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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549
 Form 10-Q (Mark one) [X]
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2004  [ ]
    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: 333-114502 GENERAL NUTRITION CENTERS, INC.  DELAWARE
    
    72-1575168(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.  [ ] Yes   [ X ] No Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 
[ ] Yes   [ X ] No As of September 30, 2004, one hundred (100) shares of the registrants common
stock, par value $0.01 per share (the Common Stock) were outstanding.




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TABLE OF CONTENTS PAGEPart I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial StatementsConsolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003
    
    
    3Unaudited Consolidated Statements of Operations for the three months and nine months ending September 30, 2004 and 2003
    
    
    4Unaudited Consolidated Statement of Stockholders Equity as of September 30, 2004
    
    
    5Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003
    
    
    6Summarized Notes to Consolidated Financial Statements
    
    
    7Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4
    
    Controls and Procedures
    
    
    37Part II
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    38Item 5
    
    Other Information
    
    
    38Item 6
    
    Exhibits
    
    
    38Exhibit 31.1Exhibit 31.2Exhibit 32.1
  Page 2 of 42




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PART I FINANCIAL INFORMATION 
 Item 1. Financial Statements GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES 
 Consolidated Balance Sheets
 (In thousands) December 31,
    
    September 30,2003 *
    
    2004(unaudited)Current assets:Cash and cash equivalents
    
    $
    33,176
    
    
    $
    72,384Receivables, net (Note 2)
    
    
    87,984
    
    
    
    77,734Inventories, net (Note 3)
    
    
    256,000
    
    
    
    255,546Deferred tax assets, net
    
    
    15,946
    
    
    
    Other current assets
    
    
    27,480
    
    
    
    30,046Total current assets
    
    
    420,586
    
    
    
    435,710Long-term assets:Goodwill, net (Note 4)
    
    
    83,089
    
    
    
    87,787Brands, net (Note 4)
    
    
    212,000
    
    
    
    212,000Other intangible assets, net (Note 4)
    
    
    32,667
    
    
    
    29,656Property, plant and equipment, net
    
    
    201,280
    
    
    
    194,293Deferred financing fees, net
    
    
    19,796
    
    
    
    18,436Deferred tax assets, net
    
    
    15,289
    
    
    
    8,496Other long-term assets (Note 5)
    
    
    34,160
    
    
    
    22,684Total long-term assets
    
    
    598,281
    
    
    
    573,352Total assets
    
    $
    1,018,867
    
    
    $
    1,009,062Current liabilities:Accounts payable
    
    $
    102,926
    
    
    $
    80,053Accrued payroll and related liabilities (Note 10)
    
    
    33,277
    
    
    
    14,531Accrued income taxes (Note 8)
    
    
    438
    
    
    
    Accrued interest (Note 7)
    
    
    1,799
    
    
    
    6,473Current portion, long-term debt (Note 7)
    
    
    3,830
    
    
    
    3,875Other current liabilities (Note 6)
    
    
    78,271
    
    
    
    67,097Total current liabilities
    
    
    220,541
    
    
    
    172,029Long-term liabilities:Long-term debt (Note 7)
    
    
    510,374
    
    
    
    507,462Other long-term liabilities
    
    
    9,796
    
    
    
    9,497Total long-term liabilities
    
    
    520,170
    
    
    
    516,959Total liabilities
    
    
    740,711
    
    
    
    688,988Stockholders equity:Common stock, $0.01 par value,
authorized 1,000, issued and outstanding 100 shares
    
    
    
    
    
    
    Paid-in-capital
    
    
    277,500
    
    
    
    279,081Retained earnings
    
    
    354
    
    
    
    40,399Accumulated other comprehensive income (Note 13)
    
    
    302
    
    
    
    594Total stockholders equity
    
    
    278,156
    
    
    
    320,074Total liabilities and stockholders equity
    
    $
    1,018,867
    
    
    $
    1,009,062
 * Footnotes summarized from the Audited Financial Statements. The accompanying summarized notes are an integral part of the consolidated financial statements. Page 3 of 42




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES 
 Consolidated Statements of Operations and Comprehensive Income
 (unaudited)
 (in thousands)
 Predecessor
    
    Successor
    
    Predecessor
    
    SuccessorFor the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Revenue
    
    $
    362,576
    
    
    $
    323,141
    
    
    $
    1,085,753
    
    
    $
    1,043,424Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    254,379
    
    
    
    216,818
    
    
    
    758,141
    
    
    
    690,541Gross profit
    
    
    108,197
    
    
    
    106,323
    
    
    
    327,612
    
    
    
    352,883Compensation and related benefits
    
    
    62,349
    
    
    
    54,034
    
    
    
    182,001
    
    
    
    172,959Advertising and promotion
    
    
    9,115
    
    
    
    10,042
    
    
    
    30,958
    
    
    
    35,252Other selling, general and administrative
    
    
    17,408
    
    
    
    19,132
    
    
    
    58,405
    
    
    
    55,749Income from legal settlements
    
    
    (4,631
    )
    
    
    
    
    
    
    (7,190
    )
    
    
    Foreign currency (gain) loss
    
    
    (255
    )
    
    
    (300
    )
    
    
    (2,477
    )
    
    
    118Impairment of goodwill and intangible assets
    
    
    709,367
    
    
    
    
    
    
    
    709,367
    
    
    
    Operating (loss) income
    
    
    (685,156
    )
    
    
    23,415
    
    
    
    (643,452
    )
    
    
    88,805Interest expense, net (Note 7)
    
    
    33,048
    
    
    
    8,556
    
    
    
    97,840
    
    
    
    25,704(Loss) income before income taxes
    
    
    (718,204
    )
    
    
    14,859
    
    
    
    (741,292
    )
    
    
    63,101Income tax (benefit) expense
    
    
    (170,774
    )
    
    
    5,479
    
    
    
    (164,281
    )
    
    
    23,056Net (loss) income
    
    
    (547,430
    )
    
    
    9,380
    
    
    
    (577,011
    )
    
    
    40,045Other comprehensive (loss) income (Note 13)
    
    
    (23
    )
    
    
    747
    
    
    
    1,041
    
    
    
    292Comprehensive (loss) income
    
    $
    (547,453
    )
    
    $
    10,127
    
    
    $
    (575,970
    )
    
    $
    40,337
 The accompanying summarized notes are an integral part of the consolidated financial statements Page 4 of 42




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES 
 Consolidated Statements of Stockholders Equity
 (in thousands except share data)
 CommonStock
    
    Additional
    
    Retained
    
    OtherComprehensive
    

TotalStockholdersShares
    
    Dollars
    
    Paid-in-Capital
    
    Earnings
    
    Income
    
    EquityBalance at December 31, 2003
    
    
    100
    
    
    $
    
    
    
    $
    277,500
    
    
    $
    354
    
    
    $
    302
    
    
    $
    278,156GNC Corporation investment in
General Nutrition Centers, Inc.
    
    
    
    
    
    
    
    
    
    
    1,581
    
    
    
    
    
    
    
    
    
    
    
    1,581Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,045
    
    
    
    
    
    
    
    40,045Foreign currency gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    292
    
    
    
    292Balance at September 30, 2004
(unaudited)
    
    
    100
    
    
    $
    
    
    
    $
    279,081
    
    
    $
    40,399
    
    
    $
    594
    
    
    $
    320,074
 The accompanying summarized notes are an integral part of the consolidated financial statements. Page 5 of 42




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES 
 Consolidated Statements of Cash Flows
 (unaudited)
 (in thousands)
 Predecessor
    
    SuccessorFor the nine months endedSeptember 30,2003
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (577,011
    )
    
    $
    40,045Depreciation expense
    
    
    40,957
    
    
    
    24,976Impairment of intangible assets
    
    
    709,367
    
    
    
    Amortization of intangible assets
    
    
    6,608
    
    
    
    3,011Amortization of deferred financing fees
    
    
    
    
    
    
    2,058Change in stock-based compensation
    
    
    541
    
    
    
    Stock appreciation rights compensation
    
    
    2,414
    
    
    
    Inventory non-cash decrease
    
    
    25,417
    
    
    
    8,470Provision for losses on accounts receivable
    
    
    2,472
    
    
    
    1,942Change in net deferred taxes
    
    
    (193,319
    )
    
    
    21,682Changes in assets and liabilities:Decrease (increase) in receivables, net
    
    
    85,878
    
    
    
    (4,454
    )Increase in inventory, net
    
    
    (10,075
    )
    
    
    (7,651
    )(Increase) decrease in franchise note receivables, net
    
    
    (357
    )
    
    
    8,520(Increase) decrease in other assets
    
    
    (8,667
    )
    
    
    723Decrease in accounts payable
    
    
    (21,355
    )
    
    
    (19,023
    )Increase (decrease) in accrued taxes
    
    
    11,989
    
    
    
    (438
    )Increase in interest payable
    
    
    33,082
    
    
    
    4,674Increase (decrease) in accrued liabilities
    
    
    1,685
    
    
    
    (24,003
    )Net cash provided by operating activities
    
    
    109,626
    
    
    
    60,532CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (23,587
    )
    
    
    (17,865
    )Proceeds from disposal of assets
    
    
    2,615
    
    
    
    168Store acquisition costs
    
    
    (881
    )
    
    
    (522
    )Purchase transaction fees
    
    
    
    
    
    
    (7,710
    )Payments for purchase price adjustments
    
    
    
    
    
    
    (5,899
    )Proceeds from purchase price adjustments
    
    
    
    
    
    
    15,711Net cash used in investing activities
    
    
    (21,853
    )
    
    
    (16,117
    )CASH FLOWS FROM FINANCING ACTIVITIES:GNC Corporation investment in
General Nutrition Centers, Inc.
    
    
    
    
    
    
    1,581Decrease in cash overdrafts
    
    
    (585
    )
    
    
    (3,813
    )Payments on long-term debt  related party
    
    
    (75,000
    )
    
    
    Payments on long-term debt  third parties
    
    
    (658
    )
    
    
    (2,866
    )Deferred financing fees
    
    
    
    
    
    
    (327
    )Net cash used in financing activities
    
    
    (76,243
    )
    
    
    (5,425
    )Effect of exchange rates on cash
    
    
    (335
    )
    
    
    218Net increase in cash
    
    
    11,195
    
    
    
    39,208Beginning balance, cash
    
    
    38,765
    
    
    
    33,176Ending balance, cash
    
    $
    49,960
    
    
    $
    72,384
 The accompanying summarized notes are an integral part of the consolidated financial statements. Page 6 of 42




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Nature of Business.General Nutrition Centers, Inc. (the
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, but also merchandises
various third-party products. Additionally, the Company licenses the use of its
trademarks and trade names. The processing, formulation, packaging, labeling
and advertising of the Companys products are subject to regulation by one or
more federal agencies, including the Food and Drug Administration (FDA),
Federal Trade Commission (FTC), Consumer Product Safety Commission, United
States Department of Agriculture and the Environmental Protection Agency. These
activities are also regulated by various agencies of the states and localities
in which the Companys products are sold. Acquisition of the Company.In August 1999, General Nutrition Companies,
Inc. (GNCI) was acquired by Numico Investment Corp. (NIC), which subsequent
to the Acquisition, was merged into GNCI. NIC was a wholly owned subsidiary
of Numico U.S. L.P., which was merged into Nutricia USA, Inc. (Nutricia) in
2000. Nutricia (now known as Numico USA, Inc.) is a wholly owned subsidiary
of Koninklijke (Royal) Numico N.V. (Numico), a Dutch public company
headquartered in Zoetermeer, Netherlands. The results of GNCI were reported as
part of the consolidated Numico financial statements from August 1999 to
December 4, 2003. On October 16, 2003, the Company entered into a purchase agreement (the
Purchase Agreement) with Numico and Numico USA, Inc. to acquire 100% of the
outstanding equity interest of GNCI from Numico USA Inc., a subsidiary of
Numico (the Acquisition). The purchase equity contribution was made by GNC
Investors, LLC, (GNC LLC) an affiliate of Apollo Management LP (Apollo),
together with additional institutional investors and certain management of the
Company. The equity contribution from GNC LLC was recorded on GNC Corporation
(GNCH), formerly known as General Nutrition Centers Holding Company. GNCH
utilized this equity contribution to purchase the investment in the Company.
The Company is a wholly owned subsidiary of GNCH. The transaction closed on
December 5, 2003 and was accounted for under the purchase method of accounting.
The net purchase price was $733.2 million, which was paid via a combination of
cash, and the proceeds received from the issuance of senior subordinated notes
and borrowings under a senior credit facility, and is summarized herein.
Apollo and certain institutional investors, through GNC LLC and GNCH,
contributed a cash equity investment of $277.5 million to the Company. In
connection with the Acquisition on December 5, 2003, the Company also issued
$215.0 million aggregate principal amount of its 8 1/2% Senior Subordinated
Notes, due 2010, resulting in net proceeds to the Company of $207.1 million.
In addition, the Company obtained a new secured senior credit facility
consisting of a $285.0 million term loan facility and a $75.0 million revolving
credit facility. The Company borrowed the entire $285.0 million under the term
loan facility to fund a portion of the Acquisition price, which netted proceeds
to the Company of $275.8 million. These total proceeds were reduced by certain
debt issuance and other transaction costs. Subject to certain limitations in
accordance with the Purchase Agreement, Numico and Numico USA, Inc. agreed to
indemnify the Company on losses arising from, among other items, breaches of
representations, warranties, covenants and other certain liabilities relating
to the business of GNCI, arising prior to December 5, 2003 as well as any
losses payable in connection with certain litigation including ephedra-related
claims. The Company utilized these proceeds to purchase GNCI with the
remainder of $19.8 million used to fund operating capital. Subsequent to the
Acquisition, in 2004, the Company received a cash payment of $15.7 million from
Numico related to a working capital contingent purchase price adjustment. This
adjustment was recorded as a contingent purchase price receivable as of
December 31, 2003. Also in 2004, the Company remitted a payment to Numico of
$5.9 million related to a tax purchase price adjustment. In conjunction with the Acquisition, fair value adjustments were made to
the Companys financial statements as of December 5, 2003. As a result of the
Acquisition and fair values assigned, the accompanying financial statements as
of December 31, 2003 reflect adjustments made in accordance with Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations. The
following table summarizes the original and adjusted, due to purchase price
adjustments, fair values assigned at December 5, 2003 to the Companys assets
and liabilities in connection with the Acquisition. Page 7 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Fair value Opening Balance Sheet: Original
    
    AdjustedDecember 5, 2003
    
    December 5, 2003(in thousands)Assets:Current assets
    
    $
    438,933
    
    
    $
    434,913Goodwill
    
    
    83,089
    
    
    
    87,787Other intangible assets
    
    
    244,970
    
    
    
    244,970Property, plant and equipment
    
    
    201,287
    
    
    
    201,287Other assets
    
    
    54,426
    
    
    
    54,426Total assets
    
    
    1,022,705
    
    
    
    1,023,383Liabilities:Current liabilities
    
    
    217,033
    
    
    
    217,711Long-term debt
    
    
    513,217
    
    
    
    513,217Other liabilities
    
    
    14,955
    
    
    
    14,955Total liabilities
    
    
    745,205
    
    
    
    745,883GNC Corporation
investment in General Nutrition Centers , Inc
    
    $
    277,500
    
    
    $
    277,500
 NOTE 1. Basis of Presentation and Principles of Consolidation 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 for the year ending
December 31, 2003, which are included in the Companys S-4 filing with the
Securities and Exchange Commission (the SEC). The accompanying unaudited consolidated financial statements include all
adjustments (consisting of a normal and recurring nature) that management
considers necessary for a fair presentation 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, 2004. For the three and nine months ended September 30, 2003, the consolidated
financial statements of our predecessor GNCI, were prepared on a carve-out
basis and reflect the consolidated financial position, results of operations
and cash flows in accordance with accounting principles generally accepted in
the United States of America. The financial statements for this period
reflected amounts that were pushed down from the former parent of GNCI in order
to depict the financial position, results of operations and cash flows of GNCI
based on these carve-out principles. The financial statements as of December 31, 2003, and September 30, 2004
reflect periods subsequent to the Acquisition and include the accounts of the
Company and its wholly owned subsidiaries. Included for the period ending
December 31, 2003 are fair value adjustments to assets and liabilities,
including inventory, goodwill, other intangible assets and property, plant and
equipment. Accordingly, the accompanying financial statements for the periods
prior to the Acquisition are labeled as Predecessor and the periods
subsequent to the Acquisition are labeled as Successor. 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. Page 8 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) 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 subsequent to the audited financial statements at December 31, 2003. 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 September 30, 2004 and nine months
ended September 30, 2004, stock compensation represents shares of GNCH stock
issued pursuant to the General Nutrition Centers Holding Company (presently
known as GNC Corporation) 2003 Omnibus Stock Incentive Plan. The common stock
issued pursuant to this plan is not registered or traded on any exchange.
Stock compensation for the three months ended September 30, 2003 and nine
months ended September 30, 2003 represents shares of Numico stock under the
Numico 1999 Share Option Plan. 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. It does not require, however, that the fair value method be
adopted and reflected in the financial statements. The Company has adopted the
disclosure requirements of SFAS No. 148 Accounting for Stock Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123
by illustrating compensation costs in the following table. On February 11, 2004 the Company issued additional stock options to
certain management and directors. On March 31, 2004, the Company performed a
valuation of their common stock using the same model that was used by Apollo to
acquire GNCI, which resulted in a value under $6.00 per share. On July 23,
2004 the Company issued additional stock options to certain management and
directors. On September 30, 2004, the Company performed a valuation of their
common stock using the same model that was used by Apollo to acquire GNCI,
which resulted in a value under $6.00 per share. Therefore, no compensation
expense was recognized in connection with these issuances. Had compensation costs for stock options been determined using the fair
market value method of SFAS No. 123 and SFAS No. 148, the effect on net loss
for each of the periods presented would have been as follows: Predecessor
    
    Successor
    
    Predecessor
    
    SuccessorThree months ended
    
    Nine months endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004(unaudited)(in thousands)Net (loss) income as reported
    
    $
    (547,430
    )
    
    $
    9,380
    
    
    $
    (577,011
    )
    
    $
    40,045Less: total stock based employee compensation
costs determined using fair value method, net of
related tax effects
    
    
    
    
    
    
    (217
    )
    
    
    (215
    )
    
    
    (647
    )Adjusted net (loss) income
    
    $
    (547,430
    )
    
    $
    9,163
    
    
    $
    (577,226
    )
    
    $
    39,398
 New Accounting Pronouncements. In January 2003, the FASB issued FASB Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities  an interpretation of Accounting
Research Bulletin (ARB) No. 51. This interpretation addresses the
consolidation of variable interest entities (VIEs) and its intent is to
achieve greater consistency and comparability of reporting between business
enterprises. It defines the characteristics of a business enterprise that
qualifies as a primary beneficiary of a variable interest entity. In December
2003, the FASB issued a modification to FIN 46, titled FIN 46R. FIN 46R
delayed the effective date for certain entities and also provided technical
clarifications related to implementation issues. In summary, a primary
beneficiary is a business enterprise that is subject to the majority of the
risk of loss from the VIE, entitled to receive a majority of the VIEs residual
returns, or both. The implementation of FIN No. 46R has been deferred for
non-public entities. For non-public entities, such as the Company, FIN No. 46R
requires immediate application to all VIEs created after December 31, 2003. For
all other VIEs, the Company is required to adopt FIN No. 46R by no later than
the beginning of the first period beginning after December 15, 2004. FIN No.
46R also requires certain disclosures in financial statements regardless of the
date on which the VIE was created if it is reasonably possible that the
business enterprise is required to disclose the activity of the VIE. The
Company adopted FIN No. 46R on January 1, 2004 and determined that it does not
have an impact to its financial statements. Page 9 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) In March, 2004, the Emerging Issues Task Force issued EITF 03-6,
Participating Securities and the Two-Class Method under FASB Statement No.
128. This statement provides additional guidance on the calculation and
disclosure requirements for earnings per share. The FASB concluded in EITF 03-6
that companies with multiple classes of common stock or participating
securities, as defined by SFAS No. 128, calculate and disclose earnings per
share based on the two-class method. The adoption of this statement does not
have an impact to the Companys financial statement presentation. NOTE 2. RECEIVABLES, NET Receivables at each respective period consisted of the following: December 31,
    
    September 30,2003
    
    2004(unaudited)(in thousands)Trade receivables
    
    $
    77,481
    
    
    $
    79,003Related party receivables
    
    
    
    
    
    
    797Contingent purchase price receivable
    
    
    12,711
    
    
    
    Other
    
    
    5,536
    
    
    
    4,157Sales returns and allowance for doubtful accounts
    
    
    (7,744
    )
    
    
    (6,223
    )$
    87,984
    
    
    $
    77,734
 NOTE 3. INVENTORIES, NET Inventories at each respective period consisted of the following: December 31, 2003Net CarryingGross cost
    
    Reserves
    
    Value(in thousands)Finished product ready for sale
    
    $
    235,984
    
    
    $
    (15,319
    )
    
    $
    220,665Unpackaged bulk product and raw materials
    
    
    35,615
    
    
    
    (3,932
    )
    
    
    31,683Packaging supplies
    
    
    3,652
    
    
    
    
    
    
    
    3,652$
    275,251
    
    
    $
    (19,251
    )
    
    $
    256,000
 September 30, 2004Net CarryingGross cost
    
    Reserves
    
    Value(unaudited)(in thousands)Finished product ready for sale
    
    $
    225,713
    
    
    $
    (12,839
    )
    
    $
    212,874Unpackaged bulk product and raw materials
    
    
    43,315
    
    
    
    (3,289
    )
    
    
    40,026Packaging supplies
    
    
    2,646
    
    
    
    
    
    
    
    2,646$
    271,674
    
    
    $
    (16,128
    )
    
    $
    255,546
 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. 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 following tables summarize the
Companys goodwill and intangible asset activity from December 31, 2003 to
September 30, 2004: Page 10 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Goodwill, net Manufacturing/Retail
    
    Franchising
    
    Wholesale
    
    Total(in thousands)Goodwill balance at December 31, 2003
    
    $
    19,086
    
    
    $
    63,563
    
    
    $
    440
    
    
    $
    83,089Adjustments from contingent consideration
    
    
    2,087
    
    
    
    812
    
    
    
    
    
    
    
    2,899Purchase accounting adjustments
    
    
    1,398
    
    
    
    402
    
    
    
    (1
    )
    
    
    1,799Goodwill balance at September 30, 2004 (unaudited)
    
    $
    22,571
    
    
    $
    64,777
    
    
    $
    439
    
    
    $
    87,787
 The adjustments from contingent consideration relate to additional amounts
paid to Numico upon completion of the final federal tax return for GNCI. The
purchase accounting adjustments are a result of re-allocations of net excess
purchase price to assets acquired and liabilities assumed. Other Intangibles, net Retail
    
    Franchise
    
    OperatingGold Card
    
    Brand
    
    Brand
    
    Agreements
    
    Total(in thousands)Balance at December 31, 2003
    
    $
    2,485
    
    
    $
    49,000
    
    
    $
    163,000
    
    
    $
    30,182
    
    
    $
    244,667Amortization expense
    
    
    (803
    )
    
    
    
    
    
    
    
    
    
    
    (2,208
    )
    
    
    (3,011
    )Balance at September 30, 2004 (unaudited)
    
    $
    1,682
    
    
    $
    49,000
    
    
    $
    163,000
    
    
    $
    27,974
    
    
    $
    241,656
 The following table reflects the gross carrying amount and accumulated
amortization for each major intangible asset: December 31, 2003
    
    September 30, 2004Accumulated
    
    
    
    
    
    AccumulatedCost
    
    Amortization
    
    Cost
    
    Amortization(unaudited)(in thousands)Brands  retail
    
    $
    49,000
    
    
    $
    
    
    
    $
    49,000
    
    
    $
    Brands  franchise
    
    
    163,000
    
    
    
    
    
    
    
    163,000
    
    
    
    Gold card  retail
    
    
    2,230
    
    
    
    (61
    )
    
    
    2,230
    
    
    
    (771
    )Gold card  franchise
    
    
    340
    
    
    
    (24
    )
    
    
    340
    
    
    
    (117
    )Retail agreements
    
    
    8,500
    
    
    
    (88
    )
    
    
    8,500
    
    
    
    (972
    )Franchise agreements
    
    
    21,900
    
    
    
    (130
    )
    
    
    21,900
    
    
    
    (1,454
    )$
    244,970
    
    
    $
    (303
    )
    
    $
    244,970
    
    
    $
    (3,314
    )
 The following table represents future estimated amortization expense of other
intangible assets, net with definite lives: EstimatedamortizationYears ending December 31,
    
    expense(in thousands)2004
    
    $
    1,0032005
    
    
    3,8432006
    
    
    3,4572007
    
    
    2,943Thereafter
    
    
    18,410Total
    
    $
    29,656
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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) NOTE 5. OTHER LONG-TERM ASSETS Other assets at each respective period consisted of the following: December 31,
    
    September 30,2003
    
    2004(unaudited)(in thousands)Long-term franchise notes receivables
    
    $
    30,078
    
    
    $
    23,217Long-term deposits
    
    
    9,070
    
    
    
    5,072Other
    
    
    1,287
    
    
    
    702Allowance for doubtful accounts
    
    
    (6,275
    )
    
    
    (6,307
    )$
    34,160
    
    
    $
    22,684
 NOTE 6. OTHER CURRENT LIABILITIES Other current liabilities at each respective period consisted of the
following: December 31,
    
    September 30,2003
    
    2004(unaudited)(in thousands)Deferred revenue
    
    $
    31,077
    
    
    $
    30,790Accrued occupancy
    
    
    4,352
    
    
    
    4,533Accrued acquisition costs
    
    
    7,750
    
    
    
    Accrued store closing costs
    
    
    7,600
    
    
    
    455Accrued worker compensation
    
    
    5,083
    
    
    
    7,640Other current liabilities
    
    
    22,409
    
    
    
    23,679Total
    
    $
    78,271
    
    
    $
    67,097
 As of the date of the Acquisition, the Company had identified 117
underperforming stores that were scheduled to be closed and had established a
store restructuring reserve for these stores. As of September 30, 2004 the
total number of underperforming stores to be closed decreased to 98. Of these,
94 were closed as of September 30, 2004. The Company expects to close the
remainder of the stores during 2004. As of September 30, 2004, the reserves
consisted of $0.5 million in estimated store lease termination costs. Following
is a summary of the store closure activity for the nine months ended September
30, 2004. The store closing costs incurred represent store lease termination
cost payments for the nine months ended September 30, 2004: Accrued storeclosing costs(in thousands)Balance at December 31, 2003
    
    $
    7,600Purchase accounting adjustment
    
    
    (2,893
    )Store closing costs incurred
    
    
    (4,252
    )Balance at September 30, 2004 (unaudited)
    
    $
    455
 NOTE 7. LONG-TERM DEBT / INTEREST In connection with the Acquisition, the Company entered into a new senior
credit facility with a syndicate of lenders. GNCH has guaranteed the Companys
obligations under the senior credit facility. The senior credit facility
consists of a $285.0 million term loan facility and a $75.0 million revolving
credit facility. 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 Page 12 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) 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, the Company is also required to pay
acommitment fee relating to the unused portion of the revolving credit facility
at a rate of 0.5% per annum. The revolving credit facility allows for $50.0
million to be used as collateral for outstanding letters of credit, of which
$8.2 million and $1.0 million was used at September 30, 2004 and December 31,
2003, respectively, leaving $66.8 million and $74.0 million, respectively, of
this facility available for borrowing on such dates. The senior credit
facility is payable quarterly in arrears and at September 30, 2004, carried an
average interest rate of 4.9%. The interest on the revolving credit facility is
payable quarterly in arrears and at September 30, 2004, carried an average
interest rate of 0.8%. The senior credit facility contains customary covenants
including financial tests, (including maximum total leverage, minimum fixed
charge coverage ratio and maximum capital expenditures) and certain other
limitations such as the Companys and its subsidiaries ability to incur
additional debt, guarantee other obligations, grant liens on assets, make
investments, acquisitions or mergers, dispose of assets, make optional payments
or modifications of other debt instruments, and pay dividends or other payments
on capital stock. The senior credit facility also contains covenants requiring
the Company to submit to each agent and lender certain audited financial
reports within 90 days of each fiscal year end and certain unaudited statements
within 45 days after the end of each quarter. The Company is also required to
submit to the Administrative Agent monthly management sales and revenue
reports. The Company believes that for the quarter ended September 30, 2004, it
has complied with its covenant reporting and compliance requirements in all
material respects. In conjunction with the Acquisition, the Company issued $215.0 million of
8 1/2% 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,
beginning with the first payment due on June 1, 2004. Prior to December 1,
2006, the Company may redeem up to 35% of the aggregate principal amount at a
redemption price of 108.50% of the principal amount, plus any accrued and
unpaid interest. The Company may also redeem all or part of the senior
subordinated notes on or after December 1, 2007 according to the following
redemption table, which includes the principal amount plus accrued and unpaid
interest: RedemptionPeriod
    
    Price2007
    
    
    104.250
    %2008
    
    
    102.125
    %2009 and after
    
    
    100.000
    %
 The senior subordinated notes are general unsecured obligations and are
guaranteed on a senior subordinated basis by certain of the Companys domestic
subsidiaries and rank secondary to the Companys senior credit facility. The
senior subordinated notes contain customary covenants including certain
limitations and restrictions on the Company and its subsidiaries to incur
additional indebtedness beyond certain levels, dispose of assets, grant liens
on assets, make investments, acquisitions or mergers, and declare or pay
dividends. The senior subordinated notes also contain covenants requiring the
Company to submit to the Trustee or holders of the notes certain financial
reports that are required to be filed with the Securities and Exchange
Commission, such as Forms 10-K, 10-Q and 8-K. Also, the Company is required to
submit to the Trustee certain Compliance Certificates within 120 days of the
fiscal year end. In accordance with the terms of the 8 1/2 % Senior Subordinated Notes
agreement and the offering memorandum, these notes were required to be
exchanged for publicly registered exchange notes within 250 days after the sale
of these notes. As required, these notes were registered and the exchange
offer was completed on September 16, 2004. Long-term debt at each respective period consisted of the following: December 31,
    
    September 30,2003
    
    2004(unaudited)(in thousands)Mortgage
    
    $
    14,160
    
    
    $
    13,439Capital leases
    
    
    44
    
    
    
    35Senior credit facility
    
    
    285,000
    
    
    
    282,863Related party term loan
    
    
    
    
    
    
    Senior subordinated notes
    
    
    215,000
    
    
    
    215,000Less: current maturities
    
    
    (3,830
    )
    
    
    (3,875
    )Total
    
    $
    510,374
    
    
    $
    507,462
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GENERAL NUTRITION CENTERS
INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Accrued interest at each respective period consisted of the following: December 31,
    
    September 30,2003
    
    2004(unaudited)(in thousands)Accrued senior credit facility interest
    
    $
    429
    
    
    $
    381Accrued subordinated notes interest
    
    
    1,370
    
    
    
    6,092Total
    
    $
    1,799
    
    
    $
    6,473
 Interest expense at each respective period consisted of the following: Predecessor
    
    Successor
    
    Predecessor
    
    SuccessorThree months ended
    
    Nine months endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004(unaudited)
    
    (unaudited)(in thousands)
    
    (in thousands)Composition of interest expense:Interest on mortgage
    
    $
    256
    
    
    $
    236
    
    
    $
    774
    
    
    $
    721Interest on senior credit facility
    
    
    
    
    
    
    3,418
    
    
    
    
    
    
    
    9,760Interest on senior subordinated notes
    
    
    
    
    
    
    4,569
    
    
    
    
    
    
    
    13,655Interest on related party term loan
    
    
    33,082
    
    
    
    
    
    
    
    98,168
    
    
    
    Deferred financing fees
    
    
    
    
    
    
    583
    
    
    
    
    
    
    
    2,129Interest income  other
    
    
    (290
    )
    
    
    (250
    )
    
    
    (1,102
    )
    
    
    (561
    )Interest expense, net
    
    $
    33,048
    
    
    $
    8,556
    
    
    $
    97,840
    
    
    $
    25,704
 NOTE 8. INCOME TAXES Net deferred tax assets and liabilities were $8.5 million and $31.2
million as of September 30, 2004 and December 31, 2003, respectively. Accrued
income taxes were $0.4 million as of December 31, 2003. There were no accrued
income taxes as of September 30, 2004. The effective tax rate for the three
months ended September 30, 2004 was 36.9% and (23.8%) for the three months
ended September 30, 2003. The effective tax rate for the nine months ended
September 30, 2004 was 36.5% and (22.2%) for the nine months ended September
30, 2003. The effective tax rate as of September 30, 2003 primarily resulted
from a valuation allowance on deferred tax assets associated with interest
expense on the related party pushdown debt from Numico. The Company believed
that, as of September 30, 2003, it was unlikely that future taxable income
would be sufficient to realize the tax assets associated with the interest
expense on the related party pushdown debt from Numico. Thus, a valuation
allowance was recorded. According to the Purchase Agreement, Numico has agreed
to indemnify the Company for any subsequent tax liabilities arising from
periods prior to the Acquisition. NOTE 9. 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 are in
compliance with that standard at September 30, 2004. 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. As part of the Purchase Agreement between the Company and Numico, Numico
has agreed to indemnify the Company for certain losses arising from claims
related to products containing ephedra or Kava Kava sold prior to the Company
purchasing GNCI. Page 14 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) NOTE 10. ACCRUED PAYROLL AND RELATED LIABILITIES Accrued payroll and related liabilities at each respective period
consisted of the following: December 31,
    
    September 30,2003
    
    2004(unaudited)(in thousands)Accrued payroll
    
    $
    27,688
    
    
    $
    10,245Accrued taxes & benefits
    
    
    5,589
    
    
    
    4,286Total
    
    $
    33,277
    
    
    $
    14,531
 In conjunction with the Acquisition, certain senior executive officers and
other non-senior executive employees of the Company were granted change in
control and retention payments. As of December 31, 2003, $9.2 million was
accrued by the Company in connection with such change in control and retention
expense, of which $8.5 million was paid in January 2004. The remainder of
these payments accrued ratably over six months beginning December 5, 2003 and
were paid in June 2004. For the nine months ended September 30, 2004, the
Company paid $12.1 million in change in control and retention costs, which
included the associated Company portion of FICA expense of $0.2 million. The
Company was reimbursed for these payments by Numico, in accordance with the
terms of the Purchase Agreement and, accordingly, these amounts were included
in Accounts Receivable at December 31, 2003. These net costs are reflected in
compensation and related benefits in the accompanying financial statements. The following table summarizes the retention and severance activity for the
nine months ended September 30, 2004: Change in Control/Retention
    
    Severance
    
    Total(in thousands)Balance at December 31, 2003
    
    $
    9,236
    
    
    $
    2,198
    
    
    $
    11,434Severance accruals
    
    
    
    
    
    
    481
    
    
    
    481Change in control accrual
    
    
    2,911
    
    
    
    
    
    
    
    2,911Change in control/retention payments
    
    
    (12,147
    )
    
    
    
    
    
    
    (12,147
    )Severance payments
    
    
    
    
    
    
    (1,559
    )
    
    
    (1,559
    )Balance at September 30, 2004(unaudited)
    
    $
    
    
    
    $
    1,120
    
    
    $
    1,120
 NOTE 11. 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 the Summary of Significant Accounting
Policies, which is included in the Companys S-4 filing with the SEC. Page 15 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Predecessor
    
    Successor
    
    Predecessor
    
    SuccessorThree months
    
    Three months
    
    Nine months
    
    Nine monthsEnded
    
    Ended
    
    Ended
    
    EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004(unaudited)
    
    (unaudited)(in thousands)
    
    (in thousands)Revenues:Retail
    
    $
    264,079
    
    
    $
    235,054
    
    
    $
    807,257
    
    
    $
    776,050Franchise
    
    
    68,320
    
    
    
    57,588
    
    
    
    196,432
    
    
    
    180,616Manuf acturing/Wholesale:Intersegment (A)
    
    
    12,923
    
    
    
    37,322
    
    
    
    100,540
    
    
    
    136,600Third Party
    
    
    30,177
    
    
    
    30,499
    
    
    
    82,064
    
    
    
    86,758Sub total Manufacturing/Wholesale
    
    
    43,100
    
    
    
    67,821
    
    
    
    182,604
    
    
    
    223,358Sub total segment revenues
    
    
    375,499
    
    
    
    360,463
    
    
    
    1,186,293
    
    
    
    1,180,024Intersegment elimination (A)
    
    
    (12,923
    )
    
    
    (37,322
    )
    
    
    (100,540
    )
    
    
    (136,600
    )Total revenues
    
    $
    362,576
    
    
    $
    323,141
    
    
    $
    1,085,753
    
    
    $
    1,043,424Operating income:Retail
    
    $
    23,314
    
    
    $
    20,965
    
    
    $
    66,128
    
    
    $
    86,948Franchise
    
    
    16,062
    
    
    
    16,084
    
    
    
    50,854
    
    
    
    49,691Manuf acturing/Wholesale
    
    
    6,711
    
    
    
    10,099
    
    
    
    20,449
    
    
    
    28,152Unallocated corporate and other costs:Warehousing & distribution costs
    
    
    (11,754
    )
    
    
    (12,083
    )
    
    
    (32,663
    )
    
    
    (37,110
    )Corporate costs
    
    
    (14,753
    )
    
    
    (11,650
    )
    
    
    (46,043
    )
    
    
    (38,876
    )Impairment of goodwill and intangible assets
    
    
    (709,367
    )
    
    
    
    
    
    
    (709,367
    )
    
    
    Legal settlement income
    
    
    4,631
    
    
    
    
    
    
    
    7,190
    
    
    
    Sub total unallocated corporate and other costs
    
    
    (731,243
    )
    
    
    (23,733
    )
    
    
    (780,883
    )
    
    
    (75,986
    )Total operating (loss) income
    
    
    (685,156
    )
    
    
    23,415
    
    
    
    (643,452
    )
    
    
    88,805Interest expense, net
    
    
    33,048
    
    
    
    8,556
    
    
    
    97,840
    
    
    
    25,704(Loss) income before income taxes
    
    
    (718,204
    )
    
    
    14,859
    
    
    
    (741,292
    )
    
    
    63,101Income tax (benefit) expense
    
    
    (170,774
    )
    
    
    5,479
    
    
    
    (164,281
    )
    
    
    23,056Net (loss) income
    
    $
    (547,430
    )
    
    $
    9,380
    
    
    $
    (577,011
    )
    
    $
    40,045Depreciation & amortization:Retail
    
    $
    11,824
    
    
    $
    5,728
    
    
    $
    32,704
    
    
    $
    16,577Franchise
    
    
    745
    
    
    
    478
    
    
    
    2,239
    
    
    
    1,434Manufacturing/Wholesale
    
    
    3,440
    
    
    
    2,132
    
    
    
    10,306
    
    
    
    6,711Corporate / Other
    
    
    145
    
    
    
    1,222
    
    
    
    2,316
    
    
    
    3,265Total depreciation & amortization
    
    $
    16,154
    
    
    $
    9,560
    
    
    $
    47,565
    
    
    $
    27,987Capital expenditures:Retail
    
    $
    4,677
    
    
    $
    5,820
    
    
    $
    15,731
    
    
    $
    12,755Franchise
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Manufacturing/Wholesale
    
    
    931
    
    
    
    1,432
    
    
    
    3,105
    
    
    
    3,774Corporate / Other
    
    
    2,703
    
    
    
    448
    
    
    
    4,751
    
    
    
    1,336Total capital expenditures
    
    $
    8,311
    
    
    $
    7,700
    
    
    $
    23,587
    
    
    $
    17,865Geographic areasTotal revenues:United States
    
    $
    348,883
    
    
    $
    308,414
    
    
    $
    1,047,031
    
    
    $
    996,861Foreign
    
    
    13,693
    
    
    
    14,727
    
    
    
    38,722
    
    
    
    46,563Total revenues
    
    $
    362,576
    
    
    $
    323,141
    
    
    $
    1,085,753
    
    
    $
    1,043,424
 (A) Intersegment revenues are eliminated from consolidated revenue. Page 16 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) NOTE 12. SUPPLEMENTAL UNAUDITED PRO FORMA INFORMATION The following unaudited pro forma information for the three and nine
months ended September 30, 2003 assumes that the acquisition of the Company had
occurred as of January 1, 2003. The Pro Forma adjustments relate to
depreciation, amortization, interest, and management, transaction, and
directors fees. The tax effects of the pro forma adjustments have been
reflected at the Companys blended federal and state income tax rate of 36.5%. The pro forma results are not necessarily indicative of the results that
would have occurred had the Acquisition occurred at such date, and are not
intended to provide a forecast of future expected results. As reported
    
    Pro Forma
    
    As reported
    
    Pro FormaFor the three
    
    For the three
    
    For the nine
    
    For the ninemonths ended
    
    months ended
    
    months ended
    
    months endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2003
    
    2003
    
    2003
    
    2003(unaudited)
    
    (unaudited)(in thousands)
    
    (in thousands)Revenue
    
    $
    362,576
    
    
    $
    362,576
    
    
    $
    1,085,753
    
    
    $
    1,085,753Net income (loss)
    
    $
    (547,430
    )
    
    $
    (526,285
    )
    
    $
    (577,011
    )
    
    $
    (513,510
    )
 NOTE 13. OTHER COMPREHENSIVE INCOME The accumulated balances of other comprehensive income and their related
tax effects included as part of the consolidated financial statements are as
follows: Net OtherBefore tax amount
    
    Comprehensive IncomeForeign
    
    Foreigncurrency
    
    currencytranslation
    
    translation
    
    Total(in thousands)Balance at December 31, 2003
    
    $
    302
    
    
    $
    302
    
    
    $
    302Foreign currency translation adjustment
    
    
    292
    
    
    
    292
    
    
    
    292Balance at September 30, 2004 (unaudited)
    
    $
    594
    
    
    $
    594
    
    
    $
    594
 NOTE 14. SUPPLEMENTAL GUARANTOR INFORMATION As of September 30, 2004, the Companys debt includes the senior credit
facility and the 8 1/2% senior subordinated notes. The senior credit
facility has been guaranteed by the Companys parent, GNCH, and the Companys
domestic subsidiaries. The senior subordinated notes are general unsecured
obligations and are guaranteed on a senior subordinated basis by certain of the
Companys domestic subsidiaries and rank secondary to the Company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 100% owned by the Company, the
guarantees are full and unconditional, and are joint and several. Following are condensed consolidated financial statements of the Company
and the combined guarantor and non-guarantor subsidiaries for the three months
ended September 30, 2004 and the nine months ended September 30, 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. Also following are
condensed consolidated financial statements for GNCI for the three months and
nine months ended September 30, 2003. Intercompany balances and transactions
have been eliminated. For the three months and nine months ended September 30, 2004 and the year
ended December 31, 2003, the Parent/Issuer company is the Company, (Successor).
For the three months and nine months ended September 30, 2003, the Parent
company is GNCI (Predecessor). Page 17 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Supplemental Condensed Consolidating Balance Sheets Combined
    
    CombinedParent/
    
    Guarantor
    
    Non-GuarantorSeptember 30, 2004
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(unaudited)(in thousands)Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    69,844
    
    
    $
    2,540
    
    
    $
    
    
    
    $
    72,384Receivable, net
    
    
    796
    
    
    
    75,645
    
    
    
    1,293
    
    
    
    
    
    
    
    77,734Intercompany receivables
    
    
    22,704
    
    
    
    17,801
    
    
    
    
    
    
    
    (40,505
    )
    
    
    Inventories,
net
    
    
    
    
    
    
    241,738
    
    
    
    13,808
    
    
    
    
    
    
    
    255,546Other current assets
    
    
    205
    
    
    
    26,214
    
    
    
    3,627
    
    
    
    
    
    
    
    30,046Total current assets
    
    
    23,705
    
    
    
    431,242
    
    
    
    21,268
    
    
    
    (40,505
    )
    
    
    435,710Property, plant and equipment, net
    
    
    
    
    
    
    167,590
    
    
    
    26,703
    
    
    
    
    
    
    
    194,293Investment in subsidiaries
    
    
    781,960
    
    
    
    5,906
    
    
    
    
    
    
    
    (787,866
    )
    
    
    Goodwill,
net
    
    
    
    
    
    
    86,872
    
    
    
    915
    
    
    
    
    
    
    
    87,787Brands,
net
    
    
    
    
    
    
    209,000
    
    
    
    3,000
    
    
    
    
    
    
    
    212,000Other assets
    
    
    18,642
    
    
    
    69,057
    
    
    
    353
    
    
    
    (8,780
    )
    
    
    79,272Total assets
    
    $
    824,307
    
    
    $
    969,667
    
    
    $
    52,239
    
    
    $
    (837,151
    )
    
    $
    1,009,062Current liabilitiesCurrent liabilities
    
    $
    9,220
    
    
    $
    155,507
    
    
    $
    7,302
    
    
    $
    
    
    
    $
    172,029Intercompany payable
    
    
    
    
    
    
    22,703
    
    
    
    17,802
    
    
    
    (40,505
    )
    
    
    Total current liabilities
    
    
    9,220
    
    
    
    178,210
    
    
    
    25,104
    
    
    
    (40,505
    )
    
    
    172,029Long-term debt
    
    
    495,013
    
    
    
    
    
    
    
    21,229
    
    
    
    (8,780
    )
    
    
    507,462Other long-term liabilities
    
    
    
    
    
    
    9,497
    
    
    
    
    
    
    
    
    
    
    
    9,497Total liabilities
    
    
    504,233
    
    
    
    187,707
    
    
    
    46,333
    
    
    
    (49,285
    )
    
    
    688,988Total stockholders equity (deficit)
    
    
    320,074
    
    
    
    781,960
    
    
    
    5,906
    
    
    
    (787,866
    )
    
    
    320,074Total liabilities and stockholders equity
    
    $
    824,307
    
    
    $
    969,667
    
    
    $
    52,239
    
    
    $
    (837,151
    )
    
    $
    1,009,062
 Page 18 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Supplemental Condensed Consolidating Balance Sheets Combined
    
    CombinedParent/
    
    Guarantor
    
    Non-GuarantorDecember 31, 2003
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(in thousands)Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    30,642
    
    
    $
    2,534
    
    
    $
    
    
    
    $
    33,176Receivable, net
    
    
    12,711
    
    
    
    74,066
    
    
    
    1,207
    
    
    
    
    
    
    
    87,984Intercompany receivables
    
    
    18,750
    
    
    
    3,848
    
    
    
    
    
    
    
    (22,598
    )
    
    
    Inventories, net
    
    
    
    
    
    
    242,367
    
    
    
    13,633
    
    
    
    
    
    
    
    256,000Other current assets
    
    
    
    
    
    
    40,544
    
    
    
    2,882
    
    
    
    
    
    
    
    43,426Total current assets
    
    
    31,461
    
    
    
    391,467
    
    
    
    20,256
    
    
    
    (22,598
    )
    
    
    420,586Property, plant and equipment, net
    
    
    
    
    
    
    173,483
    
    
    
    27,797
    
    
    
    
    
    
    
    201,280Investment in subsidiaries
    
    
    736,448
    
    
    
    2,099
    
    
    
    
    
    
    
    (738,547
    )
    
    
    Goodwill, net
    
    
    
    
    
    
    82,112
    
    
    
    977
    
    
    
    
    
    
    
    83,089Brands, net
    
    
    
    
    
    
    209,000
    
    
    
    3,000
    
    
    
    
    
    
    
    212,000Other assets
    
    
    19,796
    
    
    
    90,563
    
    
    
    333
    
    
    
    (8,780
    )
    
    
    101,912Total assets
    
    $
    787,705
    
    
    $
    948,724
    
    
    $
    52,363
    
    
    $
    (769,925
    )
    
    $
    1,018,867Current liabilitiesCurrent liabilities
    
    $
    12,399
    
    
    $
    202,480
    
    
    $
    5,662
    
    
    $
    
    
    
    $
    220,541Intercompany payable
    
    
    
    
    
    
    
    
    
    
    22,598
    
    
    
    (22,598
    )
    
    
    Total current liabilities
    
    
    12,399
    
    
    
    202,480
    
    
    
    28,260
    
    
    
    (22,598
    )
    
    
    220,541Long-term debt
    
    
    497,150
    
    
    
    
    
    
    
    22,004
    
    
    
    (8,780
    )
    
    
    510,374Other long-term liabilities
    
    
    
    
    
    
    9,796
    
    
    
    
    
    
    
    
    
    
    
    9,796Total liabilities
    
    
    509,549
    
    
    
    212,276
    
    
    
    50,264
    
    
    
    (31,378
    )
    
    
    740,711Total stockholders equity (deficit)
    
    
    278,156
    
    
    
    736,448
    
    
    
    2,099
    
    
    
    (738,547
    )
    
    
    278,156Total liabilities and stockholders
equity (deficit)
    
    $
    787,705
    
    
    $
    948,724
    
    
    $
    52,363
    
    
    $
    (769,925
    )
    
    $
    1,018,867
 Page 19 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Supplemental Condensed Consolidating Balance Sheets Combined
    
    CombinedSuccessor
    
    Parent/
    
    Guarantor
    
    Non-GuarantorThree months ended September 30, 2004
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    308,195
    
    
    $
    17,327
    
    
    $
    (2,381
    )
    
    $
    323,141Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    206,855
    
    
    
    12,344
    
    
    
    (2,381
    )
    
    
    216,818Gross profit
    
    
    
    
    
    
    101,340
    
    
    
    4,983
    
    
    
    
    
    
    
    106,323Compensation and related benefits
    
    
    
    
    
    
    51,157
    
    
    
    2,877
    
    
    
    
    
    
    
    54,034Advertising and promotion
    
    
    
    
    
    
    9,972
    
    
    
    70
    
    
    
    
    
    
    
    10,042Other selling, general and administrative
    
    
    438
    
    
    
    18,032
    
    
    
    662
    
    
    
    
    
    
    
    19,132Subsidiary (income) expense
    
    
    (9,657
    )
    
    
    (1,190
    )
    
    
    
    
    
    
    10,847
    
    
    
    Other income
    
    
    
    
    
    
    (58
    )
    
    
    (242
    )
    
    
    
    
    
    
    (300
    )Operating income (loss)
    
    
    9,219
    
    
    
    23,427
    
    
    
    1,616
    
    
    
    (10,847
    )
    
    
    23,415Interest expense, net
    
    
    
    
    
    
    8,159
    
    
    
    397
    
    
    
    
    
    
    
    8,556Income (loss) before income taxes
    
    
    9,219
    
    
    
    15,268
    
    
    
    1,219
    
    
    
    (10,847
    )
    
    
    14,859Income tax (benefit) expense
    
    
    (161
    )
    
    
    5,611
    
    
    
    29
    
    
    
    
    
    
    
    5,479Net income (loss)
    
    $
    9,380
    
    
    $
    9,657
    
    
    $
    1,190
    
    
    $
    (10,847
    )
    
    $
    9,380
 Supplemental Condensed Consolidating Statements of Operations Combined
    
    CombinedSuccessor
    
    Parent/
    
    Guarantor
    
    Non-GuarantorNine months ended September 30, 2004
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    995,711
    
    
    $
    54,935
    
    
    $
    (7,222
    )
    
    $
    1,043,424Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    658,266
    
    
    
    39,497
    
    
    
    (7,222
    )
    
    
    690,541Gross profit
    
    
    
    
    
    
    337,445
    
    
    
    15,438
    
    
    
    
    
    
    
    352,883Compensation and related benefits
    
    
    
    
    
    
    164,075
    
    
    
    8,884
    
    
    
    
    
    
    
    172,959Advertising and promotion
    
    
    
    
    
    
    35,030
    
    
    
    222
    
    
    
    
    
    
    
    35,252Other selling, general and administrative
    
    
    1,297
    
    
    
    52,990
    
    
    
    1,462
    
    
    
    
    
    
    
    55,749Subsidiary (income) expense
    
    
    (40,868
    )
    
    
    (3,514
    )
    
    
    
    
    
    
    44,382
    
    
    
    Other expense
    
    
    
    
    
    
    7
    
    
    
    111
    
    
    
    
    
    
    
    118Operating income (loss)
    
    
    39,571
    
    
    
    88,857
    
    
    
    4,759
    
    
    
    (44,382
    )
    
    
    88,805Interest expense, net
    
    
    
    
    
    
    24,517
    
    
    
    1,187
    
    
    
    
    
    
    
    25,704Income (loss) before income taxes
    
    
    39,571
    
    
    
    64,340
    
    
    
    3,572
    
    
    
    (44,382
    )
    
    
    63,101Income tax (benefit) expense
    
    
    (474
    )
    
    
    23,472
    
    
    
    58
    
    
    
    
    
    
    
    23,056Net income (loss)
    
    $
    40,045
    
    
    $
    40,868
    
    
    $
    3,514
    
    
    $
    (44,382
    )
    
    $
    40,045
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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Supplemental Condensed Consolidating Balance Sheets Combined
    
    CombinedPredecessor
    
    
    
    Guarantor
    
    Non-GuarantorThree months ended September 30, 2003
    
    Parent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    347,962
    
    
    $
    16,502
    
    
    $
    (1,888
    )
    
    $
    362,576Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    243,838
    
    
    
    12,429
    
    
    
    (1,888
    )
    
    
    254,379Gross profit
    
    
    
    
    
    
    104,124
    
    
    
    4,073
    
    
    
    
    
    
    
    108,197Compensation and related benefits
    
    
    
    
    
    
    59,672
    
    
    
    2,677
    
    
    
    
    
    
    
    62,349Advertising and promotion
    
    
    
    
    
    
    9,070
    
    
    
    45
    
    
    
    
    
    
    
    9,115Other selling, general and administrative
    
    
    
    
    
    
    17,394
    
    
    
    14
    
    
    
    
    
    
    
    17,408Other expense (income)
    
    
    
    
    
    
    (4,559
    )
    
    
    (327
    )
    
    
    
    
    
    
    (4,886
    )Impairment of intangible assets
    
    
    
    
    
    
    692,314
    
    
    
    17,053
    
    
    
    
    
    
    
    709,367Subsidiary loss (income)
    
    
    547,430
    
    
    
    15,958
    
    
    
    
    
    
    
    (563,388
    )
    
    
    Operating (loss) income
    
    
    (547,430
    )
    
    
    (685,725
    )
    
    
    (15,389
    )
    
    
    563,388
    
    
    
    (685,156
    )Interest expense, net
    
    
    
    
    
    
    32,479
    
    
    
    569
    
    
    
    
    
    
    
    33,048(Loss) income before income taxes
    
    
    (547,430
    )
    
    
    (718,204
    )
    
    
    (15,958
    )
    
    
    563,388
    
    
    
    (718,204
    )Income tax benefit
    
    
    
    
    
    
    (170,774
    )
    
    
    
    
    
    
    
    
    
    
    (170,774
    )Net (loss) income
    
    $
    (547,430
    )
    
    $
    (547,430
    )
    
    $
    (15,958
    )
    
    $
    563,388
    
    
    $
    (547,430
    )
 Combined
    
    CombinedPredecessor
    
    
    
    Guarantor
    
    Non-GuarantorNine months ended September 30, 2003
    
    Parent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    1,045,235
    
    
    $
    47,262
    
    
    $
    (6,744
    )
    
    $
    1,085,753Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    728,976
    
    
    
    35,909
    
    
    
    (6,744
    )
    
    
    758,141Gross profit
    
    
    
    
    
    
    316,259
    
    
    
    11,353
    
    
    
    
    
    
    
    327,612Compensation and related benefits
    
    
    
    
    
    
    174,068
    
    
    
    7,933
    
    
    
    
    
    
    
    182,001Advertising and promotion
    
    
    
    
    
    
    30,840
    
    
    
    118
    
    
    
    
    
    
    
    30,958Other selling, general and administrative
    
    
    
    
    
    
    58,279
    
    
    
    126
    
    
    
    
    
    
    
    58,405Other expense (income)
    
    
    
    
    
    
    (5,743
    )
    
    
    (3,924
    )
    
    
    
    
    
    
    (9,667
    )Impairment of intangible assets
    
    
    
    
    
    
    692,314
    
    
    
    17,053
    
    
    
    
    
    
    
    709,367Subsidiary loss (income)
    
    
    577,011
    
    
    
    11,769
    
    
    
    
    
    
    
    (588,780
    )
    
    
    Operating (loss) income
    
    
    (577,011
    )
    
    
    (645,268
    )
    
    
    (9,953
    )
    
    
    588,780
    
    
    
    (643,452
    )Interest expense, net
    
    
    
    
    
    
    96,024
    
    
    
    1,816
    
    
    
    
    
    
    
    97,840(Loss) income before income taxes
    
    
    (577,011
    )
    
    
    (741,292
    )
    
    
    (11,769
    )
    
    
    588,780
    
    
    
    (741,292
    )Income tax benefit
    
    
    
    
    
    
    (164,281
    )
    
    
    
    
    
    
    
    
    
    
    (164,281
    )Net (loss) income
    
    $
    (577,011
    )
    
    $
    (577,011
    )
    
    $
    (11,769
    )
    
    $
    588,780
    
    
    $
    (577,011
    )
 Page 21 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Supplemental Condensed Consolidating Balance Sheets Combined
    
    CombinedSuccessor
    
    Parent/
    
    Guarantor
    
    Non-GuarantorNine months ended September 30, 2004
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Consolidated(unaudited)(in thousands)Net cash (used in) provided by operating activities
    
    $
    (3,356
    )
    
    $
    62,765
    
    
    $
    1,123
    
    
    $
    60,532CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    
    
    
    
    (17,259
    )
    
    
    (606
    )
    
    
    (17,865
    )Purchase transaction fees
    
    
    (7,710
    )
    
    
    
    
    
    
    
    
    
    
    (7,710
    )Payments for purchase price adjustments
    
    
    (5,899
    )
    
    
    
    
    
    
    
    
    
    
    (5,899
    )Proceeds from purchase price adjustments
    
    
    15,711
    
    
    
    
    
    
    
    
    
    
    
    15,711Investment/distribution
    
    
    2,137
    
    
    
    (2,137
    )
    
    
    
    
    
    
    Other investing
    
    
    
    
    
    
    (354
    )
    
    
    
    
    
    
    (354
    )Net cash provided by (used in) investing activities
    
    
    4,239
    
    
    
    (19,750
    )
    
    
    (606
    )
    
    
    (16,117
    )CASH FLOWS FROM FINANCING ACTIVITIES:GNC Corporation investment
in General Nutrition Centers, Inc
    
    
    1,581
    
    
    
    
    
    
    
    
    
    
    
    1,581Other financing
    
    
    (2,464
    )
    
    
    (3,813
    )
    
    
    (729
    )
    
    
    (7,006
    )Net cash used in financing activities
    
    
    (883
    )
    
    
    (3,813
    )
    
    
    (729
    )
    
    
    (5,425
    )Effect of exchange rate on cash
    
    
    
    
    
    
    
    
    
    
    218
    
    
    
    218Net increase in cash and cash equivalents
    
    
    
    
    
    
    39,202
    
    
    
    6
    
    
    
    39,208Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    30,642
    
    
    
    2,534
    
    
    
    33,176Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    69,844
    
    
    $
    2,540
    
    
    $
    72,384
 Page 22 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Supplemental Condensed Consolidating Balance Sheets CombinedPredecessor
    
    
    
    Guarantor
    
    Non-GuarantorNine months ended September 30, 2003
    
    Parent
    
    Subsidiaries
    
    Subsidiaries
    
    Consolidated(unaudited)(in thousands)Net cash from operating
    
    $
    
    
    
    $
    97,720
    
    
    $
    11,906
    
    
    $
    109,626CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    
    
    
    
    (22,689
    )
    
    
    (898
    )
    
    
    (23,587
    )Investment/distribution
    
    
    75,000
    
    
    
    (75,000
    )
    
    
    
    
    
    
    Other investing
    
    
    
    
    
    
    1,729
    
    
    
    5
    
    
    
    1,734Net cash used in investing activities
    
    
    75,000
    
    
    
    (95,960
    )
    
    
    (893
    )
    
    
    (21,853
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payments on long-term debt  related party
    
    
    (75,000
    )
    
    
    
    
    
    
    
    
    
    
    (75,000
    )Other financing
    
    
    
    
    
    
    (585
    )
    
    
    (658
    )
    
    
    (1,243
    )Net cash used in financing activities
    
    
    (75,000
    )
    
    
    (585
    )
    
    
    (658
    )
    
    
    (76,243
    )Effect of exchange rate on cash
    
    
    
    
    
    
    
    
    
    
    (335
    )
    
    
    (335
    )Net increase in cash and cash equivalents
    
    
    
    
    
    
    1,175
    
    
    
    10,020
    
    
    
    11,195Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    27,327
    
    
    
    11,438
    
    
    
    38,765Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    28,502
    
    
    $
    21,458
    
    
    $
    49,960
 NOTE 15. RELATED PARTY TRANSACTIONS Successor During the normal course of operations, for the nine months ended
September 30, 2004 the Company entered into transactions with entities that
were under common ownership and control with GNCH and Apollo. In accordance
with SFAS No. 57, Related Party Disclosures, the nature of these transactions
is described in the following footnotes. Management Service Fees.As of December 5, 2003 the Company entered into
a management services agreement with Apollo. The agreement provides that
Apollo furnish certain investment banking, management, consulting, financial
planning, and financial advisory services on an ongoing basis and for any
significant financial transactions that may be undertaken in the future. The
length of the agreement is ten years. There is an annual general services fee
of $1.5 million which is payable in monthly installments. As of September 30,
2004 payments of $1.1 million were made to Apollo. There are also major
transaction services fees for services that Apollo may provide which would be
based on customary fees of like kind. The Purchase Agreement also contained a
structuring and transaction services fee related to the Acquisition. This fee
amounted to $7.5 million, was accrued for at December 31, 2003, and
subsequently paid in January, 2004. Cost of Sales.At February 4, 2004, the Company, through its
manufacturing subsidiary, entered into an agreement with Nalco, an Apollo-owned
company, for water treatment programs at its South Carolina manufacturing
facility. The agreement allows for water treatment to occur at the facility
for a one year period, at a total cost of twelve thousand dollars to be billed
in equal monthly installments beginning in February, 2004. Predecessor: During the normal course of operations, for the nine months ended
September 30, 2003, GNCI entered into transactions with entities that were
under common ownership and control of Numico. In accordance with SFAS No. 57,
Related Party Disclosures, the nature of these material transactions is
described below. During 2003, Rexall and Unicity ceased to be related parties
as their operations were sold by Numico. Transactions recorded with these
companies prior to their sale dates are included in related party transactions. Sales.GNCI recorded net sales of $19.4 million to Numico affiliated
companies for the nine months ended September 30, 2003. These amounts were
included in the Manufacturing/Wholesale segment of the business. Page 23 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Cost of Sales.Included in cost of sales were purchases from Numico
affiliated companies of $120.3 million for the nine months ended September 30,
2003. A significant portion of these purchases related to raw material and
packaging material purchases from Nutraco S.A., a purchasing subsidiary of
Numico. Included in the above totals were additional purchases from another
related party in the amount of $28.8 million for the nine months ended
September 30, 2003. Transportation Revenue.GNCI operated a fleet of distribution vehicles
that serviced delivery of product to company-owned and franchise locations.
GNCI also delivered product for a related party. GNCI recorded amounts
associated with these transportation services for the nine months ended
September 30, 2003, of $1.4 million. Research and Development.In accordance with the previous Research
Activities Agreement with Numico, also included in selling, general and
administrative expenses for the nine months ended September 30, 2003, were
costs related to research and development charged by Numico. The agreement
provided that Numico conduct research and development activities including but
not limited to: ongoing program of scientific and medical research, support
and advice on strategic research objectives, design and develop new products,
organize and manage clinical trials, updates on the latest technological and
scientific developments, and updates on regulatory issues. These charges
totaled $4.2 million for the nine months ended September 30, 2003. Insurance.In order to reduce costs and mitigate duplicate insurance
coverage, GNCIs ultimate parent, Numico, purchased certain global insurance
policies covering several types of insurance. GNCI received charges for their
portion of these costs. These charges totaled $2.4 million for the nine months
ended September 30, 2003. Shared Service Personnel Costs.GNCI provided certain risk management, tax
and internal audit services to other affiliates of Numico. The payroll and
benefit costs associated with these services were reflected on GNCIs financial
statements and were not allocated to any affiliates. Total costs related to
shared services absorbed by GNCI was $0.9 million for the nine months ended
September 30, 2003. GNCI also incurred costs related to management services
provided for the benefit of all U.S. affiliates. These costs totaled $1.1
million for the nine months ended September 30, 2003. GNCI received certain
management services related to the affiliation between GNCI and its U.S.
parent, Nutricia and its ultimate parent, Numico. These services were not
significant to GNCIs operations for the nine months ended September 30, 2003. NOTE 16. 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 September 30, 2004 the number of stock
options outstanding at fair value is 2.6 million. No stock appreciation rights,
restricted stock, deferred stock or performance shares were granted under the
Plan as of September 30, 2004. The weighted average fair value of options
granted under the Plan is $2.40 per share. The following table outlines the total stock options granted: WeightedAverageTotal
    
    ExerciseOptions
    
    PriceOutstanding at December 31, 2002
    
    
    
    
    
    $
    Granted effective December 5, 2003
    
    
    2,604,974
    
    
    
    6.00Outstanding at December 31, 2003
    
    
    2,604,974
    
    
    
    6.00Granted July 23, 2004
    
    
    62,020
    
    
    
    6.00Forfeited 2004
    
    
    (35,440
    )Outstanding at September 30, 2004
    
    
    2,631,554
    
    
    $
    6.00
 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. Refer to the
Summary of Significant Accounting Policies for this disclosure. There were
325,000 options vested under the Plan at September 30, 2004. Page 24 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED) Fair value information for the Plan was estimated using the Black-Scholes
option-pricing model based on the following assumptions for the options granted
in 2003: 2003
    
    
    2004Dividend yield
    
    
    0.00%
    
    
    
    
    
    
    
    0.00
    %Expected option life
    
    5 years
    
    
    
    
    
    5 yearsVolatility factor percentage of market price
    
    
    40.00%
    
    
    
    
    
    
    
    40.00
    %Discount rate
    
    
    3.27
    %
    
    
    
    
    
    
    3.38
    %
 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. Page 25 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES 
 Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations Overview The following Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) is intended to help the reader understand
General Nutrition Centers, Inc. (Centers). MD&A is provided as a supplement
to, and should be read in conjunction with, our financial statements and the
accompanying notes. The discussion in this section contains forward-looking statements that
involve risks and uncertainties. You should review the Risk Factors included
in our registration statement on Form S-4, filed with the Securities and
Exchange Commission (the SEC) 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. On December 5, 2003, we acquired 100% of the outstanding equity interests
of General Nutrition Companies, Inc. (GNCI) from Numico USA, Inc. (together
with its parent company, Koninklijke (Royal) Numico N.V., Numico), for an
aggregate purchase price of $747.4 million, consisting of $733.2 million in
cash payable and the assumption of $14.2 million of mortgage indebtedness.
Subsequent to the Acquisition in 2004, the Company received a cash payment of
$15.7 million from Numico related to a working capital contingent purchase
price adjustment. This adjustment was recorded as a contingent purchase price
receivable as of December 31, 2003. Also in 2004, the Company remitted a
payment to Numico of $5.9 million related to a tax purchase price adjustment.
Simultaneously with the closing of the Acquisition, we entered into a new
senior credit facility with a syndicate of lenders, consisting of a $285.0
million term loan facility and a $75.0 million revolving credit facility. We
borrowed the full amount of the term loan facility to fund a portion of the
Acquisition purchase price, but made no borrowings under the revolving credit
facility. Our obligations under the senior credit facility have been
guaranteed by our parent. We also issued $215.0 million of 8 1/2 % senior
subordinated notes to fund a portion of the Acquisition purchase price. In
addition, GNC Investors, LLC (our Equity Sponsor), certain of our directors,
members of our management and other employees made an equity contribution of
$277.5 million in exchange for 29,566,666 shares of our parents common stock
and, in the case of our Equity Sponsor, 100,000 shares of our parents 12%
Series A Exchangeable Preferred Stock, (Series A Preferred). Our parent
contributed the full amount of the equity contribution to us to fund a portion
of the Acquisition. Our Equity Sponsor subsequently resold all of our parents
Series A Preferred to other institutional investors. Business 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 approximately
5,700 locations operating under the GNC brand name. Revenues from Business Segments Revenues are derived from our three business segments, Retail, Franchise,
and Manufacturing/Wholesale, primarily as follows:  
    
    Retail revenues are generated by sales to consumers at our company-owned stores.
    
    Franchise revenues are generated primarily from:  (1)
    
    Product sales to our franchisees;(2)
    
    Royalties on franchise retail sales; and(3)
    
    Franchise fees, which are charged for initial franchise
awards, renewals and transfers of franchises.  
    
    Manufacturing/Wholesale revenues are generated through sales of
manufactured products to third parties, generally for third-party
private label brands, and the sale of our proprietary third-party
products to Rite Aid and drugstore.com. Trends and Other Factors Affecting our Business Our performance is affected by trends that affect the nutritional
supplement 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,
which we may not foresee, may also impact our business. Our business allows us
to respond to changing customer preferences and drive revenues by emphasizing
new product development, introducing targeted third-party products, and
adjusting our product mix. Some of the trends that have impacted our business
include the following: Page 26 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES  
    
    Historically, our primary product sales have been in the sports
nutrition and VMHS categories. Sales of sports nutrition products have
been driven largely by the increasing focus on fitness and the
introduction of new products. Sales of VMHS products have been driven
largely by the aging population and rising healthcare costs. Within
this category, herbal supplement sales tend to be more significantly
impacted by publicity and changes in consumer trends.
    
    Sales of diet products are generally more sensitive to consumer
trends, resulting in higher volatility than our other products. In
1999, our diet category began to grow more rapidly with the introduction
of ephedra products, which reached a high point in 2001 and began to
decline in the second half of 2002. Although we instructed our
locations to cease sales of ephedra beginning in early 2003, our
introduction of low carbohydrate and other ephedra substitute products
in 2003 partially offset these declines in the first half of 2003, and
resulted in increased sales in the diet product category in the second
half of 2003. However, for the first nine months of 2004, we
experienced a sharp decline in sales in our diet category, we believe in
large part because the availability of low carbohydrate products has
expanded in the marketplace. Even though we have launched new diet
products in 2004, we expect sales in the diet category will remain below
our prior year levels throughout 2004 and into the first quarter of
2005.
    
    When diets featuring products low in carbohydrates (low carb)
became popular in the first quarter of 2003, we purchased most of the
available inventory of specialty low carb products, primarily snacks and
bars, and became a destination for many new customers. As the
popularity of low carb diet programs increased, manufacturers increased
their production levels and product offerings and food manufacturers
followed the low carb dieting trend by offering low carb diet products,
including staple foods such as pastas, ketchup and sauces. These
products became widely distributed into the food, drug and mass channels
of distribution, which led to lower levels of sales of low carb
specialty products in our stores starting in the latter half of the
first quarter of 2004. Additionally, programs based on a low carb
dietary approach typically do not require diet supplements as a
component of the program. As a larger percentage of the dieting
population pursued a low carb program, sales of our diet supplements
declined. Critical Accounting Policies You should review the significant accounting policies that are described
in the notes to our consolidated financial statements under the heading
Summary of Significant Accounting Policies included in our registration
statement on Form S-4, filed with the SEC. On a regular basis, management
reviews its policies and any estimates. Utilizing currently available
information, changes in facts and circumstances, historical experience and
reasonable assumptions, those estimates are adjusted accordingly, if deemed
appropriate. There have been no material changes in our accounting policies or
use of estimates and assumptions. The accompanying unaudited consolidated
financial statements and results of operations should be read in conjunction
with our audited consolidated financial statements for the period ended
December 31, 2003, which are included in our S-4 filing with the SEC. Results of Operations The information presented below for the three and nine months ended
September 30, 2004 and 2003 was prepared by management and is unaudited. In
the opinion of management, all adjustments necessary for a fair presentation of
our financial position and operating results for such periods and as of such
dates have been included. Page 27 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES (Dollars in millions and percentages expressed as a percentage of net revenues) Predecessor
    
    Successor
    
    Predecessor
    
    SuccessorThree Months Ended September 30,
    
    Nine Months Ended September 30,2003
    
    2004
    
    2003
    
    2004Revenues:Retail
    
    $
    264.1
    
    
    
    72.9
    %
    
    $
    235.0
    
    
    
    72.8
    %
    
    $
    807.3
    
    
    
    74.3
    %
    
    $
    776.0
    
    
    
    74.4
    %Franchise
    
    
    68.3
    
    
    
    18.8
    %
    
    
    57.6
    
    
    
    17.8
    %
    
    
    196.4
    
    
    
    18.1
    %
    
    
    180.6
    
    
    
    17.3
    %Manufacturing / Wholesale
    
    
    30.2
    
    
    
    8.3
    %
    
    
    30.5
    
    
    
    9.4
    %
    
    
    82.1
    
    
    
    7.6
    %
    
    
    86.8
    
    
    
    8.3
    %Total net revenues
    
    
    362.6
    
    
    
    100.0
    %
    
    
    323.1
    
    
    
    100.0
    %
    
    
    1,085.8
    
    
    
    100.0
    %
    
    
    1,043.4
    
    
    
    100.0
    %Operating expenses:Cost of sales, including costs of
warehousing, distribution and
occupancy
    
    
    254.4
    
    
    
    70.3
    %
    
    
    216.8
    
    
    
    67.1
    %
    
    
    758.2
    
    
    
    69.8
    %
    
    
    690.5
    
    
    
    66.1
    %Compensation and related benefits
    
    
    62.3
    
    
    
    17.2
    %
    
    
    54.0
    
    
    
    16.7
    %
    
    
    182.0
    
    
    
    16.8
    %
    
    
    173.0
    
    
    
    16.6
    %Advertising and promotion
    
    
    9.2
    
    
    
    2.5
    %
    
    
    10.0
    
    
    
    3.1
    %
    
    
    31.0
    
    
    
    2.9
    %
    
    
    35.3
    
    
    
    3.4
    %Other selling, general and
administrative expenses
    
    
    14.5
    
    
    
    4.0
    %
    
    
    18.1
    
    
    
    5.6
    %
    
    
    51.8
    
    
    
    4.8
    %
    
    
    52.7
    
    
    
    5.1
    %Amortization expense
    
    
    2.9
    
    
    
    0.8
    %
    
    
    1.0
    
    
    
    0.3
    %
    
    
    6.6
    
    
    
    0.6
    %
    
    
    3.0
    
    
    
    0.3
    %Income from legal settlement
    
    
    (4.6
    )
    
    
    -1.3
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (7.2
    )
    
    
    -0.7
    %
    
    
    
    
    
    
    0.0
    %Foreign currency translation
(gain) loss
    
    
    (0.3
    )
    
    
    -0.1
    %
    
    
    (0.3
    )
    
    
    -0.1
    %
    
    
    (2.5
    )
    
    
    -0.2
    %
    
    
    0.1
    
    
    
    0.0
    %Impairment of goodwill and intangible
assets
    
    
    709.4
    
    
    
    195.6
    %
    
    
    
    
    
    
    0.0
    %
    
    
    709.4
    
    
    
    65.3
    %
    
    
    
    
    
    
    0.0
    %Total operating expenses
    
    
    1,047.8
    
    
    
    289.0
    %
    
    
    299.6
    
    
    
    92.7
    %
    
    
    1,729.3
    
    
    
    159.3
    %
    
    
    954.6
    
    
    
    91.5
    %Operating IncomeRetail
    
    
    23.3
    
    
    
    6.5
    %
    
    
    20.9
    
    
    
    6.4
    %
    
    
    66.2
    
    
    
    6.0
    %
    
    
    86.9
    
    
    
    8.3
    %Franchise
    
    
    16.1
    
    
    
    4.4
    %
    
    
    16.1
    
    
    
    5.0
    %
    
    
    50.8
    
    
    
    4.7
    %
    
    
    49.7
    
    
    
    4.8
    %Manufacturing / Wholesale
    
    
    6.7
    
    
    
    1.8
    %
    
    
    10.2
    
    
    
    3.2
    %
    
    
    20.4
    
    
    
    1.9
    %
    
    
    28.2
    
    
    
    2.7
    %Unallocated corporate and other costs:Warehousing & distribution costs
    
    
    (11.8
    )
    
    
    -3.3
    %
    
    
    (12.1
    )
    
    
    -3.7
    %
    
    
    (32.7
    )
    
    
    -3.0
    %
    
    
    (37.1
    )
    
    
    -3.6
    %Corporate Overhead costs
    
    
    (14.7
    )
    
    
    -4.1
    %
    
    
    (11.6
    )
    
    
    -3.6
    %
    
    
    (46.0
    )
    
    
    -4.2
    %
    
    
    (38.9
    )
    
    
    -3.7
    %Income from legal settlement
    
    
    4.6
    
    
    
    1.3
    %
    
    
    
    
    
    
    0.0
    %
    
    
    7.2
    
    
    
    0.7
    %
    
    
    
    
    
    
    0.0
    %Impairment of goodwill and intangible
assets
    
    
    (709.4
    )
    
    
    -195.6
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (709.4
    )
    
    
    -65.4
    %
    
    
    
    
    
    
    0.0
    %Sub total unallocated corporate
and other costs
    
    
    (731.3
    )
    
    
    -201.7
    %
    
    
    (23.7
    )
    
    
    -7.3
    %
    
    
    (780.9
    )
    
    
    -71.9
    %
    
    
    (76.0
    )
    
    
    -7.3
    %Total operating income
    
    
    (685.2
    )
    
    
    -189.0
    %
    
    
    23.5
    
    
    
    7.3
    %
    
    
    (643.5
    )
    
    
    -59.3
    %
    
    
    88.8
    
    
    
    8.5
    %Interest expense,
net
    
    
    33.0
    
    
    
    
    
    
    
    8.5
    
    
    
    
    
    
    
    97.8
    
    
    
    
    
    
    
    25.7(Loss) income before income taxes
    
    
    (718.2
    )
    
    
    
    
    
    
    15.0
    
    
    
    
    
    
    
    (741.3
    )
    
    
    
    
    
    
    63.1Income tax expense (benefit)
    
    
    (170.8
    )
    
    
    
    
    
    
    5.6
    
    
    
    
    
    
    
    (164.3
    )
    
    
    
    
    
    
    23.1Net (loss) income
    
    
    (547.4
    )
    
    
    
    
    
    
    9.4
    
    
    
    
    
    
    
    (577.0
    )
    
    
    
    
    
    
    40.0Other comprehensive income (loss)
    
    
    (0.1
    )
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    0.3Comprehensive (loss) income
    
    $
    (547.5
    )
    
    
    
    
    
    $
    10.2
    
    
    
    
    
    
    $
    (576.0
    )
    
    
    
    
    
    $
    40.3
 Note: All calculations related to the Results of Operation throughout the
three month and nine months year over year comparisons below, were
calculated based on the numbers in the above table, that have been rounded to
millions. As discussed in the segments footnote to the 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
distribution and transportation costs, corporate overhead, impairments, 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. Page 28 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES Comparison of Three Months Ended September 30, 2004 and September 30, 2003 Revenues Consolidated.Our consolidated net revenues decreased $39.5 million, or
10.9%, to $323.1 million for the three months ended September 30, 2004 compared
to $362.6 million for the same period in 2003. The decrease was the result of
decreases in our Retail and Franchise segments, offset by a slight increase in
our Manufacturing/ Wholesale segment. Retail.Revenues in our Retail segment decreased $29.1 million, or 11.0%,
to $235.0 million for the three months ended September 30, 2004 compared to
$264.1 million for the same period in 2003. The revenue decrease is
attributable to: (1) a sharp decline in sales in our diet category, and to a
lesser extent, our sports nutrition category, and (2) a decrease in the number
of stores operating in comparison with last year. The diet category experienced
a drop in sales from 2003 due to a decrease in sales of products low in
carbohydrates (''low carb) and a decrease in the sale of other diet
supplements. The sports nutrition category decrease is primarily due to a drop
in the sales of meal replacement bars. We believe that these decreases are
largely a result of low-carb and meal replacement bar products having become
more readily available in the marketplace since the prior year period.
Additionally, retail sales declined as a result of operating 2,759 corporate
stores as of September 2003 versus 2,632 as of September 2004. Comparable
store sales in company owned domestic stores declined 10.7% for the three
months ended September 30, 2004 compared with the same period in 2003.
Comparable store sales in company owned Canadian stores declined 1.3% for the
three months ended September 30, 2004 compared with the same period in 2003. Franchise.Revenues in our Franchise segment decreased $10.7 million, or
15.7%, to $57.6 million for the three months ended September 30, 2004 compared
to $68.3 million for the same period in 2003. Decreases in net wholesale
product sales, which was the result of lower retail sales at our franchise
stores, accounted for $9.6 million of the decrease. Decreases in sales of
company-owned stores to franchisees (conversions) accounted for $0.8 million
of the decrease and the remaining decrease in revenue of $0.3 million occurred
in other revenue areas. For the three months ended September 30, 2004
comparable store sales in franchise domestic stores declined 9.3% when compared
with the same period in 2003. Manufacturing/Wholesale.Revenues in our Manufacturing/Wholesale segment
increased $0.3 million, or 1.0%, to $30.5 million for the three months ended
September 30, 2004 compared to $30.2 million for the same period in 2003. This
increase was the result of an increase in sales at our Australia manufacturing
facility offset by a slight decrease in sales to third-party customers from our
South Carolina plant. Cost of Sales Consolidated cost of sales, which includes product costs, costs of
warehousing and distribution and occupancy costs, decreased $37.6 million, or
14.8%, to $216.8 million for the three months ended September 30, 2004 compared
to $254.4 million for the same period in 2003. Consolidated cost of sales, as
a percentage of net revenue, was 67.1% for the three months ended September 30,
2004, compared to 70.3% for the same period in 2003. Consolidated product costs decreased $31.3 million, or 16.6%, to $157.8
million for the three months ended September 30, 2004 compared to $189.1
million for the same period in 2003. Consolidated product costs as a
percentage of net revenue dropped to 43.6% for the three months ended September
30, 2004 from 45.8% for the same period in 2003. This decrease was a result of
improved margins in the Retail segment as a result of increased sales of higher
margin GNC proprietary products and decreased sales of lower margin third-party
products. Consolidated warehousing and distribution costs remained flat at $12.3
million for the three months ended September 30, 2004 and 2003. For the three
months ended September 30, 2004, we experienced a decline in income from
providing freight deliveries to third parties of $1.7 million. The majority of
this decline occurred as a result of the sale of a former affiliate, Rexall, by
Numico in July, 2003. This drop in income was offset by decreases in wage
related expenses of $0.9 million, and operating expenses of $0.8 million, which
was a result of a reduction in staffing and the trucking fleet to meet our new
transportation requirements. Consolidated occupancy costs decreased $6.3 million, or 11.9%, to $46.7
million for the three months ended September 30, 2004 compared to $53.0 million
for the same period in 2003. This decrease was primarily due to a reduction in
depreciation expense of $5.1 million as a result of the revaluation of our
assets due to purchase accounting relating to the Acquisition. Reductions in
base rental expense as a result of fewer stores operating and more favorable
lease terms, accounted for another $0.9 million of the decrease. The remaining
$0.3 million decrease was spread across multiple lease related accounts. 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,
decreased $5.8 million, or 6.5%, to $83.1 million, for the three months ended
September 30, 2004, compared to $88.9 million for the same period in 2003. 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, were
25.7% of net revenues during the three months ended September 30, 2004 compared
to 24.5% for the same period in 2003. Page 29 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES Consolidated compensation and related benefits decreased $8.3 million, or
13.3%, to $54.0 million for the three months ended September 30, 2004 compared
to $62.3 million for the same period in 2003. The primary reasons for the
reduction are: (1) a reduction in incentives and store commissions costs of
$4.5 million, (2) a reduction in stock based compensation of $3.0 million, (3)
a reduction in health care costs of $0.5 million, and (4) other decreases of
$0.3 million. Consolidated advertising and promotion expenses increased $0.8 million, or
8.7%, to $10.0 million for the three months ended September 30, 2004 compared
to $9.2 million for the same period in 2003. We incurred additional
advertising costs of $0.6 million for the three months ended September 30, 2004
related to an in store signage reset program in our stores. The remaining $0.2
million increase was the result of additional general marketing expenses in
2004. Consolidated other selling, general and administrative expenses, including
amortization expense, increased $1.7 million, or 9.8%, to $19.1 million for the
three months ended September 30, 2004 compared to $17.4 million for the same
period in 2003. The increase was primarily a result of increases of $1.8
million in insurance costs and $2.5 million in professional fees, of which $0.3
million was related to preparation for the implementation of Sarbanes-Oxley
requirements. These were offset by decreases of: (1) $0.5 million in research
and development costs, (2) $0.4 million in credit card expenses, (3) $0.2
million in franchise convention expenses, (4) $0.9 million of amortization
expense, and (5) $0.6 million in other operating accounts. Income from Legal Settlements For the three months ended September 30, 2003, we received $4.6 million in
non-recurring legal settlement proceeds related to raw material pricing
litigation. We received no proceeds from legal settlements for the three months
ended September 30, 2004. Foreign Currency Loss (Gain) Consolidated foreign currency gain was unchanged at $0.3 million for the
three months ended September 30, 2004 and the three months ended September 30,
2003, as a result of translating our Canadian and Australian subsidiary results
of operations into U.S. currency. Impairment of Goodwill and Intangible Assets In October, 2003, Numico entered into an agreement to sell GNCI for a
purchase price that indicated a potential impairment of our long-lived assets.
Accordingly, management initiated an evaluation of the carrying value of
goodwill and indefinite-lived intangible assets as of September 30, 2003. As a
result of this evaluation, an impairment charge of $709.4 million (pre-tax) was
recorded for goodwill and other indefinite-lived intangibles in accordance with
SFAS No. 142. Operating Income (Loss) Consolidated.As a result of the foregoing, operating income increased
$708.7 million, or 103.4%, to $23.5 million for the three months ended
September 30, 2004 compared to a $685.2 million operating loss for the same
period in 2003. For the three months ended September 30, 2003, we recognized a
$709.4 million impairment charge relating to the write down of our goodwill and
intangible assets, with no impairment charges recognized in 2004. Operating
income as a percentage of net revenues was 7.3% for the three months ended
September 30, 2004 compared to 189.0% operating loss for the same period in
2003. Retail.Operating income decreased $2.4 million, or 10.3%, to $20.9
million for the three months ended September 30, 2004 compared to $23.3 million
for the same period in 2003. The decrease was a result of reduced sales
volume, offset by increased sales of higher margin VMHS products, reduced sales
of lower margin diet and sports nutrition products, decreased depreciation
expense and decreased rental costs due to operating fewer stores. Franchise.Operating income was unchanged at $16.1 million for the three
months ended September 30, 2004 and 2003. Although sales decreased, operating
income remained unchanged due to the timing of recognition of profits from
sales of products from our annual franchise convention and improved margin on
our wholesale sales. For the nine months ended September 30, 2004 comparable
store sales in franchise domestic stores declined 2.2% when compared with the
same period in 2003. Manufacturing/Wholesale.Operating income increased $3.5 million, or
52.2%, to $10.2 million for the three months ended September 30, 2004 compared
to $6.7 million for the same period in 2003. This increase was primarily the
result of improved margins on our wholesale sales and decreased depreciation
expense at our manufacturing facilities. Warehousing & Distribution Costs.Unallocated warehousing and distribution
costs increased $0.3 million, or 2.5%, to $12.1 million for the three months
ended September 30, 2004 compared to $11.8 million for the same period in 2003.
A decline in revenue from providing trucking services to third parties was
offset by reduced wages and operating expense. Page 30 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES Corporate Costs.Operating expenses decreased $3.1 million, or 21.1%, to
$11.6 million for the three months ended September 30, 2004 compared to $14.7
million for the same period in 2003. The primary reasons for the decrease were:
(1) a reduction in incentive compensation expense of $2.9 million, (2) reduced
stock based compensation of $3.0 million, (3) a reduction in health care costs
of $0.8 million, and (4) research and development costs of $0.5 million,
partially offset by increases in: (1) insurance costs of $1.8 million, (2)
professional fees of $1.2 million, and (3) other operating accounts of $1.1
million. Income from Legal Settlement.Income from legal settlements
decreased by $4.6 million for the
three months ended September 30, 2004, compared to the same period in 2003. We
received $4.6 million in non-recurring legal settlement proceeds related to raw
material pricing litigation in the three months ended September 30, 2003. Impairment of Goodwill and Intangible Assets.Expense from the impairment
of goodwill and other intangible assets decreased by $709.4 million for the
three months ended September 30, 2004, compared to the same period in 2003. In
October, 2003, Numico entered into an agreement to sell GNCI for a purchase
price that indicated a potential impairment of our long-lived assets.
Accordingly, management initiated an evaluation of the carrying value of
goodwill and indefinite-lived intangible assets as of September 30, 2003. As a
result of this evaluation, an impairment charge of $709.4 million (pre-tax) was
recorded for goodwill and other indefinite-lived intangibles in accordance with
SFAS No. 142. Interest Expense Interest expense decreased $24.5 million, or 74.2%, to $8.5 million for
the three months ended September 30, 2004 compared to $33.0 million for the
same period in 2003. This decrease was primarily attributable to the new debt
structure after the Acquisition The new debt structure consists of: (1) a
$285.0 million term loan, with interest payable at an average rate of 4.65% for
the three months ended September 30, 2004, (2) $215.0 million in senior
subordinated notes with interest payable at 8 1/2%, and (3) a $75.0 million
revolving loan facility with interest expense payable at an average rate of
0.80% for the three months ended September 30, 2004, consisting of commitment
fees and letter of credit fees, of which $8.2 million was used for letters of
credit at September 30, 2004. Our new debt structure replaces our previous debt
structure, which included intercompany debt of $1.8 billion, which was payable
to Numico at an annual interest rate of 7.5%. Income Tax Expense (Benefit) We recognized $5.6 million of consolidated income tax expense during the
three months ended September 30, 2004 compared to a $170.8 million income tax
benefit for the same period of 2003. The increased tax expense for the three
months ended September 30, 2004 was a result of a decrease in gross profit of
$1.9 million, offset by a decrease in operating expenses of $1.2 million, a
decrease in impairment of goodwill and intangible assets of $709.4 million, and
a decrease of $24.5 million in interest expense. The effective tax rate for the
three months ended September 30, 2004 was 36.9%, compared to an effective tax
rate of (23.8%) for the three months ended September 30, 2003, which was
primarily the result of a valuation allowance on deferred tax assets associated
with interest expense on the related party push down debt from Numico. We
believed that as of September 30, 2003, it was unlikely that future taxable
income would be sufficient to realize the tax assets associated with the
interest expense on the related party push down debt from Numico. Thus, a
valuation allowance was recorded. According to the Purchase Agreement, Numico
has agreed to indemnify the Company for any subsequent tax liabilities arising
from periods prior to the Acquisition. Net Income (Loss) As a result of the foregoing, consolidated net income increased $556.8
million, or 101.7%, to $9.4 million for the three months ended September 30,
2004 compared to a loss of $547.4 million for the same period in 2003. For the
three months ended September 30, 2003, we recognized a $709.4 million
impairment charge relating to the write down of our goodwill and intangible
assets, with no impairment in 2004. Although revenues decreased, these
decreases were offset by improved margins, operating cost reductions, and a
significant decrease in interest expense. Other Comprehensive Income (Loss) We recognized $0.8 million of foreign currency gain for the three months
ended September 30, 2004 and recognized a $0.1 million foreign currency loss
for the three months ended September 30, 2003. The amounts recognized in each
period resulted from foreign currency adjustments related to the investment in
and receivables due from Canadian and Australian subsidiaries. Page 31 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES Comparison of Nine months ended September 30, 2004 and September 30, 2003 Revenues Consolidated.Our consolidated net revenues decreased $42.4 million, or
3.9%, to $1,043.4 million for the nine months ended September 30, 2004 compared
to $1,085.8 million for the same period in 2003. The decrease was the result of
decreases in our Retail and Franchise segments, offset by slight increases in
our Manufacturing/ Wholesale segment. Retail.Revenues in our Retail segment decreased $31.3 million, or 3.9%,
to $776.0 million for the nine months ended September 30, 2004 compared to
$807.3 million for the same period in 2003. The revenue decrease occurred
primarily in our diet category, and to a lesser extent, the sports nutrition
category. The diet category experienced a sharp drop in sales from 2003
primarily due to the discontinuation of sales of products containing ephedra
and a decrease in sales of low carb products. Sales from ephedra products were
$35.3 million for the nine months ended September 30, 2003. This decrease was
offset partially by sales in the first quarter of 2004 of low carb products and
diet products intended to replace the ephedra products. However, beginning in
the second quarter of 2004 and continuing in the third quarter of 2004, sales
of low carb products decreased significantly from the prior year periods.
Beginning in the second quarter of 2004, and especially in the third quarter of
2004, the sports nutrition category saw a decrease in sales of meal replacement
bars (bars). We believe that these decreases are largely a result of low
carb products and bars having become more readily available in the marketplace
since the prior year period. Additionally, overall retail sales declined as a
result of operating 2,759 corporate stores as of September 2003 versus 2,632 as
of September 2004. Comparable store sales in company owned domestic stores
declined 2.4% for the nine months ended September 30, 2004 compared with the
same period in 2003. Comparable store sales in company owned Canadian stores
improved 7.6% for the nine months ended September 30, 2004 compared with the
same period in 2003. Franchise.Revenues in our Franchise segment decreased $15.8 million, or
8.0%, to $180.6 million for the nine months ended September 30, 2004, compared
to $196.4 million for the same period in 2003. These decreases were the result
of: (1) a decline in sales of company-owned stores to franchisees
(conversions) of $9.0 million, as there were nine such sales in 2004 compared
with 59 in 2003, (2) a decrease in wholesale product sales to franchisees of
$5.9 million, which was the result of lower retail sales at our franchise
stores, and (3) a decrease in franchise fee revenue of $1.2 million. These
decreases were offset by an increase in other revenue areas of $0.3 million. Manufacturing/Wholesale.Revenues in our Manufacturing/Wholesale segment
increased $4.7 million, or 5.7%, to $86.8 million for the nine months ended
September 30, 2004 compared to $82.1 million for the same period in 2003. This
increase was the result of increases in: (1) third party sales at our
Australian manufacturing facility of $2.4 million, (2) sales to Rite Aid of
$1.6 million, (3) sales to drugstore.com of $1.1 million, offset by a decrease
in third party sales from our South Carolina manufacturing facility of $0.4
million. Cost of Sales Consolidated cost of sales, which includes product costs, costs of
warehousing and distribution and occupancy costs, decreased $67.7 million, or
8.9%, to $690.5 million for the first nine months of 2004 compared to $758.2
million for the same period in 2003. Consolidated costs of sales, as a
percentage of net revenue, was 66.1% for the nine months ended September 30,
2004, compared to 69.8% for the same period in 2003. Consolidated product costs decreased $53.3 million, or 9.4%, to $511.3
million for the nine months ended September 30, 2004 compared to $564.6 million
for the same period in 2003. Consolidated product costs as a percentage of net
revenue dropped to 49.0% for the nine months ended September 30, 2004 from
52.0% for the same period in 2003. This decrease was a result of the following:
(1) improved margins in the Retail segment as a result of increased sales of
higher margin GNC proprietary products and decreased sales of lower margin
third-party products, (2) improved management of inventory which resulted in
lower product costs and fewer inventory losses due to expired product, and (3)
improved efficiencies in our South Carolina manufacturing facility. 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 $4.1 million, or
12.0%, to $38.2 million for the nine months ended September 30, 2004 compared
to $34.1 million for the same period in 2003. In the prior period, we earned an
additional $6.0 million in income from providing trucking services for our
vendors and former affiliates, which we used to offset a portion of our total
transportation expenses. We no longer provide these services and, accordingly,
are no longer able to offset the related income against our warehousing and
distribution costs. Partially to offset this loss of income, wage related
expenses were reduced $1.2 million and operating expenses were reduced $0.7
million for the nine months ended September 30, 2004 compared with the same
period in 2003. Consolidated occupancy costs decreased $18.5 million, or 11.6%, to $141.0
million for the nine months ended September 30, 2004 compared to $159.5 million
for the same period in 2003. This decrease was primarily due to a reduction in
depreciation expense of $15.0 million as a result of the revaluation of our
assets due to purchase accounting relating to the Acquisition. Reductions in
rental expenses as a result of fewer stores operating and more favorable lease
terms, accounted for another $3.5 million of the decrease. Page 32 of 42




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GENERAL NUTRITION CENTERS INC. 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,
decreased $7.4 million, or 2.7%, to $264.0 million, for the nine months ended
September 30, 2004, compared to $271.4 million for the same period in 2003.
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, as a
percentage of net revenues, were 25.3% during the nine months ended September
30, 2004 compared to 25.0% for the same period in 2003. Consolidated compensation and related benefits decreased $9.0 million, or
4.9%, to $173.0 million for the nine months ended September 30, 2004 compared
to $182.0 million for the same period in 2003. The decrease was the result of
decreases in: (1) stock based compensation expense of $3.0 million, (2)
incentives and commissions expense of $2.6 million, (3) group health insurance
and workers compensation expense of $2.4 million, and (4) severance costs of
$1.0 million. Consolidated advertising and promotion expenses increased $4.3 million, or
13.9%, to $35.3 million for the nine months ended September 30, 2004 compared
to $31.0 million during the same period in 2003. Advertising expense increased
during the first nine months of 2004 compared to the same period in 2003 in the
following areas: (1) direct marketing to our gold card customers increased $1.6
million, (2) general marketing costs increased $1.2 million, (3) product
specific TV advertising increased $1.1 million, and (4) a $0.5 million increase
in store signage costs. Other advertising expenses decreased by $0.1 million. Consolidated other selling, general and administrative expenses, including
amortization expense, decreased $2.7 million, or 4.6%, to $55.7 million for the
nine months ended September 30, 2004 compared to $58.4 million for the same
period in 2003. The primary reasons for the decrease were: (1) a decrease of
$3.2 million in research and development costs, (2) reduced bad debt expense of
$2.6 million, (3) reduced amortization expense of $2.5 million, (4) reduced one
time costs previously incurred as a result of the Acquisition of $2.3 million,
and (5) a reduction of $1.0 million in credit card discount expenses. These
decreases were offset by: (1) a $4.7 million increase in insurance expense, (2)
a $2.2 million increase in other professional fees, of which $0.5 million was
related to our ongoing efforts to prepare for Sarbanes-Oxley requirements, and
(3) an increase of $2.0 million in other operating expense accounts. Income from Legal Settlements For the nine months ended September 30, 2003, we received $7.2 million in
non-recurring legal settlement proceeds related to raw material pricing
litigation. We received no proceeds from legal settlements for the nine months
ended September 30, 2004. Foreign Currency Loss (Gain) Consolidated foreign currency gain decreased $2.6 million, or 104.0%, for
the nine months ended September 30, 2004 to a loss of $0.1 million compared to
a gain of $2.5 million for the nine months ended September 30, 2003, as a
result of translating our Canadian and Australian subsidiary results of
operations into U.S. currency. Impairment of Goodwill and Intangible Assets In October, 2003, Numico entered into an agreement to sell GNCI for a
purchase price that indicated a potential impairment of our long-lived assets.
Accordingly, management initiated an evaluation of the carrying value of
goodwill and indefinite-lived intangible assets as of September 30, 2003. As a
result of this evaluation, an impairment charge of $709.4 million (pre-tax) was
recorded for goodwill and other indefinite-lived intangibles in accordance with
SFAS No. 142. Operating Income (Loss) Consolidated.As a result of the foregoing, operating income increased
$732.3 million, or 113.8%, to $88.8 million for the nine months ended September
30, 2004 compared to $643.5 million operating loss for the same period in 2003.
For the nine months ended September 30, 2003, we recognized a $709.4 million
impairment charge relating to the write down of our goodwill and intangible
assets, with no impairment charges in 2004. Operating income as a percentage
of net revenues was 8.5% for the nine months ended September 30, 2004 compared
to a 59.3% operating loss for the same period in 2003. Retail.Operating income increased $20.7 million, or 31.3%, to $86.9
million for the nine months ended September 30, 2004 compared to $66.2 million
for the same period in 2003. The increase was a result of improved margins due
to the sales shift to higher margin items, decreased depreciation expense and
decreased rental costs due to operating fewer stores. Franchise.Operating income decreased $1.1 million, or 2.2%, to $49.7
million for the nine months ended September 30, 2004 compared to $50.8 million
for the same period in 2003. The decrease was principally a result of fewer
sales of company-owned stores to franchisees and decreased wholesale product
sales. Page 33 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES Manufacturing/Wholesale.Operating income increased $7.8 million, or
38.2%, to $28.2 million for the nine months ended September 30, 2004 compared
to $20.4 million for the same period in 2003. This increase was primarily the
result of increased revenues to our third party customers, more favorable
contract terms from a new agreement with Rite Aid, and decreased depreciation
expense at our manufacturing facilities. Warehousing & Distribution Costs.Unallocated warehousing and distribution
costs increased $4.4 million, or 13.5%, to $37.1 million for the nine months
ended September 30, 2004 compared to $32.7 million for the same period in 2003.
This increase in costs was primarily a result of decreased income from trucking
services provided to our vendors and former affiliates, which was partially
offset by reduced wages and operating expense. Corporate Costs.Operating expense decreased $7.1 million, or 15.4%, to
$38.9 million for the nine months ended September 30, 2004 compared to $46.0
million for the same period in 2003. This decrease was the result of decreases
in: (1) research and development costs of $3.2 million, (2) wage and benefit
expense of $7.9 million, (3) one time transaction costs in preparing the
company for the Acquisition of $2.3 million, and (4) other operating accounts
of $0.6 million, offset by increases in insurance costs of $4.7 million and
professional fees and transaction related costs of $2.2 million. Income from Legal Settlement.Income from legal settlements
decreased by $7.2 million for the
nine months ended September 30, 2004, compared to the same period in 2003.
We received $7.2 million in non-recurring legal settlement proceeds related to
raw material pricing litigation in the nine months ended September 30, 2003. Impairment of Goodwill and Intangible Assets.Expense from the impairment
of goodwill and other intangible assets decreased by $709.4 million for the
nine months ended September 30, 2004, compared to the same period in 2003. In
October, 2003, Numico entered into an agreement to sell GNCI for a purchase
price that indicated a potential impairment of our long-lived assets.
Accordingly, management initiated an evaluation of the carrying value of
goodwill and indefinite-lived intangible assets as of September 30, 2003. As a
result of this evaluation, an impairment charge of $709.4 million (pre-tax) was
recorded for goodwill and other indefinite-lived intangibles in accordance with
SFAS No. 142. Interest Expense Interest expense decreased $72.1 million, or 73.7%, to $25.7 million for
the nine months ended September 30, 2004 compared to $97.8 million for the same
period in 2003. This decrease was primarily attributable to the new debt
structure after the Acquisition. The new debt structure consists of: (1) a
$285.0 million term loan, with interest payable at an average rate of 4.38% for
the nine months ended September 30, 2004, (2) $215.0 million in senior
subordinated notes with interest payable at 8 1/2%, and (3) a $75.0 million
revolving loan facility with interest expense payable at an average rate of
0.77% for the nine months ended September 30, 2004, consisting of commitment
fees and letter of credit fees, of which $8.2 million was used for letters of
credit at September 30, 2004. Our new debt structure replaces our previous debt
structure, which included intercompany debt of $1.8 billion, which was payable
to Numico at an annual interest rate of 7.5%. Income Tax Expense (Benefit) We recognized $23.1 million of consolidated income tax expense during the
nine months ended September 30, 2004 compared to a $164.3 million benefit for
the same period of 2003. The increased tax expense for the nine months ended
September 30, 2004, was a result of an increase in operating expenses of $2.4
million, offset by an increase in gross profit of $25.3 million and a decrease
in impairment of goodwill and intangible assets of $709.4 million, and a
decrease of interest expense of $72.0 million. The effective tax rate for the
nine months ended September 30, 2004 was 36.5%, compared to an effective tax
rate of (22.2%) for the nine months ended September 30, 2003, which was
primarily the result of a valuation allowance on deferred tax assets associated
with interest expense on the related party push down debt from Numico. We
believed that as of September 30, 2003, it was unlikely that future taxable
income would be sufficient to realize the tax assets associated with the
interest expense on the related party push down debt from Numico. Thus, a
valuation allowance was recorded. According to the Purchase Agreement, Numico
has agreed to indemnify the Company for any subsequent tax liabilities arising
from periods prior to the Acquisition. Net Income (Loss) As a result of the foregoing, consolidated net income increased $617.0
million, or 106.9%, to $40.0 million for the nine months ended September 30,
2004 compared to a loss of $577.0 million for the same period in 2003. For the
nine months ended September 30, 2003, we recognized a $709.4 million (pre-tax)
impairment charge relating to the write down of our goodwill and intangible
assets, with no impairment in 2004. Although revenues decreased, these
decreases were offset by improved margins, operating cost reductions, a
decrease in impairment charges and a significant decrease in interest expense. Other Comprehensive Income (Loss) We recognized $0.3 million of foreign currency gain for the nine months
ended September 30, 2004 compared to $1.0 million for the same period in 2003.
The amounts recognized in each period resulted from foreign currency
adjustments related to the investment in and receivables due from Canadian and
Australian subsidiaries. Page 34 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES Liquidity and Capital Resources At September 30, 2004, we had $72.4 million in cash and cash equivalents
and $263.7 million in working capital compared with $50.0 million in cash and
cash equivalents and $116.8 million in working capital at September 30, 2003.
The $146.9 million increase in working capital was primarily driven by the new
debt structure, which eliminated the short term intercompany debt payments due
to Numico, and reductions in taxes and accounts payable. Cash Provided by Operating Activities Historically, we have funded our operations through internally generated
cash. Cash provided by operating activities was $60.5 million and $109.6
million in the nine months ended September 30, 2004 and September 30, 2003,
respectively. Included in the $109.6 million cash provided by operating
activities in 2003 was a decrease of $93.9 million in accounts receivable,
which consisted of the collection of litigation settlement income recognized in
2002 of $134.8 million, offset by a cash advance payment to our former parent,
Numico, of $40.9 million. Also in 2003, interest payable increased $33.1
million during the nine months ended September 30, 2003, a result of interest
being payable on December 31 on our $1.8 billion intercompany debt due to our
former parent. In the nine months ended September 30, 2004, accrued
liabilities decreased $24.0 million primarily due to: (1) $12.1 million in
change in control and retention payments made in the nine months ended
September 30, 2004, which reduced the liability accordingly, (2) wage and
incentive accrual reductions of $7.3 million, and (3) payments made for store
closing termination costs of $4.3 million. Accounts payable decreased in the
nine months ended September 30, 2004 by $19.0 million, mostly due to the timing
of inventory payments. Net deferred taxes changed $21.7 million in the nine
months ended September 30, 2004, a result of an increase in our deferred tax
liability, which was due to book versus tax timing differences. Cash Used in Investing Activities We used cash in investing activities of approximately $16.1 million and
$21.9 million for the nine months ended September 30, 2004 and September 30,
2003, respectively. Capital expenditures, primarily for improvements at
company-owned stores, were our largest use of cash for the periods presented.
During the nine months ended September 30, 2004, we received cash from Numico,
our former parent, of $15.7 million for a working capital adjustment to the
Acquisition purchase price, which was previously recognized as a contingent
adjustment to the purchase price. Also during the nine months ended September
30, 2004, we paid $7.7 million in transaction fees and $5.9 million in purchase
price adjustments relating to the Acquisition. Cash Used in Financing Activities We used cash in financing activities of approximately $5.4 million and
$76.2 million for the nine months ended September 30, 2004 and September 30,
2003, respectively. In the first nine months of 2004, our parent issued common
stock and used the proceeds to make an investment in us of $1.6 million; we
used $2.8 million to pay down debt on our term loan facility and mortgage, and
had a decrease of $3.8 million in cash overdrafts. For the first nine months
of 2003, we used $75.0 million to pay down debt to related parties and $0.7
million to pay down debt to third parties. In connection with the Acquisition, we entered into a senior credit
facility, consisting of a $285.0 million term loan facility and a $75.0 million
revolving credit facility. We borrowed the full amount under the term loan
facility in connection with the closing of the Acquisition. 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, the Company 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 term loan facility matures on December 5, 2009 and 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 $8.2 million was used at September 30, 2004,
leaving $66.8 million of this facility available for future borrowing. This
facility contains customary covenants including financial tests (including
maximum total leverage, minimum fixed charge coverage ratio and maximum capital
expenditures) and places certain other limitations on us concerning our and our
subsidiaries ability to incur additional debt, guarantee other obligations,
grant liens on assets, make investments, acquisitions or mergers, dispose of
assets, make optional payments or modifications of other debt instruments, and
pay dividends or other payments on capital stock. See Note 7 of our
consolidated financial statements for further information. On December 5, 2003, the Company issued $215.0 million aggregate principal
amount of senior subordinated notes in connection with the Acquisition. The
senior subordinated notes mature in 2010 and bear interest at the rate of
81/2% per annum. In addition, our Equity Sponsor and certain of our
directors, members of our management and other employees made an equity
contribution of $277.5 million in exchange for 29,566,666 shares of our common
stock and in the case of our Equity Sponsor, 100,000 shares of our Series A
preferred stock. The proceeds of the equity contribution were contributed to
the Company to fund a portion of the Acquisition price. In addition, we sold
shares of our common stock for $200,000 to one of our new outside directors
shortly after consummation of the Acquisition and subsequently sold shares of
our common stock for approximately $1.7 million to certain members of our
management. The proceeds of all of such sales were contributed by GNC
Corporation to the Company. Page 35 of 42




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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES 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, working capital requirements and capital expenditures. 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 during
the next twelve months. 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. Capital Expenditures Capital expenditures were $17.9 million and $23.6 million during the nine
months ended September 30, 2004 and September 30, 2003, respectively. The
primary use of cash was for improvements to our retail stores, and on-going
maintenance and improvements of our manufacturing facility. As of September
30, 2004, we expected our total store-related maintenance capital expenditures
(excluding new stores) to be approximately $14.0 million and our total capital
expenditures to be approximately $28.0 million for 2004. Contractual Obligations The following table summarizes our future minimum non-cancelable
contractual obligations at September 30, 2004: Less than 1Total
    
    year
    
    1 - 3 years
    
    4 - 5 years
    
    After 5 years(in millions)Long-term debt
obligations
    
    $
    511.3
    
    
    $
    3.9
    
    
    $
    8.0
    
    
    $
    209.2
    
    
    $
    290.2Operating lease obligations
    
    
    397.9
    
    
    
    102.8
    
    
    
    153.1
    
    
    
    83.6
    
    
    
    58.4Scheduled interest payments (1)
    
    
    186.5
    
    
    
    33.6
    
    
    
    66.6
    
    
    
    62.9
    
    
    
    23.4Purchase obligations (2)
    
    
    34.5
    
    
    
    8.0
    
    
    
    13.3
    
    
    
    11.9
    
    
    
    1.3$
    1,130.2
    
    
    $
    148.3
    
    
    $
    241.0
    
    
    $
    367.6
    
    
    $
    373.3
 (1)
    
    Includes debt interest payments, which are estimated using current interest rates.(2)
    
    Consists of advertising and inventory commitments.


Off Balance Sheet Arrangements

As of September 30, 2004 and 2003 and December 31, 2003, 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.

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 APB 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 September 30, 2004, and December 31, 2003,
the available credit balance was $11.3 million, and $16.6 million,
respectively. The barter contract is effective through March 2005, with
renewable extensions.

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 for the periods presented in our financial statements.

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GENERAL NUTRITION CENTERS INC. AND SUBSIDIARIES Recently Issued Accounting Pronouncements In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities  an interpretation of ARB No. 51. This interpretation
addresses the consolidation of variable interest entities (VIEs) and its
intent is to achieve greater consistency and comparable of reporting between
business enterprises. It defines the characteristics of a business enterprise
that qualifies as a primary beneficiary of a variable interest entity. In
December 2003, the FASB issued a modification to FIN 46, titled FIN 46R. Fin
46R delayed the effective date for certain entities and also provided technical
clarifications related to implementation issues. In summary, a primary
beneficiary is a business enterprise that is subject to the majority of the
risk of loss from the VIE, entitled to receive a majority of the VIEs residual
returns, or both. The implementation of FIN No. 46R has been deferred for
non-public entities. For non-public entities, such as us, FIN No. 46R requires
immediate application to all VIEs created after December 31, 2003. For all
other VIEs, we are required to adopt Fin No. 46R by not later than the
beginning of the first period beginning after December 15, 2004. FIN No. 46R
also requires certain disclosures in financial statements regardless of the
date on which the VIE was created if it is reasonably possible that the
business enterprise is required to disclose the activity of the VIE. The
Company adopted FIN No. 46R on January 1, 2004 and determined that it does not
have an impact to its financial statements. In March, 2004, the Emerging Issues Task Force issued EITF 03-6,
Participating Securities and the Two-Class Method under FASB Statement No.
128. This statement provides additional guidance on the calculation and
disclosure requirements for earnings per share. The FASB concluded in EITF 03-6
that companies with multiple classes of common stock or participating
securities, as defined by SFAS No. 128, calculate and disclose earnings per
share based on the two-class method. The adoption of this statement does not
have an impact to our financial statement presentation. 
 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 Euro. 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 September 30, 2004, we had fixed rate debt of $228.4
million and variable rate debt of $282.9 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 September 30, 2004, a 1%
change in interest rates would increase or decrease our annual interest cost by
$3.0 million. There have been no significant changes in market risk subsequent to the
audited financial statements as of December 31, 2003. 
 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 the period covered by this report. Based
on such evaluation, our CEO and CFO have concluded that, as of the end of such
period, our disclosure controls and procedures are effective. Page 37 of 42




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GENERAL NUTRITION CENTERS INC. 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 Companys registration statement on
Form S-4, registration no. 333-114502 filed with the SEC, except for the
following cases: On or about November 2, 2001, a former store manager filed a purported
class action lawsuit in the Superior Court of the State of California, Orange
County, alleging that the Company misclassified store managers in California
and violated certain California wage and hour laws. In May 2004, the Company
entered into an agreement in principal to settle the claims of the putative
class members, without admitting any liability, for the total payment of
approximately $4.6 million. This amount has been reserved as of September 30,
2004. The settlement is subject to approval by the court and the plaintiffs
class. Moreover, the Company has the right to rescind the settlement if more
than 10% of the putative class members opt out of the settlement. Therefore,
as of September 30, 2004, no final decisions or resolution has been reached. On or about May 10, 2004, seven former employees brought an action in the
United States District Court for the Southern District of New York on behalf of
themselves and a purported class of other similarly situated current and former
employees employed by GNC within the last six years and who allegedly worked
but were not paid overtime for hours worked in excess of 40 hours per week.
The complaint is brought under the federal Fair Labor Standards Act (the
FLSA) and New York State Labor Law. The plaintiffs seek actual damages,
liquidated damages, an order enjoining GNC from engaging in the future in the
practices alleged in their complaint, and attorneys fees and the costs of
suit. Based on the information available to us at the present time, we believe
that this matter will not have a material adverse effect upon our liquidity,
financial condition or results of operations. 
 Item 5. Other Information In November 2003, the SEC adopted rules requiring public companies to
disclose their policies and procedures relating to the nomination of the board
of directors. These rules do not require companies to adopt such policies, but
instead impose specific disclosure requirements for any material changes to the
Companys nominating procedures. There have been no material changes to the
Companys nominating procedures for the quarter ended September 30, 2004. Subsequent Events On October 29, 2004, Peter P. Copses resigned his position as Chairman of
our Board of Directors, and the Board of Directors appointed Robert J. DiNicola
to replace Mr. Copses as Chairman of the Board. Mr. Copses will remain a member
of our Board of Directors. On November 2, 2004, the Company announced that it has determined to
postpone its previously announced initial public offering (IPO) of its common
stock due to current market conditions. The Company has filed to withdraw its
Form S-1 Registration Statement, previously filed with the SEC, relating to the
proposed IPO. The Company will continue to evaluate market conditions and may
proceed with a public offering at a later date. 
 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 Page 38 of 42




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GENERAL NUTRITION CENTERS INC. 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
undersigned thereunto duly authorized. GENERAL NUTRITION CENTERS, INC.(Registrant)November 5, 2004
    
    /s/ Louis Mancini
    
    Louis ManciniPresident and Chief Executive OfficerNovember 5, 2004
    
    /s/ David R. Heilman
    
    David R. HeilmanChief Financial Officer
 Page 39 of 42