UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

(Mark one)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

GNC CORPORATION

(Exact name of registrant as specified in its charter)

		DELAWARE (State or other jurisdiction of Incorporation or organization)		72-1575170 (I.R.S. Employer Identification No.)
		300 Sixth Avenue Pittsburgh, Pennsylvania		15222 (Zip Code)
		(Address of principal executive offices)

Registrant’s telephone number, including area code: (412) 288-4600

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2), has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No

As of June 30, 2005, 29,659,663 shares of the registrant’s $0.01 par value Common Stock (the “Common Stock”) were outstanding.

 

 

TABLE OF CONTENTS

				PAGE
PART I		FINANCIAL INFORMATION
Item 1		Financial Statements
		Consolidated Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004			3
		Unaudited Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2005 and 2004			4
		Unaudited Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2005			5
		Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004			6
		Summarized Notes to Unaudited Consolidated Financial Statements			7
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3		Quantitative and Qualitative Disclosures About Market Risk			30
Item 4		Controls and Procedures			30
PART II		OTHER INFORMATION
Item 1		Legal Proceedings			31
Item 6		Exhibits			31
Signatures					32
EX-31.1
EX-31.2
EX-32.1

PART I FINANCIAL INFORMATION

GNC CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets
(in thousands, except share data)

		December 31,				June 30,
		2004 *				2005
						(unaudited)
Current assets:
Cash and cash equivalents		$	85,161			$	54,900
Receivables, net			68,148				72,134
Inventories, net (Note 3)			272,254				303,213
Deferred tax assets, net			14,133				13,169
Other current assets			36,382				31,565
Total current assets			476,078				474,981
Long-term assets:
Goodwill (Note 4)			78,585				78,585
Brands (Note 4)			212,000				212,000
Other intangible assets, net (Note 4)			28,652				26,731
Property, plant and equipment, net			195,409				186,247
Deferred financing fees, net			18,130				17,429
Deferred tax assets, net			1,093				—
Other long-term assets			21,393				13,969
Total long-term assets			555,262				534,961
Total assets		$	1,031,340			$	1,009,942
Current liabilities:
Accounts payable		$	106,557			$	107,065
Accrued payroll and related liabilities			20,353				19,470
Accrued interest (Note 5)			1,863				7,721
Current portion, long-term debt (Note 5)			3,901				2,045
Other current liabilities			61,325				60,558
Total current liabilities			193,999				196,859
Long-term liabilities:
Long-term debt (Note 5)			506,474				472,337
Deferred tax liabilities, net			—				346
Other long-term liabilities			9,866				10,502
Total long-term liabilities			516,340				483,185
Total liabilities			710,339				680,044
Cumulative redeemable exchangeable preferred stock, $0.01 par value, 110,000 shares authorized, 100,000 shares issued and outstanding (liquidation preference of $123,815 and $130,729, respectively)			112,734				119,714
Stockholders’ equity:
Common stock, $0.01 par value, 100,000,000 shares authorized, 29,854,663 and 29,659,663 shares issued and outstanding, respectively			299				297
Paid-in-capital			178,245				177,467
Retained earnings			28,924				31,791
Treasury stock, at cost, 100,000 and 0 shares, respectively			(364	)			—
Accumulated other comprehensive income			1,163				629
Total stockholders’ equity			208,267				210,184
Total liabilities and stockholders’ equity		$	1,031,340			$	1,009,942

The accompanying notes are an integral part of the consolidated financial statements.

GNC CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income
(unaudited)
(in thousands)

		For the three months								For the six months
		ended June 30,								ended June 30,
		2004				2005				2004				2005
Revenue		$	347,728			$	333,347			$	720,283			$	669,782
Cost of sales, including costs of warehousing, distribution and occupancy			226,580				223,724				473,723				454,180
Gross profit			121,148				109,623				246,560				215,602
Compensation and related benefits			57,825				56,229				118,925				113,543
Advertising and promotion			12,654				13,540				25,210				28,141
Other selling, general and administrative			18,837				18,814				36,660				37,729
Foreign currency loss (gain)			611				48				418				(57	)
Other income			—				—				—				(2,500	)
Operating income			31,221				20,992				65,347				38,746
Interest expense, net (Note 5)			8,522				9,805				17,216				23,276
Income before income taxes			22,699				11,187				48,131				15,470
Income tax expense			8,292				4,076				17,536				5,623
Net income			14,407				7,111				30,595				9,847
Other comprehensive loss			(37	)			(270	)			(455	)			(534	)
Comprehensive income		$	14,370			$	6,841			$	30,140			$	9,313

The accompanying notes are an integral part of the consolidated financial statements.

GNC CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)

																										Accumulated
																										Other				Total
		Common Stock												Retained				Treasury Stock								Comprehensive				Stockholders’
		Shares				Dollars				Paid-in-Capital				Earnings				Shares				Dollars				Income				Equity
Balance at December 31, 2004			29,854,663			$	299			$	178,245			$	28,924				(100,000	)		$	(364	)		$	1,163			$	208,267
Retirement of treasury stock			(100,000	)			(1	)			(363	)			—				100,000				364				—				—
Repurchase and retirement of common stock			(95,000	)			(1	)			(415	)			—				—				—				—				(416	)
Preferred stock dividends			—				—				—				(6,914	)			—				—				—				(6,914	)
Amortization of preferred stock issuance costs			—				—				—				(66	)			—				—				—				(66	)
Net income			—				—				—				9,847				—				—				—				9,847
Foreign currency translation adjustments			—				—				—				—				—				—				(534	)			(534	)
Balance at June 30, 2005 (unaudited)			29,659,663			$	297			$	177,467			$	31,791				—			$	—			$	629			$	210,184

The accompanying notes are an integral part of the consolidated financial statements.

GNC CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(unaudited)
(in thousands)

		For the six months
		ended June 30,
		2004				2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	30,595			$	9,847
Depreciation expense			16,420				18,372
Deferred fee writedown — early debt extinguishment			—				3,890
Amortization of intangible assets			2,007				1,921
Amortization of deferred financing fees			1,546				1,384
Increase in provision for inventory losses			5,869				3,504
(Decrease) increase in provision for losses on accounts receivable			(1,844	)			2,190
Decrease in net deferred taxes			3,783				2,404
Changes in assets and liabilities:
Decrease (increase) in receivables			1,614				(6,178	)
Increase in inventory, net			(36,781	)			(34,038	)
Decrease in franchise note receivables, net			5,046				5,370
Decrease in other assets			7,604				6,875
Increase (decrease) in accounts payable			1,362				(1,329	)
Increase in accrued taxes			8,689				—
Increase in interest payable			65				5,858
Decrease in accrued liabilities			(20,172	)			(1,500	)
Net cash provided by operating activities			25,803				18,570
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures			(10,165	)			(8,915	)
Franchise store conversions			123				—
Store acquisition costs			(285	)			(1,105	)
Acquisition of General Nutrition Companies, Inc			2,102				—
Net cash used in investing activities			(8,225	)			(10,020	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock			1,581				—
Repurchase and retirement of common stock			—				(416	)
(Decrease) increase in cash overdrafts			(3,063	)			1,800
Payments on long-term debt			(1,906	)			(185,994	)
Proceeds from senior notes issuance			—				150,000
Financing fees			(327	)			(4,090	)
Net cash used in financing activities			(3,715	)			(38,700	)
Effect of exchange rate on cash			529				(111	)
Net increase (decrease) in cash			14,392				(30,261	)
Beginning balance, cash			33,176				85,161
Ending balance, cash		$	47,568			$	54,900

The accompanying notes are an integral part of the consolidated financial statements.

GNC CORPORATION AND SUBSIDIARIES

SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. NATURE OF BUSINESS

     General Nature of Business. GNC Corporation (the “Company”), formerly known as General Nutrition Centers Holding Company, a Delaware corporation, is a leading specialty retailer of vitamin, mineral and herbal supplements, diet and sports nutrition products and specialty supplements. The Company is also a provider of personal care and other health related products. The Company operates primarily in three business segments: Retail, Franchising and Manufacturing/Wholesale. The Company manufactures the majority of its branded products, and also merchandises various third-party products. Additionally, the Company licenses the use of its trademarks and trade names. The processing, formulation, packaging, labeling and advertising of the Company’s products are subject to regulation by one or more federal agencies, including the Food and Drug Administration, Federal Trade Commission, Consumer Product Safety Commission, United States Department of Agriculture and the Environmental Protection Agency. These activities are also regulated by various agencies of the states and localities in which the Company’s products are sold.

     Acquisition of the Company. On October 16, 2003, the Company entered into a purchase agreement (the “Purchase Agreement”) with Koninklijke (Royal) Numico N.V. (“Numico”) and Numico USA, Inc. to acquire 100% of the outstanding equity interest of General Nutrition Companies, Inc. (“GNCI”) from Numico USA, Inc. on December 5, 2003 (the “Acquisition”). The purchase equity contribution was made by GNC Investors, LLC (“GNC LLC”), an affiliate of Apollo Management L.P. (“Apollo”), together with additional institutional investors and certain management of the Company. The equity contribution from GNC LLC was recorded by the Company. The Company utilized this equity contribution to purchase the investment in General Nutrition Centers, Inc., (“Centers”). Centers is a wholly owned subsidiary of the Company.

NOTE 2. BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with the instructions to Form 10-Q and Article 210-10-01 of Regulation S-X. Accordingly, they do not include all of the information and related footnotes that would normally be required by accounting principles generally accepted in the United States of America for complete financial reporting. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2004 (the “Form 10-K”).

     The accompanying unaudited consolidated financial statements include all adjustments (consisting of a normal and recurring nature) that management considers necessary for a fair statement of financial information for the interim periods. Interim results are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2005.

     The Company’s normal reporting period is based on a 52-week calendar year.

     Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. Accordingly, these estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Some of the most significant estimates pertaining to the Company include the valuation of inventories, the allowance for doubtful accounts, income tax valuation allowances and the recoverability of long-lived assets. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. There have been no material changes to critical estimates since the audited financial statements at December 31, 2004.

     Cash and Cash Equivalents. The Company considers cash and cash equivalents to include all cash and liquid deposits and investments with a maturity of three months or less. The majority of payments due from banks for third-party credit cards process within 24-48 hours, except for transactions occurring on a Friday, which are generally processed the following Monday. All credit card transactions are classified as cash and the amounts due from these transactions totaled $1.5 million at June 30, 2005 and $1.4 million at December 31, 2004.

GNC CORPORATION AND SUBSIDIARIES

SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED — CONTINUED)

     Stock Compensation. In accordance with Accounting Principles Board (“APB”) No. 25, “Accounting for Stock issued to Employees”, the Company accounts for stock-based employee compensation using the intrinsic value method of accounting. For the three and six months ended June 30, 2005 and 2004, stock compensation represents shares of the Company’s stock issued pursuant to the General Nutrition Centers Holding Company (presently known as GNC Corporation) 2003 Omnibus Stock Incentive Plan. The common stock associated with this plan is not registered or traded on any exchange. Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-based Compensation”, prescribes that companies utilize the fair value method of valuing stock-based compensation and recognize compensation expense accordingly. SFAS No. 123 did not require that the fair value method be adopted and reflected in the financial statements. However, in December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R) which sets accounting requirements for “share-based” compensation. It requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation and disallows the use of the intrinsic value method of accounting for stock compensation. This statement is not effective for the Company until the beginning of our fiscal year 2006. The Company has adopted the disclosure requirements of SFAS No. 148 “Accounting for Stock Based Compensation-Transition and Disclosure-an amendment of SFAS No. 123” by illustrating compensation costs in the following table and will adopt SFAS No. 123 (R) beginning with our fiscal year 2006.

     Had compensation costs for stock options been determined using the fair market value method of SFAS No. 123, the effect on net income for each of the periods presented would have been as follows:

		Three Months ended								Six Months ended
		June 30,								June 30,
		2004				2005				2004				2005
		(unaudited)
		(in thousands)
Net income as reported		$	14,407			$	7,111			$	30,595			$	9,847
Less: total stock-based employee compensation costs determined using fair value method, net of related tax effects			(211	)			(182	)			(427	)			(360	)
Adjusted net income		$	14,196			$	6,929			$	30,168			$	9,487

     Recently Issued Accounting Pronouncements

     In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Correction” a replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This Statement also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will adopt this standard beginning the first quarter of fiscal year 2006.

     In December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment: an Amendment of FASB Statements No. 123 and 95”. SFAS No. 123(R) sets accounting requirements for “share-based” compensation to employees. It requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees and disallows the use of the intrinsic value method of accounting for stock compensation. Originally SFAS No. 123(R) was applicable for all interim and fiscal periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission (“SEC”) announced that it was extending the adoption of SFAS No. 123(R) for public companies to be applicable for all fiscal periods beginning after June 15, 2005. Although we are not a public entity as defined by SFAS No. 123(R), this statement is also not effective for the Company until the beginning of our fiscal year 2006. The adoption of this statement is not expected to have a significant impact on our consolidated financial statements or results of operations.

     In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions”. The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. The statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this statement shall be applied prospectively. The Company does not anticipate that the adoption of SFAS No. 153 will have a significant impact on the Company’s consolidated financial statements or results of operations.

GNC CORPORATION AND SUBSIDIARIES

SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED — CONTINUED)

     In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” an amendment of Accounting Research Bulletin (“ARB”) No. 43, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal”. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. Companies are required to adopt the provisions of this statement for fiscal years beginning after June 15, 2005. The Company will adopt this standard beginning the first quarter of fiscal year 2006 and currently is evaluating the effects of this statement on its consolidated financial statements.

NOTE 3. INVENTORIES, NET

     Inventories at each respective period consisted of the following:

		December 31, 2004
										Net Carrying
		Gross cost				Reserves				Value
						(in thousands)
Finished product ready for sale		$	242,578			$	(11,542	)		$	231,036
Unpackaged bulk product and raw materials			41,607				(3,019	)			38,588
Packaging supplies			2,630				—				2,630
		$	286,815			$	(14,561	)		$	272,254

		June 30, 2005
										Net Carrying
		Gross cost				Reserves				Value
						(unaudited)
						(in thousands)
Finished product ready for sale		$	257,304			$	(9,310	)		$	247,994
Unpackaged bulk product and raw materials			54,410				(2,940	)			51,470
Packaging supplies			3,749				—				3,749
		$	315,463			$	(12,250	)		$	303,213

NOTE 4. GOODWILL AND INTANGIBLE ASSETS, NET

     Goodwill represents the excess of purchase price over the fair value of identifiable net assets of acquired entities. In accordance with SFAS No. 142, goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. Other intangible assets with finite lives are amortized on a straight-line basis over periods not exceeding 20 years. The Company records goodwill upon the acquisition of franchisee stores when the acquisition price exceeds the fair value of the identifiable assets acquired and liabilities assumed of the store. The Company’s goodwill remained the same at June 30, 2005 compared to December 31, 2004, with Retail of $17.6 million, Franchise of $60.5 million and Manufacturing/Wholesale of $0.5 million.

     The following table summarizes the Company’s intangible asset activity from December 31, 2004 to June 30, 2005.

						Retail				Franchise				Operating
		Gold Card				Brand				Brand				Agreements				Total
		(in thousands)
Balance at December 31, 2004		$	1,413			$	49,000			$	163,000			$	27,239			$	240,652
Amortization expense			(449	)			—				—				(1,472	)			(1,921	)
Balance at June 30, 2005 (unaudited)		$	964			$	49,000			$	163,000			$	25,767			$	238,731

GNC CORPORATION AND SUBSIDIARIES

SUMMARIZED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED — CONTINUED)

     The following table reflects the gross carrying amount and accumulated amortization for each major intangible asset:

		December 31, 2004												June 30, 2005
						Accumulated				Carrying								Accumulated				Carrying
		Cost				Amortization				Amount				Cost				Amortization				Amount
																		(unaudited)
		(in thousands)
Brands — retail		$	49,000			$	—			$	49,000			$	49,000			$	—			$	49,000
Brands — franchise			163,000				—				163,000				163,000				—				163,000
Gold card — retail			2,230				(1,004	)			1,226				2,230				(1,393	)			837
Gold card — franchise			340				(153	)			187				340				(213	)			127
Retail agreements			8,500				(1,267	)			7,233				8,500				(1,858	)			6,642
Franchise agreements			21,900				(1,894	)			20,006				21,900				(2,775	)			19,125
		$	244,970			$	(4,318	)		$	240,652			$	244,970			$	(6,239	)		$	238,731

     The following table represents future estimated amortization expense of other intangible assets, net, with definite lives at June 30, 2005:

		Estimated
		amortization
Years ending December 31,		expense
		(unaudited)
		(in thousands)
2005		$	1,922
2006			3,457
2007			2,943
2008			2,895
2009			2,283
Thereafter			13,231
Total		$	26,731

NOTE 5. LONG-TERM DEBT / INTEREST

     In December 2003, the Company’s wholly owned subsidiary, Centers, entered into a senior credit facility with a syndicate of lenders. The senior credit facility consists of a $285.0 million term loan facility and a $75.0 million revolving credit facility. This indebtedness has been guaranteed by the Company and its domestic subsidiaries. All borrowings under the senior credit facility bear interest at a rate per annum equal to either (a) the greater of the prime rate as quoted on the British Banking Association Telerate, and the federal funds effective rate plus 0.5% per annum, plus in each case, additional margins of 2.0% per annum for both the term loan facility and the revolving credit facility, or (b) the Eurodollar rate plus additional margins of 3.0% per annum for both the term loan facility and the revolving credit facility. In addition to paying the above stated interest rates, Centers is also required to pay a commitment fee relating to the unused portion of the revolving credit facility at a rate of 0.5% per annum. The senior credit facility matures on December 5, 2009 and permits Centers to prepay a portion or all of the outstanding balance without incurring penalties. The revolving credit facility matures on December 5, 2008. The revolving credit facility allows for $50.0 million to be used as collateral for outstanding letters of credit, of which $7.9 million and $8.0 million was used at June 30, 2005 and December 31, 2004, respectively, leaving $67.1 million and $67.0 million, respectively, of this facility available for borrowing on such dates. The term loan facility at June 30, 2005 and December 31, 2004 carried a balance of $96.7 million and $282.2 million, respectively. Interest on the term loan facility is payable quarterly in arrears and at June 30, 2005 and December 31, 2004, carried an average interest rate of 6.4% and 5.4%, respectively. The Company has complied with its covenant reporting and compliance requirements in all material respects for the three and six months ended June 30, 2005.

     In December 2003, Centers also issued $215.0 million of its 8 1/2% Senior Subordinated Notes due 2010 (the “Senior Subordinated Notes”). The Senior Subordinated Notes mature on December 1, 2010, and bear interest at the rate of 8 1/2% per annum, which is payable semi-annually in arrears on June 1 and December 1 of each year, which began with the first payment due on June 1, 2004.

     In January 2005, Centers issued $150.0 million aggregate principal amount of its 8 5/8% Senior Notes due 2011 (the “Senior Notes”). Centers used the net proceeds of this offering of $145.6 million, together with $39.4 million of cash on hand, to repay a portion of the indebtedness under the $285.0 million term loan facility. The Senior Notes bear an interest rate of 8 5/8% per annum, which is payable semi-annually in arrears on January 15 and July 15 of each year, beginning with the first payment due on July 15, 2005.

     Long-term debt at each respective period consisted of the following:

		December 31,				June 30,
		2004				2005
						(unaudited)
		(in thousands)
Mortgage		$	13,190			$	12,691
Capital leases			35				32
Senior credit facility			282,150				96,659
8 5/8% Senior Notes			—				150,000
8 1/2% Senior Subordinated Notes			215,000				215,000
Less: current maturities			(3,901	)			(2,045	)
Total		$	506,474			$	472,337

     At June 30, 2005, the Company’s total debt principal maturities are as follows:

		Mortgage												8 1/2% Senior
		Loan/Capital				Senior				8 5/8% Senior				Subordinated
Years Ending December 31,		Leases				Credit Facility				Notes				Notes				Total
										(unaudited)
										(in thousands)
2005		$	549			$	491			$	—			$	—			$	1,040
2006			1,141				981				—				—				2,122
2007			1,195				981				—				—				2,176
2008			1,281				981				—				—				2,262
2009			1,373				93,225				—				—				94,598
Thereafter			7,184				—				150,000				215,000				372,184
		$	12,723			$	96,659			$	150,000			$	215,000			$	474,382

     The Company’s net interest expense for each respective period is as follows:

		Three months ended								Six months ended
		June 30,								June 30,
		2004				2005				2004				2005
						(unaudited)
						(in thousands)
Composition of interest expense:
Mortgage		$	241			$	223			$	486			$	455
Senior credit facility — Revolver			152				150				241				299
Senior credit facility — Term Loan			3,028				1,488				6,067				3,322
8 5/8% Senior Notes			—				3,234				—				5,858
8 1/2 % Senior Subordinated Notes			4,518				4,569				9,087				9,137
Deferred fee writedown — early debt extinguishment			—				—				—				3,890
Deferred financing fees			775				700				1,546				1,384
Interest income —— other			(192	)			(559	)			(211	)			(1,069	)
Interest expense, net		$	8,522			$	9,805			$	17,216			$	23,276

     Accrued interest at each respective period consisted of the following:

		December 31,				June 30,
		2004				2005
						(unaudited)
		(in thousands)
Senior credit facility		$	340			$	340
8 5/8% Senior notes			—				5,858
8 1/2% Senior Subordinated Notes			1,523				1,523
Total		$	1,863			$	7,721

NOTE 6. COMMITMENTS AND CONTINGENCIES

Litigation

     The Company is engaged in various legal actions, claims and proceedings arising out of the normal course of business, including claims related to breach of contracts, product liabilities, intellectual property matters and employment-related matters resulting from the Company’s business activities. As is inherent with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. The Company continues to assess its requirement to account for additional contingencies in accordance with SFAS No. 5, “Accounting for Contingencies” and believes that it is in compliance with that standard at June 30, 2005. The Company is currently of the opinion that the amount of any potential liability resulting from these actions, when taking into consideration the Company’s general and product liability coverage, and the indemnification provided by Numico under the Purchase Agreement, will not have a material adverse impact on its financial position, results of operations or liquidity. However, if the Company is required to make a payment in connection with an adverse outcome in these matters, it could have a material impact on our financial condition and operating results.

     As a manufacturer and retailer of nutritional supplements and other consumer products that are ingested by consumers or applied to their bodies, we have been and are currently subjected to various product liability claims. Although the effects of these claims to date have not been material to us, it is possible that current and future product liability claims could have a material adverse impact on our financial condition and operating results. We currently maintain product liability insurance with a deductible/retention of $1.0 million per claim with an aggregate cap on retained loss of $10.0 million per claim. We typically seek and have obtained contractual indemnification from most parties that supply raw materials for our products or that manufacture or market products we sell. We also typically seek to be added, and have been added, as additional insured under most of such parties’ insurance policies. We are also entitled to indemnification by Numico for certain losses arising from claims related to products containing ephedra or Kava Kava sold prior to December 5, 2003. However, any such indemnification or insurance is limited by its terms and any such indemnification, as a practical matter, is limited to the creditworthiness of the indemnifying party and its insurer, and the absence of significant defenses by the insurers. We may incur material products liability claims, which could increase our costs and adversely affect our reputation, revenues and operating income.

     Ephedra (Ephedrine Alkaloids). As of June 30, 2005, we have been named as a defendant in 211 pending cases involving the sale of third-party products that contain ephedra. Of those cases, one involves a proprietary GNC product. Ephedra products have been the subject of adverse publicity and regulatory scrutiny in the United States and other countries relating to alleged harmful effects, including the deaths of several individuals. In early 2003, we instructed all of our locations to stop selling products containing ephedra that were manufactured by GNC or one of our affiliates. Subsequently, we instructed all of our locations to stop selling any products containing ephedra by June 30, 2003. In April 2004, the FDA banned the sale of products containing ephedra. All claims to date have been tendered to the third-party manufacturer or to our insurer and we have incurred no expense to date with respect to litigation involving ephedra products. Furthermore, we are entitled to indemnification by Numico for certain losses arising from claims related to products containing ephedra sold prior to December 5, 2003. All of the pending cases relate to products sold prior to such time and, accordingly, we are entitled to indemnification from Numico for all of the pending cases.

     Pro-Hormone/Androstenedione. On July 29, 2001, five substantially identical class action lawsuits were filed in the state courts of the States of Florida, New York, New Jersey, Pennsylvania and Illinois against us and various manufacturers of products containing pro-hormones, including androstenedione:

	•		Brown v. General Nutrition Companies, Inc., Case No. 02-14221-AB, Florida Circuit Court for the 15th Judicial Circuit Court, Palm Beach County;
	•		Rodriguez v. General Nutrition Companies, Inc., Index No. 02/126277, New York Supreme Court, County of New York, Commercial Division;
	•		Abrams v. General Nutrition Companies, Inc., Docket No. L-3789-02, New Jersey Superior Court, Mercer County;
	•		Toth v. Bodyonics, Ltd., Case No. 003886, Pennsylvania Court of Common Pleas, Philadelphia County; and
	•		Pio v. General Nutrition Companies, Inc., Case No. 2-CH-14122, Illinois Circuit Court, Cook County.

     On March 20, 2004, a similar lawsuit was filed in California (Guzman v. General Nutrition Companies, Inc., Case No. 04-00283). Plaintiffs allege that we have distributed or published periodicals that contain advertisements claiming that the various pro-hormone products promote muscle growth. The complaints allege that we knew the advertisements and label claims promoting muscle growth were false, but nonetheless continued to sell the products to consumers. Plaintiffs seek injunctive relief, disgorgement of profits, attorney’s fees and the costs of suit. All of the products involved in the cases are third-party products. We have tendered these cases to the various manufacturers for defense and indemnification. Based upon the information available to us at the present time, we believe that these matters will not have a material adverse effect upon our liquidity, financial condition or results of operations.

NOTE 7. STOCK-BASED COMPENSATION PLANS

Stock Options

     On December 5, 2003, the board of directors of the Company (the “Board”) approved and adopted the General Nutrition Centers Holding Company (presently known as GNC Corporation) 2003 Omnibus Stock Incentive Plan (the “Plan”). The purpose of the Plan is to enable the Company to attract and retain highly qualified personnel who will contribute to the success of the Company. The Plan provides for the granting of stock options, stock appreciation rights, restricted stock, deferred stock and performance shares. The Plan is available to certain eligible employees as determined by the Board. The total number of shares of common stock reserved and available for the Plan is 4.0 million shares. The stock options carry a four year vesting schedule and expire after seven years from date of grant. As of June 30, 2005 the number of stock options outstanding was 2.8 million. No stock appreciation rights, restricted stock, deferred stock or performance shares were granted under the Plan as of June 30, 2005. The weighted average Black-Scholes value of cumulative options granted and outstanding under the Plan at June 30, 2005 is $1.69 per share.

     The following table outlines the total stock options granted:

						Weighted				Weighted
						Average Exercise				Average Black-
		Total Options				Price				Scholes Value
Outstanding at December 31, 2004			2,435,393			$	6.00
Granted March 2005			294,573				6.00			$	0.28
Granted June 2005			450,000				6.00				0.27
Forfeited			(380,979	)
Outstanding at June 30, 2005 (unaudited)			2,798,987				6.00				1.69

     The Company has adopted the disclosure requirements of SFAS No. 148, but has elected to continue to measure compensation expense using the intrinsic value method for accounting for stock-based compensation as outlined by APB No. 25. In accordance with SFAS No. 148, pro forma information regarding net income is required to be disclosed as if the Company had accounted for its employee stock options using the fair value method of SFAS No. 123. See the Basis of Presentation note for this disclosure. There were 812,409 options vested under the Plan at June 30, 2005.

     Fair value information for the Plan was estimated using the Black-Scholes option-pricing model based on the following assumptions for the options granted:

		December 31,				June 30,
		2004				2005
						(unaudited)
Dividend yield			0.00	%			0.00	%
Expected option life		5 years				5 years
Volatility factor percentage of market price			40.00	%			24.00	%
Discount rate			3.63	%			3.84	%

     Because the Black-Scholes option valuation model utilizes certain estimates and assumptions, the existing models do not necessarily represent the definitive fair value of options for future periods.

NOTE 8. SEGMENTS

     The following operating segments represent identifiable components of the Company for which separate financial information is available. This information is utilized by management to assess performance and allocate assets accordingly. The Company’s management evaluates segment operating results based on several indicators. The primary key performance indicators are sales and operating income or loss for each segment. Operating income or loss, as evaluated by management, excludes certain items that are managed at the consolidated level, such as warehousing and distribution costs and corporate costs. The following table represents key financial information for each of the Company’s business segments, identifiable by the distinct operations and management of each: Retail, Franchising, and Manufacturing/Wholesale. The Retail segment includes the Company’s corporate store operations in the United States and Canada. The Franchise segment represents the Company’s franchise operations, both domestically and internationally. The Manufacturing/Wholesale segment represents the Company’s manufacturing operations in South Carolina and Australia and the wholesale sales business. This segment supplies the Retail and Franchise segments, along with various third parties, with finished products for sale. The Warehousing and Distribution costs, Corporate costs, and Other Unallocated Costs represent the Company’s administrative expenses. The accounting policies of the segments are the same as those described in “Basis of Presentation and Summary of Significant Accounting Policies”, which is included in the Form 10-K.

		Three months ended June 30,								Six months ended June 30,
		2004				2005				2004				2005
						(unaudited)
						(in thousands)
Revenues:
Retail		$	261,355			$	250,277			$	540,996			$	505,529
Franchise			58,890				57,754				123,028				110,381
Manufacturing/Wholesale:
Intersegment (1)			51,732				49,223				99,278				104,718
Third Party			27,483				25,316				56,259				53,872
Sub total Manufacturing/Wholesale			79,215				74,539				155,537				158,590
Sub total segment revenues			399,460				382,570				819,561				774,500
Intersegment elimination (1)			(51,732	)			(49,223	)			(99,278	)			(104,718	)
Total revenues			347,728				333,347				720,283				669,782
Operating income:
Retail			30,588				21,200				65,983				39,106
Franchise (2)			16,485				12,124				33,607				25,467
Manufacturing/Wholesale			9,867				12,551				18,053				24,610
Unallocated corporate and other costs:
Warehousing & distribution costs			(12,322	)			(12,211	)			(25,027	)			(24,870	)
Corporate costs			(13,397	)			(12,672	)			(27,269	)			(25,567	)
Sub total unallocated corporate and other costs			(25,719	)			(24,883	)			(52,296	)			(50,437	)
Total operating income			31,221				20,992				65,347				38,746
Interest expense, net			8,522				9,805				17,216				23,276
Income before income taxes			22,699				11,187				48,131				15,470
Income tax expense			8,292				4,076				17,536				5,623
Net income		$	14,407			$	7,111			$	30,595			$	9,847

		December 31,				June 30,
		2004				2005
Total assets:
Retail		$	418,136			$	425,645
Franchise			314,836				314,545
Manufacturing / Wholesale			143,151				150,452
Corporate / Other			155,217				119,300
Total assets		$	1,031,340			$	1,009,942

NOTE 9. SUPPLEMENTAL GUARANTOR INFORMATION

     As of June 30, 2005, the Company’s debt includes Centers’ senior credit facility, its Senior Notes and its Senior Subordinated Notes. The senior credit facility has been guaranteed by the Company and its domestic subsidiaries. The Senior Notes are general unsecured obligations of Centers and rank secondary to Centers’ senior credit facility and are senior in right of payment to all existing and future subordinated obligations of Centers, including Centers Senior Subordinated Notes. The Senior Notes are unconditionally guaranteed on an unsecured basis by all of Centers’ existing and future material domestic subsidiaries. The Senior Subordinated Notes are general unsecured obligations and are guaranteed on a senior subordinated basis by certain of Centers’ domestic subsidiaries and rank secondary to Center’s senior credit facility. Guarantor subsidiaries include the Company’s direct and indirect domestic subsidiaries as of the respective balance sheet dates. Non-guarantor subsidiaries include the remaining direct and indirect foreign subsidiaries. The subsidiary guarantors are wholly owned by the Company. The guarantees are full and unconditional and joint and several.

     Presented below are condensed consolidated financial statements of the Company, Centers as the issuer, and the combined guarantor and non-guarantor subsidiaries as of, and for the three and six months ended June 30, 2005 and 2004. The guarantor and non-guarantor subsidiaries are presented in a combined format as their individual operations are not material to the Company’s consolidated financial statements. Investments in subsidiaries are either consolidated or accounted for under the equity method of accounting. Intercompany balances and transactions have been eliminated.

Supplemental Condensed Consolidating Balance Sheets

										Combined				Combined
										Guarantor				Non-Guarantor
June 30, 2005		Parent				Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
		(unaudited)
		(in thousands)
Current assets
Cash and cash equivalents		$	—			$	—			$	52,076			$	2,824			$	—			$	54,900
Receivables, net			—				—				71,183				951				—				72,134
Intercompany receivables			—				1,570				33,580				—				(35,150	)			—
Inventories, net			—				—				288,951				14,262				—				303,213
Other current assets			60				2,554				37,867				4,253				—				44,734
Total current assets			60				4,124				483,657				22,290				(35,150	)			474,981
Goodwill, net			—				—				77,643				942				—				78,585
Brands, net			—				—				209,000				3,000				—				212,000
Property, plant and equipment, net			—				—				164,954				21,293				—				186,247
Investment in subsidiaries			331,424				797,737				5,012				—				(1,134,173	)			—
Other assets			—				17,635				49,199				75				(8,780	)			58,129
Total assets		$	331,484			$	819,496			$	989,465			$	47,600			$	(1,178,103	)		$	1,009,942
Current liabilities
Current liabilities		$	16			$	9,185			$	180,880			$	6,778			$	—			$	196,859
Intercompany payables			1,570				18,209				—				15,371				(35,150	)			—
Total current liabilities			1,586				27,394				180,880				22,149				(35,150	)			196,859
Long-term debt			—				460,678				—				20,439				(8,780	)			472,337
Other long-term liabilities			—				—				10,848				—				—				10,848
Total liabilities			1,586				488,072				191,728				42,588				(43,930	)			680,044
Cumulative redeemable exchangeable preferred stock			119,714				—				—				—				—				119,714
Total stockholders’ equity (deficit)			210,184				331,424				797,737				5,012				(1,134,173	)			210,184
Total liabilities and stockholders’ equity (deficit)		$	331,484			$	819,496			$	989,465			$	47,600			$	(1,178,103	)		$	1,009,942

Supplemental Condensed Consolidating Balance Sheets

										Combined				Combined
										Guarantor				Non-Guarantor
December 31, 2004		Parent				Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
		(in thousands)
Current assets
Cash and cash equivalents		$	—			$	—			$	82,722			$	2,439			$	—			$	85,161
Receivables, net			—				—				66,821				1,327				—				68,148
Intercompany receivables			—				17,752				16,848				—				(34,600	)			—
Inventories, net			—				—				258,085				14,169				—				272,254
Other current assets			607				257				45,731				3,920				—				50,515
Total current assets			607				18,009				470,207				21,855				(34,600	)			476,078
Property, plant and equipment, net			—				—				172,813				22,596				—				195,409
Investment in subsidiaries			322,422				784,710				3,951				—				(1,111,083	)			—
Goodwill, net			—				—				77,643				942				—				78,585
Brands, net			—				—				209,000				3,000				—				212,000
Other assets			—				18,336				59,339				373				(8,780	)			69,268
Total assets		$	323,029			$	821,055			$	992,953			$	48,766			$	(1,154,463	)		$	1,031,340
Current liabilities
Current liabilities		$	163			$	4,333			$	182,490			$	7,013			$	—			$	193,999
Intercompany payables			1,865				—				15,887				16,848				(34,600	)			—
Total current liabilities			2,028				4,333				198,377				23,861				(34,600	)			193,999
Long-term debt			—				494,300				—				20,954				(8,780	)			506,474
Other long-term liabilities			—				—				9,866				—				—				9,866
Total liabilities			2,028				498,633				208,243				44,815				(43,380	)			710,339
Cumulative redeemable exchangeable preferred stock			112,734				—				—				—				—				112,734
Total stockholders’ equity (deficit			208,267				322,422				784,710				3,951				(1,111,083	)			208,267
Total liabilities and stockholders’ equity (deficit)		$	323,029			$	821,055			$	992,953			$	48,766			$	(1,154,463	)		$	1,031,340