##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission File Number: 333-114502
 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 September 30, 2006 (unaudited) and December 31, 2005
    
    
    3Unaudited Consolidated Statements of Operations and Comprehensive Income for the three
months ended September 30, 2006 and 2005 and for the nine months ended September 30,
2006 and 2005
    
    
    4Unaudited Consolidated Statement of Stockholders Equity for the nine months ended
September 30, 2006
    
    
    5Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2006
and 2005
    
    
    6Summarized Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    35Item 4. Controls and Procedures.
    
    
    35PART II  OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    36Item 1A. Risk Factors.
    
    
    39Item 6. Exhibits.
    
    
    45Signatures
    
    
    46EX-31.1EX-31.2EX-32.1
  EXPLANATORY NOTE
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets
 (in thousands, except share data)
 September 30,
    
    
    December 31,2006
    
    
    2005 *(unaudited)Current assets:Cash and cash equivalents
    
    $
    87,360
    
    
    $
    86,013Receivables, net of reserve of $3,792 and $8,898, respectively
    
    
    84,503
    
    
    
    72,439Inventories, net (Note 3)
    
    
    313,531
    
    
    
    298,166Deferred tax assets, net
    
    
    18,078
    
    
    
    13,861Other current assets
    
    
    25,743
    
    
    
    30,826Total current assets
    
    
    529,215
    
    
    
    501,305Long-term assets:Goodwill (Note 4)
    
    
    81,044
    
    
    
    80,109Brands (Note 4)
    
    
    212,000
    
    
    
    212,000Other intangible assets, net (Note 4)
    
    
    24,011
    
    
    
    26,460Property, plant and equipment, net
    
    
    169,843
    
    
    
    179,482Deferred financing fees, net
    
    
    13,890
    
    
    
    16,125Deferred tax assets, net
    
    
    676
    
    
    
    45Other long-term assets
    
    
    6,295
    
    
    
    10,114Total long-term assets
    
    
    507,759
    
    
    
    524,335Total assets
    
    $
    1,036,974
    
    
    $
    1,025,640Current liabilities:Accounts payable, includes cash overdraft of $5,576 and $5,063, respectively
    
    $
    112,356
    
    
    $
    104,595Accrued payroll and related liabilities
    
    
    23,808
    
    
    
    20,812Accrued income taxes
    
    
    7,436
    
    
    
    2,431Accrued interest
    
    
    9,195
    
    
    
    7,877Current portion, long-term debt
    
    
    2,143
    
    
    
    2,117Other current liabilities
    
    
    69,701
    
    
    
    64,793Total current liabilities
    
    
    224,639
    
    
    
    202,625Long-term liabilities:Long-term debt
    
    
    469,668
    
    
    
    471,244Other long-term liabilities
    
    
    10,828
    
    
    
    10,891Total long-term liabilities
    
    
    480,496
    
    
    
    482,135Total liabilities
    
    
    705,135
    
    
    
    684,760Stockholders equity:Common stock, $0.01 par value,
1,000 shares authorized, 100 shares issued and outstanding
    
    
    
    
    
    
    Paid-in-capital
    
    
    280,363
    
    
    
    277,989Retained earnings
    
    
    50,308
    
    
    
    61,667Accumulated other comprehensive income
    
    
    1,168
    
    
    
    1,224Total stockholders equity
    
    
    331,839
    
    
    
    340,880Total liabilities and stockholders equity
    
    $
    1,036,974
    
    
    $
    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 nine monthsended September 30,
    
    
    ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    367,735
    
    
    $
    322,559
    
    
    $
    1,137,399
    
    
    $
    992,341Cost of sales, including costs of warehousing, distribution and occupancy
    
    
    241,251
    
    
    
    222,084
    
    
    
    751,451
    
    
    
    676,264Gross profit
    
    
    126,484
    
    
    
    100,475
    
    
    
    385,948
    
    
    
    316,077Compensation and related benefits
    
    
    60,831
    
    
    
    58,432
    
    
    
    187,300
    
    
    
    171,975Advertising and promotion
    
    
    10,982
    
    
    
    8,639
    
    
    
    41,337
    
    
    
    36,780Other selling, general and administrative
    
    
    21,760
    
    
    
    18,495
    
    
    
    66,126
    
    
    
    56,059Foreign currency gain
    
    
    (3
    )
    
    
    (80
    )
    
    
    (705
    )
    
    
    (137
    )Other expense (income)
    
    
    1,078
    
    
    
    
    
    
    
    1,078
    
    
    
    (2,500
    )Operating income
    
    
    31,836
    
    
    
    14,989
    
    
    
    90,812
    
    
    
    53,900Interest expense, net (Note 5)
    
    
    9,687
    
    
    
    9,957
    
    
    
    29,484
    
    
    
    33,233Income before income taxes
    
    
    22,149
    
    
    
    5,032
    
    
    
    61,328
    
    
    
    20,667Income tax expense
    
    
    8,217
    
    
    
    1,830
    
    
    
    22,753
    
    
    
    7,513Net income
    
    
    13,932
    
    
    
    3,202
    
    
    
    38,575
    
    
    
    13,154Other comprehensive (loss) income
    
    
    (12
    )
    
    
    805
    
    
    
    (56
    )
    
    
    271Comprehensive income
    
    $
    13,920
    
    
    $
    4,007
    
    
    $
    38,519
    
    
    $
    13,425
  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
    
    
    
    
    
    
    
    
    
    
    1,887
    
    
    
    
    
    
    
    
    
    
    
    1,887Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,575
    
    
    
    
    
    
    
    38,575Restricted payment made by General
Nutrition Centers, Inc. to GNC
Corporation Common
Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49,934
    )
    
    
    
    
    
    
    (49,934
    )Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    (56
    )Balance at September 30, 2006 (unaudited)
    
    
    100
    
    
    $
    
    
    
    $
    280,363
    
    
    $
    50,308
    
    
    $
    1,168
    
    
    $
    331,839
  5




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 (unaudited)(in thousands)
 Nine months
    
    
    Nine monthsended
    
    
    endedSeptember 30,
    
    
    September 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net
income
    
    $
    38,575
    
    
    $
    13,154Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
expense
    
    
    25,730
    
    
    
    27,840Fixed asset
write-off
    
    
    220
    
    
    
    366Loss on sale of
subsidiary
    
    
    1,078
    
    
    
    Deferred fee
writedown - early debt
extinguishment
    
    
    
    
    
    
    3,890Amortization of intangible assets
    
    
    3,471
    
    
    
    2,985Amortization of deferred financing fees
    
    
    2,235
    
    
    
    2,103Increase in provision for inventory
losses
    
    
    6,176
    
    
    
    5,889Non-cash stock-based
compensation
    
    
    1,887
    
    
    
    (Decrease) increase in provision for losses on accounts
receivable
    
    
    (1,984
    )
    
    
    1,894(Increase) decrease in net deferred
taxes
    
    
    (4,848
    )
    
    
    6,368Changes in assets and liabilities:Increase in
receivables
    
    
    (11,812
    )
    
    
    (7,370
    )Increase in inventory,
net
    
    
    (20,890
    )
    
    
    (13,431
    )Decrease in franchise note receivables,
net
    
    
    3,598
    
    
    
    7,568Decrease in other
assets
    
    
    4,182
    
    
    
    5,273Increase (decrease) in accounts
payable
    
    
    7,214
    
    
    
    (23,128
    )Increase in accrued
taxes
    
    
    5,005
    
    
    
    Increase in interest
payable
    
    
    1,317
    
    
    
    7,301Increase (decrease) in accrued
liabilities
    
    
    7,701
    
    
    
    (6,048
    )Net cash provided by operating activities
    
    
    68,855
    
    
    
    34,654CASH FLOWS FROM INVESTING ACTIVITIES:Capital
expenditures
    
    
    (16,050
    )
    
    
    (13,819
    )Sales of corporate stores to
franchisees
    
    
    
    
    
    
    23Store acquisition
costs
    
    
    (591
    )
    
    
    (547
    )Net cash used in investing activities
    
    
    (16,641
    )
    
    
    (14,343
    )CASH FLOWS FROM FINANCING ACTIVITIES:Decrease in GNC Corporation investment in
General Nutrition Centers,
Inc.
    
    
    (23
    )
    
    
    (834
    )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 (decrease) in cash
overdrafts
    
    
    513
    
    
    
    (1,067
    )Proceeds from senior notes
issuance
    
    
    
    
    
    
    150,000Payments on long-term
debt
    
    
    (1,550
    )
    
    
    (186,500
    )Debt financing
fees
    
    
    
    
    
    
    (4,672
    )Net cash used in financing activities
    
    
    (50,889
    )
    
    
    (43,073
    )Effect of exchange rate on
cash
    
    
    22
    
    
    
    4Net increase (decrease) in
cash
    
    
    1,347
    
    
    
    (22,758
    )Beginning balance, cash
    
    
    86,013
    
    
    
    85,161Ending balance,
cash
    
    $
    87,360
    
    
    $
    62,403
  6




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




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




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




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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.
 Wage and Hour Claim
 13




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




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
     September 30,
    
    September 30,2006
    
    2005(unaudited)Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected option life
    
    5
    years
    
    5
    yearsVolatility factor percentage of market price
    
    
    22.00
    %
    
    
    24.00
    %Discount rate
    
    
    4.59% - 5.10
    %
    
    
    3.84% - 4.18
    %
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005(unaudited)(in thousands)Net income as reported
    
    $
    3,202
    
    
    $
    13,154Less: total stock-based employee compensation
costs determined using fair value method, net
of tax
    
    
    (187
    )
    
    
    (582
    )Adjusted net income
    
    $
    3,015
    
    
    $
    12,572
 15




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 NOTE 8. SEGMENTS
  Three Months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(unaudited)(in thousands)Revenue:Retail
    
    $
    274,156
    
    
    $
    239,172
    
    
    $
    853,806
    
    
    $
    744,701Franchise
    
    
    60,727
    
    
    
    53,144
    
    
    
    180,341
    
    
    
    163,525Manufacturing/Wholesale:Intersegment (1)
    
    
    44,770
    
    
    
    45,749
    
    
    
    130,500
    
    
    
    150,467Third Party
    
    
    32,852
    
    
    
    30,243
    
    
    
    103,252
    
    
    
    84,115Sub total Manufacturing/Wholesale
    
    
    77,622
    
    
    
    75,992
    
    
    
    233,752
    
    
    
    234,582Sub total segment revenues
    
    
    412,505
    
    
    
    368,308
    
    
    
    1,267,899
    
    
    
    1,142,808Intersegment elimination (1)
    
    
    (44,770
    )
    
    
    (45,749
    )
    
    
    (130,500
    )
    
    
    (150,467
    )Total revenue
    
    $
    367,735
    
    
    $
    322,559
    
    
    $
    1,137,399
    
    
    $
    992,341(1) Intersegment revenues are eliminated from consolidated revenue.Operating income:Retail
    
    $
    31,012
    
    
    $
    16,431
    
    
    $
    99,921
    
    
    $
    55,537Franchise
    
    
    17,213
    
    
    
    14,640
    
    
    
    48,311
    
    
    
    37,607Manufacturing/Wholesale
    
    
    14,279
    
    
    
    11,477
    
    
    
    38,789
    
    
    
    36,087Unallocated corporate and other (costs) income:Warehousing and distribution
costs
    
    
    (12,644
    )
    
    
    (12,565
    )
    
    
    (37,965
    )
    
    
    (37,435
    )Corporate costs
    
    
    (16,946
    )
    
    
    (14,994
    )
    
    
    (57,166
    )
    
    
    (40,396
    )Other (expense) income
    
    
    (1,078
    )
    
    
    
    
    
    
    (1,078
    )
    
    
    2,500Sub total unallocated corporate and
other (costs) income
    
    
    (30,668
    )
    
    
    (27,559
    )
    
    
    (96,209
    )
    
    
    (75,331
    )Total operating income
    
    $
    31,836
    
    
    $
    14,989
    
    
    $
    90,812
    
    
    $
    53,900
 September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)(unaudited)Total assets:Retail
    
    $
    466,698
    
    
    $
    441,364Franchise
    
    
    284,795
    
    
    
    290,092Manufacturing / Wholesale
    
    
    151,587
    
    
    
    148,445Corporate / Other
    
    
    133,894
    
    
    
    145,739Total assets
    
    $
    1,036,974
    
    
    $
    1,025,640
 16




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 NOTE 9. SUPPLEMENTAL GUARANTOR INFORMATION
   Supplemental Condensed Consolidating Balance Sheets
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)September 30, 2006
    
    (in thousands)Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    82,919
    
    
    $
    4,441
    
    
    $
    
    
    
    $
    87,360Receivables, net
    
    
    2,366
    
    
    
    80,804
    
    
    
    1,333
    
    
    
    
    
    
    
    84,503Intercompany receivables
    
    
    
    
    
    
    30,873
    
    
    
    
    
    
    
    (30,873
    )
    
    
    Inventories, net
    
    
    
    
    
    
    297,235
    
    
    
    16,296
    
    
    
    
    
    
    
    313,531Other current assets
    
    
    246
    
    
    
    38,589
    
    
    
    4,986
    
    
    
    
    
    
    
    43,821Total current assets
    
    
    2,612
    
    
    
    530,420
    
    
    
    27,056
    
    
    
    (30,873
    )
    
    
    529,215Goodwill
    
    
    
    
    
    
    80,102
    
    
    
    942
    
    
    
    
    
    
    
    81,044Brands
    
    
    
    
    
    
    209,000
    
    
    
    3,000
    
    
    
    
    
    
    
    212,000Property, plant and equipment, net
    
    
    
    
    
    
    149,832
    
    
    
    20,011
    
    
    
    
    
    
    
    169,843Investment in subsidiaries
    
    
    802,310
    
    
    
    9,794
    
    
    
    
    
    
    
    (812,104
    )
    
    
    Other assets
    
    
    14,096
    
    
    
    39,482
    
    
    
    74
    
    
    
    (8,780
    )
    
    
    44,872Total assets
    
    $
    819,018
    
    
    $
    1,018,630
    
    
    $
    51,083
    
    
    $
    (851,757
    )
    
    $
    1,036,974Current liabilitiesCurrent liabilities
    
    $
    8,366
    
    
    $
    205,527
    
    
    $
    10,746
    
    
    $
    
    
    
    $
    224,639Intercompany payables
    
    
    19,362
    
    
    
    
    
    
    
    11,511
    
    
    
    (30,873
    )
    
    
    Total current liabilities
    
    
    27,728
    
    
    
    205,527
    
    
    
    22,257
    
    
    
    (30,873
    )
    
    
    224,639Long-term debt
    
    
    459,451
    
    
    
    
    
    
    
    18,997
    
    
    
    (8,780
    )
    
    
    469,668Other long-term liabilities
    
    
    
    
    
    
    10,793
    
    
    
    35
    
    
    
    
    
    
    
    10,828Total liabilities
    
    
    487,179
    
    
    
    216,320
    
    
    
    41,289
    
    
    
    (39,653
    )
    
    
    705,135Total stockholders equity (deficit)
    
    
    331,839
    
    
    
    802,310
    
    
    
    9,794
    
    
    
    (812,104
    )
    
    
    331,839Total liabilities and stockholders equity (deficit)
    
    $
    819,018
    
    
    $
    1,018,630
    
    
    $
    51,083
    
    
    $
    (851,757
    )
    
    $
    1,036,974
 17




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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-GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedDecember 31, 2005
    
    (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




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Three months ended September 30, 2006
    
    
    
    
    
    
    
    
    
    (in thousands)Revenue
    
    $
    
    
    
    $
    348,570
    
    
    $
    21,102
    
    
    $
    (1,937
    )
    
    $
    367,735Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    227,815
    
    
    
    15,373
    
    
    
    (1,937
    )
    
    
    241,251Gross profit
    
    
    
    
    
    
    120,755
    
    
    
    5,729
    
    
    
    
    
    
    
    126,484Compensation and related benefits
    
    
    
    
    
    
    57,436
    
    
    
    3,395
    
    
    
    
    
    
    
    60,831Advertising and promotion
    
    
    
    
    
    
    10,836
    
    
    
    146
    
    
    
    
    
    
    
    10,982Other selling, general and administrative
    
    
    490
    
    
    
    20,886
    
    
    
    384
    
    
    
    
    
    
    
    21,760Subsidiary (income) expense
    
    
    (14,716
    )
    
    
    28
    
    
    
    
    
    
    
    14,688
    
    
    
    Other (income) expense
    
    
    
    
    
    
    (6
    )
    
    
    1,081
    
    
    
    
    
    
    
    1,075Operating income (loss)
    
    
    14,226
    
    
    
    31,575
    
    
    
    723
    
    
    
    (14,688
    )
    
    
    31,836Interest expense, net
    
    
    757
    
    
    
    8,598
    
    
    
    332
    
    
    
    
    
    
    
    9,687Income (loss) before income taxes
    
    
    13,469
    
    
    
    22,977
    
    
    
    391
    
    
    
    (14,688
    )
    
    
    22,149Income tax (benefit) expense
    
    
    (463
    )
    
    
    8,261
    
    
    
    419
    
    
    
    
    
    
    
    8,217Net income (loss)
    
    $
    13,932
    
    
    $
    14,716
    
    
    $
    (28
    )
    
    $
    (14,688
    )
    
    $
    13,932
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Nine months ended September 30, 2006
    
    
    
    
    
    
    
    
    
    (in thousands)Revenue
    
    $
    
    
    
    $
    1,081,953
    
    
    $
    63,309
    
    
    $
    (7,863
    )
    
    $
    1,137,399Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    713,598
    
    
    
    45,716
    
    
    
    (7,863
    )
    
    
    751,451Gross profit
    
    
    
    
    
    
    368,355
    
    
    
    17,593
    
    
    
    
    
    
    
    385,948Compensation and related benefits
    
    
    
    
    
    
    177,269
    
    
    
    10,031
    
    
    
    
    
    
    
    187,300Advertising and promotion
    
    
    
    
    
    
    40,798
    
    
    
    539
    
    
    
    
    
    
    
    41,337Other selling, general and administrative
    
    
    2,000
    
    
    
    62,894
    
    
    
    1,232
    
    
    
    
    
    
    
    66,126Subsidiary (income) expense
    
    
    (41,238
    )
    
    
    (2,767
    )
    
    
    
    
    
    
    44,005
    
    
    
    Other (income) expense
    
    
    
    
    
    
    (19
    )
    
    
    392
    
    
    
    
    
    
    
    373Operating income (loss)
    
    
    39,238
    
    
    
    90,180
    
    
    
    5,399
    
    
    
    (44,005
    )
    
    
    90,812Interest expense, net
    
    
    2,234
    
    
    
    26,203
    
    
    
    1,047
    
    
    
    
    
    
    
    29,484Income (loss) before income taxes
    
    
    37,004
    
    
    
    63,977
    
    
    
    4,352
    
    
    
    (44,005
    )
    
    
    61,328Income tax (benefit) expense
    
    
    (1,571
    )
    
    
    22,739
    
    
    
    1,585
    
    
    
    
    
    
    
    22,753Net income (loss)
    
    $
    38,575
    
    
    $
    41,238
    
    
    $
    2,767
    
    
    $
    (44,005
    )
    
    $
    38,575
 19




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GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED  CONTINUED)
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Three months ended September 30, 2005
    
    
    
    
    
    
    
    
    
    (in thousands)Revenue
    
    $
    
    
    
    $
    307,427
    
    
    $
    17,696
    
    
    $
    (2,564
    )
    
    $
    322,559Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    211,586
    
    
    
    13,062
    
    
    
    (2,564
    )
    
    
    222,084Gross profit
    
    
    
    
    
    
    95,841
    
    
    
    4,634
    
    
    
    
    
    
    
    100,475Compensation and related benefits
    
    
    
    
    
    
    55,370
    
    
    
    3,062
    
    
    
    
    
    
    
    58,432Advertising and promotion
    
    
    
    
    
    
    8,501
    
    
    
    138
    
    
    
    
    
    
    
    8,639Other selling, general and administrative
    
    
    522
    
    
    
    16,667
    
    
    
    1,306
    
    
    
    
    
    
    
    18,495Subsidiary (income) expense
    
    
    (3,990
    )
    
    
    204
    
    
    
    
    
    
    
    3,786
    
    
    
    Other income
    
    
    
    
    
    
    (22
    )
    
    
    (58
    )
    
    
    
    
    
    
    (80
    )Operating income (loss)
    
    
    3,468
    
    
    
    15,121
    
    
    
    186
    
    
    
    (3,786
    )
    
    
    14,989Interest expense, net
    
    
    719
    
    
    
    8,868
    
    
    
    370
    
    
    
    
    
    
    
    9,957Income (loss) before income taxes
    
    
    2,749
    
    
    
    6,253
    
    
    
    (184
    )
    
    
    (3,786
    )
    
    
    5,032Income tax (benefit) expense
    
    
    (453
    )
    
    
    2,263
    
    
    
    20
    
    
    
    
    
    
    
    1,830Net income (loss)
    
    $
    3,202
    
    
    $
    3,990
    
    
    $
    (204
    )
    
    $
    (3,786
    )
    
    $
    3,202
 Supplemental Condensed Consolidating Statements of Operations
 Combined
    
    
    CombinedParent/
    
    
    Guarantor
    
    
    Non-GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Nine months ended September 30, 2005
    
    
    
    
    
    
    
    
    
    (in thousands)Revenue
    
    $
    
    
    
    $
    947,920
    
    
    $
    53,196
    
    
    $
    (8,775
    )
    
    $
    992,341Cost of sales, including costs of warehousing,
distribution and occupancy
    
    
    
    
    
    
    645,974
    
    
    
    39,065
    
    
    
    (8,775
    )
    
    
    676,264Gross profit
    
    
    
    
    
    
    301,946
    
    
    
    14,131
    
    
    
    
    
    
    
    316,077Compensation and related benefits
    
    
    
    
    
    
    163,009
    
    
    
    8,966
    
    
    
    
    
    
    
    171,975Advertising and promotion
    
    
    
    
    
    
    36,365
    
    
    
    415
    
    
    
    
    
    
    
    36,780Other selling, general and administrative
    
    
    1,536
    
    
    
    52,106
    
    
    
    2,417
    
    
    
    
    
    
    
    56,059Subsidiary (income) expense
    
    
    (17,967
    )
    
    
    (1,350
    )
    
    
    
    
    
    
    19,317
    
    
    
    Other income
    
    
    
    
    
    
    (2,492
    )
    
    
    (145
    )
    
    
    
    
    
    
    (2,637
    )Operating income (loss)
    
    
    16,431
    
    
    
    54,308
    
    
    
    2,478
    
    
    
    (19,317
    )
    
    
    53,900Interest expense, net
    
    
    5,993
    
    
    
    26,169
    
    
    
    1,071
    
    
    
    
    
    
    
    33,233Income (loss) before income taxes
    
    
    10,438
    
    
    
    28,139
    
    
    
    1,407
    
    
    
    (19,317
    )
    
    
    20,667Income tax (benefit) expense
    
    
    (2,716
    )
    
    
    10,172
    
    
    
    57
    
    
    
    
    
    
    
    7,513Net income (loss)
    
    $
    13,154
    
    
    $
    17,967
    
    
    $
    1,350
    
    
    $
    (19,317
    )
    
    $
    13,154
 20




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##### Table of Contents



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




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




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Results of Operations
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(unaudited)Revenues:Retail
    
    $
    274.1
    
    
    
    74.5
    %
    
    $
    239.2
    
    
    
    74.1
    %
    
    $
    853.8
    
    
    
    75.1
    %
    
    $
    744.7
    
    
    
    75.0
    %Franchise
    
    
    60.7
    
    
    
    16.5
    %
    
    
    53.2
    
    
    
    16.5
    %
    
    
    180.3
    
    
    
    15.8
    %
    
    
    163.5
    
    
    
    16.5
    %Manufacturing / Wholesale
    
    
    32.9
    
    
    
    9.0
    %
    
    
    30.2
    
    
    
    9.4
    %
    
    
    103.3
    
    
    
    9.1
    %
    
    
    84.1
    
    
    
    8.5
    %Total net revenues
    
    
    367.7
    
    
    
    100.0
    %
    
    
    322.6
    
    
    
    100.0
    %
    
    
    1,137.4
    
    
    
    100.0
    %
    
    
    992.3
    
    
    
    100.0
    %Operating expenses:Cost of sales, including warehousing,
distribution and occupancy costs
    
    
    241.3
    
    
    
    65.6
    %
    
    
    222.1
    
    
    
    68.9
    %
    
    
    751.5
    
    
    
    66.1
    %
    
    
    676.2
    
    
    
    68.2
    %Compensation and related benefits
    
    
    60.8
    
    
    
    16.6
    %
    
    
    58.5
    
    
    
    18.1
    %
    
    
    187.3
    
    
    
    16.5
    %
    
    
    172.0
    
    
    
    17.3
    %Advertising and promotion
    
    
    11.0
    
    
    
    3.0
    %
    
    
    8.7
    
    
    
    2.7
    %
    
    
    41.3
    
    
    
    3.6
    %
    
    
    36.8
    
    
    
    3.7
    %Other selling, general and administrative
expenses
    
    
    20.2
    
    
    
    5.5
    %
    
    
    17.3
    
    
    
    5.4
    %
    
    
    62.6
    
    
    
    5.5
    %
    
    
    53.0
    
    
    
    5.4
    %Amortization expense
    
    
    1.5
    
    
    
    0.4
    %
    
    
    1.1
    
    
    
    0.3
    %
    
    
    3.5
    
    
    
    0.3
    %
    
    
    3.0
    
    
    
    0.3
    %Foreign currency gain
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (0.7
    )
    
    
    -0.1
    %
    
    
    (0.1
    )
    
    
    0.0
    %Other expense (income)
    
    
    1.1
    
    
    
    0.3
    %
    
    
    
    
    
    
    0.0
    %
    
    
    1.1
    
    
    
    0.1
    %
    
    
    (2.5
    )
    
    
    -0.3
    %Total operating expenses
    
    
    335.9
    
    
    
    91.4
    %
    
    
    307.7
    
    
    
    95.4
    %
    
    
    1,046.6
    
    
    
    92.0
    %
    
    
    938.4
    
    
    
    94.6
    %Operating income:Retail
    
    
    31.0
    
    
    
    8.4
    %
    
    
    16.4
    
    
    
    5.1
    %
    
    
    99.9
    
    
    
    8.8
    %
    
    
    55.5
    
    
    
    5.6
    %Franchise
    
    
    17.2
    
    
    
    4.7
    %
    
    
    14.7
    
    
    
    4.6
    %
    
    
    48.3
    
    
    
    4.3
    %
    
    
    37.6
    
    
    
    3.8
    %Manufacturing / Wholesale
    
    
    14.2
    
    
    
    3.8
    %
    
    
    11.4
    
    
    
    3.5
    %
    
    
    38.8
    
    
    
    3.4
    %
    
    
    36.1
    
    
    
    3.6
    %Unallocated corporate and other
(costs) income:Warehousing and distribution costs
    
    
    (12.6
    )
    
    
    -3.4
    %
    
    
    (12.5
    )
    
    
    -3.9
    %
    
    
    (37.9
    )
    
    
    -3.3
    %
    
    
    (37.4
    )
    
    
    -3.8
    %Corporate costs
    
    
    (16.9
    )
    
    
    -4.6
    %
    
    
    (15.1
    )
    
    
    -4.7
    %
    
    
    (57.2
    )
    
    
    -5.1
    %
    
    
    (40.4
    )
    
    
    -4.1
    %Other (expense) income
    
    
    (1.1
    )
    
    
    -0.3
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (1.1
    )
    
    
    -0.1
    %
    
    
    2.5
    
    
    
    0.3
    %Subtotal unallocated corporate and
other costs net
    
    
    (30.6
    )
    
    
    -8.3
    %
    
    
    (27.6
    )
    
    
    -8.6
    %
    
    
    (96.2
    )
    
    
    -8.5
    %
    
    
    (75.3
    )
    
    
    -7.6
    %Total operating income
    
    
    31.8
    
    
    
    8.6
    %
    
    
    14.9
    
    
    
    4.6
    %
    
    
    90.8
    
    
    
    8.0
    %
    
    
    53.9
    
    
    
    5.4
    %Interest expense, net
    
    
    9.7
    
    
    
    
    
    
    
    9.9
    
    
    
    
    
    
    
    29.5
    
    
    
    
    
    
    
    33.2Income before income taxes
    
    
    22.1
    
    
    
    
    
    
    
    5.0
    
    
    
    
    
    
    
    61.3
    
    
    
    
    
    
    
    20.7Income tax expense
    
    
    8.2
    
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    22.7
    
    
    
    
    
    
    
    7.6Net income
    
    $
    13.9
    
    
    
    
    
    
    $
    3.2
    
    
    
    
    
    
    $
    38.6
    
    
    
    
    
    
    $
    13.1
 Note:
 25




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Other expense.
 Interest Expense
  Income Tax Expense
  Net Income
  28




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Senior Credit Facility.
  Senior Notes. 85/8%
 Senior Subordinated Notes. 1/2
 Common
and Preferred Stock.
 Contractual Obligations
  Off Balance Sheet Arrangements
  33




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##### Table of Contents



Effect of Inflation
  Critical Accounting Estimates
   Recently Issued Accounting Pronouncements
     34




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Nutrition 21.
 Franklin Publications.
 Wage and Hour Claim
 Visa/MasterCard Antitrust Litigation.
 Product Claim Settlement.
 38




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Our failure to comply with FTC regulations and existing consent decrees imposed on us by the FTC
could result in substantial monetary penalties and could adversely affect our operating results.
  Because we rely on our manufacturing operations to produce nearly all of the proprietary products
we sell, disruptions in our manufacturing system or losses of manufacturing certifications could
adversely affect our sales and customer relationships.
  If we fail to protect our brand name, competitors may adopt trade names that dilute the value of
our brand name.
  Intellectual property litigation and infringement claims against us could cause us to incur
significant expenses or prevent us from manufacturing, selling, or using some aspect of our
products, which could adversely affect our revenues and market share.
  41




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##### Table of Contents



A substantial amount of our revenues are generated from our franchisees, and our revenues could
decrease significantly if our franchisees do not conduct their operations profitably or if we
fail to attract new franchisees.
   Economic, political, and other risks associated with our international operations could adversely
affect our revenues and international growth prospects.
  
    
    political and economic instability of foreign markets;
    
    foreign governments restrictive trade policies;
    
    inconsistent product regulation or sudden policy changes by foreign agencies or
governments;
    
    the imposition of, or increase in, duties, taxes, government royalties, or non-tariff trade
barriers;
    
    difficulty in collecting international accounts receivable and potentially longer payment
cycles;
    
    increased costs in maintaining international franchise and marketing efforts;
    
    difficulty in operating our manufacturing facility abroad and procuring supplies from
overseas suppliers;
    
    exchange controls;
    
    problems entering international markets with different cultural bases and consumer
preferences; and
    
    fluctuations in foreign currency exchange rates.
  Franchise regulations could limit our ability to terminate or replace under-performing
franchises, which could adversely impact franchise revenues.
  We may incur material product liability claims, which could increase our costs and adversely
affect our reputation, revenues, and operating income.
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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.
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Our holding company structure makes us dependent on our subsidiaries for our
cash flow and subordinates the rights of our stockholders to the rights of
creditors of our subsidiaries in the event of an insolvency or liquidation of
any of our subsidiaries.
  
 Item 6. Exhibits.
 Exhibit 31.1 
    
    Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 31.2 
    
    Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 32.1 
    
    Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
  GENERAL NUTRITION CENTERS, INC.(Registrant)October 27, 2006
    
    /s/ Joseph M. Fortunato

Joseph M. FortunatoPresident and Chief Executive Officer(principal executive officer)October 27, 2006
    
    /s/ Curtis J. Larrimer

Curtis J. LarrimerExecutive Vice President andChief Financial Officer(principal financial and accounting officer)
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