##### Table of Contents



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
 June 30, 2010
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 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
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



TABLE OF CONTENTS
 PAGEPART I  FINANCIAL INFORMATIONExplanatory NoteItem 1. Financial StatementsConsolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009
    
    
    1Unaudited Consolidated Statements of Operations for the three and six months ended June 30,
2010 and 2009
    
    
    2Unaudited Consolidated Statement of Stockholders Equity and Comprehensive Income
for the six months ended June 30, 2010 and 2009
    
    
    3Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2010
and 2009
    
    
    4Summarized Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 4. Controls and Procedures
    
    
    39PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3. Defaults Upon Senior Securities
    
    
    40Item 4. Removed and Reserved
    
    
    40Item 5. Other Information
    
    
    40Item 6. Exhibits
    
    
    40Signatures
    
    
    41EX-31.1EX-31.2EX-32.1




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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets
 (in thousands, except share data)
 June 30,
    
    
    December 31,2010
    
    
    2009 *(unaudited)Current assets:Cash and cash equivalents
    
    $
    118,515
    
    
    $
    75,089Receivables, net
    
    
    92,862
    
    
    
    94,355Inventories, net (Note 3)
    
    
    395,669
    
    
    
    370,492Prepaids and other current assets
    
    
    37,276
    
    
    
    42,219Total current assets
    
    
    644,322
    
    
    
    582,155Long-term assets:Goodwill (Note 4)
    
    
    624,910
    
    
    
    624,753Brands (Note 4)
    
    
    720,000
    
    
    
    720,000Other intangible assets, net (Note 4)
    
    
    150,607
    
    
    
    154,370Property, plant and equipment, net
    
    
    194,328
    
    
    
    199,581Deferred financing fees, net
    
    
    16,287
    
    
    
    18,411Other long-term assets
    
    
    4,458
    
    
    
    4,332Total long-term assets
    
    
    1,710,590
    
    
    
    1,721,447Total assets
    
    $
    2,354,912
    
    
    $
    2,303,602Current liabilities:Accounts payable
    
    $
    119,893
    
    
    $
    95,904Accrued payroll and related liabilities
    
    
    19,973
    
    
    
    22,277Accrued interest (Note 5)
    
    
    13,289
    
    
    
    14,552Current portion, long-term debt (Note 5)
    
    
    1,539
    
    
    
    1,724Deferred revenue and other current liabilities
    
    
    74,526
    
    
    
    65,130Total current liabilities
    
    
    229,220
    
    
    
    199,587Long-term liabilities:Long-term debt (Note 5)
    
    
    1,057,505
    
    
    
    1,058,085Deferred tax liabilities, net
    
    
    291,871
    
    
    
    288,894Other long-term liabilities
    
    
    32,968
    
    
    
    39,520Total long-term liabilities
    
    
    1,382,344
    
    
    
    1,386,499Total liabilities
    
    
    1,611,564
    
    
    
    1,586,086Stockholders equity:Common stock, $0.01 par value,
1,000 shares authorized, 100 shares issued and
outstanding
    
    
    
    
    
    
    Paid-in-capital
    
    
    596,508
    
    
    
    594,932Retained earnings
    
    
    152,959
    
    
    
    129,783Accumulated other comprehensive loss
    
    
    (6,119
    )
    
    
    (7,199
    )Total stockholders equity
    
    
    743,348
    
    
    
    717,516Total liabilities and stockholders equity
    
    $
    2,354,912
    
    
    $
    2,303,602
 
 *
    
    Footnotes summarized from the Audited Financial Statements  1




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Operations
 (unaudited)
 (in thousands)
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    $
    455,903
    
    
    $
    432,416
    
    
    $
    920,922
    
    
    $
    872,313Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    292,251
    
    
    
    280,906
    
    
    
    591,368
    
    
    
    566,635Gross profit
    
    
    163,652
    
    
    
    151,510
    
    
    
    329,554
    
    
    
    305,678Compensation and related benefits
    
    
    67,633
    
    
    
    65,526
    
    
    
    135,391
    
    
    
    130,851Advertising and promotion
    
    
    14,122
    
    
    
    14,395
    
    
    
    29,576
    
    
    
    29,134Other selling, general and administrative
    
    
    25,164
    
    
    
    25,881
    
    
    
    50,258
    
    
    
    49,734Foreign currency (gain) loss
    
    
    19
    
    
    
    (130
    )
    
    
    (57
    )
    
    
    (33
    )Operating income
    
    
    56,714
    
    
    
    45,838
    
    
    
    114,386
    
    
    
    95,992Interest expense, net (Note 5)
    
    
    16,317
    
    
    
    17,081
    
    
    
    32,946
    
    
    
    36,143Income before income taxes
    
    
    40,397
    
    
    
    28,757
    
    
    
    81,440
    
    
    
    59,849Income tax expense (Note 11)
    
    
    14,796
    
    
    
    10,791
    
    
    
    29,880
    
    
    
    22,437Net income
    
    $
    25,601
    
    
    $
    17,966
    
    
    $
    51,560
    
    
    $
    37,412
  2




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 
 Consolidated Statement of Stockholders Equity and Comprehensive Income
 (in thousands, except share data)
 AccumulatedOther
    
    
    TotalCommon Stock
    
    
    
    
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Dollars
    
    
    Paid-in-Capital
    
    
    Earnings
    
    
    Income/(Loss)
    
    
    EquityBalance at December 31, 2009
    
    
    100
    
    
    $
    
    
    
    $
    594,932
    
    
    $
    129,783
    
    
    $
    (7,199
    )
    
    $
    717,516Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,560
    
    
    
    
    
    
    
    51,560Unrealized gain on derivatives designated and qualified
as cash flow hedges, net of tax of $874
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,526
    
    
    
    1,526Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (446
    )
    
    
    (446
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,640Non-cash stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,576
    
    
    
    
    
    
    
    
    
    
    
    1,576Dividend payment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,384
    )
    
    
    
    
    
    
    (28,384
    )Balance at June 30, 2010 (unaudited)
    
    
    100
    
    
    $
    
    
    
    $
    596,508
    
    
    $
    152,959
    
    
    $
    (6,119
    )
    
    $
    743,348Balance at December 31, 2008
    
    
    100
    
    
    $
    
    
    
    $
    592,355
    
    
    $
    73,764
    
    
    $
    (14,057
    )
    
    $
    652,062Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,412
    
    
    
    
    
    
    
    37,412Unrealized gain on derivatives designated and qualified
as cash flow hedges, net of tax of $1,422
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,485
    
    
    
    2,485Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,267
    
    
    
    1,267Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,164Return of capital to GNC Corporation
    
    
    
    
    
    
    
    
    
    
    (278
    )
    
    
    
    
    
    
    
    
    
    
    (278
    )Non-cash stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,343
    
    
    
    
    
    
    
    
    
    
    
    1,343Dividend payment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at June 30, 2009 (unaudited)
    
    
    100
    
    
    $
    
    
    
    $
    593,420
    
    
    $
    111,176
    
    
    $
    (10,305
    )
    
    $
    694,291
  3




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 (unaudited)
 (in thousands)
 Six months endedJune 30,
    
    
    June 30,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    51,560
    
    
    $
    37,412Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation expense
    
    
    18,821
    
    
    
    18,059Amortization of intangible assets
    
    
    4,051
    
    
    
    4,950Amortization of deferred financing fees
    
    
    2,124
    
    
    
    2,026Amortization of original issue discount
    
    
    201
    
    
    
    182Increase in provision for inventory losses
    
    
    5,943
    
    
    
    5,779Non-cash stock-based compensation
    
    
    1,576
    
    
    
    1,343Decrease in provision for losses on accounts receivable
    
    
    (662
    )
    
    
    (1,503
    )Decrease (increase) in net deferred
taxes
    
    
    
    
    
    
    82Changes in assets and liabilities:Decrease (increase) in
receivables
    
    
    2,043
    
    
    
    (517
    )Increase in inventory,
net
    
    
    (31,556
    )
    
    
    (26,988
    )Increase in franchise note receivables,
net
    
    
    (30
    )
    
    
    (178
    )Increase in accrued income
taxes
    
    
    5,498
    
    
    
    9,783Decrease in other
assets
    
    
    152
    
    
    
    5,187Increase (decrease) in accounts
payable
    
    
    24,052
    
    
    
    (4,754
    )Decrease in interest
payable
    
    
    (1,264
    )
    
    
    (1,786
    )Increase in accrued
liabilities
    
    
    4,045
    
    
    
    7,265Net cash provided by operating activities
    
    
    86,554
    
    
    
    56,342CASH FLOWS FROM INVESTING ACTIVITIES:Capital
expenditures
    
    
    (13,675
    )
    
    
    (11,303
    )Franchise store
conversions
    
    
    65
    
    
    
    158Store acquisition
costs
    
    
    (240
    )
    
    
    (1,050
    )Net cash used in investing activities
    
    
    (13,850
    )
    
    
    (12,195
    )CASH FLOWS FROM FINANCING ACTIVITIES:Return of capital to Parent company
    
    
    
    
    
    
    (278
    )Dividend payment
    
    
    (28,384
    )
    
    
    (45
    )Payments on long-term
debt
    
    
    (966
    )
    
    
    (19,623
    )Net cash used in financing activities
    
    
    (29,350
    )
    
    
    (19,946
    )Effect of exchange rate on cash
    
    
    72
    
    
    
    67Net increase in cash
    
    
    43,426
    
    
    
    24,268Beginning balance, cash
    
    
    75,089
    
    
    
    42,307Ending balance, cash
    
    $
    118,515
    
    
    $
    66,575
  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 AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    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 .
  Balance Sheet Location
    
    
    June 30, 2010
    
    
    December 31, 2009(unaudited)(in thousands)Interest Rate Products
    
    Deferred revenue and other current liabilities
    
    $
    (5,780
    )
    
    $
    Interest Rate Products
    
    Other long-term liabilities
    
    $
    (6,499
    )
    
    $
    (14,679
    )
   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)(unaudited)(in thousands)2010Interest Rate Products
    
    $
    (1,616
    )
    
    Interest income (expense)
    
    $
    (3,577
    )2009Interest Rate Products
    
    $
    409
    
    
    Interest income (expense)
    
    $
    (2,650
    )
  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)(unaudited)(in thousands)2010Interest Rate Products
    
    $
    (5,275
    )
    
    Interest income (expense)
    
    $
    (7,675
    )2009Interest Rate Products
    
    $
    (1,796
    )
    
    Interest income (expense)
    
    $
    (5,703
    )
   Recently Issued Accounting Pronouncements
  8




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 3. INVENTORIES, NET
  June 30, 2010Net CarryingGross cost
    
    
    Reserves (a)
    
    
    Value(unaudited)(in thousands)Finished product ready for sale
    
    $
    329,310
    
    
    $
    (7,253
    )
    
    $
    322,057Work-in-process, bulk product and raw
materials
    
    
    68,612
    
    
    
    (1,439
    )
    
    
    67,173Packaging
supplies
    
    
    6,439
    
    
    
    
    
    
    
    6,439$
    404,361
    
    
    $
    (8,692
    )
    
    $
    395,669
 December 31, 2009Net CarryingGross cost
    
    
    Reserves (a)
    
    
    Value(in thousands)Finished product ready for sale
    
    $
    319,688
    
    
    $
    (8,266
    )
    
    $
    311,422Work-in-process, bulk product and raw
materials
    
    
    54,803
    
    
    
    (1,288
    )
    
    
    53,515Packaging
supplies
    
    
    5,555
    
    
    
    
    
    
    
    5,555$
    380,046
    
    
    $
    (9,554
    )
    
    $
    370,492
 
 (a)
    
    Reserves primarily consist of amounts recorded for valuation and obsolescence. NOTE 4. GOODWILL AND INTANGIBLE ASSETS, NET
    Manufacturing/Retail
    
    
    Franchising
    
    
    Wholesale
    
    
    Total(in thousands)Balance at December 31, 2009
    
    $
    304,609
    
    
    $
    117,303
    
    
    $
    202,841
    
    
    $
    624,753Acquired franchise stores
    
    
    157
    
    
    
    
    
    
    
    
    
    
    
    157Balance at June 30, 2010
(unaudited)
    
    $
    304,766
    
    
    $
    117,303
    
    
    $
    202,841
    
    
    $
    624,910
 9




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Retail
    
    
    Franchise
    
    
    Operating
    
    
    FranchiseGold Card
    
    
    Brand
    
    
    Brand
    
    
    Agreements
    
    
    Rights
    
    
    Total(in thousands)Balance at December 31, 2009
    
    $
    375
    
    
    $
    500,000
    
    
    $
    220,000
    
    
    $
    153,076
    
    
    $
    919
    
    
    $
    874,370Acquired franchise stores
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288
    
    
    
    288Amortization expense
    
    
    (375
    )
    
    
    
    
    
    
    
    
    
    
    (3,426
    )
    
    
    (250
    )
    
    
    (4,051
    )Balance at June 30, 2010
(unaudited)
    
    $
    
    
    
    $
    500,000
    
    
    $
    220,000
    
    
    $
    149,650
    
    
    $
    957
    
    
    $
    870,607
  Estimated
    
    
    June 30, 2010
    
    
    December 31, 2009Life
    
    
    
    
    
    
    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
    
    
    
    (3,500
    )
    
    
    
    
    
    
    3,500
    
    
    
    (3,354
    )
    
    
    146Gold card 
franchise
    
    
    3
    
    
    
    5,500
    
    
    
    (5,500
    )
    
    
    
    
    
    
    5,500
    
    
    
    (5,271
    )
    
    
    229Retail agreements
    
    
    25-35
    
    
    
    31,000
    
    
    
    (3,616
    )
    
    
    27,384
    
    
    
    31,000
    
    
    
    (3,090
    )
    
    
    27,910Franchise
agreements
    
    
    25
    
    
    
    70,000
    
    
    
    (9,217
    )
    
    
    60,783
    
    
    
    70,000
    
    
    
    (7,817
    )
    
    
    62,183Manufacturing agreements
    
    
    25
    
    
    
    70,000
    
    
    
    (9,217
    )
    
    
    60,783
    
    
    
    70,000
    
    
    
    (7,817
    )
    
    
    62,183Other intangibles
    
    
    5
    
    
    
    1,150
    
    
    
    (450
    )
    
    
    700
    
    
    
    1,150
    
    
    
    (350
    )
    
    
    800Franchise rights
    
    
    1-5
    
    
    
    3,349
    
    
    
    (2,392
    )
    
    
    957
    
    
    
    3,061
    
    
    
    (2,142
    )
    
    
    919$
    904,499
    
    
    $
    (33,892
    )
    
    $
    870,607
    
    
    $
    904,211
    
    
    $
    (29,841
    )
    
    $
    874,370
  EstimatedamortizationYears ending December 31,
    
    expense(unaudited)(in thousands)2010
    
    
    3,6922011
    
    
    7,2082012
    
    
    7,0482013
    
    
    6,9532014
    
    
    6,696Thereafter
    
    
    119,010Total
    
    $
    150,607
 10




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 5. LONG-TERM DEBT / INTEREST EXPENSE
  June 30,
    
    
    December 31,2010
    
    
    2009(unaudited)(in thousands)2007 Senior Credit Facility
    
    $
    644,382
    
    
    $
    644,619Senior Toggle Notes
    
    
    298,160
    
    
    
    297,95910.75% Senior Subordinated Notes
    
    
    110,000
    
    
    
    110,000Mortgage
    
    
    6,461
    
    
    
    7,184Capital
leases
    
    
    41
    
    
    
    47Less: current maturities
    
    
    (1,539
    )
    
    
    (1,724
    )Total
    
    $
    1,057,505
    
    
    $
    1,058,085
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(unaudited)(in thousands)2007 Senior Credit FacilityTerm Loan
    
    $
    7,228
    
    
    $
    7,943
    
    
    $
    14,783
    
    
    $
    17,148Revolver
    
    
    112
    
    
    
    129
    
    
    
    224
    
    
    
    265Senior Toggle Notes
    
    
    4,853
    
    
    
    4,803
    
    
    
    9,709
    
    
    
    10,33410.75% Senior Subordinated Notes
    
    
    2,956
    
    
    
    2,956
    
    
    
    5,912
    
    
    
    5,912Deferred financing fees
    
    
    1,068
    
    
    
    1,025
    
    
    
    2,124
    
    
    
    2,026Mortgage
    
    
    116
    
    
    
    141
    
    
    
    231
    
    
    
    288OID amortization
    
    
    102
    
    
    
    93
    
    
    
    201
    
    
    
    182Interest income-other
    
    
    (118
    )
    
    
    (9
    )
    
    
    (238
    )
    
    
    (12
    )Interest expense, net
    
    $
    16,317
    
    
    $
    17,081
    
    
    $
    32,946
    
    
    $
    36,143
  June 30,
    
    
    December 31,2010
    
    
    2009(unaudited)(in thousands)2007 Senior Credit Facility
    
    $
    4,082
    
    
    $
    5,350Senior Toggle Notes
    
    
    5,725
    
    
    
    5,72010.75% Senior Subordinated
Notes
    
    
    3,482
    
    
    
    3,482Total
    
    $
    13,289
    
    
    $
    14,552
 11




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  NOTE 6. FINANCIAL INSTRUMENTS
  June 30,
    
    
    December 31,2010
    
    
    2009Carrying
    
    Fair
    
    
    Carrying
    
    FairAmount
    
    Value
    
    
    Amount
    
    Value(unaudited)(in thousands)Cash and cash equivalents
    
    $
    118,515
    
    
    $
    118,515
    
    
    
    $
    75,089
    
    
    $
    75,089Receivables
    
    
    92,862
    
    
    
    92,862
    
    
    
    
    94,355
    
    
    
    94,355Franchise notes receivable
    
    
    3,260
    
    
    
    3,260
    
    
    
    
    3,364
    
    
    
    3,364Accounts payable
    
    
    119,893
    
    
    
    119,893
    
    
    
    
    95,904
    
    
    
    95,904Long term debt (including current portion)
    
    
    1,059,044
    
    
    
    978,768
    
    
    
    
    1,059,809
    
    
    
    977,718
 12




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 7. COMMITMENTS AND CONTINGENCIES
 Litigation
   Hydroxycut Claims. see the Ciavarra
Claim
  Pro-Hormone/Androstenedione Cases.
 California Wage and Break Claim
 13




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Other cases.
 Environmental Compliance
   Contingencies
  14




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 8. STOCK-BASED COMPENSATION PLANS
 Stock Options
    WeightedAverageTotal Options
    
    Exercise PriceOutstanding at December 31, 2009
    
    
    9,263,640
    
    
    $
    7.27Granted
    
    
    380,000
    
    
    
    11.57Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (377,325
    )
    
    
    7.64Expired
    
    
    (28,502
    )
    
    
    6.25Outstanding at June 30, 2010
    
    
    9,237,813
    
    
    $
    7.44Exercisable at June 30, 2010
    
    
    4,825,576
    
    
    $
    6.70
    15




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 June 30,2010(unaudited)Dividend yield
    
    
    0.00
    %Expected option life
    
    7.5 yearsVolatility factor percentage of market price
    
    
    31.5
    %Discount rate
    
    
    2.98 - 3.28
    %
  NOTE 9. SEGMENTS
  16




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(unaudited)(in thousands)Revenue:Retail
    
    $
    342,834
    
    
    $
    316,942
    
    
    $
    693,668
    
    
    $
    650,654Franchise
    
    
    73,043
    
    
    
    69,225
    
    
    
    145,645
    
    
    
    133,708Manufacturing/Wholesale:Intersegment (1)
    
    
    51,262
    
    
    
    50,267
    
    
    
    98,607
    
    
    
    98,018Third Party
    
    
    40,026
    
    
    
    46,249
    
    
    
    81,609
    
    
    
    87,951Sub total Manufacturing/Wholesale
    
    
    91,288
    
    
    
    96,516
    
    
    
    180,216
    
    
    
    185,969Sub total segment revenues
    
    
    507,165
    
    
    
    482,683
    
    
    
    1,019,529
    
    
    
    970,331Intersegment elimination (1)
    
    
    (51,262
    )
    
    
    (50,267
    )
    
    
    (98,607
    )
    
    
    (98,018
    )Total revenue
    
    $
    455,903
    
    
    $
    432,416
    
    
    $
    920,922
    
    
    $
    872,313Operating income:Retail
    
    $
    49,382
    
    
    $
    41,583
    
    
    $
    99,578
    
    
    $
    86,026Franchise
    
    
    22,930
    
    
    
    19,550
    
    
    
    45,331
    
    
    
    38,757Manufacturing/Wholesale
    
    
    16,367
    
    
    
    17,337
    
    
    
    33,239
    
    
    
    35,218Unallocated corporate and other costs:Warehousing and distribution costs
    
    
    (13,773
    )
    
    
    (13,700
    )
    
    
    (27,665
    )
    
    
    (27,017
    )Corporate costs
    
    
    (18,192
    )
    
    
    (18,932
    )
    
    
    (36,097
    )
    
    
    (36,992
    )Sub total unallocated corporate and
other costs
    
    
    (31,965
    )
    
    
    (32,632
    )
    
    
    (63,762
    )
    
    
    (64,009
    )Total operating income
    
    $
    56,714
    
    
    $
    45,838
    
    
    $
    114,386
    
    
    $
    95,992
 
 (1)
    
    Intersegment revenues are eliminated from consolidated
revenue. 17




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 10. SUPPLEMENTAL GUARANTOR INFORMATION
   18




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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-GuarantorJune 30, 2010
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Current assetsCash and cash equivalents
    
    $
    110,581
    
    
    $
    2,965
    
    
    $
    4,969
    
    
    $
    
    
    
    $
    118,515Receivables, net
    
    
    493
    
    
    
    91,625
    
    
    
    744
    
    
    
    
    
    
    
    92,862Intercompany receivables
    
    
    80,223
    
    
    
    
    
    
    
    
    
    
    
    (80,223
    )
    
    
    Inventories, net
    
    
    
    
    
    
    365,756
    
    
    
    29,913
    
    
    
    
    
    
    
    395,669Prepaids and other current assets
    
    
    14,466
    
    
    
    18,224
    
    
    
    4,586
    
    
    
    
    
    
    
    37,276Total current assets
    
    
    205,763
    
    
    
    478,570
    
    
    
    40,212
    
    
    
    (80,223
    )
    
    
    644,322Goodwill
    
    
    
    
    
    
    624,442
    
    
    
    468
    
    
    
    
    
    
    
    624,910Brands
    
    
    
    
    
    
    720,000
    
    
    
    
    
    
    
    
    
    
    
    720,000Property, plant and equipment, net
    
    
    6,545
    
    
    
    159,729
    
    
    
    28,054
    
    
    
    
    
    
    
    194,328Investment in subsidiaries
    
    
    1,604,858
    
    
    
    (7,903
    )
    
    
    
    
    
    
    (1,596,955
    )
    
    
    Other assets
    
    
    26,971
    
    
    
    153,162
    
    
    
    
    
    
    
    (8,781
    )
    
    
    171,352Total assets
    
    $
    1,844,137
    
    
    $
    2,128,000
    
    
    $
    68,734
    
    
    $
    (1,685,959
    )
    
    $
    2,354,912Current liabilitiesCurrent liabilities
    
    $
    32,175
    
    
    $
    183,559
    
    
    $
    13,486
    
    
    $
    
    
    
    $
    229,220Intercompany payables
    
    
    
    
    
    
    60,787
    
    
    
    19,436
    
    
    
    (80,223
    )
    
    
    Total current liabilities
    
    
    32,175
    
    
    
    244,346
    
    
    
    32,922
    
    
    
    (80,223
    )
    
    
    229,220Long-term debt
    
    
    1,052,542
    
    
    
    26
    
    
    
    13,718
    
    
    
    (8,781
    )
    
    
    1,057,505Deferred tax liabilities
    
    
    (1,776
    )
    
    
    294,086
    
    
    
    (439
    )
    
    
    
    
    
    
    291,871Other long-term liabilities
    
    
    17,848
    
    
    
    13,327
    
    
    
    1,793
    
    
    
    
    
    
    
    32,968Total liabilities
    
    
    1,100,789
    
    
    
    551,785
    
    
    
    47,994
    
    
    
    (89,004
    )
    
    
    1,611,564Total stockholders equity
(deficit)
    
    
    743,348
    
    
    
    1,576,215
    
    
    
    20,740
    
    
    
    (1,596,955
    )
    
    
    743,348Total liabilities and stockholders
equity (deficit)
    
    $
    1,844,137
    
    
    $
    2,128,000
    
    
    $
    68,734
    
    
    $
    (1,685,959
    )
    
    $
    2,354,912
 19




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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-GuarantorDecember 31, 2009
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Current assetsCash and cash equivalents
    
    $
    77,797
    
    
    $
    (4,801
    )
    
    $
    2,093
    
    
    $
    
    
    
    $
    75,089Receivables, net
    
    
    895
    
    
    
    92,273
    
    
    
    1,187
    
    
    
    
    
    
    
    94,355Intercompany receivables
    
    
    139,168
    
    
    
    
    
    
    
    
    
    
    
    (139,168
    )
    
    
    Inventories, net
    
    
    
    
    
    
    339,975
    
    
    
    30,517
    
    
    
    
    
    
    
    370,492Prepaids and other current assets
    
    
    19,308
    
    
    
    14,409
    
    
    
    8,502
    
    
    
    
    
    
    
    42,219Total current assets
    
    
    237,168
    
    
    
    441,856
    
    
    
    42,299
    
    
    
    (139,168
    )
    
    
    582,155Goodwill
    
    
    
    
    
    
    624,285
    
    
    
    468
    
    
    
    
    
    
    
    624,753Brands
    
    
    
    
    
    
    720,000
    
    
    
    
    
    
    
    
    
    
    
    720,000Property, plant and equipment, net
    
    
    7,409
    
    
    
    163,882
    
    
    
    28,290
    
    
    
    
    
    
    
    199,581Investment in subsidiaries
    
    
    1,550,708
    
    
    
    (7,687
    )
    
    
    
    
    
    
    (1,543,021
    )
    
    
    Other assets
    
    
    28,876
    
    
    
    157,018
    
    
    
    
    
    
    
    (8,781
    )
    
    
    177,113Total assets
    
    $
    1,824,161
    
    
    $
    2,099,354
    
    
    $
    71,057
    
    
    $
    (1,690,970
    )
    
    $
    2,303,602Current liabilitiesCurrent liabilities
    
    $
    34,129
    
    
    $
    154,435
    
    
    $
    11,023
    
    
    $
    
    
    
    $
    199,587Intercompany payables
    
    
    
    
    
    
    113,359
    
    
    
    25,809
    
    
    
    (139,168
    )
    
    
    Total current liabilities
    
    
    34,129
    
    
    
    267,794
    
    
    
    36,832
    
    
    
    (139,168
    )
    
    
    199,587Long-term debt
    
    
    1,052,341
    
    
    
    32
    
    
    
    14,493
    
    
    
    (8,781
    )
    
    
    1,058,085Deferred tax liabilities
    
    
    (4,754
    )
    
    
    294,087
    
    
    
    (439
    )
    
    
    
    
    
    
    288,894Other long-term liabilities
    
    
    24,929
    
    
    
    14,129
    
    
    
    462
    
    
    
    
    
    
    
    39,520Total liabilities
    
    
    1,106,645
    
    
    
    576,042
    
    
    
    51,348
    
    
    
    (147,949
    )
    
    
    1,586,086Total stockholders equity
(deficit)
    
    
    717,516
    
    
    
    1,523,312
    
    
    
    19,709
    
    
    
    (1,543,021
    )
    
    
    717,516Total liabilities and stockholders
equity (deficit)
    
    $
    1,824,161
    
    
    $
    2,099,354
    
    
    $
    71,057
    
    
    $
    (1,690,970
    )
    
    $
    2,303,602
 20




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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 June 30, 2010
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    431,575
    
    
    $
    27,887
    
    
    $
    (3,559
    )
    
    $
    455,903Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    275,228
    
    
    
    20,582
    
    
    
    (3,559
    )
    
    
    292,251Gross profit
    
    
    
    
    
    
    156,347
    
    
    
    7,305
    
    
    
    
    
    
    
    163,652Compensation and related benefits
    
    
    10,932
    
    
    
    52,276
    
    
    
    4,425
    
    
    
    
    
    
    
    67,633Advertising and promotion
    
    
    
    
    
    
    13,781
    
    
    
    341
    
    
    
    
    
    
    
    14,122Other selling, general and administrative
    
    
    7,783
    
    
    
    17,245
    
    
    
    136
    
    
    
    
    
    
    
    25,164Subsidiary (income) expense
    
    
    (27,532
    )
    
    
    154
    
    
    
    
    
    
    
    27,378
    
    
    
    Other (income) expense
    
    
    (17,674
    )
    
    
    16,504
    
    
    
    1,189
    
    
    
    
    
    
    
    19Operating income
(loss)
    
    
    26,491
    
    
    
    56,387
    
    
    
    1,214
    
    
    
    (27,378
    )
    
    
    56,714Interest expense, net
    
    
    890
    
    
    
    15,150
    
    
    
    277
    
    
    
    
    
    
    
    16,317Income (loss) before income taxes
    
    
    25,601
    
    
    
    41,237
    
    
    
    937
    
    
    
    (27,378
    )
    
    
    40,397Income tax (benefit) expense
    
    
    
    
    
    
    14,510
    
    
    
    286
    
    
    
    
    
    
    
    14,796Net income (loss)
    
    $
    25,601
    
    
    $
    26,727
    
    
    $
    651
    
    
    $
    (27,378
    )
    
    $
    25,601
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorSix months ended June 30, 2010
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    871,355
    
    
    $
    56,318
    
    
    $
    (6,751
    )
    
    $
    920,922Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    557,129
    
    
    
    40,990
    
    
    
    (6,751
    )
    
    
    591,368Gross profit
    
    
    
    
    
    
    314,226
    
    
    
    15,328
    
    
    
    
    
    
    
    329,554Compensation and related benefits
    
    
    21,101
    
    
    
    105,606
    
    
    
    8,684
    
    
    
    
    
    
    
    135,391Advertising and promotion
    
    
    
    
    
    
    28,948
    
    
    
    628
    
    
    
    
    
    
    
    29,576Other selling, general and administrative
    
    
    15,886
    
    
    
    33,980
    
    
    
    392
    
    
    
    
    
    
    
    50,258Subsidiary (income) expense
    
    
    (54,598
    )
    
    
    217
    
    
    
    
    
    
    
    54,381
    
    
    
    Other (income) expense
    
    
    (35,017
    )
    
    
    31,987
    
    
    
    2,973
    
    
    
    
    
    
    
    (57
    )Operating income
(loss)
    
    
    52,628
    
    
    
    113,488
    
    
    
    2,651
    
    
    
    (54,381
    )
    
    
    114,386Interest expense, net
    
    
    1,739
    
    
    
    30,657
    
    
    
    550
    
    
    
    
    
    
    
    32,946Income (loss) before income taxes
    
    
    50,889
    
    
    
    82,831
    
    
    
    2,101
    
    
    
    (54,381
    )
    
    
    81,440Income tax (benefit) expense
    
    
    (671
    )
    
    
    29,928
    
    
    
    623
    
    
    
    
    
    
    
    29,880Net income (loss)
    
    $
    51,560
    
    
    $
    52,903
    
    
    $
    1,478
    
    
    $
    (54,381
    )
    
    $
    51,560
 21




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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 June 30, 2009
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    410,575
    
    
    $
    25,029
    
    
    $
    (3,188
    )
    
    $
    432,416Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    266,292
    
    
    
    17,802
    
    
    
    (3,188
    )
    
    
    280,906Gross profit
    
    
    
    
    
    
    144,283
    
    
    
    7,227
    
    
    
    
    
    
    
    151,510Compensation and related benefits
    
    
    10,658
    
    
    
    50,841
    
    
    
    4,027
    
    
    
    
    
    
    
    65,526Advertising and promotion
    
    
    
    
    
    
    14,173
    
    
    
    222
    
    
    
    
    
    
    
    14,395Other selling, general and administrative
    
    
    8,910
    
    
    
    17,049
    
    
    
    (78
    )
    
    
    
    
    
    
    25,881Subsidiary (income) expense
    
    
    (19,207
    )
    
    
    (1,509
    )
    
    
    
    
    
    
    20,716
    
    
    
    Other (income) expense
    
    
    (18,547
    )
    
    
    17,543
    
    
    
    874
    
    
    
    
    
    
    
    (130
    )Operating income
(loss)
    
    
    18,186
    
    
    
    46,186
    
    
    
    2,182
    
    
    
    (20,716
    )
    
    
    45,838Interest expense, net
    
    
    889
    
    
    
    15,894
    
    
    
    298
    
    
    
    
    
    
    
    17,081Income (loss) before income taxes
    
    
    17,297
    
    
    
    30,292
    
    
    
    1,884
    
    
    
    (20,716
    )
    
    
    28,757Income tax (benefit) expense
    
    
    (669
    )
    
    
    11,085
    
    
    
    375
    
    
    
    
    
    
    
    10,791Net income (loss)
    
    $
    17,966
    
    
    $
    19,207
    
    
    $
    1,509
    
    
    $
    (20,716
    )
    
    $
    17,966
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorSix months ended June 30, 2009
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    829,157
    
    
    $
    49,441
    
    
    $
    (6,285
    )
    
    $
    872,313Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    538,469
    
    
    
    34,451
    
    
    
    (6,285
    )
    
    
    566,635Gross profit
    
    
    
    
    
    
    290,688
    
    
    
    14,990
    
    
    
    
    
    
    
    305,678Compensation and related benefits
    
    
    20,742
    
    
    
    102,376
    
    
    
    7,733
    
    
    
    
    
    
    
    130,851Advertising and promotion
    
    
    
    
    
    
    28,646
    
    
    
    488
    
    
    
    
    
    
    
    29,134Other selling, general and administrative
    
    
    17,134
    
    
    
    32,460
    
    
    
    140
    
    
    
    
    
    
    
    49,734Subsidiary (income) expense
    
    
    (39,645
    )
    
    
    (2,954
    )
    
    
    
    
    
    
    42,599
    
    
    
    Other (income) expense
    
    
    (36,139
    )
    
    
    34,250
    
    
    
    1,856
    
    
    
    
    
    
    
    (33
    )Operating income
(loss)
    
    
    37,908
    
    
    
    95,910
    
    
    
    4,773
    
    
    
    (42,599
    )
    
    
    95,992Interest expense, net
    
    
    1,764
    
    
    
    33,789
    
    
    
    590
    
    
    
    
    
    
    
    36,143Income (loss) before income taxes
    
    
    36,144
    
    
    
    62,121
    
    
    
    4,183
    
    
    
    (42,599
    )
    
    
    59,849Income tax (benefit) expense
    
    
    (1,268
    )
    
    
    22,476
    
    
    
    1,229
    
    
    
    
    
    
    
    22,437Net income (loss)
    
    $
    37,412
    
    
    $
    39,645
    
    
    $
    2,954
    
    
    $
    (42,599
    )
    
    $
    37,412
 22




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Supplemental Condensed Consolidating Statements of Cash Flows
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorSix months ended June 30, 2010
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)(in thousands)NET CASH PROVIDED BY OPERATING ACTIVITIES:
    
    $
    
    
    
    $
    81,712
    
    
    $
    4,842
    
    
    $
    86,554CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (1,246
    )
    
    
    (11,114
    )
    
    
    (1,315
    )
    
    
    (13,675
    )Investment/distribution
    
    
    62,651
    
    
    
    (62,651
    )
    
    
    
    
    
    
    Other investing
    
    
    
    
    
    
    (175
    )
    
    
    
    
    
    
    (175
    )Net cash provided by (used in) investing activities
    
    
    61,405
    
    
    
    (73,940
    )
    
    
    (1,315
    )
    
    
    (13,850
    )CASH FLOWS FROM FINANCING ACTIVITIES:Dividend payment
    
    
    (28,384
    )
    
    
    
    
    
    
    
    
    
    
    (28,384
    )Other financing
    
    
    (237
    )
    
    
    (6
    )
    
    
    (723
    )
    
    
    (966
    )Net cash used in financing activities
    
    
    (28,621
    )
    
    
    (6
    )
    
    
    (723
    )
    
    
    (29,350
    )Effect of exchange rate on cash
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    72Net increase in
cash
    
    
    32,784
    
    
    
    7,766
    
    
    
    2,876
    
    
    
    43,426Beginning balance, cash
    
    
    77,797
    
    
    
    (4,801
    )
    
    
    2,093
    
    
    
    75,089Ending balance,
cash
    
    $
    110,581
    
    
    $
    2,965
    
    
    $
    4,969
    
    
    $
    118,515
 23




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorSix months ended June 30, 2009
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)(in thousands)NET CASH PROVIDED BY OPERATING ACTIVITIES:
    
    $
    
    
    
    $
    53,496
    
    
    $
    2,846
    
    
    $
    56,342CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (1,359
    )
    
    
    (8,230
    )
    
    
    (1,714
    )
    
    
    (11,303
    )Investment/distribution
    
    
    85,810
    
    
    
    (85,810
    )
    
    
    
    
    
    
    Other investing
    
    
    
    
    
    
    (892
    )
    
    
    
    
    
    
    (892
    )Net cash provided by (used in) investing activities
    
    
    84,451
    
    
    
    (94,932
    )
    
    
    (1,714
    )
    
    
    (12,195
    )CASH FLOWS FROM FINANCING ACTIVITIES:GNC Corporation investment in
General Nutrition Centers, Inc.
    
    
    (278
    )
    
    
    
    
    
    
    
    
    
    
    (278
    )Financing fees
    
    
    (45
    )
    
    
    
    
    
    
    
    
    
    
    (45
    )Other financing
    
    
    (18,944
    )
    
    
    (4
    )
    
    
    (675
    )
    
    
    (19,623
    )Net cash used in financing activities
    
    
    (19,267
    )
    
    
    (4
    )
    
    
    (675
    )
    
    
    (19,946
    )Effect of exchange rate on cash
    
    
    
    
    
    
    
    
    
    
    67
    
    
    
    67Net increase (decrease) in cash
    
    
    65,184
    
    
    
    (41,440
    )
    
    
    524
    
    
    
    24,268Beginning balance, cash
    
    
    
    
    
    
    40,077
    
    
    
    2,230
    
    
    
    42,307Ending balance, cash
    
    $
    65,184
    
    
    $
    (1,363
    )
    
    $
    2,754
    
    
    $
    66,575
 NOTE 11. INCOME TAXES
   24




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 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.
  Fair Value Measurements UsingLevel 1
    
    
    Level 2
    
    
    Level 3(unaudited)(in thousands)Other current liabilities
    
    $
    
    
    
    $
    5,780
    
    
    $
    Other long-term liabilities
    
    $
    2,512
    
    
    $
    6,499
    
    
    $
    
  Fair Value Measurements UsingLevel 1
    
    Level 2
    
    Level 3(in thousands)Other current liabilities
    
    $
    
    
    
    $
    
    
    
    $
    Other long-term liabilities
    
    $
    2,337
    
    
    $
    14,679
    
    
    $
    
  25




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Other Current Liabilities and Other Long-term Liabilities
  NOTE 13. RELATED PARTY TRANSACTIONS
 Management Services Agreement.
 Credit Facility.
 Lease Agreements.
 Product Purchases
 Product Development and Distribution Agreement
 26




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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 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 including, but not
limited to, tax 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.
  27




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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.
 28




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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 regulations including,
but not limited to, tax regulations; and
    
    a change in disposable income available to consumers, as a result of current
economic conditions.
 Executive Overview
       29




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##### Table of Contents




    
    retail sales at our company stores and through our website 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 choose 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 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 and the introduction of new, scientifically
backed products, improved product assortment, effective marketing campaigns designed
to increase traffic at our and our franchisees stores and awareness of the GNC
brand, and price competitiveness;
    
    investing in key infrastructure areas for future growth, including e-commerce and
international development; and
    
    generating efficiencies and cost savings in the everyday operations of the
business that will allow us to leverage profit margins on revenue growth.
  30




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##### Table of Contents



Related Parties
  Results of Operations
   Results of Operations
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(unaudited)Revenues:Retail
    
    $
    342.8
    
    
    
    75.2
    %
    
    $
    316.9
    
    
    
    73.3
    %
    
    $
    693.7
    
    
    
    75.3
    %
    
    $
    650.6
    
    
    
    74.6
    %Franchise
    
    
    73.1
    
    
    
    16.0
    %
    
    
    69.2
    
    
    
    16.0
    %
    
    
    145.6
    
    
    
    15.8
    %
    
    
    133.7
    
    
    
    15.3
    %Manufacturing / Wholesale
    
    
    40.0
    
    
    
    8.8
    %
    
    
    46.3
    
    
    
    10.7
    %
    
    
    81.6
    
    
    
    8.9
    %
    
    
    88.0
    
    
    
    10.1
    %Total net revenues
    
    
    455.9
    
    
    
    100.0
    %
    
    
    432.4
    
    
    
    100.0
    %
    
    
    920.9
    
    
    
    100.0
    %
    
    
    872.3
    
    
    
    100.0
    %Operating expenses:Cost of sales, including warehousing,
distribution and occupancy costs
    
    
    292.3
    
    
    
    64.1
    %
    
    
    280.9
    
    
    
    65.0
    %
    
    
    591.4
    
    
    
    64.2
    %
    
    
    566.6
    
    
    
    65.0
    %Compensation and related benefits
    
    
    67.6
    
    
    
    14.9
    %
    
    
    65.5
    
    
    
    15.2
    %
    
    
    135.4
    
    
    
    14.7
    %
    
    
    130.8
    
    
    
    15.0
    %Advertising and promotion
    
    
    14.1
    
    
    
    3.1
    %
    
    
    14.4
    
    
    
    3.3
    %
    
    
    29.5
    
    
    
    3.2
    %
    
    
    29.1
    
    
    
    3.3
    %Other selling, general and administrative
expenses
    
    
    23.3
    
    
    
    5.1
    %
    
    
    23.6
    
    
    
    5.5
    %
    
    
    46.2
    
    
    
    5.0
    %
    
    
    44.9
    
    
    
    5.1
    %Amortization expense
    
    
    1.9
    
    
    
    0.4
    %
    
    
    2.3
    
    
    
    0.4
    %
    
    
    4.1
    
    
    
    0.5
    %
    
    
    4.9
    
    
    
    0.6
    %Foreign currency (gain) loss
    
    
    
    
    
    
    0.0
    %
    
    
    (0.1
    )
    
    
    0.0
    %
    
    
    (0.1
    )
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Total operating expenses
    
    
    399.2
    
    
    
    87.6
    %
    
    
    386.6
    
    
    
    89.4
    %
    
    
    806.5
    
    
    
    87.6
    %
    
    
    776.3
    
    
    
    89.0
    %Operating income:Retail
    
    
    49.4
    
    
    
    10.8
    %
    
    
    41.6
    
    
    
    9.6
    %
    
    
    99.6
    
    
    
    10.8
    %
    
    
    86.0
    
    
    
    9.9
    %Franchise
    
    
    22.9
    
    
    
    5.0
    %
    
    
    19.5
    
    
    
    4.6
    %
    
    
    45.3
    
    
    
    4.9
    %
    
    
    38.7
    
    
    
    4.4
    %Manufacturing / Wholesale
    
    
    16.4
    
    
    
    3.6
    %
    
    
    17.3
    
    
    
    4.0
    %
    
    
    33.3
    
    
    
    3.6
    %
    
    
    35.2
    
    
    
    4.0
    %Unallocated corporate and other
costs:Warehousing and distribution costs
    
    
    (13.8
    )
    
    
    -3.0
    %
    
    
    (13.7
    )
    
    
    -3.2
    %
    
    
    (27.7
    )
    
    
    -3.0
    %
    
    
    (27.0
    )
    
    
    -3.1
    %Corporate costs
    
    
    (18.2
    )
    
    
    -4.0
    %
    
    
    (18.9
    )
    
    
    -4.4
    %
    
    
    (36.1
    )
    
    
    -3.9
    %
    
    
    (36.9
    )
    
    
    -4.2
    %Subtotal unallocated corporate and
other costs, net
    
    
    (32.0
    )
    
    
    -7.0
    %
    
    
    (32.6
    )
    
    
    -7.6
    %
    
    
    (63.8
    )
    
    
    -6.9
    %
    
    
    (63.9
    )
    
    
    -7.3
    %Total operating income
    
    
    56.7
    
    
    
    12.4
    %
    
    
    45.8
    
    
    
    10.6
    %
    
    
    114.4
    
    
    
    12.4
    %
    
    
    96.0
    
    
    
    11.0
    %Interest expense, net
    
    
    16.3
    
    
    
    
    
    
    
    17.1
    
    
    
    
    
    
    
    32.9
    
    
    
    
    
    
    
    36.2Income before income taxes
    
    
    40.4
    
    
    
    
    
    
    
    28.7
    
    
    
    
    
    
    
    81.5
    
    
    
    
    
    
    
    59.8Income tax expense
    
    
    14.8
    
    
    
    
    
    
    
    10.7
    
    
    
    
    
    
    
    29.9
    
    
    
    
    
    
    
    22.4Net income
    
    $
    25.6
    
    
    
    
    
    
    $
    18.0
    
    
    
    
    
    
    $
    51.6
    
    
    
    
    
    
    $
    37.4
 Note:
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##### Table of Contents



Comparison of the Three Months Ended June 30, 2010 and 2009
 Revenues
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 Cost of Sales
  Selling, General and Administrative (SG&A) Expenses
  Compensation and related benefits.
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##### Table of Contents



Advertising and promotion.
 Other SG&A.
 Foreign Currency (Gain) Loss
  Operating Income
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 Warehousing and Distribution Costs.
 Corporate Costs.
 Interest Expense
  Income Tax Expense
  33




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##### Table of Contents



Net Income
  Comparison of the Six Months Ended June 30, 2010 and 2009
 Revenues
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 Cost of Sales
  Selling, General and Administrative (SG&A) Expenses
  34




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##### Table of Contents



Compensation and related benefits.
 Advertising and promotion.
 Other SG&A.
 Foreign Currency (Gain) Loss
  Operating Income
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 Warehousing and Distribution Costs.
 Corporate Costs.
 35




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##### Table of Contents



Interest Expense
  Income Tax Expense
  Net Income
  Liquidity and Capital Resources
      Six months
    
    Six monthsended June 30,
    
    ended June 30,(Dollars in millions)
    
    2010
    
    2009Cash provided by operating activities
    
    $
    86.6
    
    
    $
    56.3Cash used in investing activities
    
    
    (13.9
    )
    
    
    (12.2
    )Cash used in financing activities
    
    
    (29.4
    )
    
    
    (19.9
    )
 36




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##### Table of Contents



Cash Provided by Operating Activities
   Cash Used in Investing Activities
   Cash Used in Financing Activities
   $735.0 Million Senior Credit Facility
 Senior Toggle Notes
 10.75% Senior Subordinated Notes
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##### Table of Contents



Contractual Obligations
  Off Balance Sheet Arrangements
  Effect of Inflation
  Critical Accounting Estimates
  Recently Issued Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
    Derivative
    

Total Notional Amount
    
    Term
    
    Counterparty Pays
    
    Company PaysInterest Rate Swap
    
    $150.0 million
    
    April 2009-April 2011
    
    3 month LIBOR
    
    3.07%Interest Rate Swap
    
    $150.0 million
    
    April 2010-April 2011
    
    3 month LIBOR
    
    3.41%Interest Rate Swap
    
    $100.0 million
    
    September 2008-September 2011
    
    3 month LIBOR
    
    3.31%Interest Rate Swap
    
    $150.0 million
    
    September 2009-September 2012
    
    6 month LIBOR
    
    2.68%
 38




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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
  39




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##### Table of Contents



Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Removed and Reserved.
 
 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.
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##### Table of Contents



SIGNATURES
  GENERAL NUTRITION CENTERS, INC.
(Registrant)August 10, 2010
    /s/ Joseph M. FortunatoJoseph M. FortunatoChief Executive Officer
(Principal Executive Officer)August 10, 2010
    /s/ Michael M. NuzzoMichael M. NuzzoChief Financial Officer
(Principal Financial Officer) 41