##### 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
 For the quarterly period ended March 31, 2010
 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
(State or other jurisdiction of 
Incorporation or organization)
    
    72-1575168
(I.R.S. Employer
Identification No.)300 Sixth Avenue 
Pittsburgh, Pennsylvania
(Address of principal executive offices)
    
    15222
(Zip Code)
 (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 March 31, 2010 (unaudited) and December 31, 2009.
    
    
    1Unaudited Consolidated Statements of Operations for the three months
ended March 31, 2010 and 2009.
    
    
    2Unaudited Consolidated Statement of Stockholders Equity and Comprehensive Income (Loss)
for the three months ended March 31, 2010 and 2009.
    
    
    3Unaudited Consolidated Statements of Cash Flows for the three months ended
March 31, 2010 and 2009.
    
    
    4Summarized Notes to Unaudited Consolidated Financial Statements.
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    29Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    39Item 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. Submission of Matters to a Vote of Security Holders.
    
    
    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)
 March 31,
    
    
    December 31,2010
    
    
    2009 *(unaudited)Current assets:Cash and cash equivalents
    
    $
    110,628
    
    
    $
    75,089Receivables, net
    
    
    96,964
    
    
    
    94,355Inventories, net (Note 3)
    
    
    390,187
    
    
    
    370,492Prepaids and other current assets
    
    
    35,883
    
    
    
    42,219Total current assets
    
    
    633,662
    
    
    
    582,155Long-term assets:Goodwill (Note 4)
    
    
    624,808
    
    
    
    624,753Brands (Note 4)
    
    
    720,000
    
    
    
    720,000Other intangible assets, net (Note 4)
    
    
    152,277
    
    
    
    154,370Property, plant and equipment, net
    
    
    197,689
    
    
    
    199,581Deferred financing fees, net
    
    
    17,355
    
    
    
    18,411Other long-term assets
    
    
    4,692
    
    
    
    4,332Total long-term assets
    
    
    1,716,821
    
    
    
    1,721,447Total assets
    
    $
    2,350,483
    
    
    $
    2,303,602Current liabilities:Accounts payable
    
    $
    143,193
    
    
    $
    95,904Accrued payroll and related liabilities
    
    
    20,903
    
    
    
    22,277Accrued interest (Note 5)
    
    
    6,079
    
    
    
    14,552Current portion, long-term debt (Note 5)
    
    
    1,513
    
    
    
    1,724Deferred revenue and other current liabilities
    
    
    74,750
    
    
    
    65,130Total current liabilities
    
    
    246,438
    
    
    
    199,587Long-term liabilities:Long-term debt (Note 5)
    
    
    1,057,796
    
    
    
    1,058,085Deferred tax liabilities, net
    
    
    289,054
    
    
    
    288,894Other long-term liabilities
    
    
    40,033
    
    
    
    39,520Total long-term liabilities
    
    
    1,386,883
    
    
    
    1,386,499Total liabilities
    
    
    1,633,321
    
    
    
    1,586,086Stockholders equity:Common stock, $0.01 par value,
1,000 shares authorized, 100 shares issued and outstanding
    
    
    
    
    
    
    Paid-in-capital
    
    
    595,774
    
    
    
    594,932Retained earnings
    
    
    127,358
    
    
    
    129,783Accumulated other comprehensive loss
    
    
    (5,970
    )
    
    
    (7,199
    )Total stockholders equity
    
    
    717,162
    
    
    
    717,516Total liabilities and stockholders equity
    
    $
    2,350,483
    
    
    $
    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 endedMarch 31,
    
    
    March 31,2010
    
    
    2009Revenue
    
    $
    465,019
    
    
    $
    439,897Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    299,117
    
    
    
    285,729Gross profit
    
    
    165,902
    
    
    
    154,168Compensation and related benefits
    
    
    67,758
    
    
    
    65,325Advertising and promotion
    
    
    15,454
    
    
    
    14,739Other selling, general and administrative
    
    
    25,094
    
    
    
    23,853Foreign currency (gain) loss
    
    
    (76
    )
    
    
    97Operating income
    
    
    57,672
    
    
    
    50,154Interest expense, net (Note 5)
    
    
    16,629
    
    
    
    19,062Income before income taxes
    
    
    41,043
    
    
    
    31,092Income tax expense (Note 11)
    
    
    15,084
    
    
    
    11,647Net income
    
    $
    25,959
    
    
    $
    19,445
  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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,959
    
    
    
    
    
    
    
    25,959Unrealized gain on derivatives designated and qualified
as cash flow hedges, net of tax of $159
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    279
    
    
    
    279Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    950
    
    
    
    950Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,188Non-cash stock-based compensation
    
    
    
    
    
    
    
    
    
    
    842
    
    
    
    
    
    
    
    
    
    
    
    842Dividend payment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,384
    )
    
    
    
    
    
    
    (28,384
    )Balance at March 31, 2010 (unaudited)
    
    
    100
    
    
    $
    
    
    
    $
    595,774
    
    
    $
    127,358
    
    
    $
    (5,970
    )
    
    $
    717,162Balance at December 31, 2008
    
    
    100
    
    
    $
    
    
    
    $
    592,355
    
    
    $
    73,764
    
    
    $
    (14,057
    )
    
    $
    652,062Comprehensive income :Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,445
    
    
    
    
    
    
    
    19,445Unrealized gain on derivatives designated and qualified
as cash flow hedges, net of tax of $309
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    540
    
    
    
    540Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (618
    )
    
    
    (618
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,367Return of capital to GNC Corporation
    
    
    
    
    
    
    
    
    
    
    (278
    )
    
    
    
    
    
    
    
    
    
    
    (278
    )Non-cash stock-based compensation
    
    
    
    
    
    
    
    
    
    
    657
    
    
    
    
    
    
    
    
    
    
    
    657Balance at March 31, 2009 (unaudited)
    
    
    100
    
    
    $
    
    
    
    $
    592,734
    
    
    $
    93,209
    
    
    $
    (14,135
    )
    
    $
    671,808
  3




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 Three months endedMarch 31,
    
    
    March 31,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    25,959
    
    
    $
    19,445Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation expense
    
    
    9,564
    
    
    
    8,862Amortization of intangible assets
    
    
    2,186
    
    
    
    2,597Amortization of deferred financing fees
    
    
    1,056
    
    
    
    1,002Amortization of original issue discount
    
    
    99
    
    
    
    89Increase in provision for inventory losses
    
    
    1,946
    
    
    
    3,808Non-cash stock-based compensation
    
    
    842
    
    
    
    657Decrease in provision for losses on accounts receivable
    
    
    (122
    )
    
    
    (1,284
    )Changes in assets and liabilities:Increase in receivables
    
    
    (2,282
    )
    
    
    (306
    )Increase in inventory, net
    
    
    (20,846
    )
    
    
    (18,422
    )(Increase) decrease in franchise note receivables, net
    
    
    (246
    )
    
    
    112Increase in accrued income taxes
    
    
    13,384
    
    
    
    10,333(Increase) decrease in other assets
    
    
    (2,802
    )
    
    
    2,525Increase in accounts payable
    
    
    47,144
    
    
    
    16,507Decrease in interest payable
    
    
    (8,474
    )
    
    
    (8,927
    )Increase (decrease) in accrued liabilities
    
    
    4,692
    
    
    
    (2,656
    )Net cash provided by operating activities
    
    
    72,100
    
    
    
    34,342CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (7,313
    )
    
    
    (5,539
    )Store acquisition costs
    
    
    (226
    )
    
    
    (300
    )Net cash used in investing activities
    
    
    (7,539
    )
    
    
    (5,839
    )CASH FLOWS FROM FINANCING ACTIVITIES:Return of capital to Parent company
    
    
    
    
    
    
    (278
    )Dividend payment
    
    
    (28,384
    )
    
    
    Payments on long-term debt
    
    
    (599
    )
    
    
    (4,906
    )Net cash used in financing activities
    
    
    (28,983
    )
    
    
    (5,184
    )Effect of exchange rate on cash
    
    
    (39
    )
    
    
    9Net increase in cash
    
    
    35,539
    
    
    
    23,328Beginning balance, cash
    
    
    75,089
    
    
    
    42,307Ending balance, cash
    
    $
    110,628
    
    
    $
    65,635
  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 .
  Fair ValueBalance Sheet Location
    
    
    March 31, 2010
    
    
    December 31, 2009(unaudited)(in thousands)Interest Rate Products
    
    Other long-term liabilities
    
    $
    (14,240
    )
    
    $
    (14,679
    )
    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)2010Interest Rate Products
    
    $
    (3,659
    )
    
    Interest income / (expense)
    
    $
    (4,097
    )2009Interest Rate Products
    
    $
    (2,208
    )
    
    Interest income / (expense)
    
    $
    (3,057
    )
 7




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
   Recently Issued Accounting Pronouncements
  NOTE 3. INVENTORIES, NET
  March 31, 2010Net CarryingGross cost
    
    
    Reserves (a)
    
    
    Value(unaudited)(in thousands)Finished product ready for sale
    
    $
    334,170
    
    
    $
    (7,104
    )
    
    $
    327,066Work-in-process, bulk product and raw materials
    
    
    59,236
    
    
    
    (1,328
    )
    
    
    57,908Packaging supplies
    
    
    5,213
    
    
    
    
    
    
    
    5,213$
    398,619
    
    
    $
    (8,432
    )
    
    $
    390,187
 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. 8




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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, 2009
    
    $
    304,609
    
    
    $
    117,303
    
    
    $
    202,841
    
    
    $
    624,753Acquired franchise stores
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    55Balance at March 31, 2010 (unaudited)
    
    $
    304,664
    
    
    $
    117,303
    
    
    $
    202,841
    
    
    $
    624,808
  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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93
    
    
    
    93Amortization expense
    
    
    (375
    )
    
    
    
    
    
    
    
    
    
    
    (1,713
    )
    
    
    (98
    )
    
    
    (2,186
    )Balance at March 31, 2010 (unaudited)
    
    $
    
    
    
    $
    500,000
    
    
    $
    220,000
    
    
    $
    151,363
    
    
    $
    914
    
    
    $
    872,277
  Estimated
    
    March 31, 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
    
    
    
    (3,353
    )
    
    
    27,647
    
    
    
    31,000
    
    
    
    (3,090
    )
    
    
    27,910Franchise agreements
    
    25
    
    
    70,000
    
    
    
    (8,517
    )
    
    
    61,483
    
    
    
    70,000
    
    
    
    (7,817
    )
    
    
    62,183Manufacturing agreements
    
    25
    
    
    70,000
    
    
    
    (8,517
    )
    
    
    61,483
    
    
    
    70,000
    
    
    
    (7,817
    )
    
    
    62,183Other intangibles
    
    5
    
    
    1,150
    
    
    
    (400
    )
    
    
    750
    
    
    
    1,150
    
    
    
    (350
    )
    
    
    800Franchise rights
    
    1-5
    
    
    3,154
    
    
    
    (2,240
    )
    
    
    914
    
    
    
    3,061
    
    
    
    (2,142
    )
    
    
    919$
    904,304
    
    
    $
    (32,027
    )
    
    $
    872,277
    
    
    $
    904,211
    
    
    $
    (29,841
    )
    
    $
    874,370
 9




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  EstimatedamortizationYears ending December 31,
    
    expense(unaudited)(in thousands)2010
    
    
    5,4842011
    
    
    7,1202012
    
    
    7,0062013
    
    
    6,9532014
    
    
    6,696Thereafter
    
    
    119,018Total
    
    $
    152,277
 NOTE 5. LONG-TERM DEBT / INTEREST EXPENSE
  March 31,
    
    
    December 31,2010
    
    
    2009(unaudited)(in thousands)2007 Senior Credit Facility
    
    $
    644,382
    
    
    $
    644,619Senior Toggle Notes
    
    
    298,058
    
    
    
    297,95910.75% Senior Subordinated Notes
    
    
    110,000
    
    
    
    110,000Mortgage
    
    
    6,825
    
    
    
    7,184Capital leases
    
    
    44
    
    
    
    47Less: current maturities
    
    
    (1,513
    )
    
    
    (1,724
    )Total
    
    $
    1,057,796
    
    
    $
    1,058,085
  Three months endedMarch 31,
    
    
    March 31,2010
    
    
    2009(unaudited)(in thousands)2007 Senior Credit FacilityTerm Loan
    
    $
    7,555
    
    
    $
    9,205Revolver
    
    
    111
    
    
    
    136Senior Toggle Notes
    
    
    4,856
    
    
    
    5,53110.75% Senior Subordinated Notes
    
    
    2,956
    
    
    
    2,956Deferred financing fees
    
    
    1,056
    
    
    
    1,002Mortgage
    
    
    115
    
    
    
    147OID amortization
    
    
    99
    
    
    
    89Interest income-other
    
    
    (119
    )
    
    
    (4
    )Interest expense, net
    
    $
    16,629
    
    
    $
    19,062
 10




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  March 31,
    
    
    December 31,2010
    
    
    2009(unaudited)(in thousands)2007 Senior Credit Facility
    
    $
    4,681
    
    
    $
    5,350Senior Toggle Notes
    
    
    872
    
    
    
    5,72010.75% Senior Subordinated Notes
    
    
    526
    
    
    
    3,482Total
    
    $
    6,079
    
    
    $
    14,552
  NOTE 6. FINANCIAL INSTRUMENTS
  March 31,
    
    
    December 31,2010
    
    
    2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    Value(unaudited)(in thousands)Cash and cash equivalents
    
    $
    110,628
    
    
    $
    110,628
    
    
    $
    75,089
    
    
    $
    75,089Receivables
    
    
    96,964
    
    
    
    96,964
    
    
    
    94,355
    
    
    
    94,355Franchise notes receivable
    
    
    3,540
    
    
    
    3,540
    
    
    
    3,364
    
    
    
    3,364Accounts payable
    
    
    143,193
    
    
    
    143,193
    
    
    
    95,904
    
    
    
    95,904Long term debt (including current portion)
    
    
    1,059,309
    
    
    
    982,034
    
    
    
    1,059,809
    
    
    
    977,718
 11




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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
  12




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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
 Romero Claim
 Ciavarra Claim
 13




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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
 Ciavarra Claim
 
    
    Christopher and Dana Hamilton v. Iovate Health Sciences USA, Inc., et al., U.S.
District Court, Northern District of Ohio, 09CV1944 (filed August 18, 2009);
    
    Hector Manuel Abarca and Diana Curiel v. Iovate Health Sciences USA, Inc., et al.,
U.S. District Court, Northern District of California, 09CV3861 (filed August 21, 2009);
    
    Jessica Rogoff v. General Nutrition Centers, Inc., et al., Superior Court of the
State of California, County of Los Angeles, BC422842 (filed September 29, 2009);
    
    Lucretia Ballou v. Muscletech Research and Development, Inc., et al., U.S. District
Court, Western District of Louisiana, 09CV1996 (filed December 3, 2009);
    
    Clinton Davis v. GNC Corporation, et al., U.S. District Court, Eastern District of
Pennsylvania, 09CV5055 (filed November 11, 2009);
    
    Michael Fyalka v. Iovate Health Sciences, et al., U.S. District Court, Southern
District of Illinois, 09CV944 (filed November 10, 2009);
    
    Monica Fay Stepter v. Iovate Health Sciences, USA, Inc., et al., 17th
Judicial District Court, Parish of LaFourche, Louisiana (filed November 25, 2009);
    
    Andrew Nolley v. Muscletech Research and Development, et al., U.S. District Court,
Northern District of Mississippi, 09CV140 (filed December 18, 2009);
    
    Kerry Donald v. Iovate Health Sciences Group, et al., Supreme Court of the State of
New York, Kings County (filed January 22, 2010);
    
    Casey Slyter v. GNC Corporation, et al., U.S. District Court, District of Kansas,
10CV2065 (filed January 29, 2010);
    
    Debra Rutherford, et al. v. Muscletech Research and Development, Inc., U.S. District
Court, Northern District of Alabama, 10CV370 (filed February 19, 2010);
    
    Edward J. Torres v. General Nutrition Centers, Inc., et al., Superior Court of
Arizona, Maricopa County, CV2010-005999 (filed  March 11, 2010);
    
    Amber Lutz, et al. v. General Nutrition Centers, Inc., et al., Superior Court of
California, County of Orange, 30-2010 00357532 (filed March 26, 2010);
    
    Shannon Justers, et al. v. General Nutrition Centers, Inc., et al., Superior Court
of California, County of Orange, 30-2010 00357521 (filed March 26, 2010);
    
    William Crowell, et al. v. General Nutrition Centers, Inc., et al., Superior Court
of California, County of Orange, 30-2010 00357528 (filed March 26, 2010);
    
    Scott Rosenthal, et al. v. General Nutrition Centers, Inc., et al., Superior Court
of California, County of San Francisco, CGC 10-498138 (filed March 26, 2010);
    
    Richard Limpert, et al. v. General Nutrition Centers, Inc., et al., Superior Court
of California, County of San Francisco, CGC 10-498137 (filed  March 26, 2010);
    
    Savoen Roeun, et al. v. General Nutrition Centers, Inc., et al., Superior Court of
California, County of San Francisco, CGC 10-497919 (filed  March 19, 2010);
    
    Torris Lucas, et al. v. GNC Corporation, et al., U.S. District Court, Northern
District of Alabama, 10CV780 (filed March 31, 2010);
 14




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
    
    Phillip Sims v. GNC Corporation, et al., U.S. District Court, District of New
Jersey, 10CV1728 (filed April 5, 2010);
    
    Donna Natali v. GNC Corporation, et al., Superior Court of New Jersey, Atlantic
County, ATL-L-001499-10 (filed April 5, 2010);
    
    Matthew Carhart v. GNC Corporation, et al., Court of Common Pleas Philadelphia
County, 10-0402210 (filed April 15, 2010);
    
    Michael Brown v. GNC Corporation, et al., Court of Common Pleas Philadelphia County,
10-0402217 (filed April 15, 2010); and
    
    Alan DAlessio, Jr. v. GNC Corporation, et al., Court of Common Pleas Philadelphia
County, 10-0402214 (filed April 15, 2010).
  
    
    Andrew Dremak, et al. v. Iovate Health Sciences Group, Inc., et al., U.S. District
Court, Southern District of California, 09CV1088 (filed May 19, 2009);
    
    Enjoli Pennier, et al. v. Iovate Health Sciences, et al., U.S. District Court,
Eastern District of Louisiana, 09CV3533 (filed May 13, 2009);
    
    Alejandro M. Jimenez, et al. v. Iovate Health Sciences, Inc., et al., U.S. District
Court, Eastern District of California, 09CV1473 (filed May 28, 2009);
    
    Amy Baker, et al. v. Iovate Health Sciences USA, Inc., et al., U.S. District Court,
Northern District of Alabama, 09CV872 (filed May 4, 2009);
    
    Kyle Davis and Sara Carreon, et al. v. Iovate Health Sciences USA, Inc., et al.,
U.S. District Court, Northern District of Alabama, 09CV896 (filed May 7, 2009); and
    
    Lenny Charles Gunn, et al. v. Iovate Health Sciences Group, Inc., et al., U.S.
District Court, Southern District of California, 09CV2337 (filed October 24, 2009).
  Bedell Claim.
 Chen Claim
 California False Labeling and Consumer Fraud Claims.
 
    
    Richard Johnson, et al. v. Vianda, LLC, et al., Superior Court of California, County of
Los Angeles, BC 423825 (filed October 20, 2009);
    
    Michael Flores, et al. v. EP2. Inc., et al., U.S. District Court, Central District of
California, 09CV7872 (filed October 28, 2009); and
 15




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
    
    Shalena Dysthe, et al. v. Basic Research, et al., U.S. District Court, Central District
of California, 09CV8013 (filed November 2, 2009).
  Environmental Compliance
   Contingencies
  16




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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
    
    
    255,000
    
    
    
    12.29Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (130,016
    )
    
    
    6.25Expired
    
    
    (28,502
    )
    
    
    6.25Outstanding at March 31, 2010
    
    
    9,360,122
    
    
    $
    7.43Exercisable at March 31, 2010
    
    
    4,762,099
    
    
    $
    6.70
  17




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
   March 31,2010(unaudited)Dividend yield
    
    0.00%Expected option life
    
    7.5 yearsVolatility factor percentage of market price
    
    31.5%Discount rate
    
    3.06 - 3.28%
  18




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 9. SEGMENTS
  Three months endedMarch 31,
    
    
    March 31,2010
    
    
    2009(unaudited)(in thousands)Revenue:Retail
    
    $
    350,834
    
    
    $
    333,712Franchise
    
    
    72,602
    
    
    
    64,483Manufacturing/Wholesale:Intersegment (1)
    
    
    47,345
    
    
    
    47,751Third Party
    
    
    41,583
    
    
    
    41,702Sub total Manufacturing/Wholesale
    
    
    88,928
    
    
    
    89,453Sub total segment revenues
    
    
    512,364
    
    
    
    487,648Intersegment elimination (1)
    
    
    (47,345
    )
    
    
    (47,751
    )Total revenue
    
    $
    465,019
    
    
    $
    439,897Operating income:Retail
    
    $
    50,196
    
    
    $
    44,443Franchise
    
    
    22,401
    
    
    
    19,207Manufacturing/Wholesale
    
    
    16,872
    
    
    
    17,881Unallocated corporate and other costs:Warehousing and distribution costs
    
    
    (13,892
    )
    
    
    (13,317
    )Corporate costs
    
    
    (17,905
    )
    
    
    (18,060
    )Sub total unallocated corporate and
other costs
    
    
    (31,797
    )
    
    
    (31,377
    )Total operating income
    
    $
    57,672
    
    
    $
    50,154
 
 (1)
    
    Intersegment revenues are eliminated from consolidated revenue. 19




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 10. SUPPLEMENTAL GUARANTOR INFORMATION
   20




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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-GuarantorMarch 31, 2010
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Current assetsCash and cash equivalents
    
    $
    104,446
    
    
    $
    2,904
    
    
    $
    3,278
    
    
    $
    
    
    
    $
    110,628Receivables, net
    
    
    483
    
    
    
    95,927
    
    
    
    554
    
    
    
    
    
    
    
    96,964Intercompany receivables
    
    
    84,010
    
    
    
    
    
    
    
    
    
    
    
    (84,010
    )
    
    
    Inventories, net
    
    
    
    
    
    
    360,503
    
    
    
    29,684
    
    
    
    
    
    
    
    390,187Prepaids and other current assets
    
    
    10,078
    
    
    
    21,593
    
    
    
    4,212
    
    
    
    
    
    
    
    35,883Total current assets
    
    
    199,017
    
    
    
    480,927
    
    
    
    37,728
    
    
    
    (84,010
    )
    
    
    633,662Goodwill
    
    
    
    
    
    
    624,340
    
    
    
    468
    
    
    
    
    
    
    
    624,808Brands
    
    
    
    
    
    
    720,000
    
    
    
    
    
    
    
    
    
    
    
    720,000Property, plant and equipment, net
    
    
    6,733
    
    
    
    162,383
    
    
    
    28,573
    
    
    
    
    
    
    
    197,689Investment in subsidiaries
    
    
    1,578,724
    
    
    
    (7,750
    )
    
    
    
    
    
    
    (1,570,974
    )
    
    
    Other assets
    
    
    28,021
    
    
    
    155,084
    
    
    
    
    
    
    
    (8,781
    )
    
    
    174,324Total assets
    
    $
    1,812,495
    
    
    $
    2,134,984
    
    
    $
    66,769
    
    
    $
    (1,663,765
    )
    
    $
    2,350,483Current liabilitiesCurrent liabilities
    
    $
    22,235
    
    
    $
    212,970
    
    
    $
    11,233
    
    
    $
    
    
    
    $
    246,438Intercompany payables
    
    
    
    
    
    
    65,441
    
    
    
    18,569
    
    
    
    (84,010
    )
    
    
    Total current liabilities
    
    
    22,235
    
    
    
    278,411
    
    
    
    29,802
    
    
    
    (84,010
    )
    
    
    246,438Long-term debt
    
    
    1,052,439
    
    
    
    30
    
    
    
    14,108
    
    
    
    (8,781
    )
    
    
    1,057,796Deferred tax liabilities
    
    
    (4,594
    )
    
    
    294,087
    
    
    
    (439
    )
    
    
    
    
    
    
    289,054Other long-term liabilities
    
    
    25,253
    
    
    
    12,968
    
    
    
    1,812
    
    
    
    
    
    
    
    40,033Total liabilities
    
    
    1,095,333
    
    
    
    585,496
    
    
    
    45,283
    
    
    
    (92,791
    )
    
    
    1,633,321Total stockholders equity (deficit)
    
    
    717,162
    
    
    
    1,549,488
    
    
    
    21,486
    
    
    
    (1,570,974
    )
    
    
    717,162Total liabilities and stockholders
equity (deficit)
    
    $
    1,812,495
    
    
    $
    2,134,984
    
    
    $
    66,769
    
    
    $
    (1,663,765
    )
    
    $
    2,350,483
 21




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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, 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
 22




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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 March 31, 2010
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    439,780
    
    
    $
    28,431
    
    
    $
    (3,192
    )
    
    $
    465,019Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    281,901
    
    
    
    20,408
    
    
    
    (3,192
    )
    
    
    299,117Gross profit
    
    
    
    
    
    
    157,879
    
    
    
    8,023
    
    
    
    
    
    
    
    165,902Compensation and related benefits
    
    
    10,169
    
    
    
    53,330
    
    
    
    4,259
    
    
    
    
    
    
    
    67,758Advertising and promotion
    
    
    
    
    
    
    15,167
    
    
    
    287
    
    
    
    
    
    
    
    15,454Other selling, general and administrative
    
    
    8,103
    
    
    
    16,735
    
    
    
    256
    
    
    
    
    
    
    
    25,094Subsidiary (income) expense
    
    
    (27,066
    )
    
    
    63
    
    
    
    
    
    
    
    27,003
    
    
    
    Other (income) expense
    
    
    (17,343
    )
    
    
    15,483
    
    
    
    1,784
    
    
    
    
    
    
    
    (76
    )Operating income
(loss)
    
    
    26,137
    
    
    
    57,101
    
    
    
    1,437
    
    
    
    (27,003
    )
    
    
    57,672Interest expense, net
    
    
    849
    
    
    
    15,507
    
    
    
    273
    
    
    
    
    
    
    
    16,629Income (loss) before income taxes
    
    
    25,288
    
    
    
    41,594
    
    
    
    1,164
    
    
    
    (27,003
    )
    
    
    41,043Income tax (benefit) expense
    
    
    (671
    )
    
    
    15,418
    
    
    
    337
    
    
    
    
    
    
    
    15,084Net income (loss)
    
    $
    25,959
    
    
    $
    26,176
    
    
    $
    827
    
    
    $
    (27,003
    )
    
    $
    25,959
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorThree months ended March 31, 2009
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    418,582
    
    
    $
    24,412
    
    
    $
    (3,097
    )
    
    $
    439,897Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    272,177
    
    
    
    16,649
    
    
    
    (3,097
    )
    
    
    285,729Gross profit
    
    
    
    
    
    
    146,405
    
    
    
    7,763
    
    
    
    
    
    
    
    154,168Compensation and related benefits
    
    
    10,084
    
    
    
    51,535
    
    
    
    3,706
    
    
    
    
    
    
    
    65,325Advertising and promotion
    
    
    
    
    
    
    14,473
    
    
    
    266
    
    
    
    
    
    
    
    14,739Other selling, general and administrative
    
    
    8,224
    
    
    
    15,411
    
    
    
    218
    
    
    
    
    
    
    
    23,853Subsidiary (income) expense
    
    
    (20,438
    )
    
    
    (1,445
    )
    
    
    
    
    
    
    21,883
    
    
    
    Other (income) expense
    
    
    (17,592
    )
    
    
    16,707
    
    
    
    982
    
    
    
    
    
    
    
    97Operating income
(loss)
    
    
    19,722
    
    
    
    49,724
    
    
    
    2,591
    
    
    
    (21,883
    )
    
    
    50,154Interest expense, net
    
    
    875
    
    
    
    17,895
    
    
    
    292
    
    
    
    
    
    
    
    19,062Income (loss) before income taxes
    
    
    18,847
    
    
    
    31,829
    
    
    
    2,299
    
    
    
    (21,883
    )
    
    
    31,092Income tax (benefit) expense
    
    
    (598
    )
    
    
    11,391
    
    
    
    854
    
    
    
    
    
    
    
    11,647Net income (loss)
    
    $
    19,445
    
    
    $
    20,438
    
    
    $
    1,445
    
    
    $
    (21,883
    )
    
    $
    19,445
 23




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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-GuarantorThree months ended March 31, 2010
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)(in thousands)NET CASH PROVIDED BY OPERATING ACTIVITIES:
    
    $
    
    
    
    $
    69,850
    
    
    $
    2,250
    
    
    $
    72,100CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (556
    )
    
    
    (6,090
    )
    
    
    (667
    )
    
    
    (7,313
    )Investment/distribution
    
    
    55,826
    
    
    
    (55,826
    )
    
    
    
    
    
    
    Other investing
    
    
    
    
    
    
    (226
    )
    
    
    
    
    
    
    (226
    )Net cash provided by (used in) investing activities
    
    
    55,270
    
    
    
    (62,142
    )
    
    
    (667
    )
    
    
    (7,539
    )CASH FLOWS FROM FINANCING ACTIVITIES:Dividend payment
    
    
    (28,384
    )
    
    
    
    
    
    
    
    
    
    
    (28,384
    )Other financing
    
    
    (237
    )
    
    
    (3
    )
    
    
    (359
    )
    
    
    (599
    )Net cash used in financing activities
    
    
    (28,621
    )
    
    
    (3
    )
    
    
    (359
    )
    
    
    (28,983
    )Effect of exchange rate on cash
    
    
    
    
    
    
    
    
    
    
    (39
    )
    
    
    (39
    )Net increase in
cash
    
    
    26,649
    
    
    
    7,705
    
    
    
    1,185
    
    
    
    35,539Beginning balance, cash
    
    
    77,797
    
    
    
    (4,801
    )
    
    
    2,093
    
    
    
    75,089Ending balance,
cash
    
    $
    104,446
    
    
    $
    2,904
    
    
    $
    3,278
    
    
    $
    110,628
 24




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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-GuarantorThree months ended March 31, 2009
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)(in thousands)NET CASH PROVIDED BY OPERATING ACTIVITIES:
    
    $
    
    
    
    $
    29,259
    
    
    $
    5,083
    
    
    $
    34,342CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (754
    )
    
    
    (4,071
    )
    
    
    (714
    )
    
    
    (5,539
    )Investment/distribution
    
    
    57,258
    
    
    
    (57,258
    )
    
    
    
    
    
    
    Other investing
    
    
    
    
    
    
    (300
    )
    
    
    
    
    
    
    (300
    )Net cash provided by (used in) investing activities
    
    
    56,504
    
    
    
    (61,629
    )
    
    
    (714
    )
    
    
    (5,839
    )CASH FLOWS FROM FINANCING ACTIVITIES:GNC Corporation investment in
General Nutrition Centers, Inc.
    
    
    (278
    )
    
    
    
    
    
    
    
    
    
    
    (278
    )Other financing
    
    
    (4,569
    )
    
    
    (3
    )
    
    
    (334
    )
    
    
    (4,906
    )Net cash used in financing activities
    
    
    (4,847
    )
    
    
    (3
    )
    
    
    (334
    )
    
    
    (5,184
    )Effect of exchange rate on cash
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    9Net increase (decrease) in
cash
    
    
    51,657
    
    
    
    (32,373
    )
    
    
    4,044
    
    
    
    23,328Beginning balance, cash
    
    
    
    
    
    
    40,077
    
    
    
    2,230
    
    
    
    42,307Ending balance, cash
    
    $
    51,657
    
    
    $
    7,704
    
    
    $
    6,274
    
    
    $
    65,635
 25




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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.
 26




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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
    
    $
    2,448
    
    
    $
    14,240
    
    
    $
    
  Fair Value Measurements UsingLevel 1
    
    
    Level 2
    
    
    Level 3(in thousands)Other long-term
liabilities
    
    $
    2,337
    
    
    $
    14,679
    
    
    $
    
  Other long-term liabilities
  27




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##### Table of Contents



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 13. RELATED PARTY TRANSACTIONS
 Management Services Agreement.
 Credit Facility.
 Lease Agreements.
 Product Purchases
 28




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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.
  29




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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.
 30




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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
       31




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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 modest revenue growth.
  Related Parties
  32




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##### Table of Contents



Results of Operations
   Results of Operations
 Three Months EndedMarch 31,
    
    
    March 31,2010
    
    
    2009(unaudited)Revenues:Retail
    
    $
    350.8
    
    
    
    75.5
    %
    
    $
    333.7
    
    
    
    75.8
    %Franchise
    
    
    72.6
    
    
    
    15.6
    %
    
    
    64.5
    
    
    
    14.7
    %Manufacturing / Wholesale
    
    
    41.6
    
    
    
    8.9
    %
    
    
    41.7
    
    
    
    9.5
    %Total net revenues
    
    
    465.0
    
    
    
    100.0
    %
    
    
    439.9
    
    
    
    100.0
    %Operating expenses:Cost of sales, including warehousing, distribution and occupancy costs
    
    
    299.1
    
    
    
    64.3
    %
    
    
    285.7
    
    
    
    64.9
    %Compensation and related benefits
    
    
    67.8
    
    
    
    14.6
    %
    
    
    65.3
    
    
    
    14.9
    %Advertising and promotion
    
    
    15.4
    
    
    
    3.3
    %
    
    
    14.7
    
    
    
    3.4
    %Other selling, general and administrative expenses
    
    
    22.9
    
    
    
    4.9
    %
    
    
    21.3
    
    
    
    4.8
    %Amortization expense
    
    
    2.2
    
    
    
    0.5
    %
    
    
    2.6
    
    
    
    0.6
    %Foreign currency (gain) loss
    
    
    (0.1
    )
    
    
    0.0
    %
    
    
    0.1
    
    
    
    0.0
    %Total operating expenses
    
    
    407.3
    
    
    
    87.6
    %
    
    
    389.7
    
    
    
    88.6
    %Operating income:Retail
    
    
    50.2
    
    
    
    10.8
    %
    
    
    44.4
    
    
    
    10.1
    %Franchise
    
    
    22.4
    
    
    
    4.8
    %
    
    
    19.2
    
    
    
    4.4
    %Manufacturing / Wholesale
    
    
    16.9
    
    
    
    3.6
    %
    
    
    17.9
    
    
    
    4.0
    %Unallocated corporate and other costs:Warehousing and distribution costs
    
    
    (13.9
    )
    
    
    -3.0
    %
    
    
    (13.3
    )
    
    
    -3.0
    %Corporate costs
    
    
    (17.9
    )
    
    
    -3.8
    %
    
    
    (18.0
    )
    
    
    -4.1
    %Subtotal unallocated corporate andother costs, net
    
    
    (31.8
    )
    
    
    -6.8
    %
    
    
    (31.3
    )
    
    
    -7.1
    %Total operating income
    
    
    57.7
    
    
    
    12.4
    %
    
    
    50.2
    
    
    
    11.4
    %Interest expense, net
    
    
    16.6
    
    
    
    
    
    
    
    19.1Income before income taxes
    
    
    41.1
    
    
    
    
    
    
    
    31.1Income tax expense
    
    
    15.1
    
    
    
    
    
    
    
    11.7Net income
    
    $
    26.0
    
    
    
    
    
    
    $
    19.4
 Note:
 33




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##### Table of Contents



Comparison of the Three Months Ended March 31, 2010 and 2009
 Revenues
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 Cost of Sales
  Product costs.
 Warehousing and distribution costs.
 34




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##### Table of Contents



Occupancy costs.
 Selling, General and Administrative (SG&A) Expenses
  Compensation and related benefits.
 Advertising and promotion.
 Other SG&A.
 Foreign Currency (Gain) Loss
  Operating Income
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 35




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##### Table of Contents



Warehousing and Distribution Costs.
 Corporate Costs.
 Interest Expense
  Income Tax Expense
  Net Income
  Liquidity and Capital Resources
     36




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##### Table of Contents



Three months
    
    
    Three monthsended March 31,
    
    
    ended March 31,(Dollars in millions)
    
    2010
    
    
    2009Cash provided by operating activities
    
    $
    72.1
    
    
    $
    34.3Cash used in investing activities
    
    
    (7.5
    )
    
    
    (5.8
    )Cash used in financing activities
    
    
    (29.0
    )
    
    
    (5.2
    )
 Cash Provided by Operating Activities
   Cash Used in Investing Activities
   Cash Used in Financing Activities
  $735.0 Million Senior Credit Facility
 37




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##### Table of Contents



Senior Toggle Notes
 10.75% Senior Subordinated Notes
 Contractual Obligations
  Off Balance Sheet Arrangements
  Effect of Inflation
  Critical Accounting Estimates
  Recently Issued Accounting Pronouncements
  38




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk.
    Total NotionalDerivative
    
    Amount
    
    Term
    
    Counterparty Pays
    
    Company PaysInterest Rate Swap
    
    $150.0 million
    
    April 2007-April 2010
    
    3 month LIBOR
    
    
    4.90
    %Interest Rate Swap
    
    $150.0 million
    
    April 2009-April 2011
    
    3 month LIBOR
    
    
    3.07
    %Forward 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
    %
  
 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. 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.
 40




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##### Table of Contents



SIGNATURES
  GENERAL NUTRITION CENTERS, INC.
(Registrant)May 6, 2010
    /s/ Joseph M. FortunatoJoseph M. FortunatoChief Executive Officer
(Principal Executive Officer)May 6, 2010
    /s/ Michael M. NuzzoMichael M. NuzzoChief Financial Officer
(Principal Financial Officer) 41