##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 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 AvenuePittsburgh, Pennsylvania
    
    15222(Address of principal executive offices)
    
    (Zip Code)
 (412) 288-4600
 þ o
  o o þ
 o þ




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##### 



TABLE OF CONTENTS
 PAGEPART I- FINANCIAL INFORMATIONExplanatory Note.
    
    
    2Item 1. Financial Statements.Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005
    
    
    3Unaudited Consolidated Statements of Operations and Comprehensive Income for the three
months ended September 30, 2006 and 2005 and for the nine months ended September 30,
2006 and 2005
    
    
    4Unaudited Consolidated Statement of Stockholders Equity for the nine months ended
September 30, 2006
    
    
    5Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2006
and 2005
    
    
    6Summarized Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    35Item 4. Controls and Procedures.
    
    
    35PART II  OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    36Item 1A. Risk Factors.
    
    
    39Item 6. Exhibits.
    
    
    45Signatures
    
    
    46EX-31.1EX-31.2EX-32.1
  EXPLANATORY NOTE
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 GNC CORPORATION AND SUBSIDIARIES
 
 Consolidated Balance Sheets
 (in thousands, except share data)
 September 30,
    
    
    December 31,2006
    
    
    2005 *(unaudited)Current assets:Cash and cash equivalents
    
    $
    87,360
    
    
    $
    86,013Receivables, net of reserve of $3,792 and $8,898, respectively
    
    
    82,137
    
    
    
    70,630Inventories, net (Note 3)
    
    
    313,531
    
    
    
    298,166Deferred tax assets, net
    
    
    18,078
    
    
    
    13,861Other current assets
    
    
    27,413
    
    
    
    30,826Total current assets
    
    
    528,519
    
    
    
    499,496Long-term assets:Goodwill (Note 4)
    
    
    81,044
    
    
    
    80,109Brands (Note 4)
    
    
    212,000
    
    
    
    212,000Other intangible assets, net (Note 4)
    
    
    24,011
    
    
    
    26,460Property, plant and equipment, net
    
    
    169,843
    
    
    
    179,482Deferred financing fees, net
    
    
    13,890
    
    
    
    16,125Deferred tax assets, net
    
    
    676
    
    
    
    45Other long-term assets
    
    
    6,295
    
    
    
    10,114Total long-term assets
    
    
    507,759
    
    
    
    524,335Total assets
    
    $
    1,036,278
    
    
    $
    1,023,831Current liabilities:Accounts payable, includes cash overdraft of $5,576 and $5,063, respectively
    
    $
    112,356
    
    
    $
    104,595Accrued payroll and related liabilities
    
    
    23,808
    
    
    
    20,812Accrued income taxes
    
    
    7,327
    
    
    
    2,280Accrued interest
    
    
    9,195
    
    
    
    7,877Current portion, long-term debt
    
    
    2,143
    
    
    
    2,117Other current liabilities
    
    
    70,991
    
    
    
    64,826Total current liabilities
    
    
    225,820
    
    
    
    202,507Long-term liabilities:Long-term debt
    
    
    469,668
    
    
    
    471,244Other long-term liabilities
    
    
    10,828
    
    
    
    10,891Total long-term liabilities
    
    
    480,496
    
    
    
    482,135Total liabilities
    
    
    706,316
    
    
    
    684,642Cumulative redeemable exchangeable preferred stock, $0.01 par value,
110,000 shares authorized, 100,000 shares issued and outstanding
(liquidation preference of $148,198 and $136,349, respectively)
    
    
    139,063
    
    
    
    127,115Stockholders equity:Common stock, $0.01 par value, 160,000,000 shares authorized,
50,563,948 and 50,422,054 shares issued and outstanding, respectively
    
    
    506
    
    
    
    504Paid-in-capital
    
    
    129,845
    
    
    
    177,407Retained earnings
    
    
    59,380
    
    
    
    32,939Accumulated other comprehensive income
    
    
    1,168
    
    
    
    1,224Total stockholders equity
    
    
    190,899
    
    
    
    212,074Total liabilities and stockholders equity
    
    $
    1,036,278
    
    
    $
    1,023,831
 
 *
    
    Footnotes summarized from the Audited Financial Statements.  3




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GNC CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Operations and Comprehensive Income
 (unaudited)
 (in thousands)
 For the three months
    
    
    For the nine monthsended September 30,
    
    
    ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    367,735
    
    
    $
    322,559
    
    
    $
    1,137,399
    
    
    $
    992,341Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    241,251
    
    
    
    222,084
    
    
    
    751,451
    
    
    
    676,264Gross profit
    
    
    126,484
    
    
    
    100,475
    
    
    
    385,948
    
    
    
    316,077Compensation and related benefits
    
    
    60,831
    
    
    
    58,432
    
    
    
    187,300
    
    
    
    171,975Advertising and promotion
    
    
    10,982
    
    
    
    8,639
    
    
    
    41,337
    
    
    
    36,780Other selling, general and administrative
    
    
    21,860
    
    
    
    18,536
    
    
    
    66,421
    
    
    
    56,265Foreign currency gain
    
    
    (3
    )
    
    
    (80
    )
    
    
    (705
    )
    
    
    (137
    )Other expense (income)
    
    
    1,078
    
    
    
    
    
    
    
    1,078
    
    
    
    (2,500
    )Operating income
    
    
    31,736
    
    
    
    14,948
    
    
    
    90,517
    
    
    
    53,694Interest expense, net (Note 5)
    
    
    9,687
    
    
    
    9,957
    
    
    
    29,484
    
    
    
    33,233Income before income taxes
    
    
    22,049
    
    
    
    4,991
    
    
    
    61,033
    
    
    
    20,461Income tax expense
    
    
    8,181
    
    
    
    1,816
    
    
    
    22,644
    
    
    
    7,439Net income
    
    
    13,868
    
    
    
    3,175
    
    
    
    38,389
    
    
    
    13,022Other comprehensive (loss) income
    
    
    (12
    )
    
    
    805
    
    
    
    (56
    )
    
    
    271Comprehensive income
    
    $
    13,856
    
    
    $
    3,980
    
    
    $
    38,333
    
    
    $
    13,293Income per share  Basic and Diluted :Net income
    
    $
    13,868
    
    
    $
    3,175
    
    
    $
    38,389
    
    
    $
    13,022Cumulative redeemable exchangeable preferred
stock dividends and accretion
    
    
    (4,100
    )
    
    
    (3,646
    )
    
    
    (11,948
    )
    
    
    (10,626
    )Net income (loss) available to common stockholders
    
    $
    9,768
    
    
    $
    (471
    )
    
    $
    26,441
    
    
    $
    2,396Earnings (loss) per share:Basic
    
    $
    0.19
    
    
    $
    (0.01
    )
    
    $
    0.52
    
    
    $
    0.05Diluted
    
    $
    0.18
    
    
    $
    (0.01
    )
    
    $
    0.50
    
    
    $
    0.05Weighted average shares outstanding:Basic
    
    
    50,563,948
    
    
    
    50,564,650
    
    
    
    50,511,824
    
    
    
    50,659,617Diluted
    
    
    52,475,750
    
    
    
    50,564,650
    
    
    
    54,423,626
    
    
    
    51,593,403
  4




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GNC CORPORATION AND SUBSIDIARIES
 
 Consolidated Statement of Stockholders Equity
 (in thousands, except share data)
 AccumulatedOther
    
    
    TotalCommon Stock
    
    
    
    
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Dollars
    
    
    Paid-in-Capital
    
    
    Earnings
    
    
    Income/(Loss)
    
    
    EquityBalance at December 31, 2005
    
    
    50,422,054
    
    
    $
    504
    
    
    $
    177,407
    
    
    $
    32,939
    
    
    $
    1,224
    
    
    $
    212,074Repurchase and retirement of
common stock
    
    
    (28,806
    )
    
    
    
    
    
    
    (68
    )
    
    
    
    
    
    
    
    
    
    
    (68
    )Non-cash stock-based compensation
    
    
    42,675
    
    
    
    
    
    
    
    1,887
    
    
    
    
    
    
    
    
    
    
    
    1,887Exercise of stock options
    
    
    128,025
    
    
    
    2
    
    
    
    448
    
    
    
    
    
    
    
    
    
    
    
    450Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    105Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,849
    )
    
    
    
    
    
    
    (11,849
    )Amortization of preferred stock
issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99
    )
    
    
    
    
    
    
    (99
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,389
    
    
    
    
    
    
    
    38,389Restricted payment made by General
Nutrition Centers, Inc. to GNC
Corporation Common Stockholders
    
    
    
    
    
    
    
    
    
    
    (49,934
    )
    
    
    
    
    
    
    
    
    
    
    (49,934
    )Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    (56
    )Balance at September 30, 2006 (unaudited)
    
    
    50,563,948
    
    
    $
    506
    
    
    $
    129,845
    
    
    $
    59,380
    
    
    $
    1,168
    
    
    $
    190,899
  5




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GNC CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 (unaudited)
 (in thousands)
 Nine months
    
    
    Nine monthsended
    
    
    endedSeptember 30,
    
    
    September 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    38,389
    
    
    $
    13,022Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation expense
    
    
    25,730
    
    
    
    27,840Fixed asset write-off
    
    
    220
    
    
    
    366Loss on sale of subsidiary
    
    
    1,078
    
    
    
    Deferred fee writedown  early debt extinguishment
    
    
    
    
    
    
    3,890Amortization of intangible assets
    
    
    3,471
    
    
    
    2,985Amortization of deferred financing fees
    
    
    2,235
    
    
    
    2,103Increase in provision for inventory losses
    
    
    6,176
    
    
    
    5,889Non-cash stock-based compensation
    
    
    1,887
    
    
    
    (Decrease) increase in provision for losses on accounts receivable
    
    
    (1,984
    )
    
    
    1,894(Increase) decrease in net deferred taxes
    
    
    (4,848
    )
    
    
    6,368Changes in assets and liabilities:Increase in receivables
    
    
    (11,660
    )
    
    
    (7,665
    )Increase in inventory, net
    
    
    (20,890
    )
    
    
    (13,431
    )Decrease in franchise note receivables, net
    
    
    3,598
    
    
    
    7,568Decrease in other assets
    
    
    4,182
    
    
    
    5,805Increase (decrease) in accounts payable
    
    
    7,214
    
    
    
    (23,128
    )Increase in accrued taxes
    
    
    5,047
    
    
    
    Increase in interest payable
    
    
    1,317
    
    
    
    7,301Increase (decrease) in accrued liabilities
    
    
    7,693
    
    
    
    (6,153
    )Net cash provided by operating activities
    
    
    68,855
    
    
    
    34,654CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (16,050
    )
    
    
    (13,819
    )Sales of corporate stores to franchisees
    
    
    
    
    
    
    23Store acquisition costs
    
    
    (591
    )
    
    
    (547
    )Net cash used in investing activities
    
    
    (16,641
    )
    
    
    (14,343
    )CASH FLOWS FROM FINANCING ACTIVITIES:Restricted payment made by General Nutrition Centers, Inc. to
GNC Corporation Common Stockholders
    
    
    (49,934
    )
    
    
    Repurchase and retirement of common stock
    
    
    (68
    )
    
    
    (834
    )Proceeds from exercised stock options
    
    
    450
    
    
    
    Tax benefit from exercise of stock options
    
    
    105
    
    
    
    Increase (decrease) in cash overdrafts
    
    
    513
    
    
    
    (1,067
    )Proceeds from senior notes issuance
    
    
    
    
    
    
    150,000Payments on long-term debt
    
    
    (1,550
    )
    
    
    (186,500
    )Debt and equity financing fees
    
    
    (405
    )
    
    
    (4,672
    )Net cash used in financing activities
    
    
    (50,889
    )
    
    
    (43,073
    )Effect of exchange rate on cash
    
    
    22
    
    
    
    4Net increase (decrease) in cash
    
    
    1,347
    
    
    
    (22,758
    )Beginning balance, cash
    
    
    86,013
    
    
    
    85,161Ending balance, cash
    
    $
    87,360
    
    
    $
    62,403
  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 .
   Acquisition of the Company.
  NOTE 2. BASIS OF PRESENTATION
   Principles of Consolidation.
 Use of Estimates .
 7




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GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Earnings Per Share.
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    13,868
    
    
    $
    3,175
    
    
    $
    38,389
    
    
    $
    13,022Cumulative redeemable exchangeable
preferred stock dividends and accretion
    
    
    (4,100
    )
    
    
    (3,646
    )
    
    
    (11,948
    )
    
    
    (10,626
    )Net income (loss) available to common stockholders
    
    $
    9,768
    
    
    $
    (471
    )
    
    $
    26,441
    
    
    $
    2,396Weighted average shares
    
    
    50,563,948
    
    
    
    50,564,650
    
    
    
    50,511,824
    
    
    
    50,659,617Effect of dilutive employee stock options
    
    
    1,911,802
    
    
    
    
    
    
    
    1,911,802
    
    
    
    933,786Diluted weighted average shares
    
    
    52,475,750
    
    
    
    50,564,650
    
    
    
    52,423,626
    
    
    
    51,593,403Basic earnings (loss) per share
    
    $
    0.19
    
    
    $
    (0.01
    )
    
    $
    0.52
    
    
    $
    0.05Diluted earnings (loss) per share
    
    $
    0.18
    
    
    $
    (0.01
    )
    
    $
    0.50
    
    
    $
    0.05
 Cash and Cash Equivalents .
 Recently Issued Accounting Pronouncements
     8




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GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
  NOTE 3. INVENTORIES, NET
  September 30, 2006Net CarryingGross cost
    
    
    Reserves
    
    
    Value(unaudited)(in thousands)Finished product ready for sale
    
    $
    264,616
    
    
    $
    (8,427
    )
    
    $
    256,189Work-in-process, bulk product and raw materials
    
    
    54,873
    
    
    
    (2,157
    )
    
    
    52,716Packaging supplies
    
    
    4,626
    
    
    
    
    
    
    
    4,626$
    324,115
    
    
    $
    (10,584
    )
    
    $
    313,531
 December 31, 2005Net CarryingGross cost
    
    
    Reserves
    
    
    Value(in thousands)Finished product ready for sale
    
    $
    257,525
    
    
    $
    (10,025
    )
    
    $
    247,500Work-in-process, bulk product and raw materials
    
    
    48,513
    
    
    
    (2,128
    )
    
    
    46,385Packaging supplies
    
    
    4,281
    
    
    
    
    
    
    
    4,281$
    310,319
    
    
    $
    (12,153
    )
    
    $
    298,166
 NOTE 4. GOODWILL AND INTANGIBLE ASSETS, NET
    Manufacturing/Retail
    
    
    Franchising
    
    
    Wholesale
    
    
    Total(in thousands)Balance at December 31, 2005
    
    $
    22,970
    
    
    $
    56,693
    
    
    $
    446
    
    
    $
    80,109Additions: Acquired franchise stores
    
    
    935
    
    
    
    
    
    
    
    
    
    
    
    935Reclassification: Due to franchise
store aquisitions
    
    
    2,131
    
    
    
    (2,131
    )
    
    
    
    
    
    
    Balance at September 30, 2006 (unaudited)
    
    $
    26,036
    
    
    $
    54,562
    
    
    $
    446
    
    
    $
    81,044
 9




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GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
  Retail
    
    
    Franchise
    
    
    Operating
    
    
    FranchiseGold Card
    
    
    Brand
    
    
    Brand
    
    
    Agreements
    
    
    Rights
    
    
    Total(in thousands)Balance at December 31, 2005
    
    $
    514
    
    
    $
    59,659
    
    
    $
    152,341
    
    
    $
    24,296
    
    
    $
    1,650
    
    
    $
    238,460Additions: Acquired franchise stores
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,022
    
    
    
    1,022Reclassification: Due to franchise
store aquisitions
    
    
    
    
    
    
    5,959
    
    
    
    (5,959
    )
    
    
    
    
    
    
    
    
    
    
    Amortization expense
    
    
    (386
    )
    
    
    
    
    
    
    
    
    
    
    (2,208
    )
    
    
    (877
    )
    
    
    (3,471
    )Balance at September 30, 2006 (unaudited)
    
    $
    128
    
    
    $
    65,618
    
    
    $
    146,382
    
    
    $
    22,088
    
    
    $
    1,795
    
    
    $
    236,011
  Estimated
    
    September 30, 2006
    
    
    December 31, 2005Life
    
    
    
    
    
    Accumulated
    
    
    Carrying
    
    
    
    
    
    
    Accumulated
    
    
    Carryingin years
    
    Cost
    
    
    Amortization
    
    
    Amount
    
    
    Cost
    
    
    Amortization
        
    Amount(unaudited)(in thousands)Brands  retail
    
    
    
    $
    65,618
    
    
    $
    
    
    
    $
    65,618
    
    
    $
    59,659
    
    
    $
    
    
    
    $
    59,659Brands  franchise
    
    
    
    
    146,382
    
    
    
    
    
    
    
    146,382
    
    
    
    152,341
    
    
    
    
    
    
    
    152,341Gold card  retail
    
    3
    
    
    2,230
    
    
    
    (2,119
    )
    
    
    111
    
    
    
    2,230
    
    
    
    (1,784
    )
    
    
    446Gold card  franchise
    
    3
    
    
    340
    
    
    
    (323
    )
    
    
    17
    
    
    
    340
    
    
    
    (272
    )
    
    
    68Retail agreements
    
    5  10
    
    
    8,500
    
    
    
    (3,332
    )
    
    
    5,168
    
    
    
    8,500
    
    
    
    (2,447
    )
    
    
    6,053Franchise agreements
    
    10  15
    
    
    21,900
    
    
    
    (4,980
    )
    
    
    16,920
    
    
    
    21,900
    
    
    
    (3,657
    )
    
    
    18,243Franchise rights
    
    1  5
    
    
    2,820
    
    
    
    (1,025
    )
    
    
    1,795
    
    
    
    1,798
    
    
    
    (148
    )
    
    
    1,650$
    247,790
    
    
    $
    (11,779
    )
    
    $
    236,011
    
    
    $
    246,768
    
    
    $
    (8,308
    )
    
    $
    238,460
  Estimatedamortizationexpense(unaudited)(in thousands)Years ending December 31,2006 (1)
    
    $
    1,1162007
    
    
    3,6882008
    
    
    3,3442009
    
    
    2,4942010
    
    
    2,397Thereafter
    
    
    10,972Total
    
    $
    24,011
 
 (1)
    
    This period is a partial year and represents the period from October 1 to December 31, 2006. 10




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GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 NOTE 5. INTEREST EXPENSE
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(unaudited)(in thousands)Senior credit facilityTerm Loan
    
    $
    1,973
    
    
    $
    1,608
    
    
    $
    5,693
    
    
    $
    4,930Revolver
    
    
    158
    
    
    
    160
    
    
    
    477
    
    
    
    4598 5/8% Senior Notes
    
    
    3,234
    
    
    
    3,234
    
    
    
    9,703
    
    
    
    9,0928 1/2 % Senior Subordinated Notes
    
    
    4,569
    
    
    
    4,569
    
    
    
    13,706
    
    
    
    13,706Deferred financing fees
    
    
    757
    
    
    
    719
    
    
    
    2,235
    
    
    
    2,103Deferred fee writedown  early
extinguishment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,890Mortgage
    
    
    200
    
    
    
    217
    
    
    
    546
    
    
    
    672Interest income - other
    
    
    (1,204
    )
    
    
    (550
    )
    
    
    (2,876
    )
    
    
    (1,619
    )Interest expense, net
    
    $
    9,687
    
    
    $
    9,957
    
    
    $
    29,484
    
    
    $
    33,233
 NOTE 6. COMMITMENTS AND CONTINGENCIES
 Litigation
   Ephedra (Ephedrine Alkaloids).
 11




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GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Pro-Hormone/Androstenedione Cases.
 Harry Rodriguez v. General Nutrition Companies, Inc. (previously pending in the
Supreme Court of the State of New York, New York County, New York, Index No. 02/126277).
 Everett Abrams v. General Nutrition Companies, Inc. (previously pending in the
Superior Court of New Jersey, Mercer County, New Jersey, Docket No. L-3789-02).
 Shawn Brown, Ozan Cirak, Thomas Hannon, and Luke Smith v. General Nutrition Companies,
Inc. (previously pending in the 15 th Judicial Circuit Court, Palm Beach County,
Florida, Index. No. CA-02-14221AB).
 Abrams, et al. v. General Nutrition Companies, Inc., et al., previously pending in
the Common Pleas Court of Philadelphia County, Philadelphia, Class Action No. 02-703886).
 David Pio and Ty Stephens, individually and on behalf of all others similarly situated
v. General Nutrition Companies, Inc. , previously pending in the Circuit Court of Cook
County, Illinois, County Department, Chancery Division, Case No. 02-CH-14122).
 Santiago Guzman, individually, on behalf of all others similarly situated, and on
behalf of the general public v. General Nutrition Companies, Inc., previously pending on
the California Judicial Counsel Coordination Proceeding No. 4363, Los Angeles County Superior
Court).
 Companies Creditors
Arrangement Act In re MuscleTech Research and Development, Inc., et al.
  12




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GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Class Action Settlement.
 Nutrition 21.
 Franklin Publications.
 Wage and Hour Claim
 13




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GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Visa/MasterCard Antitrust Litigation.
 Product Claim Settlement.
 Pennsylvania Claim
  NOTE 7. STOCK-BASED COMPENSATION PLANS
   WeightedAverage
    
    
    AggregateTotal Options
    
    
    Exercise Price
    
    
    Intrinsic Value(in thousands)Outstanding at December 31, 2005
    
    
    4,706,403
    
    
    $
    3.52Granted
    
    
    485,641
    
    
    
    5.65Exercised
    
    
    (128,025
    )
    
    
    3.52Forfeited
    
    
    (285,323
    )
    
    
    5.04Outstanding at September 30, 2006 (unaudited)
    
    
    4,778,696
    
    
    
    3.65
    
    
    $
    41,499Exercisable at September 30, 2006 (unaudited)
    
    
    2,337,769
    
    
    $
    3.56
    
    
    $
    20,501
  14




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GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
    September 30,
    
    September 30,2006
    
    2005(unaudited)Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected option life
    
    5 years
    
    5 yearsVolatility factor percentage of market price
    
    
    22.00
    %
    
    
    24.00
    %Discount rate
    
    4.59%  5.10%
    
    3.84%  4.18%
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005(unaudited)(in thousands)Net (loss) income available to
common stockholders, as reported
    
    $
    (471
    )
    
    $
    2,396Less: total stock-based employee compensation
costs determined using fair value method, net of tax
    
    
    (187
    )
    
    
    (582
    )Adjusted net (loss) income
    
    $
    (658
    )
    
    $
    1,814Earnings Per Share  Basic and DilutedBasic (loss) earnings per share as reported
    
    $
    (0.01
    )
    
    $
    0.05 pro forma
    
    $
    (0.01
    )
    
    $
    0.04Diluted (loss) earnings per share as reported
    
    $
    (0.01
    )
    
    $
    0.05 pro forma
    
    $
    (0.01
    )
    
    $
    0.04Weighted average common shares outstanding: basic.
    
    
    50,564,650
    
    
    
    50,659,617 diluted.
    
    
    50,564,650
    
    
    
    51,593,403
 15




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##### Table of Contents



GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 NOTE 8. SEGMENTS
  Three Months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(unaudited)(in thousands)Revenue:Retail
    
    $
    274,156
    
    
    $
    239,172
    
    
    $
    853,806
    
    
    $
    744,701Franchise
    
    
    60,727
    
    
    
    53,144
    
    
    
    180,341
    
    
    
    163,525Manufacturing/Wholesale:Intersegment (1)
    
    
    44,770
    
    
    
    45,749
    
    
    
    130,500
    
    
    
    150,467Third Party
    
    
    32,852
    
    
    
    30,243
    
    
    
    103,252
    
    
    
    84,115Sub total Manufacturing/Wholesale
    
    
    77,622
    
    
    
    75,992
    
    
    
    233,752
    
    
    
    234,582Sub total segment revenues
    
    
    412,505
    
    
    
    368,308
    
    
    
    1,267,899
    
    
    
    1,142,808Intersegment elimination (1)
    
    
    (44,770
    )
    
    
    (45,749
    )
    
    
    (130,500
    )
    
    
    (150,467
    )Total revenue
    
    $
    367,735
    
    
    $
    322,559
    
    
    $
    1,137,399
    
    
    $
    992,341
 
 (1)
    
    Intersegment revenues are eliminated from consolidated revenue. Operating income:Retail
    
    $
    31,012
    
    
    $
    16,431
    
    
    $
    99,921
    
    
    $
    55,537Franchise
    
    
    17,213
    
    
    
    14,640
    
    
    
    48,311
    
    
    
    37,607Manufacturing/Wholesale
    
    
    14,279
    
    
    
    11,477
    
    
    
    38,789
    
    
    
    36,087Unallocated corporate and other (costs) income:Warehousing and distribution costs
    
    
    (12,644
    )
    
    
    (12,565
    )
    
    
    (37,965
    )
    
    
    (37,435
    )Corporate costs
    
    
    (17,046
    )
    
    
    (15,035
    )
    
    
    (57,461
    )
    
    
    (40,602
    )Other (expense) income
    
    
    (1,078
    )
    
    
    
    
    
    
    (1,078
    )
    
    
    2,500Sub total unallocated corporate and
other (costs) income
    
    
    (30,768
    )
    
    
    (27,600
    )
    
    
    (96,504
    )
    
    
    (75,537
    )Total operating income
    
    $
    31,736
    
    
    $
    14,948
    
    
    $
    90,517
    
    
    $
    53,694
 September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)(unaudited)Total assets:Retail
    
    $
    466,698
    
    
    $
    441,364Franchise
    
    
    284,795
    
    
    
    290,092Manufacturing / Wholesale
    
    
    151,587
    
    
    
    148,445Corporate / Other
    
    
    133,198
    
    
    
    143,930Total assets
    
    $
    1,036,278
    
    
    $
    1,023,831
 16




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GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 NOTE 9. SUPPLEMENTAL GUARANTOR INFORMATION
   Supplemental Condensed Consolidating Balance Sheets
 Combined
    
    
    CombinedGuarantor
    
    
    Non-GuarantorParent
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)September 30, 2006Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    82,919
    
    
    $
    4,441
    
    
    $
    
    
    
    $
    87,360Receivables, net
    
    
    
    
    
    
    
    
    
    
    80,804
    
    
    
    1,333
    
    
    
    
    
    
    
    82,137Intercompany receivables
    
    
    
    
    
    
    2,366
    
    
    
    30,873
    
    
    
    
    
    
    
    (33,239
    )
    
    
    Inventories, net
    
    
    
    
    
    
    
    
    
    
    297,235
    
    
    
    16,296
    
    
    
    
    
    
    
    313,531Other current assets
    
    
    1,670
    
    
    
    246
    
    
    
    38,589
    
    
    
    4,986
    
    
    
    
    
    
    
    45,491Total current assets
    
    
    1,670
    
    
    
    2,612
    
    
    
    530,420
    
    
    
    27,056
    
    
    
    (33,239
    )
    
    
    528,519Goodwill
    
    
    
    
    
    
    
    
    
    
    80,102
    
    
    
    942
    
    
    
    
    
    
    
    81,044Brands
    
    
    
    
    
    
    
    
    
    
    209,000
    
    
    
    3,000
    
    
    
    
    
    
    
    212,000Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    149,832
    
    
    
    20,011
    
    
    
    
    
    
    
    169,843Investment in subsidiaries
    
    
    331,839
    
    
    
    802,310
    
    
    
    9,794
    
    
    
    
    
    
    
    (1,143,943
    )
    
    
    Other assets
    
    
    
    
    
    
    14,096
    
    
    
    39,482
    
    
    
    74
    
    
    
    (8,780
    )
    
    
    44,872Total assets
    
    $
    333,509
    
    
    $
    819,018
    
    
    $
    1,018,630
    
    
    $
    51,083
    
    
    $
    (1,185,962
    )
    
    $
    1,036,278Current liabilitiesCurrent liabilities
    
    $
    1,181
    
    
    $
    8,366
    
    
    $
    205,527
    
    
    $
    10,746
    
    
    $
    
    
    
    $
    225,820Intercompany payables
    
    
    2,366
    
    
    
    19,362
    
    
    
    
    
    
    
    11,511
    
    
    
    (33,239
    )
    
    
    Total current liabilities
    
    
    3,547
    
    
    
    27,728
    
    
    
    205,527
    
    
    
    22,257
    
    
    
    (33,239
    )
    
    
    225,820Long-term debt
    
    
    
    
    
    
    459,451
    
    
    
    
    
    
    
    18,997
    
    
    
    (8,780
    )
    
    
    469,668Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    10,793
    
    
    
    35
    
    
    
    
    
    
    
    10,828Total liabilities
    
    
    3,547
    
    
    
    487,179
    
    
    
    216,320
    
    
    
    41,289
    
    
    
    (42,019
    )
    
    
    706,316Cumulative redeemable exchangeable
preferred stock
    
    
    139,063
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139,063Total stockholders equity (deficit)
    
    
    190,899
    
    
    
    331,839
    
    
    
    802,310
    
    
    
    9,794
    
    
    
    (1,143,943
    )
    
    
    190,899Total liabilities and stockholders
equity (deficit)
    
    $
    333,509
    
    
    $
    819,018
    
    
    $
    1,018,630
    
    
    $
    51,083
    
    
    $
    (1,185,962
    )
    
    $
    1,036,278
 17




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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-GuarantorParent
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)December 31, 2005Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    83,143
    
    
    $
    2,870
    
    
    $
    
    
    
    $
    86,013Receivables, net
    
    
    
    
    
    
    
    
    
    
    69,518
    
    
    
    1,112
    
    
    
    
    
    
    
    70,630Intercompany receivables
    
    
    
    
    
    
    1,809
    
    
    
    33,079
    
    
    
    
    
    
    
    (34,888
    )
    
    
    Inventories, net
    
    
    
    
    
    
    
    
    
    
    283,511
    
    
    
    14,655
    
    
    
    
    
    
    
    298,166Other current assets
    
    
    
    
    
    
    97
    
    
    
    39,825
    
    
    
    4,765
    
    
    
    
    
    
    
    44,687Total current assets
    
    
    
    
    
    
    1,906
    
    
    
    509,076
    
    
    
    23,402
    
    
    
    (34,888
    )
    
    
    499,496Goodwill
    
    
    
    
    
    
    
    
    
    
    79,167
    
    
    
    942
    
    
    
    
    
    
    
    80,109Brands
    
    
    
    
    
    
    
    
    
    
    209,000
    
    
    
    3,000
    
    
    
    
    
    
    
    212,000Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    158,877
    
    
    
    20,605
    
    
    
    
    
    
    
    179,482Investment in subsidiaries
    
    
    340,880
    
    
    
    809,105
    
    
    
    7,081
    
    
    
    
    
    
    
    (1,157,066
    )
    
    
    Other assets
    
    
    
    
    
    
    16,331
    
    
    
    45,120
    
    
    
    73
    
    
    
    (8,780
    )
    
    
    52,744Total assets
    
    $
    340,880
    
    
    $
    827,342
    
    
    $
    1,008,321
    
    
    $
    48,022
    
    
    $
    (1,200,734
    )
    
    $
    1,023,831Current liabilitiesCurrent liabilities
    
    $
    (118
    )
    
    $
    5,801
    
    
    $
    188,362
    
    
    $
    8,462
    
    
    $
    
    
    
    $
    202,507Intercompany payables
    
    
    1,809
    
    
    
    20,474
    
    
    
    
    
    
    
    12,605
    
    
    
    (34,888
    )
    
    
    Total current liabilities
    
    
    1,691
    
    
    
    26,275
    
    
    
    188,362
    
    
    
    21,067
    
    
    
    (34,888
    )
    
    
    202,507Long-term debt
    
    
    
    
    
    
    460,187
    
    
    
    
    
    
    
    19,837
    
    
    
    (8,780
    )
    
    
    471,244Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    10,854
    
    
    
    37
    
    
    
    
    
    
    
    10,891Total liabilities
    
    
    1,691
    
    
    
    486,462
    
    
    
    199,216
    
    
    
    40,941
    
    
    
    (43,668
    )
    
    
    684,642Cumulative redeemable exchangeable
preferred stock
    
    
    127,115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127,115Total stockholders equity (deficit)
    
    
    212,074
    
    
    
    340,880
    
    
    
    809,105
    
    
    
    7,081
    
    
    
    (1,157,066
    )
    
    
    212,074Total liabilities and stockholders
equity (deficit)
    
    $
    340,880
    
    
    $
    827,342
    
    
    $
    1,008,321
    
    
    $
    48,022
    
    
    $
    (1,200,734
    )
    
    $
    1,023,831
 18




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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-GuarantorParent
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Three months ended September 30, 2006Revenue
    
    $
    
    
    
    $
    
    
    
    $
    348,570
    
    
    $
    21,102
    
    
    $
    (1,937
    )
    
    $
    367,735Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    
    
    
    
    227,815
    
    
    
    15,373
    
    
    
    (1,937
    )
    
    
    241,251Gross profit
    
    
    
    
    
    
    
    
    
    
    120,755
    
    
    
    5,729
    
    
    
    
    
    
    
    126,484Compensation and related benefits
    
    
    
    
    
    
    
    
    
    
    57,436
    
    
    
    3,395
    
    
    
    
    
    
    
    60,831Advertising and promotion
    
    
    
    
    
    
    
    
    
    
    10,836
    
    
    
    146
    
    
    
    
    
    
    
    10,982Other selling, general and administrative
    
    
    100
    
    
    
    490
    
    
    
    20,886
    
    
    
    384
    
    
    
    
    
    
    
    21,860Subsidiary (income) loss
    
    
    (13,932
    )
    
    
    (14,716
    )
    
    
    28
    
    
    
    
    
    
    
    28,620
    
    
    
    Other (income) expense
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    1,081
    
    
    
    
    
    
    
    1,075Operating income (loss)
    
    
    13,832
    
    
    
    14,226
    
    
    
    31,575
    
    
    
    723
    
    
    
    (28,620
    )
    
    
    31,736Interest expense, net
    
    
    
    
    
    
    757
    
    
    
    8,598
    
    
    
    332
    
    
    
    
    
    
    
    9,687Income (loss) before income taxes
    
    
    13,832
    
    
    
    13,469
    
    
    
    22,977
    
    
    
    391
    
    
    
    (28,620
    )
    
    
    22,049Income tax (benefit) expense
    
    
    (36
    )
    
    
    (463
    )
    
    
    8,261
    
    
    
    419
    
    
    
    
    
    
    
    8,181Net income (loss)
    
    $
    13,868
    
    
    $
    13,932
    
    
    $
    14,716
    
    
    $
    (28
    )
    
    $
    (28,620
    )
    
    $
    13,868
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedGuarantor
    
    
    Non-GuarantorParent
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Nine months ended September 30, 2006Revenue
    
    $
    
    
    
    $
    
    
    
    $
    1,081,953
    
    
    $
    63,309
    
    
    $
    (7,863
    )
    
    $
    1,137,399Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    
    
    
    
    713,598
    
    
    
    45,716
    
    
    
    (7,863
    )
    
    
    751,451Gross profit
    
    
    
    
    
    
    
    
    
    
    368,355
    
    
    
    17,593
    
    
    
    
    
    
    
    385,948Compensation and related benefits
    
    
    
    
    
    
    
    
    
    
    177,269
    
    
    
    10,031
    
    
    
    
    
    
    
    187,300Advertising and promotion
    
    
    
    
    
    
    
    
    
    
    40,798
    
    
    
    539
    
    
    
    
    
    
    
    41,337Other selling, general and administrative
    
    
    295
    
    
    
    2,000
    
    
    
    62,894
    
    
    
    1,232
    
    
    
    
    
    
    
    66,421Subsidiary (income) loss
    
    
    (38,575
    )
    
    
    (41,238
    )
    
    
    (2,767
    )
    
    
    
    
    
    
    82,580
    
    
    
    Other (income) expense
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    392
    
    
    
    
    
    
    
    373Operating income (loss)
    
    
    38,280
    
    
    
    39,238
    
    
    
    90,180
    
    
    
    5,399
    
    
    
    (82,580
    )
    
    
    90,517Interest expense, net
    
    
    
    
    
    
    2,234
    
    
    
    26,203
    
    
    
    1,047
    
    
    
    
    
    
    
    29,484Income (loss) before income taxes
    
    
    38,280
    
    
    
    37,004
    
    
    
    63,977
    
    
    
    4,352
    
    
    
    (82,580
    )
    
    
    61,033Income tax (benefit) expense
    
    
    (109
    )
    
    
    (1,571
    )
    
    
    22,739
    
    
    
    1,585
    
    
    
    
    
    
    
    22,644Net income (loss)
    
    $
    38,389
    
    
    $
    38,575
    
    
    $
    41,238
    
    
    $
    2,767
    
    
    $
    (82,580
    )
    
    $
    38,389
 19




---



##### Table of Contents



GNC CORPORATION AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedGuarantor
    
    
    Non-GuarantorParent
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Three months ended September 30, 2005Revenue
    
    $
    
    
    
    $
    
    
    
    $
    307,427
    
    
    $
    17,696
    
    
    $
    (2,564
    )
    
    $
    322,559Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    
    
    
    
    211,586
    
    
    
    13,062
    
    
    
    (2,564
    )
    
    
    222,084Gross profit
    
    
    
    
    
    
    
    
    
    
    95,841
    
    
    
    4,634
    
    
    
    
    
    
    
    100,475Compensation and related benefits
    
    
    
    
    
    
    
    
    
    
    55,370
    
    
    
    3,062
    
    
    
    
    
    
    
    58,432Advertising and promotion
    
    
    
    
    
    
    
    
    
    
    8,501
    
    
    
    138
    
    
    
    
    
    
    
    8,639Other selling, general and administrative
    
    
    41
    
    
    
    522
    
    
    
    16,667
    
    
    
    1,306
    
    
    
    
    
    
    
    18,536Subsidiary (income) loss
    
    
    (3,202
    )
    
    
    (3,990
    )
    
    
    204
    
    
    
    
    
    
    
    6,988
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    (22
    )
    
    
    (58
    )
    
    
    
    
    
    
    (80
    )Operating income (loss)
    
    
    3,161
    
    
    
    3,468
    
    
    
    15,121
    
    
    
    186
    
    
    
    (6,988
    )
    
    
    14,948Interest expense, net
    
    
    
    
    
    
    719
    
    
    
    8,868
    
    
    
    370
    
    
    
    
    
    
    
    9,957Income (loss) before income taxes
    
    
    3,161
    
    
    
    2,749
    
    
    
    6,253
    
    
    
    (184
    )
    
    
    (6,988
    )
    
    
    4,991Income tax (benefit) expense
    
    
    (14
    )
    
    
    (453
    )
    
    
    2,263
    
    
    
    20
    
    
    
    
    
    
    
    1,816Net income (loss)
    
    $
    3,175
    
    
    $
    3,202
    
    
    $
    3,990
    
    
    $
    (204
    )
    
    $
    (6,988
    )
    
    $
    3,175
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedGuarantor
    
    
    Non-GuarantorParent
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Nine months ended September 30, 2005Revenue
    
    $
    
    
    
    $
    
    
    
    $
    947,920
    
    
    $
    53,196
    
    
    $
    (8,775
    )
    
    $
    992,341Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    
    
    
    
    645,974
    
    
    
    39,065
    
    
    
    (8,775
    )
    
    
    676,264Gross profit
    
    
    
    
    
    
    
    
    
    
    301,946
    
    
    
    14,131
    
    
    
    
    
    
    
    316,077Compensation and related benefits
    
    
    
    
    
    
    
    
    
    
    163,009
    
    
    
    8,966
    
    
    
    
    
    
    
    171,975Advertising and promotion
    
    
    
    
    
    
    
    
    
    
    36,365
    
    
    
    415
    
    
    
    
    
    
    
    36,780Other selling, general and administrative
    
    
    206
    
    
    
    1,536
    
    
    
    52,106
    
    
    
    2,417
    
    
    
    
    
    
    
    56,265Subsidiary (income) loss
    
    
    (13,154
    )
    
    
    (17,967
    )
    
    
    (1,350
    )
    
    
    
    
    
    
    32,471
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    (2,492
    )
    
    
    (145
    )
    
    
    
    
    
    
    (2,637
    )Operating income (loss)
    
    
    12,948
    
    
    
    16,431
    
    
    
    54,308
    
    
    
    2,478
    
    
    
    (32,471
    )
    
    
    53,694Interest expense, net
    
    
    
    
    
    
    5,993
    
    
    
    26,169
    
    
    
    1,071
    
    
    
    
    
    
    
    33,233Income (loss) before income taxes
    
    
    12,948
    
    
    
    10,438
    
    
    
    28,139
    
    
    
    1,407
    
    
    
    (32,471
    )
    
    
    20,461Income tax (benefit) expense
    
    
    (74
    )
    
    
    (2,716
    )
    
    
    10,172
    
    
    
    57
    
    
    
    
    
    
    
    7,439Net income (loss)
    
    $
    13,022
    
    
    $
    13,154
    
    
    $
    17,967
    
    
    $
    1,350
    
    
    $
    (32,471
    )
    
    $
    13,022
 20




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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
 Combined
    
    
    CombinedGuarantor
    
    
    Non-GuarantorParent
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)(in thousands)Nine months ended September 30, 2006NET CASH PROVIDED BY OPERATING ACTIVITIES:
    
    $
    
    
    
    $
    
    
    
    $
    65,270
    
    
    $
    3,585
    
    
    $
    68,855CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    
    
    
    
    
    
    
    
    (14,828
    )
    
    
    (1,222
    )
    
    
    (16,050
    )Investment/distribution
    
    
    
    
    
    
    50,693
    
    
    
    (50,693
    )
    
    
    
    
    
    
    Other investing
    
    
    
    
    
    
    
    
    
    
    (591
    )
    
    
    
    
    
    
    (591
    )Net cash provided by (used in) investing activities
    
    
    
    
    
    
    50,693
    
    
    
    (66,112
    )
    
    
    (1,222
    )
    
    
    (16,641
    )CASH FLOWS FROM FINANCING ACTIVITIES:GNC Corporation investment in
General Nutrition Centers, Inc.
    
    
    23
    
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    Restricted payment made by General Nutrition Centers, Inc. to
GNC Corporation Common Stockholders
    
    
    
    
    
    
    (49,934
    )
    
    
    
    
    
    
    
    
    
    
    (49,934
    )Repurchase/retirement of common stock
    
    
    (68
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68
    )Proceeds from exercised stock options
    
    
    450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    450Payments on long-term debt
    
    
    
    
    
    
    (736
    )
    
    
    
    
    
    
    (814
    )
    
    
    (1,550
    )Other financing
    
    
    (405
    )
    
    
    
    
    
    
    618
    
    
    
    
    
    
    
    213Net cash (used in) provided by financing activities
    
    
    
    
    
    
    (50,693
    )
    
    
    618
    
    
    
    (814
    )
    
    
    (50,889
    )Effect of exchange rate on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    22Net (decrease) increase in cash
    
    
    
    
    
    
    
    
    
    
    (224
    )
    
    
    1,571
    
    
    
    1,347Beginning balance, cash
    
    
    
    
    
    
    
    
    
    
    83,143
    
    
    
    2,870
    
    
    
    86,013Ending balance, cash
    
    $
    
    
    
    $
    
    
    
    $
    82,919
    
    
    $
    4,441
    
    
    $
    87,360
 21




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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)(in thousands)Nine months ended September 30, 2005Net cash provided by operating activities
    
    $
    
    
    
    $
    4,672
    
    
    $
    28,980
    
    
    $
    1,002
    
    
    $
    34,654CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    
    
    
    
    
    
    
    
    (13,620
    )
    
    
    (199
    )
    
    
    (13,819
    )Investment/distribution
    
    
    
    
    
    
    36,569
    
    
    
    (36,569
    )
    
    
    
    
    
    
    Other investing
    
    
    
    
    
    
    
    
    
    
    (524
    )
    
    
    
    
    
    
    (524
    )Net cash provided by (used in) investing activities
    
    
    
    
    
    
    36,569
    
    
    
    (50,713
    )
    
    
    (199
    )
    
    
    (14,343
    )CASH FLOWS FROM FINANCING ACTIVITIES:GNC Corporation return of capital
from General Nutrition Centers, Inc.
    
    
    834
    
    
    
    (834
    )
    
    
    
    
    
    
    
    
    
    
    Repurchase/retirement of common stock
    
    
    (834
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (834
    )Payments on long-term debt  third parties
    
    
    
    
    
    
    (185,735
    )
    
    
    
    
    
    
    (765
    )
    
    
    (186,500
    )Proceeds from senior notes issuance
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    150,000Other financing
    
    
    
    
    
    
    (4,672
    )
    
    
    (1,067
    )
    
    
    
    
    
    
    (5,739
    )Net cash used in financing activities
    
    
    
    
    
    
    (41,241
    )
    
    
    (1,067
    )
    
    
    (765
    )
    
    
    (43,073
    )Effect of exchange rate on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Net (decrease) increase in cash
    
    
    
    
    
    
    
    
    
    
    (22,800
    )
    
    
    42
    
    
    
    (22,758
    )Beginning balance, cash
    
    
    
    
    
    
    
    
    
    
    82,722
    
    
    
    2,439
    
    
    
    85,161Ending balance, cash
    
    $
    
    
    
    $
    
    
    
    $
    59,922
    
    
    $
    2,481
    
    
    $
    62,403
 NOTE
10. ASSETS HELD FOR SALE
  22




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Forward-Looking Statements
   
    
    significant competition in our industry;
    
    unfavorable publicity or consumer perception of our products;
    
    the incurrence of material product liability and product recall costs;
    
    costs of compliance and our failure to comply with governmental regulations;
    
    the failure of our franchisees to conduct their operations profitably and limitations on our ability to terminate or replace under-
performing franchisees;
    
    economic, political, and other risks associated with our international operations;
    
    our failure to keep pace with the demands of our customers for new products and services;
    
    disruptions in our manufacturing system or losses of manufacturing certifications;
    
    the lack of long-term experience with human consumption of ingredients in some of our products;
    
    increases in the frequency and severity of insurance claims, particularly claims for which we are self-insured;
    
    loss or retirement of key members of management;
    
    increases in the cost of borrowings and limitations on availability of additional debt or equity capital;
    
    the impact of our substantial debt on our operating income and our ability to grow; and
    
    the failure to adequately protect or enforce our intellectual property rights against competitors.
   Business Overview
  23




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##### Table of Contents



Executive Overview
  
    
    introduced a single national pricing structure in order to simplify our pricing
approach and improve our customer value perception;
    
    developed and executed a national, more diversified marketing program focused on
competitive pricing of key items and reinforcing GNCs well-recognized and dominant
brand name among consumers;
    
    overhauled our field organization and store programs to improve our value-added
customer shopping experience;
    
    focused our merchandising and marketing initiatives on driving increased traffic
to our store locations, particularly with promotional events outside of Gold Card
week;
    
    improved supply chain and inventory management, resulting in better in-stock
levels of products generally and never out levels of top products;
    
    reinvigorated our proprietary new product development activities;
    
    revitalized vendor relationships, including their new product development
activities and our exclusive or first-to-market access to new products;
    
    realigned our franchise system with our corporate strategies and re-acquired or
closed unprofitable or non-compliant franchised stores in order to improve the
financial performance of the franchise system;
    
    reduced our overhead cost structure; and
    
    launched internet sales of our products on www.gnc.com.
  
    
    Our fifth consecutive quarter of positive same store sales in our Retail segment.
Same store sales, including internet sales, increased 11.7% for the three months
ended September 30, 2006 compared to the same period in 2005. We believe that this
increase was driven by our strategic initiatives that included simplifying our
pricing and a national, more diversified marketing program and developing a better
overall experience for our customers.
    
    A realigned domestic franchise program, operating in a more unified way with our
company-owned stores, which contributed to positive same store sales for our
domestic franchised locations for the fourth consecutive quarter.
 Results of Operations
   24
    Table of Contents    Results of Operations
  Three Months Ended
        
    Nine Months EndedSeptember 30,
        

    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(unaudited)Revenues:Retail
    
    $
    274.1
    
    
    
    74.5
    %
    
    $
    239.2
    
    
    
    74.1
    %
    
    $
    853.8
    
    
    
    75.1
    %
    
    $
    744.7
    
    
    
    75.0
    %Franchise
    
    
    60.7
    
    
    
    16.5
    %
    
    
    53.2
    
    
    
    16.5
    %
    
    
    180.3
    
    
    
    15.8
    %
    
    
    163.5
    
    
    
    16.5
    %Manufacturing / Wholesale
    
    
    32.9
    
    
    
    9.0
    %
    
    
    30.2
    
    
    
    9.4
    %
    
    
    103.3
    
    
    
    9.1
    %
    
    
    84.1
    
    
    
    8.5
    %Total net revenues
    
    
    367.7
    
    
    
    100.0
    %
    
    
    322.6
    
    
    
    100.0
    %
    
    
    1,137.4
    
    
    
    100.0
    %
    
    
    992.3
    
    
    
    100.0
    %Operating expenses:Cost of sales, including warehousing,
distribution and occupancy costs
    
    
    241.3
    
    
    
    65.6
    %
    
    
    222.1
    
    
    
    68.9
    %
    
    
    751.5
    
    
    
    66.1
    %
    
    
    676.2
    
    
    
    68.2
    %Compensation and related benefits
    
    
    60.8
    
    
    
    16.6
    %
    
    
    58.5
    
    
    
    18.1
    %
    
    
    187.3
    
    
    
    16.5
    %
    
    
    172.0
    
    
    
    17.3
    %Advertising and promotion
    
    
    11.0
    
    
    
    3.0
    %
    
    
    8.7
    
    
    
    2.7
    %
    
    
    41.3
    
    
    
    3.6
    %
    
    
    36.8
    
    
    
    3.7
    %Other selling, general and administrative
expenses
    
    
    20.3
    
    
    
    5.5
    %
    
    
    17.3
    
    
    
    5.4
    %
    
    
    62.9
    
    
    
    5.5
    %
    
    
    53.2
    
    
    
    5.4
    %Amortization expense
    
    
    1.5
    
    
    
    0.4
    %
    
    
    1.1
    
    
    
    0.3
    %
    
    
    3.5
    
    
    
    0.3
    %
    
    
    3.0
    
    
    
    0.3
    %Foreign currency gain
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (0.7
    )
    
    
    -0.1
    %
    
    
    (0.1
    )
    
    
    0.0
    %Other expense (income)
    
    
    1.1
    
    
    
    0.3
    %
    
    
    
    
    
    
    0.0
    %
    
    
    1.1
    
    
    
    0.1
    %
    
    
    (2.5
    )
    
    
    -0.3
    %Total operating expenses
    
    
    336.0
    
    
    
    91.4
    %
    
    
    307.7
    
    
    
    95.4
    %
    
    
    1,046.9
    
    
    
    92.0
    %
    
    
    938.6
    
    
    
    94.6
    %Operating income:Retail
    
    
    31.0
    
    
    
    8.4
    %
    
    
    16.4
    
    
    
    5.1
    %
    
    
    99.9
    
    
    
    8.8
    %
    
    
    55.5
    
    
    
    5.6
    %Franchise
    
    
    17.2
    
    
    
    4.7
    %
    
    
    14.7
    
    
    
    4.6
    %
    
    
    48.3
    
    
    
    4.3
    %
    
    
    37.6
    
    
    
    3.8
    %Manufacturing / Wholesale
    
    
    14.2
    
    
    
    3.8
    %
    
    
    11.4
    
    
    
    3.5
    %
    
    
    38.8
    
    
    
    3.4
    %
    
    
    36.1
    
    
    
    3.6
    %Unallocated corporate and other
(costs) income:Warehousing and distribution costs
    
    
    (12.6
    )
    
    
    -3.4
    %
    
    
    (12.5
    )
    
    
    -3.9
    %
    
    
    (37.9
    )
    
    
    -3.3
    %
    
    
    (37.4
    )
    
    
    -3.8
    %Corporate costs
    
    
    (17.0
    )
    
    
    -4.6
    %
    
    
    (15.1
    )
    
    
    -4.7
    %
    
    
    (57.5
    )
    
    
    -5.1
    %
    
    
    (40.6
    )
    
    
    -4.1
    %Other (expense) income
    
    
    (1.1
    )
    
    
    -0.3
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (1.1
    )
    
    
    -0.1
    %
    
    
    2.5
    
    
    
    0.3
    %Subtotal unallocated corporate and
other costs net
    
    
    (30.7
    )
    
    
    -8.3
    %
    
    
    (27.6
    )
    
    
    -8.6
    %
    
    
    (96.5
    )
    
    
    -8.5
    %
    
    
    (75.5
    )
    
    
    -7.6
    %Total operating income
    
    
    31.7
    
    
    
    8.6
    %
    
    
    14.9
    
    
    
    4.6
    %
    
    
    90.5
    
    
    
    8.0
    %
    
    
    53.7
    
    
    
    5.4
    %Interest expense, net
    
    
    9.7
    
    
    
    
    
    
    
    9.9
    
    
    
    
    
    
    
    29.5
    
    
    
    
    
    
    
    33.2Income before income taxes
    
    
    22.0
    
    
    
    
    
    
    
    5.0
    
    
    
    
    
    
    
    61.0
    
    
    
    
    
    
    
    20.5Income tax expense
    
    
    8.1
    
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    22.6
    
    
    
    
    
    
    
    7.5Net income
    
    $
    13.9
    
    
    
    
    
    
    $
    3.2
    
    
    
    
    
    
    $
    38.4
    
    
    
    
    
    
    $
    13.0
 Note:
 25




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Comparison of the Three Months Ended September 30, 2006 and 2005
 Revenues
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 Cost of Sales
  Product costs.
 Warehousing and distribution costs.
 Occupancy costs.
 26




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Selling, General and Administrative (SG&A) Expenses
  Compensation and related benefits.
 Advertising and promotion.
 Other SG&A.
 Foreign Currency Gain
  Other Expense
  Operating Income
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 Warehousing and Distribution Costs.
 Corporate Costs.
 27




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##### Table of Contents



Other expense.
 Interest Expense
  Income Tax Expense
  Net Income
  28




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##### Table of Contents



Comparison of the Nine Months Ended September 30, 2006 and 2005
 Revenues
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 Cost of Sales
  Product costs.
 Warehousing and distribution costs.
 Occupancy costs.
 29




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##### Table of Contents



Selling, General and Administrative (SG&A) Expenses
  Compensation and related benefits.
 Advertising and promotion.
 Other SG&A.
 Foreign Currency Gain
  Other Expense / Income
  Operating Income
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 30




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Warehousing and Distribution Costs.
 Corporate Costs.
 Other expense/income.
 Interest Expense
  Income Tax Expense
  Net Income
  31




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Liquidity and Capital Resources
    Cash Provided by Operating Activities
    Cash Used in Investing Activities
   Cash Used in Financing Activities
  32




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##### Table of Contents









Senior Credit Facility.




Senior Notes. 5/8


Senior Subordinated Notes. 1/2


Common and Preferred Stock.


Contractual Obligations




Off Balance Sheet Arrangements




33



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Effect of Inflation
  Critical Accounting Estimates
   Recently Issued Accounting Pronouncements
     34




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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4. Controls and Procedures.
   35




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   Ephedra (Ephedrine Alkaloids).
 Pro-Hormone/Androstenedione Cases.
 Harry Rodriguez v. General Nutrition Companies, Inc. (previously pending in the
Supreme Court of the State of New York, New York County, New York, Index No. 02/126277).
 Everett Abrams v. General Nutrition Companies, Inc. (previously pending in the
Superior Court of New Jersey, Mercer County, New Jersey, Docket No. L-3789-02).
 36




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##### Table of Contents



Shawn Brown, Ozan Cirak, Thomas Hannon, and Luke Smith v. General Nutrition Companies,
Inc. (previously pending in the 15 th Judicial Circuit Court, Palm Beach County,
Florida, Index. No. CA-02-14221AB).
 Abrams, et al. v. General Nutrition Companies, Inc., et al., previously pending in
the Common Pleas Court of Philadelphia County, Philadelphia, Class Action No. 02-703886).
 David Pio and Ty Stephens, individually and on behalf of all others similarly situated
v. General Nutrition Companies, Inc. , previously pending in the Circuit Court of Cook
County, Illinois, County Department, Chancery Division, Case No. 02-CH-14122).
 Santiago Guzman, individually, on behalf of all others similarly situated, and on
behalf of the general public v. General Nutrition Companies, Inc., previously pending on
the California Judicial Counsel Coordination Proceeding No. 4363, Los Angeles County Superior
Court).
 Companies Creditors
Arrangement Act In re MuscleTech Research and Development, Inc., et al.
  Class Action Settlement. 37
    Table of Contents    Nutrition 21.
 Franklin Publications.
 Wage and Hour Claim
 Visa/MasterCard Antitrust Litigation.
 Product Claim Settlement.
 38




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##### Table of Contents



Pennsylvania Claim
  
 Item 1A. Risk Factors.
  Risks Relating to Our Business and Industry
 We operate in a highly competitive industry. Our failure to compete effectively could adversely
affect our market share, revenues, and growth prospects.
  Unfavorable publicity or consumer perception of our products and any similar products distributed
by other companies could cause fluctuations in our operating results and could have a material
adverse effect on our reputation, the demand for our products, and our ability to generate
revenues.
  Our failure to appropriately respond to changing consumer preferences and demand for new products
could significantly harm our customer relationships and product sales.
  39




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
    
    accurately anticipate customer needs;
    
    innovate and develop new products;
    
    successfully commercialize new products in a timely manner;
    
    price our products competitively;
    
    manufacture and deliver our products in sufficient volumes and in a timely manner; and
    
    differentiate our product offerings from those of our competitors.
  Changes in our management team could affect our business strategy and adversely impact our
performance and results of operations.
  Compliance with new and existing governmental regulations could increase our costs significantly
and adversely affect our results of operations.
   40




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##### Table of Contents







Our failure to comply with FTC regulations and existing consent decrees imposed on us by the FTC
could result in substantial monetary penalties and could adversely affect our operating results.




Because we rely on our manufacturing operations to produce nearly all of the proprietary products
we sell, disruptions in our manufacturing system or losses of manufacturing certifications could
adversely affect our sales and customer relationships.




If we fail to protect our brand name, competitors may adopt trade names that dilute the value of
our brand name.




Intellectual property litigation and infringement claims against us could cause us to incur
significant expenses or prevent us from manufacturing, selling, or using some aspect of our
products, which could adversely affect our revenues and market share.


41




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A substantial amount of our revenues are generated from our franchisees, and our revenues could
decrease significantly if our franchisees do not conduct their operations profitably or if we
fail to attract new franchisees.






Economic, political, and other risks associated with our international operations could adversely
affect our revenues and international growth prospects.





    
    political and economic instability of foreign markets;
    
    foreign governments restrictive trade policies;
    
    inconsistent product regulation or sudden policy changes by foreign agencies or
governments;
    
    the imposition of, or increase in, duties, taxes, government royalties, or non-tariff trade
barriers;
    
    difficulty in collecting international accounts receivable and potentially longer payment
cycles;
    
    increased costs in maintaining international franchise and marketing efforts;
    
    difficulty in operating our manufacturing facility abroad and procuring supplies from
overseas suppliers;
    
    exchange controls;
    
    problems entering international markets with different cultural bases and consumer
preferences; and
    
    fluctuations in foreign currency exchange rates.




Franchise regulations could limit our ability to terminate or replace under-performing
franchises, which could adversely impact franchise revenues.




We may incur material product liability claims, which could increase our costs and adversely
affect our reputation, revenues, and operating income.


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##### Table of Contents







We are not insured for a significant portion of our claims exposure, which could materially and
adversely affect our operating income and profitability.




Risks Related to Our Substantial Debt


Our substantial debt could adversely affect our results of operations and financial condition and
otherwise adversely impact our operating income and growth prospects.







    
    require us to use all or a large portion of our cash to pay principal and interest on our
debt, which could reduce the availability of our cash to fund working capital, capital
expenditures, and other business activities;
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate;
    
    restrict us from making strategic acquisitions or exploiting business opportunities;
    
    make it more difficult for us to satisfy our obligations with respect to our debt;
    
    place us at a competitive disadvantage compared to our competitors that have less debt; and
    
    limit our ability to borrow additional funds, dispose of assets, or pay cash dividends.




We require a significant amount of cash to service our debt. Our ability to generate cash depends
on many factors beyond our control and, as a result, we may not be able to make payments on our
debt obligations.


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Changes in our results of operation or financial condition and other events may adversely affect
our ability to comply with financial covenants in our senior credit facility or other debt
covenants.
  Despite our and our subsidiaries current significant level of debt, we may still be able to
incur more debt, which would increase the risks described above.
  Our principal stockholder may take actions that conflict with other stockholders and investors
interests. This control may have the effect of delaying or preventing changes of control or
changes in management, or limiting the ability of other stockholders to approve transactions they
may deem to be in their best interest.
  Certain provisions of our corporate governing documents and Delaware law could
discourage, delay, or prevent a merger or acquisition at a premium price.
  44




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Our holding company structure makes us dependent on our subsidiaries for our
cash flow and subordinates the rights of our stockholders to the rights of
creditors of our subsidiaries in the event of an insolvency or liquidation of
any of our subsidiaries.
  
 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.
 45




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SIGNATURES
  GNC CORPORATION
(Registrant)October 27, 2006
    /s/ Joseph M. FortunatoJoseph M. FortunatoPresident and Chief Executive Officer
(principal executive officer)October 27, 2006
    /s/ Curtis J. LarrimerCurtis J. LarrimerExecutive Vice President and Chief Financial Officer
(principal financial and accounting officer) 46