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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549
 Form 10-Q (Mark one)o
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005
 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: 333-116040 GNC CORPORATION  DELAWARE
    
    72-1575170(State or other jurisdiction of
    
    (I.R.S. EmployerIncorporation or organization)
    
    Identification No.)300 Sixth Avenue
    
    15222Pittsburgh, Pennsylvania
    
    (Zip Code)(Address of principal executive offices)
 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. þ Yes o No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).o Yes þ No As of March 31, 2005, 29,659,663 shares of the registrants $0.01 par value Common Stock (the
Common Stock) were outstanding.




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TABLE OF CONTENTS  
 PAGEPART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial StatementsConsolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004
    
    3Unaudited Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2005 and 2004
    
    4Unaudited Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2005
    
    5Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
    
    6Summarized Notes to Unaudited Consolidated Financial Statements
    
    7Item 2
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    18Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    25Item 4
    
    Controls and Procedures
    
    25PART II
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    26Item 2(c)
    
    Unregistered
Sales of Equity Securities and Use of Proceeds
    
    26Item 6
    
    Exhibits
    
    26Signatures
    
    
    
    27Exhibit 31.1Exhibit 31.2Exhibit 32.1
  2




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PART I FINANCIAL INFORMATION 
 Item 1. Financial Statements
 
 GNC CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data) December 31,
    
    
    March 31,2004 *
    
    
    2005(unaudited)Current assets:Cash and cash equivalents
    
    $
    85,161
    
    
    $
    77,765Receivables, net
    
    
    68,148
    
    
    
    68,428Inventories, net (Note 3)
    
    
    272,254
    
    
    
    293,371Deferred tax assets, net
    
    
    14,133
    
    
    
    13,164Other current assets
    
    
    36,382
    
    
    
    36,881Total current assets
    
    
    476,078
    
    
    
    489,609Long-term assets:Goodwill (Note 4)
    
    
    78,585
    
    
    
    78,585Brands (Note 4)
    
    
    212,000
    
    
    
    212,000Other intangible assets, net (Note 4)
    
    
    28,652
    
    
    
    27,691Property, plant and equipment, net
    
    
    195,409
    
    
    
    190,808Deferred financing fees, net
    
    
    18,130
    
    
    
    17,727Deferred tax assets, net
    
    
    1,093
    
    
    
    Other long-term assets
    
    
    21,393
    
    
    
    15,797Total long-term assets
    
    
    555,262
    
    
    
    542,608Total assets
    
    $
    1,031,340
    
    
    $
    1,032,217Current liabilities:Accounts payable
    
    $
    106,557
    
    
    $
    134,473Accrued payroll and related liabilities
    
    
    20,353
    
    
    
    16,631Accrued interest (Note 5)
    
    
    1,863
    
    
    
    9,022Current portion, long-term debt (Note 5)
    
    
    3,901
    
    
    
    2,048Other current liabilities
    
    
    61,325
    
    
    
    63,570Total current liabilities
    
    
    193,999
    
    
    
    225,744Long-term liabilities:Long-term debt (Note 5)
    
    
    506,474
    
    
    
    472,836Deferred tax liabilities, net
    
    
    
    
    
    
    346Other long-term liabilities
    
    
    9,866
    
    
    
    10,234Total long-term liabilities
    
    
    516,340
    
    
    
    483,416Total liabilities
    
    
    710,339
    
    
    
    709,160Cumulative redeemable exchangeable preferred stock, $0.01 par value,
110,000 shares authorized, 100,000 shares issued and outstanding
(liquidation preference of $123,815 and $127,221, respectively)
    
    
    112,734
    
    
    
    116,173Stockholders equity:Common stock, $0.01 par value, 100,000,000 shares authorized,
29,854,663 and 29,659,663 shares issued and outstanding, respectively
    
    
    299
    
    
    
    297Paid-in-capital
    
    
    178,245
    
    
    
    177,467Retained earnings
    
    
    28,924
    
    
    
    28,221Treasury stock, at cost, 100,000 and 0 shares, respectively
    
    
    (364
    )
    
    
    Accumulated other comprehensive income
    
    
    1,163
    
    
    
    899Total stockholders equity
    
    
    208,267
    
    
    
    206,884Total liabilities and stockholders equity
    
    $
    1,031,340
    
    
    $
    1,032,217
 * Footnotes summarized from the Audited Financial Statements. The accompanying notes are an integral part of the consolidated financial statements. 3




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GNC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
(unaudited)
(in thousands) Three months
    
    
    Three monthsended
    
    
    endedMarch 31,
    
    
    March 31,2004
    
    
    2005Revenue
    
    $
    372,555
    
    
    $
    336,435Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    247,143
    
    
    
    230,456Gross profit
    
    
    125,412
    
    
    
    105,979Compensation and related benefits
    
    
    61,100
    
    
    
    57,314Advertising and promotion
    
    
    12,556
    
    
    
    14,601Other selling, general and administrative
    
    
    17,823
    
    
    
    18,915Foreign currency gain
    
    
    (193
    )
    
    
    (105
    )Other income
    
    
    
    
    
    
    (2,500
    )Operating income
    
    
    34,126
    
    
    
    17,754Interest expense, net
    
    
    8,694
    
    
    
    13,471Income before income taxes
    
    
    25,432
    
    
    
    4,283Income tax expense
    
    
    9,244
    
    
    
    1,547Net income
    
    
    16,188
    
    
    
    2,736Other comprehensive loss
    
    
    (418
    )
    
    
    (264
    )Comprehensive income
    
    $
    15,770
    
    
    $
    2,472
 The accompanying notes are an integral part of the consolidated financial statements. 4




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GNC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
(in thousands, except share data) AccumulatedOther
    
    
    TotalCommon Stock
    
    
    
    
    
    
    Retained
    
    
    Treasury Stock
    
    
    Comprehensive
    
    
    Stockholders'Shares
    
    
    Dollars
    
    
    Paid-in-Capital
    
    
    Earnings
    
    
    Shares
    
    
    Dollars
    
    
    Income
    
    
    EquityBalance at December 31, 2004
    
    
    29,854,663
    
    
    $
    299
    
    
    $
    178,245
    
    
    $
    28,924
    
    
    
    (100,000
    )
    
    $
    (364
    )
    
    $
    1,163
    
    
    $
    208,267Retirement of treasury stock
    
    
    (100,000
    )
    
    
    (1
    )
    
    
    (363
    )
    
    
    
    
    
    
    100,000
    
    
    
    364
    
    
    
    
    
    
    
    Repurchase and retirement of common stock
    
    
    (95,000
    )
    
    
    (1
    )
    
    
    (415
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (416
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,406
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,406
    )Amortization of preferred stock
issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,736
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,736Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (264
    )
    
    
    (264
    )Balance at March 31, 2005 (unaudited)
    
    
    29,659,663
    
    
    $
    297
    
    
    $
    177,467
    
    
    $
    28,221
    
    
    
    
    
    
    $
    
    
    
    $
    899
    
    
    $
    206,884
 The accompanying notes are an integral part of the consolidated financial statements. 5




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GNC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands) Three months
    
    
    Three monthsended
    
    
    endedMarch 31,
    
    
    March 31,2004
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    16,188
    
    
    $
    2,736Depreciation expense
    
    
    8,257
    
    
    
    9,139Deferred fee writedown  early debt extinguishment
    
    
    
    
    
    
    3,890Amortization of intangible assets
    
    
    1,004
    
    
    
    961Amortization of deferred financing fees
    
    
    771
    
    
    
    683Increase in provision for inventory losses
    
    
    4,659
    
    
    
    2,238(Decrease) increase in provision for losses on accounts receivable
    
    
    (1,099
    )
    
    
    591Decrease in net deferred taxes
    
    
    1,353
    
    
    
    2,408Changes in assets and liabilities:Decrease (increase) in receivables
    
    
    941
    
    
    
    (872
    )Increase in inventory, net
    
    
    (31,844
    )
    
    
    (23,159
    )Decrease in franchise note receivables, net
    
    
    3,201
    
    
    
    3,604Decrease in other assets
    
    
    5,654
    
    
    
    1,495Increase in accounts payable
    
    
    36,814
    
    
    
    26,157Increase in accrued taxes
    
    
    7,884
    
    
    
    Increase in interest payable
    
    
    4,572
    
    
    
    7,159Decrease in accrued liabilities
    
    
    (9,909
    )
    
    
    (1,490
    )Net cash provided by operating activities
    
    
    48,446
    
    
    
    35,540CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (5,342
    )
    
    
    (4,383
    )Franchise store conversions
    
    
    27
    
    
    
    Store acquisition costs
    
    
    (232
    )
    
    
    (558
    )Acquisition of General Nutrition Companies, Inc
    
    
    (7,710
    )
    
    
    Net cash used in investing activities
    
    
    (13,257
    )
    
    
    (4,941
    )CASH FLOWS FROM FINANCING ACTIVITIES:Issuance of common stock
    
    
    1,628
    
    
    
    Repurchase and retirement of common stock
    
    
    
    
    
    
    (416
    )(Decrease) increase in cash overdrafts
    
    
    (839
    )
    
    
    1,760Payments on long-term debt  third parties
    
    
    (951
    )
    
    
    (185,491
    )Proceeds from senior notes issuance
    
    
    
    
    
    
    150,000Financing fees
    
    
    
    
    
    
    (3,785
    )Net cash used in financing activities
    
    
    (162
    )
    
    
    (37,932
    )Effect of exchange rate on cash
    
    
    (72
    )
    
    
    (63
    )Net increase (decrease) in cash
    
    
    34,955
    
    
    
    (7,396
    )Beginning balance, cash
    
    
    33,176
    
    
    
    85,161Ending balance, cash
    
    $
    68,131
    
    
    $
    77,765
 The accompanying notes are an integral part of the consolidated financial statements. 6




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GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. NATURE OF BUSINESS General Nature of Business.GNC Corporation (the Company), formerly known as General
Nutrition Centers Holding Company, a Delaware corporation, is a leading specialty retailer of
vitamin, mineral and herbal supplements, diet and sports nutrition products and specialty
supplements. The Company is also a provider of personal care and other health related products.
The Company operates primarily in three business segments: Retail, Franchising and
Manufacturing/Wholesale. The Company manufactures the majority of its branded products, and 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, Federal Trade Commission, 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. Acquisition of the Company.On October 16, 2003, the Company entered into a purchase
agreement (the Purchase Agreement) with Koninklijke (Royal) Numico N.V. (Numico) and Numico
USA, Inc. to acquire 100% of the outstanding equity interest of General Nutrition Companies, Inc.
(GNCI) from Numico USA, Inc. on December 5, 2003 (the Acquisition). The purchase equity
contribution was made by GNC Investors, LLC (GNC LLC), an affiliate of Apollo Management L.P.
(Apollo), together with additional institutional investors and certain management of the Company.
The equity contribution from GNC LLC was recorded by the Company. The Company utilized this equity contribution to purchase the investment in
General Nutrition Centers, Inc., (Centers). Centers is a wholly owned subsidiary of the Company. NOTE 2. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared by the Company
in accordance with accounting principles generally accepted in the United States of America for
interim financial reporting and with the instructions to Form 10-Q and Article 210-10-01 of
Regulation S-X. Accordingly, they do not include all of the information and related footnotes that
would normally be required by accounting principles generally accepted in the United States of
America 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, 2004 (the Form 10-K). 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,
2005. The Companys normal reporting period is based on a 52-week calendar year. Certain reclassifications have been made to the financial statements to ensure consistency in
reporting and conformity between prior year and current year amounts. Use of Estimates.The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 continual 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. There have been no material changes
to critical estimates since the audited financial statements at December 31, 2004. Stock Compensation.In accordance with Accounting Principles Board (APB) No. 25, Accounting
for Stock issued to Employees, the Company accounts for stock-based employee compensation using
the intrinsic value method of accounting. For the three months ended March 31, 2005, stock
compensation represents shares of the Companys stock issued pursuant to the General Nutrition
Centers Holding Company (presently known as GNC Corporation) 2003 Omnibus Stock Incentive Plan.
The common stock associated with this plan is not registered or traded on any exchange. Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-based Compensation,
prescribes that companies utilize the fair value method of valuing stock-based compensation and
recognize compensation expense accordingly. SFAS No. 123 did not require that the fair value
method be adopted and reflected in the financial statements. However, in December 2004, the
Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) which sets accounting
requirements for share-based compensation. It requires companies to recognize in the income
statement the grant-date fair value of stock options and other equity-based compensation and
disallows the use of the intrinsic value method of accounting for stock compensation. This
statement is also not effective for the Company until the beginning of our fiscal year 2006. The
Company has adopted the disclosure requirements of SFAS No. 148 Accounting for Stock Based
Compensation-Transition and Disclosure-an amendment of SFAS No. 123 by illustrating compensation
costs in the following table and will adopt SFAS No. 123(R) beginning of our fiscal year 2006. 7




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GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Had compensation costs for stock options been determined using the fair market value method of
SFAS No. 123, the effect on net income for each of the periods presented would have been as
follows: Three Months endedMarch 31,2004
    
    
    2005(unaudited)(in thousands)Net income as reported
    
    $
    16,188
    
    
    $
    2,736Less: total stock-based employee compensation
costs determined using fair value method, net of
related tax effects
    
    
    (216
    )
    
    
    (313
    )Adjusted net income
    
    $
    15,972
    
    
    $
    2,423
 NOTE 3. INVENTORIES, NET Inventories at each respective period consisted of the following: December 31, 2004Net CarryingGross cost
    
    
    Reserves
    
    
    Value(in thousands)Finished product ready for sale
    
    $
    242,578
    
    
    $
    (11,542
    )
    
    $
    231,036Unpackaged bulk product and raw materials
    
    
    41,607
    
    
    
    (3,019
    )
    
    
    38,588Packaging supplies
    
    
    2,630
    
    
    
    
    
    
    
    2,630$
    286,815
    
    
    $
    (14,561
    )
    
    $
    272,254
 March 31, 2005Net CarryingGross cost
    
    
    Reserves
    
    
    Value(unaudited)(in thousands)Finished product ready for sale
    
    $
    258,981
    
    
    $
    (10,785
    )
    
    $
    248,196Unpackaged bulk product and raw materials
    
    
    45,198
    
    
    
    (3,179
    )
    
    
    42,019Packaging supplies
    
    
    3,156
    
    
    
    
    
    
    
    3,156$
    307,335
    
    
    $
    (13,964
    )
    
    $
    293,371
 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 SFAS No. 142, 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 basis over periods not
exceeding 20 years. The Company records goodwill upon the acquisition of franchisee stores when
the acquisition price exceeds the fair value of the identifiable assets acquired and liabilities
assumed of the store. The Companys goodwill remained the same at March 31, 2005 compared to
December 31, 2004, with Retail of $17.6 million, Franchise of $60.5 million and
Manufacturing/Wholesale of $0.4 million. The following table summarizes the Companys intangible asset activity from December 31, 2004
to March 31, 2005. Retail
    
    
    Franchise
    
    
    OperatingGold Card
    
    
    Brand
    
    
    Brand
    
    
    Agreements
    
    
    Total(in thousands)Balance at December 31, 2004
    
    $
    1,413
    
    
    $
    49,000
    
    
    $
    163,000
    
    
    $
    27,239
    
    
    $
    240,652Amortization expense
    
    
    (224
    )
    
    
    
    
    
    
    
    
    
    
    (737
    )
    
    
    (961
    )Balance at March 31, 2005
(unaudited)
    
    $
    1,189
    
    
    $
    49,000
    
    
    $
    163,000
    
    
    $
    26,502
    
    
    $
    239,691
 8




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GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) The following table reflects the gross carrying amount and accumulated amortization for each
major intangible asset: December 31, 2004
    
    
    March 31, 2005Accumulated
    
    
    Carrying
    
    
    
    
    
    
    Accumulated
    
    
    CarryingCost
    
    
    Amortization
    
    
    Amount
    
    
    Cost
    
    
    Amortization
    
    
    Amount(unaudited)(in thousands)Brands  retail
    
    $
    49,000
    
    
    $
    
    
    
    $
    49,000
    
    
    $
    49,000
    
    
    $
    
    
    
    $
    49,000Brands  franchise
    
    
    163,000
    
    
    
    
    
    
    
    163,000
    
    
    
    163,000
    
    
    
    
    
    
    
    163,000Gold card  retail
    
    
    2,230
    
    
    
    (1,004
    )
    
    
    1,226
    
    
    
    2,230
    
    
    
    (1,198
    )
    
    
    1,032Gold card  franchise
    
    
    340
    
    
    
    (153
    )
    
    
    187
    
    
    
    340
    
    
    
    (183
    )
    
    
    157Retail agreements
    
    
    8,500
    
    
    
    (1,267
    )
    
    
    7,233
    
    
    
    8,500
    
    
    
    (1,562
    )
    
    
    6,938Franchise agreements
    
    
    21,900
    
    
    
    (1,894
    )
    
    
    20,006
    
    
    
    21,900
    
    
    
    (2,336
    )
    
    
    19,564$
    244,970
    
    
    $
    (4,318
    )
    
    $
    240,652
    
    
    $
    244,970
    
    
    $
    (5,279
    )
    
    $
    239,691
 The following table represents future estimated amortization expense of other intangible
assets, net, with definite lives at March 31, 2005: EstimatedamortizationYears ending December 31,
    
    expense(unaudited)(in thousands)2005
    
    $
    2,8822006
    
    
    3,4572007
    
    
    2,9432008
    
    
    2,8942009
    
    
    2,283Thereafter
    
    
    13,232Total
    
    $
    27,691
 NOTE 5. LONG-TERM DEBT / INTEREST In December 2003, the Companys wholly owned subsidiary, Centers entered into a senior credit
facility with a syndicate of lenders. The senior credit facility consists of a $285.0 million term
loan facility and a $75.0 million revolving credit facility. This indebtedness has been guaranteed
by the Company and its domestic subsidiaries. All borrowings under the senior credit facility bear
interest at a rate per annum equal to either (a) the greater of the prime rate as quoted on the
British Banking Association Telerate, and the federal funds effective rate plus one half percent
per annum, plus in each case, additional margins of 2.0% per annum for both the term loan facility
and the revolving credit facility, or (b) the Eurodollar rate plus additional margins of 3.0% per
annum for both the term loan facility and the revolving credit facility. In addition to paying the
above stated interest rates, Centers is also required to pay a commitment fee relating to the
unused portion of the revolving credit facility at a rate of 0.5% per annum. The senior credit
facility matures on December 5, 2009 and permits Centers to prepay a portion or all of the
outstanding balance without incurring penalties. The revolving credit facility matures on December
5, 2008. The revolving credit facility allows for $50.0 million to be used as collateral for
outstanding letters of credit, of which $7.9 million and $8.0 million was used at March 31, 2005
and December 31, 2004, respectively, leaving $67.1 million and $67.0 million, respectively, of this
facility available for borrowing on such dates. The term loan facility at March 31, 2005 and
December 31, 2004 carried a balance of $96.9 million and $282.2 million, respectively. Interest on
the term loan facility is payable quarterly in arrears and at March 31, 2005 and December 31, 2004,
carried an average interest rate of 5.9% and 5.4%, respectively. The Company has complied with its
covenant reporting and compliance requirements in all material respects for the quarter ended March
31, 2005. In
December 2003, Centers also issued $215.0 million of its 8 1/2% Senior
Subordinated Notes due
2010 (the Senior Subordinated Notes). The Senior Subordinated Notes mature on December 1, 2010,
and bear interest at the rate of 8 1/2% per annum, which is payable semi-annually in arrears on June 1 and December 1 of each year, which
began with the first payment due on June 1, 2004. In January 2005, Centers issued $150.0 million aggregate principal amount of its 8 5/8% Senior
Notes due 2011 (the Senior Notes). Centers used the net proceeds of this offering of $145.6
million, together with $39.4 million of cash on hand, to repay a portion of our indebtedness under
our term loan facility. The Senior Notes bear an interest rate of 8 5/8% per annum, which is
payable semi-annually in arrears on January 15 and July 15 of each year, beginning with the first
payment due on July 15, 2005. 9




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GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Long-term debt at each respective period consisted of the following: December 31,
    
    
    March 31,2004
    
    
    2005(unaudited)(in thousands)Mortgage
    
    $
    13,190
    
    
    $
    12,946Capital leases
    
    
    35
    
    
    
    34Senior credit facility
    
    
    282,150
    
    
    
    96,9048 5/8% Senior Notes
    
    
    
    
    
    
    150,0008 1/2% Senior Subordinated Notes
    
    
    215,000
    
    
    
    215,000Less: current maturities
    
    
    (3,901
    )
    
    
    (2,048
    )Total
    
    $
    506,474
    
    
    $
    472,836
 At March 31, 2005, the Companys total debt principal maturities are as follows: Mortgage
    
    
    
    
    
    
    
    
    
    
    8 1/2% SeniorLoan/Capital
    
    
    Senior
    
    
    8 5/8% Senior
    
    
    SubordinatedYears Ended December 31,
    
    Leases
    
    
    Credit Facility
    
    
    Notes
    
    
    Notes
    
    
    Total(unaudited)(in thousands)2005
    
    $
    806
    
    
    $
    736
    
    
    $
    
    
    
    $
    
    
    
    $
    1,5422006
    
    
    1,141
    
    
    
    981
    
    
    
    
    
    
    
    
    
    
    
    2,1222007
    
    
    1,195
    
    
    
    981
    
    
    
    
    
    
    
    
    
    
    
    2,1762008
    
    
    1,281
    
    
    
    981
    
    
    
    
    
    
    
    
    
    
    
    2,2622009
    
    
    1,373
    
    
    
    93,225
    
    
    
    
    
    
    
    
    
    
    
    94,598Thereafter
    
    
    7,184
    
    
    
    
    
    
    
    150,000
    
    
    
    215,000
    
    
    
    372,184$
    12,980
    
    
    $
    96,904
    
    
    $
    150,000
    
    
    $
    215,000
    
    
    $
    474,884
 The Companys net interest expense for each respective period is as follows: Three months endedMarch 31,2004
    
    
    2005(unaudited)(in thousands)Composition of interest expense:Mortgage
    
    $
    245
    
    
    $
    232Senior credit facility
    
    
    3,161
    
    
    
    1,9838 5/8% Senior Notes
    
    
    
    
    
    
    2,6238 1/2% Senior Subordinated Notes
    
    
    4,569
    
    
    
    4,569Deferred fee writedown  early debt extinguishment
    
    
    
    
    
    
    3,890Deferred financing fees
    
    
    771
    
    
    
    683Interest income  other
    
    
    (52
    )
    
    
    (509
    )Interest expense, net
    
    $
    8,694
    
    
    $
    13,471
 Accrued interest at each respective period consisted of the following: December 31,
    
    
    March 31,2004
    
    
    2005(unaudited)(in thousands)Senior credit facility
    
    $
    340
    
    
    $
    3078 5/8% Senior Notes
    
    
    
    
    
    
    2,6238 1/2% Senior Subordinated Notes
    
    
    1,523
    
    
    
    6,092Total
    
    $
    1,863
    
    
    $
    9,022
 10




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##### Table of Contents



GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) NOTE 6. COMMITMENTS AND CONTINGENCIES Litigation The Company is engaged in various legal actions, claims and proceedings arising out of the
normal course of business, including claims related to breach of contracts, product liabilities,
intellectual property matters and employment-related matters resulting from the Companys business
activities. As is inherent with most actions such as these, an estimation of any possible and/or
ultimate liability cannot always be determined. The Company continues to assess its requirement to
account for additional contingencies in accordance with SFAS No. 5, Accounting for Contingencies
and believes that it is in compliance with that standard at March 31, 2005. The Company is
currently of the opinion that the amount of any potential liability resulting from these actions,
when taking into consideration the Companys general and product liability coverage, and the
indemnification provided by Numico under the Purchase Agreement, will not have a material adverse
impact on its financial position, results of operations or liquidity.
However 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 our
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, we have been and are currently subjected to
various product liability claims. Although the effects of these claims to date have not been
material to us, it is possible that current and future product liability claims could have a
material adverse impact on our financial condition and operating results. We currently maintain
product liability insurance with a deductible/retention of $1.0 million per claim with an aggregate
cap on retained loss of $10 million per claim. We typically seek and have obtained contractual
indemnification from most parties that supply raw materials for our products or that manufacture or
market products we sell. We also typically seek to be added, and have been added, as additional
insured under most of such parties insurance policies. We are 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. We
may incur material products liability claims, which could increase our costs and adversely affect
our reputation, revenues and operating income. Ephedra (Ephedrine Alkaloids). As of March 31, 2005, we have been named as a defendant in
211 pending cases involving the sale of third-party products that contain ephedra. Of those cases,
one involves a proprietary GNC product. Ephedra products have been the subject of adverse publicity
and regulatory scrutiny in the United States and other countries relating to alleged harmful
effects, including the deaths of several individuals. In early 2003, we instructed all of our
locations to stop selling products containing ephedra that were manufactured by GNC or one of our
affiliates. Subsequently, we instructed all of our locations to stop selling any products
containing ephedra by June 30, 2003. In April 2004, the FDA banned the sale of products containing
ephedra. All claims to date have been tendered to the third-party manufacturer or to our insurer
and we have incurred no expense to date with respect to litigation involving ephedra products.
Furthermore, we are entitled to indemnification by Numico for certain losses arising from claims
related to products containing ephedra sold prior to December 5, 2003. All of the pending cases
relate to products sold prior to such time and, accordingly, we are entitled to indemnification
from Numico for all of the pending cases. Pro-Hormone/Androstenedione. On July 29, 2001, five substantially identical class action
lawsuits were filed in the state courts of the States of Florida, New York, New Jersey,
Pennsylvania and Illinois against us and various manufacturers of products containing pro-hormones,
including androstenedione:  
    Brown v. General Nutrition Companies, Inc., Case No. 02-14221-AB, Florida Circuit Court
for the 15th Judicial Circuit Court, Palm Beach County;
    Rodriguez v. General Nutrition Companies, Inc., Index No. 02/126277, New York Supreme
Court, County of New York, Commercial Division;
    Abrams v. General Nutrition Companies, Inc., Docket No. L-3789-02, New Jersey Superior Court, Mercer County;
    Toth v. Bodyonics, Ltd., Case No. 003886, Pennsylvania Court of Common Pleas, Philadelphia County; and
    Pio v. General Nutrition Companies, Inc., Case No. 2-CH-14122, Illinois Circuit Court, Cook County. On March 20, 2004, a similar lawsuit was filed in California (Guzman v. General Nutrition
Companies, Inc., Case No. 04-00283). Plaintiffs allege that we have distributed or published
periodicals that contain advertisements claiming that the various pro-hormone products promote
muscle growth. The complaints allege that we knew the advertisements and label claims promoting
muscle growth were false, but nonetheless continued to sell the products to consumers. Plaintiffs
seek injunctive relief, disgorgement of profits, attorneys fees and the costs of suit. All of the
products involved in the cases are third-party products. We have tendered these cases to the
various manufacturers for defense and indemnification. Based upon the information available to us
at the present time, we believe that these matters will not have a material adverse effect upon our
liquidity, financial condition or results of operations. 11




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##### Table of Contents



GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) NOTE 7. STOCK-BASED COMPENSATION PLANS Stock Options On December 5, 2003, the board of directors of the Company (the Board) approved and adopted
the General Nutrition Centers Holding Company (presently known as GNC Corporation) 2003 Omnibus
Stock Incentive Plan (the Plan). The purpose of the Plan is to enable the Company 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, stock appreciation rights, restricted stock, deferred
stock and performance shares. The Plan is available to certain eligible employees as determined by
the Board. The total number of shares of common stock reserved and available for the Plan is 4.0
million shares. The stock options carry a four year vesting schedule and expire after seven years
from date of grant. As of March 31, 2005 the number of stock options outstanding is 2.4 million.
No stock appreciation rights, restricted stock, deferred stock or performance shares were granted
under the Plan as of March 31, 2005. The weighted average fair value of cumulative options granted
and outstanding under the Plan at March 31, 2005 is $1.95 per share. The following table outlines the total stock options granted: WeightedAverage
    
    
    WeightedTotal
    
    
    Exercise
    
    
    AverageOptions
    
    
    Price
    
    
    Fair ValueOutstanding at December 31, 2004
    
    
    2,435,393
    
    
    $
    6.00Granted
    
    
    294,573
    
    
    
    6.00
    
    
    $
    0.20Forfeited
    
    
    (349,969
    )
    
    
    6.00Outstanding at March 31, 2005 (unaudited)
    
    
    2,379,997
    
    
    
    6.00
    
    
    
    1.95
 The Company has adopted the disclosure requirements of SFAS No. 148, but has elected to
continue to measure compensation expense using the intrinsic value method for accounting for
stock-based compensation as outlined by APB No. 25. In accordance with SFAS No. 148, pro forma
information regarding net income is required to be disclosed as if the Company had accounted for
its employee stock options using the fair value method of SFAS No. 123. See the Basis of
Presentation note for this disclosure. There were 825,699 options vested under the Plan at March
31, 2005. Fair value information for the Plan was estimated using the Black-Scholes option-pricing model
based on the following assumptions for the options granted: December 31,
    
    
    March 31,2004
    
    
    2005(unaudited)Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected option life
    
    5 years
    
    
    5 yearsVolatility factor percentage of market price
    
    
    40.00
    %
    
    
    24.00
    %Discount rate
    
    
    3.63
    %
    
    
    4.18
    %
 Because the Black-Scholes option valuation model utilizes certain estimates and assumptions,
the existing models do not necessarily represent the definitive fair value of options for future
periods. 12




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##### Table of Contents



GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) NOTE 8. SEGMENTS The following operating segments represent identifiable components 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 business segments, identifiable by the distinct operations
and management of each: Retail, Franchising, and Manufacturing/Wholesale. The Retail segment
includes the Companys corporate store operations in the United States and Canada. The Franchise
segment represents the Companys franchise operations, both domestically and internationally. The
Manufacturing/Wholesale segment represents the Companys manufacturing operations in South Carolina
and Australia 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
Basis of Presentation and Summary of Significant Accounting Policies, which is included in the
Form 10-K. Three months ended March 31,2004
    
    
    2005(unaudited)(in thousands)Revenues:Retail
    
    $
    279,641
    
    
    $
    255,252Franchise
    
    
    64,138
    
    
    
    52,627Manufacturing/Wholesale:Intersegment (1)
    
    
    47,546
    
    
    
    55,495Third Party
    
    
    28,776
    
    
    
    28,556Sub total Manufacturing/Wholesale
    
    
    76,322
    
    
    
    84,051Sub total segment revenues
    
    
    420,101
    
    
    
    391,930Intersegment elimination (1)
    
    
    (47,546
    )
    
    
    (55,495
    )Total revenues
    
    
    372,555
    
    
    
    336,435Operating income:Retail
    
    
    35,395
    
    
    
    17,906Franchise(2)
    
    
    17,122
    
    
    
    13,343Manufacturing/Wholesale
    
    
    8,186
    
    
    
    12,059Unallocated corporate and other costs:Warehousing & distribution costs
    
    
    (12,705
    )
    
    
    (12,659
    )Corporate costs
    
    
    (13,872
    )
    
    
    (12,895
    )Sub total unallocated corporate and
other costs
    
    
    (26,577
    )
    
    
    (25,554
    )Total operating income
    
    
    34,126
    
    
    
    17,754Interest expense, net
    
    
    8,694
    
    
    
    13,471Income before income taxes
    
    
    25,432
    
    
    
    4,283Income tax expense
    
    
    9,244
    
    
    
    1,547Net income
    
    $
    16,188
    
    
    $
    2,736Total assets:Retail
    
    $
    458,208
    
    
    $
    431,263Franchise
    
    
    336,017
    
    
    
    310,630Manufacturing / Wholesale
    
    
    142,463
    
    
    
    145,319Corp / Other
    
    
    135,338
    
    
    
    145,005Total assets
    
    $
    1,072,026
    
    
    $
    1,032,217
  (1)
    Intersegment revenues are eliminated from consolidated revenue.(2)
    Franchise operating income for the three months ended March 31, 2005 includes
$2.5 million of income, which related to recognition of transaction fee income on the
transfer of our Australian franchise. 13




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##### Table of Contents



GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) NOTE 9. SUPPLEMENTAL GUARANTOR INFORMATION As of March 31, 2005, the Companys debt includes Centers senior credit facility, its Senior
Notes and its Senior Subordinated Notes. The senior credit facility has been guaranteed by the
Company and its domestic subsidiaries. The Senior Notes are general unsecured obligations of
Centers and rank secondary to Centers senior credit facility and are senior in right of payment to
all existing and future subordinated obligations of Centers, including Centers Senior Subordinated
Notes. The Senior Notes are unconditionally guaranteed on an unsecured basis by all of Centers
existing and future material domestic subsidiaries. The Senior Subordinated Notes are general
unsecured obligations and are guaranteed on a senior subordinated basis by certain of Centers
domestic subsidiaries and rank secondary to Centers senior credit facility. Guarantor
subsidiaries include the Companys direct and indirect domestic subsidiaries as of the respective
balance sheet dates. Non-guarantor subsidiaries include the remaining direct and indirect foreign
subsidiaries. The subsidiary guarantors are wholly owned by the Company. The guarantees are full
and unconditional and joint and several. Presented below are condensed consolidated financial statements of the Company, Centers as the
issuer, and the combined guarantor and non-guarantor subsidiaries for the three months ended March
31, 2005 and 2004. The guarantor and non-guarantor subsidiaries are presented in a combined format
as their individual operations are not material to the Companys consolidated financial statements.
Investments in subsidiaries are either consolidated or accounted for under the equity method of
accounting. Intercompany balances and transactions have been eliminated. Supplemental Condensed Consolidating Balance Sheets Combined
    
    
    CombinedGuarantor
    
    
    Non-GuarantorMarch 31, 2005
    
    Parent
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    74,691
    
    
    $
    3,074
    
    
    $
    
    
    
    $
    77,765Receivables, net
    
    
    
    
    
    
    
    
    
    
    67,284
    
    
    
    1,144
    
    
    
    
    
    
    
    68,428Intercompany receivables
    
    
    
    
    
    
    2,080
    
    
    
    33,538
    
    
    
    
    
    
    
    (35,618
    )
    
    
    Inventories, net
    
    
    
    
    
    
    
    
    
    
    278,789
    
    
    
    14,582
    
    
    
    
    
    
    
    293,371Other current assets
    
    
    641
    
    
    
    2,162
    
    
    
    43,152
    
    
    
    4,090
    
    
    
    
    
    
    
    50,045Total current assets
    
    
    641
    
    
    
    4,242
    
    
    
    497,454
    
    
    
    22,890
    
    
    
    (35,618
    )
    
    
    489,609Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    168,922
    
    
    
    21,886
    
    
    
    
    
    
    
    190,808Investment in subsidiaries
    
    
    324,537
    
    
    
    790,050
    
    
    
    4,520
    
    
    
    
    
    
    
    (1,119,107
    )
    
    
    Goodwill, net
    
    
    
    
    
    
    
    
    
    
    77,643
    
    
    
    942
    
    
    
    
    
    
    
    78,585Brands, net
    
    
    
    
    
    
    
    
    
    
    209,000
    
    
    
    3,000
    
    
    
    
    
    
    
    212,000Other assets
    
    
    
    
    
    
    17,727
    
    
    
    51,897
    
    
    
    371
    
    
    
    (8,780
    )
    
    
    61,215Total assets
    
    $
    325,178
    
    
    $
    812,019
    
    
    $
    1,009,436
    
    
    $
    49,089
    
    
    $
    (1,163,505
    )
    
    $
    1,032,217Current liabilitiesCurrent liabilities
    
    $
    41
    
    
    $
    9,915
    
    
    $
    208,600
    
    
    $
    7,188
    
    
    $
    
    
    
    $
    225,744Intercompany payables
    
    
    2,080
    
    
    
    16,850
    
    
    
    
    
    
    
    16,688
    
    
    
    (35,618
    )
    
    
    Total current liabilities
    
    
    2,121
    
    
    
    26,765
    
    
    
    208,600
    
    
    
    23,876
    
    
    
    (35,618
    )
    
    
    225,744Long-term debt
    
    
    
    
    
    
    460,923
    
    
    
    
    
    
    
    20,693
    
    
    
    (8,780
    )
    
    
    472,836Other long-term liabilities
    
    
    
    
    
    
    (206
    )
    
    
    10,786
    
    
    
    
    
    
    
    
    
    
    
    10,580Total liabilities
    
    
    2,121
    
    
    
    487,482
    
    
    
    219,386
    
    
    
    44,569
    
    
    
    (44,398
    )
    
    
    709,160Cumulative redeemable exchangeable
preferred stock
    
    
    116,173
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116,173Total stockholders equity (deficit)
    
    
    206,884
    
    
    
    324,537
    
    
    
    790,050
    
    
    
    4,520
    
    
    
    (1,119,107
    )
    
    
    206,884Total liabilities and stockholders
equity (deficit)
    
    $
    325,178
    
    
    $
    812,019
    
    
    $
    1,009,436
    
    
    $
    49,089
    
    
    $
    (1,163,505
    )
    
    $
    1,032,217
 14




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##### Table of Contents



GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Supplemental Condensed Consolidating Balance Sheets Combined
    
    
    CombinedGuarantor
    
    
    Non-GuarantorDecember 31, 2004
    
    Parent
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    82,722
    
    
    $
    2,439
    
    
    $
    
    
    
    $
    85,161Receivables, net
    
    
    
    
    
    
    
    
    
    
    66,821
    
    
    
    1,327
    
    
    
    
    
    
    
    68,148Intercompany receivables
    
    
    
    
    
    
    17,752
    
    
    
    16,848
    
    
    
    
    
    
    
    (34,600
    )
    
    
    Inventories, net
    
    
    
    
    
    
    
    
    
    
    258,085
    
    
    
    14,169
    
    
    
    
    
    
    
    272,254Other current assets
    
    
    607
    
    
    
    257
    
    
    
    45,731
    
    
    
    3,920
    
    
    
    
    
    
    
    50,515Total current assets
    
    
    607
    
    
    
    18,009
    
    
    
    470,207
    
    
    
    21,855
    
    
    
    (34,600
    )
    
    
    476,078Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    172,813
    
    
    
    22,596
    
    
    
    
    
    
    
    195,409Investment in subsidiaries
    
    
    322,422
    
    
    
    784,710
    
    
    
    3,951
    
    
    
    
    
    
    
    (1,111,083
    )
    
    
    Goodwill, net
    
    
    
    
    
    
    
    
    
    
    77,643
    
    
    
    942
    
    
    
    
    
    
    
    78,585Brands, net
    
    
    
    
    
    
    
    
    
    
    209,000
    
    
    
    3,000
    
    
    
    
    
    
    
    212,000Other assets
    
    
    
    
    
    
    18,336
    
    
    
    59,339
    
    
    
    373
    
    
    
    (8,780
    )
    
    
    69,268Total assets
    
    $
    323,029
    
    
    $
    821,055
    
    
    $
    992,953
    
    
    $
    48,766
    
    
    $
    (1,154,463
    )
    
    $
    1,031,340Current liabilitiesCurrent liabilities
    
    $
    163
    
    
    $
    4,333
    
    
    $
    182,490
    
    
    $
    7,013
    
    
    $
    
    
    
    $
    193,999Intercompany payables
    
    
    1,865
    
    
    
    
    
    
    
    15,887
    
    
    
    16,848
    
    
    
    (34,600
    )
    
    
    Total current liabilities
    
    
    2,028
    
    
    
    4,333
    
    
    
    198,377
    
    
    
    23,861
    
    
    
    (34,600
    )
    
    
    193,999Long-term debt
    
    
    
    
    
    
    494,300
    
    
    
    
    
    
    
    20,954
    
    
    
    (8,780
    )
    
    
    506,474Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    9,866
    
    
    
    
    
    
    
    
    
    
    
    9,866Total liabilities
    
    
    2,028
    
    
    
    498,633
    
    
    
    208,243
    
    
    
    44,815
    
    
    
    (43,380
    )
    
    
    710,339Cumulative redeemable exchangeable
preferred stock
    
    
    112,734
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112,734Total stockholders equity (deficit)
    
    
    208,267
    
    
    
    322,422
    
    
    
    784,710
    
    
    
    3,951
    
    
    
    (1,111,083
    )
    
    
    208,267Total liabilities and stockholders
equity (deficit)
    
    $
    323,029
    
    
    $
    821,055
    
    
    $
    992,953
    
    
    $
    48,766
    
    
    $
    (1,154,463
    )
    
    $
    1,031,340
 Supplemental Condensed Consolidating Statements of Operations Combined
    
    
    CombinedGuarantor
    
    
    Non-GuarantorThree months ended March 31, 2005
    
    Parent
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    
    
    
    $
    322,346
    
    
    $
    17,685
    
    
    $
    (3,596
    )
    
    $
    336,435Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    
    
    
    
    220,927
    
    
    
    13,125
    
    
    
    (3,596
    )
    
    
    230,456Gross profit
    
    
    
    
    
    
    
    
    
    
    101,419
    
    
    
    4,560
    
    
    
    
    
    
    
    105,979Compensation and related benefits
    
    
    
    
    
    
    
    
    
    
    54,321
    
    
    
    2,993
    
    
    
    
    
    
    
    57,314Advertising and promotion
    
    
    
    
    
    
    
    
    
    
    14,483
    
    
    
    118
    
    
    
    
    
    
    
    14,601Other selling, general and administrative
    
    
    93
    
    
    
    478
    
    
    
    17,930
    
    
    
    414
    
    
    
    
    
    
    
    18,915Subsidiary (income) loss
    
    
    (2,795
    )
    
    
    (6,022
    )
    
    
    (810
    )
    
    
    
    
    
    
    9,627
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    (2,510
    )
    
    
    (95
    )
    
    
    
    
    
    
    (2,605
    )Operating income(loss)
    
    
    2,702
    
    
    
    5,544
    
    
    
    18,005
    
    
    
    1,130
    
    
    
    (9,627
    )
    
    
    17,754Interest expense, net
    
    
    
    
    
    
    4,574
    
    
    
    8,571
    
    
    
    326
    
    
    
    
    
    
    
    13,471Income (loss) before income taxes
    
    
    2,702
    
    
    
    970
    
    
    
    9,434
    
    
    
    804
    
    
    
    (9,627
    )
    
    
    4,283Income tax (benefit) expense
    
    
    (34
    )
    
    
    (1,825
    )
    
    
    3,412
    
    
    
    (6
    )
    
    
    
    
    
    
    1,547$Net income (loss)
    
    $
    2,736
    
    
    $
    2,795
    
    
    $
    6,022
    
    
    
    810
    
    
    $
    (9,627
    )
    
    $
    2,736
 15




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##### Table of Contents



GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Supplemental Condensed Consolidating Statements of Operations Combined
    
    
    CombinedGuarantor
    
    
    Non-GuarantorThree months ended March 31, 2004
    
    Parent
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    
    
    
    $
    355,490
    
    
    $
    19,344
    
    
    $
    (2,279
    )
    
    $
    372,555Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    
    
    
    
    235,442
    
    
    
    13,980
    
    
    
    (2,279
    )
    
    
    247,143Gross profit
    
    
    
    
    
    
    
    
    
    
    120,048
    
    
    
    5,364
    
    
    
    
    
    
    
    125,412Compensation and related benefits
    
    
    
    
    
    
    
    
    
    
    58,007
    
    
    
    3,093
    
    
    
    
    
    
    
    61,100Advertising and promotion
    
    
    
    
    
    
    
    
    
    
    12,452
    
    
    
    104
    
    
    
    
    
    
    
    12,556Other selling, general and administrative
    
    
    39
    
    
    
    394
    
    
    
    16,755
    
    
    
    635
    
    
    
    
    
    
    
    17,823Subsidiary (income) loss
    
    
    (16,233
    )
    
    
    (16,483
    )
    
    
    (1,291
    )
    
    
    
    
    
    
    34,007
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    (163
    )
    
    
    
    
    
    
    (193
    )Operating income
(loss)
    
    
    16,194
    
    
    
    16,089
    
    
    
    34,155
    
    
    
    1,695
    
    
    
    (34,007
    )
    
    
    34,126Interest expense, net
    
    
    41
    
    
    
    
    
    
    
    8,249
    
    
    
    404
    
    
    
    
    
    
    
    8,694Income (loss) before income taxes
    
    
    16,153
    
    
    
    16,089
    
    
    
    25,906
    
    
    
    1,291
    
    
    
    (34,007
    )
    
    
    25,432Income tax (benefit) expense
    
    
    (35
    )
    
    
    (144
    )
    
    
    9,423
    
    
    
    
    
    
    
    
    
    
    
    9,244Net income (loss)
    
    $
    16,188
    
    
    $
    16,233
    
    
    $
    16,483
    
    
    $
    1,291
    
    
    $
    (34,007
    )
    
    $
    16,188
 Supplemental Condensed Consolidating Statements of Cash Flows CombinedGuarantor
    
    
    Non-GuarantorThree months ended March 31, 2005
    
    Parent
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)(in thousands)Net cash provided by operating activities
    
    $
    
    
    
    $
    4,201
    
    
    $
    30,373
    
    
    $
    966
    
    
    $
    35,540CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    
    
    
    
    
    
    
    
    (4,361
    )
    
    
    (22
    )
    
    
    (4,383
    )Investment/distribution
    
    
    
    
    
    
    35,245
    
    
    
    (35,245
    )
    
    
    
    
    
    
    Other investing
    
    
    
    
    
    
    
    
    
    
    (558
    )
    
    
    
    
    
    
    (558
    )Net cash provided by (used in) investing activities
    
    
    
    
    
    
    35,245
    
    
    
    (40,164
    )
    
    
    (22
    )
    
    
    (4,941
    )CASH FLOWS FROM FINANCING ACTIVITIES:GNC Corporation return of capital
from General Nutrition Centers, Inc
    
    
    416
    
    
    
    (416
    )
    
    
    
    
    
    
    
    
    
    
    Repurchase/retirement of common stock
    
    
    (416
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (416
    )Payments on long-term debt  third parties
    
    
    
    
    
    
    (185,245
    )
    
    
    
    
    
    
    (246
    )
    
    
    (185,491
    )Proceeds from senior notes issuance
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    150,000Other financing
    
    
    
    
    
    
    (3,785
    )
    
    
    1,760
    
    
    
    
    
    
    
    (2,025
    )Net cash (used in) provided by financing activities
    
    
    
    
    
    
    (39,446
    )
    
    
    1,760
    
    
    
    (246
    )
    
    
    (37,932
    )Effect of exchange rate on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63
    )
    
    
    (63
    )Net (decrease) increase in cash
    
    
    
    
    
    
    
    
    
    
    (8,031
    )
    
    
    635
    
    
    
    (7,396
    )Beginning balance, cash
    
    
    
    
    
    
    
    
    
    
    82,722
    
    
    
    2,439
    
    
    
    85,161Ending balance, cash
    
    $
    
    
    
    $
    
    
    
    $
    74,691
    
    
    $
    3,074
    
    
    $
    77,765
 16




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##### Table of Contents



GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Supplemental Condensed Consolidating Statements of Cash Flows
 CombinedGuarantor
    
    
    Non-GuarantorParent
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)Three months ended March 31, 2004
    
    (in thousands)Net cash provided by operating activities
    
    $
    
    
    
    $
    6,082
    
    
    $
    42,034
    
    
    $
    330
    
    
    $
    48,446CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    
    
    
    
    
    
    
    
    (5,124
    )
    
    
    (218
    )
    
    
    (5,342
    )Purchase transaction fees
    
    
    
    
    
    
    (7,710
    )
    
    
    
    
    
    
    
    
    
    
    (7,710
    )Investment/distribution
    
    
    
    
    
    
    713
    
    
    
    (713
    )
    
    
    
    
    
    
    Other investing
    
    
    
    
    
    
    
    
    
    
    (205
    )
    
    
    
    
    
    
    (205
    )Net cash used in investing activities
    
    
    
    
    
    
    (6,997
    )
    
    
    (6,042
    )
    
    
    (218
    )
    
    
    (13,257
    )CASH FLOWS FROM FINANCING ACTIVITIES:GNC Corporationinvestment in General Nutrition Centers, Inc
    
    
    (1,628
    )
    
    
    1,628
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock
    
    
    1,628
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,628Other financing
    
    
    
    
    
    
    (713
    )
    
    
    (839
    )
    
    
    (238
    )
    
    
    (1,790
    )Net cash provided by (used in) financing activities
    
    
    
    
    
    
    915
    
    
    
    (839
    )
    
    
    (238
    )
    
    
    (162
    )Effect of exchange rate on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72
    )
    
    
    (72
    )Net increase (decrease) in cash
    
    
    
    
    
    
    
    
    
    
    35,153
    
    
    
    (198
    )
    
    
    34,955Beginning balance, cash
    
    
    
    
    
    
    
    
    
    
    30,642
    
    
    
    2,534
    
    
    
    33,176Ending balance, cash
    
    $
    
    
    
    $
    
    
    
    $
    65,795
    
    
    $
    2,336
    
    
    $
    68,131
 17




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##### Table of Contents



GNC CORPORATION AND SUBSIDIARIES 
 Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations The following Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our consolidated financial statements and related
notes included elsewhere in this quarterly report on Form 10-Q (the Report). The discussion in
this section contains forward looking statements that involve risks and uncertainties. See Risk
Factors included in our Annual Report on Form 10-K filed for the year ending December 31, 2004
(the Form 10-K), for a discussion of important factors that could cause actual results to differ
materially from those described or implied by the forward-looking statements contained herein. Overview We are the largest global specialty retailer of nutritional supplements, which include sports
nutrition products, diet products, VMHS (vitamins, minerals and herbal supplements) and specialty
supplements. We derive our revenues principally from product sales through our company-owned
stores, franchise activities and sales of products manufactured in our facilities to third parties.
We sell products through a worldwide network of more than 5,700 locations operating under the GNC
brand name. Revenues are derived from our three business segments, Retail, Franchise and
Manufacturing/ Wholesale, primarily. Trends and Other Factors Affecting Our Business Our performance is affected by trends that affect the nutritional supplements industry
generally. Current trends affecting our business include the aging population, rising healthcare
costs, increasing focus on fitness and increasing incidence of obesity. Changes in these trends and
other factors, may also impact our business. Our business allows us to
respond to changing consumer preferences and drive revenues by emphasizing new product development,
introducing targeted third-party products, and adjusting our product
mix. There have been no new
material developments in the matters disclosed in the Trends and Other Factors Affecting Our
Business section included in the Form 10-K. Results of Operations The information presented below for the three months ended March 31, 2005 and 2004 was
prepared by management and is unaudited. In the opinion of management, all adjustments necessary
for a fair statement of our financial position and operating results for such periods and as of
such dates have been included. As discussed in the Segments note to our consolidated financial statements, we evaluate
segment operating results based on several indicators. The primary key performance indicators are
revenues and operating income or loss for each segment. Revenues and operating income or loss, as
evaluated by management, exclude certain items that are managed at the consolidated level, such as
warehousing and transportation costs and other corporate costs. The following discussion compares
the revenues and the operating income or loss by segment, as well as those items excluded from the
segment totals. We calculate our same store sales growth to exclude the net sales of a store for any period
if the store was not open during the same period of the prior year. When a stores square footage
has been changed as a result of reconfiguration or relocation in the same mall, the store continues
to be treated as a same store. Company-owned and domestic franchised same store sales have been
calculated on a calendar basis for all periods presented. All calculations related to the Results of Operations for the year-over-year comparisons below
were calculated based on the numbers in the following table, which have been rounded to millions. 18




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##### Table of Contents



GNC CORPORATION AND SUBSIDIARIES Results of Operations and Comprehensive Income
(Dollars in millions and percentages expressed as a percentage of net revenues) Three
    
    
    ThreeMonths Ended
    
    
    Months EndedMarch 31,
    
    
    March 31,2004
    
    
    2005Revenues:Retail
    
    $
    279.6
    
    
    
    75.1
    %
    
    $
    255.2
    
    
    
    75.9
    %Franchise
    
    
    64.2
    
    
    
    17.2
    %
    
    
    52.6
    
    
    
    15.6
    %Manufacturing / Wholesale
    
    
    28.8
    
    
    
    7.7
    %
    
    
    28.6
    
    
    
    8.5
    %Total net revenues
    
    
    372.6
    
    
    
    100.0
    %
    
    
    336.4
    
    
    
    100.0
    %Operating expenses:Cost of sales, including costs of
warehousing, distribution and
occupancy
    
    
    247.2
    
    
    
    66.3
    %
    
    
    230.4
    
    
    
    68.5
    %Compensation and related benefits
    
    
    61.1
    
    
    
    16.4
    %
    
    
    57.3
    
    
    
    17.0
    %Advertising and promotion
    
    
    12.6
    
    
    
    3.4
    %
    
    
    14.6
    
    
    
    4.3
    %Other selling, general and
administrative expenses
    
    
    16.8
    
    
    
    4.5
    %
    
    
    17.9
    
    
    
    5.3
    %Amortization expense
    
    
    1.0
    
    
    
    0.3
    %
    
    
    1.0
    
    
    
    0.3
    %Foreign currency gain
    
    
    (0.2
    )
    
    
    -0.1
    %
    
    
    (0.1
    )
    
    
    0.0
    %Other income
    
    
    
    
    
    
    0.0
    %
    
    
    (2.5
    )
    
    
    -0.7
    %Total operating expenses
    
    
    338.5
    
    
    
    90.8
    %
    
    
    318.6
    
    
    
    94.7
    %Operating IncomeRetail
    
    
    35.4
    
    
    
    9.5
    %
    
    
    17.9
    
    
    
    5.3
    %Franchise
    
    
    17.1
    
    
    
    4.6
    %
    
    
    10.8
    
    
    
    3.2
    %Manufacturing / Wholesale
    
    
    8.2
    
    
    
    2.2
    %
    
    
    12.1
    
    
    
    3.6
    %Unallocated corporate and other costs:Warehousing & distribution costs
    
    
    (12.7
    )
    
    
    -3.4
    %
    
    
    (12.7
    )
    
    
    -3.7
    %Corporate costs
    
    
    (13.9
    )
    
    
    -3.7
    %
    
    
    (12.8
    )
    
    
    -3.8
    %Other income
    
    
    
    
    
    
    0.0
    %
    
    
    2.5
    
    
    
    0.7
    %Sub total unallocated corporate
and other costs
    
    
    (26.6
    )
    
    
    -7.1
    %
    
    
    (23.0
    )
    
    
    -6.8
    %Total operating income
    
    
    34.1
    
    
    
    9.2
    %
    
    
    17.8
    
    
    
    5.3
    %Interest expense, net
    
    
    8.7
    
    
    
    
    
    
    
    13.5Income before income taxes
    
    
    25.4
    
    
    
    
    
    
    
    4.3Income tax expense
    
    
    9.2
    
    
    
    
    
    
    
    1.6Net income
    
    
    16.2
    
    
    
    
    
    
    
    2.7Other comprehensive loss
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.2
    )Comprehensive income
    
    $
    15.8
    
    
    
    
    
    
    $
    2.5
 19




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##### Table of Contents



GNC CORPORATION AND SUBSIDIARIES Comparison of Three Months Ended March 31, 2005 and March 31, 2004 Revenues Consolidated.Our consolidated net revenues decreased $36.2 million, or 9.7%, to $336.4
million for the three months ended March 31, 2005 compared to $372.6 million for the same period in
2004. The decrease was primarily the result of decreased same store sales in our Retail and
Franchise segments and a reduced store base. Retail.Revenues in our Retail segment decreased $24.4 million, or 8.7%, to $255.2 million for
the three months ended March 31, 2005 compared to $279.6 million for the same period in 2004. The
revenue decrease occurred primarily in our diet category. Sales in the diet category declined
$24.0 million in the first quarter of 2005, primarily due to significantly lower sales of products
low in carbohydrates (low-carb). Sales of low-carb products were very strong in the first
quarter of 2004. As a result, same store sales for the first quarter
of 2005 declined in both company-owned
domestic and Canadian stores by 7.8% and 12.9%, respectively. Our Canadian retail stores revenue
represents approximately 5.2% of retail revenue. A downward trend of low-carb sales began late in
the second quarter of 2004, continued for the remainder of 2004 and through the first quarter of
2005. Additionally, overall retail sales declined as a result of operating fewer stores: 2,509
company-owned stores as of March 31, 2005 versus 2,549 as of March 31, 2004. Franchise.Revenues in our Franchise segment decreased $11.6 million, or 18.1%, to $52.6
million for the three months ended March 31, 2005, compared to $64.2 million for the same period in
2004. This decrease was primarily the result of decreased wholesale product sales to franchisees of
$10.9 million and a decrease in franchise royalty revenue of $0.6 million; both were a result of
lower retail sales at the franchise stores, as our franchisees experienced the same decline in
low-carb product sales as the corporate stores, and higher discounts provided to the franchisees to
support our first quarter 2005 promotions. Additionally, domestic franchise retail sales declined
as a result of operating fewer domestic stores: 1,261 domestic franchise stores at March 31, 2005
compared with 1,335 as of March 31, 2004. The number of international stores, to whom we sell
fewer products, increased to 767 as of March 31, 2005 versus 666 as of March 31, 2004. Decreases
in other revenue accounted for the remaining $0.1 million decrease. Manufacturing/Wholesale.Revenues in our Manufacturing/Wholesale segment remained relatively
flat with a decrease of $0.2 million, or 0.7%, to $28.6 million for the three months ended March 31,
2005 compared to $28.8 million for the same period in 2004. Cost of Sales Consolidated cost of sales, which includes product costs, costs of warehousing and
distribution and occupancy costs, decreased $16.8 million, or 6.8%, to $230.4 million for the three
months ended March 31, 2005 compared to $247.2 million for the same period in 2004. This decrease
was primarily driven by lower consolidated total revenue which directly and proportionately
decreased our cost of sales, while costs from warehousing and distribution and occupancy remained
relatively unchanged. Consolidated costs of sales, as a percentage of net revenue, was 68.5% for
the three months ended March 31, 2005, compared to 66.3% for the same period in 2004. Consolidated product costs decreased $17.8 million, or 9.5%, to $169.7 million for the three
months ended March 31, 2005 compared to $187.5 million for the same period in 2004. The decrease
in consolidated product costs was a result of a shift in the sales mix from lower margin, third
party low-carb products in 2004 to higher margin, GNC brand products in 2005, including improved
margins and efficiencies at our South Carolina manufacturing facility, offset by increased
promotional pricing in the first quarter of 2005. The consolidated product costs as a percentage
of net revenue was 50.4% and 50.3% for the three months ended March 31, 2005 and 2004,
respectively. Included in product costs in 2004 is $1.3 million of expense as a result of
adjustments due to increased inventory valuation related to the Acquisition. Consolidated warehousing and distribution costs increased $0.2 million, or 1.6%, to $13.0
million for the three months ended March 31, 2005 compared to $12.8 million for the same period in
2004. This increase was a result of increased fuel costs, offset by decreases, due to efficiencies,
in wages and other warehousing costs. Consolidated warehousing and distribution costs, as a
percentage of net revenue, was 3.9% for the three months ended March 31, 2005, compared to 3.4% for
the same period in 2004. Consolidated occupancy costs increased $0.8 million, or 1.7%, to $47.7 million for the three
months ended March 31, 2005 compared to $46.9 million for the same period in 2004. This increase
was primarily due to an increase in depreciation expense of $0.9 million, offset by decreases in
lease-related expenses of $0.1 million. This increase in depreciation expense resulted from
increased capital expenditures of shorter lived store assets than in prior years. Consolidated
occupancy costs, as a percentage of net revenue, was 14.2% for the three months ended March 31,
2005, compared to 12.5% for the same period in 2004. 20




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GNC CORPORATION AND SUBSIDIARIES Selling, General and Administrative Expenses Our consolidated selling, general and administrative expenses, including compensation and
related benefits, advertising and promotion expense, other selling, general and administrative
expenses, and amortization expense (SG&A), decreased $0.7 million, or 0.8%, to $90.8 million, for
the three months ended March 2005, compared to $91.5 million for the same period in 2004. Our
consolidated SG&A expense, as a percentage of net revenues, was
26.9% during the three months ended
March 31, 2005 compared to 24.6% for the same period in 2004. Consolidated compensation and related benefits decreased $3.8 million, or 6.2%, to $57.3
million for the three months ended March 31, 2005 compared to $61.1 million for the same period in
2004. The decrease was the result of decreases in incentives and commission expense of $3.0 million
and other costs of $0.8 million. Consolidated advertising and promotion expenses increased $2.0 million, or 15.9%, to $14.6
million for the three months ended March 31, 2005 compared to $12.6 million during the same period
in 2004. Advertising expense increased due to additional expenditures in 2005 for television
advertising of $2.0 million. This advertising was done to support specific GNC brand and
third-party product promotions. Consolidated other selling, general and administrative expenses, including amortization
expense, increased $1.1 million, or 6.2%, to $18.9 million for the three months ended March 31,
2005 compared to $17.8 million for the same period in 2004. The primary reason for the increase was
an increase in bad debt expense of $1.1 million. Foreign currency gain Consolidated foreign currency gain decreased $0.1 million for the three months ended March 31,
2005 to a gain of $0.1 million compared to a gain of $0.2 million for the three months ended March
31, 2004. Other income Other income for the three months ended March 31, 2005 was $2.5 million, which was recognition
of transaction fee income related to the transfer of our Australian franchise. There was no other
income for the same period in 2004. Operating Income Consolidated.As a result of the foregoing, operating income decreased $16.3 million, or
47.8%, to $17.8 million for the three months ended March 31, 2005 compared to $34.1 million
for the same period in 2004. Operating income as a percentage of net revenues was
5.3% for the three months ended March 31, 2005 compared to 9.2% for the same period in 2004. Retail.Operating income decreased $17.5 million, or 49.4%, to $17.9 million for the three
months ended March 31, 2005 compared to $35.4 million for the same period in 2004. The decrease
was primarily a result of decreased margin as a result of decreased sales, increases in occupancy
and advertising expenses, offset by decreases in salaries and benefits and other selling, general
and administrative expenses. Franchise.Operating income decreased $6.3 million, or 36.8%, to $10.8 million for the three
months ended March 31, 2005 compared to $17.1 million for the same period in 2004. The decrease was
principally a result of decreased wholesale product sales of $10.9 million and an increase in bad
debt charges of $0.9 million. Manufacturing/Wholesale.Operating income increased $3.9 million, or 47.6%, to $12.1 million
for the three months ended March 31, 2005 compared to $8.2 million for the same period in 2004.
This increase was primarily as a result of improved margins on
third-party sales and increased manufacturing efficiencies at our South
Carolina manufacturing facility. Warehousing & Distribution Costs.Unallocated warehousing and distribution costs remained at
$12.7 million for the three months ended March 31, 2005 compared to the same period in 2004. We
recognized significant increases in fuel costs, which were offset by efficiency savings in
warehousing costs. Corporate Costs.Operating expenses decreased $1.1 million, or 7.9%, to $12.8 million for the
three months ended March 31, 2005 compared to $13.9 million for the same period in 2004. This
decrease was primarily a result of decreases in: (1) wage and benefit costs, (2) insurance costs
and (3) research and development costs, offset by increases in legal and accounting fees. 21




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GNC CORPORATION AND SUBSIDIARIES Interest Expense Interest expense increased $4.8 million, or 55.2%, to $13.5 million for the three months ended
March 31, 2005 compared to $8.7 million for the same period in 2004. This increase was due to the
write-off of $3.9 million of deferred financing fees, a result of the retirement of $185.0 million
of our bank debt, and a higher fixed interest rate on the $150.0 million Senior Notes, which
replaced a portion of our bank debt. Income Tax Expense We recognized $1.6 million of consolidated income tax expense during the three months ended
March 31, 2005 compared to $9.2 million of expense for the same period of 2004. Our effective tax
rate for three months ended March 31, 2005 was 36.1% versus 36.3% for the same period in 2004. Net Income As a result of the foregoing, consolidated net income decreased $13.5 million to $2.7 million
for the three months ended March 31, 2005 from $16.2 million for the same period in 2004. Other Comprehensive Loss We
recognized $0.2 million of foreign currency translation loss for the three months ended
March 31, 2005 compared to $0.4 million for the same period in 2004. The amounts recognized in each
period resulted from foreign currency translation adjustments related to the investment in and
receivables due from our Canadian and Australian subsidiaries. 22




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GNC CORPORATION AND SUBSIDIARIES Liquidity and Capital Resources At March 31, 2005 we had $77.8 million in cash and cash equivalents and $263.9 million in
working capital compared to $68.1 million in cash and cash equivalents and $228.8 million in
working capital at March 31, 2004. The $35.1 million increase in working capital was primarily
driven by an accumulation of cash from operations, and reductions in current liabilities. Cash Provided by Operating Activities Cash provided by operating activities was $35.5 million and $48.4 million for the three months
ended March 31, 2005 and 2004, respectively. The primary reason for the change in each year was
changes in working capital accounts. For the three months ended March 31, 2005 and 2004, inventory
increased $23.2 million and $31.8 million, respectively, as a result of increasing our finished
goods and bulk inventory and a decrease in our reserves. Primarily as a result of the increase in
inventory, accounts payable increased by $26.2 million and $36.8 million for the three months ended
March 31, 2005 and 2004, respectively. Franchise notes receivable decreased $3.6 million and $3.2
million for the three months ended March 31, 2005 and 2004, respectively, as a result of payments
on existing notes and fewer franchise store openings than in prior years. Other assets decreased
$5.7 million for the three months ended March 31, 2004, primarily as a result of a refund of
deposits of $4.4 million previously pledged as collateral for worker compensation letters of
credit. Accrued liabilities decreased $9.9 million for the three months ended March 31, 2004,
primarily a result of reductions of incentives, change of control payments, and other payroll
accruals of $9.6 million. Cash Used in Investing Activities We used cash from investing activities of approximately $4.9 million and $13.3 million for the
three months ended March 31, 2005 and 2004, respectively. Capital expenditures were $4.4 million
and $5.3 million during the three months ended March 31, 2005 and 2004, respectively. Capital
expenditures were for improvements to our retail stores and South Carolina manufacturing facility.
Additionally, in 2004, we paid $7.7 million in expenses related to the Acquisition. Cash Used in and Provided by Financing Activities We used cash in financing activities of approximately $37.9 million and $0.2 million for the
three months ended March 31, 2005 and 2004, respectively. In January 2005, Centers issued $150.0
million aggregate principal amount of its Senior Notes, and used the net proceeds from this
issuance, along with additional cash on hand, to pay down $185.0 million of Centers indebtedness
under its term loan facility. We also paid $3.8 million in fees related to the Senior Notes
offering and paid down an additional $0.5 million of our debt. In 2004, we issued common stock of
$1.6 million, and paid down $1.0 million of Centers debt. We expect to fund our operations through internally generated cash and, if necessary, from
borrowings under our $75.0 million revolving credit facility. We expect our primary uses of cash
in the near future will be debt service requirements, capital expenditures, and working capital
requirements. We anticipate that cash generated from operations, together with amounts available
under our revolving credit facility, will be sufficient to meet our future operating expenses,
capital expenditures and debt service obligations as they become due. However, our ability to make
scheduled payments of principal on, to pay interest on, or to refinance our indebtedness and to
satisfy our other debt obligations will depend on our future operating performance, which will be
affected by general economic, financial and other factors beyond our control. Contractual Obligations The only material change from December 31, 2004 was related to Centers January 2005 issuance
of $150.0 million aggregate principal amount of Senior Notes due 2011, with an interest rate of 8
5/8% (the Senior Notes). Centers used the net proceeds
from this offering of $145.6 million,
together with $39.4 million of cash on hand, to repay a portion of the term loan indebtedness under
our senior credit facility. The interest on the Senior Notes is payable semi-annually in arrears on
January 15 and July 15 of each year, beginning with the first payment due on July 15, 2005. Off Balance Sheet Arrangements As of March 31, 2005 and 2004, we had 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. We are, therefore, not materially
exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in
such relationships. 23




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GNC CORPORATION AND SUBSIDIARIES We have a balance of unused advertising barter credits on account with a third-party
advertising agency. We generated these barter credits by exchanging inventory with a third-party
barter vendor. In exchange, the barter vendor supplied us with advertising credits. We did not
record a sale on the transaction as the inventory sold was for expiring products that were
previously fully reserved for on our balance sheet. In accordance with the Accounting Principles
Board (APB) APB No. 29, a sale is recorded based on either the value given up or the value
received, whichever is more easily determinable. The value of the inventory was determined to be
zero, as the inventory was fully reserved. Therefore, these credits were not recognized on the
balance sheet and are only realized when we advertise through the bartering company. The credits
can be used to offset the cost of cable advertising. As of March 31, 2005 and December 31, 2004,
the available credit balance was $10.4 million, and $11.3 million, respectively. The barter credits
are effective through April 1, 2006. Effect of Inflation Inflation generally affects us by increasing costs of raw materials, labor and equipment. We
do not believe that inflation had any material effect on our results of operations in the periods
presented in our consolidated financial statements. Recently Issued Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statements of
Financial Accounting Standards (SFAS No. 123 (Revised 2004) Share-Based Payment: an Amendment of
FASB Statements No. 123 and 95. SFAS No. 123(R); sets accounting requirements for share-based
compensation to employees. It requires companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation issued to employees and
disallows the use of the intrinsic value method of accounting for stock compensation. Originally
SFAS No. 123(R) was applicable for all interim and fiscal periods beginning after June 15, 2005.
In April 2005, the Securities and Exchange Commission (SEC) announced that it was extending the
adoption of SFAS No. 123(R) for public companies to be applicable for all fiscal periods beginning
after June 15, 2005. Although we are not a public entity as
defined by SFAS No. 123(R), this
statement is also not effective for the Company until the beginning of our fiscal year 2006. The
adoption of this statement is not expected to have a significant impact on our consolidated
financial statements or results of operations. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment
of APB Opinion No. 29, Accounting for Nonmonetary Transactions. The amendments made by SFAS No.
153 are based on the principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a broader exception for
exchanges of nonmonetary assets that do not have commercial substance. The statement is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning
after the date of issuance. The provisions of this statement shall be applied prospectively. The
Company does not anticipate that the adoption of SFAS No. 153 will have a significant impact on the
Companys consolidated financial statements or results of operations. In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment of Accounting
Research Bulletin (ARB) No. 43, to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). This statement requires that
those items be recognized as current-period charges regardless of whether they meet the criterion
of so abnormal. In addition, this statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the production facilities.
Companies are required to adopt the provisions of this statement for fiscal years beginning after
June 15, 2005. The Company will adopt this standard beginning the first quarter of fiscal year
2006 and currently is evaluating the effects of this statement on its consolidated financial
statements. 24




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GNC CORPORATION AND SUBSIDIARIES 
 Item 3 Quantitative and Qualitative Disclosures about Market Risk Market risk represents the risk of changes in the value of market risk sensitive instruments
caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in
these factors could cause fluctuations in the results of our operations and cash flows. In the
ordinary course of business, we are primarily exposed to foreign currency and interest rate risks.
We do not use derivative financial instruments in connection with these market risks. Foreign Exchange Rate Market Risk.We are subject to the risk of foreign currency exchange
rate changes in the conversion from local currencies to the U.S. dollar of the reported financial
position and operating results of our non-U.S. based subsidiaries. We are also subject to foreign
currency exchange rate changes for purchase and services that are denominated in currencies other
than the U.S. dollar. The primary currencies to which we are exposed to fluctuations are the
Canadian Dollar and the Australian Dollar. The fair value of our net foreign investments and our
foreign denominated payables would not be materially affected by a 10% adverse change in foreign
currency exchange rates for the periods presented. Interest Rate Market Risk.A portion of our debt is subject to changing interest rates.
Although changes in interest rates do not impact our operating income, the changes could affect the
fair value of such debt and related interest payments. As of March 31, 2005, we had fixed rate
debt of $378.0 million and variable rate debt of $96.9 million. Fluctuations in market rates have
not had a significant impact on our results of operations in recent years because, in general, our
contracts with vendors limit our exposure to increases in product prices. We are not exposed to
price risks except with respect to product purchases. We do not enter into futures or swap
contracts at this time. Based on our variable rate debt balance as of March 31, 2005, a 1% change
in interest rates would increase or decrease our annual interest cost by $1.0 million. On
January 18, 2005, Centers issued $150.0 million aggregate
principal amount of its Senior Notes,
with an interest rate of 8 5/8%. Centers used the net proceeds of this offering of $145.6 million,
together with $39.4 million of cash on hand, to repay a portion of the indebtedness under its
term loan facility. This issuance increased our fixed rate debt by $150.0 million and decreased
our variable rate debt by $185.0 million. With the exception of the issuance of the Senior Notes
and the repayment of a portion of the indebtedness under its term loan facility, there have been no
significant changes in market risk subsequent to the audited financial statements as of December
31, 2004. 
 Item 4 Controls and Procedures Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of
our disclosure controls and procedures (as such term is defined in Rules 13-a-15(e) and 14d-15(e)
under the Securities and Exchange Act of 1934, as amended, as of the
end of March 31, 2005. Disclosure controls and procedures are designed to
provide reasonable assurance that the information required to be
disclosed in this Report has been appropriately recorded, processed,
summarized and reported. Based on such evaluation, at the
reasonable assurance level our CEO and CFO have concluded that, as of the end of such
period, our disclosure controls and procedures are effective. Although we are not yet subject to the
disclosure and reporting requirements under Section 404 of the
Sarbanes-Oxley Act of 2002, we have evaluated our internal controls
over financial reporting and there have been no changes during the
most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect our internal controls over
financial reporting. 25




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GNC CORPORATION AND SUBSIDIARIES 
 PART II OTHER INFORMATION 
 Item 1. Legal Proceedings There have been no material developments in the matters disclosed in the Legal Proceedings
section included in the Form 10-K. See the Commitments and Contingences note included elsewhere
in this Report. 
 Item 2.(c) Unregistered
Sales of Equity Securities and Use of Proceeds On
March 30, 2005, we agreed to repurchase 62,500 shares of GNC common
stock at $6.00 per share for an aggregate purchase price of $375,000
from David R. Heilman, former Executive Vice President and Chief
Administrative Officer, per a March 10, 2005 Separation
Agreement and General Release. This common stock was subsequently
retired as of March 31, 2005. 
 Item 6 Exhibits Exhibit 31.1 
    
    Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 31.2 
    
    Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 32.1 
    
    Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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GNC CORPORATION AND SUBSIDIARIES 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the persons undersigned thereunto duly authorized. GNC CORPORATION
(Registrant)May 10, 2005
    /s/ Robert J. DiNicolaRobert J. DiNicolaInterim Chief Executive OfficerMay 10, 2005
    /s/ Curtis J. LarrimerCurtis J. LarrimerChief Financial Officer 27