UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-144396

GENERAL NUTRITION CENTERS, INC.

(Exact name of registrant as specified in its charter)

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)

Registrant’s telephone number, including area code: (412) 288-4600

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. o Yes þ No

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

     As of May 5, 2010 100 shares of common stock, par value $0.01 per share (the “Common Stock”) of General Nutrition Centers, Inc. were outstanding. All shares of our Common Stock are held by GNC Corporation.

 

 

TABLE OF CONTENTS

		PAGE
PART I — FINANCIAL INFORMATION
Explanatory Note.
Item 1. Financial Statements.
Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009.			1
Unaudited Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009.			2
Unaudited Consolidated Statement of Stockholder’s Equity and Comprehensive Income (Loss) for the three months ended March 31, 2010 and 2009.			3
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009.			4
Summarized Notes to Unaudited Consolidated Financial Statements.			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			29
Item 3. Quantitative and Qualitative Disclosures About Market Risk.			39
Item 4. Controls and Procedures.			39
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.			40
Item 1A. Risk Factors.			40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			40
Item 3. Defaults Upon Senior Securities.			40
Item 4. Submission of Matters to a Vote of Security Holders.			40
Item 5. Other Information.			40
Item 6. Exhibits.			40
Signatures			41
EX-31.1
EX-31.2
EX-32.1

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			$	75,089
Receivables, net			96,964				94,355
Inventories, net (Note 3)			390,187				370,492
Prepaids and other current assets			35,883				42,219
Total current assets			633,662				582,155
Long-term assets:
Goodwill (Note 4)			624,808				624,753
Brands (Note 4)			720,000				720,000
Other intangible assets, net (Note 4)			152,277				154,370
Property, plant and equipment, net			197,689				199,581
Deferred financing fees, net			17,355				18,411
Other long-term assets			4,692				4,332
Total long-term assets			1,716,821				1,721,447
Total assets		$	2,350,483			$	2,303,602
Current liabilities:
Accounts payable		$	143,193			$	95,904
Accrued payroll and related liabilities			20,903				22,277
Accrued interest (Note 5)			6,079				14,552
Current portion, long-term debt (Note 5)			1,513				1,724
Deferred revenue and other current liabilities			74,750				65,130
Total current liabilities			246,438				199,587
Long-term liabilities:
Long-term debt (Note 5)			1,057,796				1,058,085
Deferred tax liabilities, net			289,054				288,894
Other long-term liabilities			40,033				39,520
Total long-term liabilities			1,386,883				1,386,499
Total liabilities			1,633,321				1,586,086
Stockholder’s equity:
Common stock, $0.01 par value, 1,000 shares authorized, 100 shares issued and outstanding			—				—
Paid-in-capital			595,774				594,932
Retained earnings			127,358				129,783
Accumulated other comprehensive loss			(5,970	)			(7,199	)
Total stockholder’s equity			717,162				717,516
Total liabilities and stockholder’s equity		$	2,350,483			$	2,303,602

The accompanying notes are an integral part of the consolidated financial statements.

GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES

		Three months ended
		March 31,				March 31,
		2010				2009
Revenue		$	465,019			$	439,897
Cost of sales, including costs of warehousing, distribution and occupancy			299,117				285,729
Gross profit			165,902				154,168
Compensation and related benefits			67,758				65,325
Advertising and promotion			15,454				14,739
Other selling, general and administrative			25,094				23,853
Foreign currency (gain) loss			(76	)			97
Operating income			57,672				50,154
Interest expense, net (Note 5)			16,629				19,062
Income before income taxes			41,043				31,092
Income tax expense (Note 11)			15,084				11,647
Net income		$	25,959			$	19,445

The accompanying notes are an integral part of the consolidated financial statements.

GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES

																		Accumulated
																		Other				Total
		Common Stock												Retained				Comprehensive				Stockholder’s
		Shares				Dollars				Paid-in-Capital				Earnings				Income/(Loss)				Equity
Balance at December 31, 2009			100			$	—			$	594,932			$	129,783			$	(7,199	)		$	717,516
Comprehensive income :
Net income			—				—				—				25,959				—				25,959
Unrealized gain on derivatives designated and qualified as cash flow hedges, net of tax of $159			—				—				—				—				279				279
Foreign currency translation adjustments			—				—				—				—				950				950
Comprehensive income																							27,188
Non-cash stock-based compensation			—				—				842				—				—				842
Dividend payment			—				—				—				(28,384	)			—				(28,384	)
Balance at March 31, 2010 (unaudited)			100			$	—			$	595,774			$	127,358			$	(5,970	)		$	717,162
Balance at December 31, 2008			100			$	—			$	592,355			$	73,764			$	(14,057	)		$	652,062
Comprehensive income :
Net income			—				—				—				19,445				—				19,445
Unrealized gain on derivatives designated and qualified as cash flow hedges, net of tax of $309			—				—				—				—				540				540
Foreign currency translation adjustments			—				—				—				—				(618	)			(618	)
Comprehensive income																							19,367
Return of capital to GNC Corporation			—				—				(278	)			—				—				(278	)
Non-cash stock-based compensation			—				—				657				—				—				657
Balance at March 31, 2009 (unaudited)			100			$	—			$	592,734			$	93,209			$	(14,135	)		$	671,808

The accompanying notes are an integral part of the consolidated financial statements.

GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES

		Three months ended
		March 31,				March 31,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	25,959			$	19,445
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense			9,564				8,862
Amortization of intangible assets			2,186				2,597
Amortization of deferred financing fees			1,056				1,002
Amortization of original issue discount			99				89
Increase in provision for inventory losses			1,946				3,808
Non-cash stock-based compensation			842				657
Decrease 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	)			112
Increase in accrued income taxes			13,384				10,333
(Increase) decrease in other assets			(2,802	)			2,525
Increase in accounts payable			47,144				16,507
Decrease in interest payable			(8,474	)			(8,927	)
Increase (decrease) in accrued liabilities			4,692				(2,656	)
Net cash provided by operating activities			72,100				34,342
CASH 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	)			9
Net increase in cash			35,539				23,328
Beginning balance, cash			75,089				42,307
Ending balance, cash		$	110,628			$	65,635

The accompanying notes are an integral part of the consolidated financial statements.

GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. NATURE OF BUSINESS

     General Nature of Business. General Nutrition Centers, Inc. (“GNC” or the “Company”), a Delaware corporation, is a leading specialty retailer of nutritional supplements, which includes: vitamins, minerals and herbal supplements (“VMHS”), sports nutrition products, diet products and other wellness products.

     The Company’s business is vertically integrated, as the operations consist of purchasing raw materials, formulating and manufacturing products and selling the finished products through its retail, franchising and manufacturing/wholesale segments. The Company operates primarily in three business segments: Retail, Franchising, and Manufacturing/Wholesale. Corporate retail store operations are located in North America and Puerto Rico, and in addition the Company offers products domestically through www.gnc.com. Franchise stores are located in the United States and 49 countries. The Company operates its primary manufacturing facilities in South Carolina and distribution centers in Arizona, Pennsylvania and South Carolina. The Company manufactures the majority of its branded products, but also merchandises various third-party products. Additionally, the Company licenses the use of its trademarks and trade names.

     The processing, formulation, packaging, labeling and advertising of the Company’s products are subject to regulation by one or more federal agencies, including the Food and Drug Administration (“FDA”), Federal Trade Commission (“FTC”), Consumer Product Safety Commission, United States Department of Agriculture and the Environmental Protection Agency. These activities are also regulated by various agencies of the states and localities in which the Company’s products are sold.

     Merger of the Company. On February 8, 2007, GNC Parent Corporation entered into an Agreement and Plan of Merger with GNC Acquisition Inc. and its parent company, GNC Acquisition Holdings Inc. (“Parent”), pursuant to which GNC Acquisition Inc. agreed to merge with and into GNC Parent Corporation, with GNC Parent Corporation as the surviving corporation and a wholly owned subsidiary of Parent (the “Merger”). Immediately following the Merger, GNC Parent Corporation was converted into a Delaware limited liability company and renamed GNC Parent LLC. The purchase equity contribution was made by Ares Corporate Opportunities Fund II, L.P. (“Ares”) and Ontario Teachers’ Pension Plan Board (“OTPP”) (collectively, the “Sponsors”), together with additional institutional investors and certain management of the Company. The transaction closed on March 16, 2007 and was accounted for under the purchase method of accounting. The transaction occurred between unrelated parties and no common control existed. The Merger consideration (excluding acquisition costs of $13.7 million) totaled $1.65 billion, including the repayment of existing debt and other liabilities, and was funded with a combination of equity contributions and the issuance of new debt. The Merger agreement requires payments to former shareholders and optionholders in lieu of income tax payments made for utilizing net operating losses created as a result of the Merger. No such payments were made during the three months ended March 31, 2010 or March 31, 2009.

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

NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accompanying unaudited consolidated financial statements and footnotes have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and related footnotes that would normally be required by U.S. GAAP for complete financial reporting. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2009 (the “Form 10-K”). The Company’s reporting period is based on a calendar year.

     The accounting policies of the Company are consistent with the policies disclosed in the Company’s audited financial statements for the year ended December 31, 2009. There have been no significant changes to these policies since December 31, 2009.

     The accompanying unaudited consolidated financial statements include all adjustments (consisting of a normal and recurring nature) that management considers necessary for a fair statement of financial information for the interim periods. Interim results are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2010.

     Principles of Consolidation. The consolidated financial statements include the accounts of the Company, all of its subsidiaries and a variable interest entity. All material intercompany transactions have been eliminated in consolidation.

     The Company has no relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off balance sheet arrangements, or other contractually narrow or limited purposes.

     Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP principles requires management to make estimates and assumptions. Accordingly, these estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Some of the most significant estimates pertaining to the Company include the valuation of inventories, the allowance for doubtful accounts, income tax valuation allowances and the recoverability of long-lived assets. On a regular basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.

     Cash and Cash Equivalents. The Company considers cash and cash equivalents to include all cash and liquid deposits and investments with a maturity of three months or less. The majority of payments due from banks for third-party credit cards process within 24-48 hours, except for transactions occurring on a Friday, which are generally processed the following Monday. All credit card transactions are classified as cash, and the amounts due from these transactions totaled $2.2 million at March 31, 2010 and $2.1 million at December 31, 2009.

     Book overdrafts of $10.4 million and $0.7 million as of March 31, 2010 and December 31, 2009, respectively, represent checks issued that had not been presented for payment to the banks and are classified as accounts payable in the Company’s consolidated balance sheet. The Company typically funds these overdrafts through normal collections of funds or transfers from bank balances at other financial institutions. Under the terms of the Company’s facilities with its banks, the respective financial institutions are not obligated to honor the book overdraft balances as of March 31, 2010 and December 31, 2009, or any balance on any given date.

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

     Financial Instruments and Derivatives. As part of the Company’s financial risk management program, it uses certain derivative financial instruments. The Company does not enter into derivative transactions for speculative purposes and holds no derivative instruments for trading purposes. The Company uses derivative financial instruments to reduce its exposure to market risk for changes in interest rates primarily in respect of its long term debt obligations. The Company tries to manage its interest rate risk in order to balance its exposure to both fixed and floating rates while minimizing its borrowing costs. Floating-to-fixed interest rate swap agreements, designated as cash flow hedges of interest rate risk, are entered into from time to time to hedge the Company’s exposure to interest rate changes on a portion of the Company’s floating rate debt. These interest rate swap agreements convert a portion of its floating rate debt to fixed rate debt. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an upfront premium. The Company records the fair value of these contracts as an asset or a liability, as applicable, in the balance sheet. The effective portions of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income, net of tax. The ineffective portions, if any, are recorded in interest expense in the current period. As of March 31, 2010, the Company has not recorded any hedge ineffectiveness in earnings related to its cash flow hedges.

     Derivatives designated as hedging instruments have been recorded in the consolidated balance sheet at fair value as follows:

						Fair Value
		Balance Sheet Location				March 31, 2010				December 31, 2009
						(unaudited)
						(in thousands)
Interest Rate Products		Other long-term liabilities				$	(14,240	)		$	(14,679	)

     The Company has interest rate swap agreements outstanding that effectively converted an aggregate $550.0 million of debt from floating to fixed interest rates which includes a derivative contract that consists of an interest rate swap with a purchased interest rate floor that effectively converted $150.0 million of the Senior Toggle Notes from a floating to a fixed rate, effective September 2009. The floor is intended to replicate the optionality present in the original debt agreement, providing an equivalent offset in the interest payments. The Company did not enter into any new swap agreements during the first quarter of 2010. Each of its five outstanding agreements mature between April 2010 and September 2012.

     Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the twelve months ending March 31, 2011, the Company estimates that an additional $13.2 million will be reclassified as an increase to interest expense.

     Components of gains and losses recorded in the consolidated balance sheet and consolidated income statements for the three months ended March 31, 2010 and 2009, are as follows:

		Amount of Gain or				Location of Gain or (Loss)				Amount of Gain or (Loss)
Derivatives in Cash		(Loss) Recognized in				Reclassified from				Reclassified from
Flow Hedging		OCI on Derivative				Accumulated OCI into				Accumulated OCI into
Relationships		(Effective Portion)				Income (Effective Portion)				Income (Effective Portion)
2010
Interest Rate Products		$	(3,659	)		Interest income / (expense)				$	(4,097	)
2009
Interest Rate Products		$	(2,208	)		Interest income / (expense)				$	(3,057	)

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

     Under the Company’s agreements with its derivative counterparty, if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

     As of March 31, 2010, the fair value of derivatives in a net liability position related to these agreements was $17.7 million, including accrued interest of $2.8 million but excluding adjustments for nonperformance risk.

Recently Issued Accounting Pronouncements

     As of March 31, 2010, there were no developments related to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements, in addition to those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

NOTE 3. INVENTORIES, NET

     Inventories at each respective period consisted of the following:

		March 31, 2010
										Net Carrying
		Gross cost				Reserves (a)				Value
						(unaudited)
		(in thousands)
Finished product ready for sale		$	334,170			$	(7,104	)		$	327,066
Work-in-process, bulk product and raw materials			59,236				(1,328	)			57,908
Packaging supplies			5,213				—				5,213
		$	398,619			$	(8,432	)		$	390,187

		December 31, 2009
										Net Carrying
		Gross cost				Reserves (a)				Value
		(in thousands)
Finished product ready for sale		$	319,688			$	(8,266	)		$	311,422
Work-in-process, bulk product and raw materials			54,803				(1,288	)			53,515
Packaging supplies			5,555				—				5,555
		$	380,046			$	(9,554	)		$	370,492

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

NOTE 4. GOODWILL AND INTANGIBLE ASSETS, NET

     Goodwill represents the excess of purchase price over the fair value of identifiable net assets of acquired entities. In accordance with the standard on intangibles and goodwill, goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. Other intangible assets with finite lives are amortized on a straight-line or declining balance basis over periods not exceeding 35 years.

     For the three months ended March 31, 2010, the Company acquired seven franchise stores. These acquisitions were accounted for utilizing the purchase method of accounting and the Company recorded the acquired inventory, fixed assets, franchise rights and goodwill, with an applicable reduction to receivables and cash. The total purchase price associated with these acquisitions was $0.7 million, of which $0.2 million was paid in cash.

     The following table summarizes the Company’s goodwill activity from December 31, 2009 to March 31, 2010:

										Manufacturing/
		Retail				Franchising				Wholesale				Total
		(in thousands)
Balance at December 31, 2009		$	304,609			$	117,303			$	202,841			$	624,753
Acquired franchise stores			55				—				—				55
Balance at March 31, 2010 (unaudited)		$	304,664			$	117,303			$	202,841			$	624,808

     The following table summarizes the Company’s intangible asset activity from December 31, 2009 to March 31, 2010:

						Retail				Franchise				Operating				Franchise
		Gold Card				Brand				Brand				Agreements				Rights				Total
		(in thousands)
Balance at December 31, 2009		$	375			$	500,000			$	220,000			$	153,076			$	919			$	874,370
Acquired franchise stores			—				—				—				—				93				93
Amortization expense			(375	)			—				—				(1,713	)			(98	)			(2,186	)
Balance at March 31, 2010 (unaudited)		$	—			$	500,000			$	220,000			$	151,363			$	914			$	872,277

     The following table reflects the gross carrying amount and accumulated amortization for each major intangible asset:

		Estimated		March 31, 2010												December 31, 2009
		Life						Accumulated				Carrying								Accumulated				Carrying
		in years		Cost				Amortization				Amount				Cost				Amortization				Amount
								(unaudited)				(in thousands)
Brands — retail		—		$	500,000			$	—			$	500,000			$	500,000			$	—			$	500,000
Brands — franchise		—			220,000				—				220,000				220,000				—				220,000
Gold card — retail		3			3,500				(3,500	)			—				3,500				(3,354	)			146
Gold card — franchise		3			5,500				(5,500	)			—				5,500				(5,271	)			229
Retail agreements		25-35			31,000				(3,353	)			27,647				31,000				(3,090	)			27,910
Franchise agreements		25			70,000				(8,517	)			61,483				70,000				(7,817	)			62,183
Manufacturing agreements		25			70,000				(8,517	)			61,483				70,000				(7,817	)			62,183
Other intangibles		5			1,150				(400	)			750				1,150				(350	)			800
Franchise 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

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

     The following table represents future estimated amortization expense of other intangible assets, net, with definite lives at March 31, 2010:

		Estimated
		amortization
Years ending December 31,		expense
		(unaudited)
		(in thousands)
2010			5,484
2011			7,120
2012			7,006
2013			6,953
2014			6,696
Thereafter			119,018
Total		$	152,277

NOTE 5. LONG-TERM DEBT / INTEREST EXPENSE

     Long-term debt at each respective period consisted of the following:

		March 31,				December 31,
		2010				2009
		(unaudited)
		(in thousands)
2007 Senior Credit Facility		$	644,382			$	644,619
Senior Toggle Notes			298,058				297,959
10.75% Senior Subordinated Notes			110,000				110,000
Mortgage			6,825				7,184
Capital leases			44				47
Less: current maturities			(1,513	)			(1,724	)
Total		$	1,057,796			$	1,058,085

     The Company’s net interest expense for each respective period is as follows:

		Three months ended
		March 31,				March 31,
		2010				2009
		(unaudited)
		(in thousands)
2007 Senior Credit Facility
Term Loan		$	7,555			$	9,205
Revolver			111				136
Senior Toggle Notes			4,856				5,531
10.75% Senior Subordinated Notes			2,956				2,956
Deferred financing fees			1,056				1,002
Mortgage			115				147
OID amortization			99				89
Interest income-other			(119	)			(4	)
Interest expense, net		$	16,629			$	19,062

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

     Accrued interest at each respective period consisted of the following:

		March 31,				December 31,
		2010				2009
		(unaudited)
		(in thousands)
2007 Senior Credit Facility		$	4,681			$	5,350
Senior Toggle Notes			872				5,720
10.75% Senior Subordinated Notes			526				3,482
Total		$	6,079			$	14,552

     Interest on the 2007 Senior Credit Facility and the Senior Toggle Notes is based on variable rates. At March 31, 2010 and December 31, 2009 the interest rate for the 2007 Senior Credit Facility was 2.5%. At March 31, 2010 and December 31, 2009 the interest rate for the Senior Toggle Notes was 5.8%.

NOTE 6. FINANCIAL INSTRUMENTS

     At March 31, 2010 and December 31, 2009, the Company’s financial instruments consisted of cash and cash equivalents, receivables, franchise notes receivable, accounts payable, certain accrued liabilities and long-term debt. The carrying amount of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximates their fair value because of the short maturity of these instruments. Based on current interest rates and their underlying risk, the carrying value of the franchise notes receivable approximates their fair value. These fair values are reflected net of reserves, which are recognized according to Company policy. The Company determined the estimated fair values of its debt by using currently available market information and estimates and assumptions where appropriate. Accordingly, as considerable judgment is required to determine these estimates, changes in the assumptions or methodologies may have an effect on these estimates. The actual and estimated fair values of the Company’s financial instruments are as follows:

		March 31,								December 31,
		2010								2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(unaudited)
		(in thousands)
Cash and cash equivalents		$	110,628			$	110,628			$	75,089			$	75,089
Receivables			96,964				96,964				94,355				94,355
Franchise notes receivable			3,540				3,540				3,364				3,364
Accounts payable			143,193				143,193				95,904				95,904
Long term debt (including current portion)			1,059,309				982,034				1,059,809				977,718

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

NOTE 7. COMMITMENTS AND CONTINGENCIES

Litigation

     The Company is engaged in various legal actions, claims and proceedings arising in the normal course of business, including claims related to breach of contracts, products liabilities, intellectual property matters and employment-related matters resulting from the Company’s business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. The Company continues to assess the requirement to account for additional contingencies in accordance with the standard on contingencies. If the Company is required to make a payment in connection with an adverse outcome in these matters, it could have a material impact on its financial condition and operating results.

     As a manufacturer and retailer of nutritional supplements and other consumer products that are ingested by consumers or applied to their bodies, the Company has been and is currently subjected to various product liability claims. Although the effects of these claims to date have not been material to the Company, it is possible that current and future product liability claims could have a material adverse impact on its business or financial condition. The Company currently maintains product liability insurance with a deductible/retention of $3.0 million per claim with an aggregate cap on retained loss of $10.0 million. The Company typically seeks and has obtained contractual indemnification from most parties that supply raw materials for its products or that manufacture or market products it sells. The Company also typically seeks to be added, and has been added, as an additional insured under most of such parties’ insurance policies. The Company is also entitled to indemnification by Numico for certain losses arising from claims related to products containing ephedra or Kava Kava sold prior to December 5, 2003. However, any such indemnification or insurance is limited by its terms and any such indemnification, as a practical matter, is limited to the creditworthiness of the indemnifying party and its insurer, and the absence of significant defenses by the insurers. The Company may incur material products liability claims, which could increase its costs and adversely affect its reputation, revenues and operating income.

     Pro-Hormone/Androstenedione Cases. The Company is currently defending six lawsuits (the “Andro Actions”) relating to the sale by GNC of certain nutritional products alleged to contain the ingredients commonly known as Androstenedione, Androstenediol, Norandrostenedione, and Norandrostenediol (collectively, “Andro Products”). Five of these lawsuits were filed in California, New York, New Jersey, Pennsylvania, and Florida. The most recent case was filed in Illinois (see Stephens and Pio matter discussed below).

     In each of the six cases, plaintiffs sought, or are seeking, to certify a class and obtain damages on behalf of the class representatives and all those similarly-situated who purchased from the Company certain nutritional supplements alleged to contain one or more Andro Products.

     In April 2006, the Company filed pleadings seeking to remove the then-pending Andro Actions to the respective federal district courts for the districts in which the respective Andro Actions were pending. At the same time, the Company filed motions seeking to transfer the then-pending Andro Actions to the U.S. District Court, Southern District of New York based on “related to” bankruptcy jurisdiction, as one of the manufacturers supplying it with Andro Products, and from whom it sought indemnity, MuscleTech Research and Development, Inc. (“MuscleTech”), had filed for bankruptcy. The Company was successful in removing the New Jersey, New York, Pennsylvania, and Florida Andro Actions to federal court and transferring these actions to the U.S. District Court, Southern District of New York based on bankruptcy jurisdiction. The California case, Guzman v. General Nutrition Companies, Inc., was not removed and remains pending in the Superior Court of the State of California for the County of Los Angeles.

     Following the conclusion of the MuscleTech bankruptcy case, in September 2007, plaintiffs filed a stipulation dismissing all claims related to the sale of MuscleTech products in the four cases then-pending in the U.S. District Court, Southern District of New York (New Jersey, New York, Pennsylvania, and Florida). Additionally, plaintiffs filed motions with the Court to remand those actions to their respective state courts, asserting that the federal court had been divested of jurisdiction because the MuscleTech bankruptcy action was no longer pending. That motion was never ruled upon and has been rendered moot by the disposition of the case, discussed below.

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

     On June 4, 2008, the U.S. District Court, Southern District of New York (on its own motion) set a hearing for the purpose of hearing argument as to why the New Jersey, New York, Pennsylvania, and Florida cases should not be dismissed for failure to prosecute in conformity to the Court’s Case Management Order. Following the hearing, the Court advised that all four cases would be dismissed with prejudice and issued an order to that effect. In August 2008, plaintiffs appealed the dismissal of the four cases to U.S. Court of Appeals for the Second Circuit, and oral argument was heard on October 14, 2009. On December 14, 2009, the Second Circuit reversed the dismissal and remanded the case to the U.S. District Court, Southern District of New York. On March 8, 2010, the District Court granted plaintiffs’ previously filed motion to remand these cases to their respective state courts. To date, no further proceedings have been scheduled in any of the state courts.

     In the Guzman case in California, plaintiffs’ Motion for Class Certification was denied on September 8, 2008. Plaintiffs appealed on October 31, 2008. Oral arguments took place on January 15, 2010 and the court reversed the order denying class certification. On March 1, 2010, the Company filed a petition for review with the California Supreme Court which was denied. The case will be tried as a class action lawsuit in the Superior Court of the State of California for the County of Los Angeles.

     On October 3, 2008, the plaintiffs in the five other Andro Actions filed another suit related to the sale of Andro Products in state court in Illinois. Stephens and Pio v. General Nutrition Companies, Inc. (Case No. 08 CH 37097, Circuit Court of Cook County, Illinois, County Department, Chancery Division). The allegations are substantially similar to all of the other Andro Actions.

     As any liabilities that may arise from these cases are not probable or reasonably estimable at this time, no liability has been accrued in the accompanying financial statements.

     California Wage and Break Claim. On November 4, 2008, 98 plaintiffs filed individual claims against the Company in the Superior Court of the State of California for the County of Orange, which was removed to the U.S. District Court, Central District of California on February 17, 2009. Each of the plaintiffs had previously been a member of a purported class in a lawsuit filed against the Company in 2007 and resolved in September 2009. The plaintiffs allege that they were not provided all of the rest and meal periods to which they were entitled under California law, and further allege that the Company failed to pay them split shift and overtime compensation to which they were entitled under California law. Discovery in this case is ongoing and the Company is vigorously defending these matters. The court has developed a mediation procedure for handling the pending claims and has ordered the parties to mediate with small groups of plaintiffs and stayed the case as to the plaintiffs not participating in the mediations. The first of the mediation sessions occurred February 10, 2010 and March 4, 2010 and did not result in any settlements. Any liabilities that may arise from these matters are not probable or reasonably estimable at this time.

     Romero Claim. On April 27, 2009, plaintiff J.C. Romero, a professional baseball player, filed a complaint against the Company, among others, in Superior Court of New Jersey (Law Division/ Camden County). Plaintiff alleges that he purchased from a GNC store and consumed 6-OXO Extreme, which is manufactured by a third party, and in August 2008, was alleged to have tested positive for a banned substance. Plaintiff served a 50 game suspension imposed by Major League Baseball. The seven count complaint asserts, among other things, claims for negligence, strict liability, misrepresentation, breach of implied warranty and violations of the New Jersey Consumer Fraud Act, and seeks unspecified monetary damages. GNC tendered the claim to the insurance company of the franchisee whose GNC store sold and allegedly misrepresented the product. On or about October 9, 2009, GNC answered plaintiff’s first amended complaint and cross-claimed against co-defendants Proviant Technologies and Ergopharm. Discovery in this case is ongoing and the Company is vigorously defending the matter. Any liabilities that may arise from this matter are not probable or reasonably estimable at this time.

     Ciavarra Claim. On November 19, 2008, Ryan Ciavarra filed a personal injury lawsuit against, among others, General Nutrition Corporation, in the District Court of Harris County, Texas. Plaintiff alleges that his use and consumption of the diet product Hydroxycut, which is manufactured by a third party and was, until recently, sold in the Company’s stores, caused severe liver damage, jaundice and elevated liver enzymes. Plaintiff asserts claims for strict liability, negligence and breach of warranty and seeks unspecified monetary damages. Discovery in this case is ongoing and the Company is vigorously defending the matter. Any liabilities that may arise from this matter are not probable or reasonably estimable at this time.

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

     Hydroxycut Claims. On May 1, 2009, the FDA issued a warning on several Hydroxycut-branded products manufactured by Iovate Health Sciences U.S.A., Inc. (“Iovate”). The FDA warning was based on 23 reports of liver injuries from consumers who claimed to have used the products between 2002 and 2009. As a result, Iovate voluntarily recalled 14 Hydroxycut-branded products. Following the recall, GNC was named, among other defendants, in 32 lawsuits in several states (note that prior to May 1, 2009, GNC was a co-defendant in one Hydroxycut case (see “Ciavarra Claim” entry above). Iovate previously accepted GNC’s tender request for defense and indemnification under its purchasing agreement with GNC and, as such, Iovate has accepted GNC’s request for defense and indemnification in the new Hydroxycut matters. GNC’s ability to obtain full recovery in respect of any claims against GNC in connection with products manufactured by Iovate under the indemnity is dependent on Iovate’s insurance coverage, the creditworthiness of its insurer, and the absence of significant defenses by such insurer. To the extent GNC is not fully compensated by Iovate’s insurer, it can seek recovery directly from Iovate. GNC’s ability to fully recover such amounts may be limited by the creditworthiness of Iovate.

     GNC has been named in several lawsuits related to Hydroxycut. The following personal injury matters (in addition to the Ciavarra Claim discussed above) were filed by individuals claiming injuries from use and consumption of Hydroxycut-branded products:

	•		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);

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).

     The following putative class actions generally include claims of consumer fraud, misrepresentation, strict liability, and breach of warranty related to Hydroxycut-branded products:

	•		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).

By court order dated October 6, 2009, the United States Judicial Panel on Multidistrict Litigation consolidated pretrial proceedings of many of the pending actions (including the above-listed GNC class actions) in the Southern District of California (In re: Hydroxycut Marketing and Sales Practices Litigation, MDL No. 2087). Any liabilities that may arise from these matters are not probable or reasonably estimable at this time.

     Bedell Claim. On May 1, 2009, plaintiff Eugene Bedell, Jr. filed a personal injury complaint against, among others, the Company and GNC Corporation, in Circuit Court of Loudoun County, Virginia. Plaintiff alleges that his use and consumption of a non-GNC product called “Nitro T3” caused him to have a stroke. Plaintiff makes certain allegations regarding the risks of using and consuming Nitro T3 and GNC’s alleged failure to warn consumers of those risks. Plaintiff seeks unspecified monetary damages. Under its purchasing agreement with the vendor, WellNx, GNC tendered the matter to WellNx for defense and indemnification. WellNx has accepted GNC’s request for defense and indemnification. Any liabilities that may arise from this matter are not probable or reasonably estimable at this time.

     Chen Claim. On April 30, 2009, plaintiff Yuging “Phillis” Chen filed a Third Amended Complaint against, among others, Nutra Manufacturing, Inc., in the Superior Court of California for the County of Los Angeles. Plaintiff alleges that her use and consumption of various products, including Mega Garlic Plus and Herbalifeline, manufactured by Nutra Manufacturing, caused personal injuries. Plaintiff asserts, among other things, claims for strict liability, negligence, and fraud, and seeks unspecified monetary damages. Any liabilities that may arise from this matter are not probable or reasonably estimable at this time.

     California False Labeling and Consumer Fraud Claims. Beginning in May 2009, a series of false labeling and consumer fraud cases (listed below) were filed in California in connection with label claims of non-GNC products sold in the Company’s stores. The following cases are active:

	•		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

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).

GNC tendered each of the above matters to the applicable vendor for defense and indemnification. Each such vendor accepted GNC’s request for defense and indemnification. Any liabilities that may arise from these matters are not probable or reasonably estimable at this time.

Environmental Compliance

     In March 2008, the South Carolina Department of Health and Environmental Control (“DHEC”) requested that the Company investigate its South Carolina facility for a possible source or sources of contamination detected on an adjoining property. The Company has commenced the investigation at the facility as requested by DHEC. After several phases of the investigation the possible source or sources of contamination have not been sufficiently identified. The Company is continuing such investigation. The proceedings in this matter have not yet progressed to a stage where it is possible to estimate the timing and extent of any remedial action that may be required, the ultimate cost of remediation, or the amount of the Company’s potential liability.

     In addition to the foregoing, the Company is subject to numerous federal, state, local, and foreign environmental and health and safety laws and regulations governing its operations, including the handling, transportation, and disposal of the Company’s non-hazardous and hazardous substances and wastes, as well as emissions and discharges from its operations into the environment, including discharges to air, surface water, and groundwater. Failure to comply with such laws and regulations could result in costs for remedial actions, penalties, or the imposition of other liabilities. New laws, changes in existing laws or the interpretation thereof, or the development of new facts or changes in their processes could also cause the Company to incur additional capital and operation expenditures to maintain compliance with environmental laws and regulations and environmental permits. The Company also is subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment without regard to fault or knowledge about the condition or action causing the liability. Under certain of these laws and regulations, such liabilities can be imposed for cleanup of previously owned or operated properties, or for properties to which substances or wastes that were sent in connection with current or former operations at its facilities. The presence of contamination from such substances or wastes could also adversely affect the Company’s ability to sell or lease its properties, or to use them as collateral for financing. From time to time, the Company has incurred costs and obligations for correcting environmental and health and safety noncompliance matters and for remediation at or relating to certain of its properties or properties at which its waste has been disposed. The Company believes it has complied with, and is currently complying with, its environmental obligations pursuant to environmental and health and safety laws and regulations in all material respects, and that any liabilities for noncompliance will not have a material adverse effect on its business or financial performance. However, it is difficult to predict future liabilities and obligations, which could be material.

Contingencies

     Due to the nature of the Company’s business operations having a presence in multiple taxing jurisdictions, the Company periodically receives inquiries and/or audits from various state and local taxing authorities. Any probable and reasonably estimable liabilities that may arise from these inquiries have been accrued and reflected in the accompanying financial statements.

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

NOTE 8. STOCK-BASED COMPENSATION PLANS

Stock Options

     In 2007, the Board of Directors of Parent (the “Board”) and Parent’s stockholders approved and adopted the GNC Acquisition Holdings Inc. 2007 Stock Incentive Plan (the “Plan”). The purpose of the Plan is to enable Parent to attract and retain highly qualified personnel who will contribute to the success of the Company. The Plan provides for the granting of stock options, restricted stock, and other stock-based awards. The Plan is available to certain eligible employees, directors, consultants or advisors as determined by the Compensation Committee of the Board (the “Compensation Committee”). The total number of shares of Parent’s Class A common stock reserved and available for the Plan is 10.4 million shares. Stock options under the Plan generally are granted with exercise prices at or above fair market value, typically vest over a four or five-year period and expire ten years from date of grant. The Compensation Committee has used a valuation methodology in which the fair market value of the common stock is based on the Company’s business enterprise value and, in situations deemed appropriate by the Compensation Committee, may be discounted to reflect the lack of marketability associated with the common stock. No stock appreciation rights, restricted stock, deferred stock or performance shares have been granted under the Plan.

     The Company utilizes the Black-Scholes model to calculate the fair value of options under the standard on stock compensation. The resulting compensation cost is recognized in the Company’s financial statements over the option vesting period. At March 31, 2010, the net unrecognized compensation cost was $8.8 million and is expected to be recognized over a weighted average period of approximately 2.5 years.

     The following table outlines the Parent’s stock option activity:

						Weighted
						Average
		Total Options				Exercise Price
Outstanding at December 31, 2009			9,263,640			$	7.27
Granted			255,000				12.29
Exercised			—				—
Forfeited			(130,016	)			6.25
Expired			(28,502	)			6.25
Outstanding at March 31, 2010			9,360,122			$	7.43
Exercisable at March 31, 2010			4,762,099			$	6.70

The standard on stock compensation requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. Stock-based compensation expense for the three months ended March 31, 2010 and 2009 was $0.8 million and $0.7 million, respectively.

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

     As of March 31, 2010, the weighted average remaining contractual life of outstanding options was 7.3 years. At March 31, 2010, the weighted average remaining contractual life of exercisable options was 6.9 years. The weighted average fair value of options granted during 2010 was $3.43.

     The Black-Scholes model utilizes the following assumptions in determining a fair value: price of underlying stock, option exercise price, expected option term, risk-free interest rate, expected dividend yield, and expected stock price volatility over the option’s expected term. As the Company has had minimal exercises of stock options through December 31, 2009, 2008 and 2007, the option term has been estimated by considering both the vesting period, which is typically five years, and the contractual term of ten years. As the Company’s underlying stock is not publicly traded on an open market, the Company utilized its current peer group average to estimate the expected volatility. The assumptions used in the Company’s Black-Scholes valuation related to stock option grants made during the three months ended March 31, 2010 were as follows:

		March 31,
		2010
		(unaudited)
Dividend yield		0.00%
Expected option life		7.5 years
Volatility factor percentage of market price		31.5%
Discount rate		3.06 - 3.28%

     As the Black-Scholes model utilizes certain estimates and assumptions, the existing models do not necessarily represent the definitive fair value of options for future periods.

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

NOTE 9. SEGMENTS

     The Company has three reportable segments, each of which represents an identifiable component of the Company for which separate financial information is available. This information is utilized by management to assess performance and allocate assets accordingly. The Company’s management evaluates segment operating results based on several indicators. The primary key performance indicators are sales and operating income or loss for each segment. Operating income or loss, as evaluated by management, excludes certain items that are managed at the consolidated level, such as distribution and warehousing, impairments and other corporate costs. The following table represents key financial information for each of the Company’s reportable segments, identifiable by the distinct operations and management of each: Retail, Franchising, and Manufacturing/Wholesale. The Retail reportable segment includes the Company’s corporate store operations in the United States, Canada and its www.gnc.com business. The Franchise reportable segment represents the Company’s franchise operations, both domestically and internationally. The Manufacturing/Wholesale reportable segment represents the Company’s manufacturing operations in South Carolina and the Wholesale sales business. This segment supplies the Retail and Franchise segments, along with various third parties, with finished products for sale. The Warehousing and Distribution costs, Corporate Costs, and Other Unallocated Costs represent the Company’s administrative expenses. The accounting policies of the segments are the same as those described in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.”

		Three months ended
		March 31,				March 31,
		2010				2009
		(unaudited)
		(in thousands)
Revenue:
Retail		$	350,834			$	333,712
Franchise			72,602				64,483
Manufacturing/Wholesale:
Intersegment (1)			47,345				47,751
Third Party			41,583				41,702
Sub total Manufacturing/Wholesale			88,928				89,453
Sub total segment revenues			512,364				487,648
Intersegment elimination (1)			(47,345	)			(47,751	)
Total revenue		$	465,019			$	439,897
Operating income:
Retail		$	50,196			$	44,443
Franchise			22,401				19,207
Manufacturing/Wholesale			16,872				17,881
Unallocated 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

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

NOTE 10. SUPPLEMENTAL GUARANTOR INFORMATION

     As of March 31, 2010 the Company’s debt included its 2007 Senior Credit Facility, Senior Toggle Notes and 10.75% Senior Subordinated Notes. The 2007 Senior Credit Facility has been guaranteed by the Company’s direct parent, GNC Corporation, and the Company’s existing and future direct and indirect material domestic subsidiaries. The Senior Toggle Notes are general non collateralized obligations of the Company, are effectively subordinated to the Company’s 2007 Senior Credit Facility to the extent of the value of the collateral securing the 2007 Senior Credit Facility and are senior in right of payment to all existing and future subordinated obligations of the Company, including its 10.75% Senior Subordinated Notes. The Senior Toggle Notes are unconditionally guaranteed on a non collateralized basis by all of the Company’s existing and future direct and indirect material domestic subsidiaries. The 10.75% Senior Subordinated Notes are general non collateralized obligations and are guaranteed on a senior subordinated basis by the Company’s existing and future direct and indirect material domestic subsidiaries and rank junior in right of payment to the Company’s 2007 Senior Credit Facility and Senior Toggle Notes. The guarantors are the same for the 2007 Senior Credit Facility, Senior Toggle Notes and 10.75% Senior Subordinated Notes. Non-guarantor subsidiaries include the Company’s direct and indirect foreign subsidiaries. Each subsidiary guarantor is 100% owned, directly or indirectly, by the Company. The guarantees are full and unconditional and joint and several. Investments in subsidiaries are accounted for under the equity method of accounting.

     Presented below are condensed consolidating financial statements of the Company as the parent/issuer, and the combined guarantor and non-guarantor subsidiaries as of March 31, 2010, and December 31, 2009, and the three months ended March 31, 2010 and 2009. Intercompany balances and transactions have been eliminated.

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

Supplemental Condensed Consolidating Balance Sheets

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

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

Supplemental Condensed Consolidating Balance Sheets

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