GNC 2010 Annual Report Download - page 27

Table of Contents
Our failure to comply with FTC regulations and existing consent decrees imposed on us by the FTC could result in substantial
monetary penalties and could adversely affect our operating results.
The FTC exercises jurisdiction over the advertising of dietary supplements and has instituted numerous enforcement actions against
dietary supplement companies, including us, for failure to have adequate substantiation for claims made in advertising or for the use of false or
misleading advertising claims. As a result of these enforcement actions, we are currently subject to three consent decrees that limit our ability to
make certain claims with respect to our products and required us in the past to pay civil penalties and other amounts in the aggregate amount
of $3.0 million. See Item 1, "Business — Government Regulation — Product Regulation" for more information. Failure by us or our franchisees
to comply with the consent decrees and applicable regulations could occur from time to time. Violations of these orders could result in
substantial monetary penalties, which could have a material adverse effect on our financial condition or results of operations.
We may incur material product liability claims, which could increase our costs and adversely affect our reputation, revenues, and
operating income.
As a retailer, distributor, and manufacturer of products designed for human consumption, we are subject to product liability claims if the
use of our products is alleged to have resulted in injury. Our products consist of vitamins, minerals, herbs and other ingredients that are
classified as foods or dietary supplements and are not subject to pre-market regulatory approval in the United States. Our products could
contain contaminated substances, and some of our products contain ingredients that do not have long histories of human consumption.
Previously unknown adverse reactions resulting from human consumption of these ingredients could occur. In addition, third-party
manufacturers produce many of the products we sell. As a distributor of products manufactured by third parties, we may also be liable for
various product liability claims for products we do not manufacture. Although our purchase agreements with our third party vendors typically
require the vendor to indemnify us to the extent of any such claims, any such indemnification is limited by its terms. Moreover, as a practical
matter, any such indemnification is dependent on the creditworthiness of the indemnifying party and its insurer, and the absence of significant
defenses by the insurers. To the extent we are unable to obtain full recovery from the insurer or any third party in respect of any claims against
us in connection with products manufactured by such party, we could seek recovery directly from such party.
We have been and may be subject to various product liability claims, including, among others, that our products include inadequate
instructions for use or inadequate warnings concerning possible side effects and interactions with other substances. For example, as of
January 25, 2010, we have been named as a defendant in twenty pending cases involving the sale of Hydroxycut diet products, including six
putative class action cases and eight personal injury cases. See Item 3, "Legal Proceedings." Any product liability claim against us could result
in increased costs and could adversely affect our reputation with our customers, which in turn could adversely affect our revenues and
operating income.
Compliance with the Iovate Hydroxycut recall has reduced our sales and margin and may adversely affect our results of operations.
In May 2009, the FDA warned consumers to stop using Hydroxycut diet products, which are produced by Iovate Health Sciences, Inc.
("Iovate"), which were sold in our stores. Iovate issued a voluntary recall, with which we fully complied. Sales of the recalled Hydroxycut
products amounted to approximately $57.8 million, or 4.7% of our retail sales in 2008, and $18.8 million, or 4.2% of our retail sales in the first
four months of 2009. We provided refunds or gift cards to consumers who returned these products to our stores. In the second quarter we
experienced a reduction in sales and margin due to this recall as a result of accepting returns of products from customers and a loss of sales as
a replacement product was not available. Through December 31, 2009, we had refunded approximately $3.5 million to our retail customers and
approximately $1.6 million to our wholesale customers for Hydroxycut product returns. A significant majority of the retail refunds occurred in our
second quarter; the wholesale refunds were recognized in the early part of the third quarter. At the end of June, Iovate launched new
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