##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from  to .
 Commission File Number: 333-114502
 GENERAL NUTRITION CENTERS, INC.
  Delaware
(State or other jurisdiction of
Incorporation or organization)
    
    72-1575168
(I.R.S. Employer
Identification No.)
 300 Sixth Avenue
Pittsburgh, Pennsylvania
(Address of principal executive offices)
    
    15222
(Zip Code)
 (412) 288-4600
 þ o
  o o þ
 o þ




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##### 



TABLE OF CONTENTS
 PAGEPART I  FINANCIAL INFORMATIONExplanatory
Note
    
    
    2Item 1. Financial Statements.Consolidated Balance Sheets as of June 30, 2006 (unaudited) and December 31, 2005
    
    
    3Unaudited Consolidated Statements of Operations and Comprehensive Income for the three
months ended June 30, 2006 and 2005 and for the six months ended June 30, 2006 and 2005
    
    
    4Unaudited Consolidated Statement of Stockholders Equity for the six months ended
June 30, 2006
    
    
    5Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2006
and 2005
    
    
    6Summarized Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    34Item 4. Controls and Procedures.
    
    
    34PART II  OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    35Item 1A. Risk Factors.
    
    
    38Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    44Item 6. Exhibits.
    
    
    44Signatures
    
    
    45
 EXPLANATORY NOTE
  2




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##### 



PART I  FINANCIAL INFORMATION
Item 1. Financial Statements.
 GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
 June 30,
    
    
    December 31,2006
    
    
    2005 *Current assets:Cash and cash equivalents
    
    $
    57,478
    
    
    $
    86,013Receivables, net of reserve of $6,249 and $8,898, respectively
    
    
    87,008
    
    
    
    72,439Inventories, net (Note 3)
    
    
    300,047
    
    
    
    298,166Deferred tax assets, net
    
    
    13,862
    
    
    
    13,861Other current assets
    
    
    29,931
    
    
    
    30,826Total current assets
    
    
    488,326
    
    
    
    501,305Long-term assets:Goodwill (Note 4)
    
    
    80,977
    
    
    
    80,109Brands (Note 4)
    
    
    212,000
    
    
    
    212,000Other intangible assets, net (Note 4)
    
    
    25,260
    
    
    
    26,460Property, plant and equipment, net
    
    
    172,276
    
    
    
    179,482Deferred financing fees, net
    
    
    14,647
    
    
    
    16,125Deferred tax assets, net
    
    
    45
    
    
    
    45Other long-term assets
    
    
    7,395
    
    
    
    10,114Total long-term assets
    
    
    512,600
    
    
    
    524,335Total assets
    
    $
    1,000,926
    
    
    $
    1,025,640Current liabilities:Accounts payable, includes cash overdraft of $2,962 and $5,063, respectively
    
    $
    90,068
    
    
    $
    104,595Accrued payroll and related liabilities
    
    
    25,202
    
    
    
    20,812Accrued income taxes
    
    
    5,950
    
    
    
    2,431Accrued interest
    
    
    7,844
    
    
    
    7,877Current portion, long-term debt
    
    
    2,147
    
    
    
    2,117Other current liabilities
    
    
    71,317
    
    
    
    64,793Total current liabilities
    
    
    202,528
    
    
    
    202,625Long-term liabilities:Long-term debt
    
    
    470,192
    
    
    
    471,244Other long-term liabilities
    
    
    10,952
    
    
    
    10,891Total long-term liabilities
    
    
    481,144
    
    
    
    482,135Total liabilities
    
    
    683,672
    
    
    
    684,760Stockholders equity:Common stock, $0.01 par value,
1,000 shares authorized, 100 shares issued and outstanding
    
    
    
    
    
    
    Paid-in-capital
    
    
    279,698
    
    
    
    277,989Retained earnings
    
    
    36,376
    
    
    
    61,667Accumulated other comprehensive income
    
    
    1,180
    
    
    
    1,224Total stockholders equity
    
    
    317,254
    
    
    
    340,880Total liabilities and stockholders equity
    
    $
    1,000,926
    
    
    $
    1,025,640
 
 *
    
    Footnotes summarized from the Audited Financial Statements.  3




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##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
(unaudited)
(in thousands)
 For the three months
    
    
    For the six monthsended June 30,
    
    
    ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    382,772
    
    
    $
    333,347
    
    
    $
    769,664
    
    
    $
    669,782Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    253,328
    
    
    
    223,724
    
    
    
    510,200
    
    
    
    454,180Gross profit
    
    
    129,444
    
    
    
    109,623
    
    
    
    259,464
    
    
    
    215,602Compensation and related benefits
    
    
    60,617
    
    
    
    56,229
    
    
    
    126,469
    
    
    
    113,543Advertising and promotion
    
    
    14,516
    
    
    
    13,540
    
    
    
    30,355
    
    
    
    28,141Other selling, general and administrative
    
    
    23,395
    
    
    
    18,742
    
    
    
    44,366
    
    
    
    37,564Foreign currency (gain) loss
    
    
    (114
    )
    
    
    48
    
    
    
    (702
    )
    
    
    (57
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,500
    )Operating income
    
    
    31,030
    
    
    
    21,064
    
    
    
    58,976
    
    
    
    38,911Interest expense, net (Note 5)
    
    
    10,121
    
    
    
    9,805
    
    
    
    19,797
    
    
    
    23,276Income before income taxes
    
    
    20,909
    
    
    
    11,259
    
    
    
    39,179
    
    
    
    15,635Income tax expense
    
    
    7,759
    
    
    
    4,102
    
    
    
    14,536
    
    
    
    5,683Net income
    
    
    13,150
    
    
    
    7,157
    
    
    
    24,643
    
    
    
    9,952Other comprehensive income (loss)
    
    
    576
    
    
    
    (270
    )
    
    
    (44
    )
    
    
    (534
    )Comprehensive income
    
    $
    13,726
    
    
    $
    6,887
    
    
    $
    24,599
    
    
    $
    9,418
  4




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##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity
(in thousands, except share data)
 AccumulatedOther
    
    
    TotalCommon Stock
    
    
    
    
    
    
    Retained
    
    
    Comprehensive
    
    
    Stockholder'sShares
    
    
    Dollars
    
    
    Paid-in-Capital
    
    
    Earnings
    
    
    Income/(Loss)
    
    
    EquityBalance at December 31, 2005
    
    
    100
    
    
    $
    
    
    
    $
    277,989
    
    
    $
    61,667
    
    
    $
    1,224
    
    
    $
    340,880GNC Corporation investment in
General Nutrition Centers, Inc
    
    
    
    
    
    
    
    
    
    
    487
    
    
    
    
    
    
    
    
    
    
    
    487Non-cash stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,222
    
    
    
    
    
    
    
    
    
    
    
    1,222Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,643
    
    
    
    
    
    
    
    24,643Restricted payment made by General
Nutrition Centers, Inc. to GNC
Corporation Common Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49,934
    )
    
    
    
    
    
    
    (49,934
    )Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44
    )
    
    
    (44
    )Balance at June 30, 2006(unaudited)
    
    
    100
    
    
    $
    
    
    
    $
    279,698
    
    
    $
    36,376
    
    
    $
    1,180
    
    
    $
    317,254
  5




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##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 Six months
    
    
    Six monthsended
    
    
    endedJune 30,
    
    
    June 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    24,643
    
    
    $
    9,952Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation expense
    
    
    17,159
    
    
    
    18,372Deferred fee writedown  early debt extinguishment
    
    
    
    
    
    
    3,890Amortization of intangible assets
    
    
    1,966
    
    
    
    1,921Amortization of deferred financing fees
    
    
    1,478
    
    
    
    1,384Increase in provision for inventory losses
    
    
    2,649
    
    
    
    3,504Non-cash stock-based compensation
    
    
    1,222
    
    
    
    (Decrease) increase in provision for losses on accounts receivable
    
    
    (1,577
    )
    
    
    2,190Decrease in net deferred taxes
    
    
    
    
    
    
    2,404Changes in assets and liabilities:Increase in receivables
    
    
    (14,838
    )
    
    
    (5,883
    )Increase in inventory, net
    
    
    (3,275
    )
    
    
    (34,038
    )Decrease in franchise note receivables, net
    
    
    2,354
    
    
    
    5,370Decrease in other assets
    
    
    281
    
    
    
    6,329Decrease in accounts payable
    
    
    (12,458
    )
    
    
    (1,329
    )Increase in accrued taxes
    
    
    3,520
    
    
    
    (Decrease) increase in interest payable
    
    
    (34
    )
    
    
    5,858Increase (decrease) in accrued liabilities
    
    
    10,842
    
    
    
    (1,354
    )Net cash provided by operating activities
    
    
    33,932
    
    
    
    18,570CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (9,434
    )
    
    
    (8,915
    )Store acquisition costs
    
    
    (359
    )
    
    
    (1,105
    )Net cash used in investing activities
    
    
    (9,793
    )
    
    
    (10,020
    )CASH FLOWS FROM FINANCING ACTIVITIES:GNC Corporation return of capital from
General Nutrition Centers, Inc
    
    
    382
    
    
    
    (416
    )Restricted payment made by General Nutrition Centers, Inc. to
GNC Corporation Common Stockholders
    
    
    (49,934
    )
    
    
    Tax benefit from exercise of GNC Corporation stock options
    
    
    105
    
    
    
    Increase in cash overdrafts
    
    
    (2,101
    )
    
    
    1,800Proceeds from senior notes issuance
    
    
    
    
    
    
    150,000Payments on long-term debt
    
    
    (1,021
    )
    
    
    (185,994
    )Financing fees
    
    
    
    
    
    
    (4,090
    )Net cash used in financing activities
    
    
    (52,569
    )
    
    
    (38,700
    )Effect of exchange rate on cash
    
    
    (105
    )
    
    
    (111
    )Net decrease in cash
    
    
    (28,535
    )
    
    
    (30,261
    )Beginning balance, cash
    
    
    86,013
    
    
    
    85,161Ending balance, cash
    
    $
    57,478
    
    
    $
    54,900
  6




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##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 1. NATURE OF BUSINESS
 General Nature of Business .
   Acquisition of the Company.
  NOTE 2. BASIS OF PRESENTATION
   Principles of Consolidation.
 Use of Estimates .
 7




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Cash and Cash Equivalents .
 Recently Issued Accounting Pronouncements
   8




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##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 3. INVENTORIES, NET
  June 30, 2006Net CarryingGross cost
    
    
    Reserves
    
    
    Value(unaudited)(in thousands)Finished product ready for sale
    
    $
    257,905
    
    
    $
    (7,955
    )
    
    $
    249,950Work-in-process bulk product and raw materials
    
    
    47,993
    
    
    
    (2,308
    )
    
    
    45,685Packaging supplies
    
    
    4,412
    
    
    
    
    
    
    
    4,412$
    310,310
    
    
    $
    (10,263
    )
    
    $
    300,047
 December 31, 2005Net CarryingGross cost
    
    
    Reserves
    
    
    Value(in thousands)Finished product ready for sale
    
    $
    257,525
    
    
    $
    (10,025
    )
    
    $
    247,500Work-in-process bulk product and raw materials...
    
    
    48,513
    
    
    
    (2,128
    )
    
    
    46,385Packaging supplies
    
    
    4,281
    
    
    
    
    
    
    
    4,281$
    310,319
    
    
    $
    (12,153
    )
    
    $
    298,166
 NOTE 4. GOODWILL AND INTANGIBLE ASSETS, NET
    Manufacturing/Retail
    
    
    Franchising
    
    
    Wholesale
    
    
    Total(in thousands)Goodwill at December 31, 2005
    
    $
    22,970
    
    
    $
    56,693
    
    
    $
    446
    
    
    $
    80,109Additions: Acquired franchise stores
    
    
    868
    
    
    
    
    
    
    
    
    
    
    
    868Reclassification: Due to franchise
store aquisitions
    
    
    1,750
    
    
    
    (1,750
    )
    
    
    
    
    
    
    Goodwill at June 30, 2006 (unaudited)
    
    $
    25,588
    
    
    $
    54,943
    
    
    $
    446
    
    
    $
    80,977
 9




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##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
  Retail
    
    
    Franchise
    
    
    Operating
    
    
    FranchiseGold Card
    
    
    Brand
    
    
    Brand
    
    
    Agreements
    
    
    Rights
    
    
    Total(in thousands)Balance at December 31, 2005
    
    $
    514
    
    
    $
    59,659
    
    
    $
    152,341
    
    
    $
    24,296
    
    
    $
    1,650
    
    
    $
    238,460Additions: Acquired franchise stores
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    766
    
    
    
    766Reclassification: Due to franchise
store aquisitions
    
    
    
    
    
    
    4,895
    
    
    
    (4,895
    )
    
    
    
    
    
    
    
    
    
    
    Amortization expense
    
    
    (257
    )
    
    
    
    
    
    
    
    
    
    
    (1,472
    )
    
    
    (237
    )
    
    
    (1,966
    )Balance at June 30, 2006 (unaudited)
    
    $
    257
    
    
    $
    64,554
    
    
    $
    147,446
    
    
    $
    22,824
    
    
    $
    2,179
    
    
    $
    237,260
  Estimated
    
    
    June 30, 2006
    
    
    December 31, 2005Life
    
    
    
    
    
    
    Accumulated
    
    
    Carrying
    
    
    
    
    
    
    Accumulated
    
    
    Carryingin years
    
    
    Cost
    
    
    Amortization
    
    
    Amount
    
    
    Cost
    
    
    Amortization
    
    
    Amount(unaudited)(in thousands)Brands  retail
    
    
    
    
    
    $
    64,554
    
    
    $
    
    
    
    $
    64,554
    
    
    $
    59,659
    
    
    $
    
    
    
    $
    59,659Brands  franchise
    
    
    
    
    
    
    147,446
    
    
    
    
    
    
    
    147,446
    
    
    
    152,341
    
    
    
    
    
    
    
    152,341Gold card  retail
    
    
    3
    
    
    
    2,230
    
    
    
    (2,007
    )
    
    
    223
    
    
    
    2,230
    
    
    
    (1,784
    )
    
    
    446Gold card  franchise
    
    
    3
    
    
    
    340
    
    
    
    (306
    )
    
    
    34
    
    
    
    340
    
    
    
    (272
    )
    
    
    68Retail agreements
    
    
    5-10
    
    
    
    8,500
    
    
    
    (3,037
    )
    
    
    5,463
    
    
    
    8,500
    
    
    
    (2,447
    )
    
    
    6,053Franchise agreements
    
    
    10-15
    
    
    
    21,900
    
    
    
    (4,539
    )
    
    
    17,361
    
    
    
    21,900
    
    
    
    (3,657
    )
    
    
    18,243Franchise rights
    
    
    5
    
    
    
    2,564
    
    
    
    (385
    )
    
    
    2,179
    
    
    
    1,798
    
    
    
    (148
    )
    
    
    1,650$
    247,534
    
    
    $
    (10,274
    )
    
    $
    237,260
    
    
    $
    246,768
    
    
    $
    (8,308
    )
    
    $
    238,460
  EstimatedamortizationYears ending December 31,
    
    expense(unaudited)(in thousands)2006(1)
    
    $
    1,9852007
    
    
    3,4562008
    
    
    3,4072009
    
    
    2,7962010
    
    
    2,647Thereafter
    
    
    10,969Total
    
    $
    25,260
 
 (1)
    
    This period is a partial year and represents the period from July 1 to December 31, 2006. 10




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##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 NOTE 5. INTEREST EXPENSE
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(unaudited)(in thousands)Senior credit facilityTerm Loan
    
    $
    1,907
    
    
    $
    1,488
    
    
    $
    3,719
    
    
    $
    3,322Revolver
    
    
    161
    
    
    
    150
    
    
    
    320
    
    
    
    2998 5/8% Senior Notes
    
    
    3,234
    
    
    
    3,234
    
    
    
    6,469
    
    
    
    5,8588 1/2 % Senior Subordinated Notes
    
    
    4,568
    
    
    
    4,568
    
    
    
    9,137
    
    
    
    9,137Deferred financing fees
    
    
    743
    
    
    
    700
    
    
    
    1,478
    
    
    
    1,384Deferred fee writedown  early
extinguishment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,890Mortgage
    
    
    194
    
    
    
    223
    
    
    
    346
    
    
    
    455Interest income  other
    
    
    (686
    )
    
    
    (558
    )
    
    
    (1,672
    )
    
    
    (1,069
    )Interest expense, net
    
    $
    10,121
    
    
    $
    9,805
    
    
    $
    19,797
    
    
    $
    23,276
 NOTE 6. COMMITMENTS AND CONTINGENCIES
 Litigation
   Ephedra
(Ephedrine Alkaloids).
 11




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##### 



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




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##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Class Action Settlement.
 Nutrition 21.
 Franklin Publications.
 Visa/MasterCard Antitrust Litigation.
 Product Claim Settlement.
 13




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##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Pennsylvania Claim
  NOTE 7. STOCK-BASED COMPENSATION PLANS
   WeightedTotal
    
    
    Average
    
    
    AggregateOptions
    
    
    Exercise Price
    
    
    Intrinsic Value(in thousands)Outstanding at December
31, 2005
    
    
    4,706,403
    
    
    $
    3.52Granted
    
    
    485,641
    
    
    
    5.65Exercised
    
    
    (128,025
    )
    
    
    3.52Forfeited
    
    
    (253,129
    )
    
    
    5.23Outstanding at June 30,
2006 (unaudited)
    
    
    4,810,890
    
    
    
    3.64
    
    
    $
    60,755Exercisable at June 30,
2006 (unaudited)
    
    
    2,341,531
    
    
    $
    3.56
    
    
    $
    29,851
     14




---



##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
  June 30,
    
    June 30,2006
    
    2005(unaudited)Dividend yield
    
    0.00%
    
    0.00%Expected option life
    
    5 years
    
    5 yearsVolatility factor percentage of market price
    
    22.00%
    
    24.00%Discount rate
    
    5.10%
    
    3.84%
   Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2005(unaudited)(in thousands)Net income as reported
    
    $
    7,157
    
    
    $
    9,952Less: total stock-based employee compensation
costs determined using fair value method, net
of tax
    
    
    (182
    )
    
    
    (360
    )Adjusted net income
    
    $
    6,975
    
    
    $
    9,592
 NOTE 8. SEGMENTS
  15




---



##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Three Months ended June 30,
    
    
    Six Months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(unaudited)(in thousands)Revenue:Retail
    
    $
    284,760
    
    
    $
    250,277
    
    
    $
    579,650
    
    
    $
    505,529Franchise
    
    
    59,277
    
    
    
    57,754
    
    
    
    119,614
    
    
    
    110,381Manufacturing/Wholesale:Intersegment (1)
    
    
    41,799
    
    
    
    41,003
    
    
    
    85,730
    
    
    
    86,052Third Party
    
    
    38,735
    
    
    
    25,316
    
    
    
    70,400
    
    
    
    53,872Sub total Manufacturing/Wholesale
    
    
    80,534
    
    
    
    66,319
    
    
    
    156,130
    
    
    
    139,924Sub total segment revenues
    
    
    424,571
    
    
    
    374,350
    
    
    
    855,394
    
    
    
    755,834Intersegment elimination (1)
    
    
    (41,799
    )
    
    
    (41,003
    )
    
    
    (85,730
    )
    
    
    (86,052
    )Total revenue
    
    $
    382,772
    
    
    $
    333,347
    
    
    $
    769,664
    
    
    $
    669,782(1)Intersegment revenues are eliminated from
consolidated revenue.Operating income:Retail
    
    $
    33,646
    
    
    $
    21,200
    
    
    $
    68,909
    
    
    $
    39,106Franchise
    
    
    15,010
    
    
    
    12,124
    
    
    
    31,098
    
    
    
    22,967Manufacturing/Wholesale
    
    
    13,351
    
    
    
    12,551
    
    
    
    24,510
    
    
    
    24,610Unallocated corporate and other (costs) income:Warehousing and distribution costs
    
    
    (12,475
    )
    
    
    (12,211
    )
    
    
    (25,321
    )
    
    
    (24,870
    )Corporate costs
    
    
    (18,502
    )
    
    
    (12,600
    )
    
    
    (40,220
    )
    
    
    (25,402
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500Sub total unallocated corporate and
other (costs) income
    
    
    (30,977
    )
    
    
    (24,811
    )
    
    
    (65,541
    )
    
    
    (47,772
    )Total operating income
    
    $
    31,030
    
    
    $
    21,064
    
    
    $
    58,976
    
    
    $
    38,911
 June 30,
    
    
    December 31,2006
    
    
    2005(in thousands)(unaudited)Total assets:Retail
    
    $
    458,595
    
    
    $
    441,364Franchise
    
    
    284,265
    
    
    
    290,092Manufacturing / Wholesale
    
    
    152,092
    
    
    
    148,445Corporate / Other
    
    
    105,974
    
    
    
    145,739Total assets
    
    $
    1,000,926
    
    
    $
    1,025,640
 NOTE 9. SUPPLEMENTAL GUARANTOR INFORMATION
   16




---



##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Supplemental Condensed Consolidating Balance Sheets
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorJune 30, 2006
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    54,089
    
    
    $
    3,389
    
    
    $
    
    
    
    $
    57,478Receivables, net
    
    
    2,035
    
    
    
    83,602
    
    
    
    1,371
    
    
    
    
    
    
    
    87,008Intercompany receivables
    
    
    
    
    
    
    30,614
    
    
    
    
    
    
    
    (30,614
    )
    
    
    Inventories, net
    
    
    
    
    
    
    283,034
    
    
    
    17,013
    
    
    
    
    
    
    
    300,047Other current assets
    
    
    293
    
    
    
    37,976
    
    
    
    5,524
    
    
    
    
    
    
    
    43,793Total current assets
    
    
    2,328
    
    
    
    489,315
    
    
    
    27,297
    
    
    
    (30,614
    )
    
    
    488,326Goodwill
    
    
    
    
    
    
    80,035
    
    
    
    942
    
    
    
    
    
    
    
    80,977Brands
    
    
    
    
    
    
    209,000
    
    
    
    3,000
    
    
    
    
    
    
    
    212,000Property, plant and equipment, net
    
    
    
    
    
    
    151,953
    
    
    
    20,323
    
    
    
    
    
    
    
    172,276Investment in subsidiaries
    
    
    786,941
    
    
    
    9,834
    
    
    
    
    
    
    
    (796,775
    )
    
    
    Other assets
    
    
    14,853
    
    
    
    41,200
    
    
    
    74
    
    
    
    (8,780
    )
    
    
    47,347Total assets
    
    $
    804,122
    
    
    $
    981,337
    
    
    $
    51,636
    
    
    $
    (836,169
    )
    
    $
    1,000,926Current liabilitiesCurrent liabilities
    
    $
    7,715
    
    
    $
    183,480
    
    
    $
    11,333
    
    
    $
    
    
    
    $
    202,528Intercompany payables
    
    
    19,456
    
    
    
    
    
    
    
    11,158
    
    
    
    (30,614
    )
    
    
    Total current liabilities
    
    
    27,171
    
    
    
    183,480
    
    
    
    22,491
    
    
    
    (30,614
    )
    
    
    202,528Long-term debt
    
    
    459,697
    
    
    
    
    
    
    
    19,275
    
    
    
    (8,780
    )
    
    
    470,192Other long-term liabilities
    
    
    
    
    
    
    10,916
    
    
    
    36
    
    
    
    
    
    
    
    10,952Total liabilities
    
    
    486,868
    
    
    
    194,396
    
    
    
    41,802
    
    
    
    (39,394
    )
    
    
    683,672Total stockholders equity (deficit)
    
    
    317,254
    
    
    
    786,941
    
    
    
    9,834
    
    
    
    (796,775
    )
    
    
    317,254Total liabilities and stockholders
equity (deficit)
    
    $
    804,122
    
    
    $
    981,337
    
    
    $
    51,636
    
    
    $
    (836,169
    )
    
    $
    1,000,926
 17




---



##### 



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, 2005
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    83,143
    
    
    $
    2,870
    
    
    $
    
    
    
    $
    86,013Receivables, net
    
    
    1,809
    
    
    
    69,518
    
    
    
    1,112
    
    
    
    
    
    
    
    72,439Intercompany receivables
    
    
    
    
    
    
    33,079
    
    
    
    
    
    
    
    (33,079
    )
    
    
    Inventories, net
    
    
    
    
    
    
    283,511
    
    
    
    14,655
    
    
    
    
    
    
    
    298,166Other current assets
    
    
    97
    
    
    
    39,825
    
    
    
    4,765
    
    
    
    
    
    
    
    44,687Total current assets
    
    
    1,906
    
    
    
    509,076
    
    
    
    23,402
    
    
    
    (33,079
    )
    
    
    501,305Goodwill
    
    
    
    
    
    
    79,167
    
    
    
    942
    
    
    
    
    
    
    
    80,109Brands
    
    
    
    
    
    
    209,000
    
    
    
    3,000
    
    
    
    
    
    
    
    212,000Property, plant and equipment, net
    
    
    
    
    
    
    158,877
    
    
    
    20,605
    
    
    
    
    
    
    
    179,482Investment in subsidiaries
    
    
    809,105
    
    
    
    7,081
    
    
    
    
    
    
    
    (816,186
    )
    
    
    Other assets
    
    
    16,331
    
    
    
    45,120
    
    
    
    73
    
    
    
    (8,780
    )
    
    
    52,744Total assets
    
    $
    827,342
    
    
    $
    1,008,321
    
    
    $
    48,022
    
    
    $
    (858,045
    )
    
    $
    1,025,640Current liabilitiesCurrent liabilities
    
    $
    5,801
    
    
    $
    188,362
    
    
    $
    8,462
    
    
    $
    
    
    
    $
    202,625Intercompany payables
    
    
    20,474
    
    
    
    
    
    
    
    12,605
    
    
    
    (33,079
    )
    
    
    Total current
liabilities
    
    
    26,275
    
    
    
    188,362
    
    
    
    21,067
    
    
    
    (33,079
    )
    
    
    202,625Long-term debt
    
    
    460,187
    
    
    
    
    
    
    
    19,837
    
    
    
    (8,780
    )
    
    
    471,244Other long-term liabilities
    
    
    
    
    
    
    10,854
    
    
    
    37
    
    
    
    
    
    
    
    10,891Total liabilities
    
    
    486,462
    
    
    
    199,216
    
    
    
    40,941
    
    
    
    (41,859
    )
    
    
    684,760Total stockholders equity (deficit)
    
    
    340,880
    
    
    
    809,105
    
    
    
    7,081
    
    
    
    (816,186
    )
    
    
    340,880Total liabilities and stockholders
equity (deficit)
    
    $
    827,342
    
    
    $
    1,008,321
    
    
    $
    48,022
    
    
    $
    (858,045
    )
    
    $
    1,025,640
 18




---



##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorThree months ended June 30, 2006
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    364,219
    
    
    $
    21,311
    
    
    $
    (2,758
    )
    
    $
    382,772Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    240,657
    
    
    
    15,429
    
    
    
    (2,758
    )
    
    
    253,328Gross profit
    
    
    
    
    
    
    123,562
    
    
    
    5,882
    
    
    
    
    
    
    
    129,444Compensation and related benefits
    
    
    
    
    
    
    57,233
    
    
    
    3,384
    
    
    
    
    
    
    
    60,617Advertising and promotion
    
    
    
    
    
    
    14,217
    
    
    
    299
    
    
    
    
    
    
    
    14,516Other selling, general and administrative
    
    
    481
    
    
    
    22,594
    
    
    
    320
    
    
    
    
    
    
    
    23,395Subsidiary (income) expense
    
    
    (13,919
    )
    
    
    (1,199
    )
    
    
    
    
    
    
    15,118
    
    
    
    Other income
    
    
    
    
    
    
    (39
    )
    
    
    (75
    )
    
    
    
    
    
    
    (114
    )Operating income (loss)
    
    
    13,438
    
    
    
    30,756
    
    
    
    1,954
    
    
    
    (15,118
    )
    
    
    31,030Interest expense, net
    
    
    742
    
    
    
    9,047
    
    
    
    332
    
    
    
    
    
    
    
    10,121Income (loss) before income taxes
    
    
    12,696
    
    
    
    21,709
    
    
    
    1,622
    
    
    
    (15,118
    )
    
    
    20,909Income tax (benefit) expense
    
    
    (454
    )
    
    
    7,790
    
    
    
    423
    
    
    
    
    
    
    
    7,759Net income (loss)
    
    $
    13,150
    
    
    $
    13,919
    
    
    $
    1,199
    
    
    $
    (15,118
    )
    
    $
    13,150
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorSix months ended June 30, 2006
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    733,383
    
    
    $
    42,207
    
    
    $
    (5,926
    )
    
    $
    769,664Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    485,783
    
    
    
    30,343
    
    
    
    (5,926
    )
    
    
    510,200Gross profit
    
    
    
    
    
    
    247,600
    
    
    
    11,864
    
    
    
    
    
    
    
    259,464Compensation and related benefits
    
    
    
    
    
    
    119,833
    
    
    
    6,636
    
    
    
    
    
    
    
    126,469Advertising and promotion
    
    
    
    
    
    
    29,962
    
    
    
    393
    
    
    
    
    
    
    
    30,355Other selling, general and administrative
    
    
    1,510
    
    
    
    42,008
    
    
    
    848
    
    
    
    
    
    
    
    44,366Subsidiary (income) expense
    
    
    (26,522
    )
    
    
    (2,795
    )
    
    
    
    
    
    
    29,317
    
    
    
    Other income
    
    
    
    
    
    
    (13
    )
    
    
    (689
    )
    
    
    
    
    
    
    (702
    )Operating income (loss)
    
    
    25,012
    
    
    
    58,605
    
    
    
    4,676
    
    
    
    (29,317
    )
    
    
    58,976Interest expense, net
    
    
    1,477
    
    
    
    17,605
    
    
    
    715
    
    
    
    
    
    
    
    19,797Income (loss) before income taxes
    
    
    23,535
    
    
    
    41,000
    
    
    
    3,961
    
    
    
    (29,317
    )
    
    
    39,179Income tax (benefit) expense
    
    
    (1,108
    )
    
    
    14,478
    
    
    
    1,166
    
    
    
    
    
    
    
    14,536Net income (loss)
    
    $
    24,643
    
    
    $
    26,522
    
    
    $
    2,795
    
    
    $
    (29,317
    )
    
    $
    24,643
 19




---



##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorThree months ended June 30, 2005
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    318,147
    
    
    $
    17,815
    
    
    $
    (2,615
    )
    
    $
    333,347Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    213,461
    
    
    
    12,878
    
    
    
    (2,615
    )
    
    
    223,724Gross profit
    
    
    
    
    
    
    104,686
    
    
    
    4,937
    
    
    
    
    
    
    
    109,623Compensation and related benefits
    
    
    
    
    
    
    53,318
    
    
    
    2,911
    
    
    
    
    
    
    
    56,229Advertising and promotion
    
    
    
    
    
    
    13,381
    
    
    
    159
    
    
    
    
    
    
    
    13,540Other selling, general and administrative
    
    
    536
    
    
    
    17,509
    
    
    
    697
    
    
    
    
    
    
    
    18,742Subsidiary (income) expense
    
    
    (7,955
    )
    
    
    (744
    )
    
    
    
    
    
    
    8,699
    
    
    
    Other expense
    
    
    
    
    
    
    40
    
    
    
    8
    
    
    
    
    
    
    
    48Operating income (loss)
    
    
    7,419
    
    
    
    21,182
    
    
    
    1,162
    
    
    
    (8,699
    )
    
    
    21,064Interest expense, net
    
    
    700
    
    
    
    8,730
    
    
    
    375
    
    
    
    
    
    
    
    9,805Income (loss) before income taxes
    
    
    6,719
    
    
    
    12,452
    
    
    
    787
    
    
    
    (8,699
    )
    
    
    11,259Income tax (benefit) expense
    
    
    (438
    )
    
    
    4,497
    
    
    
    43
    
    
    
    
    
    
    
    4,102Net income (loss)
    
    $
    7,157
    
    
    $
    7,955
    
    
    $
    744
    
    
    $
    (8,699
    )
    
    $
    7,157
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorSix months ended June 30, 2005
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)(in thousands)Revenue
    
    $
    
    
    
    $
    640,493
    
    
    $
    35,500
    
    
    $
    (6,211
    )
    
    $
    669,782Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    434,388
    
    
    
    26,003
    
    
    
    (6,211
    )
    
    
    454,180Gross profit
    
    
    
    
    
    
    206,105
    
    
    
    9,497
    
    
    
    
    
    
    
    215,602Compensation and related benefits
    
    
    
    
    
    
    107,639
    
    
    
    5,904
    
    
    
    
    
    
    
    113,543Advertising and promotion
    
    
    
    
    
    
    27,864
    
    
    
    277
    
    
    
    
    
    
    
    28,141Other selling, general and administrative
    
    
    1,014
    
    
    
    35,439
    
    
    
    1,111
    
    
    
    
    
    
    
    37,564Subsidiary (income) expense
    
    
    (13,977
    )
    
    
    (1,554
    )
    
    
    
    
    
    
    15,531
    
    
    
    Other income
    
    
    
    
    
    
    (2,470
    )
    
    
    (87
    )
    
    
    
    
    
    
    (2,557
    )Operating income (loss)
    
    
    12,963
    
    
    
    39,187
    
    
    
    2,292
    
    
    
    (15,531
    )
    
    
    38,911Interest expense, net
    
    
    5,274
    
    
    
    17,301
    
    
    
    701
    
    
    
    
    
    
    
    23,276Income (loss) before income taxes
    
    
    7,689
    
    
    
    21,886
    
    
    
    1,591
    
    
    
    (15,531
    )
    
    
    15,635Income tax (benefit) expense
    
    
    (2,263
    )
    
    
    7,909
    
    
    
    37
    
    
    
    
    
    
    
    5,683Net income (loss)
    
    $
    9,952
    
    
    $
    13,977
    
    
    $
    1,554
    
    
    $
    (15,531
    )
    
    $
    9,952
 20




---



##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Supplemental Condensed Consolidating Statements of Cash Flows
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorSix months ended June 30, 2006
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)(in thousands)NET CASH PROVIDED BY OPERATING ACTIVITIES:
    
    $
    
    
    
    $
    32,263
    
    
    $
    1,669
    
    
    $
    33,932CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    
    
    
    
    (8,919
    )
    
    
    (515
    )
    
    
    (9,434
    )Investment/distribution
    
    
    50,043
    
    
    
    (50,043
    )
    
    
    
    
    
    
    Other investing
    
    
    
    
    
    
    (359
    )
    
    
    
    
    
    
    (359
    )Net cash provided by (used in) investing activities
    
    
    50,043
    
    
    
    (59,321
    )
    
    
    (515
    )
    
    
    (9,793
    )CASH FLOWS FROM FINANCING ACTIVITIES:GNC Corporation investment in General Nutrition Centers, Inc
    
    
    382
    
    
    
    
    
    
    
    
    
    
    
    382Restricted payment made to GNC Corporation shareholders
    
    
    (49,934
    )
    
    
    
    
    
    
    
    
    
    
    (49,934
    )Payments on long-term debt
    
    
    (491
    )
    
    
    
    
    
    
    (530
    )
    
    
    (1,021
    )Other financing
    
    
    
    
    
    
    (1,996
    )
    
    
    
    
    
    
    (1,996
    )Net cash (used in) provided by financing activities
    
    
    (50,043
    )
    
    
    (1,996
    )
    
    
    (530
    )
    
    
    (52,569
    )Effect of exchange rate on cash
    
    
    
    
    
    
    
    
    
    
    (105
    )
    
    
    (105
    )Net (decrease) increase in cash
    
    
    
    
    
    
    (29,054
    )
    
    
    519
    
    
    
    (28,535
    )Beginning balance, cash
    
    
    
    
    
    
    83,143
    
    
    
    2,870
    
    
    
    86,013Ending balance, cash
    
    $
    
    
    
    $
    54,089
    
    
    $
    3,389
    
    
    $
    57,478
 21




---



##### 



GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Supplemental Condensed Consolidating Statements of Cash Flows
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorSix months ended June 30, 2005
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)(in thousands)Net cash provided by operating activities
    
    $
    4,506
    
    
    $
    12,960
    
    
    $
    1,104
    
    
    $
    18,570CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    
    
    
    
    (8,811
    )
    
    
    (104
    )
    
    
    (8,915
    )Investment/distribution
    
    
    35,490
    
    
    
    (35,490
    )
    
    
    
    
    
    
    Other investing
    
    
    
    
    
    
    (1,105
    )
    
    
    
    
    
    
    (1,105
    )Net cash provided by (used in) investing activities
    
    
    35,490
    
    
    
    (45,406
    )
    
    
    (104
    )
    
    
    (10,020
    )CASH FLOWS FROM FINANCING ACTIVITIES:GNC Corporation return of capital
from General Nutrition Centers, Inc
    
    
    (416
    )
    
    
    
    
    
    
    
    
    
    
    (416
    )Payments on long-term debt  third parties
    
    
    (185,490
    )
    
    
    
    
    
    
    (504
    )
    
    
    (185,994
    )Proceeds from senior notes issuance
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    150,000Other financing
    
    
    (4,090
    )
    
    
    1,800
    
    
    
    
    
    
    
    (2,290
    )Net cash (used in) provided by financing activities
    
    
    (39,996
    )
    
    
    1,800
    
    
    
    (504
    )
    
    
    (38,700
    )Effect of exchange rate on cash
    
    
    
    
    
    
    
    
    
    
    (111
    )
    
    
    (111
    )Net (decrease) increase in cash
    
    
    
    
    
    
    (30,646
    )
    
    
    385
    
    
    
    (30,261
    )Beginning balance, cash
    
    
    
    
    
    
    82,722
    
    
    
    2,439
    
    
    
    85,161Ending balance, cash
    
    $
    
    
    
    $
    52,076
    
    
    $
    2,824
    
    
    $
    54,900
 NOTE
10. SUBSEQUENT EVENTS
  22




---



##### 



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




---



##### 



Executive Overview
  
    
    introduced a single national pricing structure in order to simplify our pricing
approach and improve our customer value perception;
    
    developed and executed a national, more diversified marketing program focused on
competitive pricing of key items and reinforcing GNCs well-recognized and dominant
brand name among consumers;
    
    overhauled our field organization and store programs to improve our value-added
customer shopping experience;
    
    focused our merchandising and marketing initiatives on driving increased traffic
to our store locations, particularly with promotional events outside of Gold Card
week;
    
    improved supply chain and inventory management, resulting in better in-stock
levels of products generally and never out levels of top products;
    
    reinvigorated our proprietary new product development activities;
    
    revitalized vendor relationships, including their new product development
activities and our exclusive or first-to-market access to new products;
    
    realigned our franchise system with our corporate strategies and re-acquired or
closed unprofitable or non-compliant franchised stores in order to improve the
financial performance of the franchise system;
    
    reduced our overhead cost structure; and
    
    launched internet sales of our products on www.gnc.com.
  
    
    Our fourth consecutive quarter of positive same store sales in our Retail
segment. Same store sales, including internet sales, increased 11.5% for the three
months ended June 30, 2006 compared to the same period in 2005. We believe that
this increase was driven by our strategic initiatives that included simplifying our
pricing and a national, more diversified marketing program and developing a better
overall experience for our customers.
    
    A realigned domestic franchise program, operating in a more unified way with our
company-owned stores, which contributed to positive same store sales for our
domestic franchised locations for the third consecutive quarter.
    
    A more efficient and productive manufacturing environment, which allowed for the
utilization of excess manufacturing capacity for the production of third-party
contract products. Third-party sales in the manufacturing unit were approximately
66% higher than usual for the three months ended June 30, 2006, a direct result of
utilizing available excess capacity.
 Results of Operations
   24




---



##### 



Results of Operations
  Three Months Ended
    
    

    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(unaudited)Revenues:Retail
    
    $
    284.8
    
    
    
    74.4
    %
    
    $
    250.3
    
    
    
    75.1
    %
    
    $
    579.7
    
    
    
    75.3
    %
    
    $
    505.5
    
    
    
    75.5
    %Franchise
    
    
    59.3
    
    
    
    15.5
    %
    
    
    57.7
    
    
    
    17.3
    %
    
    
    119.6
    
    
    
    15.5
    %
    
    
    110.4
    
    
    
    16.5
    %Manufacturing / Wholesale
    
    
    38.7
    
    
    
    10.1
    %
    
    
    25.3
    
    
    
    7.6
    %
    
    
    70.4
    
    
    
    9.2
    %
    
    
    53.9
    
    
    
    8.0
    %Total net revenues
    
    
    382.8
    
    
    
    100.0
    %
    
    
    333.3
    
    
    
    100.0
    %
    
    
    769.7
    
    
    
    100.0
    %
    
    
    669.8
    
    
    
    100.0
    %Operating expenses:Cost of sales, including warehousing,
distribution and occupancy costs
    
    
    253.3
    
    
    
    66.2
    %
    
    
    223.7
    
    
    
    67.0
    %
    
    
    510.2
    
    
    
    66.3
    %
    
    
    454.2
    
    
    
    67.9
    %Compensation and related benefits
    
    
    60.6
    
    
    
    15.8
    %
    
    
    56.2
    
    
    
    16.9
    %
    
    
    126.5
    
    
    
    16.4
    %
    
    
    113.5
    
    
    
    16.9
    %Advertising and promotion
    
    
    14.5
    
    
    
    3.8
    %
    
    
    13.5
    
    
    
    4.1
    %
    
    
    30.3
    
    
    
    3.9
    %
    
    
    28.1
    
    
    
    4.2
    %Other selling, general and administrative
expenses
    
    
    22.5
    
    
    
    5.9
    %
    
    
    17.8
    
    
    
    5.3
    %
    
    
    42.4
    
    
    
    5.5
    %
    
    
    35.6
    
    
    
    5.3
    %Amortization expense
    
    
    1.0
    
    
    
    0.2
    %
    
    
    0.9
    
    
    
    0.3
    %
    
    
    2.0
    
    
    
    0.3
    %
    
    
    1.9
    
    
    
    0.3
    %Foreign currency gain
    
    
    (0.1
    )
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (0.7
    )
    
    
    -0.1
    %
    
    
    (0.1
    )
    
    
    0.0
    %Other income
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (2.5
    )
    
    
    -0.4
    %Total operating expenses
    
    
    351.8
    
    
    
    91.9
    %
    
    
    312.1
    
    
    
    93.6
    %
    
    
    710.7
    
    
    
    92.3
    %
    
    
    630.7
    
    
    
    94.2
    %Operating income:Retail
    
    
    33.6
    
    
    
    8.8
    %
    
    
    21.2
    
    
    
    6.4
    %
    
    
    68.9
    
    
    
    8.9
    %
    
    
    39.1
    
    
    
    5.8
    %Franchise
    
    
    15.0
    
    
    
    3.9
    %
    
    
    12.2
    
    
    
    3.6
    %
    
    
    31.1
    
    
    
    4.0
    %
    
    
    23.0
    
    
    
    3.4
    %Manufacturing / Wholesale
    
    
    13.4
    
    
    
    3.5
    %
    
    
    12.5
    
    
    
    3.8
    %
    
    
    24.5
    
    
    
    3.2
    %
    
    
    24.6
    
    
    
    3.7
    %Unallocated corporate and other
(costs) income:Warehousing and distribution costs
    
    
    (12.5
    )
    
    
    -3.3
    %
    
    
    (12.2
    )
    
    
    -3.7
    %
    
    
    (25.3
    )
    
    
    -3.3
    %
    
    
    (24.9
    )
    
    
    -3.7
    %Corporate costs
    
    
    (18.5
    )
    
    
    -4.8
    %
    
    
    (12.6
    )
    
    
    -3.7
    %
    
    
    (40.2
    )
    
    
    -5.1
    %
    
    
    (25.4
    )
    
    
    -3.8
    %Other income
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    2.5
    
    
    
    0.4
    %Subtotal unallocated corporate and
other costs net
    
    
    (31.0
    )
    
    
    -8.1
    %
    
    
    (24.8
    )
    
    
    -7.4
    %
    
    
    (65.5
    )
    
    
    -8.4
    %
    
    
    (47.8
    )
    
    
    -7.1
    %Total operating income
    
    
    31.0
    
    
    
    8.1
    %
    
    
    21.1
    
    
    
    6.4
    %
    
    
    59.0
    
    
    
    7.7
    %
    
    
    38.9
    
    
    
    5.8
    %Interest expense, net
    
    
    10.1
    
    
    
    
    
    
    
    9.8
    
    
    
    
    
    
    
    19.8
    
    
    
    
    
    
    
    23.3Income before income taxes
    
    
    20.9
    
    
    
    
    
    
    
    11.3
    
    
    
    
    
    
    
    39.2
    
    
    
    
    
    
    
    15.6Income tax expense
    
    
    7.8
    
    
    
    
    
    
    
    4.0
    
    
    
    
    
    
    
    14.6
    
    
    
    
    
    
    
    5.6Net income
    
    $
    13.1
    
    
    
    
    
    
    $
    7.3
    
    
    
    
    
    
    $
    24.6
    
    
    
    
    
    
    $
    10.0
 Note:
 25




---



##### 



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




---



##### 



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




---



##### 



Income Tax Expense
  Net Income
  28




---



##### 



Comparison of the Six Months Ended June 30, 2006 and 2005
 Revenues
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 Cost of Sales
  Product costs.
 Warehousing and distribution costs.
 Occupancy costs.
 Selling, General and Administrative (SG&A) Expenses
  29




---



##### 



Compensation and related benefits.
 Advertising and promotion.
 Other SG&A.
 Foreign Currency Gain
  Other Income
  Operating Income
  Retail.
 Franchise.
 Manufacturing/Wholesale.
 Warehousing & Distribution Costs.
 Corporate Costs.
 Other.
 30




---



##### 



Interest Expense
  Income Tax Expense
  Net Income
  31




---



##### 



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




---



##### 



Senior Credit Facility.
  Senior Notes.
 Senior Subordinated Notes.
 Common and Preferred Stock.
 Contractual Obligations
  Off Balance Sheet Arrangements
   33




---



##### 



Effect of Inflation
  Critical Accounting Estimates
   Recently Issued Accounting Pronouncements
   Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  Item 4. Controls and Procedures.
   34




---



##### 



PART II  OTHER INFORMATION
 Item 1. Legal Proceedings.
   Ephedra (Ephedrine Alkaloids).
 Pro-Hormone/Androstenedione Cases.
 Harry Rodriguez v. General Nutrition Companies, Inc. (previously pending in the
Supreme Court of the State of New York, New York County, New York, Index No. 02/126277).
 Everett Abrams v. General Nutrition Companies, Inc. (previously pending in the
Superior Court of New Jersey, Mercer County, New Jersey, Docket No. L-3789-02).
 Shawn Brown, Ozan Cirak, Thomas Hannon, and Luke Smith v. General Nutrition Companies,
Inc. (previously pending in the 15 th Judicial Circuit Court, Palm Beach County,
Florida, Index. No. CA-02-14221AB).
 35




---



##### 



Abrams, et al. v. General Nutrition Companies, Inc., et al., previously pending in
the Common Pleas Court of Philadelphia County, Philadelphia, Class Action No. 02-703886).
 David Pio and Ty Stephens, individually and on behalf of all others similarly situated
v. General Nutrition Companies, Inc. , previously pending in the Circuit Court of Cook
County, Illinois, County Department, Chancery Division, Case No. 02-CH-14122).
 Santiago Guzman, individually, on behalf of all others similarly situated, and on
behalf of the general public v. General Nutrition Companies, Inc., previously pending on
the California Judicial Counsel Coordination Proceeding No. 4363, Los Angeles County Superior
Court).
 Companies Creditors
Arrangement Act In re MuscleTech Research and Development, Inc., et al.
  Class Action Settlement.
 36




---



##### 



Nutrition
21.
 Franklin Publications.
 Visa/MasterCard Antitrust Litigation.
 Product Claim Settlement.
 Pennsylvania Claim
  37




---



##### 



Item 1A. Risk Factors.
  Risks Relating to Our Business and Industry
 We operate in a highly competitive industry. Our failure to compete effectively could adversely
affect our market share, revenues, and growth prospects.
  Unfavorable publicity or consumer perception of our products and any similar products distributed
by other companies could cause fluctuations in our operating results and could have a material
adverse effect on our reputation, the demand for our products, and our ability to generate
revenues.
  Our failure to appropriately respond to changing consumer preferences and demand for new products
could significantly harm our customer relationships and product sales.
   
    
    accurately anticipate customer needs;
    
    innovate and develop new products;
    
    successfully commercialize new products in a timely manner;
 38




---



##### 




    
    price our products competitively;
    
    manufacture and deliver our products in sufficient volumes and in a timely manner; and
    
    differentiate our product offerings from those of our competitors.
  Changes in our management team could affect our business strategy and adversely impact our
performance and results of operations.
  Compliance with new and existing governmental regulations could increase our costs significantly
and adversely affect our results of operations.
   39




---



##### 



Our failure to comply with FTC regulations and existing consent decrees imposed on us by the FTC
could result in substantial monetary penalties and could adversely affect our operating results.
  Because we rely on our manufacturing operations to produce nearly all of the proprietary products
we sell, disruptions in our manufacturing system or losses of manufacturing certifications could
adversely affect our sales and customer relationships.
  If we fail to protect our brand name, competitors may adopt trade names that dilute the value of
our brand name.
  Intellectual property litigation and infringement claims against us could cause us to incur
significant expenses or prevent us from manufacturing, selling, or using some aspect of our
products, which could adversely affect our revenues and market share.
  A substantial amount of our revenues are generated from our franchisees, and our revenues could
decrease significantly if our franchisees do not conduct their operations profitably or if we
fail to attract new franchisees.
   40




---



##### 



Economic, political, and other risks associated with our international operations could adversely
affect our revenues and international growth prospects.
  
    
    political and economic instability of foreign markets;
    
    foreign governments restrictive trade policies;
    
    inconsistent product regulation or sudden policy changes by foreign agencies or
governments;
    
    the imposition of, or increase in, duties, taxes, government royalties, or non-tariff trade
barriers;
    
    difficulty in collecting international accounts receivable and potentially longer payment
cycles;
    
    increased costs in maintaining international franchise and marketing efforts;
    
    difficulty in operating our manufacturing facility abroad and procuring supplies from
overseas suppliers;
    
    exchange controls;
    
    problems entering international markets with different cultural bases and consumer
preferences; and
    
    fluctuations in foreign currency exchange rates.
  Franchise regulations could limit our ability to terminate or replace under-performing
franchises, which could adversely impact franchise revenues.
  We may incur material product liability claims, which could increase our costs and adversely
affect our reputation, revenues, and operating income.
  41




---



##### 



We are not insured for a significant portion of our claims exposure, which could materially and
adversely affect our operating income and profitability.
  Risks Related to Our Substantial Debt
 Our substantial debt could adversely affect our results of operations and financial condition and
otherwise adversely impact our operating income and growth prospects.
   
    
    require us to use all or a large portion of our cash to pay principal and interest on our
debt, which could reduce the availability of our cash to fund working capital, capital
expenditures, and other business activities;
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate;
    
    restrict us from making strategic acquisitions or exploiting business opportunities;
    
    make it more difficult for us to satisfy our obligations with respect to our debt;
    
    place us at a competitive disadvantage compared to our competitors that have less debt; and
    
    limit our ability to borrow additional funds, dispose of assets, or pay cash dividends.
  We require a significant amount of cash to service our debt. Our ability to generate cash depends
on many factors beyond our control and, as a result, we may not be able to make payments on our
debt obligations.
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Changes in our results of operation or financial condition and other events may adversely affect
our ability to comply with financial covenants in our senior credit facility or other debt
covenants.
  Despite our current significant level of debt, we may still be able to incur more debt, which
would increase the risks described above.
  Our Parents principal stockholder may take actions that conflict with other stockholders and
investors interests. This control may have the effect of delaying or preventing changes of
control or changes in management, or limiting the ability of other stockholders to approve
transactions they may deem to be in their best interest.
  Certain provisions of our corporate governing documents and Delaware law could
discourage, delay, or prevent a merger or acquisition at a premium price.
  Our holding company structure makes us dependent on our subsidiaries for our
cash flow and subordinates the rights of our stockholders to the rights of
creditors of our subsidiaries in the event of an insolvency or liquidation of
any of our subsidiaries.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  Item 6. Exhibits.
 Exhibit 31.1 
    
    Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 31.2 
    
    Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 32.1 
    
    Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
  GENERAL NUTRITION CENTERS, INC.(Registrant)August 4, 2006
    
    /s/ Joseph M. FortunatoJoseph M. FortunatoPresident and Chief Executive Officer(principal executive officer)August 4, 2006
    
    /s/ Curtis J. LarrimerCurtis J. LarrimerExecutive Vice President andChief Financial Officer(principal financial and accounting officer)
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