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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
.
 Commission File Number: 333-144396
 GENERAL NUTRITION CENTERS, INC.
  Delaware
    
    72-1575168(State or other jurisdiction of
    
    (I.R.S. EmployerIncorporation or organization)
    
    Identification No.)300 Sixth Avenue
    
    15222Pittsburgh, Pennsylvania
    
    (Zip Code)(Address of principal executive offices)
 (412) 288-4600
 o þ
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



TABLE OF CONTENTS
 PAGEPART I  FINANCIAL INFORMATIONExplanatory Note.Item 1.
    
    Financial Statements.Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008
    
    
    1Unaudited Consolidated Statements of Operations and Comprehensive Income for the
three and nine months ended September 30, 2009 and 2008.
    
    
    2Unaudited Consolidated Statement of Stockholders Equity for the nine months ended
September 30, 2009
    
    
    3Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 2009 and 2008
    
    
    4Summarized Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    33Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk.
    
    
    48Item 4.
    
    Controls and Procedures.
    
    
    49PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings.
    
    
    50Item 1A.
    
    Risk Factors.
    
    
    55Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    64Item 3.
    
    Defaults Upon Senior Securities.
    
    
    64Item 4.
    
    Submission of Matters to a Vote of Security Holders.
    
    
    64Item 5.
    
    Other Information.
    
    
    64Item 6.
    
    Exhibits.
    
    
    64Signatures
    
    
    65EX-31.1EX-31.2EX-32.1




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets  (in thousands, except share data)
 September 30,
    
    
    December 31,2009
    
    
    2008 *(unaudited)Current assets:Cash and cash equivalents
    
    $
    64,559
    
    
    $
    42,307Receivables, net
    
    
    96,805
    
    
    
    89,413Inventories, net (Note 3)
    
    
    376,659
    
    
    
    363,654Deferred tax assets, net
    
    
    3,566
    
    
    
    11,455Prepaids and other current assets
    
    
    30,967
    
    
    
    47,952Total current assets
    
    
    572,556
    
    
    
    554,781Long-term assets:Goodwill (Note 4)
    
    
    624,725
    
    
    
    622,909Brands (Note 4)
    
    
    720,000
    
    
    
    720,000Other intangible assets, net (Note 4)
    
    
    156,641
    
    
    
    163,176Property, plant and equipment, net
    
    
    200,572
    
    
    
    206,154Deferred financing fees, net
    
    
    19,463
    
    
    
    22,470Other long-term assets
    
    
    4,044
    
    
    
    2,518Total long-term assets
    
    
    1,725,445
    
    
    
    1,737,227Total assets
    
    $
    2,298,001
    
    
    $
    2,292,008Current liabilities:Accounts payable
    
    $
    102,925
    
    
    $
    123,577Accrued payroll and related liabilities
    
    
    23,773
    
    
    
    22,582Accrued interest (Note 5)
    
    
    6,270
    
    
    
    15,745Current portion, long-term debt (Note 5)
    
    
    1,462
    
    
    
    13,509Deferred revenue and other current liabilities
    
    
    75,965
    
    
    
    74,309Total current liabilities
    
    
    210,395
    
    
    
    249,722Long-term liabilities:Long-term debt (Note 5)
    
    
    1,063,605
    
    
    
    1,071,237Deferred tax liabilities, net
    
    
    281,837
    
    
    
    278,003Other long-term liabilities
    
    
    40,215
    
    
    
    40,984Total long-term liabilities
    
    
    1,385,657
    
    
    
    1,390,224Total liabilities
    
    
    1,596,052
    
    
    
    1,639,946Stockholders equity:Common stock, $0.01 par value,
1,000 shares authorized, 100 shares issued and outstanding
    
    
    
    
    
    
    Paid-in-capital
    
    
    594,139
    
    
    
    592,355Retained earnings
    
    
    117,100
    
    
    
    73,764Accumulated other comprehensive loss
    
    
    (9,290
    )
    
    
    (14,057
    )Total stockholders equity
    
    
    701,949
    
    
    
    652,062Total liabilities and stockholders equity
    
    $
    2,298,001
    
    
    $
    2,292,008
 
 *
    
    Footnotes summarized from the Audited Financial Statements  1




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Operations and Comprehensive Income  (unaudited)  (in thousands)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    430,798
    
    
    $
    414,194
    
    
    $
    1,303,111
    
    
    $
    1,264,989Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    282,606
    
    
    
    269,976
    
    
    
    849,241
    
    
    
    823,143Gross profit
    
    
    148,192
    
    
    
    144,218
    
    
    
    453,870
    
    
    
    441,846Compensation and related benefits
    
    
    65,470
    
    
    
    63,351
    
    
    
    196,321
    
    
    
    187,806Advertising and promotion
    
    
    11,043
    
    
    
    13,565
    
    
    
    40,177
    
    
    
    45,352Other selling, general and administrative
    
    
    24,272
    
    
    
    23,668
    
    
    
    74,006
    
    
    
    73,504Foreign currency (gain) loss
    
    
    6
    
    
    
    76
    
    
    
    (27
    )
    
    
    139Operating income
    
    
    47,401
    
    
    
    43,558
    
    
    
    143,393
    
    
    
    135,045Interest expense, net (Note 5)
    
    
    16,874
    
    
    
    19,714
    
    
    
    53,017
    
    
    
    62,218Income before income taxes
    
    
    30,527
    
    
    
    23,844
    
    
    
    90,376
    
    
    
    72,827Income tax expense (Note 11)
    
    
    11,002
    
    
    
    7,528
    
    
    
    33,440
    
    
    
    26,163Net income
    
    
    19,525
    
    
    
    16,316
    
    
    
    56,936
    
    
    
    46,664Other comprehensive income
    
    
    1,015
    
    
    
    3,502
    
    
    
    4,767
    
    
    
    1,281Comprehensive income
    
    $
    20,540
    
    
    $
    19,818
    
    
    $
    61,703
    
    
    $
    47,945
  2




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 
 Consolidated Statement of Stockholders Equity  (in thousands, except share data)
 AccumulatedOther
    
    
    TotalCommon Stock
    
    
    
    
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Dollars
    
    
    Paid-in-Capital
    
    
    Earnings
    
    
    Loss
    
    
    EquityBalance at December 31, 2008
    
    
    100
    
    
    $
    
    
    
    $
    592,355
    
    
    $
    73,764
    
    
    $
    (14,057
    )
    
    $
    652,062Return of capital to GNC Corporation
    
    
    
    
    
    
    
    
    
    
    (278
    )
    
    
    
    
    
    
    
    
    
    
    (278
    )Non-cash stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,062
    
    
    
    
    
    
    
    
    
    
    
    2,062Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,936
    
    
    
    
    
    
    
    56,936Dividend payment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,600
    )
    
    
    
    
    
    
    (13,600
    )Unrealized gain on derivatives designated and qualified
as cash flow hedges, net of tax of $753
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,316
    
    
    
    1,316Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,451
    
    
    
    3,451Balance at September 30, 2009 (unaudited)
    
    
    100
    
    
    $
    
    
    
    $
    594,139
    
    
    $
    117,100
    
    
    $
    (9,290
    )
    
    $
    701,949
  3




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows  (unaudited)  (in thousands)
 Nine months endedSeptember 30,
    
    
    September 30,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    56,936
    
    
    $
    46,664Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation expense
    
    
    27,327
    
    
    
    23,029Amortization of intangible assets
    
    
    7,308
    
    
    
    8,330Amortization of deferred financing fees
    
    
    3,053
    
    
    
    2,909Amortization of original issue discount
    
    
    277
    
    
    
    250Increase in provision for inventory losses
    
    
    8,278
    
    
    
    10,345Non-cash stock-based compensation
    
    
    2,062
    
    
    
    2,182(Decrease) increase in provision for losses on accounts receivable
    
    
    (2,173
    )
    
    
    638Decrease in net deferred taxes
    
    
    10,970
    
    
    
    (651
    )Changes in assets and liabilities:(Increase) decrease in receivables
    
    
    (6,762
    )
    
    
    (3,374
    )Increase in inventory, net
    
    
    (19,298
    )
    
    
    (43,753
    )(Increase) decrease in franchise note receivables, net
    
    
    (31
    )
    
    
    754Decrease in prepaid income taxes
    
    
    8,928
    
    
    
    17,310Decrease in other assets
    
    
    7,486
    
    
    
    1,876(Decrease) increase in accounts payable
    
    
    (21,025
    )
    
    
    20,194Decrease in interest payable
    
    
    (9,475
    )
    
    
    (11,036
    )Increase (decrease) in accrued liabilities
    
    
    3,987
    
    
    
    (11,911
    )Net cash provided by operating activities
    
    
    77,848
    
    
    
    63,756CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (20,448
    )
    
    
    (34,997
    )Acquisition of the Company
    
    
    
    
    
    
    (10,842
    )Franchise store conversions
    
    
    231
    
    
    
    163Store acquisition costs
    
    
    (1,791
    )
    
    
    (258
    )Net cash used in investing activities
    
    
    (22,008
    )
    
    
    (45,934
    )CASH FLOWS FROM FINANCING ACTIVITIES:Return of capital to Parent company
    
    
    (278
    )
    
    
    (832
    )Dividend payment
    
    
    (13,600
    )
    
    
    Debt financing fees
    
    
    (45
    )
    
    
    Payments on long-term debt
    
    
    (19,973
    )
    
    
    (5,956
    )Net cash used in financing activities
    
    
    (33,896
    )
    
    
    (6,788
    )Effect of exchange rate on cash
    
    
    308
    
    
    
    14Net increase in cash
    
    
    22,252
    
    
    
    11,048Beginning balance, cash
    
    
    42,307
    
    
    
    28,854Ending balance, cash
    
    $
    64,559
    
    
    $
    39,902
  4




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 1. NATURE OF BUSINESS
 General Nature of Business .
   Merger of the Company.
 5




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 2. BASIS OF PRESENTATION
    Principles of Consolidation.
  Use of Estimates .
 Cash and Cash Equivalents .
  6




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Financial Instruments and Derivatives .
   Fair ValueBalance Sheet Location
    
    September 30, 2009
    
    
    December 31, 2008(unaudited)(in thousands)Interest Rate Products
    
    Other long-term liabilities
    
    $
    (16,833
    )
    
    $
    (18,902
    )
   7




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Amount of Gain or
    
    
    Location of Gain or (Loss)
    
    Amount of Gain or (Loss)Derivatives in Cash
    
    (Loss) Recognized in
    
    
    Reclassified from
    
    Reclassified fromFlow Hedging
    
    OCI on Derivative
    
    
    Accumulated OCI into
    
    Accumulated OCI intoRelationships
    
    (Effective Portion)
    
    
    Income (Effective Portion)
    
    Income (Effective Portion)(in thousands)Interest Rate Products
    
    $
    1,543
    
    
    Interest income/ (expense)
    
    $
    (3,381
    )
  Amount of Gain or
    
    
    Location of Gain or (Loss)
    
    Amount of Gain or (Loss)Derivatives in Cash
    
    (Loss) Recognized in
    
    
    Reclassified from
    
    Reclassified fromFlow Hedging
    
    OCI on Derivative
    
    
    Accumulated OCI into
    
    Accumulated OCI intoRelationships
    
    (Effective Portion)
    
    
    Income (Effective Portion)
    
    Income (Effective Portion)(in thousands)Interest Rate Products
    
    $
    6,307
    
    
    Interest income/ (expense)
    
    $
    (8,376
    )
    Recently Issued Accounting Pronouncements
   8




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
         9




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
    10




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 3. INVENTORIES, NET
  September 30, 2009Net CarryingGross cost
    
    
    Reserves
    
    
    Value(unaudited)(in thousands)Finished product ready for sale
    
    $
    318,131
    
    
    $
    (8,471
    )
    
    $
    309,660Work-in-process, bulk product and raw materials
    
    
    62,877
    
    
    
    (1,320
    )
    
    
    61,557Packaging supplies
    
    
    5,442
    
    
    
    
    
    
    
    5,442$
    386,450
    
    
    $
    (9,791
    )
    
    $
    376,659
 December 31, 2008Net CarryingGross cost
    
    
    Reserves
    
    
    Value(in thousands)Finished product ready for sale
    
    $
    311,218
    
    
    $
    (9,275
    )
    
    $
    301,943Work-in-process, bulk product and raw materials
    
    
    57,995
    
    
    
    (1,111
    )
    
    
    56,884Packaging supplies
    
    
    4,827
    
    
    
    
    
    
    
    4,827$
    374,040
    
    
    $
    (10,386
    )
    
    $
    363,654
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 4. GOODWILL AND INTANGIBLE ASSETS, NET
    Manufacturing/Retail
    
    
    Franchising
    
    
    Wholesale
    
    
    Total(in thousands)Balance at December 31, 2008
    
    $
    302,765
    
    
    $
    117,303
    
    
    $
    202,841
    
    
    $
    622,909Acquired franchise stores
    
    
    1,816
    
    
    
    
    
    
    
    
    
    
    
    1,816Balance at September 30, 2009 (unaudited)
    
    $
    304,581
    
    
    $
    117,303
    
    
    $
    202,841
    
    
    $
    624,725
  Retail
    
    
    Franchise
    
    
    Operating
    
    
    FranchiseGold Card
    
    
    Brand
    
    
    Brand
    
    
    Agreements
    
    
    Rights
    
    
    Total(in thousands)Balance at December 31, 2008
    
    $
    2,456
    
    
    $
    500,000
    
    
    $
    220,000
    
    
    $
    160,019
    
    
    $
    701
    
    
    $
    883,176Acquired franchise stores
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    773
    
    
    
    773Amortization expense
    
    
    (1,631
    )
    
    
    
    
    
    
    
    
    
    
    (5,198
    )
    
    
    (479
    )
    
    
    (7,308
    )Balance at September 30, 2009 (unaudited)
    
    $
    825
    
    
    $
    500,000
    
    
    $
    220,000
    
    
    $
    154,821
    
    
    $
    995
    
    
    $
    876,641
  Estimated
    
    
    September 30, 2009
    
    
    December 31, 2008Life
    
    
    
    
    
    
    Accumulated
    
    
    Carrying
    
    
    
    
    
    
    Accumulated
    
    
    Carryingin years
    
    
    Cost
    
    
    Amortization
    
    
    Amount
    
    
    Cost
    
    
    Amortization
    
    
    Amount(unaudited)
    
    
    (in thousands)Brands  retail
    
    
    
    
    
    $
    500,000
    
    
    $
    
    
    
    $
    500,000
    
    
    $
    500,000
    
    
    $
    
    
    
    $
    500,000Brands  franchise
    
    
    
    
    
    
    220,000
    
    
    
    
    
    
    
    220,000
    
    
    
    220,000
    
    
    
    
    
    
    
    220,000Gold card  retail
    
    
    3
    
    
    
    3,500
    
    
    
    (3,179
    )
    
    
    321
    
    
    
    3,500
    
    
    
    (2,545
    )
    
    
    955Gold card  franchise
    
    
    3
    
    
    
    5,500
    
    
    
    (4,996
    )
    
    
    504
    
    
    
    5,500
    
    
    
    (3,999
    )
    
    
    1,501Retail agreements
    
    
    25-35
    
    
    
    31,000
    
    
    
    (2,827
    )
    
    
    28,173
    
    
    
    31,000
    
    
    
    (2,038
    )
    
    
    28,962Franchise agreements
    
    
    25
    
    
    
    70,000
    
    
    
    (7,117
    )
    
    
    62,883
    
    
    
    70,000
    
    
    
    (5,016
    )
    
    
    64,984Manufacturing agreements
    
    
    25
    
    
    
    70,000
    
    
    
    (7,117
    )
    
    
    62,883
    
    
    
    70,000
    
    
    
    (5,017
    )
    
    
    64,983Other intangibles
    
    
    5
    
    
    
    1,150
    
    
    
    (268
    )
    
    
    882
    
    
    
    1,150
    
    
    
    (60
    )
    
    
    1,090Franchise rights
    
    
    1-5
    
    
    
    2,881
    
    
    
    (1,886
    )
    
    
    995
    
    
    
    2,108
    
    
    
    (1,407
    )
    
    
    701$
    904,031
    
    
    $
    (27,390
    )
    
    $
    876,641
    
    
    $
    903,258
    
    
    $
    (20,082
    )
    
    $
    883,176
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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  EstimatedamortizationYears ending December 31,
    
    expense(in thousands)2009
    
    $
    2,4892010
    
    
    7,5722011
    
    
    7,0382012
    
    
    6,9552013
    
    
    6,908Thereafter
    
    
    125,679Total
    
    $
    156,641
 NOTE 5. LONG-TERM DEBT / INTEREST EXPENSE
  September 30,
    
    
    December 31,2009
    
    
    2008(unaudited)(in thousands)2007 Senior Credit Facility
    
    $
    649,619
    
    
    $
    668,563Senior Toggle Notes
    
    
    297,862
    
    
    
    297,58510.75% Senior Subordinated Notes
    
    
    110,000
    
    
    
    110,000Mortgage
    
    
    7,536
    
    
    
    8,557Capital leases
    
    
    50
    
    
    
    41Less: current maturities
    
    
    (1,462
    )
    
    
    (13,509
    )Total
    
    $
    1,063,605
    
    
    $
    1,071,237
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(unaudited)(in thousands)2007 Senior Credit FacilityTerm Loan
    
    $
    7,823
    
    
    $
    10,251
    
    
    $
    24,971
    
    
    $
    32,193Revolver
    
    
    113
    
    
    
    104
    
    
    
    378
    
    
    
    321Senior Toggle Notes
    
    
    4,716
    
    
    
    5,451
    
    
    
    15,050
    
    
    
    17,98310.75% Senior Subordinated Notes
    
    
    2,956
    
    
    
    2,956
    
    
    
    8,868
    
    
    
    8,868OID amortization
    
    
    95
    
    
    
    85
    
    
    
    277
    
    
    
    250Deferred financing fees
    
    
    1,026
    
    
    
    986
    
    
    
    3,053
    
    
    
    2,909Mortgage
    
    
    135
    
    
    
    158
    
    
    
    423
    
    
    
    482Interest income-other
    
    
    10
    
    
    
    (277
    )
    
    
    (3
    )
    
    
    (788
    )Interest expense, net
    
    $
    16,874
    
    
    $
    19,714
    
    
    $
    53,017
    
    
    $
    62,218
 13




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  September 30,
    
    
    December 31,2009
    
    
    2008(unaudited)(in thousands)2007 Senior Credit Facility
    
    $
    4,883
    
    
    $
    5,564Senior Toggle Notes
    
    
    861
    
    
    
    6,70010.75% Senior Subordinated Notes
    
    
    526
    
    
    
    3,481Total
    
    $
    6,270
    
    
    $
    15,745
  NOTE 6. FINANCIAL INSTRUMENTS
  September 30,
    
    December 31,2009
    
    2008Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(unaudited)(in thousands)Cash and cash equivalents
    
    $
    64,559
    
    
    $
    64,559
    
    
    $
    42,307
    
    
    $
    42,307Receivables
    
    
    96,805
    
    
    
    96,805
    
    
    
    89,413
    
    
    
    89,413Franchise notes receivable
    
    
    2,995
    
    
    
    2,995
    
    
    
    1,828
    
    
    
    1,828Accounts payable
    
    
    102,925
    
    
    
    102,925
    
    
    
    123,577
    
    
    
    123,577Long term debt
    
    
    1,065,067
    
    
    
    1,005,646
    
    
    
    1,084,746
    
    
    
    702,392
 14




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 7. COMMITMENTS AND CONTINGENCIES
 Litigation
   Pro-Hormone/Androstenedione Cases. Stephens and Pio
  Guzman v. General Nutrition Companies, Inc
  15




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Guzman
 Stephens and Pio v. General Nutrition
Companies, Inc. (Case No. 08 CH 37097, Circuit Court of Cook County, Illinois, County Department,
Chancery Division).
  California Wage and Break Claim
 California Wage and Break Claim
 Franchise Class Action.
 16




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Creatine Claim.
 Jackson Claim.
 DiMauro Claim. forum non
conveniens
 Romero Claim
 Ciavarra Claim
 17




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Hydroxycut Claims. see Ciavarra Claim
  
    
    Michael Owens and Donna Owens v. Iovate Health Sciences USA, Inc., et al., Superior
Court of the State of California, County of Los Angeles;
    
    Eva M. Stasiak v. Iovate Health Sciences USA, Inc., et al., Superior Court of the
State of California, County of Los Angeles;
    
    Jaime Ruben Perez v. Gerald Brandt, individually and d/b/a/ Breakthru Products, et
al., 229th Judicial District, Duval County, Texas;
    
    Juan A. Noyola, II v. Iovate Health Sciences USA, Inc., et al., U.S. District Court,
Southern District of New York;
    
    Christopher and Dana Hamilton v. Iovate Health Sciences USA, Inc., et al., U.S.
District Court, Northern District of Ohio;
    
    Hector Manuel Abarca and Diana Curiel v. Iovate Health Sciences USA, Inc., et al.,
U.S. District Court, Northern District of California; and
    
    Jessica Rogoff v. General Nutrition Centers, Inc., et al., Superior Court of the
State of California, County of Los Angeles.
   
    
    Andrew Dremak, et al. v. Iovate Health Sciences Group, Inc., et al., U.S. District
Court, Southern District of California;
    
    Enjoli Pennier, et al. v. Iovate Health Sciences, et al., U.S. District Court,
Eastern District of Louisiana;
    
    Alejandro M. Jimenez, et al. v. Iovate Health Sciences, Inc., et al., U.S. District
Court, Eastern District of California;
    
    Amy Baker, et al. v. Iovate Health Sciences USA, Inc., et al., U.S. District Court,
Northern District of Alabama;
    
    Kyle Davis and Sara Carreon, et al. v. Iovate Health Sciences USA, Inc., et al.,
U.S. District Court, Northern District of Alabama; and,
    
    Lenny Charles Gunn, Tonya Rhoden, and Nicholas Atelevich, et al., v. Iovate Health
Sciences Group, Inc., et al., U.S. District Court, Southern District of California.
  18




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Bedell Claim.
 Chen Claim
 California False Labeling and Consumer Fraud Claims.
 
    
    Michael Gonzales and Zia Nawabi, et al. v. Maximum Human Performance, Inc., et al., U.S.
District Court, Central District of California (Musclemeds);
    
    Michael Campos and Michael Gonzales, et al. v. LG Sciences, LLC, et al., Superior Court
of California, for the County of Orange (LG Sciences);
    
    Nicole Forlenza and Shaiden Monroe, et al. v. Dynakor Pharmacal, LLC, et al., U.S.
District Court, Central District of California; and
    
    Vance Monroe and Mac Gonzales, et al. v. Biotab Nutraceuticals, Inc., et al., U.S.
District Court, Southern District of California.
   Commitments
  Environmental Compliance
  19




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Contingencies
  NOTE 8. STOCK-BASED COMPENSATION PLANS
 Stock Options
  20




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  WeightedAverageTotal Options
    
    Exercise PriceOutstanding at December 31, 2008
    
    
    8,883,692
    
    
    $
    7.10Granted
    
    
    260,000
    
    
    
    9.75Forfeited
    
    
    (338,715
    )
    
    
    6.25Expired
    
    
    (88,187
    )
    
    
    6.25Outstanding at September 30, 2009
    
    
    8,716,790
    
    
    $
    7.08Exercisable at September 30, 2009
    
    
    5,677,080
    
    
    $
    7.36
    September 30,2009(unaudited)Dividend yield
    
    0.00%Expected option life
    
    7.5 yearsVolatility factor percentage of market price
    
    42.7%-44.6%Discount rate
    
    2.62-3.28%
  21




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 9. SEGMENTS
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(unaudited)(in thousands)Revenue:Retail
    
    $
    311,933
    
    
    $
    298,823
    
    
    $
    962,587
    
    
    $
    934,624Franchise
    
    
    67,355
    
    
    
    67,501
    
    
    
    201,063
    
    
    
    197,512Manufacturing/Wholesale:Intersegment (1)
    
    
    51,452
    
    
    
    43,798
    
    
    
    149,470
    
    
    
    134,120Third Party
    
    
    51,510
    
    
    
    47,870
    
    
    
    139,461
    
    
    
    132,853Sub total Manufacturing/Wholesale
    
    
    102,962
    
    
    
    91,668
    
    
    
    288,931
    
    
    
    266,973Sub total segment revenues
    
    
    482,250
    
    
    
    457,992
    
    
    
    1,452,581
    
    
    
    1,399,109Intersegment elimination (1)
    
    
    (51,452
    )
    
    
    (43,798
    )
    
    
    (149,470
    )
    
    
    (134,120
    )Total revenue
    
    $
    430,798
    
    
    $
    414,194
    
    
    $
    1,303,111
    
    
    $
    1,264,989Operating income:Retail
    
    $
    37,251
    
    
    $
    32,618
    
    
    $
    123,277
    
    
    $
    111,668Franchise
    
    
    22,486
    
    
    
    22,634
    
    
    
    61,243
    
    
    
    61,117Manufacturing/Wholesale
    
    
    18,854
    
    
    
    18,926
    
    
    
    54,072
    
    
    
    51,989Unallocated corporate and other costs:Warehousing and distribution costs
    
    
    (13,441
    )
    
    
    (13,539
    )
    
    
    (40,458
    )
    
    
    (41,145
    )Corporate costs
    
    
    (17,749
    )
    
    
    (17,081
    )
    
    
    (54,741
    )
    
    
    (48,584
    )Sub total unallocated corporate and
other costs
    
    
    (31,190
    )
    
    
    (30,620
    )
    
    
    (95,199
    )
    
    
    (89,729
    )Total operating income
    
    $
    47,401
    
    
    $
    43,558
    
    
    $
    143,393
    
    
    $
    135,045
 
 (1)
    
    Intersegment revenues are eliminated from consolidated revenue. 22




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 10. SUPPLEMENTAL GUARANTOR INFORMATION
    23




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Supplemental Condensed Consolidating Balance Sheets
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorSeptember 30, 2009
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Current assetsCash and cash equivalents
    
    $
    64,797
    
    
    $
    (2,164
    )
    
    $
    1,926
    
    
    $
    
    
    
    $
    64,559Receivables, net
    
    
    477
    
    
    
    95,424
    
    
    
    904
    
    
    
    
    
    
    
    96,805Intercompany receivables
    
    
    130,206
    
    
    
    
    
    
    
    
    
    
    
    (130,206
    )
    
    
    Inventories, net
    
    
    
    
    
    
    347,774
    
    
    
    28,885
    
    
    
    
    
    
    
    376,659Prepaids and other current assets
    
    
    13,109
    
    
    
    13,727
    
    
    
    7,697
    
    
    
    
    
    
    
    34,533Total current assets
    
    
    208,589
    
    
    
    454,761
    
    
    
    39,412
    
    
    
    (130,206
    )
    
    
    572,556Goodwill
    
    
    
    
    
    
    624,257
    
    
    
    468
    
    
    
    
    
    
    
    624,725Brands
    
    
    
    
    
    
    720,000
    
    
    
    
    
    
    
    
    
    
    
    720,000Property, plant and equipment, net
    
    
    8,062
    
    
    
    164,827
    
    
    
    27,683
    
    
    
    
    
    
    
    200,572Investment in subsidiaries
    
    
    1,568,836
    
    
    
    (7,371
    )
    
    
    
    
    
    
    (1,561,465
    )
    
    
    Other assets
    
    
    29,934
    
    
    
    158,995
    
    
    
    
    
    
    
    (8,781
    )
    
    
    180,148Total assets
    
    $
    1,815,421
    
    
    $
    2,115,469
    
    
    $
    67,563
    
    
    $
    (1,700,452
    )
    
    $
    2,298,001Current liabilitiesCurrent liabilities
    
    $
    37,251
    
    
    $
    161,102
    
    
    $
    12,042
    
    
    $
    
    
    
    $
    210,395Intercompany payables
    
    
    
    
    
    
    108,030
    
    
    
    22,176
    
    
    
    (130,206
    )
    
    
    Total current liabilities
    
    
    37,251
    
    
    
    269,132
    
    
    
    34,218
    
    
    
    (130,206
    )
    
    
    210,395Long-term debt
    
    
    1,057,481
    
    
    
    35
    
    
    
    14,870
    
    
    
    (8,781
    )
    
    
    1,063,605Deferred tax liabilities
    
    
    (6,978
    )
    
    
    288,847
    
    
    
    (32
    )
    
    
    
    
    
    
    281,837Other long-term liabilities
    
    
    25,718
    
    
    
    14,024
    
    
    
    473
    
    
    
    
    
    
    
    40,215Total liabilities
    
    
    1,113,472
    
    
    
    572,038
    
    
    
    49,529
    
    
    
    (138,987
    )
    
    
    1,596,052Total stockholders equity (deficit)
    
    
    701,949
    
    
    
    1,543,431
    
    
    
    18,034
    
    
    
    (1,561,465
    )
    
    
    701,949Total liabilities and stockholders
equity (deficit)
    
    $
    1,815,421
    
    
    $
    2,115,469
    
    
    $
    67,563
    
    
    $
    (1,700,452
    )
    
    $
    2,298,001
 24




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Supplemental Condensed Consolidating Balance Sheets
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorDecember 31, 2008
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    40,077
    
    
    $
    2,230
    
    
    $
    
    
    
    $
    42,307Receivables, net
    
    
    369
    
    
    
    88,972
    
    
    
    72
    
    
    
    
    
    
    
    89,413Intercompany receivables
    
    
    
    
    
    
    87,554
    
    
    
    
    
    
    
    (87,554
    )
    
    
    Inventories, net
    
    
    
    
    
    
    342,085
    
    
    
    21,569
    
    
    
    
    
    
    
    363,654Prepaids and other current assets
    
    
    (82
    )
    
    
    55,520
    
    
    
    3,969
    
    
    
    
    
    
    
    59,407Total current assets
    
    
    287
    
    
    
    614,208
    
    
    
    27,840
    
    
    
    (87,554
    )
    
    
    554,781Goodwill
    
    
    
    
    
    
    622,441
    
    
    
    468
    
    
    
    
    
    
    
    622,909Brands
    
    
    
    
    
    
    720,000
    
    
    
    
    
    
    
    
    
    
    
    720,000Property, plant and equipment, net
    
    
    
    
    
    
    180,494
    
    
    
    25,660
    
    
    
    
    
    
    
    206,154Investment in subsidiaries
    
    
    1,797,306
    
    
    
    10,482
    
    
    
    
    
    
    
    (1,807,788
    )
    
    
    Other assets
    
    
    22,470
    
    
    
    174,475
    
    
    
    
    
    
    
    (8,781
    )
    
    
    188,164Total assets
    
    $
    1,820,063
    
    
    $
    2,322,100
    
    
    $
    53,968
    
    
    $
    (1,904,123
    )
    
    $
    2,292,008Current liabilitiesCurrent liabilities
    
    $
    20,644
    
    
    $
    220,120
    
    
    $
    8,958
    
    
    $
    
    
    
    $
    249,722Intercompany payables
    
    
    69,244
    
    
    
    
    
    
    
    18,310
    
    
    
    (87,554
    )
    
    
    Total current liabilities
    
    
    89,888
    
    
    
    220,120
    
    
    
    27,268
    
    
    
    (87,554
    )
    
    
    249,722Long-term debt
    
    
    1,064,024
    
    
    
    30
    
    
    
    15,964
    
    
    
    (8,781
    )
    
    
    1,071,237Deferred tax liabilities
    
    
    (4,813
    )
    
    
    282,816
    
    
    
    
    
    
    
    
    
    
    
    278,003Other long-term liabilities
    
    
    18,902
    
    
    
    21,828
    
    
    
    254
    
    
    
    
    
    
    
    40,984Total liabilities
    
    
    1,168,001
    
    
    
    524,794
    
    
    
    43,486
    
    
    
    (96,335
    )
    
    
    1,639,946Total stockholders equity
(deficit)
    
    
    652,062
    
    
    
    1,797,306
    
    
    
    10,482
    
    
    
    (1,807,788
    )
    
    
    652,062Total liabilities and stockholders
equity (deficit)
    
    $
    1,820,063
    
    
    $
    2,322,100
    
    
    $
    53,968
    
    
    $
    (1,904,123
    )
    
    $
    2,292,008
 25




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorThree months ended September 30, 2009
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    409,634
    
    
    $
    26,343
    
    
    $
    (5,179
    )
    
    $
    430,798Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    268,609
    
    
    
    19,176
    
    
    
    (5,179
    )
    
    
    282,606Gross profit
    
    
    
    
    
    
    141,025
    
    
    
    7,167
    
    
    
    
    
    
    
    148,192Compensation and related benefits
    
    
    9,897
    
    
    
    51,442
    
    
    
    4,131
    
    
    
    
    
    
    
    65,470Advertising and promotion
    
    
    
    
    
    
    10,925
    
    
    
    118
    
    
    
    
    
    
    
    11,043Other selling, general and administrative
    
    
    8,382
    
    
    
    15,885
    
    
    
    5
    
    
    
    
    
    
    
    24,272Subsidiary (income) expense
    
    
    (20,789
    )
    
    
    236
    
    
    
    
    
    
    
    20,553
    
    
    
    Other (income) expense
    
    
    (17,407
    )
    
    
    16,452
    
    
    
    961
    
    
    
    
    
    
    
    6Operating income (loss)
    
    
    19,917
    
    
    
    46,085
    
    
    
    1,952
    
    
    
    (20,553
    )
    
    
    47,401Interest expense, net
    
    
    982
    
    
    
    15,595
    
    
    
    297
    
    
    
    
    
    
    
    16,874Income (loss) before income taxes
    
    
    18,935
    
    
    
    30,490
    
    
    
    1,655
    
    
    
    (20,553
    )
    
    
    30,527Income tax (benefit) expense
    
    
    (590
    )
    
    
    11,084
    
    
    
    508
    
    
    
    
    
    
    
    11,002Net income (loss)
    
    $
    19,525
    
    
    $
    19,406
    
    
    $
    1,147
    
    
    $
    (20,553
    )
    
    $
    19,525
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorNine months ended September 30, 2009
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    1,238,791
    
    
    $
    75,784
    
    
    $
    (11,464
    )
    
    $
    1,303,111Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    807,078
    
    
    
    53,627
    
    
    
    (11,464
    )
    
    
    849,241Gross profit
    
    
    
    
    
    
    431,713
    
    
    
    22,157
    
    
    
    
    
    
    
    453,870Compensation and related benefits
    
    
    30,639
    
    
    
    153,818
    
    
    
    11,864
    
    
    
    
    
    
    
    196,321Advertising and promotion
    
    
    
    
    
    
    39,571
    
    
    
    606
    
    
    
    
    
    
    
    40,177Other selling, general and administrative
    
    
    25,516
    
    
    
    48,345
    
    
    
    145
    
    
    
    
    
    
    
    74,006Subsidiary (income) expense
    
    
    (60,434
    )
    
    
    681
    
    
    
    
    
    
    
    59,753
    
    
    
    Other (income) expense
    
    
    (53,546
    )
    
    
    50,702
    
    
    
    2,817
    
    
    
    
    
    
    
    (27
    )Operating income (loss)
    
    
    57,825
    
    
    
    138,596
    
    
    
    6,725
    
    
    
    (59,753
    )
    
    
    143,393Interest expense, net
    
    
    2,746
    
    
    
    49,384
    
    
    
    887
    
    
    
    
    
    
    
    53,017Income (loss) before income taxes
    
    
    55,079
    
    
    
    89,212
    
    
    
    5,838
    
    
    
    (59,753
    )
    
    
    90,376Income tax (benefit) expense
    
    
    (1,857
    )
    
    
    33,560
    
    
    
    1,737
    
    
    
    
    
    
    
    33,440Net income (loss)
    
    $
    56,936
    
    
    $
    55,652
    
    
    $
    4,101
    
    
    $
    (59,753
    )
    
    $
    56,936
 26




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorThree months ended September 30, 2008
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    391,058
    
    
    $
    25,766
    
    
    $
    (2,630
    )
    
    $
    414,194Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    254,369
    
    
    
    18,237
    
    
    
    (2,630
    )
    
    
    269,976Gross profit
    
    
    
    
    
    
    136,689
    
    
    
    7,529
    
    
    
    
    
    
    
    144,218Compensation and related benefits
    
    
    
    
    
    
    59,297
    
    
    
    4,054
    
    
    
    
    
    
    
    63,351Advertising and promotion
    
    
    
    
    
    
    13,356
    
    
    
    209
    
    
    
    
    
    
    
    13,565Other selling, general and administrative
    
    
    695
    
    
    
    22,152
    
    
    
    821
    
    
    
    
    
    
    
    23,668Subsidiary income
    
    
    (17,411
    )
    
    
    (2,983
    )
    
    
    
    
    
    
    20,394
    
    
    
    Other (income) expense
    
    
    
    
    
    
    82
    
    
    
    (6
    )
    
    
    
    
    
    
    76Operating income .
    
    
    16,716
    
    
    
    44,785
    
    
    
    2,451
    
    
    
    (20,394
    )
    
    
    43,558Interest expense, net
    
    
    1,070
    
    
    
    18,351
    
    
    
    293
    
    
    
    
    
    
    
    19,714Income before income taxes .
    
    
    15,646
    
    
    
    26,434
    
    
    
    2,158
    
    
    
    (20,394
    )
    
    
    23,844Income tax (benefit) expense
    
    
    (670
    )
    
    
    9,023
    
    
    
    (825
    )
    
    
    
    
    
    
    7,528Net income
    
    $
    16,316
    
    
    $
    17,411
    
    
    $
    2,983
    
    
    $
    (20,394
    )
    
    $
    16,316
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorNine months ended September 30, 2008
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    1,194,061
    
    
    $
    79,290
    
    
    $
    (8,362
    )
    
    $
    1,264,989Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    774,317
    
    
    
    57,188
    
    
    
    (8,362
    )
    
    
    823,143Gross profit
    
    
    
    
    
    
    419,744
    
    
    
    22,102
    
    
    
    
    
    
    
    441,846Compensation and related benefits
    
    
    
    
    
    
    175,963
    
    
    
    11,843
    
    
    
    
    
    
    
    187,806Advertising and promotion
    
    
    
    
    
    
    44,842
    
    
    
    510
    
    
    
    
    
    
    
    45,352Other selling, general and administrative
    
    
    1,709
    
    
    
    69,243
    
    
    
    2,552
    
    
    
    
    
    
    
    73,504Subsidiary (income) expense
    
    
    (49,694
    )
    
    
    (5,258
    )
    
    
    
    
    
    
    54,952
    
    
    
    Other (income) expense
    
    
    
    
    
    
    44
    
    
    
    95
    
    
    
    
    
    
    
    139Operating income (loss)
    
    
    47,985
    
    
    
    134,910
    
    
    
    7,102
    
    
    
    (54,952
    )
    
    
    135,045Interest expense, net
    
    
    3,156
    
    
    
    58,177
    
    
    
    885
    
    
    
    
    
    
    
    62,218Income (loss) before income taxes
    
    
    44,829
    
    
    
    76,733
    
    
    
    6,217
    
    
    
    (54,952
    )
    
    
    72,827Income tax (benefit) expense
    
    
    (1,835
    )
    
    
    27,039
    
    
    
    959
    
    
    
    
    
    
    
    26,163Net income (loss)
    
    $
    46,664
    
    
    $
    49,694
    
    
    $
    5,258
    
    
    $
    (54,952
    )
    
    $
    46,664
 27




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Supplemental Condensed Consolidating Statements of Cash Flows
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorNine months ended September 30, 2009
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)(in thousands)NET CASH PROVIDED BY OPERATING ACTIVITIES:
    
    $
    
    
    
    $
    74,730
    
    
    $
    3,118
    
    
    $
    77,848CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (1,821
    )
    
    
    (15,920
    )
    
    
    (2,707
    )
    
    
    (20,448
    )Investment/distribution
    
    
    99,486
    
    
    
    (99,486
    )
    
    
    
    
    
    
    Other investing
    
    
    
    
    
    
    (1,560
    )
    
    
    
    
    
    
    (1,560
    )Net cash provided by (used in) investing activities
    
    
    97,665
    
    
    
    (116,966
    )
    
    
    (2,707
    )
    
    
    (22,008
    )CASH FLOWS FROM FINANCING ACTIVITIES:GNC Corporation investment in
General Nutrition Centers, Inc
    
    
    (278
    )
    
    
    
    
    
    
    
    
    
    
    (278
    )Dividend payment
    
    
    (13,600
    )
    
    
    
    
    
    
    
    
    
    
    (13,600
    )Financing fees
    
    
    (45
    )
    
    
    
    
    
    
    
    
    
    
    (45
    )Other financing
    
    
    (18,945
    )
    
    
    (5
    )
    
    
    (1,023
    )
    
    
    (19,973
    )Net cash used in financing activities
    
    
    (32,868
    )
    
    
    (5
    )
    
    
    (1,023
    )
    
    
    (33,896
    )Effect of exchange rate on cash
    
    
    
    
    
    
    
    
    
    
    308
    
    
    
    308Net increase (decrease) in cash
    
    
    64,797
    
    
    
    (42,241
    )
    
    
    (304
    )
    
    
    22,252Beginning balance, cash
    
    
    
    
    
    
    40,077
    
    
    
    2,230
    
    
    
    42,307Ending balance, cash
    
    $
    64,797
    
    
    $
    (2,164
    )
    
    $
    1,926
    
    
    $
    64,559
 28




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Supplemental Condensed Consolidating Statements of Cash Flows
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorNine months ended September 30, 2008
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)(in thousands)NET CASH PROVIDED BY OPERATING ACTIVITIES:
    
    $
    
    
    
    $
    59,293
    
    
    $
    4,463
    
    
    $
    63,756CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    
    
    
    
    (32,061
    )
    
    
    (2,936
    )
    
    
    (34,997
    )Investment/distribution
    
    
    16,742
    
    
    
    (16,742
    )
    
    
    
    
    
    
    Acquisition of the Company
    
    
    (10,842
    )
    
    
    
    
    
    
    
    
    
    
    (10,842
    )Other investing
    
    
    
    
    
    
    (95
    )
    
    
    
    
    
    
    (95
    )Net cash provided by (used in) investing activities
    
    
    5,900
    
    
    
    (48,898
    )
    
    
    (2,936
    )
    
    
    (45,934
    )CASH FLOWS FROM FINANCING ACTIVITIES:GNC Corporation investment in
General Nutrition Centers, Inc
    
    
    (832
    )
    
    
    
    
    
    
    
    
    
    
    (832
    )Other financing
    
    
    (5,068
    )
    
    
    
    
    
    
    (888
    )
    
    
    (5,956
    )Net cash provided by (used in) financing activities
    
    
    (5,900
    )
    
    
    
    
    
    
    (888
    )
    
    
    (6,788
    )Effect of exchange rate on cash
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    14Net increase (decrease) in cash
    
    
    
    
    
    
    10,395
    
    
    
    653
    
    
    
    11,048Beginning balance, cash
    
    
    
    
    
    
    26,090
    
    
    
    2,764
    
    
    
    28,854Ending balance, cash
    
    $
    
    
    
    $
    36,485
    
    
    $
    3,417
    
    
    $
    39,902
 29




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 11. INCOME TAXES
    NOTE 12. FAIR VALUE MEASUREMENT
  Level 1
    
    
    observable inputs such as quoted prices in active markets for identical
assets and liabilities;Level 2
    
    
    observable inputs such as quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets or liabilities in
markets that are not active, other inputs that are observable, or can be corroborated
by observable market data; andLevel 3
    
    
    unobservable inputs for which there are little or no market data, which
require the reporting entity to develop its own assumptions.
 30




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
  Fair Value Measurements UsingLevel 1
    
    
    Level 2
    
    
    Level 3(in thousands)Other long-term liabilities
    
    $
    2,161
    
    
    $
    16,833
    
    
    $
    
  Fair Value Measurements UsingLevel 1
    
    
    Level 2
    
    
    Level 3(in thousands)Other long-term liabilities
    
    $
    1,496
    
    
    $
    18,902
    
    
    $
    
  Other long-term liabilities
  NOTE 13. RELATED PARTY TRANSACTIONS
 Management Services Agreement.
 Credit Facility.
 31




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Lease Agreements.
 NOTE 14. SUBSEQUENT EVENTS
  32




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
  Forward-Looking Statements
   
    
    uncertainty of continuing weakening of the economy and its impact on us and our partners;
    
    significant competition in our industry;
    
    unfavorable publicity or consumer perception of our products;
    
    the incurrence of material product liability and product recall costs;
    
    costs of compliance and our failure to comply with new and existing governmental regulations;
    
    costs of litigation and the failure to successfully defend lawsuits and other claims against the Company;
    
    the failure of our franchisees to conduct their operations profitably and limitations on our ability to
terminate or replace under-performing franchisees;
    
    economic, political, and other risks associated with our international operations;
    
    our failure to keep pace with the demands of our customers for new products and services;
    
    disruptions in our manufacturing system or losses of manufacturing certifications;
    
    the lack of long-term experience with human consumption of ingredients in some of our products;
    
    increases in the frequency and severity of insurance claims, particularly claims for which we are self-insured;
    
    loss or retirement of key members of management;
    
    increases in the cost of borrowings and limitations on availability of additional debt or equity capital;
    
    the impact of our substantial debt on our operating income and our ability to grow;
    
    the failure to adequately protect or enforce our intellectual property rights against competitors;
    
    changes in applicable laws relating to our franchise operations; and
    
    our inability to expand our franchise operations or attract new franchisees.
   33




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##### Table of Contents



Business Overview
  Revenues and Operating Performance from our Business Segments
  
    
    Retail revenues are generated by sales to consumers at our company-owned stores and
online through www.gnc.com. Although we believe that our retail and franchise businesses
are not seasonal in nature, historically we have experienced, and expect to continue to
experience, a substantial variation in our net sales and operating results from quarter
to quarter, with the first half of the year being stronger than the second half of the
year. As a leader in our industry, we expect our retail revenue growth to be consistent
with projected industry growth as a result of our disproportionate market share, scale
economies in purchasing and advertising, strong brand awareness, and vertical
integration.
    
    Franchise revenues are generated primarily from:
 (1)
    
    product sales to our franchisees;(2)
    
    royalties on franchise retail sales; and(3)
    
    franchise fees, which are charged for initial franchise awards, renewals, and
transfers of franchises.
  
    
    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 and through Rite Aid and
www.drugstore.com. License fee revenue from the opening of GNC franchised store-within-a-store locations within Rite Aid stores is also recorded in
this segment. Our revenues generated by our manufacturing and wholesale operations are
subject to our available manufacturing capacity, and we anticipate that these revenues will
remain stable over the next five years.
    
    A significant portion of our business infrastructure is comprised of fixed
operating costs. Our vertically integrated distribution network and manufacturing
capacity can support higher sales volume without significant incremental costs. We
therefore expect our operating expenses to grow at a lesser rate than our revenues,
resulting in significant operating leverage in our business.
 34




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##### Table of Contents




    
    broader consumer awareness of health and wellness issues and rising healthcare
costs;
    
    interest in, and demand for, condition-specific products based on scientific
research;
    
    significant effects of favorable and unfavorable publicity on consumer demand;
    
    lack of a single product or group of products dominating any one product
category;
    
    lack of long-term experience with human consumption of ingredients of some of
our products;
    
    volatility in the diet category;
    
    rapidly evolving consumer preferences and demand for new products;
    
    costs associated with complying with new and existing governmental regulation;
and
    
    a change in disposable income available to consumers, as a result of current
economic conditions.
 Executive Overview
       35




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##### Table of Contents




    
    retail sales at our company stores could decline;
    
    demand for our branded products produced at our manufacturing plant could
decline;
    
    demand for products produced for distributors and other retailers / wholesalers
could diminish;
    
    our domestic franchisees may opt not to renew their franchise licenses, which
in turn would lower our franchise product revenue; and
    
    our international franchisees may experience decreased revenue resulting in
lower royalties and product revenue to us; additionally, a strengthening of the U.S.
dollar may impact us, as our international franchisees purchase inventory from us and
pay royalties to us in U.S. dollars.
   
    
    Driving top-line performance in each of our business segments by attracting new
customers through product innovation, improved assortment, effective marketing and
price competitiveness;
    
    Investing in key infrastructure areas for future growth, including e-commerce,
international development, and manufacturing; and
    
    Generating efficiencies and cost savings in the everyday operations of the
business that will allow us to leverage profit margins on modest revenue growth.
  Related Parties
  36




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##### Table of Contents



Results of Operations
   Results of Operations
 Three Months Ended
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    
    
    
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Retail
    
    $
    312.0
    
    
    
    72.4
    %
    
    $
    298.8
    
    
    
    72.1
    %
    
    $
    962.6
    
    
    
    73.9
    %
    
    $
    934.6
    
    
    
    73.9
    %Franchise
    
    
    67.3
    
    
    
    15.6
    %
    
    
    67.5
    
    
    
    16.3
    %
    
    
    201.0
    
    
    
    15.4
    %
    
    
    197.5
    
    
    
    15.6
    %Manufacturing / Wholesale
    
    
    51.5
    
    
    
    12.0
    %
    
    
    47.9
    
    
    
    11.6
    %
    
    
    139.5
    
    
    
    10.7
    %
    
    
    132.9
    
    
    
    10.5
    %Total net revenues
    
    
    430.8
    
    
    
    100.0
    %
    
    
    414.2
    
    
    
    100.0
    %
    
    
    1,303.1
    
    
    
    100.0
    %
    
    
    1,265.0
    
    
    
    100.0
    %Operating expenses:Cost of sales, including warehousing,
distribution and occupancy costs
    
    
    282.6
    
    
    
    65.6
    %
    
    
    270.0
    
    
    
    65.2
    %
    
    
    849.2
    
    
    
    65.2
    %
    
    
    823.1
    
    
    
    65.1
    %Compensation and related benefits
    
    
    65.5
    
    
    
    15.2
    %
    
    
    63.3
    
    
    
    15.3
    %
    
    
    196.3
    
    
    
    15.1
    %
    
    
    187.8
    
    
    
    14.8
    %Advertising and promotion
    
    
    11.0
    
    
    
    2.6
    %
    
    
    13.6
    
    
    
    3.3
    %
    
    
    40.2
    
    
    
    3.1
    %
    
    
    45.4
    
    
    
    3.6
    %Other selling, general and administrative
expenses
    
    
    22.0
    
    
    
    5.1
    %
    
    
    21.1
    
    
    
    5.1
    %
    
    
    66.7
    
    
    
    5.1
    %
    
    
    65.2
    
    
    
    5.1
    %Amortization expense
    
    
    2.3
    
    
    
    0.5
    %
    
    
    2.6
    
    
    
    0.6
    %
    
    
    7.3
    
    
    
    0.5
    %
    
    
    8.3
    
    
    
    0.7
    %Foreign currency (gain) loss
    
    
    
    
    
    
    0.0
    %
    
    
    0.1
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    0.2
    
    
    
    0.0
    %Total operating expenses
    
    
    383.4
    
    
    
    89.0
    %
    
    
    370.7
    
    
    
    89.5
    %
    
    
    1,159.7
    
    
    
    89.0
    %
    
    
    1,130.0
    
    
    
    89.3
    %Operating income:Retail
    
    
    37.3
    
    
    
    8.7
    %
    
    
    32.6
    
    
    
    7.9
    %
    
    
    123.3
    
    
    
    9.5
    %
    
    
    111.6
    
    
    
    8.8
    %Franchise
    
    
    22.5
    
    
    
    5.2
    %
    
    
    22.6
    
    
    
    5.4
    %
    
    
    61.2
    
    
    
    4.7
    %
    
    
    61.1
    
    
    
    4.9
    %Manufacturing / Wholesale
    
    
    18.9
    
    
    
    4.4
    %
    
    
    18.9
    
    
    
    4.6
    %
    
    
    54.1
    
    
    
    4.1
    %
    
    
    52.0
    
    
    
    4.1
    %Unallocated corporate and other
costs:Warehousing and distribution costs
    
    
    (13.5
    )
    
    
    -3.2
    %
    
    
    (13.5
    )
    
    
    -3.3
    %
    
    
    (40.5
    )
    
    
    -3.1
    %
    
    
    (41.1
    )
    
    
    -3.3
    %Corporate costs
    
    
    (17.8
    )
    
    
    -4.1
    %
    
    
    (17.1
    )
    
    
    -4.1
    %
    
    
    (54.7
    )
    
    
    -4.2
    %
    
    
    (48.6
    )
    
    
    -3.8
    %Subtotal unallocated corporate and
other costs, net
    
    
    (31.3
    )
    
    
    -7.3
    %
    
    
    (30.6
    )
    
    
    -7.4
    %
    
    
    (95.2
    )
    
    
    -7.3
    %
    
    
    (89.7
    )
    
    
    -7.1
    %Total operating income
    
    
    47.4
    
    
    
    11.0
    %
    
    
    43.5
    
    
    
    10.5
    %
    
    
    143.4
    
    
    
    11.0
    %
    
    
    135.0
    
    
    
    10.7
    %Interest expense, net
    
    
    16.9
    
    
    
    
    
    
    
    19.7
    
    
    
    
    
    
    
    53.0
    
    
    
    
    
    
    
    62.2Income before income taxes
    
    
    30.5
    
    
    
    
    
    
    
    23.8
    
    
    
    
    
    
    
    90.4
    
    
    
    
    
    
    
    72.8Income tax expense
    
    
    11.0
    
    
    
    
    
    
    
    7.5
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    26.1Net income
    
    $
    19.5
    
    
    
    
    
    
    $
    16.3
    
    
    
    
    
    
    $
    56.9
    
    
    
    
    
    
    $
    46.7
 
 Note:The numbers in the above table have been rounded to millions. All calculations
related to the Results of Operations for the year-over-year comparisons were derived from unrounded
data and could occasionally differ immaterially if you were to use the table above for these
calculations. 37




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##### Table of Contents



Comparison of the Three Months Ended September 30, 2009 and 2008
 Revenues
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 Cost of Sales
  Product costs.
 38




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##### Table of Contents



Warehousing and distribution costs.
 Occupancy costs.
 Selling, General and Administrative (SG&A) Expenses
  Compensation and related benefits.
 Advertising and promotion.
 Other SG&A.
 Foreign Currency (Loss) Gain
  Operating Income
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 39




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##### Table of Contents



Warehousing and Distribution Costs.
 Corporate Costs.
 Interest Expense
  Income Tax Expense
  Net Income
  Comparison of the Nine Months Ended September 30, 2009 and 2008
 Revenues
  Retail.
 Franchise.
 40




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##### Table of Contents



Manufacturing/Wholesale.
 Cost of Sales
  Product costs.
 Warehousing and distribution costs.
 Occupancy costs.
 Selling, General and Administrative (SG&A) Expenses
  Compensation and related benefits.
 41




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##### Table of Contents



Advertising and promotion.
 Other SG&A.
 Foreign Currency (Loss) Gain
  Operating Income
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 Warehousing and Distribution Costs.
 Corporate Costs.
 Interest Expense
  Income Tax Expense
  42




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##### Table of Contents



Net Income
  Liquidity and Capital Resources
     43




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##### Table of Contents



Nine months
    
    Nine monthsended September 30,
    
    ended September 30,(Dollars in millions)
    
    2009
    
    2008Cash provided by operating activities
    
    $
    77.8
    
    
    $
    63.8Cash used in investing activities
    
    
    (22.0
    )
    
    
    (45.9
    )Cash used in financing activities
    
    
    (33.9
    )
    
    
    (6.8
    )
 Cash Provided by Operating Activities
   Cash Used in Investing Activities
    Cash Used in Financing Activities
  44




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##### Table of Contents



$735.0 Million 2007 Senior Credit Facility
 Senior Toggle Notes
 10.75% Senior Subordinated Notes
 Contractual Obligations
  Off Balance Sheet Arrangements
   Effect of Inflation
  Critical Accounting Estimates
  45




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Recently Issued Accounting Pronouncements
        46




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47




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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
    Derivative
    

Total Notional Amount
    
    Term
    
    Counterparty Pays
    
    Company PaysInterest Rate Swap
    
    $150.0 million
    
    April 2007-April 2010
    
    LIBOR
    
    
    4.90
    %Interest Rate Swap
    
    $150.0 million
    
    April 2009-April 2011
    
    LIBOR
    
    
    3.07
    %Forward Interest Rate Swap
    
    $150.0 million
    
    April 2010-April 2011
    
    LIBOR
    
    
    3.41
    %Interest Rate Swap
    
    $100.0 million
    
    September 2008-September 2011
    
    LIBOR
    
    
    3.31
    %Interest Rate Swap
    
    $150.0 million
    
    September 2009-September 2012
    
    LIBOR
    
    
    2.69
    %
  48




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##### Table of Contents



Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  49




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##### Table of Contents



Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   Pro-Hormone/Androstenedione Cases. Stephens and Pio
  Guzman v. General Nutrition Companies, Inc
   50




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##### Table of Contents



Guzman
 Stephens and Pio v. General Nutrition
Companies, Inc. (Case No. 08 CH 37097, Circuit Court of Cook County, Illinois, County Department,
Chancery Division).
  California Wage and Break Claim
 California Wage and Break Claim
 Franchise Class Action.
 51




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##### Table of Contents



Creatine Claim.
 Jackson Claim.
 DiMauro Claim. forum non
conveniens
 Romero Claim
 Ciavarra Claim
 Hydroxycut Claims. see Ciavarra Claim
 52




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##### Table of Contents




    
    Michael Owens and Donna Owens v. Iovate Health Sciences USA, Inc., et al., Superior
Court of the State of California, County of Los Angeles;
    
    Eva M. Stasiak v. Iovate Health Sciences USA, Inc., et al., Superior Court of the
State of California, County of Los Angeles;
    
    Jaime Ruben Perez v. Gerald Brandt, individually and d/b/a/ Breakthru Products, et
al., 229th Judicial District, Duval County, Texas;
    
    Juan A. Noyola, II v. Iovate Health Sciences USA, Inc., et al., U.S. District Court,
Southern District of New York;
    
    Christopher and Dana Hamilton v. Iovate Health Sciences USA, Inc., et al., U.S.
District Court, Northern District of Ohio;
    
    Hector Manuel Abarca and Diana Curiel v. Iovate Health Sciences USA, Inc., et al.,
U.S. District Court, Northern District of California; and
    
    Jessica Rogoff v. General Nutrition Centers, Inc., et al., Superior Court of the
State of California, County of Los Angeles.
   
    
    Andrew Dremak, et al. v. Iovate Health Sciences Group, Inc., et al., U.S. District
Court, Southern District of California;
    
    Enjoli Pennier, et al. v. Iovate Health Sciences, et al., U.S. District Court,
Eastern District of Louisiana;
    
    Alejandro M. Jimenez, et al. v. Iovate Health Sciences, Inc., et al., U.S. District
Court, Eastern District of California;
    
    Amy Baker, et al. v. Iovate Health Sciences USA, Inc., et al., U.S. District Court,
Northern District of Alabama;
    
    Kyle Davis and Sara Carreon, et al. v. Iovate Health Sciences USA, Inc., et al.,
U.S. District Court, Northern District of Alabama; and,
    
    Lenny Charles Gunn, Tonya Rhoden, and Nicholas Atelevich, et al., v. Iovate Health
Sciences Group, Inc., et al., U.S. District Court, Southern District of California.
  Bedell Claim.
 Chen Claim
 53




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##### Table of Contents



California False Labeling and Consumer Fraud Claims.
 
    
    Michael Gonzales and Zia Nawabi, et al. v. Maximum Human Performance, Inc., et al., U.S.
District Court, Central District of California (Musclemeds);
    
    Michael Campos and Michael Gonzales, et al. v. LG Sciences, LLC, et al., Superior Court
of California, for the County of Orange (LG Sciences);
    
    Nicole Forlenza and Shaiden Monroe, et al. v. Dynakor Pharmacal, LLC, et al., U.S.
District Court, Central District of California; and
    
    Vance Monroe and Mac Gonzales, et al. v. Biotab Nutraceuticals, Inc., et al., U.S.
District Court, Southern District of California.
   Environmental Compliance
   54




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##### Table of Contents



Item 1A.
    
    Risk Factors.
  Risks Relating to Our Business and Industry
 General economic conditions, including continued weakening of the economy, may affect consumer
purchases, which could adversely affect our sales and the sales of our business partners.
  We operate in a highly competitive industry. Our failure to compete effectively could adversely
affect our market share, revenues, and growth prospects.
  Unfavorable publicity or consumer perception of our products and any similar products distributed
by other companies could cause fluctuations in our operating results and could have a material
adverse effect on our reputation, the demand for our products, and our ability to generate
revenues.
  55




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Our failure to appropriately respond to changing consumer preferences and demand for new products
could significantly harm our customer relationships and product sales.
   
    
    accurately anticipate customer needs;
    
    innovate and develop new products;
    
    successfully commercialize new products in a timely manner;
    
    price our products competitively;
    
    manufacture and deliver our products in sufficient volumes and in a timely manner; and
    
    differentiate our product offerings from those of our competitors.
  We depend on the services of key executives and changes in our management team could affect our
business strategy and adversely impact our performance and results of operations.
  Compliance with new and existing governmental regulations could increase our costs significantly
and adversely affect our results of operations.
  56




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##### Table of Contents



Our failure to comply with FTC regulations and existing consent decrees imposed on us by the FTC
could result in substantial monetary penalties and could adversely affect our operating results.
  We may incur material product liability claims, which could increase our costs and adversely affect
our reputation, revenues, and operating income.
  57




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##### Table of Contents



Compliance with the Iovate Hydroxycut recall has reduced our sales and margin and may adversely
affect our results of operations.
  Our operations are subject to environmental and health and safety laws and regulations that may
increase our cost of operations or expose us to environmental liabilities.
  Because we rely on our manufacturing operations to produce nearly all of the proprietary products
we sell, disruptions in our manufacturing system or losses of manufacturing certifications could
adversely affect our sales and customer relationships.
  If we fail to protect our brand name, competitors may adopt trade names that dilute the value of
our brand name.
  58




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##### Table of Contents



Intellectual property litigation and infringement claims against us could cause us to incur
significant expenses or prevent us from manufacturing, selling, or using some aspect of our
products, which could adversely affect our revenues and market share.
  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 if we fail
to attract new franchisees.
   Our operating results and financial condition could be adversely affected by the financial and
operational performance of Rite Aid.
  59




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##### Table of Contents



Economic, political, and other risks associated with our international operations could adversely
affect our revenues and international growth prospects.
  
    
    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;
    
    difficulty in operating our manufacturing facility abroad and procuring supplies from
overseas suppliers;
    
    exchange controls;
    
    problems entering international markets with different cultural bases and consumer
preferences; and
    
    fluctuations in foreign currency exchange rates.
  Franchise regulations could limit our ability to terminate or replace under-performing franchises,
which could adversely impact franchise revenues.
  We are not insured for a significant portion of our claims exposure, which could materially and
adversely affect our operating income and profitability.
  60




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##### Table of Contents



The controlling stockholders of our Parent may take actions that conflict with the interests of
other stockholders and investors. This control may have the effect of delaying or preventing
changes of control or changes in management.
  Risks Related to Our Substantial Debt
 Our substantial debt could adversely affect our results of operations and financial condition and
otherwise adversely impact our operating income and growth prospects.
     
    
    make it more difficult for us to satisfy our obligations with respect to the Senior
Toggle Notes and the 10.75% Senior Subordinated Notes;
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    require us to use all or a large portion of our cash flow from operations to pay
principal and interest on our debt, thereby reducing the availability of our cash flow to
fund working capital, research and development efforts, capital expenditures, and other
business activities;
    
    increase our vulnerability to general adverse economic and industry conditions;
 61




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##### Table of Contents




    
    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;
    
    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.
  Despite our current significant level of debt, we may still be able to incur additional debt, which
could increase the risks described above, adversely affect our financial health, or prevent us from
fulfilling our obligations under the Senior Toggle Notes and the 10.75% Senior Subordinated Notes.
  We require a significant amount of cash to service our debt. Our ability to generate cash depends
on many factors beyond our control and, as a result, we may not be able to make payments on our
debt obligations.
   We may not have the ability to raise the funds necessary to finance the change of control
offer required by the indentures, which could cause us to default on
our debt obligations, including the Senior Toggle Notes and the 10.75% Senior Subordinated Notes.
  62




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Restrictions in the agreements governing our existing indebtedness may prevent us from taking
actions that we believe would be in the best interest of our business.
  
    
    incurring additional indebtedness and issuing preferred stock;
    
    granting liens on our assets;
    
    making investments;
    
    consolidating or merging with, or acquiring, another business;
    
    selling or otherwise disposing our assets;
    
    paying dividends and making other distributions to our parent entities;
    
    entering into transactions with our affiliates; and
    
    incurring capital expenditures in excess of limitations set within the agreement.
   63




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##### Table of Contents



Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3.
    
    Defaults Upon Senior Securities.
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders.
  
 Item 5.
    
    Other Information.
  
 Item 6.
    
    Exhibits.
 ExhibitNo.
    
    Description31.1
    
    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 64




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SIGNATURES
  GENERAL NUTRITION CENTERS, INC.
(Registrant)November 5, 2009
    /s/ Joseph M. FortunatoJoseph M. FortunatoChief Executive Officer
(Principal Executive Officer)November 5, 2009
    /s/ Michael M. NuzzoMichael M. NuzzoChief Financial Officer
(Principal Financial Officer) 65