GNC 2011 Annual Report Download - page 30

Table of Contents
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 "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. We
may be unable to obtain full recovery from the insurer or any indemnifying third party in respect of any claims against us in connection with products
manufactured by such third 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 December 31, 2010, there were 50 pending
lawsuits related to Hydroxycut in which GNC had been named, including 44 individual, largely personal injury claims and six putative class action cases. See
"Business — 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.
We may experience product recalls, which could reduce our sales and margin and adversely affect our results of operations.
We may be subject to product recalls, withdrawals or seizures if any of the products we formulate, manufacture or sell are believed to cause injury or
illness or if we are alleged to have violated governmental regulations in the manufacturing, labeling, promotion, sale or distribution of such products. For
example, in May 2009, the FDA warned consumers to stop using Hydroxycut diet products, which are produced by Iovate Health Sciences, Inc. ("Iovate") and
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 of 2009, we experienced a reduction in sales and margin due to this recall
as a result of accepting
28