating that such participant has received and agrees to be bound by
the letter of transmittal and that we may enforce such letter of transmittal
against such participant.
83
The method of delivery of old notes, letters of transmittal and all other
required documents is at your election and risk. If such delivery is by mail, it
is recommended that you use registered mail, properly insured, with return
receipt requested. In all cases, you should allow sufficient time to assure
timely delivery. No letter of transmittal or old notes should be sent to us.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the old notes surrendered for exchange
are tendered:
- by a holder of the old notes who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the
letter of transmittal, or
- for the account of an Eligible Institution (as defined below).
In the event that signatures on a letter of transmittal or a notice of
withdrawal are required to be guaranteed, such guarantees must be by a firm
which is a member of the Securities Transfer Agent Medallion Program, the Stock
Exchanges Medallion Program or the New York Stock Exchange Medallion Program (we
refer to each such entity as an Eligible Institution in this prospectus). If old
notes are registered in the name of a person other than the signer of the letter
of transmittal, the old notes surrendered for exchange must be endorsed by, or
be accompanied by a written instrument or instruments of transfer or exchange,
in satisfactory form as we or the exchange agent determine in our sole
discretion, duly executed by the registered holders with the signature thereon
guaranteed by an Eligible Institution.
We or the exchange agent in our sole discretion will make a final and
binding determination on all questions as to the validity, form, eligibility,
including time of receipt, and acceptance of old notes tendered for exchange. We
reserve the absolute right to reject any and all tenders of any particular old
note not properly tendered or to not accept any particular old note which
acceptance might, in our judgment or our counsel's, be unlawful. We also reserve
the absolute right to waive any defects or irregularities or conditions of the
exchange offer as to any particular old note either before or after the
expiration date, including the right to waive the ineligibility of any holder
who seeks to tender old notes in the exchange offer. Our or the exchange agent's
interpretation of the terms and conditions of the exchange offer as to any
particular old note either before or after the expiration date, including the
letter of transmittal and the instructions thereto, will be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of old notes for exchange must be cured within a reasonable period of
time, as we determine. We are not, nor is the exchange agent or any other
person, under any duty to notify you of any defect or irregularity with respect
to your tender of old notes for exchange, and no one will be liable for failing
to provide such notification.
If the letter of transmittal is signed by a person or persons other than
the registered holder or holders of old notes, such old notes must be endorsed
or accompanied by powers of attorney signed exactly as the name(s) of the
registered holder(s) that appear on the old notes.
If the letter of transmittal or any old notes or powers of attorneys are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing. Unless waived by us or
the exchange agent, proper evidence satisfactory to us of their authority to so
act must be submitted with the letter of transmittal.
By tendering old notes, you represent to us that, among other things:
- the new notes acquired pursuant to the exchange offer are being obtained
in the ordinary course of business of the person receiving such new
notes, whether or not such person is the holder; and
- neither the holder nor such other person has any arrangement or
understanding with any person, to participate in the distribution of the
new notes.
In the case of a holder that is not a broker-dealer, that holder, by
tendering, will also represent to us that the holder is not engaged in or does
not intend to engage in a distribution of the new notes.
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If you are our "affiliate," as defined under Rule 405 under the Securities
Act, and engage in or intend to engage in or have an arrangement or
understanding with any person to participate in a distribution of such new notes
to be acquired pursuant to the exchange offer, you or any such other person:
- could not rely on the applicable interpretations of the staff of the SEC;
and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction.
Each broker-dealer that receives new notes for its own account in exchange
for old notes, where the old notes were acquired by the broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such new
notes. See "Plan of Distribution." The letter of transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration date, all old notes properly
tendered and will issue the new notes promptly after acceptance of the old
notes. See "-- Conditions to the Exchange Offer." For purposes of the exchange
offer, we will be deemed to have accepted properly tendered old notes for
exchange if and when we give oral (confirmed in writing) or written notice to
the exchange agent.
The holder of each old note accepted for exchange will receive a new note
in the amount equal to the surrendered old note. Accordingly, holders of new
notes on the record date for the first interest payment date following the
consummation of the exchange offer will received interest accruing from the most
recent date that interest has been paid on the old notes. Holders of new notes
will not receive any payment in respect of accrued interest on old notes
otherwise payable on any interest payment date, the record date for which occurs
on or after the consummation of the exchange offer.
In all cases, issuance of new notes for old notes that are accepted for
exchange will only be made after timely receipt by the exchange agent of:
- certificates for such old notes or a timely book-entry confirmation of
such old notes into the exchange agent's account at DTC,
- a properly completed and duly executed letter of transmittal or an
agent's message in lieu thereof, and
- all other required documents.
If any tendered old notes are not accepted for any reason set forth in the
terms and conditions of the exchange offer or if old notes are submitted for a
greater principal amount than the holder desires to exchange, the unaccepted or
non-exchanged old notes will be returned without expense to the tendering holder
or, in the case of old notes tendered by book-entry transfer into the exchange
agent's account at DTC pursuant to the book-entry procedures described below,
the non-exchanged old notes will be credited to an account maintained with DTC,
as promptly as practicable after the expiration or termination of the exchange
offer.
BOOK-ENTRY TRANSFERS
For purposes of the exchange offer, the exchange agent will request that an
account be established with respect to the old notes at DTC within two business
days after the date of this prospectus, unless the exchange agent already has
established an account with DTC suitable for the exchange offer. Any financial
institution that is a participant in DTC may make book-entry delivery of old
notes by causing DTC to transfer such old notes into the exchange agent's
account at DTC in accordance with DTC's procedures for transfer. Although
delivery of old notes may be effected through book-entry transfer at DTC, the
letter of transmittal or facsimile thereof or an agent's message in lieu
thereof, with any required signature guarantees
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and any other required documents, must, in any case, be transmitted to and
received by the exchange agent at the address set forth under "-- Exchange
Agent" on or prior to the expiration date or the guaranteed delivery procedures
described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If you desire to tender your old notes and your old notes are not
immediately available, or time will not permit your old notes or other required
documents to reach the exchange agent before the expiration date, a tender may
be effected if:
- prior to the expiration date, the exchange agent received from such
Eligible Institution a notice of guaranteed delivery, substantially in
the form we provide, by telegram, telex, facsimile transmission, mail or
hand delivery, setting forth your name and address, the amount of old
notes tendered, stating that the tender is being made thereby and
guaranteeing that within three New York Stock Exchange ("NYSE") trading
days after the date of execution of the notice of guaranteed delivery,
the certificates for all physically tendered old notes, in proper form
for transfer, or a book-entry confirmation, as the case may be, together
with a properly completed and duly executed appropriate letter of
transmittal or facsimile thereof or agent's message in lieu thereof, with
any required signature guarantees and any other documents required by the
letter of transmittal will be deposited by such Eligible Institution with
the exchange agent, and
- the certificates for all physically tendered old notes, in proper form
for transfer, or a book-entry confirmation, as the case may be, together
with a properly completed and duly executed appropriate letter of
transmittal or facsimile thereof or agent's message in lieu thereof, with
any required signature guarantees and all other documents required by the
letter of transmittal, are received by the exchange agent within three
NYSE trading days after the date of execution of the notice of guaranteed
delivery.
WITHDRAWAL RIGHTS
You may withdraw your tender of old notes at any time prior to the
expiration date. To be effective, a written notice of withdrawal must be
received by the exchange agent at one of the addresses set forth under
"-- Exchange Agent." This notice must specify:
- the name of the person having tendered the old notes to be withdrawn,
- the old notes to be withdrawn, including the principal amount of such old
notes, and
- where certificates for old notes have been transmitted, the name in which
such old notes are registered, if different from that of the withdrawing
holder.
If certificates for old notes have been delivered or otherwise identified
to the exchange agent, then, prior to the release of the certificates, the
withdrawing holder must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an Eligible Institution, unless such holder is an Eligible
Institution. If old notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at DTC to be credited with the withdrawn old
notes and otherwise comply with the procedures of DTC.
We or the exchange agent will make a final and binding determination on all
questions as to the validity, form and eligibility, including time of receipt,
of such notices. Any old notes so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the exchange offer. Any old notes
tendered for exchange but not exchanged for any reason will be returned to the
holder without cost to the holder, or, in the case of old notes tendered by
book-entry transfer into the exchange agent's account at DTC pursuant to the
book-entry transfer procedures described above, the old notes will be credited
to an account maintained with DTC for the old notes as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. Properly
withdrawn old notes may be re-tendered by following one of the procedures
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described under "-- Procedures for Tendering Old Notes" above at any time on or
prior to the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, we are not
required to accept for exchange, or to issue new notes in exchange for, any old
notes and may terminate or amend the exchange offer, if any of the following
events occur prior to acceptance of such old notes:
- the exchange offer violates any applicable law or applicable
interpretation of the staff of the SEC;
- an action or proceeding shall have been instituted or threatened in any
court or by any governmental agency that might materially impair our
ability to proceed with the exchange offer;
- we shall not have received all governmental approvals that we deem
necessary to consummate the exchange offer; or
- there has been proposed, adopted, or enacted any law, statute, rule or
regulation that, in our reasonable judgment, would materially impair our
ability to consummate the exchange offer.
The conditions stated above are for our sole benefit and may be asserted by
us regardless of the circumstances giving rise to any condition or may be waived
by us in whole or in part at any time in our reasonable discretion. Our failure
at any time to exercise any of the foregoing rights will not be deemed a waiver
of any such right and each such right will be deemed an ongoing right which may
be asserted at any time.
In addition, we will not accept for exchange any old notes tendered, and we
will not issue new notes in exchange for any such old notes, if at such time any
stop order by the SEC is threatened or in effect with respect to the
Registration Statement, of which this prospectus constitutes a part, or the
qualification of the indenture under the Trust Indenture Act.
EXCHANGE AGENT
U.S. Bank National Association has been appointed as the exchange agent for
the exchange offer. All executed letters of transmittal should be directed to
the exchange agent at the address set forth below. Questions and requests for
assistance, requests for additional copies of this prospectus or of the letter
of transmittal and requests for notices of guaranteed delivery should be
directed to the exchange agent addressed as follows:
U.S. Bank National Association, Exchange Agent
By Hand, Overnight Delivery or by Mail:
60 Livingston Avenue
St. Paul, Minnesota 55107-2292
Attention: Specialized Finance
By Facsimile Transmission
(for Eligible Institutions only):
(651) 495-8097
Confirm by Telephone:
(800) 934-6802
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF SUCH LETTER OF TRANSMITTAL VIA FACSIMILE OTHER THAN AS
SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE LETTER OF
TRANSMITTAL.
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FEES AND EXPENSES
The principal solicitation is being made by mail by U.S. Bank National
Association, as exchange agent. We will pay the exchange agent customary fees
for its services, reimburse the exchange agent for its reasonable out-of-pocket
expenses incurred in connection with the provision of these services and pay
other registration expenses, including fees and expenses of the trustee under
the indenture relating to the new notes, filing fees, blue sky fees and printing
and distribution expenses. We will not make any payment to brokers, dealers or
others soliciting acceptances of the exchange offer.
Additional solicitation may be made by telephone, facsimile or in person by
our and our affiliates' officers and regular employees and by persons so engaged
by the exchange agent.
ACCOUNTING TREATMENT
We will record the new notes at the same carrying value as the old notes,
as reflected in our accounting records on the date of the exchange. Accordingly,
we will not recognize any gain or loss for accounting purposes. The expenses of
the exchange offer will be amortized over the term of the new notes.
TRANSFER TAXES
You will not be obligated to pay any transfer taxes in connection with the
tender of old notes in the exchange offer unless you instruct us to register new
notes in the name of, or request that old notes not tendered or not accepted in
the exchange offer be returned to, a person other than the registered tendering
holder. In those cases, you will be responsible for the payment of any
potentially applicable transfer tax.
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES
If you do not exchange your old notes for new notes in the exchange offer,
your old notes will continue to be subject to the provisions of the indenture
relating to the notes regarding transfer and exchange of the old notes and the
restrictions on transfer of the old notes described in the legend on your
certificates. These transfer restrictions are required because the old notes
were issued under an exemption from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the old notes may not be offered or sold unless registered
under the Securities Act, except under an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. We do
not plan to register the old notes under the Securities Act.
Under existing interpretations of the Securities Act by the SEC's staff
contained in several no-action letters to third parties, and subject to the
immediately following sentence, we believe that the new notes would generally be
freely transferable by holders after the exchange offer without further
registration under the Securities Act, subject to certain representations
required to be made by each holder of new notes, as set forth below. However,
any purchaser of new notes who is one of our "affiliates" as defined in Rule 405
under the Securities Act or who intends to participate in the exchange offer for
the purpose of distributing the new notes:
- will not be able to rely on the interpretation of the SEC's staff;
- will not be able to tender its old notes in the exchange offer; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or transfer of the new
notes unless such sale or transfer is made pursuant to an exemption from
such requirements. See "Plan of Distribution."
We do not intend to seek our own interpretation regarding the exchange
offer, and there can be no assurance that the SEC's staff would make a similar
determination with respect to the new notes as it has in other interpretations
to other parties, although we have no reason to believe otherwise.
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Each broker-dealer that receives new notes for its own account in exchange
for old notes, where the old notes were acquired by it as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus that meets the requirements of the Securities Act in
connection with any resale of the new notes. The letter of transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
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DESCRIPTION OF SENIOR CREDIT FACILITY
As part of the Acquisition, we entered into a senior credit facility to be
provided by a syndicate of lenders arranged by Lehman Brothers Inc. and J.P.
Morgan Securities Inc. The senior credit facility consists of a $285.0 million
term loan facility and a $75.0 million revolving credit facility.
Interest Rate; Fees. All borrowings under the senior credit facility bear
interest, at our option, at a rate per annum equal to (i) the higher of (x) the
prime rate (as quoted on the British Banking Association Telerate Page 5) and
(y) the federal funds effective rate, plus one half percent (0.50%) per annum
plus, in each case applicable margins of 2.00% per annum for the term loan
facility and 2.00% per annum for the revolving credit facility or (ii) the
Eurodollar rate plus applicable margins of 3.00% per annum for the term loan
facility and 3.00% per annum for the revolving credit facility, which rates, in
the case of revolving loans, may be decreased if our leverage ratio is
decreased. In addition to paying interest on outstanding principal under the
senior credit facility, we are required to pay a commitment fee to the lenders
in respect of unutilized loan commitments at a rate of 0.50% per annum.
Guarantees; Security. Our obligations under the senior credit facility are
guaranteed by our parent and by each of our domestic subsidiaries. In addition,
the senior credit facility is secured by first priority perfected security
interests in substantially all of our existing and future assets and the
existing and future assets of our subsidiary guarantors, except that only up to
65% of the capital stock of our first-tier foreign subsidiaries has been pledged
in favor of the senior credit facility.
Maturity. The term loan facility matures on December 5, 2009. The revolving
credit facility matures on December 5, 2008.
Prepayment; Reduction. The senior credit facility permits all or any
portion of the loans outstanding thereunder to be prepaid at any time and
commitments thereunder to be terminated in whole or in part at our option
without premium or penalty. We are required to repay amounts borrowed under the
term loan facility in nominal quarterly installments for the first five years
and thereafter in substantial quarterly installments until the maturity date of
the term loan facility.
Subject to certain exceptions, the senior credit facility requires that
100% of the net proceeds from certain asset sales, casualty insurance,
condemnations and debt issuances, 50% of the net proceeds from certain equity
offerings and 75% of excess cash flow for each fiscal year (reducing to 50% when
our consolidated total debt to consolidated EBITDA is less than or equal to 3.00
to 1.00 and greater than 2.50 to 1.00 and 25% when our consolidated total debt
to consolidated EBITDA is less than or equal to 2.50 to 1.00) must be used to
pay down outstanding borrowings.
Covenants. The senior credit facility contains customary covenants,
including financial tests (including maximum total leverage, minimum fixed
charge coverage ratio and maximum capital expenditures) and certain other
limitations on our and certain of our subsidiaries' ability to incur additional
debt, guarantee other obligations, grant liens on assets, make investments or
acquisitions, dispose of assets, make optional payments or modifications of
other debt instruments, pay dividends or other payments on capital stock, engage
in mergers or consolidations, enter into sale and leaseback transactions, enter
into arrangements that restrict our ability to pay dividends or grant liens,
engage in transactions with affiliates and change the passive holding company
status of our parent.
Events of Default. The senior credit facility contains events of default,
including (subject to customary cure periods and materiality thresholds)
defaults based on (i) the failure to make payments under the senior credit
facility when due, (ii) breach of covenants, (iii) inaccuracies of
representations and warranties, (iv) cross-defaults to other material
indebtedness, (v) bankruptcy events, (vi) material judgments, (vii) certain
matters arising under the Employee Retirement Income Security Act of 1974, as
amended, (viii) the actual or asserted invalidity of documents relating to any
guarantee or security document, (ix) the actual or asserted invalidity of any
subordination terms supporting the senior credit facility and (x) the occurrence
of a change in control. If any such event of default occurs, the lenders under
the senior credit facility are entitled to accelerate the facilities and take
various other actions, including all actions permitted to be taken by a secured
creditor.
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DESCRIPTION OF THE NEW NOTES
You can find the definitions of certain terms used in this description
under the subheading "-- Certain Definitions." In this description, "we," "our,"
"us" and "GNC" refer only to General Nutrition Centers, Inc. and not to any of
its subsidiaries.
GNC will issue the new notes under an indenture, dated as of December 5,
2003, among itself, as issuer, the Guarantors and U.S. Bank National
Association, as trustee. This is the same indenture under which the old notes
were issued. The terms of the new notes will include those stated in the
indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939.
The following description is a summary of the material provisions of the
indenture and the registration rights agreement. It does not restate those
agreements in their entirety. Although we believe that we have disclosed in this
prospectus all the material provisions of the indenture, we urge you to read the
indenture because it, and not this description, define your rights as holders of
the new notes. Copies of the indenture are available as set forth in this
section under the caption "-- Additional Information." Certain defined terms
used in this description but not defined below under "-- Certain Definitions"
have the meanings assigned to them in the indenture.
The registered holder of a new note will be treated as the owner of it for
all purposes. Only registered holders will have rights under the indenture.
NEW NOTES VERSUS THE OLD NOTES
The new notes are substantially identical to the old notes except that the
transfer restrictions and registration rights provisions do not apply to the new
notes.
THE NEW NOTES
The new notes:
- will be general unsecured obligations of GNC;
- will be subordinated in right of payment to all existing and future
Senior Indebtedness of GNC;
- will be structurally subordinated to all obligations of our non-guarantor
Subsidiaries;
- will be pari passu in right of payment with any existing and future
Senior Subordinated Indebtedness of GNC;
- will be senior in right of payment to any future existing and
Subordinated Obligations of GNC; and
- will be unconditionally guaranteed by the Guarantors.
THE NOTE GUARANTEES
The new notes will be guaranteed by all of GNC's current and future
Domestic Subsidiaries, other than Immaterial Subsidiaries.
Each guarantee of the new notes:
- will be a general unsecured obligation of that Guarantor;
- will be subordinated in right of payment to all existing and future
Guarantor Senior Indebtedness of that Guarantor;
- will be pari passu in right of payment with any existing and future
Guarantor Senior Subordinated Indebtedness of that Guarantor; and
- will be senior in right of payment to any existing and future
Subordinated Obligations of that Guarantor.
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As of December 31, 2003, GNC and the Guarantors had total Senior
Indebtedness of approximately $299.2 million (excluding $5.4 million of letters
of credit, $4.4 million of which were cash collateralized), and GNC had the
ability to borrow up to an additional $74.0 million under the Senior Credit
Facility, after giving effect to the use of $1.0 million of the revolving credit
facility to secure letters of credit, which would be Senior Indebtedness. As
indicated above and as discussed in detail below under the subheading
"-- Ranking," payments on the new notes and under the Note Guarantees will be
subordinated to the payment of Senior Indebtedness and Guarantor Senior
Indebtedness. The indenture will permit us and the Guarantors to incur
additional Senior Indebtedness and Guarantor Senior Indebtedness.
None of our Foreign Subsidiaries or Immaterial Subsidiaries will Guarantee
the new notes. In the event of a bankruptcy, liquidation or reorganization of
any of these non-guarantor Subsidiaries, the non-guarantor Subsidiaries will pay
the holders of their debt and their trade creditors before they will be able to
distribute any of their assets to us. Our non-guarantor Subsidiaries accounted
for less than 4.6% of our net revenues for the year ended December 31, 2003, and
less than 5.2% of our total assets as of December 31, 2003.
As of the date of the indenture, all of our Subsidiaries were "Restricted
Subsidiaries." However, under the circumstances described under "-- Certain
Covenants -- Designation of Unrestricted Subsidiaries," we will be permitted to
designate certain of our Subsidiaries as "Unrestricted Subsidiaries." Our
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants in the indenture. Our Unrestricted Subsidiaries will not guarantee the
new notes.
PRINCIPAL, MATURITY AND INTEREST
GNC will issue $215 million in aggregate principal amount of new notes in
this offering. The indenture provides that GNC may issue additional notes from
time to time after this offering in an unlimited principal amount without the
consent of the holders of the notes. Any offering of additional notes is subject
to compliance with the provisions of the indenture described below under
"-- Certain Covenants -- Limitation on Indebtedness." The notes and any
additional notes subsequently issued under the indenture will be treated as a
single class for all purposes under the indenture, including, without
limitation, waivers, amendments, redemptions and offers to purchase. GNC will
issue notes in denominations of $1,000 and integral multiples of $1,000. The new
notes will mature on December 1, 2010.
Interest on each new note will accrue from the last interest payment date
on which interest was paid on the old note surrendered in exchange for the new
note or, if no interest has been paid on such old note, from the date of the old
note's original issue, December 5, 2003, at a rate of 8 1/2% per annum. Interest
on the new notes will be payable semi-annually in arrears on June 1 and December
1, beginning on December 1, 2004. GNC will make each interest payment to the
holders of record of new notes on the immediately preceding May 15 and November
15. Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NEW NOTES
If a holder has given wire transfer instructions to GNC, GNC will pay all
principal, interest and premium and Liquidated Damages, if any, on that holder's
new notes in accordance with those instructions. See "Book Entry, Delivery and
Form -- Same Day Settlement and Payment." All other payments on new notes will
be made at the office or agency of the paying agent and registrar within the
City and State of New York unless GNC elects to make interest payments by check
mailed to the holders at their address set forth in the register of holders.
PAYING AGENT AND REGISTRAR FOR THE NEW NOTES
The Trustee will initially act as paying agent and registrar. GNC may
change the paying agent or registrar without prior notice to the holders of the
new notes, and GNC or any of its Subsidiaries may act as paying agent or
registrar.
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TRANSFER AND EXCHANGE
A holder may transfer or exchange new notes in accordance with the
indenture. The registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents in connection
with a transfer of new notes. Holders will be required to pay all taxes due on
transfer. GNC is not required to transfer or exchange any new note selected for
redemption. Also, GNC is not required to transfer or exchange any new note for a
period of 15 days before a selection of new notes to be redeemed.
The registered holder of a new note will be treated as the owner of it for
all purposes.
OPTIONAL REDEMPTION
At any time prior to December 1, 2006, GNC may on any one or more occasions
redeem up to 35% of the aggregate principal amount of notes issued under the
indenture at a redemption price of 108.500% of the principal amount, plus
accrued and unpaid interest and Liquidated Damages, if any, to the redemption
date with the Net Cash Proceeds of one or more Equity Offerings; provided that:
(1) at least 65% of the aggregate principal amount of notes originally
issued under the indenture remains outstanding immediately after the
occurrence of such redemption (excluding notes held by GNC and its
Subsidiaries); and
(2) the redemption occurs within 60 days after the date of the closing
of such Equity Offering.
Except pursuant to the preceding paragraph, the notes will not be
redeemable at GNC's option prior to December 1, 2007.
Upon not less than 30 nor more than 90 days' notice, the notes are
redeemable, at GNC's option, in whole or in part, at any time and from time to
time on and after December 1, 2007 and prior to maturity at the following
redemption prices, expressed as a percentage of principal amount, plus accrued
and unpaid interest and Liquidated Damages, if any, to the redemption date,
subject to the right of holders of record on the relevant record date to receive
interest due on the relevant interest payment date, if redeemed during the
12-month period commencing on December 1 of the years set forth below:
<Table>
<Caption>
REDEMPTION
PERIOD PRICE
- ------ ----------
2007........................................................ 104.250%
2008........................................................ 102.125%
2009 and thereafter......................................... 100.000%
</Table>
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the notes are redeemed pursuant to an
optional redemption, selection of the notes for redemption will be made by the
Trustee on a pro rata basis, by lot or by such method as the Trustee shall deem
fair and appropriate. No notes of $1,000 or less may be redeemed in part.
Notices of redemption must be mailed by first-class mail at least 30, but not
more than 90, days before the redemption date to each holder of notes to be
redeemed at the holder's registered address.
If any note is to be redeemed in part only, the notice of redemption that
relates to such note must state the portion of the principal amount to be
redeemed. A note in a principal amount equal to the unredeemed portion will be
issued in the name of the holder upon cancellation of the original note. On and
after the redemption date, interest will cease to accrue on notes or portions
thereof called for redemption as long as GNC has deposited with the paying agent
for the notes funds in satisfaction of the applicable redemption price pursuant
to the indenture.
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MANDATORY REDEMPTION
GNC is not required to make mandatory redemption or sinking fund payments
with respect to the notes.
RANKING
The indebtedness evidenced by the notes:
(1) is unsecured Senior Subordinated Indebtedness of GNC;
(2) is subordinated in right of payment, as set forth in the
indenture, to the payment in full in cash when due of all existing and
future Senior Indebtedness of GNC, including GNC's obligations under the
Senior Credit Facility;
(3) ranks pari passu in right of payment with all existing and future
Senior Subordinated Indebtedness of GNC; and
(4) is senior in right of payment to all existing and future
Subordinated Obligations of GNC.
In the event that our secured creditors exercise their rights with respect
to our pledged assets, the proceeds of the liquidation of those assets will
first be applied to repay obligations secured by such assets before any
unsecured Indebtedness, including the notes, is repaid.
Although the indenture contains limitations on the amount of additional
Indebtedness which GNC may incur, under certain circumstances the amount of such
indebtedness could be substantial, and such Indebtedness may be Senior
Indebtedness. See "-- Certain Covenants -- Limitation on Indebtedness" below.
GNC may not pay principal of, premium, Liquidated Damages, if any, or
interest on the notes or make any deposit pursuant to the provisions described
under "-- Defeasance" below (except in Permitted Junior Securities or from the
trust described under "-- Defeasance") and may not otherwise purchase, redeem or
otherwise retire any notes (collectively, "pay the notes") if:
(1) any Senior Indebtedness is not paid when due in cash; or
(2) any other default on Senior Indebtedness occurs and the maturity
of such Senior Indebtedness is accelerated in accordance with its terms
unless (A) the default has been cured or waived and any such acceleration
has been rescinded in writing or (B) such Senior Indebtedness has been paid
in full in cash.
If any other default occurs under any Designated Senior Indebtedness that
permits the holders thereof to declare such Indebtedness due and payable, GNC
will not be permitted to pay the notes for a period (the "Payment Blockage
Period") beginning upon the receipt by the Trustee of written notice (a
"Blockage Notice") of such default from the Designated Senior Indebtedness
Representative specifying an election to effect a Payment Blockage Period. This
Payment Blockage Period will end on the earliest of:
(1) written notice to the Trustee to terminate the period by the
person who gave the Blockage Notice;
(2) the discharge or repayment in full in cash of such Designated
Senior Indebtedness;
(3) the date on which the default giving rise to the Blockage Notice
is no longer continuing; and
(4) the date on which 179 days have passed following the delivery of
the Blockage Notice.
Unless the maturity of the Designated Senior Indebtedness has been
accelerated, GNC will be permitted to resume payments on the notes after the end
of the Payment Blockage Period. Only one Blockage Notice may be given in a
360-day period, regardless of the number of defaults on the Designated Senior
Indebtedness during that period. However, if a Blockage Notice is given by a
holder of Designated Senior Indebtedness other than Bank Indebtedness during the
360-day period, a representative of Bank Indebtedness may give another Blockage
Notice during the 360-day period. In no event, however, may the total number of
days during which any Payment Blockage Period or Periods in the aggregate are in
effect exceed 179 days during any 360 consecutive day period.
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The holders of Senior Indebtedness are entitled to receive payment in full
in cash of all obligations due in respect of Senior Indebtedness (including
interest and fees after the commencement of any bankruptcy proceeding at the
rate specified in the applicable Senior Indebtedness) before the noteholders are
entitled to receive any payment upon:
(1) any payment or distribution of the assets of GNC upon a total or
partial liquidation, dissolution, reorganization or similar proceeding
relating to GNC; or
(2) a bankruptcy, insolvency, receivership or similar proceeding
relating to GNC.
Until the Senior Indebtedness is paid in full in cash, any payment or
distribution to which the noteholders would be entitled, but for the
subordination provisions of the indenture, will be made to the holders of the
Senior Indebtedness. If a distribution is made to the noteholders that should
not have been made to them as a result of these subordination provisions, the
noteholders are required to hold such a distribution in trust for the holders of
the Senior Indebtedness and promptly pay it over to them.
If payment of the notes is accelerated because of an Event of Default, GNC
is required to promptly notify the holders of the Designated Senior
Indebtedness. GNC is not permitted to pay the notes until five Business Days
after such holders or the Representative of the Designated Senior Indebtedness
receive notice of such acceleration. At that time, GNC may pay the notes only if
the subordination provisions of the indenture otherwise permit payment at that
time.
As a result of the subordination provisions in the indenture, creditors of
GNC who are holders of Senior Indebtedness may recover more, ratably, than the
noteholders in the event of insolvency.
NOTE GUARANTEES
Each Guarantor will unconditionally guarantee, jointly and severally, on an
unsecured, senior subordinated basis, the full and prompt payment of principal
of, premium and Liquidated Damages, if any, and interest on the new notes, and
of all other obligations under the indenture.
Ranking. The indebtedness evidenced by each Note Guarantee, including the
payment of principal of, premium and Liquidated Damages, if any, and interest on
the new notes and other obligations with respect to the new notes, will be
subordinated to all Guarantor Senior Indebtedness of such Guarantor on the same
basis as the new notes are subordinated to Senior Indebtedness of GNC. Each Note
Guarantee will in all respects rank pari passu with all other Guarantor Senior
Subordinated Indebtedness of such Guarantor.
Although the indenture contains limitations on the amount of additional
Indebtedness that GNC's Restricted Subsidiaries may incur, under certain
circumstances, the amount of such Indebtedness could be substantial, and such
Indebtedness may be Guarantor Senior Indebtedness. See "-- Certain Covenants --
Limitation on Indebtedness" and "-- Ranking."
Limitation on Note Guarantee. The obligation of each Guarantor under its
Note Guarantee is limited to the maximum amount as will not constitute a
fraudulent conveyance or fraudulent transfer under federal or state law, after
giving effect to:
(1) all other contingent and fixed liabilities of the Guarantor,
including any Guarantees under the Senior Credit Facility; and
(2) any collections from or payments made by or on behalf of any other
Guarantor with respect to the other Guarantor's obligations under its Note
Guarantee pursuant to its contribution obligations under the indenture.
Consolidation and Merger. Each Guarantor is permitted to consolidate or
merge into or sell its assets to GNC or another Wholly Owned Subsidiary of GNC
that is a Guarantor without limitation. Each Guarantor is permitted to
consolidate with or merge into or sell all or substantially all of its assets to
a corporation,
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partnership, trust, limited partnership, limited liability company or other
similar entity other than GNC or another Wholly Owned Subsidiary of GNC that is
a Guarantor if:
(1) the provisions under the indenture, including the covenant
described under "-- Certain Covenants -- Limitations on Sales of Assets,"
are complied with; and
(2) such Guarantor is released from all of its obligations under the
indenture and its Note Guarantee; provided that termination of the Note
Guarantee will only occur to the extent that the Guarantor's obligations
under the Senior Credit Facility and all of its Guarantees of any other
Indebtedness of GNC also terminate.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined below), each holder
will have the right to require GNC to repurchase all or any part of such
holder's notes at a purchase price in cash equal to 101% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the
date of repurchase. GNC will not be obligated to purchase the notes, however, if
it has exercised its right to redeem all of the notes as described under
"-- Optional Redemption."
Unless GNC has exercised its right to redeem all the notes as described
under "-- Optional Redemption," GNC is required, within 30 days following any
Change of Control, or at GNC's option, prior to such Change of Control but after
the public announcement thereof, to mail a notice to each holder with a copy to
the Trustee stating:
(1) that a Change of Control has occurred or will occur and that such
holder has, or upon such occurrence will have, the right to require GNC to
purchase such holder's notes at a purchase price in cash equal to 101% of
the principal amount thereof, plus accrued and unpaid interest to the date
of purchase, and Liquidated Damages, if any, subject to the right of
noteholders of record on a record date to receive interest on the relevant
interest payment date;
(2) the circumstances and relevant facts and financial information
regarding such Change of Control;
(3) the date of purchase, which will be no earlier than 30 days nor
later than 90 days from the date such notice is mailed;
(4) the instructions determined by GNC, consistent with this covenant,
that a holder must follow in order to have its notes purchased; and
(5) that, if such offer is made prior to such Change of Control,
payment is conditioned on the occurrence of such Change of Control.
GNC will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of notes pursuant to this covenant. To the extent
that the provisions of any securities laws or regulations conflict with
provisions of this covenant, GNC will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
this covenant as a result of such compliance.
The Change of Control purchase feature is a result of negotiations between
GNC and the initial purchasers of the notes. GNC has no present plans to engage
in a transaction involving a Change of Control, although it is possible that GNC
would decide to do so in the future. Subject to the limitations discussed below,
GNC could, in the future, enter into certain transactions, including
acquisitions, refinancings or recapitalizations, that would not constitute a
Change of Control under the indenture, but that could increase the amount of
Indebtedness outstanding at such time or otherwise affect GNC's capital
structure or credit ratings.
Prior to repurchasing any notes pursuant to this "Change of Control"
covenant, but in any event within 90 days following a Change of Control, GNC
will either repay all outstanding Senior Indebtedness and Guarantor Senior
Indebtedness or obtain the requisite consents, if any, under all agreements
governing such
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outstanding Senior Indebtedness and Guarantor Senior Indebtedness to permit the
repurchase of notes required by this covenant. The occurrence of a Change of
Control would constitute a default under the Senior Credit Agreement. Future
Senior Indebtedness and Guarantor Senior Indebtedness may contain prohibitions
of certain events which would constitute a Change of Control or require such
Senior Indebtedness and Guarantor Senior Indebtedness to be repurchased upon a
Change of Control. Moreover, the exercise by the holders of their right to
require GNC to repurchase the notes could cause a default under such Senior
Indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchase on GNC. Finally, GNC's ability to pay cash
to the holders upon a repurchase may be limited by GNC's then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required repurchases. See "Risk Factors -- Funding
Change of Control Offer -- We may not have the ability to raise the funds
necessary to finance the change of control offer required by the indenture."
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving GNC by increasing the
capital required to effectuate such transactions. The definition of "Change of
Control" includes a disposition of all or substantially all of the property and
assets of GNC and its Subsidiaries. With respect to the disposition of property
or assets, the phrase "all or substantially all" as used in the indenture varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the property or assets of a Person,
and therefore it may be unclear as to whether a Change of Control has occurred
and whether GNC is required to make an offer to repurchase the notes as
described above.
CERTAIN COVENANTS
The indenture contains covenants, including, among others, the following:
LIMITATION ON INDEBTEDNESS
GNC shall not, and shall not permit any Restricted Subsidiary to, Incur any
Indebtedness; provided, however, that GNC and any Restricted Subsidiary of GNC
that is a Guarantor may incur Indebtedness if, on the date of the Incurrence of
such Indebtedness, the Consolidated Coverage Ratio would be greater than 2.0 to
1.0.
The first paragraph of this covenant will not prohibit the Incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the Incurrence by GNC and any Guarantor of additional Indebtedness
and letters of credit under one or more Senior Credit Facilities in an
aggregate principal amount at any one time outstanding under this clause
(1) (with letters of credit being deemed to have a principal amount equal
to the maximum potential liability of GNC and its Subsidiaries thereunder)
not to exceed the greater of (a) $400 million less the aggregate amount of
all Net Cash Proceeds of Asset Dispositions applied by GNC or any of its
Restricted Subsidiaries since the date of the indenture to permanently
repay any term Indebtedness under a Senior Credit Facility or to
permanently repay any revolving credit Indebtedness under a Senior Credit
Facility and effect a corresponding commitment reduction thereunder
pursuant to the covenant described below under the caption "-- Certain
Covenants -- Limitation on Sales of Assets" and (b) the amount of the
Borrowing Base as of the date of such Incurrence, in each case less the
aggregate amount of all commitment reductions with respect to any revolving
credit borrowings under a Senior Credit Facility that have been made by GNC
or any of its Restricted Subsidiaries resulting from or relating to the
formation of any Receivables Subsidiary or the consummation of any
Qualified Receivables Transaction;
(2) the Guarantee by GNC or any Guarantor of Indebtedness of GNC or a
Restricted Subsidiary that was permitted to be Incurred by another
provision of this covenant;
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(3) the Incurrence by GNC or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among GNC and any of its Restricted
Subsidiaries; provided, however, that:
(a) if GNC or any Guarantor is the obligor on such Indebtedness,
such Indebtedness must be expressly subordinated to the prior payment in
full in cash of all obligations with respect to the notes, in the case
of GNC, or the applicable Note Guarantee, in the case of a Guarantor;
and
(b) (i) any subsequent issuance or transfer of Capital Stock that
results in any such Indebtedness being held by a Person other than GNC
or a Restricted Subsidiary and (ii) any sale or other transfer of any
such Indebtedness to a Person that is not either GNC or a Restricted
Subsidiary, will be deemed, in each case, to constitute an Incurrence of
such Indebtedness by GNC or such Restricted Subsidiary, as the case may
be, that was not permitted by this clause;
(4) the Incurrence by GNC and the Guarantors of Indebtedness
represented by the notes and the related Note Guarantees;
(5) the Incurrence by GNC and any Restricted Subsidiary of
Indebtedness existing on the date of the indenture (other than the Mellon
Letters of Credit);
(6) the Incurrence by GNC or any of its Restricted Subsidiaries of
Refinancing Indebtedness in exchange for, or the net proceeds of which are
used to refund, refinance or replace Indebtedness (other than intercompany
Indebtedness) that was permitted by the indenture to be Incurred under the
first paragraph of this covenant or clauses (2), (4), (5), (6), (7) or (14)
of this paragraph;
(7) the Incurrence by GNC or any Restricted Subsidiary of Indebtedness
represented by Capitalized Lease Obligations, mortgage financings or
purchase money obligations, in each case, Incurred for the purpose of
financing all or any part of the purchase price or cost of design,
construction or improvement of property, plant or equipment used in the
business of GNC or a Restricted Subsidiary, in an aggregate principal
amount, including all Refinancing Indebtedness Incurred to refund,
refinance or replace any Indebtedness Incurred pursuant to this clause (7),
not to exceed 2.5% of Consolidated Tangible Assets at any time outstanding
measured at the time of Incurrence;
(8) the Incurrence by GNC or any Restricted Subsidiary of Hedging
Obligations that are Incurred in the ordinary course of business and not
for speculative purposes;
(9) the Incurrence by GNC or any Restricted Subsidiary of Indebtedness
evidenced by letters of credit issued in the ordinary course of business of
GNC to secure workers' compensation and other insurance coverage;
(10) the Incurrence by the Foreign Subsidiaries of Indebtedness if, at
the time of Incurrence of such Indebtedness, and after giving effect
thereto, the aggregate principal amount of all Indebtedness of the Foreign
Subsidiaries Incurred pursuant to this clause (10) and then outstanding
does not exceed the greater of (x) $30 million and (y) an amount equal to
50% of the consolidated book value of the inventories of the Foreign
Subsidiaries measured at the time of Incurrence;
(11) the Incurrence by a Receivables Subsidiary of Indebtedness in a
Qualified Receivables Transaction that is without recourse to GNC or to any
other Restricted Subsidiary of GNC or their assets (other than such
Receivables Subsidiary and its assets and, as to GNC or any Restricted
Subsidiary of GNC, other than pursuant to representations, warranties,
covenants and indemnities customary for such transactions) and is not
Guaranteed by any such Person;
(12) the Incurrence by GNC or any of its Restricted Subsidiaries of
Indebtedness in respect of workers' compensation claims, self-insurance
obligations, letters of credit (not supporting Indebtedness for borrowed
money), bankers' acceptances, performance and surety bonds in the ordinary
course of business;
(13) Indebtedness arising from agreements of GNC or a Restricted
Subsidiary providing for indemnification, contribution, adjustment of
purchase price, earn out or similar obligations, in each case, incurred or
assumed in connection with the disposition of any business or assets of GNC
or any
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Restricted Subsidiary or Capital Stock of a Restricted Subsidiary; provided
that the maximum aggregate liability in respect of all such Indebtedness
Incurred pursuant to this clause (13) shall at no time exceed the gross
proceeds actually received by GNC and its Restricted Subsidiaries in
connection with such dispositions; and
(14) the Incurrence by GNC or any Restricted Subsidiary of
Indebtedness, which may include Bank Indebtedness, in an aggregate
principal amount not to exceed $35 million outstanding at any one time.
For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of proposed Indebtedness meets
the criteria of more than one of the categories of Permitted Debt described in
clauses (1) through (14) above, or is entitled to be Incurred pursuant to the
first paragraph of this covenant, GNC will be permitted to classify such item of
Indebtedness on the date of its Incurrence, or later reclassify, all or a
portion of such item of Indebtedness, in any manner that complies with this
covenant. Indebtedness outstanding under Senior Credit Facilities and under the
Mellon Letters of Credit on the date on which notes are first issued and
authenticated under the indenture are initially deemed to have been Incurred in
reliance on the exception provided by clause (1) of the definition of Permitted
Debt. In addition, for purposes of determining compliance with this "Limitation
on Indebtedness" covenant, the accrual of interest, the accretion or
amortization of original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the same terms will not
be deemed to be an Incurrence of Indebtedness for purposes of this covenant;
provided that the amount thereof shall be included in Consolidated Interest
Expense of GNC as accrued.
GNC will not permit any Unrestricted Subsidiary to Incur any Indebtedness
other than Non-Recourse Debt. However, if any such Indebtedness ceases to be
Non-Recourse Debt, then such event shall constitute an Incurrence of
Indebtedness by GNC or a Restricted Subsidiary.
LIMITATION ON LAYERING
GNC will not Incur any Indebtedness that is contractually subordinate in
right of payment to any Senior Indebtedness, unless such Indebtedness is Senior
Subordinated Indebtedness or is subordinated in right of payment to Senior
Subordinated Indebtedness by contract.
In addition, no Guarantor will Incur any Indebtedness that is contractually
subordinate in right of payment to any Guarantor Senior Indebtedness, unless
such Indebtedness is Guarantor Senior Subordinated Indebtedness of such
Guarantor, or is subordinated in right of payment to Guarantor Senior
Subordinated Indebtedness by contract.
Unsecured Indebtedness is not considered subordinate to Secured
Indebtedness merely because it is unsecured, and Indebtedness that is not
Guaranteed by a particular person is not deemed to be subordinate to
Indebtedness that is so guaranteed, merely because it is not Guaranteed. No
Indebtedness will be considered to be senior by virtue of being secured on a
first or junior priority basis.
LIMITATION ON RESTRICTED PAYMENTS
(A) GNC shall not, and shall not permit any Restricted Subsidiary to, take
any of the following actions:
(1) declare or pay any dividend or make any other payment or
distribution on account of GNC's or any of its Restricted Subsidiaries'
Capital Stock (including, without limitation, any payment in connection
with any merger or consolidation involving GNC or any of its Restricted
Subsidiaries) or to the direct or indirect holders of GNC's or any of its
Restricted Subsidiaries' Capital Stock in their capacity as such (other
than dividends or distributions payable in Capital Stock (other than
Disqualified Stock) of GNC or to GNC or a Restricted Subsidiary of GNC and
other than payments of dividends on, and mandatory repurchases at Stated
Maturity of, Disqualified Stock that was issued after the date of the
indenture in compliance with the covenant described under "-- Limitation on
Indebtedness");
(2) purchase, redeem, retire or otherwise acquire for value
(including, without limitation, in connection with any merger or
consolidation involving GNC) any Capital Stock of GNC, of any direct or
99
indirect parent of GNC or of any Restricted Subsidiary held by Persons
other than GNC or another Restricted Subsidiary;
(3) purchase, repurchase, redeem, defease or otherwise acquire or
retire for value any Subordinated Obligation before scheduled maturity,
scheduled repayment or scheduled sinking fund payment; provided that this
restriction does not apply to a purchase, repurchase, redemption or other
acquisition made in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within one year
of the date of such purchase, repurchase, redemption or acquisition; or
(4) make any Restricted Investment (all such payments and other
actions set forth in these clauses (1) through (4) above being collectively
referred to as "Restricted Payments"),
if at the time GNC or its Restricted Subsidiary makes a Restricted Payment:
(1) a Default occurs and continues to occur or would result therefrom;
(2) GNC could not Incur at least $1.00 of additional Indebtedness
under the first paragraph of the covenant described under "-- Limitation on
Indebtedness;" or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made after the date of the indenture
(excluding Restricted Payments permitted by clauses (1), (2), (3), (5), and
(6) of paragraph (B) below) would exceed, without duplication, the sum of:
(a) 50% of the Consolidated Net Income of GNC accrued during the
period, treated as one accounting period, from the beginning of the
first fiscal quarter commencing after the date of the indenture to the
end of the most recent fiscal quarter ending before the date of such
Restricted Payment for which consolidated financial statements of GNC
are available, or, if such Consolidated Net Income is a deficit, then
minus 100% of such deficit;
(b) 100% of the aggregate Net Cash Proceeds received by GNC since
the date of the indenture as a contribution to its common equity capital
or from the issue or sale of Capital Stock of GNC (other than
Disqualified Stock) or from the issue or sale of convertible or
exchangeable Disqualified Stock or convertible or exchangeable debt
securities of GNC that have been converted into or exchanged for such
Capital Stock (other than Capital Stock (or Disqualified Stock or debt
securities) sold to a Restricted Subsidiary of GNC), less the amount of
any such Net Cash Proceeds that are utilized for an Investment pursuant
to clause (13) of the definition of "Permitted Investments;"
(c) in the case of the disposition or repayment of any Investment
constituting a Restricted Investment, without duplication of any amount
deducted in calculating the amount of Investments at any time
outstanding included in the amount of Restricted Payments, an amount
equal to the lesser of the return of capital or similar repayment with
respect to such Investment, or the initial amount of such Investment, in
either case, less the cost of the disposition of such Investment;
(d) to the extent that any Unrestricted Subsidiary of GNC
designated as such after the date of the indenture is redesignated as a
Restricted Subsidiary after the date of the indenture, the lesser of (i)
the fair market value of GNC's Investment in such Subsidiary as of the
date of such redesignation or (ii) such fair market value as of the date
on which such Subsidiary was originally designated as an Unrestricted
Subsidiary after the date of the indenture; and
(e) 50% of any dividends received by GNC or a Guarantor after the
date of the indenture from an Unrestricted Subsidiary of GNC, to the
extent that such dividends were not otherwise included in the
Consolidated Net Income of GNC for such period.
(B) The provisions of paragraph (A) above will not prohibit the following
actions:
(1) any purchase, redemption, repurchase, defeasance, retirement or
other acquisition of Capital Stock of GNC or Subordinated Obligations made
by exchange, including any such exchange pursuant to the exercise of a
conversion right or privilege in connection with which cash is paid in lieu
of the issuance of fractional shares, for, or out of the proceeds of the
substantially concurrent sale of, Capital
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Stock of GNC, other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary or an employee stock ownership plan or other
trust established by GNC or any of its Subsidiaries; provided that the Net
Cash Proceeds or reduction of Indebtedness from such sale or exchange will
be excluded in subsequent calculations of the amount of Restricted
Payments;
(2) any purchase, redemption, repurchase, defeasance, retirement or
other acquisition of Subordinated Obligations made by exchange for, or out
of the proceeds of the substantially concurrent sale of, Subordinated
Obligations of GNC that is permitted to be Incurred by the covenant
described under "-- Limitation on Indebtedness;"
(3) any purchase, redemption, repurchase, defeasance, retirement or
other acquisition of Subordinated Obligations from Net Available Cash to
the extent permitted by the covenant described under "-- Limitation on
Sales of Assets;"
(4) payment of dividends within 60 days after the date of declaration
of such dividends, if at the date of declaration such dividend would have
complied with paragraph (A) above;
(5) any purchase or redemption of any shares of Capital Stock of GNC
from employees or former employees of GNC and its Restricted Subsidiaries
pursuant to the repurchase provisions under employee stock option or stock
purchase agreements or other agreements to compensate management or in
connection with the termination of employment in an aggregate amount after
the date of the indenture not in excess of $5 million in any fiscal year,
plus any unused amounts under this clause from prior fiscal years;
(6) the payment of any dividend by a Restricted Subsidiary to the
holders of all of its common equity interests on a pro rata basis;
(7) any payments to the Permitted Holder made in connection with, and
substantially concurrent with the closing of, the Acquisition by GNC and
its Restricted Subsidiaries;
(8) any Permitted Payments to Parent;
(9) Restricted Payments not to exceed $50 million in the aggregate
since the date of the indenture; provided that no more than $25 million of
such Restricted Payments are made in any calendar year; provided further
that, after giving pro forma effect to any such Restricted Payment, GNC
would have had a Leverage Ratio of less than 2.5 to 1.00; and
(10) Restricted Payments not to exceed $35 million in the aggregate
since the date of the indenture.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by GNC or such Restricted Subsidiary, as
the case may be, pursuant to the Restricted Payment. The fair market value of
any assets or securities that are required to be valued by this covenant will be
determined by the Board of Directors whose resolution with respect thereto will
be delivered to the Trustee. The Board of Directors' determination must be based
upon an opinion or appraisal issued by an accounting, appraisal or investment
banking firm of national standing if the fair market value exceeds $20 million.
DESIGNATION OF UNRESTRICTED SUBSIDIARIES
The Board of Directors of GNC may designate any Restricted Subsidiary to be
an Unrestricted Subsidiary if that designation would not cause a Default;
provided that in no event will a Subsidiary of GNC that owns or holds the right
to use, license or sublicense the "GNC" brand be designated as an Unrestricted
Subsidiary. If a Restricted Subsidiary is designated as an Unrestricted
Subsidiary, the aggregate fair market value of all outstanding Investments owned
by GNC and its Restricted Subsidiaries in the Subsidiary designated as
Unrestricted will be deemed to be an Investment made as of the time of the
designation and will reduce the amount available for Restricted Payments under
the covenant described under "-- Limitation on Restricted Payments" or under one
or more clauses of the definition of Permitted Investments, as determined by
GNC. That designation will only be permitted if the Investment would be
permitted at that
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time and if the Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary. The Board of Directors of GNC may redesignate any
Unrestricted Subsidiary to be a Restricted Subsidiary if that redesignation
would not cause a Default.
Any designation of a Subsidiary of GNC as an Unrestricted Subsidiary will
be evidenced to the Trustee by filing with the Trustee a certified copy of a
resolution of the Board of Directors giving effect to such designation and an
Officer's Certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described under "--
Limitation on Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the preceding requirements as an Unrestricted Subsidiary, it
will thereafter cease to be an Unrestricted Subsidiary for purposes of the
indenture and any Indebtedness of such Subsidiary will be deemed to be Incurred
by a Restricted Subsidiary of GNC as of such date and, if such Indebtedness is
not permitted to be Incurred as of such date under the covenant described under
"-- Limitation on Indebtedness," GNC will be in default of such covenant. The
Board of Directors of GNC may at any time designate any Unrestricted Subsidiary
to be a Restricted Subsidiary of GNC; provided that such designation will be
deemed to be an Incurrence of Indebtedness by a Restricted Subsidiary of GNC of
any outstanding Indebtedness of such Unrestricted Subsidiary, and such
designation will only be permitted if (1) such Indebtedness is permitted under
the covenant described under "-- Limitation on Indebtedness," calculated on a
pro forma basis as if such designation had occurred at the beginning of the
four-quarter reference period; and (2) no Default or Event of Default would be
in existence following such designation.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
Neither GNC nor any Restricted Subsidiary will create or otherwise cause or
permit to exist any consensual restriction on the ability of any Restricted
Subsidiary to take the following actions:
(1) pay dividends or make any other distributions on its Capital Stock
or pay any Indebtedness or other obligations owed to GNC or any of its
Restricted Subsidiaries;
(2) make any loans or advances to GNC or any of its Restricted
Subsidiaries; or
(3) transfer any of its property or assets to GNC or any of its
Restricted Subsidiaries.
However, this prohibition does not apply to:
(1) the Senior Credit Facility and any agreements governing
Indebtedness existing on the date of the indenture, in each case, as in
effect on the date of the indenture and any amendments, restatements,
modifications, renewals, supplements, refundings, replacements or
refinancings of those agreements; provided that the amendments,
restatements, modifications, renewals, supplements, refundings,
replacements or refinancings are not materially more restrictive, taken as
a whole, with respect to such dividend and other payment restrictions than
those contained in those agreements on the date of the indenture;
(2) the indenture, the notes and the Note Guarantees;
(3) any restriction with respect to a Restricted Subsidiary that is
either:
(a) pursuant to an agreement relating to any Indebtedness (i)
Incurred by a Restricted Subsidiary before the date on which such
Restricted Subsidiary was acquired by GNC, or (ii) of another Person
that is assumed by GNC or a Restricted Subsidiary in connection with the
acquisition of assets from, or merger or consolidation with, such Person
and is outstanding on the date of such acquisition, merger or
consolidation; provided that any restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to Indebtedness
Incurred either as consideration in, or for the provision of any portion
of the funds or credit support used to consummate, the transaction or
series of related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary or was acquired by GNC, or
such acquisition of assets, merger or consolidation shall not be
permitted pursuant to this clause (a); or
(b) pursuant to any agreement, not relating to any Indebtedness,
existing when a Person becomes a Subsidiary of GNC or acquired by GNC or
any of its Subsidiaries, that, in each case, is
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not created in contemplation of such Person becoming such a Subsidiary
or such acquisition (it being understood for purposes of this clause (b)
that if another Person is the Successor Company, any Subsidiary or
agreement thereof shall be deemed acquired or assumed by GNC when such
Person becomes the Successor Company), and, in the case of clause (a)
and (b), which restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the
properties or assets of the Person, so acquired;
(4) any restriction with respect to a Restricted Subsidiary pursuant
to an agreement (a "Refinancing Agreement") that effects a refinancing,
extension, renewal or replacement of Indebtedness under an agreement
referred to in this covenant (an "Initial Agreement") or contained in any
amendment to an Initial Agreement; provided that the restrictions contained
in any such Refinancing Agreement or amendment are not materially more
restrictive, taken as a whole, than the restrictions contained in the
Initial Agreement or Agreements to which such Refinancing Agreement or
amendment relates;
(5) any restriction that is a customary restriction on subletting,
assignment or transfer of any property or asset that is subject to a lease,
license or similar contract, or on the assignment or transfer of any lease,
license or other contract;
(6) any restriction by virtue of a transfer, agreement to transfer,
option, right, or Lien with respect to any property or assets of GNC or any
Restricted Subsidiary not otherwise prohibited by the indenture;
(7) any restriction contained in mortgages, pledges or other
agreements securing Indebtedness of GNC or a Restricted Subsidiary to the
extent such restriction restricts the transfer of the property subject to
such mortgages, pledges or other security agreements;
(8) any restriction with respect to a Restricted Subsidiary, or any of
its property or assets, imposed pursuant to an agreement for the sale or
disposition of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary, or the property or assets that are subject to such
restriction, pending the closing of such sale or disposition;
(9) any restriction existing by reason of applicable law, rule,
regulation or order;
(10) provisions limiting the disposition or distribution of assets or
property in joint venture agreements, asset sale agreements, sale-leaseback
agreements, stock sale agreements and other similar agreements entered into
with the approval of GNC's Board of Directors, which limitation is
applicable only to the assets that are the subject of such agreements;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(12) restrictions existing under Indebtedness or other contractual
requirements of a Receivables Subsidiary in connection with a Qualified
Receivables Transaction; provided that such restrictions apply only to such
Receivables Subsidiary; or
(13) restrictions contained in Indebtedness incurred by a Foreign
Subsidiary pursuant to clause (10) of the second paragraph of the covenant
entitled "-- Limitation on Indebtedness;" provided that such restrictions
relate only to one or more Foreign Subsidiaries.
LIMITATION ON SALES OF ASSETS
Neither GNC nor any Restricted Subsidiary shall make any Asset Disposition
unless:
(1) GNC or such Restricted Subsidiary receives consideration,
including relief from, or the assumption of another Person for, any
liabilities, contingent or otherwise, at the time of such Asset Disposition
at least equal to the fair market value of the shares and assets subject to
such Asset Disposition. The Board of Directors shall determine the fair
market value, and their determination shall be conclusive, including as to
the value of all non-cash consideration;
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(2) at least 75% of the consideration for any Asset Disposition
received by GNC or such Restricted Subsidiary is in the form of cash. For
the purposes of this covenant, the following are deemed to be cash:
(a) Cash Equivalents;
(b) the assumption of Indebtedness of GNC, other than Disqualified
Stock of GNC, or any Restricted Subsidiary and the release of GNC or
such Restricted Subsidiary from all liability on such Indebtedness in
connection with such Asset Disposition;
(c) Indebtedness of any Restricted Subsidiary that is no longer a
Restricted Subsidiary as a result of such Asset Disposition, to the
extent that GNC and each other Restricted Subsidiary is released from
any Guarantee, or is the beneficiary of any indemnity with respect to
such Indebtedness which is secured by any letter of credit or Cash
Equivalents, of such Indebtedness in connection with such Asset
Disposition;
(d) securities received by GNC or any Restricted Subsidiary from
the transferee that are converted by GNC or such Restricted Subsidiary
into cash within 60 days after the Asset Disposition;
(e) an amount equal to the fair market value of Indebtedness of GNC
or any Restricted Subsidiary received by GNC or a Restricted Subsidiary
as consideration for any Asset Disposition, determined at the time of
receipt of such Indebtedness by GNC or such Restricted Subsidiary; and
(f) consideration consisting of Additional Assets;
(3) GNC or such Restricted Subsidiary applies an amount equal to 100%
of the Net Available Cash from such Asset Disposition in the following
manner:
(a) to the extent GNC elects, or is required by the terms of any
Senior Indebtedness or Indebtedness, other than Preferred Stock, to
prepay, repay or purchase Senior Indebtedness or such Indebtedness, in
each case other than the Indebtedness owed to GNC or a Restricted
Subsidiary, within 365 days after the date of such Asset Disposition;
(b) to the extent of the balance of Net Available Cash, to the
extent GNC or such Restricted Subsidiary elects, to reinvest in
Additional Assets (including by means of an Investment in Additional
Assets by a Restricted Subsidiary with Net Available Cash received by
GNC or another Restricted Subsidiary) within 365 days from the date of
such Asset Disposition, or, if such reinvestment in Additional Assets is
a project that is authorized by the Board of Directors within such
365-day period, within 455 days from the date of such Asset Disposition;
(c) to the extent of the balance of such Net Available Cash
remaining after application pursuant to clauses (a) or (b) above (the
"Excess Proceeds"), to make an offer to purchase notes at a price in
cash equal to 100% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, to the purchase date,
and, to the extent required by the terms thereof, any other Senior
Subordinated Indebtedness subject to the agreements governing such other
Indebtedness at a purchase price of 100% of the principal amount thereof
plus accrued and unpaid interest to the purchase date and liquidated
damages, if any; and
(d) to the extent of the balance of such Excess Proceeds after
application pursuant to clauses (a), (b) or (c) above for any purpose
not prohibited by the indenture.
However, in connection with any prepayments, repayment or purchase of
revolving credit Indebtedness pursuant to clauses (a) and (c) above, GNC or such
Restricted Subsidiary will cause the related loan commitment, if any, to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased.
Pending the final application of any Net Available Cash, GNC may
temporarily reduce revolving credit borrowings or otherwise invest the Net
Available Cash in any manner that is not prohibited by the indenture.
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The provisions of this covenant do not require GNC or the Restricted
Subsidiaries to apply any Net Available Cash in accordance with this covenant,
except to the extent that the aggregate Net Available Cash from all Asset
Dispositions that is not applied in accordance with this covenant exceeds $15
million.
To the extent that the aggregate principal amount of the notes and other
Senior Subordinated Indebtedness tendered pursuant to an offer to purchase made
in accordance with the third clause above exceeds the amount of Excess Proceeds,
the Trustee will select the notes and Senior Subordinated Indebtedness to be
purchased on a pro rata basis, based on the aggregate principal amount thereof
surrendered in such offer to purchase; provided that when such offer to purchase
is complete, the amount of Excess Proceeds shall be reset to zero.
GNC will comply with the requirements of Section 14(e) of the Exchange Act
and any other securities laws or regulations in connection with the repurchase
of notes pursuant to this covenant, in each case, to the extent applicable. To
the extent that the provisions of any securities laws or regulations conflict
with provisions of this covenant, GNC will comply with the applicable securities
laws and regulations and will not be deemed to have breached its obligations
under this covenant as a result of such compliance.
The Senior Credit Agreement will restrict GNC from purchasing any notes,
and also provides that certain Asset Disposition events would constitute a
default under such agreement. Any future credit agreements or other agreements
relating to senior indebtedness to which GNC or any of its Restricted
Subsidiaries becomes a party may contain similar restrictions and provisions. In
the event an Asset Disposition resulting in Excess Proceeds occurs at a time
when GNC is prohibited from purchasing notes, GNC could seek the consent of its
senior lenders to the purchase of notes or could attempt to refinance the
borrowings that contain such prohibition. If GNC does not obtain such a consent
or repay such borrowings, GNC will remain prohibited from purchasing notes. In
such case, GNC's failure to purchase tendered notes would constitute an Event of
Default under the indenture which would, in turn, constitute a default under
such senior indebtedness. In such circumstances, the subordination provisions in
the indenture would likely restrict payments to the holders of notes.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
Neither GNC nor any of its Restricted Subsidiaries will engage in any
transaction or series of transactions, including the purchase, sale, lease or
exchange of any property or the rendering of any service with any Affiliate of
GNC (an "Affiliate Transaction") on terms that:
(1) taken as a whole are less favorable to GNC or such Restricted
Subsidiary than the terms that could be obtained at the time of such
transaction in arm's-length dealings with a nonaffiliate; and
(2) in the event such Affiliate Transaction involves an aggregate
amount in excess of $15 million, is not in writing and has not been
approved by a majority of the members of the Board of Directors having no
material personal financial interest in such Affiliate Transaction. If
there are no such Board members, then GNC must obtain a Fairness Opinion. A
Fairness Opinion means an opinion from an independent investment banking
firm, accounting firm or appraiser of national standing which indicates
that the terms of such transaction are fair to GNC or such Restricted
Subsidiary from a financial point of view.
In addition, any transaction involving aggregate payments or other
transfers by GNC and its Restricted Subsidiaries in excess of $30 million will
also require a Fairness Opinion.
The provisions of the paragraphs above shall not prohibit the following
actions:
(1) any Restricted Payment permitted by the covenant described under
"-- Limitation on Restricted Payments" or any Permitted Investment;
(2) the performance of the obligations of GNC or a Restricted
Subsidiary under any employment contract, collective bargaining agreement,
service agreement, employee benefit plan, related trust agreement,
severance agreement or any other similar arrangement entered into in the
ordinary course of business;
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(3) payment of compensation, performance of indemnification or
contribution obligations in the ordinary course of business;
(4) any issuance, grant or award of stock, options or other
securities, to employees, officers or directors;
(5) any transaction between GNC and a Restricted Subsidiary or between
Restricted Subsidiaries or any transaction between a Receivables Subsidiary
and any Person in which the Receivables Subsidiary has an Investment;
(6) any other transaction arising out of agreements existing on the
date of the indenture and described in the "Certain Relationships and
Related Party Transactions" section of the Offering Memorandum;
(7) transactions with suppliers or other purchasers or sellers of
goods or services, in each case in the ordinary course of business and on
terms no less favorable to GNC or the Restricted Subsidiary than those that
could be obtained at such time in arm's-length dealings with a
nonaffiliate;
(8) the payment of rent due under the Master Lease, dated as of March
23, 1999, between Gustine Sixth Avenue Associates, Ltd. and General
Nutrition, Incorporated, as in effect on the date of the indenture or as
amended in compliance with the provisions of this covenant; and
(9) so long as no Default has occurred and is continuing, (a) payment
of annual management fees to the Permitted Holder in an aggregate amount
not to exceed, during any consecutive 12-month period, $1.5 million, (b)
the payment of fees to the Permitted Holder for financial advisory and
investment banking services rendered to GNC and its Restricted Subsidiaries
in connection with acquisitions, securities offerings and other financings
and similar significant corporate transactions in customary and reasonable
amounts for such transactions, and (c) reimbursement of reasonable
out-of-pocket expenses incurred by the Permitted Holder in connection with
the services described in clauses (a) and (b) above; provided that the
foregoing payments and reimbursements are subordinated to the notes to the
same extent as the notes are subordinated to Designated Senior
Indebtedness; provided further that if any such Default prevents the
payment of any such fees, GNC may pay such deferred fees at the time such
Default is cured or waived.
LIMITATION ON THE SALE OR ISSUANCE OF PREFERRED STOCK OF RESTRICTED
SUBSIDIARIES
GNC will not sell any shares of Preferred Stock of a Restricted Subsidiary,
and will not permit any Restricted Subsidiary to issue or sell any shares of its
Preferred Stock to any Person, other than to GNC or a Restricted Subsidiary.
LIMITATION ON LIENS
Neither GNC nor any Restricted Subsidiary will create or permit to exist
any Lien, other than Permitted Liens, on any of its property or assets,
including Capital Stock, whether owned on the date of the indenture or
thereafter acquired, securing any Indebtedness that is not Senior Indebtedness
(the "Initial Lien"), unless at the same time effective provision is made to
secure the obligations due under the indenture and the notes equally and ratably
with such obligation for so long as such obligation is secured by such Initial
Lien.
Any such Lien created in favor of the notes will be automatically and
unconditionally released and discharged upon:
(1) the release and discharge of the Initial Lien to which it relates;
or
(2) any sale, exchange or transfer to a non-affiliate of GNC of the
property or assets secured by such Initial Lien, or of all of the Capital
Stock held by GNC or any Restricted Subsidiary, or all or substantially all
of the assets of any Restricted Subsidiary creating such Lien.
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REPORTING REQUIREMENTS
Whether or not required by the SEC's rules and regulations, so long as any
notes are outstanding, GNC will furnish to the holders of notes, within the time
periods specified in the SEC's rules and regulations:
(1) all quarterly and annual reports that would be required to be
filed with the SEC on Forms 10-Q and 10-K if GNC were required to file such
reports; and
(2) all current reports that would be required to be filed with the
SEC on Form 8-K if GNC were required to file such reports.
All such reports will be prepared in all material respects in accordance
with all of the rules and regulations applicable to such reports. Each annual
report on Form 10-K will include a report on GNC's consolidated financial
statements by GNC's certified independent accountants. In addition, following
the consummation of the exchange offer contemplated by the registration rights
agreement, GNC will file a copy of each of the reports referred to in clauses
(1) and (2) above with the SEC for public availability within the time periods
specified in the rules and regulations applicable to such reports (unless the
SEC will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request.
If, at any time after consummation of the exchange offer contemplated by
the registration rights agreement, GNC is no longer subject to the periodic
reporting requirements of the Exchange Act for any reason, GNC will nevertheless
continue filing the reports specified in the preceding paragraphs with the SEC
within the time periods specified above unless the SEC will not accept such a
filing. GNC agrees that it will not take any action for the purpose of causing
the SEC not to accept any such filings. If, notwithstanding the foregoing, the
SEC will not accept GNC's filings for any reason, GNC will post the reports
referred to in the preceding paragraphs on its website within the time periods
that would apply if GNC were required to file those reports with the SEC.
In addition, GNC and the Guarantors agree that, for so long as any notes
remain outstanding, at any time they are not required to file with the SEC the
reports required by the preceding paragraphs, they will furnish to the holders
and to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d) (4) under the
Securities Act.
FUTURE GUARANTORS
If GNC or any of its Restricted Subsidiaries acquires or creates another
Domestic Subsidiary after the date of the indenture, then that newly acquired or
created Domestic Subsidiary will become a Guarantor and execute a supplemental
indenture and deliver an Opinion of Counsel within 10 Business Days of the date
on which it was acquired or created; provided, however, that any Domestic
Subsidiary that constitutes an Immaterial Subsidiary need not become a Guarantor
until such time as it ceases to be an Immaterial Subsidiary.
MERGER AND CONSOLIDATION
GNC will not, in a single transaction or a series of related transactions,
consolidate with or merge with or into, or convey or transfer all or
substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") will be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia;
(2) the Successor Company, if not GNC, will expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of GNC under the notes,
the indenture and the registration rights agreement;
(3) immediately after giving effect to such transaction or series of
transactions no Default or Event of Default exists;
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(4) GNC or the Successor Company, if GNC is not the continuing obligor
under the indenture, will, at the time of such transaction or series of
transactions and after giving pro forma effect thereto as if such
transaction or series of transactions had occurred at the beginning of the
applicable four-quarter period, be permitted to Incur at least an
additional $1.00 of Indebtedness pursuant to the first paragraph of
"-- Limitation on Indebtedness;" and
(5) GNC will have delivered to the Trustee an Officer's Certificate
and an Opinion of Counsel, each to the effect that such consolidation,
merger or transfer and such supplemental indenture, if any, comply with the
indenture; provided that:
(a) in giving such opinion such counsel may rely on such Officer's
Certificate as to any matters of fact, including without limitation as
to compliance with the foregoing clauses; and
(b) no Opinion of Counsel will be required for a consolidation,
merger or transfer described in the last paragraph of this covenant.
In addition, GNC may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person.
The Successor Company will be substituted for, and may exercise every right
and power of, GNC under the indenture. Thereafter, GNC (if it is not the
Successor Company) will be relieved of all obligations and covenants under the
indenture, except that, in the case of a conveyance or transfer of less than all
its assets, GNC will not be released from the obligation to pay the principal of
and interest on the notes.
The provisions of this covenant do not prohibit any Restricted Subsidiary
from consolidating with, merging into or transferring all or part of its
properties and assets to GNC. Additionally, GNC may merge with an Affiliate
incorporated or organized for the purpose of reincorporating or reorganizing GNC
in another jurisdiction to realize tax or other benefits.
DEFAULTS
An Event of Default under the indenture is defined as:
(1) a default in any payment of interest on, or Liquidated Damages, if
any, with respect to, any note when due, whether or not such payment is
prohibited by the provisions described under "-- Ranking" above, continued
for 30 days;
(2) a default in the payment of principal of, or premium, if any, on
any note when due at its Stated Maturity, upon optional redemption, upon
required repurchase, upon declaration or otherwise, whether or not such
payment is prohibited by the provisions described under "-- Ranking" above;
(3) the failure by GNC or any of its Restricted Subsidiaries to comply
with its obligations under the covenant described under "-- Certain
Covenants -- Merger and Consolidation" above;
(4) the failure by GNC or any of its Restricted Subsidiaries to comply
for 30 days after written notice from the Trustee or the holders of at
least 25% in principal amount of the outstanding notes with any of its
obligations under the covenants described under "-- Change of Control" or
"-- Certain Covenants -- Limitation on Indebtedness," "-- Certain
Covenants -- Limitation on Restricted Payments," or "-- Certain
Covenants -- Limitation on Sales of Assets" above, in each case, other than
a failure to purchase notes;
(5) the failure by GNC or any of its Restricted Subsidiaries to comply
with its other agreements contained in the notes or the indenture for 60
days after written notice from the Trustee or the holders of at least 25%
in principal amount of the outstanding notes;
(6) the failure by GNC or any Significant Subsidiary to pay any
Indebtedness within any applicable grace period after final maturity or the
acceleration of any such Indebtedness by the holders thereof because of a
default if the total amount of such Indebtedness unpaid or accelerated
exceeds $20 million (the "Cross Acceleration Provision");
108
(7) events of bankruptcy, insolvency or reorganization of GNC or a
Significant Subsidiary (the "Bankruptcy Provisions");
(8) the rendering of any judgment or decree for the payment of money
in an amount, net of any insurance or indemnity payments actually received
in respect thereof prior to or within 90 days from the entry thereof, or to
be received in respect thereof in the event any appeal thereof shall be
unsuccessful, in excess of $20 million against GNC or a Significant
Subsidiary that is not discharged, bonded or insured by a third Person if
either an enforcement proceeding thereon is commenced, or such judgment or
decree remains outstanding for a period of 90 days and is not discharged,
waived or stayed (the "Judgment Default Provision"); or
(9) the failure of any Guarantee of the notes by a Guarantor that is a
Significant Subsidiary to be in full force, except as contemplated by the
terms thereof or of the indenture, or the denial in writing by any such
Guarantor of its obligations under the indenture or any such Guarantee if
such Default continues for 10 days.
The events listed above will constitute Events of Default regardless of
their reasons, whether voluntary or involuntary or whether effected by operation
of law or pursuant to any judgment, decree, order, rule or regulation of any
administrative or governmental body.
If an Event of Default, other than a Default relating to certain events of
bankruptcy, insolvency or reorganization of GNC, occurs and is continuing,
either the Trustee, by notice to GNC, or the holders of at least a majority in
principal amount of the outstanding notes, by notice to GNC and the Trustee, may
declare the principal of and accrued but unpaid interest on all of such notes to
be due and payable.
Upon such a declaration, such principal and interest will be due and
payable immediately; provided that so long as any Designated Senior Indebtedness
is outstanding, such acceleration will not be effective until the earlier of (1)
the acceleration of such Designated Senior Indebtedness and (2) five Business
Days after the holders of such Designated Senior Indebtedness or the
Representative thereof receive notice from GNC of the acceleration with respect
to the payment of the notes. If an Event of Default relating to events of
bankruptcy, insolvency or reorganization of GNC occurs and is continuing, the
notes will become immediately due and payable without any declaration or other
act on the part of the Trustee or any holder. Under certain circumstances, the
holders of a majority in principal amount of the outstanding notes may rescind
any such acceleration with respect to the notes and its consequences.
Subject to the provisions of the indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
indenture at the request or direction of any of the holders, unless such holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium and Liquidated Damages, if any, or interest when due, no
holder may pursue any remedy with respect to the indenture or the notes unless:
(1) such holder has previously given the Trustee notice that an Event
of Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding
notes have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days
after the receipt of the request and the offer of security or indemnity;
and
(5) the holders of a majority in principal amount of the applicable
notes have not given the Trustee a direction inconsistent with such request
within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the notes outstanding are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to
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the Trustee or of exercising any trust or power conferred on the Trustee. The
Trustee, however, may refuse to follow any direction that:
(1) conflicts with law or the indenture;
(2) the Trustee determines is unduly prejudicial to the rights of any
other holder; or
(3) would involve the Trustee in personal liability.
Before taking any action under the indenture, the Trustee will be entitled
to indemnification satisfactory to it in its sole discretion against all losses
and expenses caused by taking or not taking such action.
The indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium and Liquidated Damages, if any, or interest on any
note, the Trustee may withhold notice if and so long as a committee of its Trust
Officers in good faith determines that withholding notice is in the interests of
the noteholders. In addition, GNC is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default or Event of Default that occurred during the
previous year. GNC also is required to deliver to the Trustee, within 30 days
after the occurrence thereof, written notice of any event which would constitute
a Default, its status and what action GNC is taking or proposes to take in
respect thereof.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of GNC or any
Guarantor, as such, will have any liability for any obligations of GNC or any
Guarantor under the notes, the indenture, the Note Guarantees, or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each holder of notes by accepting a note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the notes.
The waiver may not be effective to waive liabilities under the federal
securities laws.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the indenture or the notes may be amended or
supplemented with the consent of the holders of a majority in principal amount
of the notes then outstanding. Additionally, any past default on any provisions
may be waived with the consent of the holders of a majority in principal amount
of the notes then outstanding. However, without the consent of each holder, no
amendment, supplement or waiver may, among other things:
(1) reduce the principal amount of notes whose holders must consent to
an amendment, supplement or waiver;
(2) reduce the rate of or extend the time for payment of interest on
any note;
(3) reduce the principal amount of or extend the Stated Maturity of
any note;
(4) reduce the premium payable upon the redemption or repurchase of
any note or change the time at which any note may be redeemed as described
under "-- Optional Redemption" above;
(5) make any note payable in money other than that stated in the note;
(6) make any change to the subordination provisions of the indenture
that adversely affects the rights of any holder;
(7) make any change in the provisions of the indenture relating to the
rights of holders of, notes to receive payment of principal of, and
interest, premium or Liquidated Damages on, the notes on or after the
respective due dates expressed in the notes or impair the rights of any
holder of notes to sue for the enforcement of any payment of principal of,
or interest, premium or Liquidated Damages on, such holder's notes on or
after the respective due dates;
110
(8) release any Guarantor from any of its obligations under its Note
Guarantee or the indenture, except in accordance with the terms of the
indenture; or
(9) make any change in the amendment provisions that require each
holder's consent or in the waiver provisions.
Without the consent of any holder, GNC, the Guarantors and the Trustee may
amend or supplement the indenture or notes in the following manner:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for the assumption by a successor corporation of the
obligations of GNC under the indenture;
(3) to provide for uncertificated notes in addition to or in place of
certificated notes; provided, however, that the uncertificated notes are
issued in registered form for purposes of Section 163(f) of the Code, or in
a manner such that the uncertificated notes are described in Section 163
(f) (2) (B) of the Code;
(4) to add Guarantees with respect to the notes, to secure the notes,
to add to the covenants of GNC for the benefit of the noteholders or to
surrender any right or power conferred upon GNC;
(5) to make any change that does not adversely affect the rights of
any holder;
(6) to comply with any requirement of the SEC in connection with the
qualification of the indenture under the TIA; or
(7) to conform the text of the indenture, the Note Guarantees or the
notes to any provision of this Description of Notes to the extent that such
provision in this Description of Notes was intended to be a verbatim
recitation of a provision of the indenture, the Note Guarantees or the
notes.
However, no amendment may be made to the subordination provisions of the
indenture that adversely affects the rights of any holder of Senior Indebtedness
then outstanding unless the holders of such Senior Indebtedness, or any group or
representative thereof authorized to give a consent, consent to such change.
The consent of the noteholders is not necessary under the indenture to
approve the particular form of any proposed amendment, supplement or waiver. It
is sufficient if such consent approves the substance of the proposed amendment,
supplement or waiver. After an amendment, supplement or waiver under the
indenture becomes effective, GNC is required to mail to the applicable
noteholders a notice briefly describing such amendment, supplement or waiver.
However, the failure to give such notice to all such noteholders, or any defect
in such notice, will not impair or affect the validity of the amendment,
supplement or waiver.
DEFEASANCE
GNC at any time may terminate all its obligations and the obligations of
the Guarantors under the notes and the indenture ("legal defeasance"), except
for certain obligations, including those respecting the defeasance trust and
obligations to register the transfer or exchange of the notes, to replace
mutilated, destroyed, lost or stolen notes and to maintain a registrar and
paying agent in respect of the notes. GNC at any time may terminate its
obligations and the obligations of the Guarantors under the covenants described
under "-- Certain Covenants" (other than under "-- Certain Covenants -- Merger
and Consolidation" except as set forth below), the operation of the
Cross-Acceleration Provision, the Bankruptcy Provisions with respect to
Significant Subsidiaries and the Judgment Default Provision described under
"-- Defaults" above and the limitations contained in the third and fourth
clauses under "-- Certain Covenants -- Merger and Consolidation" above
("covenant defeasance").
GNC may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If GNC exercises its legal
defeasance option, payment of the notes may not be accelerated because of an
Event of Default. If GNC exercises its covenant defeasance option, payment of
the notes may not be accelerated because of an Event of Default specified in
clauses four, five, six, seven, but only with
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respect to certain bankruptcy events of a Significant Subsidiary, eight or nine
under "-- Defaults" above or because of the failure of GNC to comply with clause
three or four under "-- Certain Covenants -- Merger and Consolidation" above.
Either defeasance option may be exercised before any redemption date or the
maturity date for the notes. In order to exercise either defeasance option, GNC
must irrevocably deposit in trust (the "defeasance trust") with the Trustee
money or Government Obligations, or a combination thereof, for the payment of
principal of, and premium and Liquidated Damages, if any, and interest on, the
applicable notes to redemption or maturity, as the case may be. Additionally,
GNC must comply with other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the notes will not recognize
income, gain or loss for federal income tax purposes as a result of such deposit
and defeasance and will be subject to federal income tax in the same amount and
in the same manner and times as would have been the case if such deposit and
defeasance had not occurred. In the case of legal defeasance only, such Opinion
of Counsel must be based on a ruling of the Internal Revenue Service or other
change in applicable federal income tax law since the date of the indenture.
CONCERNING THE TRUSTEE
U.S. Bank National Association will serve as the Trustee for the notes. The
Trustee has been appointed by GNC as Registrar and Paying Agent with regard to
the notes.
GOVERNING LAW
Both the indenture and the notes will be governed by, and construed in
accordance with, the laws of the State of New York. Principles of conflicts of
law will not apply to the extent that such principles would require the
application of the law of another jurisdiction.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indenture
without charge by writing to General Nutrition Centers, Inc., 300 Sixth Avenue,
Pittsburgh, Pennsylvania 15222; Attention: Secretary.
BOOK-ENTRY, DELIVERY AND FORM
Old notes that are issued in the form of one or more global certificates
will be exchanged for new notes, issued in the form of one or more global
certificates, known as "global notes." Except as described below, the new notes
will be initially represented by one or more global notes in fully registered
form without interest coupons. The global notes will be deposited with, or on
behalf of DTC, and registered in the name of Cede & Co., as nominee of DTC, or
will remain in the custody of the trustee pursuant to the FAST Balance
Certificate Agreement between DTC and the trustee.
Except as set forth below, the global notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the global notes may not be exchanged for
definitive notes in registered certificated form ("certificated notes") except
in the limited circumstances described below. See "-- Exchange of Global Notes
for Certificated Notes." Except in the limited circumstances described below,
owners of beneficial interests in the Global Notes will not be entitled to
receive physical delivery of notes in certificated form. In addition, transfers
of beneficial interests in the Global Notes will be subject to the applicable
rules and procedures of DTC and its direct or indirect participants (including,
if applicable, those of Euroclear and Clearstream), which may change from time
to time.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Clearstream are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them. GNC takes no
responsibility for these
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operations and procedures or description thereof and urges investors to contact
the system or their participants directly to discuss these matters.
DTC has advised GNC that DTC is a limited-purpose trust company organized
under the laws of the State of New York, a "banking organization" within the
meaning of New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within meaning of the Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the clearance
and settlement of transactions in those securities between the Participants
through electronic book-entry changes in accounts of its Participants. The
Participants include securities brokers and dealers (including the initial
purchasers), banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
(collectively, the "Indirect Participants"). Persons who are not Participants
may beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants.
DTC has also advised GNC that, pursuant to procedures established by it:
(1) upon deposit of the global notes, DTC will credit the accounts of
the Participants designated by the initial purchasers with portions of the
principal amount of the global notes; and
(2) ownership of these interests in the global notes will be shown on,
and the transfer of ownership of these interests will be effected only
through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other
owners of beneficial interest in the global notes).
Investors in the global notes who are Participants may hold their interests
therein directly through DTC. Investors in the global notes who are not
Participants may hold their interests therein indirectly through organizations
(including Euroclear and Clearstream) which are Participants. Euroclear and
Clearstream will hold interests in the global notes on behalf of their
participants through customers' securities accounts in their respective names on
the books of their respective depositories, which are Euroclear Bank S.A./N.V.,
as operator of Euroclear, and Citibank, N.A., as operator of Clearstream. All
interests in a global note, including those held through Euroclear or
Clearstream, may be subject to the procedures and requirements of DTC. Those
interests held through Euroclear or Clearstream may also be subject to the
procedures and requirements of such systems. The laws of some states require
that certain Persons take physical delivery in definitive form of securities
that they own. Consequently, the ability to transfer beneficial interests in a
global note to such Persons will be limited to that extent. Because DTC can act
only on behalf of the Participants, which in turn act on behalf of the Indirect
Participants, the ability of a Person having beneficial interests in a global
note to pledge such interests to Persons that do not participate in the DTC
system, or otherwise take actions in respect of such interests, may be affected
by the lack of a physical certificate evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and interest and premium, if any,
and Liquidated Damages, if any, on, a global note registered in the name of DTC
or its nominee will be payable to DTC in its capacity as the registered holder
under the indenture. Under the terms of the indenture, GNC and the Trustee will
treat the Persons in whose names the notes, including the global notes, are
registered as the owners of the notes for the purpose of receiving payments and
for all other purposes. Consequently, neither GNC, the Trustee nor any agent of
GNC or the Trustee has or will have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the global notes or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
global notes; or
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(2) any other matter relating to the actions and practices of DTC or
any of its Participants or Indirect Participants.
DTC has advised GNC that its current practice, upon receipt of any payment
in respect of securities such as the notes (including principal and interest),
is to credit the accounts of the relevant Participants with the payment on the
payment date unless DTC has reason to believe that it will not receive payment
on such payment date. Each relevant Participant is credited with an amount
proportionate to its beneficial ownership of an interest in the principal amount
of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the Trustee or GNC. Neither GNC nor the Trustee
will be liable for any delay by DTC or any of the Participants or the Indirect
Participants in identifying the beneficial owners of the notes, and GNC and the
Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Transfers between the Participants will be effected in accordance with
DTC's procedures, and will be settled in same-day funds, and transfers between
participants in Euroclear and Clearstream will be effected in accordance with
their respective rules and operating procedures.
Cross-market transfers between the Participants, on the one hand, and
Euroclear or Clearstream participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, as the case may be, by their respective depositaries; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver instructions
to its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in the relevant global note in DTC,
and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream participants may not deliver instructions directly to the
depositories for Euroclear or Clearstream.
DTC has advised GNC that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more Participants to whose
account DTC has credited the interests in the global notes and only in respect
of such portion of the aggregate principal amount of the notes as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the notes, DTC reserves the right to exchange the
global notes for legended notes in certificated form, and to distribute such
notes to its Participants.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the global notes among
participants in DTC, Euroclear and Clearstream, they are under no obligation to
perform or to continue to perform such procedures, and may discontinue such
procedures at any time. None of GNC, the Trustee and any of their respective
agents will have any responsibility for the performance by DTC, Euroclear or
Clearstream or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A global note is exchangeable for certificated notes if:
(1) DTC (a) notifies GNC that it is unwilling or unable to continue as
depositary for the global notes or (b) has ceased to be a clearing agency
registered under the Exchange Act and, in either case, GNC fails to appoint
a successor depositary;
(2) GNC, at its option, notifies the Trustee in writing that it elects
to cause the issuance of the certificated notes; or
(3) there has occurred and is continuing a Default or Event of Default
with respect to the notes.
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In addition, beneficial interests in a global note may be exchanged for
certificated notes upon prior written notice given to the Trustee by or on
behalf of DTC in accordance with the indenture. In all cases, certificated notes
delivered in exchange for any global note or beneficial interests in global
notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures).
EXCHANGE OF CERTIFICATED NOTES FOR GLOBAL NOTES
Certificated notes may not be exchanged for beneficial interests in any
global note unless the transferor first delivers to the Trustee a written
certificate (in the form provided in the indenture).
SAME DAY SETTLEMENT AND PAYMENT
GNC will make payments in respect of the notes represented by the global
notes (including principal, premium, if any, interest and Liquidated Damages, if
any) by wire transfer of immediately available funds to the accounts specified
by DTC or its nominee. GNC will make all payments of principal, interest and
premium, if any, and Liquidated Damages, if any, with respect to certificated
notes by wire transfer of immediately available funds to the accounts specified
by the holders of the certificated notes or, if no such account is specified, by
mailing a check to each such holder's registered address. The notes represented
by the global notes are expected to be eligible to trade in The PORTAL(SM)
Market and to trade in DTC's Same-Day Funds Settlement System, and any permitted
secondary market trading activity in such notes will, therefore, be required by
DTC to be settled in immediately available funds. GNC expects that secondary
trading in any certificated notes will also be settled in immediately available
funds.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a global note from a
Participant will be credited, and any such crediting will be reported to the
relevant Euroclear or Clearstream participant, during the securities settlement
processing day (which must be a Business Day for Euroclear and Clearstream)
immediately following the settlement date of DTC. DTC has advised GNC that cash
received in Euroclear or Clearstream as a result of sales of interests in a
global note by or through a Euroclear or Clearstream participant to a
Participant will be received with value on the settlement date of DTC but will
be available in the relevant Euroclear or Clearstream cash account only as of
the Business Day for Euroclear or Clearstream following DTC's settlement date.
CERTAIN DEFINITIONS
"Acquisition" means the acquisition of General Nutrition Companies, Inc.
pursuant to the Acquisition Agreement.
"Acquisition Agreement" means the Purchase Agreement, dated October 16,
2003, among Royal Numico N.V., Numico USA, Inc. and Apollo GNC Holding, Inc., as
in effect on the date of the indenture.
"Additional Assets" means
(l) any property or assets (other than Indebtedness and Capital Stock)
to be used by GNC or a Restricted Subsidiary in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary
as a result of the acquisition of such Capital Stock by GNC or another
Restricted Subsidiary; provided that such Restricted Subsidiary is
primarily engaged in a Related Business;
(3) Capital Stock of any Person that at such time is a Restricted
Subsidiary, acquired from a third party; provided that such Restricted
Subsidiary is primarily engaged in a Related Business; and
(4) Capital Stock or Indebtedness of any Person which is primarily
engaged in a Related Business; provided, however, for purposes of the
covenant described under "-- Certain Covenants -- Limitation on Sales of
Assets," the aggregate amount of Net Available Cash permitted to be
invested pursuant to this clause (4) shall not exceed at any one time
outstanding 2.5% of Consolidated Tangible Assets.
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"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. No
Person (other than GNC or any Subsidiary of GNC) in whom a Receivables
Subsidiary makes an Investment in connection with a Qualified Receivables
Transaction will be deemed to be an Affiliate of GNC or any of its Subsidiaries
solely by reason of such Investment.
"Apollo" means Apollo Management V, L.P. and its Affiliates or any entity
controlled thereby or any of the partners thereof.
"Asset Disposition" means any sale, lease, transfer or other disposition of
shares of Capital Stock of a Restricted Subsidiary, other than directors'
qualifying shares, property or other assets, each referred to for the purposes
of this definition as a "disposition," by GNC or any of its Restricted
Subsidiaries, including any disposition by means of a merger, consolidation or
similar transaction, other than:
(1) a disposition by a Restricted Subsidiary to GNC or by GNC or a
Restricted Subsidiary to a Restricted Subsidiary;
(2) a disposition of inventory, equipment, obsolete assets or surplus
personal property in the ordinary course of business;
(3) the sale of Cash Equivalents in the ordinary course of business;
(4) a transaction or a series of related transactions in which the
fair market value of the assets disposed of, in the aggregate, does not
exceed $2 million;
(5) the sale or discount, with or without recourse, and on
commercially reasonable terms, of accounts receivable or notes receivable
arising in the ordinary course of business, or the conversion or exchange
of accounts receivable for notes receivable;
(6) the licensing of intellectual property in the ordinary course of
business;
(7) for purposes of the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets" only, a disposition subject to
the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments;"
(8) a disposition of property or assets that is governed by the
provisions described under "-- Merger and Consolidation;"
(9) the sale of franchisee accounts receivable and related assets of
the type specified in the definition of "Qualified Receivables Transaction"
to a Receivables Subsidiary for the fair market value thereof, including
cash in an amount at least equal to 75% of the book value thereof as
determined in accordance with GAAP, it being understood that, for the
purposes of this clause (9), notes received in exchange for the transfer of
franchisee accounts receivable and related assets will be deemed cash if
the Receivables Subsidiary or other payor is required to repay said notes
as soon as practicable from available cash collections less amounts
required to be established as reserves pursuant to contractual agreements
with entities that are not Affiliates of GNC entered into as part of a
Qualified Receivables Transaction;
(10) the transfer of franchise accounts receivable and related assets
of the type specified in the definition of "Qualified Receivables
Transaction" (or a fractional undivided interest therein) by a Receivables
Subsidiary in a Qualified Receivables Transaction;
(11) any surrender or waiver of contract rights or the settlement
release or surrender of contract, tort or other litigation claims in the
ordinary course of business;
(12) the granting of Liens (and foreclosure thereon) not prohibited by
the indenture;
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(13) the closure and disposition of retail stores or distribution
centers and any sales of a store owned by GNC to a franchisee, in each case
in the ordinary course of business; and
(14) any sublease of real property by GNC or any Restricted Subsidiary
to a franchisee in the ordinary course of business.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment
of such Indebtedness or redemption or similar payment with respect to such
Indebtedness or Preferred Stock multiplied by the amount of such payment by
(2) the sum of all such payments.
"Bank Indebtedness" means any and all amounts, whether outstanding on the
date of the indenture or thereafter Incurred, payable under or in respect of the
Senior Credit Facility and all obligations under Specified Hedging Obligations
(as defined in the Senior Credit Agreement), including, without limitation,
principal, premium, if any, interest, including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to GNC
or any Restricted Subsidiary whether or not a claim for post-filing interest is
allowed in such proceedings, penalties, fees, charges, expenses,
indemnifications, damages, reimbursement obligations, Guarantees, other monetary
obligations of any nature and all other amounts payable thereunder or in respect
thereof.
"Board of Directors" means the Board of Directors of GNC or any committee
thereof duly authorized to act on behalf of such Board.
"Borrowing Base" means, as of any date, an amount equal to:
(1) 75% of the face amount of all accounts receivable owned by GNC and
its Restricted Subsidiaries as of the end of the most recent fiscal quarter
preceding such date that were not more than 60 days past due; provided,
however, that any franchise accounts receivable owned by a Receivables
Subsidiary, or that GNC or any of its Subsidiaries has agreed to transfer
to a Receivables Subsidiary, shall be excluded for purposes of determining
such amount; plus
(2) 50% of the book value of all inventory, net of reserves, owned by
GNC and its Restricted Subsidiaries as of the end of the most recent fiscal
quarter preceding such date.
"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banking institutions are authorized or required by law to close
in New York City.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in, however designated, equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.
"Cash Equivalents" means any of the following:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality of the United
States government (provided that the full faith and credit of the United
States is pledged in support of those securities) having maturities of not
more than one year from the date of acquisition;
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(3) certificates of deposit and eurodollar time deposits with
maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding one year and overnight bank
deposits, in each case, with any lender party to the Senior Credit
Agreement or with any domestic commercial bank having capital and surplus
in excess of $500.0 million and a Thomson Bank Watch Rating of "B" or
better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having one of the two highest ratings obtainable
from Moody's or S&P and, in each case, maturing within one year after the
date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means:
(1) any event occurs the result of which is that any "Person," as such
term is used in Sections 13(d) and 14(d) of the Exchange Act, other than
any Permitted Holder or its Related Parties, becomes the beneficial owner,
as defined in Rules l3d-3 and l3d-5 under the Exchange Act (except that a
Person shall be deemed to have "beneficial ownership" of all shares that
any such Person has the right to acquire within one year) directly or
indirectly, of more than 50% of the Voting Stock of GNC or a Successor
Company, as defined below, including, without limitation, through a merger
or consolidation or purchase of Voting Stock of GNC; provided that the
Permitted Holders or their Related Parties do not have the right or ability
by voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors; provided further that the transfer of
100% of the Voting Stock of GNC to a Person that has an ownership structure
identical to that of GNC prior to such transfer, such that GNC becomes a
Wholly Owned Subsidiary of such Person, shall not be treated as a Change of
Control for purposes of the indenture;
(2) after an Equity Offering that is an initial public offering of
Capital Stock of GNC, during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors, together with any new directors whose election by such Board of
Directors or whose nomination for election by the stockholders of GNC was
approved by a vote of a majority of the directors of GNC then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved, cease for
any reason to constitute a majority of the Board of Directors then in
office;
(3) the sale, lease, transfer, conveyance or other disposition, in one
or a series of related transactions other than a merger or consolidation,
of all or substantially all of the assets of GNC and its Restricted
Subsidiaries taken as a whole to any Person or group of related Persons
other than a Permitted Holder or a Related Party of a Permitted Holder; or
(4) the adoption of a plan relating to the liquidation or dissolution
of GNC.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of
(1) the aggregate amount of EBITDA of GNC and its Restricted
Subsidiaries for the period of the most recent four consecutive fiscal
quarters ending prior to the date of such determination for which
consolidated financial statements of GNC are available, to
(2) Consolidated Interest Expense of GNC for such four fiscal
quarters; provided, however, that:
(a) if GNC or any Restricted Subsidiary:
(i) has Incurred any Indebtedness since the beginning of such
period that remains outstanding on such date of determination or if
the transaction giving rise to the need to
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calculate the Consolidated Coverage Ratio is an Incurrence of
Indebtedness, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving effect on a pro forma basis
to such Indebtedness as if such Indebtedness had been Incurred on the
first day of such period, except that in making such computation, the
amount of Indebtedness under any revolving credit facility
outstanding on the date of such calculation shall be computed based
on:
(A) the average daily balance of such Indebtedness during
such four fiscal quarters or such shorter period for which such
facility was outstanding or
(B) if such facility was created after the end of such four
fiscal quarters, the average daily balance of such Indebtedness
during the period from the date of creation of such facility to
the date of such calculation, and the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such
discharge had occurred on the first day of such period, or
(ii) has repaid, repurchased, defeased or otherwise discharged
any Indebtedness since the beginning of the period that is no longer
outstanding on such date of determination, or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio
involves a discharge of Indebtedness, in each case other than
Indebtedness Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to such discharge of such Indebtedness,
including with the proceeds of such new Indebtedness, as if such
discharge had occurred on the first day of such period;
(b) if since the beginning of such period GNC or any Restricted
Subsidiary has made any Asset Disposition of any company or any business
or any business segment, the EBITDA for such period shall be reduced by
an amount equal to the EBITDA, if positive, directly attributable to the
company, business or business segment that are the subject of such Asset
Disposition for such period or increased by an amount equal to the
EBITDA, if negative, directly attributable thereto for such period and
Consolidated Interest Expense for such period shall be reduced by an
amount equal to the Consolidated Interest Expense directly attributable
to any Indebtedness of GNC or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to GNC and
its continuing Restricted Subsidiaries in connection with such Asset
Disposition for such period, and, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period
directly attributable to the Indebtedness of such Restricted Subsidiary
to the extent GNC and its continuing Restricted Subsidiaries are no
longer liable for such Indebtedness after such sale;
(c) if since the beginning of such period GNC or any Restricted
Subsidiary, by merger or otherwise, has made an Investment in any Person
that thereby becomes a Restricted Subsidiary, or otherwise acquired any
company or any business or any group of assets, including any such
acquisition of assets occurring in connection with a transaction causing
a calculation to be made hereunder, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma
effect thereto, including the Incurrence of any Indebtedness and
including the pro forma expenses and cost reductions calculated on a
basis consistent with Regulation S-X of the Securities Act, as if such
Investment or acquisition occurred on the first day of such period; and
(d) if since the beginning of such period any Person that
subsequently became a Restricted Subsidiary or was merged with or into
GNC or any Restricted Subsidiary since the beginning of such period, has
made any Asset Disposition or any Investment or acquisition of assets
that would have required an adjustment pursuant to clause (b) or (c)
above if made by GNC or a Restricted Subsidiary during such period,
EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto, including the
Incurrence of any Indebtedness and including the pro forma expenses and
cost reductions calculated on a basis consistent with
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Regulation S-X of the Securities Act, as if such Asset Disposition,
Investment or acquisition of assets occurred on the first day of such
period.
For purposes of this definition, whenever pro forma effect is to be given
to an Asset Disposition, Investment or acquisition of assets, or any transaction
governed by the provisions described under "-- Certain Covenants -- Merger and
Consolidation," or the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred or repaid, repurchased, defeased or otherwise discharged in connection
therewith, the pro forma calculations in respect thereof shall be as determined
in good faith by a responsible financial or accounting officer of GNC, based on
reasonable assumptions. If any Indebtedness bears a floating rate of interest
and is being given pro forma effect, the interest expense on such Indebtedness
shall be calculated at a fixed rate as if the rate in effect on the date of
determination had been the applicable rate for the entire period, taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term as at the date of determination in
excess of 12 months. If any Indebtedness bears, at the option of GNC or a
Restricted Subsidiary, a fixed or floating rate of interest and is being given
pro forma effect, the interest expense on such Indebtedness shall be computed by
applying, at the option of GNC or such Restricted Subsidiary, either a fixed or
floating rate. If any Indebtedness which is being given pro forma effect was
Incurred under a revolving credit facility, the interest expense on such
Indebtedness shall be computed based upon the average daily balance of such
Indebtedness during the applicable period.
"Consolidated Interest Expense" means, as to any Person, for any period,
the total consolidated interest expense of such Person and its Restricted
Subsidiaries determined in accordance with GAAP, minus, to the extent included
in such interest expense, amortization or write-off of financing costs plus, to
the extent Incurred by such Person and its Restricted Subsidiaries in such
period but not included in such interest expense, without duplication:
(1) interest expense attributable to Capitalized Lease Obligations
determined as if such lease were a capitalized lease, in accordance with
GAAP;
(2) amortization of debt discount;
(3) interest in respect of Indebtedness of any other Person that has
been Guaranteed by such Person or any Restricted Subsidiary, but only to
the extent that such interest is actually paid by such Person or any
Restricted Subsidiary;
(4) non-cash interest expense;
(5) net costs associated with Hedging Obligations;
(6) the product of:
(a) mandatory Preferred Stock cash dividends in respect of all
Preferred Stock of Restricted Subsidiaries of such Person and
Disqualified Stock of such Person held by Persons other than such Person
or a Restricted Subsidiary, multiplied by
(b) a fraction, the numerator of which is one and the denominator
of which is one minus the then current combined federal, state and local
statutory tax rate of such Person, expressed as a decimal, in each case,
determined on a consolidated basis in accordance with GAAP; and
(7) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan or
trust to pay interest to any Person, other than the referent Person or any
Subsidiary thereof, in connection with Indebtedness Incurred by such plan
or trust; provided, however, that as to GNC, there shall be excluded
therefrom any such interest expense of any Unrestricted Subsidiary to the
extent the related Indebtedness is not Guaranteed or paid by GNC or any
Restricted Subsidiary.
For purposes of the foregoing, gross interest expense shall be determined
after giving effect to any net payments made or received by such Person and its
Subsidiaries with respect to Interest Rate Agreements.
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"Consolidated Net Income" means, as to any Person, for any period, the
consolidated net income (loss) of such Person and its Subsidiaries before
preferred stock dividends, determined in accordance with GAAP; provided,
however, that there shall not be included in such Consolidated Net Income:
(1) any net income (loss) of any Person if such Person is not (as to
GNC) a Restricted Subsidiary and, as to any other Person, an unconsolidated
Person, except that:
(a) the referent Person's equity in the net income of any such
Person for such period shall be included in such Consolidated Net Income
up to the aggregate amount of cash actually distributed by such Person
during such period to the referent Person or a Subsidiary as a dividend
or other distribution, subject, in the case of a dividend or other
distribution to a Subsidiary, to the limitations contained in clause (3)
below, and
(b) the net loss of such Person shall be included to the extent of
the aggregate Investment of the referent Person or any of its Restricted
Subsidiaries in such Person;
(2) any net income (loss) of any Restricted Subsidiary, as to GNC, or
of any Subsidiary, as to any other Person, if in either case such
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Subsidiary,
directly or indirectly, to GNC, except that:
(a) such Person's equity in the net income of any such Subsidiary
for such period shall be included in Consolidated Net Income up to the
aggregate amount of cash that could have been distributed by such
Subsidiary during such period to such Person or another Subsidiary as a
dividend, subject, in the case of a dividend that could have been made
to another Restricted Subsidiary, to the limitation contained in this
clause, and
(b) the net loss of such Subsidiary shall be included in
determining Consolidated Net Income;
(3) any extraordinary gain or loss (together with any provision for
taxes related thereto);
(4) the cumulative effect of a change in accounting principles;
(5) any reduction to the Consolidated Net Income of any Person caused
by the amount, if any, of (a) non-cash charges relating to the exercise of
options and (b) non-cash losses (or minus non-cash gains) from foreign
currency translation;
(6) any decrease in net income caused by the increase in the book
value of assets as a result of the Acquisition as reflected on GNC's
balance sheet solely as a result of the application of SFAS No. 141;
(7) any gain (or loss), together with any related provision for taxes
on such gain (or loss), realized in connection with any asset sale (other
than in the ordinary course of business);
(8) costs related to the closing of stores in connection with the
Acquisition as described in the Offering Memorandum; and
(9) costs incurred by GNC relating to an election made under Section
338(h)(10) of the Code (and any corresponding election under state, local,
and foreign income tax laws), as provided in the Acquisition Agreement, in
an amount not to exceed $10 million.
"Consolidated Tangible Assets" means, as of any date of determination, the
total assets, less goodwill and other intangibles, other than patents,
trademarks, copyrights, licenses and other intellectual property, shown on the
balance sheet of GNC and its Restricted Subsidiaries as of the most recent date
for which such a balance sheet is available, determined on a consolidated basis
in accordance with GAAP less all write-ups, other than write-ups in connection
with acquisitions, subsequent to the date of the indenture in the book value of
any asset, except any such intangible assets, owned by GNC or any of its
Restricted Subsidiaries.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement or arrangement,
including derivative agreements or arrangements, as to which such Person is a
party or a beneficiary.
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"Default" means any event or condition that is, or after notice or passage
of time or both would be, an Event of Default.
"Designated Senior Indebtedness" means
(1) the Bank Indebtedness; and
(2) any other Senior Indebtedness or Guarantor Senior Indebtedness
which, at the date of determination, has an aggregate principal amount of,
or under which, at the date of determination, the holders thereof are
committed to lend up to, at least $25 million and is specifically
designated by GNC in the instrument evidencing or governing such
Indebtedness as "Designated Senior Indebtedness" for purposes of the
indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
that by its terms, or by the terms of any security into which it is convertible
or for which it is exchangeable or exercisable, or upon the happening of any
event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable for Indebtedness or Disqualified
Stock; or
(3) is redeemable at the option of the holder thereof, in whole or in
part;
in the case of clauses (1), (2) and (3), on or prior to the 91st day after the
Stated Maturity of the new notes. Notwithstanding the preceding sentence, any
Capital Stock that would constitute Disqualified Stock solely because the
holders of the Capital Stock have the right to require GNC to repurchase such
Capital Stock upon the occurrence of a change of control or asset sale will not
constitute Disqualified Stock if the terms of such Capital Stock provide that
GNC may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described above under "Certain Covenants -- Limitation on Restricted Payments."
"Domestic Subsidiary" means any Restricted Subsidiary of GNC that was
formed under the laws of the United States or any state of the United States or
the District of Columbia or that Guarantees or otherwise provides direct credit
support for any Indebtedness of GNC.
"EBITDA" means, as to any Person, for any period, the Consolidated Net
Income for such period, plus the following to the extent included in calculating
such Consolidated Net Income:
(1) income tax expense;
(2) Consolidated Interest Expense (including the amortization of any
debt issuance costs to the extent such costs are included in the
calculation of Consolidated Interest Expense);
(3) depreciation expense;
(4) amortization expense (including the amortization of any debt
issuance costs to the extent such costs are included in the calculation of
Consolidated Interest Expense);
(5) other non-cash charges or non-cash losses; and
(6) any fees or expenses paid in connection with the Acquisition as
described in the Offering Memorandum.
"Equity Offering" means any issuance or sale of Capital Stock (other than
Disqualified Stock and other than to GNC or any of its Subsidiaries), or a
contribution to the equity capital (other than by a Subsidiary of GNC), of GNC,
in each case, that results in net proceeds to GNC of at least $100 million.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Notes" means, with respect to a series of notes, any securities
of GNC containing terms identical to the notes of such series (except that such
Exchange Notes shall be registered under the Securities
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Act) that are issued and exchanged for the notes pursuant to the registration
rights agreement or the indenture.
"Foreign Subsidiary" means any Restricted Subsidiary of GNC that is not a
Domestic Subsidiary.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect on the date of the indenture, for purposes of the
definitions of the terms "Consolidated Coverage Ratio," "Consolidated Interest
Expense," "Consolidated Net Income" and "EBITDA," all defined terms in the
indenture to the extent used in or relating to any of the foregoing definitions,
and all ratios and computations based on any of the foregoing definitions, and
as in effect from time to time, for all other purposes of the indenture,
including those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations based on GAAP
contained in the indenture shall be computed in conformity with GAAP.
"Government Obligations" means direct obligations of, or obligations
guaranteed by, the United States of America, and the payment for which the
United States pledges its full faith and credit.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness, including any such
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay, or advance or supply funds for the purchase or
payment of, such Indebtedness or such other obligation of such other
Person, whether arising by virtue of partnership arrangements, or by
agreement to keep-well, to purchase assets, goods, securities or services,
to take-or-pay, or to maintain financial statement conditions or otherwise;
or
(2) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness or other obligation of the payment thereof or
to protect such obligee against loss in respect thereof, in whole or in
part; provided, however, that the term"Guarantee" shall not include
endorsements for collection or deposits made in the ordinary course of
business.
The term "Guarantee" used as a verb has a correlative meaning.
"Guarantor" means
(1) GNC's direct and indirect Domestic Subsidiaries existing on the
date of the indenture; and
(2) any Domestic Subsidiary created or acquired by GNC after the date
of the indenture, other than any Immaterial Subsidiary.
"Guarantor Senior Indebtedness" means, with respect to a Guarantor, the
following obligations, whether outstanding on the date of the indenture or
thereafter Incurred, without duplication:
(1) Bank Indebtedness; and
(2) all obligations consisting of the principal of and premium and
liquidated damages, if any, and accrued and unpaid interest, including
interest accruing on or after the filling of any petition in bankruptcy or
for reorganization relating to the Guarantor regardless of whether
post-filing interest is allowed in such proceeding, on, and fees and other
amounts owing in respect of, all other Indebtedness of the Guarantor,
unless, in the instrument creating or evidencing the same or pursuant to
which the same is outstanding, it is expressly provided that the
obligations in respect of such Indebtedness are not senior in right of
payment to the obligations of such Guarantor under the Note Guarantee;
provided, however, that Guarantor Senior Indebtedness will not include:
(a) any obligations of such Guarantor to any Subsidiary or any
other Affiliate of such Guarantor or any such Affiliate's Subsidiaries;
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(b) any liability for Federal, state, local, foreign or other taxes
owed or owing by such Guarantor;
(c) any accounts payable or other liability to trade creditors
arising in the ordinary course of business, including Guarantees thereof
or instruments evidencing such liabilities;
(d) any Indebtedness, Guarantee or obligation of such Guarantor
that is expressly subordinate or junior to any other Indebtedness,
Guarantee or obligation of such Guarantor, including any Guarantor
Senior Subordinated Indebtedness and any Subordinated Obligations of
such Guarantor;
(e) Indebtedness that is represented by redeemable Capital Stock;
or
(f) that portion of any Indebtedness that is Incurred in violation
of the indenture; provided that any Guarantee of Indebtedness under the
Senior Credit Facility will not cease to be Guarantor Senior
Indebtedness under this clause (f) if the lenders of such Indebtedness
obtained a certificate from an Officer of GNC as of the date of
Incurrence of such Indebtedness to the effect that such Indebtedness was
permitted to be Incurred by the indenture.
If any Designated Senior Indebtedness is disallowed, avoided or
subordinated pursuant to the provisions of Section 548 of Title 11 of the U.S.
Code or any applicable state fraudulent conveyance law, such Designated Senior
Indebtedness nevertheless will constitute Guarantor Senior Indebtedness.
"Guarantor Senior Subordinated Indebtedness" means with respect to a
Guarantor, the obligations of such Guarantor under the Note Guarantee and any
other Indebtedness of such Guarantor, whether outstanding on the date of the
indenture or thereafter Incurred, that:
(1) specifically provides that such Indebtedness is to rank pari passu
in right of payment with the obligations of such Guarantor under the Note
Guarantee; and
(2) is not expressly subordinated by its terms in right of payment to
any Indebtedness or other obligation of such Guarantor that is not
Guarantor Senior Indebtedness of such Guarantor.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Immaterial Subsidiary" means, as of any date, any Restricted Subsidiary
whose total assets, as of that date, are less than $2 million and whose total
revenues for the most recent 12-month period do not exceed $2 million; provided
that a Restricted Subsidiary will not be considered to be an Immaterial
Subsidiary if it, directly or indirectly, guarantees or otherwise provides
direct credit support for any Indebtedness of GNC.
"Incur" means issue, assume, enter into any Guarantee of, incur or
otherwise become liable for; provided, however, that any Indebtedness or Capital
Stock of a Person existing at the time such Person becomes a Subsidiary, whether
by merger, consolidation, acquisition or otherwise, shall be deemed to be
Incurred by such Subsidiary at the time it becomes a Subsidiary. Any
Indebtedness issued at a discount, including Indebtedness on which interest is
payable through the issuance of additional Indebtedness, shall be deemed
Incurred at the time of original issuance of the Indebtedness at the initial
accreted amount thereof.
"Indebtedness" means, with respect to any Person on any date of
determination, without duplication:
(1) the principal of Indebtedness of such Person for borrowed money if
and to the extent it would appear as a liability upon the consolidated
balance sheet of such Person prepared in accordance with GAAP;
(2) the principal of obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments if and to the extent it
would appear as a liability upon the consolidated balance sheet of such
Person prepared in accordance with GAAP;
(3) all reimbursement obligations of such Person, including
reimbursement obligations in respect of letters of credit or other similar
instruments, the amount of such obligations being equal at any time to
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the aggregate then undrawn and unexpired amount of such letters of credit
or other instruments plus the aggregate amount of drawings thereunder that
have not then been reimbursed;
(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, except Trade Payables, which
purchase price is due more than one year after the date of placing such
property in final service or taking final delivery and title thereto or the
completion of such services if and to the extent it would appear as a
liability upon the consolidated balance sheet of such Person prepared in
accordance with GAAP;
(5) all Capitalized Lease Obligations of such Person;
(6) the redemption, repayment or other repurchase amount of such
Person with respect to any Disqualified Stock or, if such Person is a
Subsidiary of GNC, any Preferred Stock of such Subsidiary, but excluding,
in each case, any accrued dividends, the amount of such obligation to be
equal at any time to the maximum fixed involuntary redemption, repayment or
repurchase price for such Capital Stock, or if such Capital Stock has no
fixed price, to the involuntary redemption, repayment or repurchase price
therefor calculated in accordance with the terms thereof as if then
redeemed, repaid or repurchased, and if such price is based upon or
measured by the fair market value of such Capital Stock, such fair market
value shall be as determined in good faith by the Board of Directors or the
board of directors of the issuer of such Capital Stock;
(7) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of Indebtedness of such Person shall be
the lesser of:
(a) the fair market value of such asset at such date of
determination; and
(b) the amount of such Indebtedness of such other Persons;
(8) all Indebtedness of other Persons to the extent Guaranteed by such
Person; and
(9) to the extent not otherwise included in this definition, net
Hedging Obligations of such Person, such obligations to be equal at any
time to the termination value of such agreement or arrangement giving rise
to such Hedging Obligation that would be payable by such Person at such
time.
The amount of Indebtedness of any Person at any date shall be determined as
set forth above or otherwise provided in the indenture, or otherwise in
accordance with GAAP.
"Initial Notes" means the first $215,000,000 aggregate principal amount of
Notes issued under the indenture on December 5, 2003.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement, including derivative agreements or arrangements, as to which
such Person is party or a beneficiary; provided, however, any such agreements
entered into in connection with the notes shall not be included.
"Investment" in any Person by any other Person means any direct or indirect
advance, loan or other extension of credit (other than to customers, suppliers,
directors, officers or employees of any Person in the ordinary course of
business) or capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others), or any purchase or acquisition of Capital Stock, Indebtedness or
other similar instruments issued by, such Person. If GNC or any Restricted
Subsidiary of GNC sells or otherwise disposes of any Capital Stock of any direct
or indirect Restricted Subsidiary of GNC such that, after giving effect to any
such sale or disposition, such entity is no longer a Subsidiary of GNC, GNC
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Capital Stock of such
Subsidiary not sold or disposed of.
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"Leverage Ratio" means, on any date of determination, the ratio of:
(1) the aggregate amount of Indebtedness of GNC and its Restricted
Subsidiaries on a consolidated basis as of such date, to
(2) the aggregate amount of EBITDA of GNC and its Restricted
Subsidiaries for the period of the most recent four consecutive fiscal
quarters ending prior to the date of such determination for which
consolidated financial statements of GNC are available; provided, however,
that:
(a) if since the beginning of such period GNC or any Restricted
Subsidiary has made any Asset Disposition of any company or any business
or any business segment, the EBITDA for such period shall be reduced by
an amount equal to the EBITDA, if positive, directly attributable to the
company, business or business segment that are the subject of such Asset
Disposition for such period or increased by an amount equal to the
EBITDA, if negative, directly attributable thereto for such period;
(b) if since the beginning of such period GNC or any Restricted
Subsidiary, by merger or otherwise, has made an Investment in any Person
that thereby becomes a Restricted Subsidiary, or otherwise acquired any
company or any business or any business segment, including any such
acquisition of assets occurring in connection with a transaction causing
a calculation to be made hereunder, EBITDA for such period shall be
calculated after giving pro forma effect thereto, including the
Incurrence of any Indebtedness and including the pro forma expenses and
cost reductions calculated on a basis consistent with Regulation S-X of
the Securities Act, as if such Investment or acquisition occurred on the
first day of such period; and
(c) if since the beginning of such period any Person that
subsequently became a Restricted Subsidiary or was merged with or into
GNC or any Restricted Subsidiary since the beginning of such period, has
made any Asset Disposition or any Investment or acquisition of assets
that would have required an adjustment pursuant to clause (a) or (b)
above if made by GNC or a Restricted Subsidiary during such period,
EBITDA for such period shall be calculated after giving pro forma effect
thereto, including the Incurrence of any Indebtedness and including the
pro forma expenses and cost reductions calculated on a basis consistent
with Regulation S-X of the Securities Act, as if such Asset Disposition,
Investment or acquisition of assets occurred on the first day of such
period.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind, including any conditional sale or other title retention
agreement or lease in the nature thereof.
"Liquidated Damages" means the liquidated damages then owing under the
registration rights agreement.
"Mellon Letters of Credit" means the letter of credit facility between
Mellon Bank, N.A. and General Nutrition, Incorporated existing on the date of
the indenture and the letters of credit issued thereunder.
"Moody's" means Moody's Investors Service, Inc., and its successors.
"Net Available Cash" from an Asset Disposition means cash payments
received, including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring person of Indebtedness or other obligations relating
to the properties or assets that are the subject of such Asset Disposition or
received in any other noncash form, therefrom, in each case net of:
(1) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, including, without limitation, fees and
expenses of legal counsel, accountants and financial advisors, and all
Federal, state, provincial, foreign and local taxes required to be paid or
accrued as a liability under GAAP, as a consequence of such Asset
Disposition;
(2) all payments made on any Indebtedness that is secured by any
assets subject to such Asset Disposition, in accordance with the terms of
any Lien upon such assets, or that must by its terms, or in
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order to obtain a necessary consent to such Asset Disposition, or by
applicable law be repaid out of the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to
minority interest holders in Subsidiaries or joint ventures as a result of
such Asset Disposition or to any other Person, other than GNC or any
Restricted Subsidiary, owning a beneficial interest in the assets disposed
of in such Asset Disposition; and
(4) appropriate amounts to be provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the assets
disposed of in such Asset Disposition and retained by GNC or any Restricted
Subsidiary after such Asset Disposition.
"Net Cash Proceeds" means, with respect to any issuance or sale of any
securities of GNC or any Subsidiary by GNC or any Subsidiary, or any capital
contribution, the cash proceeds of such issuance, sale or contribution net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees and expenses
actually incurred in connection with such issuance, sale or contribution and net
of taxes paid or payable as a result thereof.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither GNC nor any Restricted Subsidiary;
(a) provides any Guarantee or credit support of any kind, including
any undertaking, Guarantee, indemnity, agreement or instrument that
would constitute Indebtedness; or
(b) is directly or indirectly liable, as a guarantor or otherwise;
and
(2) no default with respect to which, including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary, would permit, upon notice, lapse of time or both, any holder of
any other Indebtedness of GNC or any Restricted Subsidiary to declare a
default under such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Note Guarantee" means, individually, any Guarantee of payment of the notes
by a Guarantor pursuant to the terms of the indenture, and, collectively, all
such Guarantees. Each such Guarantee will be in the form prescribed in the
indenture.
"Offering Memorandum" means GNC's offering memorandum, dated November 25,
2003, related to the issuance and sale of the Initial Notes.
"Officer" means the Chief Executive Officer, President, Chief Financial
Officer, any Vice President, Controller, Secretary or Treasurer of GNC.
"Officer's Certificate" means a certificate signed by at least one Officer.
"Opinion of Counsel" means a written opinion from legal counsel
satisfactory to the Trustee. The counsel may be an employee of or counsel to GNC
or the Trustee.
"Parent" means General Nutrition Centers Holding Company and its successors
and assigns.
"Permitted Holder" means Apollo.
"Permitted Investment" means:
(1) any Investment by GNC or any Restricted Subsidiary in a Restricted
Subsidiary, GNC or a Person that will, upon the making of such Investment,
become a Restricted Subsidiary;
(2) any Investment by GNC or any Restricted Subsidiary in another
Person if as a result of such Investment such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all
its assets to, GNC or a Restricted Subsidiary;
(3) any Investment by GNC or any Restricted Subsidiary in Cash
Equivalents;
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(4) any Investment by GNC or any Restricted Subsidiary in receivables
owing to GNC or any Restricted Subsidiary, if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; provided, however, that such trade terms may include
such concessionary trade terms as GNC or any such Restricted Subsidiary
deems reasonable under the circumstances;
(5) any Investment by GNC or any Restricted Subsidiary in securities
or other Investments received as consideration in sales or other
dispositions of property or assets made in compliance with the covenant
described under "-- Certain Covenants -- Limitation on Sales of Assets;"
(6) any Investment by GNC or any Restricted Subsidiary in securities
or other Investments received in settlement of debts created in the
ordinary course of business and owing to GNC or any Restricted Subsidiary,
or as a result of foreclosure, perfection or enforcement of any Lien, or in
satisfaction of judgments, including in connection with any bankruptcy
proceeding or other reorganization of another Person;
(7) Investments in existence or made pursuant to legally binding
written commitments in existence on the date of the indenture;
(8) any Investment by GNC or any Restricted Subsidiary in Hedging
Obligations, which obligations are Incurred in compliance with the covenant
described under "-- Certain Covenants -- Limitations on Indebtedness;"
(9) any Investment by GNC or any Restricted Subsidiary in pledges or
deposits:
(a) with respect to leases or utilities provided to third parties
in the ordinary course of business; or
(b) otherwise described in the definition of "Permitted Liens;"
(10) Investments in a Related Business in an amount not to exceed $35
million (measured at the time each such Investment is made without giving
effect to subsequent changes in value) in the aggregate at any time
outstanding (after giving effect to any such Investments that are returned
to GNC or any Restricted Subsidiary, including through redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary);
(11) loans by GNC or any Restricted Subsidiary to franchisees in an
aggregate principal amount not to exceed $75 million at any one time
outstanding;
(12) the acquisition by a Receivables Subsidiary in connection with a
Qualified Receivables Transaction of Capital Stock of a trust or other
Person established by such Receivables Subsidiary to effect such Qualified
Receivables Transaction; and any other Investment by GNC or a Restricted
Subsidiary of GNC in a Receivables Subsidiary or any Investment by a
Receivables Subsidiary in any other Person in connection with a Qualified
Receivables Transaction; provided that such other Investment is in the form
of a note or other instrument that the Receivables Subsidiary or other
Person is required to repay as soon as practicable from available cash
collections less amounts required to be established as reserves pursuant to
contractual agreements with entities that are not Affiliates of GNC entered
into as part of a Qualified Receivables Transaction;
(13) any Investment in exchange for, or out of the net proceeds of the
substantially concurrent sale (other than to a Subsidiary of GNC or an
employee stock ownership plan or similar trust) of Capital Stock of GNC
(other than Disqualified Stock); provided that the amount of any Net Cash
Proceeds that are utilized for any such Investment will be excluded from
clause 3(b) of the first paragraph set forth under "Certain
Covenants -- Restricted Payments"; provided, however, that the value of any
non-cash net proceeds shall be as conclusively determined by the Board of
Directors in good faith, except that in the event the value of any non-cash
net proceeds shall be $20 million or more, the value shall be as determined
in writing by an independent investment banking firm of nationally
recognized standing;
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(14) any sublease of real property to a franchisee, any advertising
cooperative with franchisees and any trade credit extended to franchisees,
in each case in the ordinary course of business;
(15) any Investments received in compromise or resolution of (a)
obligations of trade creditors or customers that were incurred in the
ordinary course of business of GNC or any Restricted Subsidiary, including
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of any trade creditor or customer; or (b)
litigation, arbitration or other disputes with Persons who are not
Affiliates; and
(16) any Investments representing amounts held for employees of GNC
and its Restricted Subsidiaries under GNC's deferred compensation plan;
provided that the amount of such Investments (excluding income earned
thereon) shall not exceed the amount otherwise payable to such employees
the payment of which was deferred under such plan and any amounts matched
by GNC under such plan.
"Permitted Junior Securities" means (1) common equity interests in GNC or
any Guarantor or (2) debt or preferred equity securities of GNC or any Guarantor
issued pursuant to a plan of reorganization consented to by each class of Senior
Indebtedness; provided that all such securities are subordinated to all Senior
Indebtedness and any debt securities issued in exchange for Senior Indebtedness
to substantially the same extent as, or to a greater extent than, the notes and
the Guarantees are subordinated to Senior Indebtedness under the indenture.
"Permitted Liens" means:
(1) Liens on properties or assets of (a) GNC securing Senior
Indebtedness and (b) any Guarantor securing Guarantor Senior Indebtedness,
in each case, that was permitted by the terms of the indenture to be
incurred;
(2) Liens for taxes, assessments or other governmental charges not yet
delinquent or the nonpayment of which in the aggregate would not be
reasonably expected to have a material adverse effect on GNC and its
Restricted Subsidiaries, or that are being contested in good faith and by
appropriate proceedings if adequate reserves with respect thereto are
maintained on the books of GNC or such Subsidiary, as the case may be, in
accordance with GAAP;
(3) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business
in respect of obligations that are not overdue for a period of more than 60
days or that are bonded or that are being contested in good faith and by
appropriate proceedings;
(4) pledges, deposits or Liens in connection with workers'
compensation, unemployment insurance and other social security legislation
and/or similar legislation or other insurance-related obligations,
including, without limitation, pledges or deposits securing liability to
insurance carriers under insurance or self-insurance arrangements;
(5) pledges, deposits or Liens to secure the performance of bids,
tenders, trade, government or other contracts, other than for borrowed
money, obligations and deposits for or under or in respect of utilities,
leases, licenses, statutory obligations, surety, judgment and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
(6) easements, including reciprocal easement agreements,
rights-of-way, building, zoning and similar restrictions, utility
agreements, covenants, reservations, restrictions, encroachments, changes,
and other similar encumbrances or title defects incurred, or leases or
subleases granted to others, in the ordinary course of business, which do
not in the aggregate materially interfere with the ordinary conduct of the
business of GNC and its Subsidiaries, taken as a whole;
(7) Liens existing on, or provided for underwritten arrangements
existing on, the date of the indenture, or, in the case of any such Liens
securing Indebtedness of GNC or any of its Subsidiaries existing or arising
under written arrangements existing on the date of the indenture, securing
any Refinancing Indebtedness in respect of such Indebtedness so long as the
Lien securing such Refinancing
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Indebtedness is limited to all or part of the same property or assets, plus
improvements, accessions, proceeds or dividends or distributions in respect
thereof, that secured, or under such written arrangements could secure, the
original Indebtedness;
(8) Liens securing Hedging Obligations Incurred in compliance with the
covenant described under "-- Certain Covenants -- Limitation on
Indebtedness;"
(9) Liens arising out of judgments, decrees, orders or awards in
respect of which GNC shall in good faith be prosecuting an appeal or
proceedings for review which appeal or proceedings shall not have been
finally terminated, or the period within which such appeal or proceedings
may be initiated shall not have expired and Liens arising from final
judgments only to the extent, in an amount and for a period not resulting
in an Event of Default with respect thereto;
(10) Liens existing on property or assets of a Person at the time such
Person becomes a Subsidiary of GNC, or at the time GNC or a Restricted
Subsidiary acquires such property or assets; provided, however, that such
Liens are not created in connection with, or in contemplation of, such
other Person becoming such a Subsidiary, or such acquisition of such
property or assets, and that such Liens are limited to all or part of the
same property or assets, plus improvements, accessions, proceeds or
dividends or distributions in respect thereof, that secured, or, under the
written arrangements under which such Liens arose, could secure, the
obligations to which such Liens relate;
(11) Liens on Capital Stock of an Unrestricted Subsidiary that secure
Indebtedness or other obligations of such Unrestricted Subsidiary;
(12) Liens securing the notes or the Note Guarantees;
(13) Liens on assets of GNC or a Receivables Subsidiary incurred in
connection with a Qualified Receivables Transaction;
(14) Liens securing Refinancing Indebtedness Incurred in respect of
any Indebtedness secured by, or securing any refinancing, refunding,
extension, renewal or replacement, in whole or in part, of any other
obligation secured by, any other Permitted Liens; provided that any such
new Lien is limited to all or part of the same property or assets, plus
improvements, accessions, proceeds or dividends or distributions in respect
thereof, that secured, or, under the written arrangements under which the
original Lien arose, could secure, the obligations to which such Liens
relate;
(15) survey exceptions, easements or reservations of, or rights of
others for, licenses, rights-of-way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other restrictions
as to the use of real property that were not incurred in connection with
Indebtedness and that do not in the aggregate materially adversely affect
the value of said properties or materially impair their use in the
operation of the business of such Person;
(16) Liens to secure Indebtedness permitted by clause (7) of the
second paragraph of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness"; provided that (a) any such Lien
attaches to such assets concurrently with or within 180 days after the
acquisition, construction or capital improvement thereof, (b) such Lien
attaches solely to the assets so acquired, constructed or improved in such
transaction and (c) the principal amount of the Indebtedness secured
thereby does not exceed 100% of the cost of such assets;
(17) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for sale of goods in the ordinary
course of business;
(18) licenses of intellectual property granted in the ordinary course
of business;
(19) Liens in favor of customs or revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods; and
(20) Liens in favor GNC or any Restricted Subsidiary.
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"Permitted Payments to Parent" means, without duplication as to amounts:
(1) payments to the Parent to permit the Parent to pay reasonable
directors fees and expenses when due and reasonable accounting, legal and
administrative expenses of the Parent when due in an aggregate amount not
to exceed $250,000 per annum; and
(2) for so long as GNC is a member of a group filing a consolidated,
combined or other similar group tax return with the Parent, payments to the
Parent in respect of an allocable portion of the tax liabilities of such
group that is attributable to GNC and its Subsidiaries ("Tax Payments").
The Tax Payments shall not exceed the lesser of (i) the amount of the
relevant tax (including any penalties and interest) that GNC would owe if
GNC and its Subsidiaries were filing a separate tax return (or a separate
consolidated or combined return with its Subsidiaries that are members of
the consolidated or combined group), taking into account any carryovers and
carrybacks of tax attributes (such as net operating losses) of GNC and such
Subsidiaries from other taxable years (as reduced by the use of such
carryovers and carrybacks by the group of which the Parent is a member) and
(ii) the amount of the relevant tax, taking into account any allowed tax
credits, that the Parent actually owes to the appropriate taxing authority.
Any Tax Payments received from GNC shall be paid over to the appropriate
taxing authority within 30 days of the Parent's receipt of such Tax
Payments or refunded to GNC.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" as applied to the Capital Stock of any corporation means
Capital Stock of any class or classes, however designated, that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Qualified Receivables Transaction" means any transaction or series of
transactions entered into by GNC or any of its Restricted Subsidiaries pursuant
to which GNC or any of its Restricted Subsidiaries sells, conveys or otherwise
transfers to (1) a Receivables Subsidiary (in the case of a transfer by GNC or
any of its Restricted Subsidiaries) and (2) any other Person (in the case of a
transfer by a Receivables Subsidiary), or grants a security interest in, any
franchise accounts receivable (whether now existing or arising in the future) of
GNC or any of its Restricted Subsidiaries, and any assets related thereto
including, without limitation, all collateral securing such franchise accounts
receivable, all contracts and all guarantees or other obligations in respect of
such franchise accounts receivable, proceeds of such franchise accounts
receivable and other assets that are customarily transferred or in respect of
which security interests are customarily granted in connection with asset
securitization transactions involving franchise accounts receivable.
"Receivables Subsidiary" means a Restricted Subsidiary that engages in no
activities other than in connection with the financing of franchise accounts
receivable and that is designated by the Board of Directors (as provided below)
as a Receivables Subsidiary:
(1) no portion of the Indebtedness or any other Obligations
(contingent or otherwise) of which:
(a) is guaranteed by GNC or any Restricted Subsidiary (excluding
guarantees of Obligations (other than the principal of, and interest on,
Indebtedness) pursuant to representations, warranties, covenants and
indemnities entered into in the ordinary course of business in
connection with a Qualified Receivables Transaction);
(b) is recourse to or obligates GNC or any Restricted Subsidiary in
any way other than pursuant to representations, warranties, covenants
and indemnities entered into in the ordinary course of business in
connection with a Qualified Receivables Transaction; or
(c) subjects any property or asset of GNC or any Restricted
Subsidiary (other than franchise accounts receivable and related assets
as provided in the definition of "Qualified Receivables Transaction"),
directly or indirectly, contingently or otherwise, to the satisfaction
thereof, other than
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pursuant to representations, warranties, covenants and indemnities
entered into in the ordinary course of business in connection with a
Qualified Receivables Transaction;
(2) with which neither GNC nor any Restricted Subsidiary has any
material contract, agreement, arrangement or understanding other than on
terms no less favorable to GNC or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of
GNC, other than fees payable in the ordinary course of business in
connection with servicing franchise accounts receivable; and
(3) with which neither GNC nor any Restricted Subsidiary has any
obligation to maintain or preserve such Subsidiary's financial condition or
cause such Subsidiary to achieve certain levels of operating results. Any
such designation by the Board of Directors will be evidenced to the Trustee
by filing with the Trustee a certified copy of the resolution of the Board
of Directors giving effect to such designation and an Officer's Certificate
certifying that such designation complied with the foregoing conditions.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend, including pursuant to any defeasance
or discharge mechanism (collectively, "refinances," and "refinanced" shall have
a correlative meaning), any Indebtedness existing on the date of the indenture
or Incurred in compliance with the indenture, including Indebtedness of GNC that
refinances Indebtedness of any Restricted Subsidiary, to the extent permitted in
the indenture, and Indebtedness of any Restricted Subsidiary that refinances
Indebtedness of another Restricted Subsidiary, including Indebtedness that
refinances Refinancing Indebtedness; provided, however, that:
(1) the Refinancing Indebtedness has a Stated Maturity no earlier than
the Stated Maturity of the Indebtedness being refinanced;
(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced;
(3) if the Indebtedness being refunded, refinanced, replaced, renewed,
repaid, extended, defeased or discharged is Subordinated Obligations, such
Refinancing Indebtedness is subordinated in right of payment to the notes
on terms at least as favorable to the holders of notes as those contained
in the documentation governing the Indebtedness being refunded, refinanced,
replaced, renewed, repaid, extended, defeased or discharged;
(4) such Refinancing Indebtedness is Incurred in an aggregate
principal amount, or if issued with original issue discount, an aggregate
issue price, that is equal to or less than the aggregate principal amount,
or if issued with original issue discount, the aggregate accreted value,
then outstanding of the Indebtedness being refinanced, plus fees,
underwriting discounts, premiums and other costs and expenses Incurred in
connection with such Refinancing Indebtedness; provided further, however,
that Refinancing Indebtedness shall not include:
(a) Indebtedness of a Restricted Subsidiary that refinances
Indebtedness of GNC; or
(b) Indebtedness of GNC or a Restricted Subsidiary that refinances
Indebtedness of an Unrestricted Subsidiary; and
(5) in the case of Indebtedness of GNC or a Guarantor, such
Refinancing Indebtedness is Incurred by GNC, a Guarantor or by the
Subsidiary who is the obligor on the Indebtedness being refinanced.
"Related Business" means those businesses in which GNC or any of its
Subsidiaries is engaged on the date of the indenture or that are reasonably
related or incidental thereto.
"Related Party" means:
(1) any controlling equityholder, 80% (or more) owned Subsidiary, or
immediate family member (in the case of an individual) of any Permitted
Holder; or
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(2) any trust, corporation, partnership, limited liability company or
other entity, the beneficiaries, stockholders, partners, members, owners or
Persons beneficially holding an 80% or more controlling interest of which
consist of any one or more Permitted Holders and/or such other Persons
referred to in the immediately preceding clause (1).
"Representative" means the Trustee, agent or representative, if any, for an
issue of Senior Indebtedness.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of GNC other than an
Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of GNC or its Subsidiaries
secured by a Lien.
"Senior Credit Agreement" means the credit agreement dated as of December
5, 2003, among GNC, the Parent, the banks and other financial institutions party
thereto from time to time, Lehman Commercial Paper Inc., as administrative
agent, JPMorgan Chase Bank, as syndication agent, and the other parties thereto,
as such agreement may be assumed by any successor in interest, and as such
agreement may be amended, supplemented, waived or otherwise modified from time
to time, or refunded, refinanced, restructured, replaced, renewed, repaid,
increased or extended from time to time (whether in whole or in part, whether
with GNC, or any subsidiary of GNC as borrower, whether with the original agent
and lenders or other agents and lenders or otherwise, and whether provided under
the original Senior Credit Agreement or otherwise).
"Senior Credit Facility" means the collective reference to the Senior
Credit Agreement, any Loan Documents, as defined therein, any notes and letters
of credit issued pursuant thereto and any guarantee and collateral agreement,
intellectual property security agreement, mortgages, letter of credit
applications and other security agreements and collateral documents, and other
instruments and documents, executed and delivered pursuant to or in connection
with any of the foregoing, in each case as the same may be amended,
supplemented, waived or otherwise modified from time to time, or refunded,
refinanced, restructured, replaced, renewed, repaid, increased or extended from
time to time, whether in whole or in part, whether with the original agent and
lenders or other agents and lenders or otherwise, and whether provided under the
original Senior Credit Agreement or otherwise. Without limiting the generality
of the foregoing, the term "Senior Credit Facility" shall include any agreement:
(1) changing the maturity of any Indebtedness Incurred thereunder or
contemplated thereby;
(2) adding Subsidiaries of GNC as additional borrowers or guarantors
thereunder;
(3) increasing the amount of Indebtedness Incurred thereunder or
available to be borrowed thereunder; or
(4) otherwise altering the terms and conditions thereof.
"Senior Indebtedness" means the following obligations of GNC, whether
outstanding on the date of the indenture or thereafter Incurred, without
duplication:
(1) Bank Indebtedness; and
(2) all obligations consisting of the principal of and premium and
liquidated damages, if any, and accrued and unpaid interest, including
interest accruing on or after the filing of any petition in bankruptcy or
for reorganization relating to GNC regardless of whether post-filing
interest is allowed in such proceeding, on, and fees and other amounts
owing in respect of, all other Indebtedness of GNC, unless, in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is expressly provided that the obligations in respect of
such Indebtedness are not senior in right of payment to the notes;
provided, however, that Senior Indebtedness will not include:
(a) any obligations of GNC to any Subsidiary or any other Affiliate
of GNC, or any such Affiliate's Subsidiaries;
(b) any liability for Federal, state, foreign, local or other taxes
owed or owing by GNC;
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(c) any accounts payable or other liability to trade creditors
arising in the ordinary course of business, including Guarantees thereof
or instruments evidencing such liabilities;
(d) any Indebtedness, Guarantee or obligation of GNC that is
expressly subordinate or junior to any other Indebtedness, Guarantee or
obligation of GNC, including any Senior Subordinated Indebtedness and
any Subordinated Obligations of GNC;
(e) Indebtedness that is represented by redeemable Capital Stock;
or
(f) that portion of any Indebtedness that is Incurred in violation
of the indenture; provided that Indebtedness under the Senior Credit
Facility will not cease to be Senior Indebtedness under this clause (f)
if the lenders of such Indebtedness obtained a certificate from an
Officer of GNC as of the date of Incurrence of such Indebtedness to the
effect that such Indebtedness was permitted to be Incurred by the
indenture.
If any Designated Senior Indebtedness is disallowed, avoided or
subordinated pursuant to the provisions of Section 548 of Title 11 of the U.S.
Code or any applicable state fraudulent conveyance law, such Designated Senior
Indebtedness nevertheless will constitute Senior Indebtedness.
"Senior Subordinated Indebtedness" means the notes and any other
Indebtedness of GNC, whether outstanding on the date of the indenture or
thereafter Incurred, that:
(1) specifically provides that such Indebtedness is to rank pari passu
in right of payment with the notes; and
(2) is not expressly subordinated by its terms in right of payment to
any Indebtedness or other obligation of GNC that is not Senior
Indebtedness.
"Significant Subsidiary" means:
(1) any Subsidiary that would be a "significant subsidiary" as defined
in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the
Securities Act, as such Regulation is in effect on the date of the
indenture; and
(2) any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary.
"S&P" means Standard & Poor's Ratings Service, a division of The
McGraw-Hill Companies, Inc., and its successors.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision, but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred.
"Subordinated Obligation" means any Indebtedness of GNC or any Guarantor,
whether outstanding on the date of the indenture or thereafter Incurred, which
is expressly subordinate or junior in right of payment to the notes or the Note
Guarantees pursuant to a written agreement.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency and after giving
effect to any voting agreement or stockholders' agreement that effectively
transfers voting power) to vote in the election of directors, managers or
trustees of the corporation, association or other business entity is at the
time owned or controlled, directly or indirectly, by that Person or one or
more of the other Subsidiaries of that Person (or a combination thereof);
and
(2) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are that Person or one or more
Subsidiaries of that Person (or any combination thereof).
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"Successor Company" shall have the meaning assigned thereto in clause (1)
under "-- Merger and Consolidation."
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections
77aaa-77bbbb) as in effect on the date of the indenture.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Trustee" means the party named as such in the indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means, when used with respect to the Trustee, any officer
within the corporate trust department of the Trustee, including any vice
president, assistant vice president, assistant secretary, assistant treasurer,
trust officer or any other officer of the Trustee who customarily performs
functions similar to those performed by the Persons who at the time shall be
such officers, respectively, or to whom any corporate trust matter is referred
because of such person's knowledge of and familiarity with the particular
subject and who shall have direct responsibility for the administration of the
indenture.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of GNC that at the time of determination shall be
designated an Unrestricted Subsidiary by the Board of Directors in the
manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary of GNC, including any
newly acquired or newly formed Subsidiary of GNC, to be an Unrestricted
Subsidiary unless at the time of such designation such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, GNC or any other Subsidiary of GNC that is not a
Subsidiary of the Subsidiary to be so designated; provided, however, that
either:
(a) the Subsidiary to be so designated has total consolidated assets
of $100,000 or less; or
(b) if such Subsidiary has consolidated assets greater than $100,000,
then such designation would be permitted under "-- Certain
Covenants -- Limitation on Restricted Payments."
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation:
(a) GNC could Incur at least $1.00 of additional Indebtedness under
the first paragraph of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness;" and
(b) no Default or Event of Default shall have occurred and be
continuing.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by promptly filing with the Trustee a copy of the resolution of GNC's
Board of Directors giving effect to such designation and an Officer's
Certificate certifying that such designation complied with the foregoing
provisions.
"Voting Stock" of an entity means all classes of Capital Stock of such
entity then outstanding and normally entitled to vote in the election of
directors or all interests in such entity with the ability to control the
management or actions of such entity.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of GNC all the
Capital Stock of which, other than directors' qualifying shares, is owned by GNC
or another Wholly Owned Subsidiary.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the anticipated material United States
federal income tax consequences to a holder of old notes relating to the
exchange of old notes for new notes. This summary is based upon existing United
States federal income tax law, which is subject to change, possibly with
retroactive effect. This summary does not discuss all aspects of United States
federal income taxation which may be important to particular investors in light
of their individual investment circumstances, such as notes held by investors
subject to special tax rules (e.g., financial institutions, insurance companies,
broker-dealers, and foreign or domestic tax-exempt organizations (including
private foundations)), or to persons that hold the old notes as part of a
straddle, hedge, conversion, constructive sale, or other integrated security
transaction for United States federal income tax purposes or that have a
functional currency other than the United States dollar, all of whom may be
subject to tax rules that differ significantly from those summarized below. In
addition, this summary does not address any state, local, or non-United States
tax considerations. Each prospective investor is urged to consult his tax
advisor regarding the United States federal, state, local, and non-United States
income and other tax considerations of the acquisition, ownership, and
disposition of the new notes.
EXCHANGE OF OLD NOTES FOR NEW NOTES
An exchange of old notes for new notes pursuant to the exchange offer will
be ignored for United States federal income tax purposes. Consequently, a holder
of old notes will not recognize gain or loss, for United States federal income
tax purposes, as a result of exchanging old notes for new notes pursuant to the
exchange offer. The holding period of the new notes will be the same as the
holding period of the old notes and the tax basis in the new notes will be the
same as the adjusted tax basis in the old notes as determined immediately before
the exchange.
136
MATERIAL ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain requirements on employee benefit
plans and certain other plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and certain collective investment funds or
insurance company general or separate accounts in which such plans, accounts or
arrangements are invested, that are subject to the fiduciary responsibility
provisions of ERISA and/or Section 4975 of the Code (collectively, "Plans"), and
on persons who are fiduciaries with respect to Plans, in connection with the
investment of "plan assets" of any Plan ("Plan Assets"). ERISA generally imposes
on Plan fiduciaries certain general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons ("parties in interest" under ERISA and
"disqualified persons" under the Code, collectively, "Parties in Interest") who
have certain specified relationships to a Plan or its Plan Assets, unless a
statutory or administrative exemption is available. Parties in Interest that
participate in a prohibited transaction may be subject to a penalty imposed
under ERISA and/or an excise tax imposed pursuant to Section 4975 of the Code,
unless a statutory or administrative exemption is available. These prohibited
transactions generally are set forth in Section 406 of ERISA and Section 4975 of
the Code.
The issuer may be a Party in Interest with respect to a number of Plans in
addition to Plans sponsored by the issuer. Accordingly, subject to the
considerations described below, the notes are eligible for purchase with Plan
Assets of any Plan.
Any fiduciary or other Plan investor considering whether to purchase the
notes with Plan Assets of any Plan should determine whether such purchase is
consistent with its fiduciary duties and whether such purchase would constitute
or result in a non-exempt prohibited transaction under ERISA and/or Section 4975
of the Code. The prospective Plan investor, any fiduciary or other Plan investor
considering whether to purchase or hold the notes should consult with its
counsel regarding the necessity for and availability of exemptive relief under
U.S. Department of Labor ("DOL") Prohibited Transaction Class Exemption 96-23
(relating to transactions determined by "in-house asset managers"), 95-60
(relating to transactions involving insurance company general accounts), 91-38
(relating to transactions involving bank collective investment funds), 90-1
(relating to transactions involving insurance company pooled separate accounts)
or 84-14 (relating to transactions determined by independent "qualified
professional asset managers") or any other prohibited transaction exemption
issued by the DOL. A purchaser of the notes should be aware, however, that even
if the conditions specified in one or more of the above-referenced exemptions
are met, the scope of the exemptive relief provided by the exemption might not
cover all acts which might be construed as prohibited transactions.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA), are not subject to the requirements of ERISA or Section 4975 of the
Code. Accordingly, assets of such plans may be invested in the notes without
regard to the ERISA considerations described herein, subject to the provisions
or other applicable federal and state law. However, any such plan that is
qualified and exempt from taxation under the Sections 401(a) and 501(a) of the
Code is subject to the prohibited transaction rules set forth in Section 503 of
the Code.
137
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of these new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
consummation of the exchange offer, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale. In addition, until , 200--, all dealers effecting transactions
in the new notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transaction:
- in the over-the-counter market,
- in negotiated transactions,
- through the writing of options on the new notes, or
- a combination of such methods of resale, at market prices prevailing at
the time of resale, at prices related to such prevailing market prices or
at negotiated prices.
Any resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer or the purchasers of any such new notes. Any
broker-dealer that resells new notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of new notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit of any such resale of
new notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. Any
broker-dealer that resells new notes that were received by it for its own
account in the exchange offer and any broker-dealer that participates in a
distribution of those new notes may be deemed to be an underwriter within the
meaning of the Securities Act and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction, including the delivery of a prospectus that contains
information with respect to any selling holder required by the Securities Act in
connection with any resale of the new notes. The letter of transmittal states
that, by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
Furthermore, any broker-dealer that acquired any of the old notes directly
from us:
- may not rely on the applicable interpretation of the staff of the SEC's
position contained in Exxon Capital Holdings Corp., SEC no-action letter
(April 13, 1988), Morgan, Stanley & Co. Inc., SEC no-action letter (June
5, 1991) and Shearman & Sterling, SEC no-action letter (July 2, 1983);
and
- must also be named as a selling noteholder in connection with the
registration and prospectus delivery requirements of the Securities Act
relating to any resale transaction.
For a period of 180 days after the expiration of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer (including the expenses of one counsel for the holders of the old
notes) other than commissions or concessions of any broker-dealer and will
indemnify the holders of the old notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
138
LEGAL MATTERS
Certain legal matters as to the validity and enforceability of the new
notes and the guarantees by certain guarantors will be passed upon for General
Nutrition Centers, Inc., General Nutrition Companies, Inc., General Nutrition
Distribution Company, General Nutrition Government Services, Inc., General
Nutrition International, Inc., General Nutrition Systems, Inc., GNC (Canada)
Holding Company, GNC, Limited, GNC US Delaware, Inc. and GN Investment, Inc. by
Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California. Certain legal
matters relating to the guarantees will be passed upon for General Nutrition
Corporation, General Nutrition Distribution, L.P., General Nutrition,
Incorporated and GNC Franchising, LLC by Pepper Hamilton, LLP, in Pittsburgh,
Pennsylvania. Certain legal matters relating to the guarantees will be passed
upon for General Nutrition Investment Company and General Nutrition Sales
Corporation by Lewis and Roca LLP, Phoenix, Arizona. Certain legal matters
relating to the guarantees will be passed upon for Informed Nutrition, Inc. by
Holland & Knight LLP Tallahassee, Florida. Certain legal matters relating to the
guarantees will be passed upon for Nutra Manufacturing, Inc. by Kennedy
Covington Lobdell & Hickman, L.L.P., Rock Hill, South Carolina.
EXPERTS
The consolidated financial statements of General Nutrition Centers, Inc.
and its subsidiaries as of December 31, 2003 and the period from December 5,
2003 through December 31, 2003 included in this Prospectus have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of General Nutrition Companies, Inc.
and its subsidiaries as of December 31, 2002 and for the period from January 1,
2003 through December 4, 2003, and for each of the two years in the period ended
December 31, 2002, included in this Prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
139
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
<Table>
Report of Independent Auditors.............................. F-2
Consolidated balance sheets as of December 31, 2002 and
December 31, 2003......................................... F-4
Consolidated statements of operations and comprehensive
income for years ended December 31, 2001 and December 31,
2002, and for the periods from January 1, 2003 through
December 4, 2003 and the 27 days ended December 31,
2003...................................................... F-5
Consolidated statements of stockholder's (deficit) equity
for years ended December 31, 2001 and December 31, 2002
and for the periods from January 1, 2003 through December
4, 2003 and the 27 days ended December 31, 2003........... F-6
Consolidated statements of cash flows for years ended
December 31, 2001 and December 31, 2002 and the periods
from January 1, 2003 through December 4, 2003 and the 27
days ended and December 31, 2003.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
</Table>
F-1
REPORT OF INDEPENDENT AUDITORS
To the Supervisory Board of Royal Numico N.V.
and the Stockholder of General Nutrition Companies, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and comprehensive income, of stockholder's
equity and of cash flows presents fairly, in all material respects, the
financial position of General Nutrition Companies, Inc., and its subsidiaries
(the "Company") at December 31, 2002, and the results of their operations and
their cash flows for the period from January 1, 2003 through December 4, 2003,
and for each of the two years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under item 21(b), represents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 5 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and intangible assets in
2002.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 1, 2004
F-2
REPORT OF INDEPENDENT AUDITORS
To the Stockholder and Board of Directors of
General Nutrition Centers, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations and comprehensive income, of stockholder's
equity and of cash flows presents fairly, in all material respects, the
financial position of General Nutrition Centers, Inc., and its subsidiaries (the
"Company") at December 31, 2003, and the results of their operations and their
cash flows for the period from December 5, 2003 through December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under item 21(b), represents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 23, 2004
F-3
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------ ------------
DECEMBER 31, DECEMBER 31,
2002 2003
------------ ------------
Current assets:
Cash and cash equivalents................................. $ 38,765 $ 33,176
Receivables, net (Note 1)................................. 208,334 87,984
Inventories (Note 2)...................................... 285,622 256,000
Deferred tax assets (Note 17)............................. 20,291 15,946
Other current assets (Note 3)............................. 26,826 27,480
----------- ----------
Total current assets................................... 579,838 420,586
Long-term assets:
Goodwill, net (Note 5).................................... 248,838 83,089
Brands, net (Note 5)...................................... 666,000 212,000
Other intangible assets, net (Note 5)..................... 70,469 32,667
Property, plant and equipment, net (Note 4)............... 284,638 201,280
Deferred financing fees, net.............................. -- 19,796
Deferred tax assets (Note 17)............................. -- 15,289
Other long-term assets (Note 6)........................... 28,527 34,160
----------- ----------
Total long-term assets................................. 1,298,472 598,281
----------- ----------
Total assets......................................... $ 1,878,310 $1,018,867
=========== ==========
Current liabilities:
Accounts payable (Note 7)................................. $ 121,992 $ 88,263
Accrued payroll and related liabilities................... 18,745 33,277
Accrued income taxes...................................... 37,156 438
Accrued interest.......................................... -- 1,799
Current portion, long-term debt (Note 9).................. 175,906 3,830
Other current liabilities (Note 8)........................ 72,465 92,934
----------- ----------
Total current liabilities.............................. 426,264 220,541
Long-term liabilities:
Deferred tax liabilities (Note 17)........................ 251,261 --
Long-term debt (Note 9)................................... 1,664,172 510,374
Other long-term liabilities............................... 30,365 9,796
----------- ----------
Total long-term liabilities............................ 1,945,798 520,170
Total liabilities.................................... 2,372,062 740,711
Commitments and contingencies (Note 18)
Stockholder's (deficit) equity:
Common stock authorized, issued and outstanding 1,000
shares at $.01 par..................................... -- --
Paid-in-capital........................................... 690,955 277,500
Retained (deficit) earnings............................... (1,183,231) 354
Accumulated other comprehensive (loss) income (Note 11)... (1,476) 302
----------- ----------
Total stockholder's (deficit) equity................... (493,752) 278,156
----------- ----------
Total liabilities and stockholder's (deficit)
equity.............................................. $ 1,878,310 $1,018,867
=========== ==========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS)
<Table>
<Caption>
PREDECESSOR SUCCESSOR
---------------------------------------- -------------
PERIOD 27 DAYS
TWELVE MONTHS ENDED ENDED ENDED
DECEMBER 31, DECEMBER 4, DECEMBER 31,
------------------------ ------------ -------------
2001 2002 2003 2003
---------- ---------- ------------ -------------
Revenue.......................................... $1,509,144 $1,424,976 $1,340,209 $89,288
Cost of sales, including costs of warehousing,
distribution and occupancy..................... 1,013,392 969,908 934,860 63,580
---------- ---------- ---------- -------
Gross profit..................................... 495,752 455,068 405,349 25,708
Compensation and related benefits................ 246,639 245,165 234,990 16,719
Advertising and promotion........................ 41,870 52,026 38,413 514
Other selling, general and administrative........ 140,747 86,048 70,938 5,098
Other (income) expense........................... (3,476) (216,284) (10,085) 22
Impairment of goodwill and intangible assets
(Note 5)....................................... -- 222,000 709,367 --
---------- ---------- ---------- -------
Operating income (loss).......................... 69,972 66,113 (638,274) 3,355
Interest expense, net (Note 9)................... (139,930) (136,353) (121,125) (2,773)
(Loss) income before income taxes................ (69,958) (70,240) (759,399) 582
Income tax benefit (expense) (Note 17)........... 14,099 (996) 174,478 (228)
---------- ---------- ---------- -------
Net (loss) income before cumulative effect of
accounting change.............................. (55,859) (71,236) (584,921) 354
Loss from cumulative effect of accounting change,
net of tax (Note 5)............................ -- (889,621) -- --
---------- ---------- ---------- -------
Net (loss) income................................ (55,859) (960,857) (584,921) 354
Other comprehensive income (loss) (Note 11)...... 1,745 (1,853) 1,603 302
---------- ---------- ---------- -------
Comprehensive (loss) income...................... $ (54,114) $ (962,710) $ (583,318) $ 656
========== ========== ========== =======
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S (DEFICIT) EQUITY
(IN THOUSANDS)
<Table>
<Caption>
RETAINED OTHER TOTAL
COMMON ADDITIONAL (DEFICIT) COMPREHENSIVE STOCKHOLDER'S
STOCK PAID-IN-CAPITAL EARNINGS (LOSS)/INCOME (DEFICIT) EQUITY
------ --------------- ----------- ------------- ----------------
PREDECESSOR
BALANCE AT JANUARY 1, 2001.... $-- $690,955 $ (166,515) $(1,368) $ 523,072
Net loss...................... -- -- (55,859) -- (55,859)
Unrealized appreciation on
marketable securities, net
of tax...................... -- -- -- 2,145 2,145
Foreign currency
translation................. -- -- -- (400) (400)
-- -------- ----------- ------- -----------
BALANCE AT DECEMBER 31,
2001........................ $-- $690,955 $ (222,374) $ 377 $ 468,958
Net loss...................... -- -- (960,857) -- (960,857)
Unrealized (depreciation) on
marketable securities, net
of tax...................... -- -- -- (2,145) (2,145)
Foreign currency
translation................. -- -- -- 292 292
-- -------- ----------- ------- -----------
BALANCE AT DECEMBER 31,
2002........................ $-- $690,955 $(1,183,231) $(1,476) $ (493,752)
Net loss...................... -- -- (584,921) -- (584,921)
Foreign currency
translation................. -- -- -- 1,603 1,603
-- -------- ----------- ------- -----------
BALANCE AT DECEMBER 4, 2003... $-- $690,955 $(1,768,152) $ 127 $(1,077,070)
- ---------------------------------------------------------------------------------------------------------
SUCCESSOR
General Nutrition Centers
Holding Company investment
in General Nutrition
Centers, Inc. .............. -- 277,500 -- -- 277,500
Net income.................... -- -- 354 -- 354
Foreign currency
translation................. -- -- -- 302 302
-- -------- ----------- ------- -----------
BALANCE AT DECEMBER 31,
2003........................ $-- $277,500 $ 354 $ 302 $ 278,156
== ======== =========== ======= ===========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
PREDECESSOR SUCCESSOR
----------------------------------- -------------
TWELVE MONTHS ENDED PERIOD ENDED 27 DAYS ENDED
DECEMBER 31, DECEMBER 4, DECEMBER 31,
-------------------- ------------ -------------
2001 2002 2003 2003
-------- --------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income.................................... $(55,859) $(960,857) $(584,921) $ 354
Depreciation expense............................... 46,137 46,461 50,880 1,950
Loss from cumulative effect of accounting change,
net of tax....................................... -- 889,621 -- --
Impairment of goodwill and intangible assets....... -- 222,000 709,367 --
Amortization of goodwill and intangible assets..... 75,940 11,536 8,171 303
Amortization of deferred financing fees............ -- -- -- 224
Inventory non-cash decrease........................ 25,256 33,911 27,701 2,237
Changes in stock-based compensation................ 14,582 (2,030) -- --
Stock appreciation rights compensation............. -- -- 4,347 --
Increase in allowance for doubtful accounts........ 1,815 5,285 1,953 767
Gain on sale of marketable securities.............. -- (5,043) -- --
Increase in net deferred taxes..................... (24,469) (44,908) (197,629) (210)
Changes in assets and liabilities:
(Increase) decrease in receivables................. (2,940) (132,581) 57,933 2,119
Decrease (increase) in inventory, net.............. 46,263 (11,695) 1,258 1,581
Decrease in franchise note receivables, net........ 7,995 8,069 1,546 1,326
(Increase) decrease in other assets................ (1,080) 9,125 (5,597) (4,950)
(Decrease) increase in accounts payable............ (48,183) 18,800 (3,245) (5,342)
(Decrease) increase in accrued taxes............... (2,422) 25,541 5,638 438
(Decrease) increase in interest payable............ (3,853) -- -- 1,799
(Decrease) increase in accrued liabilities......... (3,378) (2,200) 15,466 2,092
-------- --------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES........ 75,804 111,035 92,868 4,688
-------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (29,183) (51,899) (31,020) (1,827)
Proceeds from disposal of assets................... 6,179 4,254 2,760 24
Store acquisition costs............................ (21,863) (4,055) (3,193) (81)
Investments, loans and advances to investees....... (3,280) (200) -- --
Acquisition of General Nutrition Companies, Inc.... -- -- -- (738,117)
Proceeds from sale of marketable securities........ -- 7,443 -- --
-------- --------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES............ (48,147) (44,457) (31,453) (740,001)
-------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
General Nutrition Centers Holding Company
investment in General Nutrition Centers, Inc..... -- -- -- 277,500
(Decrease) increase in cash overdrafts............. (12,797) (1,112) 1,915 1,735
Short-term borrowings -- related party............. 62,341 -- -- --
Payments on short-term debt -- related party....... (20,000) (42,341) -- --
Payments on long-term debt -- related party........ (50,000) -- (91,794) --
Payments on long-term debt -- third parties........ (1,132) (847) (887) --
Borrowings from senior credit facility............. -- -- -- 285,000
Proceeds from senior subordinated notes............ -- -- -- 215,000
Deferred financing fees............................ -- -- -- (20,020)
-------- --------- --------- ---------
NET CASH (USED)/PROVIDED BY FINANCING
ACTIVITIES..................................... (21,588) (44,300) (90,766) 759,215
-------- --------- --------- ---------
Effect of exchange rates on cash..................... (231) 175 12 (152)
-------- --------- --------- ---------
Net increase (decrease) in cash...................... 5,838 22,453 (29,339) 23,750
Beginning balance, cash.............................. 10,474 16,312 38,765 9,426
-------- --------- --------- ---------
Ending balance, cash................................. $ 16,312 $ 38,765 $ 9,426 $ 33,176
======== ========= ========= =========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL NATURE OF BUSINESS. General Nutrition Centers, Inc. (the
"Company"), a Delaware corporation, is a leading specialty retailer of vitamin,
mineral and herbal supplements, diet and sports nutrition products and specialty
supplements. The Company is also a provider of personal care and other health
related products. The Company's organizational structure is vertically
integrated as the operations consist of purchasing raw materials, formulating
and manufacturing products, and selling the finished products through its
retail, franchising and manufacturing/wholesale segments. The Company operates
primarily in three business segments: Retail, Franchising and
Manufacturing/Wholesale. Corporate retail store operations are located in North
America and Puerto Rico. Franchise stores are located in the United States and
Canada and 34 international markets. The Company operates a manufacturing
facility in South Carolina and distribution centers in Arizona, Pennsylvania and
South Carolina. The Company also operates a smaller manufacturing facility in
Australia. The Company manufactures the majority of its branded products, but
also merchandises various third-party products. Additionally, the Company
licenses the use of its trademarks and trade names. The processing, formulation,
packaging, labeling and advertising of the Company's products are subject to
regulation by one or more federal agencies, including the Food and Drug
Administration ("FDA"), Federal Trade Commission ("FTC"), Consumer Product
Safety Commission, United States Department of Agriculture and the Environmental
Protection Agency. These activities are also regulated by various agencies of
the states and localities in which the Company's products are sold.
ACQUISITION OF THE COMPANY. In August 1999, General Nutrition Companies,
Inc. (GNCI) was acquired by Numico Investment Corp. ("NIC"), which subsequent to
the acquisition, was merged into GNCI. NIC was a wholly owned subsidiary of
Numico U.S. L.P., which was merged into Nutricia USA, Inc. ("Nutricia") in 2000.
Nutricia (now known as Numico USA, Inc.) is a wholly owned subsidiary of
Koninklijke (Royal) Numico N.V. ("Numico"), a Dutch public company headquartered
in Zoetermeer, Netherlands. The results of GNCI were reported as part of the
consolidated Numico financial statements from August 1999 to December 4, 2003.
On October 16, 2003, the Company entered into a purchase agreement (the
"purchase agreement") with Numico and Numico USA, Inc. to acquire 100% of the
outstanding equity interest of GNCI from Numico USA Inc., a subsidiary of Numico
("the Acquisition"). The purchase equity contribution was made by GNC Investors,
LLC, ("GNC LLC") an affiliate of Apollo, together with additional institutional
investors and certain management of the Company. The equity contribution from
GNC LLC was recorded on General Nutrition Centers Holding Company ("GNCH"). GNCH
utilized this equity contribution to purchase the investment in the Company. The
Company is a wholly owned subsidiary of GNCH. The transaction closed on December
5, 2003 and was accounted for under the purchase method of accounting. The net
purchase price was $733.2 million, which was paid from total proceeds via a
combination of cash, and the proceeds from the issuance of senior subordinated
notes and borrowings under a senior credit facility, and is summarized herein.
Apollo Management LP ("Apollo") and certain institutional investors, through GNC
LLC and GNCH, contributed a cash equity investment of $277.5 million to the
Company. In connection with the Acquisition on December 5, 2003, the Company
also issued $215 million aggregate principal amount of its 8 1/2% Senior
Subordinated Notes, due 2010, resulting in net proceeds to the Company of $207.1
million. In addition, the Company obtained a new secured senior credit facility
consisting of a $285.0 million term loan facility and a $75 million revolving
credit facility. The Company borrowed the entire $285.0 million under the term
loan facility to fund a portion of the acquisition price, which netted proceeds
to the Company of $275.8 million. These total proceeds were reduced by certain
debt issuance and other transaction costs. Subject to certain limitations in
accordance with the purchase agreement, Numico and Numico USA, Inc. agreed to
indemnify the Company on losses arising from, among other items, breaches of
representations, warranties, covenants and other certain liabilities relating to
the business of GNCI, arising prior to December 5, 2003 as well as
F-8
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
any losses payable in connection with certain litigation including ephedra
related claims. The Company utilized these proceeds to purchase GNCI with the
remainder of $19.8 million used to fund operating capital.
In conjunction with the acquisition, fair value adjustments were made to
the Company's financial statements as of December 5, 2003. As a result of the
acquisition by Apollo and fair values assigned by the appraisal specialist, the
accompanying financial statements as of December 31, 2003 reflect adjustments
made in accordance with Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations. The following table summarizes the fair values
assigned at December 5, 2003 to the Company's assets and liabilities in
connection with the acquisition.
Fair value Opening Balance Sheet at December 5, 2003:
<Table>
<Caption>
(IN THOUSANDS)
Assets:
Current assets............................................ $ 438,933
Goodwill.................................................. 83,089
Other intangible assets................................... 244,970
Property, plant and equipment............................. 201,287
Other assets.............................................. 54,426
----------
Total assets........................................... 1,022,705
----------
Liabilities:
Current liabilities....................................... 217,033
Long-term debt............................................ 513,217
Other liabilities......................................... 14,955
----------
Total liabilities...................................... 745,205
----------
General Nutrition Centers Holding Company investment in
General Nutrition Centers, Inc............................ $ 277,500
==========
</Table>
BASIS OF PRESENTATION. The accompanying financial statements for the
period from December 5, 2003 to December 31, 2003 include the accounts of
General Nutrition Centers, Inc. and its wholly owned subsidiaries. Included in
this period are fair value adjustments to assets and liabilities, including
inventory, goodwill, other intangible assets and property, plant and equipment.
Also included is the corresponding effect these adjustments had to cost of
sales, depreciation and amortization expenses. Accordingly, the accompanying
financial statements for the periods prior to the Acquisition are labeled as
"Predecessor" and the periods subsequent to the Acquisition are labeled as
"Successor".
For the period from August 8, 1999 to December 4, 2003 the consolidated
financial statements of GNCI were prepared on a carve-out basis and reflect the
consolidated financial position, results of operations and cash flows in
accordance with accounting principles generally accepted in the United States of
America. The financial statements for this period reflected amounts that were
pushed down from Nutricia and Numico in order to depict the financial position,
results of operations and cash flows of GNCI based on these carve-out
principles. As a result of the sale of GNCI to Apollo, all related party term
debt was settled in full. As a result of recording these amounts, the financial
statements of GNCI may not be indicative of the results that would be presented
if GNCI had operated as an independent, stand-alone entity. See Note 22 for
further discussion of GNCI's related party transactions with Nutricia, Numico
and other related entities.
The Company's normal reporting period is based on a 52-week calendar year.
Therefore, the Predecessor results of operations presented in the accompanying
financial statements for the period from January 1, 2003 to December 4, 2003 are
not necessarily indicative of the results that would be expected for the full
reporting
F-9
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
year. In the opinion of management, all material adjustments consisting of
normal recurring transactions, necessary to reflect a fair presentation of the
financial statements, have been included.
Certain reclassifications have been made to the financial statements to
ensure consistency in reporting and conformity between prior year and current
year amounts.
THE FOLLOWING IS A SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES ADOPTED
BY THE COMPANY. THERE HAVE BEEN NO SIGNIFICANT CHANGES IN ACCOUNTING POLICIES
SINCE THE ACQUISITION.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and all of its subsidiaries. The equity method of
accounting is used for investment ownership ranging from 20 to 50 percent.
Investment ownership of less than 20 percent is accounted for on the cost
method. All intercompany transactions have been eliminated in consolidation.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. Accordingly, these estimates and assumptions affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Some of the most
significant estimates pertaining to the Company include the valuation of
inventories, the allowance for doubtful accounts, income tax valuation
allowances and the recoverability of long-lived assets. On a continual basis,
management reviews its estimates utilizing currently available information,
changes in facts and circumstances, historical experience and reasonable
assumptions. After such reviews and if deemed appropriate, those estimates are
adjusted accordingly. Actual results could differ from those estimates.
REVENUE RECOGNITION. The Company operates predominately as a retailer,
through Company-owned and franchised stores, and to a lesser extent through
wholesale operations. For all years and periods presented herein, the Company
has complied with and adopted Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition".
The Retail segment recognizes revenue at the moment a sale to a customer is
recorded. These revenues are recorded via the Company's point of sale system.
Gross revenues are netted (decreased) by actual customer returns and an
allowance for expected customer returns. The Company records a reserve for
expected customer returns based on management's estimate, which is derived from
historical return data. Revenue is deferred on sales of the Company's Gold Cards
and subsequently amortized over 12 months. The length of the amortization period
is determined based on matching the discounts associated with the Gold Card
program to the revenue deferral during the twelve month membership period. For
an annual fee, the card provides customers with a 20% discount on all products
purchased, both on the date the card is purchased and certain specified days of
every month. The Company also defers revenue for sales of gift cards until such
time the gift cards are redeemed for products.
The Company's Franchise segment generates revenues from franchise fees (see
Note 14 Franchise Revenue), product sales to franchisees, royalties, and
interest income on the financing of the franchise locations. The franchisees
purchase a majority of the products they sell from the Company at wholesale
prices. Revenue on product sales to franchisees is recognized when risk of loss,
title and insurable risks have transferred to the franchisee. Franchise fees are
recognized by the Company at the time of a franchise store opening. Interest on
the financing of franchisee notes receivable is recorded as it becomes due and
payable. In accordance with the American Institute of Certified Public
Accountants Statement of Position No. 01-6, "Accounting by Certain Entities That
Lend to or Finance the Activities of Others", the franchisee financing activity
is further discussed in Note 6 Other Long-Term Assets. Gains from the sale of
company-owned stores to franchisees are recognized in accordance with SFAS No.
66, "Accounting for Sales of Real Estate". This standard requires gains on sales
of corporate stores to franchisees to be deferred until certain criteria are
F-10
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
satisfied regarding the collectibility of the related receivable and the
seller's remaining obligations. Remaining sources of franchise income, including
royalties, are recognized as earned.
The Manufacturing/Wholesale segment sells product primarily to the other
Company segments, third party customers and historically to certain related
parties. Revenue is recognized when risk of loss, title and insurable risks have
transferred to the customer. All intercompany transactions are eliminated in the
enclosed consolidated financial statements.
The Company also has a consignment arrangement with certain customers and
revenue is recognized when products are sold to the ultimate customer.
VENDOR ALLOWANCES. The Company receives allowances from various vendors
based on either sales or purchase volumes. In accordance with Emerging Issues
Task Force ("EITF") No. 02-16, "Accounting by a Reseller for Cash Consideration
Received from a Vendor", the Company has properly included this consideration
received from vendors in cost of sales.
DISTRIBUTION AND SHIPPING COSTS. The Company charges franchisees and third
party customers shipping and transportation costs and reflects these charges in
revenue. The costs that are associated with these charges are included in cost
of goods sold.
RESEARCH AND DEVELOPMENT. Research and development costs arising from
internally generated projects are expensed by the Company as incurred. The
Company recorded $0.1 million in research and development costs for the 27 days
ended December 31, 2003. GNCI recorded research and development amounts charged
by Numico directly to expense during the Predecessor period. Research and
development costs, recorded by GNCI, for the period ended December 4, 2003 and
the twelve months ended December 31, 2002 and 2001 were $5.1, $6.1 and $5.3
million respectively. These costs are included in Other selling, general and
administrative costs in the accompanying financial statements. See Note 22
Related Party Transactions.
CASH AND CASH EQUIVALENTS. The Company considers cash and cash equivalents
to include all cash and liquid deposits and investments with a maturity of three
months or less. Cash requirements are met utilizing funds provided by the
Company's operations. Overnight investments in certain sweep accounts generate
interest income earned from cash.
INVESTMENT SECURITIES. The Company's investments consisted of equity
securities that were classified as available-for-sale. In accordance with SFAS
No. 115, "Accounting for Certain Investments for Debt and Equity Securities",
these securities were stated at fair value based on quoted market prices.
Unrealized gains and losses were recorded, net of applicable taxes, as a
separate component of stockholder equity (deficit) in other comprehensive
income. The investment balance of $5.7 million as of December 31, 2001
represented stock purchased, in July 1999, in connection with a business
cooperation agreement with a leading on-line drugstore entity. In accordance
with an agreement entered into at the time of the investment, the shares were
subject to a mandatory holding period that prohibited the immediate sale of the
stock. For the year ended December 31, 2001, an unrealized pre-tax gain was
recorded on these investment securities of $3.3 million. For the year ended
December 31, 2002, a realized pre-tax gain of $5.0 million was recognized upon
the sale of all of the investment securities.
INVENTORIES. Cost is determined using a standard costing system which
approximates actual costs. Inventories are stated at the lower of cost or market
on a FIFO (first in, first out) basis. Inventory components consist of raw
materials, finished product and packaging supplies. The Company reviews its
inventory levels in order to identify slow moving and short dated products,
expected length of time for product sell through and future expiring product.
Upon analysis, the Company has established certain valuation allowances to
reserve for such inventory. When allowances are considered necessary, after such
reviews, the inventory balances are adjusted and reflected net in the
accompanying financial statements.
F-11
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company sells
product to its franchisees and, to a lesser extent, various third parties. See
Note 1 Receivables, for the components of accounts receivable. To determine the
allowance for doubtful accounts, factors that affect collect ability from the
Company's franchisees or customers include their financial strength, payment
history, reported sales and the overall retail economy. The Company establishes
an allowance for doubtful accounts for franchisees based on an assessment of the
franchisees' operations which includes analysis of their current year to date
operating cash flows, retail sales levels, and status of amounts due to the
Company, such as rent, interest and advertising. An allowance for international
franchisees is calculated based on unpaid, unsecured amounts associated with
their receivable balance. An allowance for receivable balances due from third
parties is recorded, if considered necessary, based on facts and circumstances.
These allowances are deducted from the related receivables and reflected net in
the accompanying financial statements.
NOTES RECEIVABLE. The Company offers financing to qualified franchisees in
connection with the initial purchase of a franchise store. The notes offered by
the Company to its franchisees are demand notes, payable monthly over a period
ranging from five to seven years. Interest accrues principally at an annual rate
that ranges from 11.25% to 13.75%, based on the amount of initial deposit, and
is payable monthly. Allowances for these receivables are recorded in accordance
with the Company's policy described in the Accounts Receivable and Allowance for
Doubtful Accounts policy.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment expenditures
are recorded at cost. Depreciation and amortization are recorded using the
straight-line method over the estimated useful life of the property. Fixtures
are depreciated over three to eight years, and equipment is generally
depreciated over ten years. Computer equipment and software costs are generally
depreciated over three years. Amortization of improvements to retail leased
premises is recorded using the straight-line method over the estimated useful
life of the improvements, or over the life of the related leases, whichever
period is shorter. Buildings are depreciated over 40 years and building
improvements are depreciated over the remaining useful life of the building. The
Company records tax depreciation in conformity with the provisions of applicable
tax law.
Expenditures that materially increase the value or clearly extend the
useful life of property, plant and equipment are capitalized in accordance with
the policies outlined above. Repair and maintenance costs incurred in the normal
operations of business are expensed as incurred. Gains from the sale of
property, plant and equipment are recorded in current operations. Periodically,
the Company receives varying amounts of reimbursements from landlords to
compensate the Company for costs incurred in the construction of stores.
Improvements to the leased premises which are recorded by the Company as fixed
assets are reduced by the amount of these reimbursements.
The Company recorded depreciation expense of property, plant and equipment
of $2.0 million for the 27 days ended December 31, 2003. GNCI recorded $50.9,
$46.5 and $46.1 million for the period ended December 4, 2003 and the twelve
months ended December 31, 2002 and 2001 respectively.
GOODWILL AND INTANGIBLE ASSETS. Goodwill represents the excess of purchase
price over the fair value of identifiable net assets of acquired entities. In
June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Intangible Assets".
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations after June 30, 2001 and provides guidance on the initial
recognition and measurement of goodwill and intangible assets resulting from
business combinations. SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. The Company adopted SFAS No. 142 as of January 1,
2002. Prior to 2002, goodwill and other intangible assets were amortized over
periods not exceeding 40 years. Other intangible assets with finite lives are
amortized on a straight-line basis over periods not exceeding 20 years. The
Company records goodwill upon the acquisition of franchisee stores when the
acquisition price exceeds the fair value of the
F-12
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
identifiable assets acquired and liabilities assumed of the store. This goodwill
is accounted for in accordance with the above policy. See Note 5 Goodwill and
Intangible Assets.
IMPAIRMENT OF LONG-LIVED ASSETS. In August 2001, the FASB issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long Lived Assets". SFAS No.
144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets
and Long-lived Assets to be Disposed of", and the provisions required by
Accounting Principles Board Opinion (APB) No. 30, "Reporting Results of
Operations and Discontinued Events and Extraordinary Items". SFAS No. 144 is
based on the framework established by SFAS No. 121, but also includes provisions
requiring that assets held for sale be presented separately in the consolidated
balance sheet and broadens the reporting of discontinued operations. SFAS No.
144 was effective for the year beginning January 1, 2002. This standard requires
that certain assets be reviewed for impairment and if impaired, be re-measured
at fair value whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. The adoption of SFAS No.
144 had no effect in the Company's financial statements.
ADVERTISING EXPENDITURES. The Company recognizes advertising, promotion
and marketing program expenses as they are incurred. Television production costs
are recognized during the period the commercial initially airs. The Company
administers national advertising funds on behalf of its franchisees. In
accordance with the franchisee contracts, the Company collects advertising funds
from the franchisee and utilizes the proceeds to coordinate various advertising
and marketing campaigns. The Company previously participated with its
franchisees in a cooperative advertising program that was discontinued as of
January 2001. The Company recorded $0.5 million in advertising expense for the
27 days ended December 31, 2003. GNCI recorded advertising expense of $38.4,
$52.0 and $41.9 million for the period ended December 4, 2003 and the twelve
months ended December 31, 2002 and 2001 respectively.
The Company has a balance of unused advertising barter credits on account
with a third party advertising agency. These available credits are not
recognized as assets in the accompanying financial statements because their fair
value cannot be reasonably estimated. The credits can be used to offset the cost
of cable advertising. As of December 31, 2003, and December 31, 2002 the
available credit balance was $16.6 and $18.8 million respectively.
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. The Company leases its warehouse
facilities in Pennsylvania and Arizona. The Company also has operating leases
for their fleet of distribution tractors and trailers and fleet of field
management vehicles. The expense associated with leases that have escalating
payment terms is recognized on a straight-line basis over the life of the lease.
We also lease 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 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 also lease a 210,000 square foot distribution center in Leetsdale,
Pennsylvania and a 112,000 square foot distribution center in Phoenix, Arizona.
We conduct additional manufacturing that we perform for wholesalers or retailers
of third-party products, as well as certain additional warehousing at a leased
facility located in New South Wales, Australia. See Note 16 Long-Term Lease
Obligations.
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.
F-13
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED FINANCING FEES. Costs related to the financing of the senior
credit facility and senior subordinated notes were capitalized and are being
amortized over the term of the respective debt utilizing the straight line
method. Accumulated amortization at December 31, 2003 is $0.2 million.
INCOME TAXES. The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes". As prescribed by SFAS No. 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 Note 17
Income Taxes.
For the period December 5, 2003 to December 31, 2003 the Company will be
participating in a consolidated federal income tax return as a subsidiary of
GNCH. For state income tax purposes, the Company will file on both a
consolidated and separate return basis in the states in which they conduct
business.
For the period ended December 4, 2003 and the years ended December 31, 2002
and 2001, GNCI was a member of a consolidated filing group for federal income
tax purposes. The filing group included GNCI, Nutricia and two other U.S. based
affiliates, Rexall Sundown, Inc. ("Rexall") and Unicity Network, Inc.
("Unicity"), both also wholly owned by Numico. An informal tax sharing agreement
existed among the members of the consolidated filing group that provided for
each entity to be responsible for a portion of the consolidated tax liability
equal to the amount that would have been determined on a separate return basis.
The agreement also provided for each company to be paid for any decreases in the
consolidated federal income tax liability resulting from the utilization of
deductions, losses and credits from current or prior years that were
attributable to each entity. The current and deferred tax expense for the period
ended December 4, 2003 and the years ended December 31, 2002 and 2001 are
presented in the accompanying consolidated financial statements and was
determined as if GNCI were a separate taxpayer. For state income tax purposes,
the Company files on both a consolidated and separate return basis in the states
in which they conduct business. Amounts due to Numico for taxes were settled in
conjunction with the acquisition. According to the purchase agreement, Numico
has agreed to indemnify the Company for any subsequent tax liabilities arising
from periods prior the acquisition.
SELF-INSURANCE. Prior to the acquisition, GNCI was included as an insured
under several of Numico's global insurance policies. Subsequent to the
acquisition, the Company has procured insurance independently for such areas as
general liability, product liability, directors and officers liability, property
insurance, and ocean marine insurance. The Company is self-insured with respect
to its medical benefits. As part of this coverage, the Company contracts with
national service providers to provide benefits to its employees for all medical,
dental, vision and prescription drug services. The Company then reimburses these
service providers as claims are processed from Company employees. The Company
maintains a specific stop loss provision of $200,000 per incident. The Company's
liability for medical claims is included as a component of accrued payroll and
related liabilities and was $3.0 and $3.5 million as of December 31, 2003 and
December 31, 2002, respectively. The Company carries general product liability
insurance with a deductible of $1.0 million per claim with an aggregate cap on
retained losses of $10.0 million. The Company is self-insured for its worker's
compensation coverage in the State of New York with a stop loss of $250,000. The
Company's liability for worker's compensation in New York was not significant as
of December 31, 2003 and December 31, 2002. The Company is self-insured for
physical damage to the Company's tractors, trailers and fleet vehicles for field
personnel use. The Company is self-insured for any physical damages that may
occur at the corporate store locations. The Company's associated liability for
this self-insurance was not significant as of December 31, 2003 and December 31,
2002.
STOCK COMPENSATION. In accordance with APB No. 25, "Accounting for Stock
issued to Employees", the Company accounts for stock-based employee compensation
using the intrinsic value method of
F-14
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting. For the period from December 5, 2003 to December 31, 2003, stock
compensation represents shares of GNCH stock per the new General Nutrition
Centers Holding Company 2003 Omnibus Stock Incentive Plan (See Note 21). The
stock associated with this plan is not traded on any exchange. Stock
compensation for the period ended December 4, 2003 and the twelve months ended
December 31, 2002 and 2001 represents shares of Numico stock under the Numico
1999 Share Option Plan. SFAS No. 123, "Accounting for Stock-based Compensation",
prescribes that companies utilize the fair value method of valuing stock based
compensation and recognize compensation expense accordingly. It does not
require, however, that the fair value method be adopted and reflected in the
financial statements. As an alternative, pro forma information is to be
disclosed in the accompanying footnotes to reflect results as if SFAS No. 123
had been adopted. The Company has elected to continue accounting for stock-based
compensation using the intrinsic value method and has disclosed the additional
information required by SFAS No. 123 in Note 21, "Stock-Based Compensation
Plans". The Company has adopted the disclosure requirements of SFAS No. 148
"Accounting for Stock Based Compensation-Transition and Disclosure-an amendment
of FASB Statement No. 123" by illustrating compensation costs in the following
table.
Had compensation costs for stock options been determined using the fair
market value method of SFAS No. 123, the effect on net loss for each of the
periods presented would have been as follows:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
----------------------------------- -------------
TWELVE MONTHS ENDED
DECEMBER 31, PERIOD ENDED 27 DAYS ENDED
-------------------- DECEMBER 4, DECEMBER 31,
2001 2002 2003 2003
-------- --------- ------------ -------------
(IN THOUSANDS)
Net (loss) income as reported........ $(55,859) $(960,857) $(584,921) $354
Less: total stock based employee
compensation costs determined using
fair value method, net of related
tax effects........................ (1,682) (657) (215) (70)
-------- --------- --------- ----
Adjusted net (loss) income........... $(57,541) $(961,514) $(585,136) $284
======== ========= ========= ====
</Table>
FOREIGN CURRENCY TRANSLATION. For all foreign operations, the functional
currency is the local currency. In accordance with SFAS No. 52, "Foreign
Currency Translation", assets and liabilities of those operations, denominated
in foreign currencies, are translated into U.S. dollars using period-end
exchange rates, and income and expenses are translated using the average
exchange rates for the reporting period. Gains or losses resulting from foreign
currency transactions are included in results of operations. In accordance with
SFAS No. 130, "Reporting Comprehensive Income", translation adjustments are
recorded as a separate component of stockholder equity (deficit) in other
comprehensive income. For the 27 days ended December 31, 2003, the foreign
currency translation amount was $0.3 million.
INVESTMENT IN EQUITY INVESTEES. During 2000, GNCI made an investment of
$1.0 million in a vitamin company. GNCI made additional advances of $8.0 million
to this company during 2000 and 2001. These advances were comprised of $5.5
million in investments (see Note 6 Other Long-Term Assets) and $3.5 million in
accounts receivable. Due to subsequent changes in facts and circumstances, the
Company assessed the realizability of this investment and established a reserve
for the entire amount of the investment and advances in 2002. As of the
Acquisition on December 5, 2003, no value was attributed to this investment.
COMPREHENSIVE INCOME. Comprehensive Income is composed of net income,
adjusted for changes in other comprehensive income items such as foreign
currency translation adjustments and unrealized gains or losses in certain
investments in debt and equity securities. In accordance with SFAS No. 130,
"Reporting Comprehensive Income", the Company has identified and reported
comprehensive income in the Consolidated
F-15
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Stockholder's (Deficit) Equity and in a separate note. See Note 11
Other Comprehensive Income.
NEW ACCOUNTING PRONOUNCEMENTS. In December 2003, the FASB revised SFAS No.
132. The revised standards relate to additional disclosures about pension plans
and other postretirement benefit plans. GNCI had previously adopted the
disclosure requirements of SFAS No. 132. The adoption of this revised standard
did not have a material impact on GNCI's consolidated financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It is effective for reporting
years beginning after June 15, 2002. The adoption of this standard did not have
a material impact on its consolidated financial position or results of
operations. As the operation of the Company's manufacturing facility and
distribution centers constitute a material portion of the Company's business,
other obligations may arise in the future. Since these operations have
indeterminate lives, an asset retirement obligation cannot be reasonably
estimated. Therefore, any additional liabilities associated with potential
obligations cannot be estimated and thus, have not been accrued for in the
accompanying financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". This statement applies to costs associated
with an exit activity that does not involve an entity newly acquired in a
business combination or with a disposal activity covered by SFAS No. 144. It is
effective for transactions after December 31, 2002. The adoption of this
standard did not have a material impact on the Company's consolidated financial
position or results of operations.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This interpretation clarifies
existing guidance relating to a guarantor's accounting for and disclosure of,
the issuance of certain types of guarantees. FIN No. 45 requires that, upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under the guarantee. FIN No. 45 is effective
on a prospective basis for guarantees issued or modified after December 31,
2002, except for the disclosure provisions which were adopted by the Company for
the year ended December 31, 2002. The adoption of the remaining provisions of
FIN No. 45 did not have a material impact on the Company's consolidated
financial position or results of operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities -- an interpretation of ARB No. 51". This interpretation
addresses the consolidation of variable interest entities ("VIEs") and its
intent is to achieve greater consistency and comparability of reporting between
business enterprises. It defines the characteristics of a business enterprise
that qualifies as a primary beneficiary of a variable interest entity. In
December 2003, the FASB issued a modification to FIN 46, titled FIN 46R. FIN 46R
delayed the effective date for certain entities and also provided technical
clarifications related to implementation issues. In summary, a primary
beneficiary is a business enterprise that is subject to the majority of the risk
of loss from the VIE, entitled to receive a majority of the VIE's residual
returns, or both. The implementation of FIN No. 46 has been deferred for
non-public entities. For non-public entities, such as the Company, FIN No. 46
requires immediate application to all VIEs created after December 31, 2003. For
all other VIEs, the Company is required to adopt FIN No. 46 by no later than the
beginning of the first period beginning after December 15, 2004. FIN No. 46 also
requires certain disclosures in financial statements regardless of the date on
which the VIE was created if it is reasonably possible that the business
enterprise will be required to disclose the activity of the VIE once the
interpretation becomes effective. The
F-16
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company has evaluated the effect of FIN No. 46 for potential VIEs. As a result,
the Company believes that the adoption of FIN No. 46 will not be material to its
financial statements.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies the accounting for and reporting of derivative instruments, including
certain derivative instruments embedded in other contracts and hedging
activities. SFAS No. 149 is effective for contracts entered into after June 30,
2003. As of December 31, 2003, the Company has not identified any financial
instruments that fall within the scope of SFAS No. 149, thus the adoption of
SFAS No. 149 does not have a material impact on the accompanying consolidated
financial statements or results of operations.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
clarifies and defines how certain financial instruments that have both the
characteristics of liabilities and equity be accounted for. Many of these
instruments that were previously classified as equity will now be recorded as
liabilities. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and must be adopted for financial statements issued
after June 15, 2003. As of December 31, 2003, the Company has not identified any
financial instruments that fall within the scope of SFAS No. 150, thus the
adoption of SFAS No. 150 does not have a material impact on the accompanying
consolidated financial statements or results of operations.
In December 2003, the Securities and Exchange Commission issued SAB No. 104
"Revenue Recognition". This SAB revises or rescinds certain portions of
interpretative guidance included in Topic 13 of the codification of staff
accounting bulletins. These changes make SAB 104 guidance consistent with
current accounting regulations promulgated under U.S. generally accepted
accounting principles. As stated in the Revenue Recognition accounting policy,
the Company has adopted SAB No. 104 for all periods presented herein. The
adoption of SAB No. 104 did not have a material impact on the accompanying
consolidated financial statements or results of operations.
NOTE 1. RECEIVABLES
Receivables at each respective period consisted of the following:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------ ------------
DECEMBER 31, DECEMBER 31,
2002 2003
------------ ------------
(IN THOUSANDS)
Settlement receivable....................................... $134,800 $ --
Trade receivables........................................... 59,277 77,481
Related party receivables................................... 12,058 --
Contingent purchase price receivable........................ -- 12,711
Other....................................................... 12,628 5,536
Allowance for doubtful accounts............................. (10,429) (7,744)
-------- -------
$208,334 $87,984
======== =======
</Table>
The settlement receivable was held in escrow for GNCI as of December 31,
2002. The entire balance was received in January 2003. The Contingent purchase
price receivable is per the purchase agreement and was settled in 2004. See Note
22 Related Party Transactions.
F-17
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. INVENTORIES
Inventories at each respective period consisted of the following:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------ ------------
DECEMBER 31, DECEMBER 31,
2002 2003
------------ ------------
(IN THOUSANDS)
Finished product ready for sale............................. $253,419 $235,607
Unpackaged bulk product and raw materials................... 43,225 35,615
Packaging supplies.......................................... 3,690 3,652
Less: reserves.............................................. (14,712) (18,874)
-------- --------
$285,622 $256,000
======== ========
</Table>
NOTE 3. OTHER CURRENT ASSETS
Other current assets at each respective period consisted of the following:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------ ------------
DECEMBER 31, DECEMBER 31,
2002 2003
------------ ------------
(IN THOUSANDS)
Current portion of franchise note receivables............... $ 9,200 $ 7,635
Less: allowance for doubtful accounts..................... (734) (971)
Prepaid rent................................................ 11,774 11,525
Other current assets........................................ 6,586 9,291
------- -------
$26,826 $27,480
======= =======
</Table>
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at each respective period consisted of the
following:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------ ------------
DECEMBER 31, DECEMBER 31,
2002 2003
------------ ------------
(IN THOUSANDS)
Land, buildings and improvements............................ $ 80,010 $ 59,655
Machinery and equipment..................................... 114,117 57,110
Leasehold improvements...................................... 77,876 35,560
Furniture and fixtures...................................... 94,373 39,990
Software.................................................... 21,154 8,964
Construction in progress.................................... 2,816 1,951
--------- --------
Total property, plant and equipment......................... $ 390,346 $203,230
Less: accumulated depreciation.............................. (105,708) (1,950)
--------- --------
Net property, plant and equipment........................... $ 284,638 $201,280
========= ========
</Table>
General Nutrition Inc., a subsidiary of the Company, is a 50% limited
partner in a partnership that owns and manages the building that houses the
Company's corporate headquarters. The Company occupies the majority of the
available lease space of the building. The general partner is responsible for
the operation and management of the property and reports the results of the
partnership to the Company. The Company has
F-18
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated the limited partnership, net of elimination adjustments, in the
accompanying financial statements. No minority interest has been reflected in
the accompanying financial statements as the partnership has sustained
cumulative net losses from inception through December 31, 2003.
NOTE 5. GOODWILL AND INTANGIBLE ASSETS
As described in the Summary of Significant Accounting Policies, Goodwill
and Intangible Assets, GNCI adopted SFAS No. 142 on January 1, 2002. As a
result, for subsequent periods including the Successor period, the Company no
longer amortizes goodwill and brands. SFAS No. 142 requires that goodwill and
other intangible assets with indefinite lives no longer be subject to
amortization, but instead are to be tested at least annually for impairment. To
accomplish this, GNCI identified its reporting units and their respective
carrying values based on the carrying value of the assets and liabilities
underlying each. The Company consulted with an independent appraisal firm and
determined the fair value of each reporting unit and compared these values to
the carrying value. The fair value of each reporting unit was estimated by
discounting its projected future cash flows at an appropriately determined
discount rate for GNCI. The carrying amount of each reporting unit exceeded its
fair value upon adoption of the new standard, thus indicating a transitional
impairment charge was necessary. The transitional impairment resulted from
several factors including the declining performance of GNCI and the overall
industry, increased competition and diminished contract manufacturing growth.
Therefore, upon adoption of SFAS No. 142, GNCI recorded a one-time, non-cash
charge of $1.06 billion (pre-tax) to reduce the carrying amount of goodwill and
other intangibles to their implied fair value. This charge is reflected as a
cumulative effect of a change in accounting principle in the accompanying
financial statements.
During 2002, deterioration in market conditions and financial results
caused further decrease in expectations regarding growth and profitability. As
of December 31, 2002, GNCI recorded an additional impairment charge of $222.0
million (pre-tax) for goodwill and other intangibles in accordance with SFAS No.
142.
During 2003, increased competition from the mass market, negative publicity
by the media on certain supplements, and increasing pressure from the Federal
Trade Commission on the industry as a whole caused a further decrease in
expectations regarding growth and profitability. Accordingly, management
initiated an evaluation of the carrying value of its long-lived intangible
assets. As a result of valuations performed by an independent appraisal
specialist as of September 30, 2003, GNCI recorded an additional impairment
charge of $709.4 million (pre-tax) for goodwill and other intangibles in
accordance with SFAS No. 142.
As stated in the Summary of Significant Accounting Policies, Acquisition of
the Company section, fair value adjustments were made to the Company's Successor
F-19
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements as of December 5, 2003. The following table summarizes the
Company's goodwill activity, including the changes in the net book value of
Goodwill arising from the acquisition:
<Table>
<Caption>
MANUFACTURING/
RETAIL FRANCHISING WHOLESALE TOTAL
--------- ----------- -------------- ----------
(IN THOUSANDS)
PREDECESSOR
Balance at January 1, 2002........... $ 387,775 $ 483,709 $ 138,202 $1,009,686
========= ========= ========= ==========
Impairment recognized upon adoption
of SFAS No. 142.................... (265,180) (252,803) (134,582) (652,565)
Additional impairment recognized
during 2002........................ (90,000) (20,000) -- (110,000)
Goodwill recorded related to
franchisee store purchases......... 1,717 -- -- 1,717
--------- --------- --------- ----------
Balance at December 31, 2002......... 34,312 210,906 3,620 248,838
Additional impairment recognized
during 2003........................ (34,312) (199,435) (3,620) (237,367)
--------- --------- --------- ----------
Goodwill recorded related to
franchisee store purchases......... 914 -- -- 914
--------- --------- --------- ----------
Balance at December 4, 2003.......... $ 914 $ 11,471 $ -- $ 12,385
========= ========= ========= ==========
- --------------------------------------------------------------------------------------------
SUCCESSOR
Balance at December 5, 2003.......... $ 19,086 $ 63,563 $ 440 $ 83,089
========= ========= ========= ==========
Balance at December 31, 2003......... $ 19,086 $ 63,563 $ 440 $ 83,089
========= ========= ========= ==========
</Table>
Brand intangibles were previously amortized over 40 years. Upon the
adoption of SFAS No. 142 on January 1, 2002, brands were assigned an indefinite
life and are no longer subject to amortization. Intangible
F-20
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets other than goodwill consisted of the following at each respective period.
Differences in the cost basis of the intangibles between periods were primarily
a result of impairment charges as previously discussed.
<Table>
<Caption>
RETAIL FRANCHISE OPERATING
GOLD CARD BRAND BRAND AGREEMENTS OTHER TOTAL
--------- --------- --------- ---------- ------- ----------
(IN THOUSANDS)
PREDECESSOR
Balance at January 1,
2002...................... $ 2,725 $ 740,801 $ 449,494 $75,632 $ 3,648 $1,272,300
======= ========= ========= ======= ======= ==========
Franchise impairment
recognized upon adoption
of SFAS No. 142........... -- -- (121,494) -- -- (121,494)
Retail impairment recognized
upon adoption of SFAS No.
142....................... -- (290,801) -- -- -- (290,801)
Amortization expense........ (2,725) -- -- (7,411) (1,400) (11,536)
Additional franchise
impairment recognized
during 2002............... -- -- (22,000) -- -- (22,000)
Additional retail impairment
recognized during 2002.... -- (90,000) -- -- -- (90,000)
------- --------- --------- ------- ------- ----------
Balance at December 31,
2002...................... $ -- $ 360,000 $ 306,000 $68,221 $ 2,248 $ 736,469
Amortization expense........ -- -- -- (6,873) (1,298) (8,171)
Additional franchise
impairment recognized
during 2003............... -- -- (149,000) -- -- (149,000)
Additional retail impairment
recognized during 2003.... -- (323,000) -- -- -- (323,000)
------- --------- --------- ------- ------- ----------
Balance at December 4,
2003...................... $ -- $ 37,000 $ 157,000 $61,348 $ 950 $ 256,298
======= ========= ========= ======= ======= ==========
- ---------------------------------------------------------------------------------------------------
SUCCESSOR
Balance at December 5,
2003...................... $ 2,570 $ 49,000 $ 163,000 $30,400 $ -- $ 244,970
Amortization expense........ (85) -- -- (218) (303)
------- --------- --------- ------- ------- ----------
Balance at December 31,
2003...................... $ 2,485 $ 49,000 $ 163,000 $30,182 $ -- $ 244,667
======= ========= ========= ======= ======= ==========
</Table>
As stated in the Summary of Significant Accounting Policies, Acquisition of
the Company section, utilizing an independent appraisal specialist, fair value
adjustments were made to the Company's financial statements as of December 5,
2003. In connection with the acquisition, fair values were assigned to various
other intangible assets. The Company's brands were assigned a fair value
representing the longevity of the Company name and general recognition of the
product lines. The Gold Card program was assigned a fair value representing the
underlying customer listing, for both the Retail and Franchise segments. The
retail agreements were assigned fair value reflecting the opportunity to expand
the Company stores within a major drug store chain and on military facilities. A
fair value was assigned to the agreements with the Company's franchisees, both
domestic and international, to operate stores for a contractual period. Fair
values were assigned to the Company's manufacturing and wholesale segments for
production and continued sales to certain customers.
F-21
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table represents future estimated amortization expense of
intangible assets with definite lives:
<Table>
<Caption>
ESTIMATED
AMORTIZATION
YEARS ENDING DECEMBER 31, EXPENSE
- ------------------------- --------------
(IN THOUSANDS)
2004........................................................ $ 4,014
2005........................................................ 3,843
2006........................................................ 3,457
2007........................................................ 2,943
Thereafter.................................................. 18,410
-------
Total....................................................... $32,667
=======
</Table>
Prior to the adoption of SFAS No. 142, GNCI amortized goodwill over periods
not exceeding 40 years. The following table outlines the impact of SFAS No. 142
on the reported net loss as a result of the non-amortization of goodwill
beginning on January 1, 2002:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------------------------------ ------------
TWELVE MONTHS ENDED 27 DAYS
DECEMBER 31, PERIOD ENDED ENDED
--------------------- DECEMBER 4, DECEMBER 31,
2001 2002 2003 2003
-------- --------- ------------ ------------
(IN THOUSANDS)
(Loss) income before cumulative
effect of accounting change........ $(55,859) $ (71,236) $(584,921) $ 354
Add back brand amortization.......... 31,652 -- -- --
Add back goodwill amortization....... 26,508 -- -- --
-------- --------- --------- --------
Adjusted income (loss) before
cumulative effect of accounting
change (net of tax)................ 2,301 (71,236) (584,921) 354
Loss from cumulative effect of
accounting change (net of tax)..... -- (889,621) -- --
-------- --------- --------- --------
Adjusted net income (loss)......... $ 2,301 $(960,857) $(584,921) $ 354
======== ========= ========= ========
</Table>
NOTE 6. OTHER LONG-TERM ASSETS
Other assets at each respective period consisted of the following:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------ ------------
DECEMBER 31, DECEMBER 31,
2002 2003
------------ ------------
(IN THOUSANDS)
Long term franchise notes receivables....................... $25,921 $30,078
Investment in and advances to equity investees.............. 5,480 --
Long term deposit........................................... 269 9,070
Other....................................................... 3,386 1,287
Allowance for doubtful accounts............................. (6,529) (6,275)
------- -------
$28,527 $34,160
======= =======
</Table>
F-22
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in investments in and advances to equity investees is a note
receivable resulting from an investment in a vitamin company. GNCI had
previously provided an allowance for the remaining balance of this receivable.
GNCI made total investments and advances to the equity investee of $5.5 million;
$2.0 million in 2000 and $3.5 million in 2001, which was fully reserved in 2002.
As of December 5, 2003, no value was attributed to this investment. The Company
had outstanding receivable balances of $4.3 and $4.0 million as of December 31,
2003 and December 31, 2002 which have also been fully reserved at each
respective period. Included in long term deposits at December 31, 2003 are $4.4
million in cash collateralized letters of credit deposits, $4.0 million in cash
collateral insurance deposits, and $0.6 million in other deposits.
Annual maturities of the Company's long term financing receivables at
December 31, 2003 are as follows:
<Table>
<Caption>
YEAR ENDING RECEIVABLES
- ----------- --------------
(IN THOUSANDS)
2004................................................... $ 7,635
2005................................................... 6,798
2006................................................... 6,333
2007................................................... 5,952
2008 and thereafter.................................... 10,995
-------
Total.................................................. $37,713
=======
</Table>
NOTE 7. ACCOUNTS PAYABLE
Accounts payable at each respective period consisted of the following:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------ ------------
DECEMBER 31, DECEMBER 31,
2002 2003
------------ ------------
(IN THOUSANDS)
Trade payables.............................................. $ 37,951 $88,263
Related party payables...................................... 84,041 --
-------- -------
Total....................................................... $121,992 $88,263
======== =======
</Table>
As of December 31, 2003, the Related party payable was settled in full in
conjunction with the Acquisition. See Note 22 Related Party Transactions.
NOTE 8. OTHER CURRENT LIABILITIES
Other current liabilities at each respective period consisted of the
following:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------ ------------
DECEMBER 31, DECEMBER 31,
2002 2003
------------ ------------
(IN THOUSANDS)
Deferred revenue............................................ $29,354 $31,077
Accrued occupancy........................................... 4,415 4,352
Accrued acquisition costs................................... -- 7,750
Accrued store closing costs................................. -- 7,600
Other current liabilities................................... 38,696 42,155
------- -------
Total....................................................... $72,465 $92,934
======= =======
</Table>
F-23
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred revenue consists primarily of Gold Card and gift card deferrals.
In conjunction with the Acquisition, the Company recorded a liability related to
a store closure program. This liability includes costs associated with
terminating leases for stores identified with this program. As of December 31,
2003 the balance of $7.6 million represents stores scheduled to be closed in
2004.
NOTE 9. LONG-TERM DEBT
In connection with the Acquisition, the Company entered into a new senior
credit facility with a syndicate of lenders. The senior credit facility consists
of a $285 million term loan facility and a $75 million revolving credit
facility. All borrowings under the senior credit facility bear interest at a
rate per annum equal to either (a) the greater of the prime rate as quoted on
the British Banking Association Telerate, and the federal funds effective rate
plus one half percent per annum, plus in each case, additional margins of 2.0%
per annum for both the term loan facility and the revolving credit facility, or
(b) the Eurodollar rate plus additional margins of 3.0% per annum for both the
term loan facility and the revolving credit facility. In addition to paying the
above stated interest rates, the Company is also required to pay a commitment
fee relating to the unused portion of the revolving credit facility at a rate of
0.5% per annum. The senior credit facility matures on December 5, 2009 and
permits the Company to prepay a portion or all of the outstanding balance
without incurring penalties. The revolving credit facility matures on December
5, 2008. The senior credit facility payment maturity schedule is structured so
that minimal payments are made quarterly for the first five years and a balloon
payment is scheduled to be paid in the final year. (refer to the maturity
schedule following). In general, the senior credit facility requires that
certain net proceeds related to the sale of assets, insurance reimbursements,
other proceeds and excess cash flow be used to pay down the outstanding balance.
The senior credit facility contains normal and customary covenants including
financial tests, (including maximum total leverage, minimum fixed charge
coverage ratio and maximum capital expenditures) and certain other limitations
such as the Company's ability to incur additional debt, guarantee other
obligations, grant liens on assets, make investments, acquisitions or mergers,
dispose of assets, make optional payments or modifications of other debt
instruments, and pay dividends or other payments on capital stock. The senior
credit facility also contains covenants requiring the Company to submit to each
agent and lender certain audited financial reports within 90 days of each fiscal
year end and certain unaudited statements within 45 days after the end of each
quarter. The Company is also required to submit to the Administrative Agent
monthly management sales and revenue reports. Also, the Company is required to
submit to the Trustee certain Compliance Certificates within 120 days of the
fiscal year end.
To fund part of the Acquisition, the Company borrowed the entire $285
million under the term loan facility. This indebtedness has been guaranteed by
the Company's parent, GNCH, and its domestic subsidiaries. In addition, the
senior credit facility is secured by first priority perfected security interests
in primarily all of the Company's assets and also the assets of the subsidiary
guarantors, except that the capital stock of the first-tier foreign subsidiaries
is secured only up to 65%. None of the $75 million revolving credit facility was
utilized in the acquisition. At December 31, 2003, $74.0 million of the
revolving credit facility was available, as $1.0 million was utilized for
letters of credit. At December 31, 2003, the average interest rate on this debt
was 4.2%.
In conjunction with the Acquisition, the Company also issued $215 million
of 8 1/2% senior subordinated notes. These notes mature on December 1, 2010 and
were used to fund a portion of the Acquisition. The senior subordinated notes
carry a fixed interest rate of 8 1/2% per annum which is payable semi-annually
in arrears on June 1 and December 1 of each year, beginning with the first
payment due on June 1, 2004. Prior to December 1, 2006 the Company may redeem up
to 35% of the aggregate principal amount at a redemption price of 108.50% of the
principal amount, plus any accrued and unpaid interest. The Company may also
F-24
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
redeem all or part of the senior subordinated notes on or after December 1, 2007
according to the following redemption table, which includes the principal amount
plus accrued and unpaid interest:
<Table>
<Caption>
REDEMPTION
PERIOD PRICE
- ------ ----------
2007........................................................ 104.250%
2008........................................................ 102.125%
2009 and after.............................................. 100.000%
</Table>
The senior subordinated notes are general unsecured obligations and are
guaranteed on a senior subordinated basis by certain of the Company's domestic
subsidiaries and rank secondary to the Company's senior credit facility. The
senior subordinated notes contain customary covenants including certain
limitations and restrictions on the Company's ability to incur additional
indebtedness beyond certain levels, dispose of assets, grant liens on assets,
make investments, acquisitions or mergers, and declare or pay dividends. The
senior subordinated notes also contain covenants requiring the Company to submit
to the Trustee or holders of the notes certain financial reports that would be
required to be filed with the Securities and Exchange Commission, such as Forms
10K, 10Q and 8K. Also, the Company is required to submit to the Trustee certain
Compliance Certificates within 120 days of the fiscal year end.
Long-term debt at each respective period consisted of the following:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------ ------------
DECEMBER 31, DECEMBER 31,
2002 2003
------------ ------------
(IN THOUSANDS)
Mortgage.................................................... $ 15,067 $ 14,160
Capital leases.............................................. 11 44
Senior credit facility...................................... -- 285,000
Related party term loan..................................... 1,825,000 --
Senior subordinated notes................................... -- 215,000
Less: current maturities.................................... (175,906) (3,830)
---------- --------
Total....................................................... $1,664,172 $510,374
========== ========
</Table>
At December 31, 2003, the Company's total long-term debt principal
maturities are as follows:
<Table>
<Caption>
MORTGAGE SENIOR SENIOR
LOAN/CAPITAL CREDIT SUBORDINATED
LEASES FACILITY NOTES TOTAL
------------ -------- ------------ --------
(IN THOUSANDS)
2004................................... $ 980 $ 2,850 $ -- $ 3,830
2005................................... 1,041 2,850 -- 3,891
2006................................... 1,115 2,850 -- 3,965
2007................................... 1,195 2,850 -- 4,045
2008................................... 1,281 2,850 -- 4,131
2009 and after......................... 8,592 270,750 215,000 494,342
------- -------- -------- --------
$14,204 $285,000 $215,000 $514,204
======= ======== ======== ========
</Table>
Prior to 1999, GNCI moved its corporate offices into a new building and
financed the move with its internal cash and a credit facility. Subsequent to
the move, in May of 1999, GNCI secured a mortgage through the 50% owned
partnership that owns and manages the building. The original principal amount
was $17.9 million, which carries a fixed annual interest rate of 6.95%, with
principal and interest payable monthly
F-25
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
over a period of 15 years. In conjunction with the Acquisition, the Company
assumed the outstanding balance of this mortgage as part of the purchase price.
The outstanding balance as of December 31, 2003 was $14.2 million.
The Company's net interest expense for each respective period is as
follows:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------------------------------ -------------
TWELVE MONTHS
ENDED DECEMBER 31, PERIOD ENDED 27 DAYS ENDED
--------------------- DECEMBER 4, DECEMBER 31,
2001 2002 2003 2003
--------- --------- ------------ -------------
(IN THOUSANDS)
Composition of interest expense:
Interest on mortgage.............. $ (1,136) $ (1,078) $ (972) $ (72)
Interest on senior credit
facility....................... -- -- -- (1,111)
Interest on senior subordinated
notes.......................... -- -- -- (1,371)
Interest on related party term
loan........................... (140,625) (136,875) (121,542) --
Deferred financing fees........... -- -- -- (224)
Interest income -- other.......... 1,831 1,600 1,389 5
--------- --------- --------- -------
Interest expense, net............... $(139,930) $(136,353) $(121,125) $(2,773)
========= ========= ========= =======
</Table>
PREDECESSOR DEBT:
In connection with GNCI's acquisition by Numico in August 1999, GNCI's
immediate parent, Nutricia, formerly Numico U.S. L.P., ("the borrower") entered
into a Loan Agreement with an affiliated financing company of Numico, Nutricia
International B.V. ("the lender"). The loan agreement provided that the lender
make available to the borrower a term loan in a principal amount totaling $1.9
billion. The loan term was 10 years and was scheduled to mature on August 10,
2009. Interest accrued at a rate of 7.5% per annum, with interest payable
semi-annually and principal payable annually in arrears. This loan was settled
in full upon the Acquisition.
GNCI was not a party to the Loan Agreement and had no assets collateralized
by the agreement. GNCI was, however, a guarantor of the loan between Nutricia
and the lender. GNCI had historically made both principal and interest payments
indirectly to Numico through payments to Nutricia. Nutricia is a holding company
with no operational sources of cash. Accordingly, the debt was pushed down to
GNCI and was reflected as if GNCI had directly entered into the external loan
agreement since inception.
The Loan Agreement contained both affirmative and negative covenants
related to Nutricia as the borrower requiring, among other items, minimum net
worth and maximum leverage ratio. Nutricia had not been in compliance with these
covenants. Additionally, Nutricia had failed to make a portion of the principal
payments as scheduled, thus creating an event of default under the terms of the
agreement. The lender had provided waivers for all events of default, had not
required any acceleration of payment obligations and had waived all covenant
requirements for the remaining term of the loan agreement. Additionally, GNCI's
ultimate parent, Numico, had provided a letter of support indicating its
intention to fund GNCI's operating cash flow needs, if required. In January
2003, GNCI remitted the $75.0 million principal payment that was due December
31, 2002 on behalf of Nutricia. As a result of the Acquisition on December 5,
2003, these amounts were settled in full.
LETTERS OF CREDIT
The Company issues letters of credit as a guarantee of payment to third
party vendors in accordance with specified terms and conditions. It also issues
letters of credit for various insurance contracts. From June
F-26
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001 to June 2003, GNCI funded these letters of credit through a $15.0 million
facility with a local lender. Beginning in June, 2003, all letters of credit
facilities were collateralized via a long term cash deposit account in GNCI's
name with the same local lender referred to above. At December 31, 2003 and
2002, the outstanding balance under the letter of credit facility was $4.4
million. As of December 31, 2003 the Company utilizes the $75 million revolving
credit facility to secure letters of credit. The Company pays interest based on
the aggregate available amount of the credit facility at a per annum rate equal
to the applicable margin in effect with respect to the Eurodollar loan rate. As
of December 31, 2003, this rate was 0.5%. The Company also pays an additional
interest rate of 1/4 of 1% per annum on all outstanding letters of credit
issued. As of December 31, 2003, $1.0 million of the revolving credit facility
was utilized to secure letters of credit.
NOTE 10. RETENTION AND SEVERANCE
During the year ended December 31, 2002, GNCI incurred a general reduction
in force, primarily at the corporate headquarters. Severance costs associated
with this reduction were $4.3 million and are reflected in compensation and
related benefits in the accompanying financial statements. In 2003, GNCI
incurred $10.4 million in retention and severance costs primarily related to
employees at the corporate headquarters. At December 4, 2003, the Company
recorded $8.7 million of retention payments for maintaining key management
personnel related to the Acquisition. The remaining $1.7 million resulted from
corporate employees terminated in 2003. Of this amount, $2.2 million was
remaining as a liability as of December 31, 2003. These costs are reflected in
compensation and related benefits in the accompanying financial statements. In
conjunction with the Acquisition, certain management of the company were granted
change in control payments. These payments accrue ratably over six months
beginning December 5, 2003 and are payable in 2004. According to the provisions
included in the purchase agreement, the Company will be reimbursed for these
payments from Numico.
<Table>
<Caption>
CHANGE IN CONTROL/
RETENTION SEVERANCE TOTAL
------------------ --------- -------
PREDECESSOR
Balance at January 1, 2002....................... $ -- $ 1,530 $ 1,530
Severance accruals............................... -- 4,274 4,274
Severance payments............................... -- (3,386) (3,386)
------ ------- -------
Balance at December 31, 2002..................... $ -- $ 2,418 $ 2,418
Severance accruals............................... -- 1,713 1,713
Severance payments............................... -- (3,207) (3,207)
Change in control/retention accrual.............. 8,673 -- 8,673
------ ------- -------
Balance at December 4, 2003...................... $8,673 $ 924 $ 9,597
- -------------------------------------------------------------------------------------------
SUCCESSOR
Severance accruals............................... -- 1,400 1,400
Change in control accrual........................ 563 -- 563
Severance payments............................... -- (126) (126)
------ ------- -------
Balance at December 31, 2003..................... $9,236 $ 2,198 $11,434
====== ======= =======
</Table>
F-27
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. OTHER COMPREHENSIVE INCOME
The accumulated balances of other comprehensive income and their related
tax effects included as part of the consolidated financial statements are as
follows:
<Table>
<Caption>
TAX BENEFIT NET OTHER COMPREHENSIVE
BEFORE TAX AMOUNT (EXPENSE) INCOME (LOSS)
------------------------- ----------- -----------------------------------
UNREALIZED UNREALIZED UNREALIZED
FOREIGN GAIN/(LOSS) GAIN/(LOSS) FOREIGN GAIN/(LOSS)
CURRENCY ON ON CURRENCY ON
TRANSLATION SECURITIES SECURITIES TRANSLATION SECURITIES TOTAL
----------- ----------- ----------- ----------- ----------- -------
PREDECESSOR
Balance at January 1, 2002... $(1,768) $ 3,300 $(1,155) $(1,768) 2,145 377
Foreign currency translation
adjustment................. 292 -- -- 292 -- 292
Unrealized appreciation
(depreciation) in
marketable equity
securities, net of tax..... -- (3,300) 1,155 -- (2,145) (2,145)
------- ------- ------- ------- ------- -------
Balance at December 31,
2002....................... $(1,476) $ -- $ -- $(1,476) $ -- $(1,476)
Foreign currency translation
adjustment................. 1,603 -- -- 1,603 -- 1,603
------- ------- ------- ------- ------- -------
Balance at December 4,
2003....................... $ 127 $ -- $ -- $ 127 $ -- $ 127
------- ------- ------- ------- ------- -------
SUCCESSOR
Foreign currency translation
adjustment................. 302 -- -- 302 -- 302
------- ------- ------- ------- ------- -------
Balance at December 31,
2003....................... $ 302 $ -- $ -- $ 302 $ -- $ 302
======= ======= ======= ======= ======= =======
</Table>
NOTE 12. SUPPLEMENTAL CASH FLOW INFORMATION
GNCI remitted cash payments for federal and state income taxes of $2.5,
$30.7 and $15.6 million for the period ended December 4, 2003 and the twelve
months ended December 31, 2002 and 2001, respectively. These payments were made
to Nutricia in accordance with the informal tax sharing agreement between the
Company and Nutricia. See Income Taxes in the Summary of Significant Accounting
Policies section. The Company remitted no tax payments for the 27 days ended
December 31, 2003.
The Company remitted cash payments for interest expense related to the
senior credit facility of $0.7 million for the 27 days ended December 31, 2003.
GNCI remitted cash payments to Numico for interest expense of $122.5, $138.0 and
$145.6 million, primarily related to the push down debt from Numico, for the
period ended December 4, 2003 and the twelve months ended December 31, 2002 and
2001, respectively. GNCI converted $4.3 million of accounts receivable to
long-term notes receivable in 2003.
F-28
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a reconciliation of the net cash purchase price of the
acquisition of the Company by Apollo and the adjusted purchase price based on
the purchase agreement.
<Table>
<Caption>
(IN THOUSANDS)
PURCHASE PRICE RECONCILIATION:
Cash paid at acquisition.................................... $ 738,117
Accrued acquisition costs................................... 7,750
Contingent purchase price receivable........................ (12,711)
----------
Adjusted net purchase price................................. $ 733,156
==========
Fair value of assets acquired............................... $1,022,705
Less liabilities............................................ (245,205)
----------
Cash paid................................................... 777,500
Less acquisition fees....................................... (19,633)
Less cash acquired.......................................... (19,750)
----------
Net cash paid............................................... $ 738,117
==========
</Table>
NOTE 13. RETIREMENT PLANS
The Company sponsors a 401(k) defined contribution savings plan covering
substantially all employees. Full time employees who have completed 30 days of
service and part time employees who have completed 1,000 hours of service are
eligible to participate in the plan. The plan provides for employee
contributions of 1% to 20% of individual compensation into deferred savings,
subject to IRS limitations. The plan provides for Company contributions of 100%
of the first 3% of participant's contributions, upon the employee meeting the
eligibility requirements. The contribution match was temporarily suspended as of
June 30, 2003.
An employee becomes vested in the Company match portion as follows:
<Table>
<Caption>
YEARS OF SERVICE PERCENT VESTED
- ---------------- --------------
0-1......................................................... 0%
1-2......................................................... 33%
2-3......................................................... 66%
3+.......................................................... 100%
</Table>
GNCI made cash contributions of $1.1, $2.2 and $2.4 million for the period
ended December 4, 2003 and the twelve months ended December 31, 2002 and 2001
respectively. As the match was suspended, the Company made no cash contributions
to the plan for the 27 days ended December 31, 2003.
The Company has a non-qualified Executive Retirement Arrangement Plan that
covers key employees. Under the provisions of this plan, certain eligible key
employees are granted cash compensation, which in the aggregate was not
significant for any year presented.
The Company has a non-qualified Deferred Compensation Plan that provides
benefits payable to certain qualified key employees upon their retirement or
their designated beneficiaries upon death. The Plan allows participants the
opportunity to defer pretax amounts ranging from 2% to 100% of their base
compensation plus bonuses. The plan is funded entirely by elective contributions
made by the participants. The Company has elected to finance any potential plan
benefit obligations using corporate owned life insurance policies. As of
December 31, 2003, plan assets exceed liabilities.
F-29
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. FRANCHISE REVENUE
The Company enters into franchise agreements with initial terms of ten
years. The Company charges franchisees three types of flat fees associated with
stores: initial, transfer and renewal. The initial franchise fee is payable
prior to the franchise store opening as consideration for the initial franchise
rights and services performed by the Company. Transfer fees are paid as
consideration for the same rights and services as the initial fee and occur when
a former franchisee transfers ownership of the franchise location to a new
franchisee. This is typically a reduced fee compared to the initial franchise
fee. The renewal franchise fee is charged to existing franchisees upon renewal
of the franchise contract. This fee is similar to, but typically less than the
initial fee.
Once the franchised store is opened, transferred or renewed, the Company
has no further obligations under these fees to the franchisee. Therefore, all
initial, transfer and renewal franchise fee revenue is recognized in the period
in which a franchise store is opened, transferred or date the contract period is
renewed. GNCI recorded initial franchise fees of $3.0, $3.2 and $5.1 million for
the period ended December 4, 2003 and the twelve months ended December 31, 2002
and 2001, respectively. The Company recorded $0.3 million in franchise fees for
the 27 days ended December 31, 2003.
NOTE 15. FINANCIAL INSTRUMENTS
At December 31, 2003 and 2002, the Company's financial instruments
consisted of cash and cash equivalents, receivables, franchise notes receivable,
accounts payable, certain accrued liabilities and long-term debt. The carrying
amount of cash and cash equivalents, receivables, accounts payable and the
accrued liabilities approximates their fair value because of the short maturity
of these instruments. Based on the interest rates currently available and their
underlying risk, the carrying value of the franchise notes receivable
approximates their fair value. These fair values are reflected net of reserves,
which are recorded according to Company policy. The carrying amount of the
senior credit facility, senior subordinated notes, and mortgage is considered to
approximate fair value since it carries an interest rate that is currently
available to the Company for issuance of debt with similar terms and remaining
maturities. The Numico related party debt was borrowed at rates and terms that
are not the same as those rates and terms that would result from similar
transactions with unrelated parties. Accordingly, it was not practical for GNCI
to estimate the fair value of the related party notes payable as of December 31,
2002. The Company determined the estimated fair values by using currently
available market information and estimates and assumptions where appropriate.
Accordingly, as considerable judgment is required to determine these estimates,
changes in the assumptions or methodologies may have an effect on these
estimates. The actual and estimated fair values of the Company's financial
instruments are as follows:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
-------------------- ------------------
DECEMBER 31, DECEMBER 31,
2002 2003
-------------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ------- -------- -------
(IN THOUSANDS)
Cash and cash equivalents................... $ 38,765 $38,765 $33,176 $33,176
Receivables................................. 208,334 208,334 87,984 87,984
Accounts payable............................ 121,995 121,995 88,263 88,263
Long term debt.............................. 15,078 15,078 514,204 514,204
Numico related party debt, not practicable
to estimate fair value.................... 1,825,000 -- -- --
</Table>
F-30
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16. LONG-TERM LEASE OBLIGATIONS
The Company enters into operating leases covering its retail store
locations. The Company is the primary lessor of the majority of all leased
retail store locations and sublets the locations to individual franchisees. The
leases generally provide for an initial term of between five and ten years, and
may include renewal options for varying terms thereafter. The leases require
minimum monthly rental payments and a pro rata share of landlord allocated
common operating expenses. Most retail leases also require additional rentals
based on a percentage of sales in excess of specified levels ("Percent Rent").
According to the individual lease specifications, real estate taxes, insurance
and other related costs may be included in the rental payment or charged in
addition to rent. Other lease expenses relate to and include transportation
equipment, data processing equipment and distribution facilities.
The composition of the Company's rental expense for all periods presented
included the following components:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
---------------------------------- -------------
TWELVE MONTHS
ENDED DECEMBER 31, PERIOD ENDED 27 DAYS ENDED
------------------- DECEMBER 4, DECEMBER 31,
2001 2002 2003 2003
-------- -------- ------------ -------------
(IN THOUSANDS)
Retail stores:
Rent on long-term operating leases,
net of sublease income.............. $ 97,385 $101,261 $ 89,672 $ 7,104
Landlord related taxes................ 13,767 14,311 13,927 1,065
Common operating expenses............. 26,231 27,626 27,443 1,920
Percent rent.......................... 10,143 8,696 7,751 507
-------- -------- -------- -------
147,526 151,894 138,793 10,596
Truck fleet........................... 4,935 5,475 5,451 366
Other................................. 10,129 10,022 10,602 595
-------- -------- -------- -------
$162,590 $167,391 $154,846 $11,557
======== ======== ======== =======
</Table>
Minimum future obligations for non-cancelable operating leases with initial
or remaining terms of at least one year in effect at December 31, 2003 are as
follows:
<Table>
<Caption>
COMPANY FRANCHISE
RETAIL RETAIL SUBLEASE
STORES STORES OTHER INCOME CONSOLIDATED
-------- --------- ------- --------- ------------
(IN THOUSANDS)
2004........................... $ 91,691 $ 35,664 $ 7,510 $ (35,664) $ 99,201
2005........................... 75,096 30,716 5,175 (30,716) 80,271
2006........................... 61,065 23,938 2,428 (23,938) 63,493
2007........................... 46,247 16,333 1,759 (16,333) 48,006
2008........................... 31,880 9,348 1,270 (9,348) 33,150
Thereafter..................... 48,704 5,605 175 (5,605) 48,879
-------- -------- ------- --------- --------
$354,683 $121,604 $18,317 $(121,604) $373,000
======== ======== ======= ========= ========
</Table>
NOTE 17. INCOME TAX (EXPENSE)/BENEFITS
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-31
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities at
each respective period consisted of the following:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------ ------------
DECEMBER 31, DECEMBER 31,
2002 2003
------------ ------------
(IN THOUSANDS)
Deferred tax:
Current assets/liabilities:
Operating reserves..................................... $ 3,504 $ --
Inventory capitalization............................... 2,463 4,603
Deferred revenue....................................... 7,977 11,343
Interest............................................... 34,841 --
Other.................................................. 6,347 --
Valuation allowance.................................... (34,841) --
--------- -------
Total current.......................................... $ 20,291 $15,946
========= =======
Non-current assets/liabilities:
Intangibles............................................ $(252,701) $ (475)
Inventory capitalization............................... -- --
Stock based compensation............................... 11,051 --
Fixed assets........................................... (9,611) 11,629
Other.................................................. -- 4,135
--------- -------
Total non-current........................................... $(251,261) $15,289
========= =======
Total net deferred taxes.................................... $(230,970) $31,235
========= =======
</Table>
At December 31, 2002, the valuation allowance relates to tax assets that
were associated with the interest expense on the related party push down debt
that was only deductible in future years upon generation of sufficient taxable
income. As of December 31, 2002, GNCI believed, based on available evidence,
that it was more likely than not, that future taxable income would not be
sufficient to utilize these carryforwards, and the net deferred tax asset
related to the debt would not be fully realizable. As discussed in Note 9
Long-Term Debt, debt had been pushed down to GNCI from Nutricia as of December
31, 2002. This deferred tax asset relates to interest deductions recorded by
GNCI, but was a tax attribute of Nutricia. As a result of the acquisition of the
Company by Apollo, Numico has retained certain tax obligations. As of December
31, 2003, the Company believes, based on current available evidence, that it is
more likely than not, that future taxable income will be sufficient to utilize
the net deferred tax assets which have been adjusted to reflect the new basis of
accounting for both book and tax basis.
F-32
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax (expense)/ benefits for all periods consisted of the following
components:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
---------------------------------- ------------
TWELVE MONTHS ENDED 27 DAYS
DECEMBER 31, PERIOD ENDED ENDED
------------------- DECEMBER 4, DECEMBER 31,
2001 2002 2003 2003
-------- -------- ------------ ------------
Current:
Federal.............................. $ (8,834) $(43,637) $ (22,145) $(420)
State................................ (1,536) (2,267) (1,006) (18)
-------- -------- ------------ -----
(10,370) (45,904) (23,151) (438)
Deferred:
Federal.............................. 32,060 40,856 218,770 202
State................................ 1,936 4,052 12,904 8
-------- -------- ------------ -----
33,996 44,908 231,674 210
Valuation allowance.................... (9,527) -- (34,045) --
-------- -------- ------------ -----
Total.................................. $ 14,099 $ (996) $ 174,478 $(228)
======== ======== ============ =====
</Table>
The following table summarizes the differences between the Company's
effective tax rate for financial reporting purposes and the federal statutory
tax rate.
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------------------------ ------------
TWELVE MONTHS
ENDED PERIOD 27 DAYS
DECEMBER 31, ENDED ENDED
--------------- DECEMBER 4, DECEMBER 31,
2001 2002 2003 2003
----- ----- ------------ ------------
Percent of pretax earnings:
Statutory federal tax rate................ 35.0% 35.0% 35.0% 35.0%
Increase/(decrease):
Goodwill amortization, impairment......... (4.6)% (37.6)% (9.6)% 0.0%
State income tax, net of federal tax
benefit................................ 1.0% 0.8% 0.5% 0.6%
Other....................................... 2.4% 0.4% 1.6% 3.6%
Valuation allowance......................... (13.6)% 0.0% (4.5)% 0.0%
----- ----- ---- ----
Effective income tax rate................... 20.2% (1.4)% 23.0% 39.2%
===== ===== ==== ====
</Table>
NOTE 18. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is engaged in various legal actions, claims and complaints
arising out of the normal course of business. Potential exposures resulting from
the Company's business activities include breach of contracts, product
liabilities, intellectual property matters and employment related issues. As is
inherent with such actions, an estimation of any possible and or ultimate
liability cannot be determined at the present time. The Company is currently of
the opinion that the amount of any potential liability resulting from these
actions, when taking into consideration the Company's general and product
liability coverage, as a named insured of Numico, will not have a material
adverse impact on its financial position, results of operations or liquidity.
F-33
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that, among other things, the use of its products
results in injury. To summarize the product liability coverage as of December
31, 2003, the Company, has a primary products liability policy of $1.0 million
per occurrence and a $10.0 million aggregate cap on the retained losses,
followed by an additional umbrella liability insurance coverage. There can be no
assurances that such insurance will continue to be available at a reasonable
cost, or if available will be adequate to cover liabilities.
As part of the purchase agreement between the Company and Numico, Numico
has agreed to indemnify the Company for various claims arising out of litigation
incurred prior to the Company purchasing GNCI.
The Company places "best by" dates on its product labels; however, there is
no state or federal requirement that any such date appear on the labels. The
Florida Attorney General became concerned that there may be expired product in
certain of the Florida stores beyond the "best buy" dates and instituted an
investigation of the Company. This investigation has concluded with a payment to
the Florida Attorney General's Office in the amount of $1.0 million, reinforced
communications to the stores of the Company's return policies and the procedures
to ensure that past dated products are removed from the shelves. After the
Florida Attorney General's investigation was concluded, substantially identical
class action lawsuits were filed in the state courts of the States of Florida,
Connecticut and Pennsylvania alleging that the Company engaged in a continuous
practice of including false and misleading "best by" dates on product labels
and/or selling products after the expiration of the purported "best by" dates.
By agreement of the parties, the Connecticut and Pennsylvania actions have been
stayed pending the outcome of the Florida case. The Florida case was submitted
to mediation but no resolution was obtained. The Company is currently of the
opinion that the amount of any potential liability resulting from these actions
will not have a material adverse impact on its financial statements, results of
operations or liquidity. Furthermore, in connection with the acquisition, the
Company is also entitled to indemnification by Numico and Nutricia for these
actions alleging the purchase of expired product.
In November 2001, a former store manager brought a case on behalf of
himself and a purported class of other similarly situated California store
employees alleging that those California employees were not properly paid
overtime wages. In October 2003, an amended complaint was filed adding another
plaintiff as well as claims for failure to provide meal periods and rest periods
from managers at our company-owned stores. This case is in the discovery phase
and will be vigorously defended. The Company is currently of the opinion that
the amount of any potential liability resulting from this action will not have a
material adverse impact on its financial statements, results of operations or
liquidity.
Beginning in 1997, several franchisees brought a purported class actions
against GNCI alleging, among other things, certain deceptive trade practices and
unreasonable wholesale prices for inventory sold to franchisees. On October 26,
2001 resolution was reached on these three class actions. The major terms of the
settlement include: (1) product purchase credits for GNC proprietary product,
(2) payment of Plaintiffs attorneys fees, and (3) several changes to the
operation of GNCI's franchise system. All of the franchisee class actions were
fully dismissed in October 2002.
On July 29, 2001, subsequently identical class actions were filed in the
state courts of Florida, New York, New Jersey, Pennsylvania and Illinois against
GNCI and various manufacturers of products containing pro-hormones, including
androstendione. Plaintiffs allege that the Company has distributed or published
periodicals that contain advertisements claiming that various pro-hormone
products promote muscle growth. The complaint alleges that GNCI knew the
advertisements and label claims promoting muscle growth were false, but
nonetheless continued to sell the products to consumers. GNCI has tendered these
cases to the various manufacturers for defense and indemnification. Based upon
the information available to the Company at the present time, the Company
believes that these matters will not have a material adverse effect upon the
liquidity, financial condition or results of operations.
F-34
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's manufacturing subsidiary was a plaintiff in a lawsuit brought
in Federal Court seeking direct damages against various raw material suppliers
for allegedly selling raw materials at artificially inflated prices. These
claims have been resolved and have resulted in a recovery to the Company, net of
attorney fees, which is primarily the amount reflected in other income in the
accompanying financial statements for the years ended December 31, 2003, 2002
and 2001, respectively.
The Company and/or one of its subsidiaries are currently named as
defendants in numerous lawsuits alleging damages from the ingestion of products
containing ephedra. These cases have been tendered to the various suppliers of
those products for indemnification and defense pursuant to certain vendor
supplier agreements. The outcome of this litigation is uncertain and taking into
consideration the available product liability coverage, no provisions have been
made in the consolidated financial statements for any possible loss.
Furthermore, in connection with the Acquisition, the Company is also entitled to
indemnification by Numico and Nutricia for certain losses arising from all
claims related to products containing ephedra.
COMMITMENTS
The Company maintains certain purchase commitments with various vendors to
ensure its operational needs are fulfilled. Future commitments related to
information technology equipment, services and maintenance agreements as of
December 31, 2003 totaled $1.2 million and various purchase commitments with
third-party vendors of $30.3 million. Other commitments related to the Company's
business operations cover varying periods of time and are not significant. All
of these commitments are expected to be fulfilled with no adverse consequences
to the Company's operations or financial condition.
CONTINGENCIES
Due to the nature of the Company's business operations having a presence in
multiple taxing jurisdictions, the Company periodically receives inquiries
and/or audits from various state and local taxing authorities. Any probable and
reasonably estimable liabilities that may arise from these inquiries have been
accrued and reflected in the accompanying financial statements. In conjunction
with the Acquisition by Apollo, certain other contingencies will be indemnified
by Numico.
NOTE 19. BUSINESS COMBINATIONS
For the period ended December 4, 2003 and the twelve months ended December
31, 2002 and 2001, GNCI acquired 58, 61 and 131 stores, respectively, from
non-corporate, franchisee store locations. These acquisitions were accounted for
utilizing the purchase method of accounting, and GNCI recorded total costs
associated with these acquisitions of $3.2, $4.1 and $21.9 million for the
period ended December 4, 2003 and the twelve months ended December 31, 2002 and
2001, respectively. Goodwill associated with these purchases of $0.9, $1.7 and
$14.1 million was recognized in the consolidated financial statements for the
period ended December 4, 2003 and the twelve months ended December 31, 2002 and
2001, respectively. For the 27 days ended December 31, 2003, the Company
recorded $0.1 million in acquisition costs.
NOTE 20. STOCKHOLDER'S EQUITY
In connection with the Acquisition by Apollo on December 5, 2003, the
Company issued 1,000 shares of common stock with a par value of $.01. The stock
is owned 100% by the Company's parent GNCH. GNCH also contributed $277.5 million
in additional paid in capital in conjunction with the acquisition.
In connection with the prior acquisition by NIC and subsequent merger into
Nutricia, GNCI issued 100 shares of common stock, par value $.01 in August 1999.
All shares were outstanding as of December 31, 2002. Nutricia also had
contributed $691.0 million of additional paid in capital in 1999.
F-35
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 21. STOCK-BASED COMPENSATION PLANS
STOCK OPTIONS
On December 5, 2003 the Board of Directors of the Company's parent, General
Nutrition Centers Holding Company approved and adopted the General Nutrition
Centers Holding Company 2003 Omnibus Stock Incentive Plan (the "Plan"). The
purpose of the Plan is to enable the Company to attract and retain highly
qualified personnel who will contribute to the success of the Company. The Plan
provides for the granting of stock options, stock appreciation rights,
restricted stock, deferred stock and performance shares. The Plan is available
to certain eligible employees as determined by the Board of Directors of GNCH.
The total number of shares of common stock reserved and available for the Plan
is 4.0 million shares of GNCH. The stock options carry a four year vesting
schedule and expire after seven years from date of grant. As of December 31,
2003 the number of stock options granted at fair value is 2.6 million. No stock
appreciation rights, restricted stock, deferred stock or performance shares were
granted under the Plan as of December 31, 2003. The weighted average fair value
of options granted under the Plan was $2.40 per share.
The following table outlines the total stock options granted, effective on
December 5, 2003:
<Table>
<Caption>
WEIGHTED
AVERAGE
TOTAL EXERCISE
OPTIONS PRICE
--------- --------
Outstanding at December 31, 2002............................ -- $ --
Granted December 5, 2003.................................. 2,604,974 6.00
Forfeited................................................. -- --
--------- -----
Outstanding at December 31, 2003............................ 2,604,974 $6.00
========= =====
</Table>
The Company has adopted the disclosure requirements of SFAS No. 148, but
has elected to continue to measure compensation expense using the intrinsic
value method for accounting for stock-based compensation as outlined by APB No.
25. In accordance with SFAS No. 148, pro forma information regarding net income
is required to be disclosed as if the Company had accounted for its employee
stock options using the fair value method of SFAS No. 123. Refer to the Summary
of Significant Accounting Policies for this disclosure. There were no options
vested or exercisable under the Plan at December 31, 2003.
Fair value information for the Plan was estimated using the Black-Scholes
option-pricing model based on the following assumptions for the options granted
in 2003:
<Table>
<Caption>
2003
-------
Dividend yield.............................................. 0.00%
Expected option life........................................ 5 years
Volatility factor percentage of market price................ 40.00%
Discount rate............................................... 3.27%
</Table>
Because the Black-Scholes option valuation model utilizes certain estimates
and assumptions, the existing models do not necessarily represent the definitive
fair value of options for future periods.
PREDECESSOR:
During 1999 and 2000, the Executive Board of Numico, under approval of the
Supervisory Board, had granted certain key employees of GNCI options to purchase
depository receipts of Numico shares under the Numico Share Option Plan ("Numico
Plan"). These options were granted with an exercise price determined by the
Numico Executive Board. The difference between the exercise price of the option
and the fair market value of Numico's common shares on the date of the option
grant was expensed ratably over the option vesting period. These amounts were
not material for the years ended December 31, 2002 and 2001. The
F-36
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Numico Plan options expire five years after the date of grant and became vested
and exercisable after three years from the date of grant. The Numico Plan
options became fully vested in 2003, and remain a liability of Numico.
Following is a table outlining the total number of shares that were granted
under the Numico Plan:
<Table>
<Caption>
WEIGHTED
AVERAGE
TOTAL EXERCISE
OPTIONS PRICE
------- --------
Outstanding at December 31, 2000............................ 742,000 $39.27
Exercised................................................. (17,332) 37.15
Forfeited................................................. (90,668) 40.10
------- ------
Outstanding at December 31, 2001............................ 634,000 40.22
Exercised................................................. --
Forfeited................................................. (99,000) 40.91
------- ------
Outstanding at December 31, 2002............................ 535,000 40.09
Exercised................................................. --
Forfeited................................................. --
------- ------
Outstanding at December 4, 2003............................. 535,000 $40.09
======= ======
</Table>
The weighted average fair value of the Numico Plan options granted in 2000
was $15.25 per share. For the years ended December 31, 2002 and 2001, GNCI
adopted the disclosure requirements of SFAS No. 123, but elected to continue to
measure compensation expense using the intrinsic value method for accounting for
stock-based compensation as outlined by APB No. 25. In accordance with SFAS No.
123, pro forma information regarding net income is required to be disclosed as
if GNCI had accounted for its employee stock options using the fair value method
of SFAS No. 123. Refer to the Summary of Significant Accounting Policies for
this disclosure. The number of options exercisable under the Numico Plan at
December 31, 2002 and December 4, 2003 was 240,000 and 535,000, respectively.
Fair value information for the Numico Plan stock options was estimated using the
Black-Scholes option-pricing model based on the following assumptions for the
options granted in 2000:
<Table>
<Caption>
2000
-------
Dividend yield.............................................. 1.75%
Expected option life........................................ 5 years
Volatility factor percentage of market price................ 33.25%
Discount rate............................................... 6.52%
</Table>
Because the Black-Scholes option valuation model utilizes certain estimates
and assumptions, the existing models do not necessarily represent the definitive
fair value of options for future periods. No options were granted in 2003, 2002
or 2001.
NUMICO STOCK APPRECIATION RIGHTS
As was previously approved by the Executive Board of Numico, stock
appreciation rights ("SARs") were granted to certain employees of GNCI. The SARs
provided for a payment in cash or stock equal to the excess of the fair market
value of a common share, when the SAR was exercised, over the grant price. GNCI
granted 262,500 and 306,000 SARs to key employees under the Stock Appreciation
Rights Plan in 2001 and 2002, respectively. SARs expire no later than five years
after the date of grant and became exercisable three years from the grant date.
As the grant price of the SARs has exceeded the fair value of Numico common
F-37
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock since the date of grant, no compensation expense was recognized for the
years presented in the accompanying financial statements.
In June 2003, GNCI granted an additional 321,000 SARs to key employees
under the above plan. These SARs had a three year vesting life and become fully
vested upon change in control of GNCI. Due to the Acquisition , GNCI recorded
$3.8 million in compensation expense related to these SARs for the period ended
December 4, 2003 as the SAR's became fully vested upon the change in control as
a result of the Acquisition.
<Table>
<Caption>
WEIGHTED
AVERAGE
TOTAL EXERCISE
SARS PRICE
------- --------
Outstanding at December 31, 2000............................ --
Grants.................................................... 262,500 $23.66
Exercised................................................. --
Forfeited................................................. --
-------
Outstanding at December 31, 2001............................ 262,500 23.66
Grants.................................................... 306,000 24.04
Exercised................................................. --
Forfeited................................................. (60,500)
-------
Outstanding at December 31, 2002............................ 508,000 23.89
Grants.................................................... 321,000 11.83
Exercised................................................. --
Forfeited................................................. --
-------
Outstanding at December 4, 2003............................. 829,000 $19.22
=======
</Table>
NUMICO MANAGEMENT STOCK PURCHASE PLAN
In accordance with the Numico Management Stock Purchase Plan ("MSPP") and
to encourage key employees of the GNCI to own shares of Numico common stock,
options to purchase shares of Numico common stock in an amount up to 200% of the
participant's base salary were granted on January 21, 2000. These options were
exercisable on January 21, 2000. Upon exercise, Numico extended a recourse loan
to the participants at an annual interest rate of 6.0%, to match on a two for
one basis the amount of the participant's own investment to purchase additional
shares. According to the MSPP, 50% of the loan balance was to be forgiven if the
participant remained employed with GNCI through August 10, 2002. The remaining
50% of the loan balance was to be forgiven by Numico if the participant remained
employed by GNCI through January 21, 2003 and certain operating performance
goals were met as outlined in the MSPP. If the participant was involuntarily
terminated without cause, the loan forgiveness was to be prorated in accordance
with the plan. Compensation expense was initially being recognized each period
based on an estimate of the amount of loan forgiveness earned by the
participants during the period. Total pre-tax compensation expense, net of loan
repayments, of $7.1 million was recognized for the year ended December 31, 2000.
The MSPP was subsequently amended in 2001 and 2002 to waive the performance
obligations and extend the date of the forgiveness for the entire loan. As a
result of the 2001 amendments, the loans were considered to have been converted
to non-recourse loans and the remaining loan balance of $14.6 million was
recognized as compensation expense for the year ended December 31, 2001. For the
year ended December 31, 2002, a recovery of loan forgiveness of $2.0 million was
recognized as a result of participants terminating from GNCI.
F-38
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 2003 Numico granted certain participants the right to a cash bonus
in an amount adequate to reimburse them for 50% of their initial cash investment
and to cover their tax liability related to this reimbursement and the loan
forgiveness. This bonus was payable on January 5, 2005, regardless of whether
the participant remains employed by GNCI. The accrued liability was adjusted
each period, based on the best available information, to the amount expected to
be paid. This adjustment in the calculation of the amount payable cannot result
in an amount exceeding a "break even point"; therefore, participants will only
be made whole in their investment and will not receive compensation in excess of
their original invested amount and associated tax liability. Based upon the
current Numico stock price at December 4, 2003, GNCI recorded no net
compensation expense for the period ended December 4, 2003. In conjunction with
the Acquisition, the plan was assumed by Numico.
NOTE 22. RELATED PARTY TRANSACTIONS
SUCCESSOR:
During the normal course of operations, for the 27 days ended December 31,
2003 the Company entered into transactions with entities that were under common
ownership and control of GNCH, the Company's immediate parent. In accordance
with SFAS No. 57, "Related Party Disclosures", the nature of these material
transactions is described in the following footnotes.
MANAGEMENT SERVICE FEES. As of December 5, 2003 the Company entered into a
management services agreement with GNCH and Apollo. The agreement provides that
Apollo furnish certain investment banking, management, consulting, financial
planning, and financial advisory and investment banking services on an ongoing
basis and for any significant financial transactions that may be undertaken in
the future. The length of the agreement is ten years. There is an annual general
services fee of $1.5 million which is payable in monthly installments. There are
also major transaction services fees for services that Apollo may provide which
would be based on normal and customary fees of like kind. The purchase agreement
also contained a structuring and transaction services fee related to the
acquisition. This fee amounted to $7.5 million and was accrued for at December
31, 2003.
PREDECESSOR:
During the normal course of operations, for the period ended December 4,
2003 and the twelve months ended December 31, 2002 and 2001 GNCI entered into
transactions with entities that were under common ownership and control of
Numico. In accordance with SFAS No. 57, "Related Party Disclosures", the nature
of these material transactions is described below. During 2003, Rexall and
Unicity ceased to be related parties as their operations were sold by Numico.
Transactions recorded with these companies prior to their sale dates are
included in related party transactions.
SALES. GNCI recorded net sales of $18.7, $44.3 and $46.1 million to Numico
affiliated companies for the period ended December 4, 2003 and the twelve months
ended December 31, 2002 and 2001, respectively. These amounts were included in
the Manufacturing/Wholesale segment of the business.
COST OF SALES. Included in cost of sales were purchases from Numico
affiliated companies of $130.9, $198.7 and $111.1 million for the period ended
December 4, 2003 and the twelve months ended December 31, 2002 and 2001,
respectively. A significant portion of these purchases related to raw material
and packaging material purchases from Nutraco S.A., a purchasing subsidiary of
Numico. Included in the above totals were additional purchases from another
related party in the amounts of $28.8, $35.2 and $46.3 million for the period
ended December 4, 2003 and the twelve months ended December 31, 2002 and 2001,
respectively.
TRANSPORTATION REVENUE. GNCI operated a fleet of distribution vehicles
that service delivery of product to company-owned and franchise locations. GNCI
also delivered product for a related party. GNCI recorded
F-39
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts associated with these transportation services for the period ended
December 4, 2003 and the twelve months ended December 31, 2002 and 2001, of
$1.4, $2.4 and $1.6 million, respectively as a reduction of its transportation
costs.
MANAGEMENT SERVICE FEES. According to the terms of a management service
agreement that began in 2002 between GNCI and Nutricia, Nutricia charged $13.2
million of costs which were included in selling, general and administrative
expenses for the year ended December 31, 2002. The fees included charges for
strategic planning, certain information technology, product and material
management, group business process, human resources, legal, tax, regulatory and
management reporting. There were no fees allocated to GNCI for the period ended
December 4, 2003.
RESEARCH AND DEVELOPMENT. GNCI incurred $0.1, $1.5 and $0.4 million of
research and development costs from US affiliates for the period ended December
4, 2003 and the twelve months ended December 31, 2002 and 2001, respectively. In
accordance with the previous Research Activities Agreement with Numico, also
included in selling, general and administrative expenses for the period ended
December 4, 2003 and the twelve months ended December 31, 2002 and 2001 were
costs related to research and development charged by Numico. The agreement
provided that Numico conduct research and development activities including but
not limited to: ongoing program of scientific and medical research, support and
advice on strategic research objectives, design and develop new products,
organize and manage clinical trials, updates on the latest technological and
scientific developments, and updates on regulatory issues. These charges totaled
$5.0, $4.6 and $4.9 million for the period ended December 4, 2003 and the twelve
months ended December 31, 2002 and 2001, respectively.
INSURANCE. For the period ended December 4, 2003 and the twelve months
ended December 31, 2002 and 2001, in order to reduce costs and mitigate
duplicate insurance coverage, GNCI's ultimate parent, Numico, purchased certain
global insurance policies covering several types of insurance. GNCI received
charges for their portion of these costs. These charges totaled $2.9, $2.6 and
$1.2 million for the period ended December 4, 2003 and the twelve months ended
December 31, 2002 and 2001, respectively.
SHARED SERVICE PERSONNEL COSTS. GNCI provided certain risk management, tax
and internal audit services to other affiliates of Numico. The payroll and
benefit costs associated with these services were reflected on GNCI's financial
statements and were not allocated to any affiliates. Total costs related to
shared services absorbed by GNCI was $1.2 million for the period ended December
4, 2003 and the twelve months ended December 31, 2002 and 2001, respectively.
GNCI also incurred costs related to management services provided for the benefit
of all U.S. affiliates. These costs totaled $1.1, $2.7 and $2.6 million for the
period ended December 4, 2003 and the twelve months ended December 31, 2002 and
2001, respectively. GNCI received certain management services related to the
affiliation between GNCI and its U.S. parent, Nutricia and its ultimate parent,
Numico. These services were not significant to GNCI's operations.
DUE FROM AND TO RELATED PARTIES. Included with other current assets were
amounts on deposit with Numico Financial Services S.A., a subsidiary of Numico.
Numico Financial Services S.A. represented the financing entity of Numico and
served as a cash concentration center for Numico subsidiaries and affiliates.
GNCI had $70.6 and $1.4 million on deposit as of December 4, 2003 and December
31, 2002, respectively, with Numico Financial Services S.A. There were no
amounts on deposit at December 31, 2001.
F-40
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As discussed above, GNCI had amounts due from and due to several related
parties. Following is a table summarizing the amount due from and due to related
parties for the following periods, excluding the related party term loan
described in Note 9:
<Table>
<Caption>
DECEMBER 31, 2002
---------------------------------
DUE FROM DUE TO
RELATED PARTIES RELATED PARTIES
--------------- ---------------
(IN THOUSANDS)
Numico.................................................... $ -- $(29,459)
Numico USA................................................ -- --
Numico Financial Services................................. 1,370 --
Nutraco................................................... -- (44,363)
Rexall.................................................... 9,042 (8,133)
Unicity................................................... 999 (1,853)
Other..................................................... 647 (233)
------- --------
Total..................................................... $12,058 $(84,041)
======= ========
</Table>
There were no related party amounts as of December 31, 2003.
NOTE DUE TO RELATED PARTY. As of December 31, 2001, GNCI had a short term
note payable to a related party resulting from an intercompany loan. The note
balance at December 31, 2001 was $42.3 million and was a non-interest bearing
note. The entire note balance was settled by December 31, 2002.
NOTE 23. SEGMENTS
The following operating segments represent identifiable components of the
Company for which separate financial information is available. This information
is utilized by management to assess performance and allocate assets accordingly.
The Company's management evaluates segment operating results based on several
indicators. The primary key performance indicators are sales and operating
income or loss for each segment. Operating income or loss, as evaluated by
management, excludes certain items that are managed at the consolidated level,
such as distribution and warehousing, corporate overhead, impairments and other
corporate costs. The following table represents key financial information for
each of the Company's business segments, identifiable by the distinct operations
and management of each: Retail, Franchising, and Manufacturing/Wholesale. The
Retail segment includes the Company's corporate store operations in the United
States and Canada. The Franchise segment represents the Company's franchise
operations, both domestically and internationally. The Manufacturing/Wholesale
segment represents the Company's manufacturing operations in South Carolina and
Australia and the Wholesale sales business. This segment supplies the Retail and
Franchise segments, along with various third parties, with finished products for
sale. The Warehousing and Distribution, Corporate Overhead, and Other
Unallocated Costs represent the Company's administrative expenses. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
F-41
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table represents key financial information of the Company's
business segments:
<Table>
<Caption>
PREDECESSOR
-------------------------------------- SUCCESSOR
TWELVE MONTHS ENDED -------------
DECEMBER 31, PERIOD ENDED 27 DAYS ENDED
----------------------- DECEMBER 4, DECEMBER 31,
2001 2002 2003 2003
---------- ---------- ------------ -------------
Revenues:
Retail................................... $1,123,150 $1,068,637 $ 993,283 $ 66,177
Franchise................................ 273,134 256,076 241,301 14,186
Manufacturing/Wholesale:
Intersegment(A)....................... 159,039 149,439 151,137 9,907
Third Party........................... 112,860 100,263 105,625 8,925
---------- ---------- ---------- ----------
Sub total Manufacturing/Wholesale..... 271,899 249,702 256,762 18,832
Sub total segment revenues............... 1,668,183 1,574,415 1,491,346 99,195
Intersegment elimination(A)........... (159,039) (149,439) (151,137) (9,907)
---------- ---------- ---------- ----------
Total revenues........................ $1,509,144 $1,424,976 $1,340,209 $ 89,288
========== ========== ========== ==========
Operating income (loss):
Retail................................... $ 89,251 $ 86,770 $ 79,105 $ 6,546
Franchise................................ 46,360 65,372 63,660 2,427
Manufacturing/Wholesale.................. 29,892 25,786 24,270 1,426
---------- ---------- ---------- ----------
Sub total segment operating income....... 165,503 177,928 167,035 10,399
Unallocated corporate and other costs:
Warehousing & distribution costs...... 40,914 40,337 40,654 3,393
Corporate overhead costs.............. 54,617 63,895 66,768 3,651
Impairment of goodwill and intangible
assets.............................. -- 222,000 709,367 --
Legal settlement income............... -- (214,417) (11,480) --
---------- ---------- ---------- ----------
Sub total unallocated corporate and
other costs......................... 95,531 111,815 805,309 7,044
---------- ---------- ---------- ----------
Total operating income (loss)......... 69,972 66,113 (638,274) 3,355
Interest expense, net...................... (139,930) (136,353) (121,125) (2,773)
(Loss) income before income taxes.......... (69,958) (70,240) (759,399) 582
Income tax benefit (expense)............... 14,099 (996) 174,478 (228)
---------- ---------- ---------- ----------
Net (loss) income before cumulative effect
of accounting change..................... $ (55,859) $ (71,236) $ (584,921) $ 354
========== ========== ========== ==========
Depreciation & amortization:
Retail................................... $ 71,168 $ 38,699 $ 41,475 $ 1,444
Franchise................................ 31,278 4,668 3,199 163
Manufacturing/Wholesale.................. 18,309 13,330 12,718 469
Corp/Other............................... 1,322 1,300 1,659 177
---------- ---------- ---------- ----------
Total depreciation & amortization..... $ 122,077 $ 57,997 $ 59,051 $ 2,253
========== ========== ========== ==========
</Table>
F-42
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
PREDECESSOR
-------------------------------------- SUCCESSOR
TWELVE MONTHS ENDED -------------
DECEMBER 31, PERIOD ENDED 27 DAYS ENDED
----------------------- DECEMBER 4, DECEMBER 31,
2001 2002 2003 2003
---------- ---------- ------------ -------------
Capital expenditures:
Retail................................... $ 21,458 $ 35,177 $ 20,780 $ 455
Franchise................................ 48 16 -- --
Manufacturing/Wholesale.................. 5,222 9,033 4,746 1,075
Corp/Other............................... 2,455 7,673 5,494 297
---------- ---------- ---------- ----------
Total capital expenditures............ $ 29,183 $ 51,899 $ 31,020 $ 1,827
========== ========== ========== ==========
Total assets:
Retail................................... $1,568,247 $ 884,541 $ 400,594 $ 424,645
Franchise................................ 1,103,286 671,616 316,497 362,748
Manufacturing/Wholesale.................. 357,043 260,413 193,199 137,105
Corp/Other............................... 43,201 61,740 127,799 94,369
---------- ---------- ---------- ----------
Total assets.......................... $3,071,777 $1,878,310 $1,038,089 $1,018,867
========== ========== ========== ==========
GEOGRAPHIC AREAS
Total revenues:
United States............................ $1,465,186 $1,379,176 $1,290,732 $ 84,605
Foreign.................................. 43,958 45,800 49,477 4,683
---------- ---------- ---------- ----------
Total revenues........................ $1,509,144 $1,424,976 $1,340,209 $ 89,288
========== ========== ========== ==========
Long-lived assets:
United States............................ $2,591,862 $1,287,474 $ 498,862 $ 555,550
Foreign.................................. 11,816 11,221 7,362 11,164
---------- ---------- ---------- ----------
Total long-lived assets............... $2,603,678 $1,298,695 $ 506,224 $ 566,714
========== ========== ========== ==========
</Table>
- ---------------
(A) Intersegment revenues are eliminated from the consolidated revenue line.
NOTE 24. SUPPLEMENTAL UNAUDITED PRO FORMA INFORMATION
The following unaudited pro forma information for the combined twelve
months ended December 31, 2003 and the year ended December 31, 2002 assumes that
the Acquisition of the Company had occurred as of January 1, 2002. The pro forma
amounts include adjustments related to depreciation, amortization, interest
expense, and certain other management fees, research and development,
transaction fees, directors fees and inventory adjustments. The tax effects of
the pro forma adjustments have been reflected at the Company's blended federal
and state income tax rate of 36.5%.
The pro forma results are not necessarily indicative of the results that
would have occurred and are not intended to provide a forecast of future
expected results.
<Table>
<Caption>
COMBINED PRO FORMA
TWELVE MONTHS TWELVE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2003 2003
------------- -------------
Revenue................................................... $1,429,497 $1,429,497
Net loss before cumulative effect of accounting change.... (584,567) (504,725)
---------- ----------
Net loss.................................................. $ (584,567) $ (504,725)
========== ==========
</Table>
F-43
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
PRO FORMA
TWELVE TWELVE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2002 2002
------------ ------------
Revenue................................................... $1,424,976 $1,424,976
Net loss before cumulative effect of accounting change.... (71,236) 21,197
---------- ----------
Loss from cumulative effect of accounting change.......... (889,621) (889,621)
---------- ----------
Net loss.................................................. $ (960,857) $ (868,424)
========== ==========
</Table>
NOTE 25. SUPPLEMENTAL GUARANTOR INFORMATION
As of December 31, 2003 the Company's debt includes the senior credit
facility and the 8 1/2% senior subordinated notes. The senior credit facility
has been guaranteed by the Company's parent GNCH and its domestic subsidiaries.
The senior subordinated notes are general unsecured obligations and are
guaranteed on a senior subordinated basis by certain of the Company's domestic
subsidiaries and rank secondary to the Company's senior credit facility.
Guarantor subsidiaries include the Company's direct and indirect domestic
subsidiaries as of the respective balance sheet dates. Non-Guarantor
subsidiaries include the remaining direct and indirect foreign subsidiaries. The
subsidiary guarantors are 100% owned by the Company, the guarantees are full and
unconditional, and the guarantees are joint and several.
Following are condensed consolidated financial statements of the Company
and the combined guarantor subsidiaries for the 27 days ended December 31, 2003.
The guarantor subsidiaries are presented in a combined format as their
individual operations are not material to the Company's consolidated financial
statements. Investments in subsidiaries are either consolidated or accounted for
under the equity method of accounting. Also following are condensed consolidated
financial statements for GNCI for the period ended December 4, 2003 and the
twelve months ended December 31, 2002 and 2001. Intercompany balances and
transactions have been eliminated.
For the twelve months ended December 31, 2001 and 2002 and the period ended
December 4, 2003, the Parent company is GNCI (Predecessor). For the 27 days
ended December 31, 2003, the Parent/Issuer company is General Nutrition Centers,
Inc. (Successor).
F-44
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
<Table>
<Caption>
COMBINED COMBINED
PARENT/ GUARANTOR NON-GUARANTOR
SUCCESSOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
DECEMBER 31, 2003 -------- ------------ ------------- ------------ ------------
Current assets
Cash and equivalents........... $ -- $ 30,642 $ 2,534 $ -- $ 33,176
Accounts receivable............ 12,711 74,066 1,207 -- 87,984
Intercompany receivable........ 18,750 3,848 -- (22,598) --
Inventory, net................. -- 242,367 13,633 -- 256,000
Other current assets........... -- 40,544 2,882 -- 43,426
Total current assets........ 31,461 391,467 20,256 (22,598) 420,586
Property, plant and equipment.... -- 173,483 27,797 -- 201,280
Investment in subsidiaries....... 736,448 2,099 -- (738,547) --
Goodwill......................... -- 82,112 977 -- 83,089
Brands........................... -- 209,000 3,000 -- 212,000
Other assets..................... 19,796 90,563 333 (8,780) 101,912
-------- -------- ------- --------- ----------
Total assets................ $787,705 $948,724 $52,363 $(769,925) $1,018,867
======== ======== ======= ========= ==========
Current liabilities
Other current liabilities...... $ 12,399 $202,480 $ 5,662 $ -- $ 220,541
Intercompany payable........... -- -- 22,598 (22,598) --
Total current liabilities... 12,399 202,480 28,260 (22,598) 220,541
Long-term debt................... 497,150 -- 22,004 (8,780) 510,374
Other long-term liabilities...... -- 9,796 -- -- 9,796
Total (deficit) equity...... 278,156 736,448 2,099 (738,547) 278,156
-------- -------- ------- --------- ----------
Total liabilities and
stockholder's (deficit)
equity.................... $787,705 $948,724 $52,363 $(769,925) $1,018,867
======== ======== ======= ========= ==========
</Table>
F-45
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
<Table>
<Caption>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PREDECESSOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
DECEMBER 31, 2002 ---------- ------------ ------------- ------------ ------------
Current assets
Cash and equivalents........ $ -- $ 27,327 $11,438 $ -- $ 38,765
Accounts receivable......... 1,370 205,987 977 -- 208,334
Intercompany receivable..... 725,842 -- -- (725,842) --
Inventory, net.............. -- 273,662 11,960 -- 285,622
Other current assets........ -- 44,450 2,667 -- 47,117
Total current assets..... 727,212 551,426 27,042 (725,842) 579,838
Property, plant and
equipment................... -- 257,108 27,530 -- 284,638
Investment in subsidiaries.... 604,036 9,848 -- (613,884) --
Goodwill...................... -- 248,250 588 -- 248,838
Brands........................ -- 648,918 17,082 -- 666,000
Other assets.................. -- 107,508 268 (8,780) 98,996
---------- ---------- ------- ----------- ----------
Total assets............. $1,331,248 $1,823,058 $72,510 $(1,348,506) $1,878,310
========== ========== ======= =========== ==========
Current liabilities
Other current liabilities... $ 175,000 $ 246,905 $ 4,359 $ -- $ 426,264
Intercompany payable........ -- 689,496 36,346 (725,842) --
Total current
liabilities............ 175,000 936,401 40,705 (725,842) 426,264
Long-term debt................ 1,650,000 -- 22,952 (8,780) 1,664,172
Other long-term liabilities... -- 282,621 (995) -- 281,626
Total (deficit) equity... (493,752) 604,036 9,848 (613,884) (493,752)
---------- ---------- ------- ----------- ----------
Total liabilities and
stockholder's (deficit)
equity................. $1,331,248 $1,823,058 $72,510 $(1,348,506) $1,878,310
========== ========== ======= =========== ==========
</Table>
F-46
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<Table>
<Caption>
COMBINED COMBINED
PARENT/ GUARANTOR NON-GUARANTOR
SUCCESSOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
27 DAYS ENDED DECEMBER 31, 2003 ------- ------------ ------------- ------------ ------------
Revenue............................. $ -- $95,987 $5,424 $(12,123) $89,288
Cost of sales, including costs of
warehousing, distribution and
occupancy......................... -- 71,702 4,001 (12,123) 63,580
----- ------- ------ -------- -------
Gross profit................... -- 24,285 1,423 -- 25,708
Compensation and related benefits... -- 15,804 915 -- 16,719
Advertising and promotion........... -- 475 39 -- 514
Other selling, general and
administrative.................... -- 4,912 186 -- 5,098
Subsidiary loss (income)............ (496) (81) -- 577 --
Other (income) expense.............. -- (18) 40 -- 22
----- ------- ------ -------- -------
Operating income (loss)............. 496 3,112 243 (496) 3,355
Interest (expense) income, net...... (224) (2,429) (120) -- (2,773)
(Loss)/income before income
taxes.......................... 272 683 123 (496) 582
Income tax benefit/(expense) (Note
17)............................... 82 (268) (42) -- (228)
----- ------- ------ -------- -------
Net income (loss)................... $ 354 $ 415 $ 81 $ (496) $ 354
===== ======= ====== ======== =======
</Table>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<Table>
<Caption>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PREDECESSOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
JANUARY 1, 2003 - DECEMBER 4, 2003 --------- ------------ ------------- ------------ ------------
Revenue.......................... $ -- $1,431,275 $ 60,071 $(151,137) $1,340,209
Cost of sales, including costs of
warehousing, distribution and
occupancy...................... -- 1,040,118 45,879 (151,137) 934,860
--------- ---------- -------- --------- ----------
Gross profit................ 391,157 14,192 -- 405,349
Compensation and related
benefits....................... -- 224,968 10,022 -- 234,990
Advertising and promotion........ -- 38,274 139 -- 38,413
Other selling, general and
administrative................. -- 73,122 (2,184) -- 70,938
Subsidiary loss (income)......... 584,921 10,380 -- (595,951) --
Other income..................... -- (5,810) (4,275) -- (10,085)
Impairment of goodwill and
intangible assets.............. -- 692,314 17,053 -- 709,367
--------- ---------- -------- --------- ----------
Operating income (loss).......... (584,921) (631,711) (6,563) 584,921 (638,274)
Interest (expense) income, net... -- (119,502) (1,623) -- (121,125)
(Loss)/income before income
taxes....................... (584,921) (751,213) (8,186) 584,921 (759,399)
Income tax benefit/(expense) (Note
17)............................ -- 177,122 (2,644) -- 174,478
--------- ---------- -------- --------- ----------
Net income (loss)................ $(584,921) $ (574,091) $(10,830) $ 584,921 $ (584,921)
========= ========== ======== ========= ==========
</Table>
F-47
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<Table>
<Caption>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PREDECESSOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
TWELVE MONTHS ENDED DECEMBER 31, 2002 --------- ------------ ------------- ------------ ------------
Revenue........................... $ -- $1,516,248 $ 58,167 $(149,439) $1,424,976
Cost of sales, including costs of
warehousing, distribution and
occupancy....................... -- 1,076,364 42,983 (149,439) 969,908
--------- ---------- -------- --------- ----------
Gross profit................. -- 439,884 15,184 -- 455,068
Compensation and related benefits... -- 235,777 9,388 -- 245,165
Advertising and promotion......... -- 51,862 164 -- 52,026
Other selling, general and
administrative.................. -- 83,067 2,981 -- 86,048
Subsidiary loss (income).......... 960,857 30,610 -- (991,467) --
Other income...................... -- (216,275) (9) -- (216,284)
Impairment of goodwill and intangible
assets.......................... -- 212,694 9,306 -- 222,000
--------- ---------- -------- --------- ----------
Operating income (loss)........... (960,857) 72,759 (6,646) 960,857 66,113
Interest (expense) income, net.... -- (133,444) (2,909) -- (136,353)
(Loss)/income before income taxes.. (960,857) (60,685) (9,555) 960,857 (70,240)
Income tax benefit/(expense) (Note
17)............................. -- (535) (461) -- (996)
--------- ---------- -------- --------- ----------
Net (loss)/income before cumulative
effect of accounting change..... (960,857) (61,220) (10,016) 960,857 (71,236)
Loss from cumulative effect of
accounting change, net of tax... -- (869,027) (20,594) -- (889,621)
--------- ---------- -------- --------- ----------
Net loss.......................... $(960,857) $ (930,247) $(30,610) $ 960,857 $ (960,857)
========= ========== ======== ========= ==========
</Table>
F-48
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<Table>
<Caption>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PREDECESSOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
TWELVE MONTHS ENDED DECEMBER 31, 2001 -------- ------------ ------------- ------------ ------------
Revenue............................ $ -- $1,611,469 $56,714 $(159,039) $1,509,144
Cost of sales, including costs of
warehousing, distribution and
occupancy........................ -- 1,130,134 42,297 (159,039) 1,013,392
-------- ---------- ------- --------- ----------
Gross profit.................. -- 481,335 14,417 -- 495,752
Compensation and related benefits... -- 237,711 8,928 -- 246,639
Advertising and promotion.......... -- 41,752 118 -- 41,870
Other selling, general and
administrative................... -- 136,756 3,991 -- 140,747
Subsidiary loss (income)........... 55,859 1,997 -- (57,850) --
Other (income) expense............. -- (3,859) 383 -- (3,476)
-------- ---------- ------- --------- ----------
Operating (loss) income............ (55,859) 68,975 997 55,859 69,972
Interest (expense) income, net..... -- (137,024) (2,906) -- (139,930)
(Loss)/income before income taxes.. (55,859) (68,049) (1,909) 55,859 (69,958)
Income tax benefit/(expense) (Note
17).............................. -- 14,187 (88) -- 14,099
-------- ---------- ------- --------- ----------
Net (loss) income.................. $(55,859) $ (53,862) $(1,997) $ 55,859 $ (55,859)
======== ========== ======= ========= ==========
</Table>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
<Table>
<Caption>
COMBINED COMBINED
PARENT/ GUARANTOR NON-GUARANTOR
SUCCESSOR ISSUER SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
27 DAYS ENDED DECEMBER 31, 2003 --------- ------------ ------------- ------------
Net cash from operating activities.......... $ (19,363) $24,139 $ (88) $ 4,688
Cash flows from investing activities:
Acquisition of General Nutrition
Companies, Inc......................... (738,117) -- -- (738,117)
Capital expenditures...................... -- (1,822) (5) (1,827)
Other investing........................... -- (57) -- (57)
--------- ------- ------ ---------
Net cash from investing activities.......... (738,117) (1,879) (5) (740,001)
Cash flows from financing activities:
General Nutrition Centers Holding Company
investment in General Nutrition
Centers, Inc........................... 277,500 -- -- 277,500
Borrowing from senior credit facility..... 285,000 -- -- 285,000
Proceeds from senior subordinated notes... 215,000 -- -- 215,000
Other financing........................... (20,020) 1,735 -- (18,285)
--------- ------- ------ ---------
Net cash from financing activities.......... 757,480 1,735 -- 759,215
Effect of exchange rates on cash............ -- -- (152) (152)
Net increase (decrease) in cash and cash
equivalents............................... -- 23,995 (245) 23,750
Cash and cash equivalents at beginning of
period.................................... -- 6,647 2,779 9,426
--------- ------- ------ ---------
Cash and cash equivalents at end of
period.................................... $ -- $30,642 $2,534 $ 33,176
========= ======= ====== =========
- -----------------------------------------------------------------------------------------------------
</Table>
F-49
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PREDECESSOR PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
PERIOD ENDED DECEMBER 4, 2003 -------- ------------ ------------- ------------
Net cash from operating activities........... $ -- $ 99,755 $(6,887) $ 92,868
Cash flows from investing activities:
Capital expenditures....................... -- (30,069) (951) (31,020)
Store acquisition costs.................... -- (3,193) -- (3,193)
Investment distribution.................... 91,794 (91,794) -- --
Other investing............................ -- 2,706 54 2,760
-------- --------- ------- --------
Net cash from investing activities........... 91,794 (122,350) (897) (31,453)
Cash flows from financing activities:
Payments on long-term debt-related party... (91,794) -- -- (91,794)
Other financing............................ -- 1,915 (887) 1,028
-------- --------- ------- --------
Net cash from financing activities........... (91,794) 1,915 (887) (90,766)
Effect of exchange rates on cash............. -- -- 12 12
Net increase (decrease) in cash and cash
equivalents................................ -- (20,680) (8,659) (29,339)
Cash and cash equivalents at beginning of
period..................................... -- 27,327 11,438 38,765
-------- --------- ------- --------
Cash and cash equivalents at end of period... $ -- $ 6,647 $ 2,779 $ 9,426
======== ========= ======= ========
</Table>
<Table>
<Caption>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PREDECESSOR PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
TWELVE MONTHS ENDED DECEMBER 31, 2002 -------- ------------ ------------- ------------
Net cash from operating activities........... $ -- $ 99,326 $11,709 $111,035
Cash flows from investing activities:
Capital expenditures....................... -- (49,936) (1,963) (51,899)
Proceeds from sale of marketable
securities.............................. -- 7,443 -- 7,443
Other investing............................ -- (1) -- (1)
-------- -------- ------- --------
Net cash from investing activities........... -- (42,494) (1,963) (44,457)
Cash flows from financing activities:
Payments on short-term debt-related
party................................... -- (42,341) -- (42,341)
Other financing............................ -- (1,112) (847) (1,959)
-------- -------- ------- --------
Net cash from financing activities........... -- (43,453) (847) (44,300)
Effect of exchange rates on cash............. -- -- 175 175
Net increase (decrease) in cash and cash
equivalents................................ -- 13,379 9,074 22,453
Cash and cash equivalents at beginning of
period..................................... -- 13,948 2,364 16,312
-------- -------- ------- --------
Cash and cash equivalents at end of period... $ -- $ 27,327 $11,438 $ 38,765
======== ======== ======= ========
</Table>
F-50
GENERAL NUTRITION CENTERS INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PREDECESSOR PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
TWELVE MONTHS ENDED DECEMBER 31, 2001 -------- ------------ ------------- ------------
Net cash from operating activities........... $ -- $ 73,860 $ 1,944 $ 75,804
Cash flows from investing activities:
Capital expenditures....................... -- (27,338) (1,845) (29,183)
Store acquisition costs.................... -- (21,863) -- (21,863)
Investment distribution.................... 50,000 (50,000) -- --
Other investing............................ -- 2,800 99 2,899
-------- -------- ------- --------
Net cash from investing activities........... 50,000 (96,401) (1,746) (48,147)
Cash flows from financing activities:
Payments on long-term debt-related party... (50,000) -- -- (50,000)
Short-term borrowings-related party........ -- 62,341 -- 62,341
Payments on short-term debt-related
party................................... -- (20,000) -- (20,000)
Decrease in cash overdrafts................ -- (12,797) -- (12,797)
Other financing............................ -- (339) (793) (1,132)
-------- -------- ------- --------
Net cash from financing activities........... (50,000) 29,205 (793) (21,588)
Effect of exchange rates on cash............. -- -- (231) (231)
Net increase (decrease) in cash and cash
equivalents................................ -- 6,664 (826) 5,838
Cash and cash equivalents at beginning of
period..................................... -- 7,284 3,190 10,474
-------- -------- ------- --------
Cash and cash equivalents at end of period... $ -- $ 13,948 $ 2,364 $ 16,312
======== ======== ======= ========
</Table>
F-51
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$215,000,000
(GNC LOGO)
GENERAL NUTRITION CENTERS, INC.
8 1/2% SENIOR SUBORDINATED NOTES
DUE 2010
----------------------------
PROSPECTUS
--, 2004
----------------------------
UNTIL , 2004, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
THE DELAWARE ENTITIES -- GENERAL NUTRITION CENTERS, INC., GENERAL NUTRITION
COMPANIES, INC., GENERAL NUTRITION DISTRIBUTION COMPANY, GENERAL NUTRITION
GOVERNMENT SERVICES, INC., GENERAL NUTRITION INTERNATIONAL, INC., GENERAL
NUTRITION SYSTEMS, INC., GNC (CANADA) HOLDING COMPANY, GNC, LIMITED, GNC US
DELAWARE, INC. AND GN INVESTMENT, INC.
General Nutrition Centers, Inc., General Nutrition Companies, Inc., General
Nutrition Distribution Company, General Nutrition Government Services, Inc.,
General Nutrition International, Inc., General Nutrition Systems, Inc., GNC
(Canada) Holding Company, GNC, Limited, GNC US Delaware, Inc. and GN Investment,
Inc., which we refer to as the Delaware entities, are each Delaware
corporations, and as a Delaware corporation, are each subject to the Delaware
General Corporation Law ("DGCL") and the exculpation from liability and
indemnification provisions contained therein.
Section 145 of the DGCL provides that a corporation may indemnify directors
and officers as well as other employees and individuals against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with any
threatened, pending or completed actions, suits or proceedings in which such
person is made a party by reason of such person being or having been a director,
officer, employee or agent to the corporation. The DGCL provides that Section
145 is not exclusive of other rights to which those seeking indemnification may
be entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for any breach
of the director's duty of loyalty to the corporation or its stockholders, for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, for unlawful payments of dividends or unlawful stock
repurchases, redemptions or other distributions, or for any transaction from
which the director derived an improper personal benefit.
GENERAL NUTRITION CENTERS, INC.
Article Sixth of General Nutrition Centers, Inc.'s certificate of
incorporation provides that a director of General Nutrition Centers, Inc. shall
not be liable to General Nutrition Centers, Inc. or any of its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL or (iv) for any transaction from which the
director derived an improper personal benefit. In addition, Article VIII of the
bylaws of General Nutrition Centers, Inc. provides that the corporation shall
indemnify any person made party to any action or proceeding by reason of the
fact that such person is or was a director or officer of the corporation, or is
or was a director or officer of the corporation serving at the request of the
corporation as a director, officer, employee or agent of another entity, if such
person acted in good faith in a manner such person reasonably believed to be in
or not opposed to the best interests of the corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to believe such conduct
was unlawful. Any such person is also entitled to have the corporation pay by
General Nutrition Centers, Inc. the expenses incurred in defending in any
proceeding in advance of its final disposition.
Article VIII, Section 8 of the bylaws of General Nutrition Centers, Inc.
provides that the corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
corporation, or is or was serving at the corporation's request as a director,
officer, employee or agent of another entity against any liability incurred by
such person in any such capacity or arising out of
II-1
such person's status as such, whether or not the corporation would have the
power to indemnify such person against such liability under Article VIII of the
bylaws.
GENERAL NUTRITION COMPANIES, INC.
Article Eighth of the certificate of incorporation of General Nutrition
Companies, Inc. provides that the corporation shall indemnify to the full extent
permitted by applicable law any person made party to any action or proceeding by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another entity. Article Eighth also
provides that the corporation may purchase and maintain insurance on behalf of
any such person against any such liabilities asserted against or incurred by him
in any such capacity or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against any such liability
under Article Eighth.
Article Eleventh of the certificate of incorporation of General Nutrition
Companies, Inc. provides that no director of the corporation shall be liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or involving intentional misconduct or knowing violation of
law, (iii) under Section 174 of the DGCL, or (iv) for any transaction in which
the director received an improper personal benefit.
The bylaws of General Nutrition Companies, Inc. do not contain provisions
under which controlling persons, directors or officers of the registrant are
insured or indemnified in any manner against liability which such persons may
incur in such persons' capacity as such.
GENERAL NUTRITION DISTRIBUTION COMPANY
Article 10 of the certificate of incorporation of General Nutrition
Distribution Company provides that, to the fullest extent permitted by the DGCL,
a director of General Nutrition Distribution Company shall not be liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. The bylaws of General Nutrition Distribution Company do not
contain provisions under which controlling persons, directors or officers of the
registrant are insured or indemnified in any manner against liability which such
persons may incur in such persons' capacity as such.
GENERAL NUTRITION GOVERNMENT SERVICES, INC.
Article Seventh of the certificate of incorporation of General Nutrition
Government Services, Inc. provides that a director of General Nutrition
Government Services, Inc. shall not be personally liable to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except (i) for breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit. The bylaws of General Nutrition
Government Services, Inc. do not contain provisions under which controlling
persons, directors or officers of the registrant are insured or indemnified in
any manner against liability which such persons may incur in such persons'
capacity as such.
GENERAL NUTRITION INTERNATIONAL, INC.
Article 10 of the certificate of incorporation of General Nutrition
International, Inc. provides that, to the fullest extent permitted by the DGCL,
a director of General Nutrition International, Inc. shall not be liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. The bylaws of General Nutrition International, Inc. do not
contain provisions under which controlling persons, directors or officers of the
registrant are insured or indemnified in any manner against liability which such
persons may incur in such persons' capacity as such.
II-2
GENERAL NUTRITION SYSTEMS, INC.
Article 10 of the certificate of incorporation of General Nutrition
Systems, Inc. provides that a director of General Nutrition Systems, Inc. shall
not be personally liable to the corporation or its stockholders for breach of
fiduciary duty except for (i) any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a known violation of law, (iii)
under Section 174 of the DGCL, or (iv) any transaction from which the director
derived an improper personal benefit. In addition, Article 11 of the certificate
of incorporation of General Nutrition Systems, Inc. provides that the
corporation shall indemnify its officers, directors, employees and agents to the
full extent permitted by Section 145 of the DGCL.
The bylaws of General Nutrition Systems, Inc. do not contain provisions
under which controlling persons, directors or officers of the registrant are
insured or indemnified in any manner against liability which such persons may
incur in such persons' capacity as such.
GNC (CANADA) HOLDING COMPANY
Article Seventh of the certificate of incorporation of GNC (Canada) Holding
Company provides that a director of GNC (Canada) Holding Company shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director except for (i) any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
known violation of law, (iii) under Section 174 of the DGCL, or (iv) any
transaction from which the director derived an improper personal benefit. The
bylaws of GNC (Canada) Holding Company do not contain provisions under which
controlling persons, directors or officers of the registrant are insured or
indemnified in any manner against liability which such persons may incur in such
persons' capacity as such.
GNC, LIMITED
Article Seventh of the certificate of incorporation of GNC, Limited
provides that a director of GNC, Limited shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director except for (i) any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a known violation of law, (iii)
under Section 174 of the DGCL, or (iv) any transaction from which the director
derived an improper personal benefit. The bylaws of GNC, Limited do not contain
provisions under which controlling persons, directors or officers of the
registrant are insured or indemnified in any manner against liability which such
persons may incur in such persons' capacity as such.
GNC US DELAWARE, INC.
Article Eighth of the certificate of incorporation of GNC US Delaware, Inc.
provides that the corporation shall indemnify to the full extent permitted by
applicable law any person made or threatened to be made party to any action or
proceeding by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another entity. Article
Eighth also provides that the corporation may purchase and maintain insurance on
behalf of any such person against any such liabilities asserted against or
incurred by him in any such capacity or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against any
such liability under Article Eighth of the bylaws.
Article Eleventh of the certificate of incorporation of GNC US Delaware,
Inc. provides that no director of the corporation shall be liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or knowing violation
of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction in
which the director received an improper personal benefit.
II-3
The bylaws of GNC US Delaware, Inc. do not contain provisions under which
controlling persons, directors or officers of the registrant are insured or
indemnified in any manner against liability which such persons may incur in such
persons' capacity as such.
GN INVESTMENT, INC.
Article Eighth of the certificate of incorporation of GN Investment, Inc.
provides that the corporation shall indemnify to the full extent permitted by
applicable law any person made or threatened to be made party to any action or
proceeding by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another entity. Article
Eighth also provides that the corporation may purchase and maintain insurance on
behalf of any such person against any such liabilities asserted against or
incurred by him in any such capacity or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against any
such liability under Article Eighth of the bylaws.
Article Eleventh of the certificate of incorporation of GN Investment, Inc.
provides that no director of the corporation shall be liable to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the DGCL, or (iv) for any transaction in which the
director received an improper personal benefit.
The bylaws of GN Investment, Inc. do not contain provisions under which
controlling persons, directors or officers of the registrant are insured or
indemnified in any manner against liability which such persons may incur in such
persons' capacity as such.
THE PENNSYLVANIA ENTITIES -- GENERAL NUTRITION CORPORATION, GENERAL NUTRITION,
INCORPORATED, GENERAL NUTRITION DISTRIBUTION, L.P. AND GNC FRANCHISING, LLC
(F/K/A GNC FRANCHISING, INC.)
General Nutrition Corporation, General Nutrition, Incorporated are each
Pennsylvania corporations, and as a Pennsylvania corporation, are each subject
to the Pennsylvania Business Corporation Law ("PBCL"). GNC Franchising, LLC
(f/k/a GNC Franchising, Inc.) is a Pennsylvania limited liability company and as
a Pennsylvania limited liability company is subject to the Pennsylvania Limited
Liability Company Law ("PLLCL"). General Nutrition Distribution, L.P. is a
limited partnership and as a Pennsylvania limited partnership is subject to the
Pennsylvania Revised Limited Partnership Act ("RLPA").
Sections 1741 and 1742 of the PBCL provide that a corporation may
indemnify, under specified circumstances, persons who were or are directors,
officers or employees of the corporation or who served or serve other business
entities at the request of the corporation. Under these provisions, a person who
is wholly successful in defending a claim will be indemnified for any reasonable
expenses. To the extent a person is not successful in defending a claim,
reasonable expenses of the defense and any liability incurred are to be
indemnified under these provisions only where independent legal counsel or
another disinterested person selected by the board of directors determines that
such person acted in good faith and in a manner such person reasonably believed
to be in, or not opposed to, the best interests of the corporation, and in
addition with respect to any criminal action or proceeding, had no reasonable
cause to believe the conduct of such person was unlawful. Any expense incurred
with respect to any claim may be advanced by the corporation if the recipient
agrees to repay such amount if it is ultimately determined that such recipient
is not entitled to be indemnified.
Section 1746 of the PBCL provides that the indemnification provided for
therein shall not be deemed exclusive of any other rights to which those seeking
indemnification may otherwise be entitled. Section 1746 also provides for
increased indemnification protections for directors, officers and others.
Indemnification may be provided by Pennsylvania corporations in any case except
where the act or failure to act giving rise to the claim for indemnification is
determined by a court to have constituted willful misconduct or recklessness.
II-4
Section 1747 of the PBCL provides that a corporation shall have power to
purchase and maintain insurance on behalf of any person who is or was a
representative of the corporation or is or was serving at the request of the
corporation as a representative of another domestic or foreign corporation for
profit or not-for-profit, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against that liability under the
provisions of the PBCL described above.
Section 1713 of the PBCL also sets forth a framework whereby Pennsylvania
corporations, with the approval of the shareholders, may limit the personal
liability of directors for monetary damages except where the act or omission
giving rise to a claim constitutes self-dealing, willful misconduct or
recklessness. The section does not apply to a director's responsibility or
liability under a criminal or tax statute and may not apply to liability under
Federal statutes, such as the Federal securities laws.
Section 8945 of the PLLCL provides that, subject to such standards and
restrictions, if any, as are set forth in the operating agreement, a limited
liability company may and shall have the power to indemnify and hold harmless
any member or manager or other person from and against any and all claims and
demands whatsoever, except that indemnification shall not be made where the act
giving rise to the claim for indemnification is determined by a court to have
constituted willful misconduct or recklessness. Any such indemnification may be
granted for any action taken and may be made whether or not the company would
have the power to indemnify the person under any other provision of law except
as provided in section 8945 and whether or not the indemnified liability arises
or arose from any threatened, pending or completed action by or in the right of
the company.
Section 8945 of the PLLCL also provides that expenses incurred by a member,
manager or other person in defending any action or proceeding against which
indemnification may be made under section 8945 may be paid by the company in
advance of the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of such person to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
company.
Section 8510 of the RLPA provides that subject to any standards and
restrictions set forth in the partnership agreement, a limited partnership shall
have the power to indemnify and hold harmless any partner or other person from
and against any and all claims and demands whatsoever, except that
indemnification shall not be made where the act giving rise to the claim for
indemnification is determined by a court to have constituted willful misconduct
or recklessness. Any such indemnification may be granted for any action taken
and may be made whether or not the limited partnership would have the power to
indemnify the person under any other provision of law except as provided in
section 8510 and whether or not the indemnified liability arises or arose from
any threatened, pending or completed action by or in the right of the limited
partnership.
Section 8510 of the RLPA also provides that expenses incurred by a partner
or other person in defending any action or proceeding against which
indemnification may be made pursuant to section 8510 may be paid by the limited
partnership in advance of the final disposition of such action or proceeding
upon receipt of an undertaking by or on behalf of such person to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the limited partnership.
GENERAL NUTRITION CORPORATION
The articles of incorporation and the bylaws of General Nutrition
Corporation do not contain provisions under which controlling persons, directors
or officers of the registrant are insured or indemnified in any manner against
liability which such persons may incur in such persons' capacity as such.
GENERAL NUTRITION, INCORPORATED
The articles of incorporation and the bylaws of General Nutrition,
Incorporated do not contain provisions under which controlling persons,
directors or officers of the registrant are insured or indemnified in any manner
against liability which such persons may incur in such persons' capacity as
such.
II-5
GNC FRANCHISING, LLC (F/K/A GNC FRANCHISING, INC.)
The certificate of organization and the limited liability company operating
agreement of GNC Franchising, LLC (f/k/a GNC Franchising, Inc.) do not contain
provisions under which controlling persons, directors or officers of the
registrant are insured or indemnified in any manner against liability which such
persons may incur in such persons' capacity as such.
GENERAL NUTRITION DISTRIBUTION, L.P.
Section 19.1 of the agreement of limited partnership of General Nutrition
Distribution, L.P. provides that the partnership shall indemnify any partner (or
employee of a partner) against any liabilities losses, judgments, claims and/or
in connection with the defense of any action or proceeding action where the
person who was, is or is threatened to be named in the proceeding was named
because the person is or was a partner of the partnership (or an employee of the
same). Such indemnification is conditioned upon a finding by the majority vote
of the partnership that such person conducted himself in good faith, reasonably
believed that his conduct was in the partnership's best interest (or in the case
of conduct not in his official capacity, personally believed that his conduct
was not opposed to the partnership's best interest), and, in the case of a
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful.
THE ARIZONA ENTITIES -- GENERAL NUTRITION INVESTMENT COMPANY AND GENERAL
NUTRITION SALES CORPORATION
General Nutrition Investment Company and General Nutrition Sales
Corporation, which we refer to as the Arizona entities, are each Arizona
corporations, and as an Arizona corporation, are each subject to the Arizona
Revised Statutes ("A.R.S.").
Sections 10-850 to 10-858 of the A.R.S. grant a corporation broad powers to
indemnify any person in connection with legal proceedings made a party to a
proceeding by reason of his present or past status as an officer or director of
the corporation, provided that the person acted in good faith and in a manner he
reasonably believed to be in (when acting in an official capacity) or not
opposed to (when acting in all other circumstances) the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, except that no
indemnification may be made in connection with any action by or in the right of
the corporation, if such person is adjudged to be liable to the corporation, or
in connection with any proceeding charging improper personal benefit to the
person whether or not involving action in the person's official capacity, in
which the person was held liable on the basis that the personal benefit was
improperly received by the person. Indemnification by the corporation is
mandatory in the case of a director who was the prevailing party, on the merits
or otherwise, in the defense of any such proceeding, and also in the case of an
outside director against reasonable expenses incurred in connection with such a
proceeding (in advance of final disposition of the proceeding upon a specified
affidavit from the director), in either case subject to the limitations noted
above and to any limitations in the articles of incorporation.
The A.R.S. also gives a corporation power to purchase and maintain
insurance on behalf of an individual who is or was a director or officer of the
corporation or who, while a director or officer of the corporation, is or was
serving at the request of the corporation as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan or other entity,
against liability asserted against or incurred by the individual in that
capacity or arising from the individual's status as a director or officer,
whether or not the corporation would have power to indemnify or advance expenses
to the individual against the same liability under the indemnification
provisions of the A.R.S.
GENERAL NUTRITION INVESTMENT COMPANY
Article Eighth of the articles of incorporation of General Nutrition
Investment Company provides that the corporation shall indemnify to the full
extent permitted by applicable law, any person made or threatened to be made
party to any action or proceeding by reason of the fact that he is or was a
director, officer,
II-6
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another entity. Article
Eighth also provides that the corporation may purchase and maintain insurance on
behalf of any such person against any such liabilities asserted against or
incurred by him in any such capacity or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against any
such liability under Article Eighth of the articles of incorporation.
Article Eleventh of the articles of incorporation of General Nutrition
Investment Company provides that no director of the corporation shall be liable
to the corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for breach of the duty of
loyalty to the corporation or its shareholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
law, (iii) under Chapter 8 of the A.R.S., or (iv) for any transaction in which
the director received an improper personal benefit.
The bylaws of General Nutrition Investment Company do not contain
provisions under which controlling persons, directors or officers of the
registrant are insured or indemnified in any manner against liability which such
persons may incur in such persons' capacity as such.
GENERAL NUTRITION SALES CORPORATION
Article Eighth of the articles of incorporation of General Nutrition Sales
Corporation provides that the corporation shall indemnify to the full extent
permitted by applicable law any person made or threatened to be made party to
any action or proceeding by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
entity. Article Eighth also provides that the corporation may purchase and
maintain insurance on behalf of any such person against any such liabilities
asserted against or incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to indemnify
him against any such liability under Article Eighth of the articles of
incorporation.
Article Eleventh of the articles of incorporation of General Nutrition
Sales Corporation provides that no director of the corporation shall be liable
to the corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for breach of the duty of
loyalty to the corporation or its shareholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
law, (iii) under Chapter 8 of the A.R.S., or (iv) for any transaction in which
the director received an improper personal benefit.
The bylaws of General Nutrition Sales Corporation do not contain provisions
under which controlling persons, directors or officers of the registrant are
insured or indemnified in any manner against liability which such persons may
incur in such persons' capacity as such.
INFORMED NUTRITION, INC.
Informed Nutrition, Inc. is a Florida corporation. Section 607.0850(1) of
the Florida Business Corporation Act (the "FBCA") empowers a corporation to
indemnify any person who was or is a party to any proceeding (other than an
action by or in the right of the corporation) by reason of the fact that he or
she is or was a director, officer, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another entity, against liability incurred in connection with such
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his or her conduct was unlawful.
Section 607.0850(2) of the FBCA empowers a corporation to indemnify any
person who was or is a party to any proceeding by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth in the preceding paragraph,
against expenses and amounts paid in settlement not exceeding, in the judgment
of the board of directors, the estimated expenses of litigating the proceeding
to the conclusion, actually and reasonably incurred in connection with the
defense or settlement of the proceeding (including any appeal thereof), provided
that the person acted
II-7
under the standards set forth in the preceding paragraph. However, no
indemnification may be made for any claim, issue or matter as to which such
person is adjudged to be liable unless, and only to the extent that, the court
in which such proceeding was brought, or any other court of competent
jurisdiction, determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity.
Section 607.0850(3) of the FBCA provides that to the extent a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in the defense of any proceeding referred to in subsections (1) and
(2) of Section 607.0850 or in the defense of any claim, issue or matter therein,
he or she shall be indemnified against expenses actually and reasonably incurred
by him or her in connection therewith.
Subsection (4) provides that any indemnification under subsections (1) and
(2) of Section 607.0850, unless determined by a court, shall be made by the
corporation only as authorized in the specific case upon a determination by the
board of directors, a committee of the board of directors or independent legal
counsel, in accordance with subsection (4), that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
or she has met the applicable standard of conduct set forth in subsections (1)
and (2) of Section 607.0850.
Expenses incurred by a director or officer in defending a civil or criminal
proceeding may be paid by the corporation in advance of the final disposition
thereof upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it is ultimately determined that such director
or officer is not entitled to indemnification under Section 607.0850.
Section 607.0850(7) of the FBCA states that indemnification and advancement
of expenses are not exclusive and empowers the corporation to make any other
further indemnification or advancement of expenses of it directors, officers,
employees or agents under any bylaw, agreement, vote of shareholders or
disinterested directors or otherwise, for actions in an official capacity and in
other capacities while holding an office. However, a corporation cannot
indemnify or advance expenses if a judgment or other final adjudication
establishes that the actions or omissions to act of the director, officer,
employee or agent were material to the cause of action adjudicated and
constituted (a) a violation of criminal law (unless the director, officer,
employee or agent had reasonable cause to believe his or her conduct was lawful
or had no reasonable cause to believe his or her conduct was unlawful), (b) a
transaction from which the director, officer, agent or employee derived an
improper personal benefit, (c) in the case of a director, a circumstance where
the liability under Section 607.0834 of the FBCA (relating to unlawful
distributions) applies, or (d) willful misconduct or conscious disregard for the
best interests of the corporation in a proceeding by or in right of the
corporation to procure a judgment in its favor or in a proceeding by or in right
of a shareholder.
Section 607.0850(12) of the FBCA permits a corporation to purchase and
maintain insurance for a director, officer, employee or agent against any
liability incurred in his or her official capacity or arising out of his or her
status as such regardless of the corporation's power to indemnify him or her
against such liability under Section 607.0850.
The articles of incorporation and the bylaws of Informed Nutrition, Inc. do
not contain provisions under which controlling persons, directors or officers of
the registrant are insured or indemnified in any manner against liability which
such persons may incur in such persons' capacity as such.
NUTRA MANUFACTURING, INC. (F/K/A NUTRICIA MANUFACTURING USA, INC.)
Nutra Manufacturing, Inc. (f/k/a Nutricia Manufacturing USA, Inc.) is a
South Carolina corporation. Section 33-8-500 et seq. of the South Carolina
Business Corporation Act of 1988 (the "Act") provides a corporation with broad
powers and authority to indemnify its directors and officers and to purchase and
maintain insurance for such purposes and mandates the indemnification of a
corporation's directors under certain circumstances.
A corporation may indemnify an individual made a party to a proceeding
because he is or was a director against liability incurred in the proceeding if
he conducted himself in good faith, and he reasonably believed: (i) in the case
of conduct in his official capacity with the corporation, that his conduct was
in its best interest; and (ii) in all other cases, that his conduct was at least
not opposed to its best interest; and in the case of any
II-8
criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful. A corporation may not indemnify a director in connection with a
proceeding by or in the right of the corporation in which the director was
adjudged liable to the corporation, or in connection with any other proceeding
charging improper personal benefit to him, whether or not involving action in
his official capacity, in which he was adjudged liable on the basis that
personal benefit was improperly received by him.
A corporation may also purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee, or agent of the
corporation, or who, while a director, officer, employee, or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise, against liability asserted against or incurred by him in that
capacity or arising from his status as a director, officer, employee, or agent,
whether or not the corporation would have power to indemnify him against the
same liability under Section 33-8-510 or 33-8-520.
The articles of incorporation and the bylaws of Nutra Manufacturing, Inc.
do not contain provisions under which controlling persons, directors or officers
of the registrant are insured or indemnified in any manner against liability
which such persons may incur in such persons' capacity as such.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
ITEM 21(A). EXHIBITS.
<Table>
3.1 Certificate of Incorporation of Apollo GNC Holding, Inc.
(n/k/a General Nutrition Centers, Inc.), filed October 16,
2003.
3.2 Certificate of Amendment to the Certificate of Incorporation
of Apollo GNC Holding, Inc. (changing name to General
Nutrition Centers, Inc.), filed November 19, 2003.
3.3 By-laws of General Nutrition Centers, Inc.
3.4 Articles of Incorporation of General Nutrition,
Incorporated, filed October 28, 2003.
3.5 By-laws of General Nutrition, Incorporated.
3.6 Articles of Incorporation of General Nutrition Corporation,
filed October 28, 2003.
3.7 By-laws of General Nutrition Corporation.
3.8 Articles of Incorporation of Nutricia Manufacturing USA,
Inc. (n/k/a Nutra Manufacturing, Inc.), filed October 31,
2003.
3.9 Amendment to Articles of Incorporation of Nutricia
Manufacturing USA, Inc. (changing name to Nutra
Manufacturing, Inc.), filed March 25, 2004.
3.10 By-laws of Nutra Manufacturing, Inc.
3.11 Certificate of Organization of GNC Franchising, LLC, filed
December 31, 2003.
3.12 Limited Liability Company Operating Agreement of GNC
Franchising, LLC, dated January 1, 2004.
3.13 Certificate of Incorporation of GND Investment Company
(n/k/a General Nutrition International, Inc.), filed March
1, 1989.
3.14 Certificate Amendment to Certificate of Incorporation of GNC
Investment Company (changing name to General Nutrition
International, Inc.), filed April 12, 1990.
3.15 By-Laws of General Nutrition International, Inc.
3.16 Articles of Incorporation of General Nutrition Investment
Company, filed October 28, 2003.
3.17 By-Laws of General Nutrition Investment Company.
3.18 Certificate of Incorporation of General Nutrition Systems,
Inc., dated September 21, 1999.
3.19 By-Laws of General Nutrition Systems, Inc.
3.20 Certificate of Incorporation of General Nutrition
Distribution Company, filed September 29, 1992.
3.21 Certificate of Amendment to Certificate of Incorporation of
General Nutrition Distribution Company (changing name to
General Nutrition Services, Inc.), filed January 13, 1993.
3.22 Certificate of Amendment to Certificate of Incorporation of
General Nutrition Services, Inc. (changing name to General
Nutrition Distribution Company), filed February 1, 1998.
</Table>
II-9
<Table>
3.23 By-Laws of General Nutrition Distribution Company.
3.24 Certificate of Incorporation of GNC, Limited, filed April 3,
1996.
3.25 By-Laws of GNC, Limited.
3.26 Certificate of Incorporation of GNC (Canada) Holding
Company, filed April 3, 1996.
3.27 By-Laws of GNC (Canada) Holding Company.
3.28 Articles of Incorporation of Informed Nutrition, Inc., filed
November 16, 1995.
3.29 By-Laws of Informed Nutrition, Inc.
3.30 Certificate of Incorporation of General Nutrition Government
Services, Inc., filed August 14, 1996.
3.31 Certificate Amendment to Certificate of Incorporation of
General Nutrition Government Services, Inc. (changing name
to GN Government Oldco Services, Inc.), filed October 29,
2003.
3.32 Certificate Amendment to Certificate of Incorporation of GN
Government Oldco Services, Inc. (changing name to General
Nutrition Government Services, Inc.), filed November 7,
2003.
3.33 By-Laws of General Nutrition Government Services, Inc.
3.34 Certificate of Incorporation of GN Investment, Inc., filed
October 29, 2003.
3.35 By-Laws of GN Investment, Inc.
3.36 Articles of Incorporation of General Nutrition Sales
Corporation, filed October 28, 2003.
3.37 By-Laws of General Nutrition Sales Corporation.
3.38 Certificate of Incorporation of GNC US Delaware, Inc., filed
October 29, 2003.
3.39 By-Laws of GNC US Delaware, Inc.
3.40 Certificate of Limited Partnership of General Nutrition
Distribution, L.P., filed January 28, 1998.
3.41 Agreement of Limited Partnership of General Nutrition
Distribution, L.P., dated January 27, 1998.
3.42 Certificate of Incorporation of General Nutrition Companies,
Inc., dated October 29, 2003.
3.43 By-Laws of General Nutrition Companies, Inc.
4.1 Indenture, dated as of December 5, 2003 among General
Nutrition Centers, Inc., the Guarantors (as defined therein)
and U.S. Bank National Association, as trustee relating to
General Nutrition Centers, Inc.'s 8 1/2% Senior Subordinated
Notes due 2010.
4.2 Supplemental Indenture, dated as of April 6, 2004 among GNC
Franchising, LLC, General Nutrition Centers, Inc., the other
Guarantors (as defined in the Indenture referred to therein)
and U.S. Bank National Association, as trustee relating to
General Nutrition Centers, Inc.'s 8 1/2% Senior Subordinated
Notes due 2010.
4.3 Form of 8 1/2% Senior Subordinated Note due 2010.
4.4 Registration Rights Agreement, dated December 5, 2003 among
General Nutrition Centers, Inc., the guarantors listed on
Schedule I thereto and Lehman Brothers Inc., J.P. Morgan
Securities Inc. and UBS Securities LLC, as the initial
purchasers of the notes.
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel
to General Nutrition Centers, Inc., General Nutrition
Companies, Inc., General Nutrition Distribution Company,
General Nutrition Government Services, Inc., General
Nutrition International, Inc., General Nutrition Systems,
Inc., GNC (Canada) Holding Company, GNC, Limited, GNC US
Delaware, Inc. and GN Investment, Inc.
5.2 Opinion of Pepper Hamilton, LLP, counsel to General
Nutrition Corporation, General Nutrition Distribution, L.P.,
General Nutrition, Incorporated and GNC Franchising, LLC.
5.3 Opinion of Lewis and Roca LLP, counsel to General Nutrition
Investment Company and General Nutrition Sales Corporation.
5.4 Opinion of Holland & Knight LLP, counsel to Informed
Nutrition, Inc.
5.5 Opinion of Kennedy Covington Lobdell & Hickman, L.L.P.,
counsel to Nutra Manufacturing USA, Inc.
</Table>
II-10
<Table>
10.1 Credit Agreement, dated as of December 5, 2003 among General
Nutrition Centers Holding Company, General Nutrition
Centers, Inc., as borrower, the several other banks and
other financial institutions or entities from time to time
party thereto, Lehman Brothers Inc. and J.P. Morgan
Securities Inc., as joint lead arrangers and joint
bookrunners, JPMorgan Chase Bank, as syndication agent and
Lehman Commercial Paper Inc., as administrative agent.
10.2 Guarantee and Collateral Agreement, dated as of December 5,
2003, made by General Nutrition Centers Holding Company,
General Nutrition Centers, Inc. and certain of its
subsidiaries in favor of Lehman Commercial Paper Inc. as
administrative agent.
10.3 Form of Intellectual Property Security Agreement, dated as
of December 5, 2003 made in favor of Lehman Commercial Paper
Inc. as administrative agent.
10.4 Management Services Agreement, dated as of December 5, 2003,
by and among General Nutrition Centers, Inc., General
Nutrition Centers Holding Company and Apollo Management V,
L.P.
10.5 Mortgage, Assignment of Leases, Rents and Contracts,
Security Agreement and Fixture Filing from Gustine Sixth
Avenue Associates, Ltd. as Mortgagor to Allstate Life
Insurance Company as Mortgagee dated March 23, 1999.
10.6 Patent License Agreement, dated December 5, 2003, by and
between N.V. Nutricia and General Nutrition Corporation.
10.7 Patent License Agreement, dated December 5, 2003, by and
between N.V. Nutricia and General Nutrition Investment
Company.
10.8 Patent License Agreement, dated December 5, 2003, by and
between N.V. Nutricia and General Nutrition Investment
Company.
10.9 Patent License Agreement, dated December 5, 2003, by and
between N.V. Nutricia and General Nutrition Corporation.
10.10 Know-How License Agreement, dated December 5, 2003, by and
between N.V. Nutricia and General Nutrition Corporation.
10.11 Know-How License Agreement, dated December 5, 2003, by and
between Numico Research B.V. and General Nutrition
Investment Company.
10.12 Know-How License Agreement, dated December 5, 2003, by and
between General Nutrition Corporation and N.V. Nutricia.
10.13 Patent License Agreement, dated December 5, 2003, by and
between General Nutrition Investment Company and Numico
Research B.V.
10.14 GNC Live Well Later Non-Qualified Compensation Plan.
10.15 General Nutrition Centers Holding Company 2003 Omnibus Stock
Incentive Plan.
10.16 Employment Agreement, dated as of December 5, 2003 between
General Nutrition Centers, Inc., and Louis Mancini.
10.17 First Amendment to Employment Agreement, dated February 12,
2004 between General Nutrition Centers, Inc. and Louis
Mancini.
10.18 Employment Agreement, dated as of December 5, 2003 between
General Nutrition Centers, Inc., and David Heilman.
10.19 First Amendment to Employment Agreement, dated February 12,
2004 between General Nutrition Centers, Inc. and David
Heilman.
10.20 Employment Agreement, dated as of December 5, 2003 between
General Nutrition Centers, Inc., and Joseph Fortunato.
10.21 First Amendment to Employment Agreement, dated February 12,
2004 between General Nutrition Centers, Inc. and Joseph
Fortunato.
10.22 Employment Agreement, dated as of December 5, 2003 between
General Nutrition Centers, Inc. and Susan Trimbo.
10.23 Employment Agreement, dated as of December 5, 2003 between
General Nutrition Centers, Inc. and Reginald Steele.
12.1 Statement Regarding the Computation of Ratio of Earnings to
Fixed Charges for General Nutrition Centers, Inc.
</Table>
II-11
<Table>
21.1 Subsidiaries of General Nutrition Centers, Inc.
23.1 Consent of PricewaterhouseCoopers LLP relating to financial
statements of General Nutrition Companies, Inc.
23.2 Consent of PricewaterhouseCoopers LLP relating to financial
statements of General Nutrition Centers, Inc.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1).
23.4 Consent of Pepper Hamilton, LLP (included in Exhibit 5.2).
23.5 Consent of Lewis and Roca LLP (included in Exhibit 5.3).
23.6 Consent of Holland & Knight LLP (included in Exhibit 5.4).
23.7 Consent of Kennedy Covington Lobdell & Hickman, L.L.P.
(included in Exhibit 5.5).
24.1 Powers of Attorney (included in the signature pages to the
Registration Statement).
25.1 Statement of Eligibility and Qualification on Form T-1 of
U.S. Bank National Association, as trustee under the
Indenture for General Nutrition Centers, Inc.'s 8 1/2%
Senior Subordinated Notes due 2010.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Letter to Clients.
99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
</Table>
ITEM 21(B). FINANCIAL STATEMENT SCHEDULES.
VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO OTHER END OF
PERIOD EXPENSE CHARGES PERIOD
------------ ---------- -------- ----------
(IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Predecessor Twelve months ended December 31, 2001... $ 5,925 $ 5,702 $ (4,933) $ 6,694
Twelve months ended December 31, 2002... 6,694 15,668 (4,670) 17,692
Period ended December 4, 2003........... 17,692 3,074 (1,151) 19,615
- -----------------------------------------------------------------------------------------------------------
Successor 27 days ended December 31, 2003......... $19,615 $ 888 $ (5,513) $14,990
DEFERRED TAX VALUATION ALLOWANCE
Predecessor Twelve months ended December 31, 2001... $25,314 $ 9,527 $ -- $34,841
Twelve months ended December 31, 2002... 34,841 -- -- 34,841
Period ended December 4, 2003........... 34,841 34,045 -- 68,886
- -----------------------------------------------------------------------------------------------------------
Successor 27 days ended December 31, 2003......... $ -- $ -- $ -- $ --
INVENTORY RESERVES
Predecessor Twelve months ended December 31, 2001... $34,723 $21,316 $(28,293) $27,746
Twelve months ended December 31, 2002... 27,746 18,927 (31,961) 14,712
Period ended December 4, 2003........... 14,712 12,584 (10,729) 16,567
- -----------------------------------------------------------------------------------------------------------
Successor 27 days ended December 31, 2003......... $16,567 $ 2,804 $ (497) $18,874
</Table>
II-12
ITEM 22. UNDERTAKINGS
The undersigned registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(4) The undersigned registrants hereby undertake to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11, or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the registration statement through the date of responding to the
request.
(5) The undersigned registrants hereby undertake to supply by means of
a post-effective amendment all information concerning a transaction and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-13
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GENERAL NUTRITION CENTERS, INC.
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID R. HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer
(principal financial
officer)
By: /s/ CURTIS LARRIMER
------------------------------------
Name: Curt Larrimer
Title: Senior Vice President of
Finance and Corporate
Controller
(principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Director April 15, 2004
- ------------------------------------------------
Louis Mancini
/s/ PETER P. COPSES Director April 15, 2004
- ------------------------------------------------
Peter P. Copses
/s/ ANDREW S. JHAWAR Director April 15, 2004
- ------------------------------------------------
Andrew S. Jhawar
</Table>
II-14
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GEORGE G. GOLLEHER Director April 15, 2004
- ------------------------------------------------
George G. Golleher
/s/ MARY ELIZABETH BURTON Director April 15, 2004
- ------------------------------------------------
Mary Elizabeth Burton
/s/ ROBERT J. DINICOLA Director April 15, 2004
- ------------------------------------------------
Robert J. DiNicola
/s/ EDGARDO A. MERCADANTE Director April 15, 2004
- ------------------------------------------------
Edgardo A. Mercadante
/s/ JOSHUA J. HARRIS Director April 15, 2004
- ------------------------------------------------
Joshua J. Harris
/s/ JOSEPH HARCH Director April 15, 2004
- ------------------------------------------------
Joseph Harch
</Table>
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GENERAL NUTRITION COMPANIES, INC.
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director
(principal executive
officer)
By: /s/ DAVID HEILMAN
-----------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GENERAL NUTRITION CORPORATION
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-17
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GENERAL NUTRITION DISTRIBUTION COMPANY
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-18
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GENERAL NUTRITION DISTRIBUTION, L.P.
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-19
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GENERAL NUTRITION GOVERNMENT SERVICES,
INC.
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ >Officer, Secretary and Director
James Sander
</Table>
II-20
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GENERAL NUTRITION, INCORPORATED
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-21
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GENERAL NUTRITION INVESTMENT COMPANY
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-22
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GENERAL NUTRITION INTERNATIONAL, INC.
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-23
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GENERAL NUTRITION SALES CORPORATION
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-24
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GENERAL NUTRITION SYSTEMS, INC.
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-25
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GNC (CANADA) HOLDING COMPANY
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-26
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GNC FRANCHISING, LLC
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-27
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GNC, LIMITED
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-28
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GNC US DELAWARE, INC.
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-29
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
GN INVESTMENT, INC.
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-30
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
INFORMED NUTRITION, INC.
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-31
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, State of
Pennsylvania, on April 15, 2004.
NUTRA MANUFACTURING, INC.
By: /s/ LOUIS MANCINI
------------------------------------
Name: Louis Mancini
Title: Chief Executive Officer
and Director (principal
executive officer)
By: /s/ DAVID HEILMAN
------------------------------------
Name: David Heilman
Title: Executive Vice President
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
Each person whose signature to this registration statement appears below
hereby severally constitutes and appoints Louis Mancini and David Heilman, and
each of them singly, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for him or her and in his or
her name, place and stead, and in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to each such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS MANCINI Chief Executive Officer and April 15, 2004
- ------------------------------------------------ Director
Louis Mancini
/s/ DAVID HEILMAN Executive Vice President, Chief April 15, 2004
- ------------------------------------------------ Financial Officer and Director
David Heilman
/s/ JAMES SANDER Senior Vice President, Chief Legal April 15, 2004
- ------------------------------------------------ Officer, Secretary and Director
James Sander
</Table>
II-32
INDEX TO EXHIBITS
<Table>
3.1 Certificate of Incorporation of Apollo GNC Holding, Inc.
(n/k/a General Nutrition Centers, Inc.), filed October 16,
2003.
3.2 Certificate of Amendment to the Certificate of Incorporation
of Apollo GNC Holding, Inc. (changing name to General
Nutrition Centers, Inc.), filed November 19, 2003.
3.3 By-laws of General Nutrition Centers, Inc.
3.4 Articles of Incorporation of General Nutrition,
Incorporated, filed October 28, 2003.
3.5 By-laws of General Nutrition, Incorporated.
3.6 Articles of Incorporation of General Nutrition Corporation,
filed October 28, 2003.
3.7 By-laws of General Nutrition Corporation.
3.8 Articles of Incorporation of Nutricia Manufacturing USA,
Inc. (n/k/a Nutra Manufacturing, Inc.), filed October 31,
2003.
3.9 Amendment to Articles of Incorporation of Nutricia
Manufacturing USA, Inc. (changing name to Nutra
Manufacturing, Inc.), filed March 25, 2004.
3.10 By-laws of Nutra Manufacturing, Inc.
3.11 Certificate of Organization of GNC Franchising, LLC, filed
December 31, 2003.
3.12 Limited Liability Company Operating Agreement of GNC
Franchising, LLC, dated January 1, 2004.
3.13 Certificate of Incorporation of GND Investment Company
(n/k/a General Nutrition International, Inc.), filed March
1, 1989.
3.14 Certificate Amendment to Certificate of Incorporation of GNC
Investment Company (changing name to General Nutrition
International, Inc.), filed April 12, 1990.
3.15 By-Laws of General Nutrition International, Inc.
3.16 Articles of Incorporation of General Nutrition Investment
Company, filed October 28, 2003.
3.17 By-Laws of General Nutrition Investment Company.
3.18 Certificate of Incorporation of General Nutrition Systems,
Inc., dated September 21, 1999.
3.19 By-Laws of General Nutrition Systems, Inc.
3.20 Certificate of Incorporation of General Nutrition
Distribution Company, filed September 29, 1992.
3.21 Certificate of Amendment to Certificate of Incorporation of
General Nutrition Distribution Company (changing name to
General Nutrition Services, Inc.), filed January 13, 1993.
3.22 Certificate of Amendment to Certificate of Incorporation of
General Nutrition Services, Inc. (changing name to General
Nutrition Distribution Company), filed February 1, 1998.
3.23 By-Laws of General Nutrition Distribution Company.
3.24 Certificate of Incorporation of GNC, Limited, filed April 3,
1996.
3.25 By-Laws of GNC, Limited.
3.26 Certificate of Incorporation of GNC (Canada) Holding
Company, filed April 3, 1996.
3.27 By-Laws of GNC (Canada) Holding Company.
3.28 Articles of Incorporation of Informed Nutrition, Inc., filed
November 16, 1995.
3.29 By-Laws of Informed Nutrition, Inc.
3.30 Certificate of Incorporation of General Nutrition Government
Services, Inc., filed August 14, 1996.
3.31 Certificate Amendment to Certificate of Incorporation of
General Nutrition Government Services, Inc. (changing name
to GN Government Oldco Services, Inc.), filed October 29,
2003.
3.32 Certificate Amendment to Certificate of Incorporation of GN
Government Oldco Services, Inc. (changing name to General
Nutrition Government Services, Inc.), filed November 7,
2003.
3.33 By-Laws of General Nutrition Government Services, Inc.
</Table>
<Table>
3.34 Certificate of Incorporation of GN Investment, Inc., filed
October 29, 2003.
3.35 By-Laws of GN Investment, Inc.
3.36 Articles of Incorporation of General Nutrition Sales
Corporation, filed October 28, 2003.
3.37 By-Laws of General Nutrition Sales Corporation.
3.38 Certificate of Incorporation of GNC US Delaware, Inc., filed
October 29, 2003.
3.39 By-Laws of GNC US Delaware, Inc.
3.40 Certificate of Limited Partnership of General Nutrition
Distribution, L.P., filed January 28, 1998.
3.41 Agreement of Limited Partnership of General Nutrition
Distribution, L.P., dated January 27, 1998.
3.42 Certificate of Incorporation of General Nutrition Companies,
Inc., dated October 29, 2003.
3.43 By-Laws of General Nutrition Companies, Inc.
4.1 Indenture, dated as of December 5, 2003 among General
Nutrition Centers, Inc., the Guarantors (as defined therein)
and U.S. Bank National Association, as trustee relating to
General Nutrition Centers, Inc.'s 8 1/2% Senior Subordinated
Notes due 2010.
4.2 Supplemental Indenture, dated as of April 6, 2004 among GNC
Franchising, LLC, General Nutrition Centers, Inc., the other
Guarantors (as defined in the Indenture referred to therein)
and U.S. Bank National Association, as trustee relating to
General Nutrition Centers, Inc.'s 8 1/2% Senior Subordinated
Notes due 2010.
4.3 Form of 8 1/2% Senior Subordinated Note due 2010.
4.4 Registration Rights Agreement, dated December 5, 2003 among
General Nutrition Centers, Inc., the guarantors listed on
Schedule I thereto and Lehman Brothers Inc., J.P. Morgan
Securities Inc. and UBS Securities LLC, as the initial
purchasers of the notes.
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel
to General Nutrition Centers, Inc., General Nutrition
Companies, Inc., General Nutrition Distribution Company,
General Nutrition Government Services, Inc., General
Nutrition International, Inc., General Nutrition Systems,
Inc., GNC (Canada) Holding Company, GNC, Limited, GNC US
Delaware, Inc. and GN Investment, Inc.
5.2 Opinion of Pepper Hamilton, LLP, counsel to General
Nutrition Corporation, General Nutrition Distribution, L.P.,
General Nutrition, Incorporated and GNC Franchising, LLC.
5.3 Opinion of Lewis and Roca LLP, counsel to General Nutrition
Investment Company and General Nutrition Sales Corporation.
5.4 Opinion of Holland & Knight LLP, counsel to Informed
Nutrition, Inc.
5.5 Opinion of Kennedy Covington Lobdell & Hickman, L.L.P.,
counsel to Nutra Manufacturing USA, Inc.
10.1 Credit Agreement, dated as of December 5, 2003 among General
Nutrition Centers Holding Company, General Nutrition
Centers, Inc., as borrower, the several other banks and
other financial institutions or entities from time to time
party thereto, Lehman Brothers Inc. and J.P. Morgan
Securities Inc., as joint lead arrangers and joint
bookrunners, JPMorgan Chase Bank, as syndication agent and
Lehman Commercial Paper Inc., as administrative agent.
10.2 Guarantee and Collateral Agreement, dated as of December 5,
2003, made by General Nutrition Centers Holding Company,
General Nutrition Centers, Inc. and certain of its
subsidiaries in favor of Lehman Commercial Paper Inc. as
administrative agent.
10.3 Form of Intellectual Property Security Agreement, dated as
of December 5, 2003 made in favor of Lehman Commercial Paper
Inc. as administrative agent.
10.4 Management Services Agreement, dated as of December 5, 2003,
by and among General Nutrition Centers, Inc., General
Nutrition Centers Holding Company and Apollo Management V,
L.P.
10.5 Mortgage, Assignment of Leases, Rents and Contracts,
Security Agreement and Fixture Filing from Gustine Sixth
Avenue Associates, Ltd. as Mortgagor to Allstate Life
Insurance Company as Mortgagee dated March 23, 1999.
</Table>
<Table>
10.6 Patent License Agreement, dated December 5, 2003, by and
between N.V. Nutricia and General Nutrition Corporation.
10.7 Patent License Agreement, dated December 5, 2003, by and
between N.V. Nutricia and General Nutrition Investment
Company.
10.8 Patent License Agreement, dated December 5, 2003, by and
between N.V. Nutricia and General Nutrition Investment
Company.
10.9 Patent License Agreement, dated December 5, 2003, by and
between N.V. Nutricia and General Nutrition Corporation.
10.10 Know-How License Agreement, dated December 5, 2003, by and
between N.V. Nutricia and General Nutrition Corporation.
10.11 Know-How License Agreement, dated December 5, 2003, by and
between Numico Research B.V. and General Nutrition
Investment Company.
10.12 Know-How License Agreement, dated December 5, 2003, by and
between General Nutrition Corporation and N.V. Nutricia.
10.13 Patent License Agreement, dated December 5, 2003, by and
between General Nutrition Investment Company and Numico
Research B.V.
10.14 GNC Live Well Later Non-Qualified Compensation Plan.
10.15 General Nutrition Centers Holding Company 2003 Omnibus Stock
Incentive Plan.
10.16 Employment Agreement, dated as of December 5, 2003 between
General Nutrition Centers, Inc., and Louis Mancini.
10.17 First Amendment to Employment Agreement, dated February 12,
2004 between General Nutrition Centers, Inc. and Louis
Mancini.
10.18 Employment Agreement, dated as of December 5, 2003 between
General Nutrition Centers, Inc., and David Heilman.
10.19 First Amendment to Employment Agreement, dated February 12,
2004 between General Nutrition Centers, Inc. and David
Heilman.
10.20 Employment Agreement, dated as of December 5, 2003 between
General Nutrition Centers, Inc., and Joseph Fortunato.
10.21 First Amendment to Employment Agreement, dated February 12,
2004 between General Nutrition Centers, Inc. and Joseph
Fortunato.
10.22 Employment Agreement, dated as of December 5, 2003 between
General Nutrition Centers, Inc. and Susan Trimbo.
10.23 Employment Agreement, dated as of December 5, 2003 between
General Nutrition Centers, Inc. and Reginald Steele.
12.1 Statement Regarding the Computation of Ratio of Earnings to
Fixed Charges for General Nutrition Centers, Inc.
21.1 Subsidiaries of General Nutrition Centers, Inc.
23.1 Consent of PricewaterhouseCoopers LLP relating to financial
statements of General Nutrition Companies, Inc.
23.2 Consent of PricewaterhouseCoopers LLP relating to financial
statements of General Nutrition Centers, Inc.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1).
23.4 Consent of Pepper Hamilton, LLP (included in Exhibit 5.2).
23.5 Consent of Lewis and Roca LLP (included in Exhibit 5.3).
23.6 Consent of Holland & Knight LLP (included in Exhibit 5.4).
23.7 Consent of Kennedy Covington Lobdell & Hickman, L.L.P.
(included in Exhibit 5.5).
</Table>
<Table>
24.1 Powers of Attorney (included in the signature pages to the
Registration Statement).
25.1 Statement of Eligibility and Qualification on Form T-1 of
U.S. Bank National Association, as trustee under the
Indenture for General Nutrition Centers, Inc.'s 8 1/2%
Senior Subordinated Notes due 2010.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Letter to Clients.
99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
</Table>