GENERAL NUTRITION INC, 10-K, 1994-05-03

GENERAL NUTRITION INC
10-K, 1994-05-03
FOOD STORES

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

-----------------------

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 5, 1994 Commission File Number 1-8055

GENERAL NUTRITION, INCORPORATED
(Exact name of Registrant as specified in its charter)

PENNSYLVANIA 25-1027307
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

921 Penn Avenue 15222
Pittsburgh, Pennsylvania (Zip Code)
(Address of principal executive offices)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

Title of each class

Series A $1.00 Stated Value Preferred Stock, $.01 Par Value
(Redeemed February 12, 1993)

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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The Registrant meets the conditions set forth in General Instructions
(J)(1)(a) and (b) of Form 10-K and is, therefore, filing this Form 10-K in
reduced disclosure format.

State the aggregate market value of Common Stock held by non-affiliates of
the Registrant: None

The number of shares of the Registrant's Common Stock outstanding at April
29, 1994 was 140.
<PAGE> 2
GENERAL NUTRITION, INCORPORATED

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Securities and Exchange Commission Item Number and Description Page
- - -------------------------------------------------------------- ----
<S> <C> <C>
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . 9
Item 6. Selected Consolidated Financial Information and Other Data . . . . . . . . . . . . . . . . . . 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . 17
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . 17
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . 17

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . 18

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
</TABLE>

ii
<PAGE> 3
PART I

ITEM 1. BUSINESS

HISTORICAL OVERVIEW

General Nutrition, Incorporated ("GNI," "GNC," or the "Company")
collectively with its subsidiaries, is the only nationwide specialty retailer
of vitamin, mineral and sports nutrition supplements, and is also a leading
provider of personal care, fitness and other health-related products. The
Company's products are sold through a network of 1,553 retail stores operating
under the GNC name, of which 1,044 are owned and operated by the Company at
leased locations and 509 are franchised. The stores, which generally are
between 1,200 and 1,800 square feet, are located primarily in regional shopping
malls in the 50 states, with 33 located outside the United States in Mexico,
Puerto Rico, Guam, Peru, Guatemala and the Bahamas. The Company's marketing
emphasis is on its high-margin, value-added vitamin, mineral and sports
nutrition supplements sold under the Company's proprietary brands and other
nationally recognized third-party brand names.

The Company's first store was opened in Pittsburgh in 1935, and until 1985,
the Company operated primarily as a discount retailer of lower-margin generic
vitamin and health food products. In 1985, following the death of the
Company's founder, a new management team refocused the Company's strategy to
become a specialty health retailer and a leading provider of products, services
and information in the self-care and personal health enhancement markets. The
three primary components of this strategy have been (i) repositioning the
Company's stores from discount to specialty retailing with an emphasis on
high-margin, value-added products; (ii) developing new business concepts,
including SuperStores and franchising; and (iii) consolidating the Company's
operations to eliminate marginally performing stores, businesses and support
facilities.

In 1992, the Company developed a strategy to expand its retail store base
and market share by further developing certain metropolitan areas where the
Company believes it has growth opportunity. This development strategy would be
accomplished through the addition of Company-owned stores and the continuing
growth of the franchise business. In 1992, 19 new Company-owned stores and 103
new franchise locations were opened. In 1993, the development continued with
350 new store openings of which 135 were Company-owned and 215 were
franchises. This strategy will continue in 1994.

The following table sets forth, for the years indicated, the number of
system-wide stores open at the beginning of the year, stores added and closed
and franchises opened:

<TABLE>
<CAPTION>
SYSTEM-WIDE STORES AND RETAIL SALES

COMPANY-OWNED FRANCHISES
Open at System-
Beginning Converted Closed/ Closed/ End Wide
of Year New Franchises Converted New Converted Converted of Year Sales
------- --- ---------- --------- --- --------- --------- ------- -----
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1,084 49 - (50) 5 17 - 1,105 $331
1990 1,105 26 - (79)(a) 22 17 - 1,091 336
1991 1,091 7 - (59) 54 32 - 1,125 383
1992 1,125 19 - (67) 103 41 (5) 1,216 458
1993 1,216 135 18 (35) 215 26 (22) 1,553 553
</TABLE>
- - -------------
(a) Includes 37 National Health & Nutrition stores sold in 1990.

All of the common stock of GNI is owned by General Nutrition Companies,
Inc. ("Holding"), a public company, which was formed by the Thomas H. Lee
Company and certain members of the Company's senior management to acquire GNI
in August 1989 (the "Acquisition"). Thomas H. Lee Company ("THL") is a private
investment firm which initiates, structures and invests in acquisitions and
recapitalizations of established public and private middle market companies.

1
<PAGE> 4
For purposes of the financial statements, the 28-week period ended at
August 19, 1989 and prior have been presented as the "Predecessor" Company.
The 24-week period ended February 3, 1990 and the fiscal years ended February
2, 1991, February 1, 1992, February 6, 1993 and February 5, 1994 represent the
Company's operations after the purchase.

The Company operates in three distinct business segments; Retail,
Franchising and Manufacturing.

Reference is made to Note 15 of the Company's financial statements for
information concerning industry segments.

RETAIL

MERCHANDISING AND MARKETING

The Company's products are sold under its various proprietary brand names,
including Ultra Mega(R), Solotron(R), GNC(R), Natural Brand(R), Pro
Performance(R), Challenge(TM), Herbal Plus(C), Preventive Nutrition(R),
Fitness Systems(R), 24-Hour Diet(R), Quick Shot(TM), Harvest of Nature(TM),
and Vita Worth(TM). In addition, the Company carries various third-party brand
name products including Weider(TM), Cybergenics(R), Health Valley(R), Twin
Lab(R), Nature's Herbs(R) and Nature's Way(R). The Company has remerchandised
its stores providing a mix of products which focus on high-margin, value-added
products, emphasizing vitamin, mineral and herbal supplements and sports
nutrition products, while de-emphasizing sales of food products.

VITAMIN AND MINERAL SUPPLEMENTS. For over 59 years, vitamin and mineral
supplements have represented the core of the Company's product line. The
Company sells more than 400 different types of vitamin and mineral supplements,
of which approximately 87% are sold under the Company's own brand names and the
remainder are sold under the brand names of others. Vitamins and minerals are
sold in single vitamin and multivitamin form and in different potency levels.
Products are produced in tablet, soft gel, hard-shell capsule and powder form.
The Company has reformulated many of its existing private label products and
added new "consumer focused" products to its line of Special Nutritional
Formulas ("SNF"). SNF products have unique formulations and/or different
delivery systems, packaging designed for target markets and are priced to
achieve high margins. The Company places continued emphasis on these
high-margin, value-added special nutritional formulas for its vitamin and
mineral products sold under GNC brand names.

SPORTS NUTRITION PRODUCTS. Sports nutrition products are food supplements
designed to be taken in conjunction with a fitness program and have provided an
increasingly important contribution to revenues and profits. Management
believes that these products, which include various protein and weight gain
powders as well as high potency vitamin formulations, appeal to consumers who
are engaged in regular exercise, including athletes who are in training to gain
weight and develop their physique. Over 300 different sports nutrition
products are stocked by the average GNC store.

HERBS. Herbal supplements are sold in various hard-shell capsule, soft gel
capsule, tea and liquid products. They come in both single herb and
combination formulas. The Company merchandises herbs in its private labels
Herbal Plus(C) and Natural Brand(R) along with products provided by third
parties, including Nature's Way(R) and Nature's Herbs(R).

DIET PRODUCTS. The diet category consists of all natural vitamin, mineral
and herbal formulas designed to supplement the diet of weight conscious
consumers. These products are sold in various pills, teas and meal replacement
shakes. The Company provides a private label line of diet supplements, 24-Hour
Diet(R), along with third party products.

FOOD PRODUCTS. The Company sells a selection of specialty food products.
As commodity natural food products have become available through more
distribution channels, the Company has reduced its line of food products,
focusing more on special attribute food products such as high-fiber, no-sugar
and low-calorie products that carry a higher gross margin. In addition, the
Company carries a wide variety of health-related snack products. This
category, while important, is being de-emphasized as part of the Company's
ongoing reallocation of shelf space to higher-margin specialty products.

2
<PAGE> 5
COSMETICS AND MISCELLANEOUS HEALTH CARE PRODUCTS. The Company sells
personal care products including shampoos, soaps, cosmetics, skin creams,
fresheners and lotions. These products are generally termed "natural" because
they contain few synthetic chemicals and additives. The Company seeks to offer
products within this category which include vitamins, herbs and other natural
ingredients and avoids products which contain harsh chemicals. Also included
in this category are various massage products which represented approximately
$8.2 million and $6.8 million in sales in 1992 and 1993, respectively.

SPORTS ACCESSORIES, FITNESS PRODUCTS AND SPECIALTY WORKOUT APPAREL. The
Company's SuperStores (and certain of its traditional stores) offer a variety
of sports accessories, including light-line fitness equipment, weight training
accessories and specialty workout apparel. Certain equipment, weight training
accessories and fitness apparel in the Company's stores are sold under the
Company's own brand of Pro Performance(R) as well as those of third-parties.

OTHER. This category represents primarily sales of the Company's Gold
Card. This card, for a $15 annual fee, provides our customers with a 20%
discount on all products purchased on the card purchase date and the first
Tuesday of each month. At February 5, 1994, there were approximately 972,000
Gold Card holders with an additional 20,000 - 40,000 card holders being added
each month.

Below is a three-year comparison of the Company's sales by major product
category and the respective percent to total retail sales:

SALES BY MAJOR PRODUCT CATEGORY
(% OF TOTAL RETAIL SALES)

<TABLE>
<CAPTION>
(In millions)
1993 1992 1991
Dollars % Dollars % Dollars %
------- - ------- - ------- -
<S> <C> <C> <C> <C> <C> <C>
Vitamin & Minerals $171 40 $158 41 $144 41
Sports Nutrition 133 31 119 31 102 29
Herbs 33 8 16 4 14 4
Diet 24 6 18 4 15 4
Fitness & Apparel 14 3 14 4 12 3
Food 19 4 32 8 38 11
Cosmetics 22 5 22 6 27 8
Other 13 3 7 2 - -
---- --- ---- --- ---- ---
Total $429 100% $386 100% $352 100%
==== ==== ==== ==== ==== ====
</TABLE>

STORES

At February 5, 1994, the Company operated a network of 1,044 Company-owned
retail stores through its wholly-owned subsidiary General Nutrition
Corporation. The stores are located primarily in regional shopping malls.
Most GNC stores contain between 1,200 and 1,800 square feet.

3
<PAGE> 6
The following table sets forth for each of the periods indicated the
weighted average sales per square foot based upon the weighted average number
of stores operated by the Company during the period and comparable store sales
growth:

SALES IN COMPANY-OWNED STORES

<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Sales Average Square Average Annual Sales Comparable
Year Per Store Feet Per Store Per Square Foot Sales Growth (a)
- - ---- ------------- -------------- --------------------- ----------------
<S> <C> <C> <C> <C>
1989 $307,706 1,624 $189 2.2%
1990 311,634 1,627 192 0.7
1991 349,043 1,642 213 10.4
1992 397,874 1,640 243 12.6
1993 437,201 1,611 271 12.5
</TABLE>

- - -------------

(a) The calculation of comparable store sales growth excludes the net sales of
a store for any period of one year if the store was not open during the
same period of the prior year. In a year with fifty-three weeks, the extra
week is excluded in determining comparable store and weighted average
sales. When a store's square footage has been increased as a result of
expansion, relocation in the same mall or conversion to a SuperStore in the
same mall, the store continues to be treated as a comparable store.
Figures have been weighted to reflect the various dates within a given
period on which individual stores have been opened or closed.

NEW STORE FORMATS. The Company's new store format, which was eventually
called the SuperStore concept, was developed in 1986 and has evolved through
various prototypes resulting in the updated appearance that is now included in
every new Company-owned and domestic franchise store built by the Company. The
Company began the implementation of this concept by converting existing GNC
stores and had converted 264 stores at February 5, 1994. An additional 95
stores will be converted to this updated format in 1994. Once updated, these
stores had significant sales increases. In the first twelve months after
conversion, sales increased an average of approximately 20.3% when compared
with the same period prior to conversion. The current format is of comparable
size to the Company's average store and has a similar operating cost structure.

CUSTOMER BASE. In 1993, the Company's stores reported over 26.7 million
customer transactions at an average sale of approximately $16.08 per
transaction as compared with 27.5 million customer transactions and $14.04 per
transaction for 1992. The decrease in customer transactions in 1993 versus
1992 is attributed primarily to the Company's reduced merchandising of the low
margin commodity food products in our stores.

By broadening its array of products to include sports nutrition, fitness
and energy products, particularly in its SuperStores, the Company is changing
the demographic characteristics of its customer base. The Company's historical
customer base has been primarily women 45 years of age and over who purchase
vitamin and diet products and products in the health and beauty aid lines.
Over the last several years, through its expansion of sports nutrition products
and vitamin and mineral supplement offerings, the Company has broadened the
appeal of its product line to a younger demographic profile primarily
interested in health and fitness. With the general aging of the population and
the public's continued interest in and awareness of health, fitness and
nutrition, management believes that the Company's potential base of customers
will continue to expand.

STORE MANAGEMENT AND CONTROL. The Company's stores are currently
regionalized into three divisions. Each division is led by a vice president
who, along with managers responsible for merchandising, promotions, and
inventory, a financial analyst and a network of regional sales directors,
manages Company-owned store operations. This decentralized organization allows
the Company's field management to customize stores to the demographics of
particular markets and has responsibility for merchandise assortment,
promotion, certain advertising and product pricing. In 1990, with the new
emphasis on franchising, a franchise management and field support group was
added to the divisional organization. This group is responsible for all
aspects of the franchise field operations.

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<PAGE> 7
ADVERTISING AND PROMOTION

The Company markets its products primarily through television
advertisements and to a limited extent through local and national print and
other broadcast media, as well as point-of-sale material. The primary focus of
the television advertising is on specific sports nutrition and vitamin
products. In connection with this program, the Company received approximately
$3.8 million, $7.6 million, and $7.2 million in each of 1991, 1992, and 1993
towards the cost of the campaign from the manufacturers or suppliers of the
products advertised. In the sports nutrition markets, the Company derives
significant benefits through advertisements that identify GNC stores as a
source for the product being advertised but that are paid for entirely by
manufacturers and suppliers of such products. In 1993, the Company spent $20.8
million net on retail advertising and other marketing efforts, or approximately
4.9% of retail net revenue, compared with $15.9 million, or approximately 4.1%
of retail net revenue in 1992. Additionally, the Company's franchisees are
currently required to spend up to 3% of sales on local advertising and
contribute further amounts to a national advertising fund.

FRANCHISING

Beginning in 1987, the Company developed a franchising strategy to enhance
the Company's operating performance through the conversion of certain
marginally performing stores and to increase its store base through the
addition of new stores. Franchise stores have demonstrated that GNC stores can
operate successfully in locations such as strip centers and smaller malls that
were previously considered secondary locations. The Company believes the
consistency and customer service that an owner/operator provides is important
given the specialized nature of the Company's product line.

The Company's franchising program is directed toward third-parties,
employees and, more recently, independently owned health food/nutrition store
owners. At February 5, 1994, 509 franchises were operating, and an additional
141 franchises had been awarded but were not yet open. Comparable store sales
for all franchise stores increased an average of approximately 20.3% in 1993
after an increase of approximately 22.8% for 1992. Moderate success has been
achieved in international franchising with a license agreement awarded in each
of Mexico, Peru, Guam, Trinidad, Nassau, the Bahamas, Colombia, and South
America, and development agreements in Thailand and South Korea. While
management believes the Company has good opportunities for foreign expansion in
international franchising, foreign import regulations continue to be the chief
barriers.

Franchisees are currently required to pay an initial fee of $20,000 per
store; however in 1993, the fee was $17,500. The Company also encourages
employees to pursue franchising opportunities by reducing the initial franchise
fee by fifty percent. In addition, the Company offers limited financing to
qualified franchisees at current fixed interest rates of 13 3/4% per annum for
a term of five to six years. A franchisee is required to carry all of the
Company's private label vitamin and mineral supplements. Franchisees are
required to pay the Company a continuing royalty of 5% to 6% of sales, to
expend up to 3% of sales on local advertising and may be required to contribute
up to 2% of sales toward a national advertising fund. The franchisees are
currently required to contribute 1 1/2% of sales to the advertising fund. A
reduced initial franchise fee of $7,500 and a lower initial royalty fee of 2%,
3% and 4% for years 1, 2 and 3, respectively, is offered to independently owned
health food/nutrition store owners to encourage them to convert to GNC
franchises. After the third year, the franchisee will pay the current
applicable royalty rate. The Company offers franchisees a three-part training
program consisting of in-store, classroom and field training concentrating on
product education and franchise operations. This training program is augmented
by the franchise management group.

Currently all franchise agreements are effective for a ten-year period.
Although franchise contracts contain strict requirements for store operations,
the Company cannot exercise the same degree of control over franchisees as it
does over its store managers; however, the Company does retain the right to
approve vendors, specific products and requires franchisees to such legal
approval of any franchise advertising. The Company recognizes a lower margin
on the wholesale sale of its products to franchisees. However, such lower
margins on product sales to franchisees are partially offset by franchise
royalties and incremental business at the Company's manufacturing facility as
well as the absence of direct store operating expenses incurred by the Company.

5
<PAGE> 8
MANUFACTURING

The Company's manufacturing plant, located in Greenville, South Carolina,
is one of the largest vitamin and mineral supplement manufacturing facilities
in the United States. The plant, which is owned by the Company, is dedicated
solely to the manufacture of vitamin, mineral, herbal and sports nutrition
supplements. The Company manufactures the majority of its products in three
forms: tablet, soft gel and hard shell capsules but also manufactures and
packages products in powder form. Products manufactured for other segments of
the Company represented 58.8% of total manufacturing revenue in 1993 as
compared with 64.3% in 1992. In addition, the Company sells its manufactured
products to a variety of third-parties. The plant is currently running at
capacity and will add more capacity in soft gel in the first and fourth
quarters of 1994. With the capacity increase and other planned capital
expenditures at Manufacturing, the Company will have sufficient manufacturing
capacity to meet its 1994 requirements.

The Company places special emphasis on quality control and conducts sample
testing on all raw materials and finished products, weight-testing and purity
testing in the Company's micro-bacterial laboratory. Each product container is
sealed with an Enercon foil seal that indicates whether the container has been
opened prior to sale, and, where required, the containers are tamper- resistant
and childproof. The Company's product development and quality control team
currently consists of 45 individuals. These individuals work closely with the
retail sales managers and field and merchandising departments to respond to
consumer demands and trends and to develop new products.

The principal raw materials used in the manufacturing process are natural
and synthetic vitamins and gelatin. The Company maintains multiple sources for
all raw materials. Currently, one vendor supplies approximately 35% of the
manufacturing facility's raw materials, and no other single vendor accounts for
more than 10% of its raw material purchases.

WAREHOUSING AND DISTRIBUTION

The Company currently distributes its products through three leased
distribution centers with its own drivers and leased trucks as well as through
contract and common carriers. Deliveries are made directly to retail stores on
a one or two-week basis for high volume stores, a three-week basis for lower
volume stores and as required for franchise stores. The Company's three
distribution centers are located in Pittsburgh, Pennsylvania; Atlanta, Georgia;
and Dallas, Texas. The Company is currently reviewing the network of its
distribution centers to ensure maximum efficiencies while continuing to provide
enhanced customer service.

EMPLOYEES

At February 5, 1994, the Company employed approximately 6,402 people, of
whom approximately 5,660 were employed in Retail; 480 were employed in
Manufacturing; 32 were employed in Franchising and 230 were employed in
corporate support functions. None of the Company's employees are covered by a
collective bargaining agreement.

GOVERNMENT REGULATIONS

The processing, formulation, packaging, labeling and advertising of the
Company's products are subject to regulation by one or more federal agencies,
including the Federal Food and Drug Administration (the "FDA"), the Federal
Trade Commission (the "FTC"), the Consumer Product Safety Commission, the
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. The FDA, in
particular, regulates the advertising, labeling and sales of vitamin and
mineral supplements if the FDA believes they are unapproved drugs or food
additives rather than food supplements.

6
<PAGE> 9
Following reports that use of manufactured L-Tryptophan, an amino acid, may
be associated with a rare blood disorder, Eosinophilia-Myalgia Syndrome, the
FDA recommended the recall of all products that, if taken as labeled, would
result in the ingestion of 100 or more milligrams per day of manufactured
L-Tryptophan. General Nutrition Corporation issued a recall of these products
on November 18, 1989, and at that time General Nutrition Products Inc. began
reformulating all of its products to eliminate all manufactured L-Tryptophan.
The 1989 operating earnings reflected a $1.7 million write-off of inventory and
related costs as a result of the FDA's November 1989 recall. On March 22,
1990, the FDA issued a separate recall asking manufacturers to remove all
product containing any quantity of manufactured L-Tryptophan from the shelves.
The Company issued a recall of these products on March 22, 1990. The Company's
1990 operating earnings reflect an additional $2.2 million write-off of
inventory and related costs as a result of the March 1990 recall. The Company
collected $2.2 million in 1990 from Showa Denko America, Inc., its major
supplier of L-Tryptophan, to offset expenses relating to the recalls. Since
the Company had already begun the reformulation process prior to the second
recall, the amounts of revenue loss in 1990 from the lost sales of these
products were minimal.

In 1984, the Federal Trade Commission instituted an investigation of the
Company alleging deceptive acts and practices in connection with the
advertising and marketing of certain of the Company's products. After lengthy
negotiations and some litigation, the Company accepted a proposed consent order
which was finalized in 1989, under which the Company agreed to refrain from,
among other things, making certain claims with respect to certain of its
products unless the claims are based on and substantiated by reliable and
competent scientific evidence. Following normal procedure, the FTC began to
monitor the Company's compliance with the 1989 order during the early part of
that year. Almost immediately, disputes arose concerning the meaning and
intent of certain sections of the order pertaining almost exclusively to label
and labeling claims for third-party (non-GNC brand) products. Compliance with
the various provisions and with FTC staff's interpretation of those provisions
was exceedingly complex and entailed continued diligence. The Company also
entered into a consent order in 1970 with the FTC which addressed "iron
deficiency anemia" type products. The FTC staff recently began interpreting
the 1970 order to cover certain energy products presently sold by the Company,
both under its own and third-party labels, and also had alleged that certain
promotional claims for two hair care products were unsubstantiated. Ultimately
members of the FTC Compliance staff indicated to the Company that they would
recommend that a proceeding be brought seeking civil penalties based on alleged
violations unless a comprehensive settlement could be reached. While the
Company believes that, at all times, it operated in material compliance with
the orders, the Company entered into a settlement with the FTC to avoid
protracted litigation. As a part of this settlement, the Company agreed to pay
a civil penalty in the amount of $2.4 million, the entire amount of which was
fully covered by reserves taken by the Company in the fiscal year ended
February 6, 1993. Therefore, the settlement amount had no impact on the
financial results of the Company for the fiscal year ended February 5, 1994.
Under the terms of the settlement, the Company neither admitted liability nor
was found liable for any of the alleged violations. The Company has agreed to
adhere to the terms of the 1970 and 1989 consent orders and to abide by the
provisions of the settlement document concerning hair care products. The
Company does not believe that future compliance with the outstanding consent
decrees will affect its business operations in any way. The Company does
intend to petition the FTC for clarification of what it and members of the FTC
staff agree is ambiguous language contained in the 1970 order. In addition the
Company intends to file a petition with the FTC to modify the 1989 order. The
Company is seeking these clarifications and modifications to minimize future
conflicts over the meaning of the orders.

Partially in response to the enactment of the Nutrition Labeling and
Education Act of 1990, ("NLEA"), the FDA, in November 1991, issued proposed
regulations designed to, among other things, establish specific regulations for
the nutrition labeling of vitamin and mineral supplements and establish
procedures for FDA approval of health claim messages. Final regulations were
to be published by November of 1992. Principally through the efforts of the
dietary supplement industry, federal legislation was passed in October 1992,
which prohibited the issuance of final regulations, as applied to dietary
supplements, until December 31, 1993. Final regulations have now been issued.
They will require dietary supplements to be relabeled, effective July 15, 1995,
in much the same manner as similar regulations caused the conventional food
industry to relabel their

7
<PAGE> 10
products. The finalized regulations also establish procedures for pre-approval
of health claim messages for dietary supplements, effective June 15, 1994.

In addition, in June of 1993, the FDA published an Advance Notice of
Proposed Rulemaking (ANPR) requesting comments on the safety of high potency
levels of certain vitamins and minerals, the safety of certain herbs and the
possible creation of a separate regulatory framework for herbs and the safety
of other dietary supplements, including certain individual amino acids. A
number of comments were submitted by the December 15, 1993 deadline. FDA
representatives have recently stated that the ANPR is no longer a high priority
item, although such oral remarks are not necessarily binding on the FDA and do
not constitute official policy.

Legislation, backed by the dietary supplement industry, is presently
pending in both houses of Congress. Passage of such legislation could have an
effect on the recently finalized NLEA regulations and would impact issues
raised in the ANPR.

The Company cannot determine what effect the FDA regulations, the proposed
rule-making referred to above, or other governmental regulations or
administrative orders, when and if promulgated, would have on its business in
the future. They could, however, require the reformulation of certain products
to meet new standards, require the recall or discontinuance of certain products
not capable of reformulation, or impose additional recordkeeping, expanded
documentation of the properties of certain products, expanded or different
labeling, and scientific substantiation. Any or all of such requirements could
adversely affect the Company's operations and its financial condition.

Compliance with the provisions of national, state and local environmental
laws and regulations has not had a material effect upon the capital
expenditures, earnings or competitive position of the Company.

ITEM 2. PROPERTIES

The Company leases its stores, distribution centers and office facilities.
The major property items are leasehold improvements and furniture and fixtures
found in these locations. Leasehold improvements are depreciated over the
shorter of 10 years or the term of the lease. Furniture and fixtures are
amortized over the estimated useful life of the asset. Of the approximately
1,044 Company-owned stores operating at February 5, 1994, an estimated 49% of
the store leases are scheduled for renewal over the next five years.

The Company owns its vitamin production facility in Greenville, South
Carolina. The plant is currently running at capacity and will add more
capacity in the soft gel production area in the first and fourth quarters of
1994. With the capacity increase and other planned capital expenditures at
Manufacturing, the Company will have sufficient capacity to meet its 1994
requirements.

ITEM 3. LEGAL PROCEEDINGS

8
<PAGE> 11
Based on the facts known to date, the GNC Companies believe that, under the
Agreement, they should be entitled to indemnification in all actions arising
out of the ingestion of products containing L-Tryptophan manufactured by SDK
and that contribution by the GNC Companies would not be warranted. The
substantial majority of all the cases in which a claimant is able to identify
the L-Tryptophan ingested implicated L-Tryptophan manufactured by SDK. Under
the Agreement, the GNC Companies must refrain from bringing cross-claims
against or joining SDA or SDK. The Company believes that SDA can only meet its
obligations under the Agreement with the financial support of SDK and pursuant
to the Agreement, SDK has provided in a separate agreement, an unconditional
and irrevocable guaranty of all the performance and payment obligations of SDA
under the Agreement.

The Agreement does not cover damages caused by the GNC Companies'
intentional misconduct or awards of punitive damages or multiple damages
arising out of such intentional misconduct or civil or criminal penalties
arising out of violations of law if any such damages or penalties were to be
awarded against the GNC Companies. The GNC Companies believe that they have
reasonable defenses against such damages or penalties. In support of their
claims for compensatory and, in some cases, punitive damages, various
plaintiffs have alleged, among other things, violations of the United States
Food, Drug and Cosmetic Act (the "FDCA"). If proven to have been a proximate
cause of a plaintiff's damages, violations of the FDCA by the GNC Companies
could preclude the GNC Companies from obtaining full indemnification. The GNC
Companies do not believe they violated the FDCA. In addition, based upon the
facts known to date, they believe that there are reasonable grounds upon which
to defend against allegations that, if any such violations occurred, such
violations proximately caused a plaintiff's damages. The GNC Companies further
believe that they should be entitled to indemnification or contribution from
some of the other suppliers or distributors in certain actions, but are not
pursuing those claims at this time.

The GNC Companies have product liability insurance which they believe
provides coverage for L-Tryptophan products subject to these claims, including
legal defense costs. However, the total of all damages alleged, if fully
awarded against the GNC Companies and ignoring the existence of the Agreement,
the guaranty by SDK, and claims for indemnification and contribution, would
substantially exceed the GNC Companies' available product liability insurance
coverage, and would have a material impact upon the Company's results of
operations. The multitude of defendants, the probability that some or all of
the total liability would be assessed against other defendants and the fact
that discovery in these actions is not complete makes it impossible to predict
the outcome of these actions or to assess the ultimate financial exposure of
the GNC Companies. No provision has been made in the financial statements for
any loss that may result to the Company as a result of these actions.

The Company is presently engaged in various other legal actions and
governmental proceedings, and, although ultimate liability cannot be determined
at the present time, the Company is currently of the opinion that the amount of
any such liability from these other actions and proceedings when taking into
consideration the Company's product liability coverage, will not have a
material adverse impact on its financial position.

The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that, among other things, the use of its products
results in injury. With respect to product liability coverage, the Company
currently has a $3 million self-insured retention per occurrence and aggregate,
followed by a primary products liability policy of $2 million per occurrence
and aggregate, and an additional $60 million of umbrella liability insurance
coverage. There can be no assurance that such insurance will continue to be
available at a reasonable cost, or if available will be adequate to cover
liabilities.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

Note 7 and Note 13 to the accompanying Consolidated Financial Statements
are incorporated herein by reference. The Company's Common Stock and Series B
Preferred Stock are not publicly traded.

9
<PAGE> 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA

A table entitled "Five Year Summary of Consolidated Financial Data" is
provided below. The consolidated financial information for the 28-week period
ended August 19, 1989 is that of the Company prior to the Acquisition by
Holding (herein sometimes referred to as the "Predecessor") and the
consolidated financial information for the 24-week period ended February 3,
1990, and subsequent periods are that of the Company after the Acquisition.
The purchase method of accounting was used to record assets acquired and
liabilities assumed by the Company. That accounting method generally results
in changes in the amortization and depreciation reported in future periods.
Accordingly, the following historical data of the Predecessor and the 24-weeks
ended February 3, 1990, and subsequent periods are not comparable in all
material respects. The information below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical consolidated financial statements of the Company
and related notes thereto included elsewhere in this Annual Report on Form
10-K. All fiscal years of the Company referred to herein had 52 weeks other
than 1992 which had 53 weeks. See Footnote (a), (b).

10
<PAGE> 13
FIVE-YEAR SUMMARY OF CONSOLIDATED FINANCIAL DATA
General Nutrition, Incorporated and Subsidiaries

<TABLE>
<CAPTION>
Predecessor
28 Weeks 24 Weeks
Ended Ended
August 19, February 3,
1989 1990 1990 1991 1992 1993
---------- ----------- ----------- ----------- ----------- -----------
DOLLARS IN THOUSANDS, EXCEPT WEIGHTED
AVERAGE SALES
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net revenue . . . . . . . . . . . . . . . . . . $199,568 $157,393 $346,818 $393,568 $453,527 $546,253
Cost of sales, including costs of
warehousing, distribution and
occupancy . . . . . . . . . . . . . . . . . . 127,139 103,759 229,118 254,794 288,335 340,729
Selling, general and administrative . . . . . . 51,398 45,321 95,021 105,509 115,023 129,684
Nonrecurring items(c) . . . . . . . . . . . . . 12,018 --- (400) --- 700 ---
---------- ---------- ---------- ---------- ---------- ---------
Earnings before interest and income taxes
(operating earnings)(d) . . . . . . . . . . . 9,013 8,313 23,079 33,265 49,469 75,840
Interest expense (income) . . . . . . . . . . . (126) 24,456 43,582 38,153 28,159 20,394
Income taxes (tax benefits) . . . . . . . . . . 6,156 (5,320) (4,137) 2,471 9,320 23,904
---------- ---------- ---------- ---------- ---------- ---------
Earnings (loss) from continuing operations . . $ 2,983 ($10,823) ($16,366) ($7,359) $ 11,990 $ 31,542
========== ========== ========== ========== ========== =========

OPERATING DATA:
Number of stores (at end of period):
Company-owned stores . . . . . . . . . . . . . 1,097 1,070 978 877 738 731
Company-owned SuperStores . . . . . . . . . . 1 9 48 97 188 313
Franchised stores . . . . . . . . . . . . . . 16 26 65 151 290 509
---------- ---------- ---------- ---------- ---------- ---------
Total system-wide stores . . . . . . . . . . 1,114 1,105 1,091 1,125 1,216 1,553
Weighted average annual sales per square
foot (Company-owned stores)(e) . . . . . . . . --- $189 $192 $213 $243 $271
Weighted average sale per customer . . . . . .
(Company-owned stores)(f) . . . . . . . . . . $9.33 $9.82 $10.23 $11.99 $14.04 $16.08
Comparable store sales growth(g) . . . . . . . 6.4% 2.2% 0.7% 10.4% 12.6% 12.5%
</TABLE>

<TABLE>
<CAPTION>
At At At At At
February 3, February 2, February 1, February 6, February 5,
1990 1991 1992 1993 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . . . . . --- $26,950 $16,099 $15,452 $17,021 $40,942
Total assets . . . . . . . . . . . . . . . . . --- 413,389 400,356 397,943 460,763 466,637
Total outstanding indebtedness . . . . . . . . --- 317,925 294,722 290,279 234,928 181,207
Preferred stock . . . . . . . . . . . . . . . . --- 32,235 35,866 38,734 38,121 40,000
Shareholder's equity . . . . . . . . . . . . . --- 16,564 15,217 5,741 76,960 156,713
</TABLE>

Notes to Consolidated Financial Statements are an integral part of these
statements.

11
<PAGE> 14
- - -------------

(a) Unless otherwise indicated, references herein to years are to the
Company's fifty-two or fifty-three week year (which ends on the
Saturday closest but not prior to January 31 in the following calendar
year). All years referred to herein had fifty-two weeks other than
1992 which had fifty-three weeks.

(b) The purchase method of accounting was used to record assets acquired
and liabilities assumed by the Company as a result of the Acquisition.
That accounting method generally results in changes in the book value
of assets acquired to reflect fair value and in the depreciation and
amortization reported in future periods. In addition, significant debt
was undertaken by the Company to finance the Acquisition. Accordingly,
the summary consolidated financial information of the Predecessor and
the Successor is not comparable in all material respects.

(c) Non-recurring items include $13.6 million acquisition costs and $1.6
million gain on the sale of the mail order business in 1989; $.4
million gain on sale of the mail order business in 1990 and $.7 million
loss for the discontinuance of the Company's Gymees retail joint
venture in 1992.

(d) Operating earnings are calculated after deduction for depreciation and
amortization of $16.7 million in 1989, $18.6 million in 1990, $18.5
million in 1991, $19.8 million in 1992 and $20.2 million in 1993.

(e) Weighted average annual sales per square foot for Company-owned stores
were determined by dividing net store sales for the period by weighted
average retail square feet at the end of the period.

(f) Weighted average sale per customer was calculated by dividing
Company-owned net store sales for each accounting period by the
reported customer transaction counts for such accounting periods.

(g) Comparable store sales growth is for Company-owned stores only. The
calculation of comparable store sales growth excludes the net sales of
a store for any period of one year if the store was not open during the
same period of the prior year. In a year with fifty-three weeks, the
extra week is excluded in determining comparable store sales. When a
store's square footage has been increased as a result of expansion,
relocation in the same mall or conversion to a SuperStore, the store
continues to be treated as a comparable store. Figures have been
weighted to reflect the various dates within a given period on which
individual stores have been opened or closed.

12
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION

RESULTS OF OPERATIONS

The Company's revenue and earnings are generated primarily from its three
business segments: Retail, Franchising and Manufacturing. The following table
is a summary of the results by segment for 1991, 1992 and 1993. Each of the
years 1991 and 1993 were 52 weeks while 1992 had 53 weeks.

<TABLE>
<CAPTION>
% of Net % of Net % of Net
(In thousands) 1991 Revenue 1992 Revenue 1993 Revenue
---- ------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
NET REVENUE:

Retail $351,744 89.4% $385,500 85.0% $428,799 78.5%
Franchising 21,218 5.4 38,845 8.6 70,262 12.9
Manufacturing 19,144 4.9 28,048 6.2 46,576 8.5
-------- ------ -------- ------ -------- ------
392,106 99.7 452,393 99.8 545,637 99.9
Corporate 1,462 0.3 1,134 0.2 616 0.1
-------- ------ -------- ------ -------- ------
CONSOLIDATED $393,568 100.0% $453,527 100.0% $546,253 100.0%
======== ====== ======== ====== ======== ======

OPERATING EARNINGS:

Retail * $ 38,687 11.0% $ 51,146 13.3% $ 67,669 15.8%
Franchising 2,488 11.7 4,806 12.4 8,481 12.1
Manufacturing 6,609 34.5 9,898 35.3 17,172 36.9
-------- -------- --------
47,784 12.2 65,850 14.6 93,322 17.1
Corporate (14,519) -- (16,381) -- (17,482) --
-------- -------- --------
CONSOLIDATED $ 33,265 8.5% $ 49,469 10.9% $ 75,840 13.9%

Interest expense $ 38,153 9.7% $ 28,159 6.2% $ 20,394 3.7%
-------- -------- --------
Earnings (loss) before
income taxes and
extraordinary item ($4,888) (1.2%) $ 21,310 4.7% $ 55,446 10.2%
======== ======== ========
</TABLE>

* Includes $6.8 million of goodwill amortization expense in each year.

1993 VERSUS 1992

CONSOLIDATED. Net revenue and earnings before interest and income
taxes (operating earnings) in 1993 increased by 20.4% and 53.3%, respectively,
when compared with 1992. When nonrecurring items are excluded from 1992,
operating earnings increased 51.2% in 1993 versus 1992. The Company's cost of
sales, which includes the costs of warehousing, distribution and occupancy
decreased as a percent of total revenue by 1.2% to 62.4%. Product costs
increased as a percentage of net revenue by .8% in 1993 versus 1992 as the
Franchising and Manufacturing sales, which carry significantly lower product
margins than Retail, increased to 21.4% of total revenue as compared with 14.8%
in 1992. Costs of warehousing and distribution declined slightly in 1993 while
occupancy costs declined as a ratio to total revenue by 1.6%.

RETAIL. Net revenue for Retail increased by 11.2% in 1993 when
compared with 1992. Excluding the $10.7 million in revenue for the 53rd week
of 1992, the increase would have been 14.4% in 1993. At February 5, 1994,
there were 1,044 Company-owned stores operating. The changes in Company-owned
locations in 1993 were as follows:

<TABLE>
<S> <C>
Operating locations at February 6, 1993 926
New locations added 135
Repurchases of franchise locations 18
Existing locations sold to franchisees (26)
Store closings (9)
------
Operating locations at February 5, 1994 1,044
======
</TABLE>

13
<PAGE> 16
Company-owned stores that were open more than one year had comparable
store sales increases greater than 10% for the third straight year, recording
increases of 12.5% in 1993, 12.6% in 1992 and 10.4% in 1991. Management
attributes this growth to the continuing strength of the overall market for
products that promote health and the success of the Company's strategies,
particularly the "Gold Card" in 1993, and the Company's ability to capitalize
on the opportunities provided by this market.

Retail expenses, including cost of sales, decreased in all categories
as a percentage of sales in 1993 with the exception of advertising which had a
planned increase. As a result, retail operating earnings increased 32.3% in
1993 when compared with 1992.

FRANCHISING. Net revenue and operating earnings for Franchising
increased 80.9% and 76.5% in 1993 when compared with 1992. In 1993, 328
franchises were awarded and 219 franchises opened versus the 1992 totals of 149
and 139, respectively. At February 5, 1994 there were 509 total franchise
stores opened and 141 stores that were awarded but were not yet opened. Retail
comparable store sales at the franchise locations continued to outpace those of
the Company-owned stores. In 1993, the franchisees reported total comparable
store sales increases of 20.3%, and those franchise stores in their first year
of reporting comparable store sales showed an increase of 38.0%.

Costs in all categories in Franchising remained relatively constant as
a percentage of franchise revenue in 1993 when compared with 1992.

MANUFACTURING. Net revenue and operating earnings from Manufacturing
increased by 66.1% and 73.5%, respectively, in 1993 when compared with 1992.
Third-party sales increases continued to be the result of the Company's
technological advances in the production of soft gelatin capsules. This
production is now operating 7 days a week, 24 hours a day to keep pace with the
current demand. The Company anticipates adding 10% and 20% more capacity in
the first and fourth quarters of 1994, respectively. Intersegment sales, which
are eliminated from consolidated revenue, increased 32% in 1993 primarily as a
result of increased store openings in both Retail and Franchising.

CORPORATE. Net revenue at Corporate was generated primarily through a
management agreement with American Health Companies, Inc. (AHC). Income
generated from the agreement is anticipated to be substantially less in 1994
than in 1993, as the contract is scheduled to expire in July 1994.

NON-OPERATING EXPENSE ANALYSIS. Interest expense, including amortization
of deferred financing fees decreased by 27.6 % in 1993 when compared with 1992.
Early retirement of the Company's senior subordinated notes was the primary
reason for the decrease. In 1993, the Company recognized an extraordinary
loss, net of income taxes, for the early retirement of these notes, of $6.1
million which included a prepayment premium of $6.8 million paid at retirement.

1992 VERSUS 1991

CONSOLIDATED. Net revenue and earnings before interest and income
taxes (operating earnings) in 1992 increased by 15.2% and 48.7%, respectively,
when compared with the same period in 1991. When the nonrecurring charges of
$700,000 for the discontinuance of the Gymees retail joint venture is excluded
from corporate expenses, operating earnings in 1992 increased 50.8% when
compared with 1991. Cost of sales including the cost of warehousing,
distribution and occupancy decreased to 63.6% of revenue compared with 64.7% in
1991. The Company's volume purchases of regular turn merchandise at favorable
prices reduced product costs for both retail and wholesale sales during 1992.
In addition, occupancy costs in 1992 declined by 1.7% of net revenue when
compared with 1991. These favorable percentage decreases were offset to an
extent by higher product costs in Franchising and Manufacturing, both of which
increased as a percentage of consolidated net revenue. Selling, general and
administrative costs also declined by 1% of net revenue but increased in total
dollars by approximately $10.2 million. The increases in advertising costs of
approximately $4.8 million, expenses variable with sales volume, and
commissions and incentives were the primary reasons for the dollar increase.
Additionally, $2.5 million of the expense increase was incurred in the 53rd
week of the year.

RETAIL. Net revenue for Retail increased by 9.6% in 1992 when compared
with 1991. Revenue increased in 1992 while the net number of operating stores
declined from 1991. The net decline of 48 stores in

14
<PAGE> 17
1992 represented 41 stores that were converted to franchises, 26 stores that
closed and 19 new locations that were opened. Stores that were open in both
1992 and 1991 had comparable store sales increases averaging 12.6% for the
year. The Company attributes these increases to the continuing success of its
marketing strategies, including local and national television advertising, the
"Gold Card" program, the conversion of its stores to the SuperStore format and
the implementation of store systems technology (POS).

Product costs decreased by approximately 0.7% of revenue in 1992 when
compared with 1991 primarily due to favorable purchasing of the Company's
products. Additionally, occupancy costs declined by 1.1% of net revenue when
compared with 1991. These favorable decreases were offset in part by the 20%
discount from customers' "Gold Card" purchases on the first Tuesday of each
month. Retail selling, general and administrative costs, excluding advertising
costs, declined by approximately 1% of total retail revenue in 1992 when
compared with 1991. As a result, retail operating earnings increased 32.2% in
1992 when compared with 1991.

FRANCHISING. Net revenue for Franchising increased by approximately
83.1% in 1992 when compared with 1991. The number of operating franchise
locations grew approximately 92.1% in 1992 to 290 compared with 151 locations
at the end of 1991. Of these 290 stores, 62% were new locations with the
remainder being conversions of Company locations. At February 6, 1993, there
were 52 franchises awarded that were not yet opened, the majority of which were
new stores. The number of conversion stores, as a percentage of total stores
awarded, decreased in 1992 and is expected to decrease further in 1993.
Franchising continues to expand, and in 1992 represented 8.6% of total
consolidated revenue, up from 5.4% in 1991. In the 53-week period ended
February 6, 1993, 149 franchises were awarded and five franchise stores closed.

The Company's franchisees reported comparable store sales increases in
1992 of approximately 22.8% when compared with the same period in 1991.
Comparable store sales for converted franchise stores increased by an average
of 37.6% when compared with the year prior to conversion.

Cost of sales and selling, general and administrative expenses remained
constant as a percentage of franchise revenue in 1992 when compared with 1991.
As a result of the significant revenue increase, operating earnings increased
approximately 93.2% in 1992 when compared with the previous year.

MANUFACTURING. Net revenue in Manufacturing increased by 36.2% in 1992
when compared with 1991. This represented an increase of 31.1% on intersegment
sales, which were eliminated from the consolidated Company's revenue and 46.5%
on third-party sales.

The increase in intersegment sales was attributable to increased sales
in Company-owned stores and product to be sold to franchisees. Sales to third
parties continued to increase primarily as a result of technological
improvements and increased capacity in the soft gelatin production area,
allowing the Company to remain competitive in the wholesale vitamin supplement
market with respect to pricing, quality and customer service. Third-party
revenue represented approximately 36% of total manufacturing revenue, up from
approximately 33% in 1991.

CORPORATE. Net revenue at Corporate was generated primarily through a
management agreement with AHC, for which the Company provided accounting,
management information systems and various other management services. Corporate
expenses represented those costs that were not directly attributable to a
specific segment. In 1992, excluding the nonrecurring charge for the
discontinuance of the Gymees retail joint venture, selling, general and
administrative costs increased approximately 9.0% when compared with 1991. The
increase was attributed to normal cost of living increases in salaries and
associated benefits and expenses associated with the 53rd week in 1992 that had
no comparative week in 1991.

NON-OPERATING INCOME (EXPENSE) ANALYSIS. Interest expense, including
amortization expense of deferred financing fees, decreased by approximately
26.2% for 1992 when compared with 1991. The decrease was the result of the
refinancing of a portion of the Company's debt in March of 1992. This
refinancing replaced senior subordinated increasing rate notes (IRNs) that
carried an interest rate in excess of 18% and a portion of the Company's junior
subordinated debt that carried an interest rate of 15%, with new senior
subordinated indebtedness carrying an interest rate of 11 3/8%. Reduced
interest rates on the Company's senior debt, which carried variable interest
rates, also contributed to the decrease.

15
<PAGE> 18
Also in 1992, the Company recorded an extraordinary loss, net of income
taxes, of $2.6 million. The charge represented the remaining balance of
deferred fees associated with the early debt extinguishments in March 1992 and
January 1993.

INCOME TAXES. The Company recognized income for both financial and tax
reporting purposes during the period beginning February 2, 1992, and ending
February 6, 1993. The effective rate of tax for financial income purposes was
in excess of the statutory rate principally due to the tax treatment accorded
goodwill amortization.

REVIEW OF FINANCIAL CONDITION

ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES. The primary sources of
liquidity in the years presented were derived from operations, contributions
from the Company's parent in the years ended February 6, 1993 and February 5,
1994, borrowings from the existing revolving credit facility and receipt of
payments on long-term notes receivable. The Company also refinanced its
outstanding indebtedness in 1992. At February 5, 1994, there was $7.9 million
available on the Company's revolving credit facility.

The Company's future use of cash will be primarily to continue the
construction and acquisition of new Company-owned stores both in domestic and
international markets. Additional cash requirements include the funding of
working capital for operations, capital expansion of manufacturing and
distribution, additional inventory, the financing for franchise locations in
domestic markets, and the funding of the Company's debt service.

The Company anticipates its funding for operations and planned capital
expenditures for the foreseeable future to be internally generated. Additional
funding will be available from the repayment of franchise notes receivable and
from the Company's revolving credit facility, and to a lesser extent from
contributions form the Company's parent. The Company also has, if needed,
access to funds through all debt markets.

The table below summarizes the Company's cash flow from continuing
operations for operating, investing and financing activities derived from the
Consolidated Statements of Cash Flows:

<TABLE>
<CAPTION>
1991 1992 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Cash provided by (used in):
Operating activities $ 23,408 $ 21,671 $ 32,250
Investing activities (7,258) (18,781) (27,750)
Financing activities (12,271) 38,043 (48,304)
--------- --------- ---------
Net increase (decrease) in cash $ 3,879 $ 40,933 $(43,804)
========= ========= =========
</TABLE>

OPERATING ACTIVITIES. Cash provided by operations increased 48.8% and
37.8% to $32.3 million in 1993 versus 1992 and 1991, respectively. The Company
increased its inventory to ensure product availability for the increased retail
and wholesale sales and for new Company-owned and franchised stores. The
Company also continued, and will continue, to finance certain new franchised
locations in the purchase of store fixtures and inventory.

INVESTING ACTIVITIES. The Company had approximately $28.0 million,
$20.9 million and $10.1 million in capital expenditures in 1993, 1992 and
1991, respectively. Also in 1991, the Company financed $8.6 million of capital
additions through capital leases. Cash required for these expenditures in each
year was generated primarily from operations and through borrowings from the
Company's revolving credit facility. In 1994, planned capital expenditures are
anticipated to be approximately $33.0 million. Internal cash flow will be used
to finance substantially all of the Company's planned capital expenditures in
1994.

FINANCING ACTIVITIES. In 1993, the Company retired $73.7 million of its
long-term debt obligations including $9.6 million of its bank term indebtedness
and $64.1 million of its senior subordinated notes. Thirty-five million
dollars of these senior subordinated notes were redeemed by the Company at a
price equal to 109.953% of the principal amount, and $29.1 million were
repurchased on the open market at an average

16
<PAGE> 19
price of 111.391% of the principal amount. Cash for these retirements was
generated primarily from capital contributions by the Company's parent and
through the use of the Company's revolving credit facility.

The Company also redeemed $43.2 million of its 12.5% cumulative preferred
stock in 1993 with the proceeds generated from the Company's parent's initial
public offering of common stock in January 1993. The cash used to fund this
was reflected as restricted cash in the ending cash balance in the year ended
February 6, 1993. Remaining proceeds from the offering were used to reduce
bank term debt and the revolving credit facility.

In 1992 the Company replaced certain existing indebtedness with a public
offering of $135.0 million aggregate principal amount of 11 3/8% senior
subordinated notes.

DISCONTINUED OPERATIONS

WEIGHT LOSS CLINICS. In anticipation of a business venture with an
affiliate of THL, WLC Acquisition Corp. ("WLC"), a newly formed subsidiary of
GNI, purchased 35 Weight Loss Clinics from Fortune Enterprises, Inc. for
$100,000 in June 1990. The clinics were located primarily in the state of
Washington and the Commonwealth of Massachusetts. At the time of the purchase,
the diet market in general had been declining as a result of negative publicity
early in 1990 primarily concerning allegations of deceptive advertising and
claims of medical problems associated with certain dietary products. The
negative publicity was aimed at various diet related companies and the industry
in general, not at Weight Loss Clinics specifically. WLC purchased the Weight
Loss Clinics to position itself and its anticipated partner for a potential
diet industry market reversal. Neither the business venture nor the market
reversal materialized, and WLC discontinued operations in December 1990 after
incurring approximately $1.8 million in operating losses for the six month
period following the acquisition. WLC sold 18 of the clinics to Diet Centers,
Inc., a subsidiary of AHC for $111,000. WLC incurred a loss on disposal of the
business of approximately $230,000 related principally to lease termination
costs for the remaining 17 clinics.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Financial Statements and Financial Statement Schedules
appearing on Page 22 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF GNI

The Company is a wholly owned subsidiary of General Nutrition Companies,
Inc., a reporting company under the Securities and Exchange Act of 1934.
Accordingly, information under this item is not required herein pursuant to
General Instruction J, Part I of Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Information under this item is not required herein pursuant to General
Instruction J, Part II of Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information under this item is not required herein pursuant to General
Instruction J, Part II of Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information under this item is not required herein pursuant to General
Instruction J, Part II of Form 10-K.

17
<PAGE> 20
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

(1) Financial Statements - See Index to Financial Statements and
Financial Statement Schedules at Page 22 of this Annual Report on
Form 10-K .

(2) Financial Statement Schedules required to be filed by Item 8 and
14(d) - See Index to Financial Statements and Financial Statement
Schedules at Page 22 of this Annual Report on Form 10-K .

(b) There were no current reports on Form 8-K filed during the fourth
quarter of 1993.

3.1 Articles of Incorporation of General Nutrition, Incorporated, as
amended. (Incorporated herein by reference to Exhibit 3.1 to the
Annual Report on Form 10-K of General Nutrition, Incorporated for
the fiscal year ended February 1, 1992, File No. 1-8055.)

3.2 By-laws of General Nutrition, Incorporated, as amended.
(Incorporated herein by reference to Exhibit 3.2 to the Annual
Report on Form 10-K of General Nutrition, Incorporated for the
fiscal year ended February 3, 1990, File No. 1-8055.)

3.3 Articles of Incorporation of General Nutrition Corporation, as
amended. (Incorporated herein by reference to Exhibit 3.5 to the
General Nutrition, Incorporated, General Nutrition Companies, Inc.
(f/k/a Lee-GN Holding Corp.) and subsidiaries of General
Nutrition, Incorporated Registration Statement on Form S-1,
Registration No. 33-31892.)

3.4 By-laws of General Nutrition Corporation, as amended.
(Incorporated herein by reference to Exhibit 3.6 to the General
Nutrition, Incorporated, General Nutrition Companies, Inc. (f/k/a
Lee-GN Holding Corp.) and subsidiaries of General Nutrition,
Incorporated Registration Statement on Form S-1, Registration No.
33-31892.)

3.5 Restated Certificate of Incorporation of General Nutrition
Companies, Inc. (f/k/a Lee-GN Holding Corp.), filed with the
Secretary of the State of Delaware on January 8, 1993.
(Incorporated herein by reference to Exhibit 3.17 to the General
Nutrition, Incorporated Registration Statement on Form S-1,
Registration No. 33-43218.)

3.6 By-laws of General Nutrition Companies, Inc. (f/k/a Lee-GN Holding
Corp.), (Incorporated herein by reference to Exhibit 3.13 to the
General Nutrition Companies, Inc. Registration Statement on Form
S-1, Registration No. 33-43218.)

4.1 Specimen certificate for shares of common stock. (Incorporated
herein by reference to Exhibit 4.1 to the Annual Report on Form
10-K of General Nutrition, Incorporated for the fiscal year ended
February 6, 1993.)

10.1 Agreement of sale of certain assets located in Fargo, North
Dakota, between General Nutrition Mills, Inc. and Portland Food
Products, Inc. dated April 13, 1988, with Exhibits and Schedules.
(Incorporated herein by reference to Exhibit 10.5 to the Annual
Report on Form 10-K of General Nutrition, Incorporated for the
fiscal year ended February 6, 1988, File No. 1-8055.)

18
<PAGE> 21
10.2 Agreement of sale of certain mail order assets between certain
General Nutrition, Incorporated subsidiaries and certain
subsidiaries of Nature's Bounty, Inc. dated March 15, 1989.
(Incorporated herein by reference to Exhibit 10.6 to the Annual
Report on Form 10-K of General Nutrition, Incorporated for the
fiscal year ended February 4, 1989, File No. 1- 8055.)

10.3 Employment Agreement between General Nutrition, Incorporated and
Jerry D. Horn, as amended. (Incorporated herein by reference to
Exhibit 10.3 to the Annual Report on Form 10-K of General
Nutrition, Incorporated for the fiscal year ended February 6,
1993.)

10.4 Employment Agreement between General Nutrition, Incorporated and
William E. Watts. (Incorporated herein by reference to Exhibit
10.9 to the General Nutrition, Incorporated and Lee-GN Acquisition
Corp. Registration Statement on Form S-4, Registration No.
33-30223.)

10.5 Agreement between General Nutrition, Incorporated and Jerry D.
Horn relating to options. (Incorporated herein by reference to
Exhibit 10.10 to the General Nutrition, Incorporated and Lee-GN
Acquisition Corp. Registration Statement on Form S-4, Registration
No. 33-30223.)

10.6 Agreement between General Nutrition, Incorporated and William E.
Watts relating to options. (Incorporated herein by reference to
Exhibit 10.11 to the General Nutrition, Incorporated and Lee-GN
Acquisition Corp. Registration Statement on Form S-4, Registration
No. 33-30223.)

10.7 Form of General Nutrition Companies, Inc. (f/k/a Lee-GN Holding
Corp.) Stock Purchase Warrant. (Incorporated herein by reference
to Exhibit 10.7 to the Annual Report on Form 10-K of General
Nutrition, Incorporated for the fiscal year ended February 6,
1993.)

10.8 Management Agreement dated August 15, 1989 between Lee-GN
Acquisition Corp. and Thomas H. Lee Company. (Incorporated herein
by reference to Exhibit 10.21 to the General Nutrition,
Incorporated and Lee-GN Acquisition Corp. Registration Statement
on Form S-4, Registration No. 33-30223.)

10.9 Amendment No. 1 to the Subordinated Note Purchase Agreement dated
October 5, 1990 among General Nutrition Companies, Inc. (f/k/a
Lee-GN Holding Corp.), Westinghouse Credit Corporation and ML-Lee
Acquisition Fund, L.P. (Incorporated herein by reference to
Exhibit 10.21 to the Annual Report on Form 10-K of General
Nutrition, Incorporated for the fiscal year ended February 2,
1991, File No. 1-8055.)

10.10 Management Agreement dated July 9, 1990, but agreed to and
accepted on July 20, 1990, between American Health Companies, Inc.
and Diet Center, Inc. and General Nutrition, Incorporated, as
amended. (Incorporated herein by reference to Exhibit 10.11 to the
Annual Report on Form 10-K of General Nutrition, Incorporated for
the fiscal year ended February 6, 1993.)

10.11 Form of General Nutrition Companies, Inc. (f/k/a Lee-GN Holding
Corp.) Junior Subordinated Note. (Incorporated herein by
reference to Exhibit 4.4 to the General Nutrition, Incorporated,
General Nutrition Companies, Inc. (f/k/a Lee-GN Holding Corp.) and
subsidiaries of General Nutrition, Incorporated Registration
Statement on Form S-1, Registration No. 33-31892.)

10.12 Amended and Restated Standard Indemnity Agreement dated September
24, 1992 between General Nutrition, Inc. and all its subsidiaries
and Showa Denko America, Inc. (Incorporated herein by reference to
Exhibit 10.13 to the Annual Report on Form 10-K of General
Nutrition, Incorporated for the fiscal year ended February 6,
1993.)

10.13 Stockholders Agreement Amendment, Consent and Waiver, effective
November 25, 1991, to the General Nutrition Companies, Inc. (f/k/a
Lee-GN Holding Corp.) Stockholders Agreement, as amended.
(Incorporated herein by reference to Exhibit 10.45 to the General
Nutrition Companies, Inc. Registration Statement on Form S-1,
Registration No. 33-43218.)

19
<PAGE> 22
10.14 Form of Junior Subordinated Notes issued by General Nutrition
Companies, Inc. (f/k/a Lee-GN Holding Corp.) to the ML- Lee
Acquisition Fund, L.P. and Westinghouse Credit Corporation in
exchange for the outstanding shares of Series B Preferred Stock.
(Incorporated herein by reference to Exhibit 10.46 to the General
Nutrition Companies, Inc. Registration Statement on Form S-1,
Registration No. 33-43218.)

10.15 Form of General Nutrition Companies, Inc. (f/k/a Lee-GN Holding
Corp.) 1991 Stock Option Plan. (Incorporated herein by reference
to Exhibit 10.47 to the General Nutrition Companies, Inc.
Registration Statement on Form S-1, Registration No. 33-43218.)

10.16 Product Purchase Agreement among Portland Food Products Company,
PFP Specialty Food, Inc. and General Nutrition Corporation, dated
as of April 1, 1991. (Incorporated herein by reference to Exhibit
10.49 to the General Nutrition, Incorporated Registration
Statement on Form S-1, Registration No. 33-42243.)

10.17 General Nutrition Companies, Inc. (f/k/a Lee-GN Holding Corp.)
Amended and Restated 1992 Stock Option Plan. (Incorporated herein
by reference to Exhibit 10.17 to the Annual Report on Form 10-K of
General Nutrition Companies, Inc. for the fiscal year ended
February 5, 1994.)

10.18 Amended and Restated Credit Agreement dated as of February 10,
1993 among General Nutrition, Incorporated and General Nutrition
Corporation, as Borrowers, Banque Nationale de Paris, New York
Branch as Administrative Agent, Heller Financial, Inc. as Agent
and the Banks named therein. (Incorporated herein by reference to
Exhibit 10.19 to the Annual Report on Form 10-K of General
Nutrition, Incorporated for the fiscal year ended February 6,
1993.)

10.19 Amendment No. 4 to Subordinated Note Purchase Agreement dated as
of January 20, 1993 between General Nutrition Companies, Inc. and
ML-Lee Acquisition Fund, L.P. (Incorporated herein by reference
to Exhibit 10.54 to the General Nutrition Companies, Inc.
Registration Statement on Form S-1, Registration No. 33-43218.)

10.20 Subordinated Note Modification Agreement dated January 20, 1993
between General Nutrition Companies, Inc. and ML-Lee Acquisition
Fund, L.P. (Incorporated herein by reference to Exhibit 10.55 to
the General Nutrition Companies, Inc. Registration Statement on
Form S-1, Registration No. 33-43218.)

10.21 Amendment Number 5 to the Employment Agreement between General
Nutrition, Incorporated and Jerry D. Horn, as amended.
(Incorporated herein by reference to Exhibit 10.21 to the Annual
Report on Form 10-K of General Nutrition Companies, Inc. for the
fiscal year ended February 5, 1994.)

10.22 Amendment Number 4 and Amendment Number 5 to the Employment
Agreement between General Nutrition, Incorporated and William E.
Watts, as amended. (Incorporated herein by reference to Exhibit
10.22 to the Annual Report on Form 10-K of General Nutrition
Companies, Inc. for the fiscal year ended February 5, 1994.)

10.23 Form of General Nutrition Companies, Inc. 1989 Stock Option Plan
(Incorporated by reference to Exhibit 4A to the General Nutrition
Companies, Inc. Registration Statement on Form S-8, Registration
No. 33-58096.)

10.24 Form of General Nutrition Companies, Inc. 1993 Stock Option Plan.
(Incorporated herein by reference to Exhibit 10.24 to the Annual
Report on Form 10-K of General Nutrition Companies, Inc. for the
fiscal year ended February 5, 1994.)

20
<PAGE> 23
10.25 Form of General Nutrition Companies, Inc. 1993 Employee Stock
Purchase Plan. (Incorporated herein by reference to Exhibit 10.25
to the Annual Report on Form 10-K of General Nutrition Companies,
Inc. for the fiscal year ended February 5, 1994.)

10.26 Form of General Nutrition Companies, Inc. 1994 Stock Option Plan
for Nonemployee Directors. (Incorporated herein by reference to
Exhibit 10.26 to the Annual Report on Form 10-K of General
Nutrition Companies, Inc. for the fiscal year ended February 5,
1994.)

24 Consent of Deloitte & Touche.

21
<PAGE> 24
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2. Financial Statements

Consolidated Balance Sheets at February 6, 1993 and
February 5, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Consolidated Statements of Operations for the years
ended February 1, 1992, February 6, 1993 and February 5, 1994 . . . . . . . . . . . . . . . . . 25

Consolidated Statements of Shareholder's Equity for
the years ended February 1, 1992, February 6, 1993
and February 5, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Consolidated Statements of Cash Flows for the
years ended February 1, 1992, February 6, 1993
and February 5, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

3. Financial Statement Schedules for:

The years ended February 1, 1992, February 6, 1993
and February 5, 1994

V Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . 39

VI Accumulated Depreciation and Amortization
of Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . . . 40

X Supplementary Income Statement Information . . . . . . . . . . . . . . . . . . . 41
</TABLE>

All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.

22
<PAGE> 25
INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholder
General Nutrition, Incorporated

We have audited the accompanying consolidated balance sheets of General
Nutrition, Incorporated and Subsidiaries as of February 5, 1994 and February 6,
1993, and the related consolidated statements of operations, shareholder's
equity and cash flows for the years ended February 5, 1994, February 6, 1993
and February 1, 1992. Our audit also included the financial statement
schedules listed in the Index under Item 14(a)(2). These financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of General Nutrition,
Incorporated and Subsidiaries as of February 5, 1994 and February 6, 1993 and
the results of their operations and their cash flows for the years ended
February 5, 1994, February 6, 1993 and February 1, 1992 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material aspects
the information set forth therein.

As discussed in Note 12 to the consolidated financial statements, the
Company and two of its subsidiaries are defendants with others in legal actions
relating to alleged personal injuries resulting from the ingestion of certain
products containing manufactured L-Tryptophan, a product sold by the Company.
The ultimate outcome of these actions cannot presently be determined.
Accordingly, no provision for any loss that may result upon resolution of these
matters has been made in the accompanying consolidated financial statements.

March 7, 1994
Pittsburgh, Pennsylvania

23
<PAGE> 26
CONSOLIDATED BALANCE SHEETS
GENERAL NUTRITION, INCORPORATED AND SUBSIDIARIES
(In thousands, except share data)

<TABLE>
<CAPTION>
February 6, February 5,
1993 1994
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $568 $ --
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,380 1,144
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,155 26,610
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,493 94,917
Deferred taxes, current portion . . . . . . . . . . . . . . . . . . . . . . . . -- 5,647
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,779 6,839
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,375 135,157
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 60,159 74,050
Deferred taxes on income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381 --
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,983 11,197
Deferred financing fees, net of accumulated amortization of $720 and $1,652 . . . 9,587 5,723
Goodwill, net of accumulated amortization of $23,426 and $30,194 . . . . . . . . 247,278 240,510
-------- --------
$460,763 $466,637
======== ========

LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,873 $ 45,458
Accrued salaries, wages, vacations and related taxes . . . . . . . . . . . . . 8,734 10,202
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,090 1,949
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,865 3,758
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,465 21,934
Redeemable preferred stock, current portion . . . . . . . . . . . . . . . . . . 43,727 1,144
Long-term debt, current portion . . . . . . . . . . . . . . . . . . . . . . . . 7,600 9,770
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,354 94,215

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227,328 171,437
Deferred taxes on income . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 4,272
Redeemable Series B Preferred Stock, $0.01 par value:
2,000,000 shares authorized and 381,210 and 400,000 shares
issued and outstanding at 1992 and 1993, respectively . . . . . . . . . . . . . 38,121 40,000
SHAREHOLDER'S EQUITY:
Common Stock, $.01 par value:
3,000 shares authorized and 140 shares issued and outstanding
at February 6, 1993 and February 5, 1994 . . . . . . . . . . . . . . . . . . . 128,702 186,649
Earnings deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (51,742) (29,936)
-------- --------
76,960 156,713
-------- --------
$460,763 $466,637
======== ========
</TABLE>

Notes to Consolidated Financial Statements are an integral part of these
statements.

24
<PAGE> 27
CONSOLIDATED STATEMENTS OF OPERATIONS
General Nutrition, Incorporated and Subsidiaries
(In thousands)

<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
February 1, February 6, February 5,
1992 1993 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . $393,568 $453,527 $546,253
Cost of sales, including costs of warehousing,
distribution and occupancy . . . . . . . . . . . . . . . . . . . 254,794 288,335 340,729
------------ ------------ ------------
138,774 165,192 205,524

Selling, general and administrative . . . . . . . . . . . . . . . 98,725 108,255 122,916
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . 6,784 6,768 6,768
Loss on discontinuance of Gymees joint venture . . . . . . . . . -- 700 --
------------ ------------ ------------
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . 33,265 49,469 75,840
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 38,153 28,159 20,394
------------ ------------ ------------
Earnings (loss) before income taxes . . . . . . . . . . . . . . . (4,888) 21,310 55,446
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 2,471 9,320 23,904
------------ ------------ ------------
Earnings (loss) from continuing operations
before extraordinary item . . . . . . . . . . . . . . . . . . . (7,359) 11,990 31,542
Loss from operations of discontinued subsidiaries,
net of income tax benefits of $0 . . . . . . . . . . . . . . . . (55) -- --
Extraordinary gain (loss) from early retirement
of debt, net of income taxes (tax benefits) of
$94, $(1,327) and $(3,295) . . . . . . . . . . . . . . . . . . . 182 (2,576) (6,119)
------------ ------------ ------------
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . $ (7,232) $ 9,414 $ 25,423
============ ============ ============
</TABLE>

Notes to Consolidated Financial Statements are an integral part of these
statements.

25
<PAGE> 28
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
General Nutrition, Incorporated and Subsidiaries
(In thousands)

<TABLE>
<CAPTION>
Common Stock
------------------------- Earnings
Shares Amount Deficit Total
<S> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------
Balance, February 2, 1991 . . . . . . . . 136 $ 54,473 $(39,256) $ 15,217
- - ----------------------------------------------------------------------------------------------------
Issuance of common stock . . . . . . . . 3 1,169 -- 1,169
Discount earned on retirement of
GNI Series A Preferred Stock . . . . . -- 1,127 -- 1,127
Net loss . . . . . . . . . . . . . . . . -- -- (7,232) (7,232)
Dividends paid/accrued . . . . . . . . . -- -- (4,540) (4,540)
- - ----------------------------------------------------------------------------------------------------
Balance, February 1, 1992 . . . . . . . . 139 56,769 (51,028) 5,741
- - ----------------------------------------------------------------------------------------------------
Net earnings . . . . . . . . . . . . . . -- -- 9,414 9,414
Common stock issued(a) . . . . . . . . . 1 71,933 -- 71,933
Dividends paid/accrued . . . . . . . . . -- -- (10,128) (10,128)
- - ----------------------------------------------------------------------------------------------------
Balance, February 6, 1993 . . . . . . . . 140 128,702 (51,742) 76,960
- - ----------------------------------------------------------------------------------------------------
Net earnings . . . . . . . . . . . . . . -- -- 25,423 25,423
Additional paid-in capital(a) . . . . . . -- 57,947 -- 57,947
Dividends paid/accrued . . . . . . . . . -- -- (3,617) (3,617)
- - ----------------------------------------------------------------------------------------------------
Balance, February 5, 1994 . . . . . . . . 140 $186,649 $(29,936) $156,713
====================================================================================================
</TABLE>

(a) Common stock issued and additional paid-in capital transactions resulted
from capital contributions by the Company's parent.

Notes to Consolidated Financial Statements are an integral part of these
statements.

26
<PAGE> 29
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
General Nutrition, Incorporated and Subsidiaries
(In thousands)
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
February 1, February 6, February 5,
1992 1993 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,232) $ 9,414 $ 25,423
---------- ---------- ----------
Adjustments to reconcile net earnings (loss) to net cash . . . . . . . . . . .
provided by operating activities:
Extraordinary (gain) loss from early retirement of debt . . . . . . . . . (182) 2,576 6,119
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 18,488 19,795 20,171
Amortization of deferred financing fees . . . . . . . . . . . . . . . . . 261 740 1,529
Noncash loss from joint ventures . . . . . . . . . . . . . . . . . . . . . 641 25 --
(Increase) decrease in deferred taxes . . . . . . . . . . . . . . . . . . (1,028) 907 (994)
Other, principally loss on disposal of fixed assets . . . . . . . . . . . 972 607 169
Change in operating assets and liabilities:
Increase in receivables . . . . . . . . . . . . . . . . . . . . . . . . 1,200 (4,250) (11,662)
(Increase) decrease in inventories . . . . . . . . . . . . . . . . . . 509 (10,498) (24,930)
Increase (decrease) in accrued income taxes . . . . . . . . . . . . . . 6,410 (1,429) 4,154
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . (2,715) (1,158) (3,247)
Increase in accounts payable and accrued liabilities . . . . . . . . . 2,834 4,893 18,243
(Increase) decrease in other working capital items . . . . . . . . . . 3,250 49 (2,725)
---------- ---------- ----------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . 30,640 12,257 6,827
---------- ---------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . 23,408 21,671 32,250
---------- ---------- ----------

Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,133) (20,886) (27,983)
Proceeds from disposal of fixed assets . . . . . . . . . . . . . . . . . . . 2,875 2,105 233
---------- ---------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . (7,258) (18,781) (27,750)
---------- ---------- ----------
Cash flows from financing activities:
Long-term debt agreements:
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (65,000) (188,522) (122,915)
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,235 141,258 144,500
---------- ---------- ----------
Net borrowings (payments) on long-term debt . . . . . . . . . . . . . . . . . (11,765) (47,264) 21,585
Retirement of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . (724) (107,191) (73,703)
Decrease in capital lease obligations . . . . . . . . . . . . . . . . . . . . (371) (1,456) (1,603)
Issuance of senior subordinated debt . . . . . . . . . . . . . . . . . . . . -- 135,000 --
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- (2,275)
Redemption of redeemable preferred stock . . . . . . . . . . . . . . . . . . (523) -- (43,236)
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,112 71,933 --
Increase in paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 57,947
Premiums paid on early retirement of debt . . . . . . . . . . . . . . . . . . -- (1,700) (6,802)
Increase in deferred financing fees . . . . . . . . . . . . . . . . . . . . . -- (11,279) (217)
---------- ---------- ----------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . (12,271) 38,043 (48,304)
---------- ---------- ----------
Net increase (decrease) in cash and equivalents . . . . . . . . . . . . . . . . . 3,879 40,933 (43,804)
Beginning balance, cash and equivalents . . . . . . . . . . . . . . . . . . . . . 136 4,015 44,948
---------- ---------- ----------
Ending balance, cash and equivalents . . . . . . . . . . . . . . . . . . . . . . $ 4,015 $ 44,948 $ 1,144
========== ========== ==========

Supplemental disclosures of cash flow information:
Cash paid (received) during the period for (from):
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,154 $ 25,501 $ 29,068
Income taxes (tax refunds) . . . . . . . . . . . . . . . . . . . . . . . . $ (2,661) $ 9,703 $ 17,971
</TABLE>

Supplemental schedule of non-cash financing activities:

(a) GNI had elected to pay dividends on its 12.5% Cumulative Preferred Stock in
additional shares. GNI distributed stock dividends of $4,518,017 in the
year ended February 1, 1992, $4,993,069 in the year ended February 6, 1993
and $652,925 in the year ended February 5, 1994.
(b) For the year ended February 1, 1992, the Company financed $8.6 million of
capital additions through capitalized leases.
(c) GNI had elected to pay dividends on its Redeemable Series B Preferred
stock in additional shares until January 28, 1993 when the election to pay
cash dividends was made. In 1992, GNI distributed stock dividends of
$3,681,153.

Notes to Consolidated Financial Statements are an integral part of these
statements
27
<PAGE> 30
GENERAL NUTRITION, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF REPORTING. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
intercompany balances and transactions. The Company's fiscal year ends on the
Saturday closest but not prior to January 31. The fiscal year consists of
fifty-two or fifty-three weeks divided into four quarters; the first three
quarters contain twelve weeks, and the last quarter contains sixteen weeks in a
fifty-two week year and seventeen weeks in a fifty-three week year.

STATEMENTS OF CASH FLOWS. Cash flows relating to initial asset sales to
franchisees in exchange for notes receivable have been classified as cash flows
from operating activities.

RECLASSIFICATIONS. Certain amounts in previously issued financial
statements have been reclassified to conform to the 1993 presentation.

CASH AND EQUIVALENTS. Cash and equivalents are comprised of cash on
hand and short-term investments maturing within 90 days.

The Company utilizes a cash management system under which a book balance
cash overdraft exists for the Company's primary disbursement accounts. This
overdraft represents uncleared checks in excess of cash balances in bank
accounts. The Company's funds are borrowed on an as needed basis to pay for
clearing checks. At February 5, 1994, cash overdrafts of $4,270,000 were
included in accounts payable.

INVENTORIES. Inventories are stated at the lower of cost or market on a
FIFO (first in, first out) cost basis.

DEPRECIATION AND AMORTIZATION. Property, plant and equipment are recorded
at cost. Depreciation and amortization are provided using the straight-line
method over the estimated useful life of the property. Amortization of
improvements to leased premises is also provided using the straight-line method
over the estimated useful life of the improvements or over the life of the
related leases if such periods are shorter. The Company provides tax
depreciation in conformity with the provisions of applicable tax law.

Amortization of goodwill is provided on a straight-line basis over 40
years.

Depreciation and amortization of property, plant and equipment was
$13,403,000, $13,027,000 and $11,702,000 for the years ended February 5, 1994,
February 6, 1993, and February 1, 1992, respectively.

Amortization of deferred financing fees is provided using the
straight-line method, which approximates the effective interest rate method,
over the term of the related debt.

REVENUE. The Company's revenue is received primarily from merchandise
sold through the Company retail stores, franchise revenue, and merchandise sold
directly to third parties by the manufacturing subsidiary. Revenue is net of
returns and excludes sales tax. Franchise revenue includes sales of product and
store fixtures, franchise fees, royalty income and interest income resulting
from financing arrangements. Franchise fees are recognized as the Company's
obligations to the franchisee are satisfied and the related store is opened.

INCOME TAXES. The Company is included in its Parent's consolidated
federal tax return. Federal income taxes are provided as if the Company filed
separately. Income taxes are provided for all items currently included in the
Consolidated Statements of Operations regardless of when such taxes are
payable. Deferred taxes result primarily from recognition of expense in
different periods for tax and financial statement purposes. These items
consist principally of inventory capitalization, installment sales and
depreciation.

The Company changed its method of accounting for income taxes, effective
the first quarter of 1993 to conform with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109) which requires an
asset and liability approach to accounting for income taxes. The effect of
adoption was immaterial.

28
<PAGE> 31
SELF-INSURANCE. The Company self-insures for certain levels of product
and general liability, workers' compensation and health care coverage.
Estimated costs of these programs are accrued based upon known and anticipated
claims. Any adjustments to previously recorded accruals are reflected in
current operating results.

NOTE 2. RECEIVABLES

Receivables at period end consisted of the following:
<TABLE>
<CAPTION>
February 6, February 5,
1993 1994
----------- -----------
(In thousands)
<S> <C> <C>
Manufacturing trade $ 6,136 $11,720
Franchise 5,522 8,935
Current portion of notes (see Note 5) 3,400 3,434
Construction allowances 535 1,634
Subtenant 643 782
Diet Center 106 12
Other 513 1,383
Allowance for uncollectible accounts (1,700) (1,290)
-------- --------
$15,155 $26,610
======= ========
</TABLE>

NOTE 3. INVENTORIES

Inventories at period end consisted of the following:
<TABLE>
<CAPTION>
February 6, February 5,
1993 1994
----------- -----------
(In thousands)
<S> <C> <C>
Product ready for sale $60,516 $81,531
Unpackaged bulk product and raw materials 7,639 11,769
Packaging supplies 1,338 1,617
------- -------
$69,493 $94,917
======= =======
</TABLE>

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at period end consisted of the following:

<TABLE>
<CAPTION>
February 6, February 5,
1993 1994
----------- -----------
(In thousands)
<S> <C> <C>
Land, buildings and improvements $ 4,964 $ 6,177
Machinery and equipment 14,187 18,660
Capital leases 8,688 8,688
Leasehold improvements 29,184 34,797
Furniture and fixtures 30,287 41,874
Construction in progress 3,544 3,238
------- --------
90,854 113,434
Less accumulated depreciation 30,695 39,384
------- --------
$60,159 $ 74,050
======= ========
</TABLE>

29
<PAGE> 32
NOTE 5. OTHER ASSETS

Other assets at period end consisted of the following:
<TABLE>
<CAPTION>
February 6, February 5,
1993 1994
------------ ------------
(In thousands)
<S> <C> <C>
Franchise notes, less current portion $7,789 $10,951
Prepaid items 175 226
Other 19 20
------ -------
$7,983 $11,197
====== =======
</TABLE>

The notes from the Company's franchisees are demand notes, payable
primarily over five years. Interest accrues at the rate of 13.75% per annum and
is payable monthly.

NOTE 6. LONG-TERM DEBT AND LINES OF CREDIT

Long-term debt at period end consisted of the following:

<TABLE>
<CAPTION>
Scheduled Interest February 6, February 5,
Maturity Rate 1993 1994
------------ --------- --------------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Bank term loan A 1997 5.9% - 7% $ 55,168 $ 46,911
Bank term loan B 1999 6.4% - 7.5% 23,981 22,667
Bank revolving credit facility 1997 7.75% - 8% 13,913 35,500
Senior subordinated notes 2000 11.375% 135,000 70,867
Capital leases 6,866 5,262
-------- ---------
234,928 181,207
Current maturities 7,600 9,770
-------- --------
$227,328 $171,437
======== ========
</TABLE>

The Company has a $51,000,000 revolving credit facility which may be
used for working capital purposes including the ability to issue up to
$16,000,000 of letters of credit, of which $8.4 million was unused at year end.
In addition, the facility allows the use of up to $15,000,000 for repurchases
of existing senior subordinated debt. Borrowing availability under the
facility is limited to eligible balances of accounts receivable and inventory.
At February 5, 1994, the Company had full borrowing availability under the
facility. Amounts drawn on the facility, including letters of credit at
February 5, 1994, were approximately $43.5 million. Substantially all assets
of the Company are pledged as collateral against the revolving credit facility
and term loans.

The 11 3/8% senior subordinated notes restrict, among other items, the
creation of additional indebtedness by GNI and its subsidiary (the "Obligors"),
dividends and distributions, redemptions of capital stock, certain transactions
with affiliates, sales of assets, consolidations, mergers and certain
investments.

In July 1993, the Company, through capital contributions by its Parent
from the sales of common stock, retired approximately $44.9 million of senior
subordinated notes at an average premium of 10.198% and $3.6 million of
long-term debt. The Company recognized a $5.0 million extraordinary loss, net
of income taxes for this transaction. In 1993, the Company utilized its
ability to finance repurchases of senior subordinated debt. Approximately
$19.2 million of senior subordinated notes were retired at an average premium
of 11.562%. The Company recognized a $1.1 million extraordinary loss, net of
income taxes, in 1993 for these transactions.

30
<PAGE> 33
At February 5, 1994, the Company's total long-term debt maturities are
as follows:

<TABLE>
<CAPTION>
Year
----
<S> <C>
1994 $ 9,770,000
1995 12,999,000
1996 18,731,000
1997 53,731,000
1998 15,111,000
1999 and thereafter 70,865,000
</TABLE>

The Company's interest expense for all periods is as follows:

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 1, February 6, February 5,
1992 1993 1994
-------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
Composition of Interest Expense:
Interest on debt $37,935 $27,503 $19,107
Amortization of deferred
financing fees 261 740 1,529
Interest income (43) (84) (242)
-------- -------- --------
$38,153 $28,159 $20,394
======== ======== ========
</TABLE>

Interest income includes all interest income other than income generated
from the financing of franchisees and is reported net of interest expense.

NOTE 7. REDEEMABLE PREFERRED STOCK

SERIES B PREFERRED STOCK. The Series B Preferred Stock is $.01 par
value and $100 stated value per share. The preferred stock consists of
2,000,000 authorized shares of which 400,000 and 381,210 were issued and
outstanding at February 5, 1994 and February 6, 1993, respectively. There was
one shareholder of Series B Preferred Stock at February 5, 1994 and February 6,
1993, respectively. The Series B Preferred Stock ranks, with respect to
dividend and redemption rights and rights upon liquidation/dissolution and
winding up, prior to all other series of preferred stock of the Company
(including the Series A Preferred Stock) and all classes of common stock of the
Company.

The holders of Series B Preferred Stock have no voting rights except as
may otherwise be required by law. Under an amendment of its Articles of
Incorporation adopted by the Company's shareholders on January 27, 1993, the
Company shall pay cumulative dividends in cash payable quarterly in arrears on
the 15th day of each February, May, August and November in each year commencing
with and including February 15, 1993 at the annual rate of 7.5% of the
liquidation preference.

The Series B Preferred Stock may be redeemed in cash according to the
following schedule: on August 15, 2000, $30,000,000 in stated value of the
outstanding shares; on November 1, 2000, all remaining outstanding shares not
to exceed $20,000,000 in stated value.

SERIES A PREFERRED STOCK. The Series A Preferred Stock was $.01 par
value and $1.00 stated value per share. On January 28, 1993, the Company
exercised its option to redeem all of the Series A Preferred Stock at a
redemption price equal to the liquidation preference together with accrued and
unpaid dividends thereon to February 12, 1993. The Company had retained
approximately $44,380,000 in an escrow account to redeem this stock. The
balance in this fund at February 5, 1994 is approximately $1,144,000.
Accordingly, these funds have been reflected on the balance sheet as restricted
cash.

31
<PAGE> 34
NOTE 8. RETIREMENT PLANS

The Company sponsors a 401(k) defined contribution savings plan covering
substantially all employees with more than one year of service. The plan, which
prior to 1991 was funded solely through participant contributions, provides for
employee contributions of 1% to 15% of individual compensation into deferred
savings. In 1991, the plan was amended to provide for Company contributions of
25-45% of the first 5% of participants' contributions. The Company may make
additional contributions based upon the achievement of performance goals
established by the Board of Directors. The Company's cash contributions for
1991, 1992 and 1993 were $522,338, $746,153 and $816,230, respectively.

NOTE 9. FRANCHISE FEE REVENUE

The Company charges franchisees a flat fee, payable prior to the
franchise store opening, as consideration for the franchise rights and initial
services performed by the Company. Once the franchised store is open, the
Company has no further obligations under this fee to the franchisee.
Therefore, all franchise fee revenue is recognized in the period in which a
franchise store is opened.

Franchise revenue related to this initial fee is as follows:

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 1, February 6, February 5,
1992 1993 1994
---------------- ---------------- ---------------
(In thousands)
<S> <C> <C> <C>
Initial franchise fee $1,136 $2,208 $3,614

Franchise store information is as follows:

Number of operating franchised stores:
Beginning of period 65 151 290
Sales to franchisees 86 144 241
Stores acquired/closed -- (5) (22)
--- ---- ----
End of period 151 290 509
=== ==== ====
</TABLE>

NOTE 10. LONG-TERM LEASE OBLIGATIONS

GNI has operating leases covering its retail store locations. The leases
generally provide for an initial term of between seven and ten years, and some
include renewal options for varying terms thereafter. The leases require
minimum monthly rental payments and a pro rata share of common operating
expenses, and most require additional rentals based on a percentage of sales in
excess of specified levels ("Percent Rent"). Real estate taxes, insurance and
other executory costs may be included in the rental payment or charged in
addition to rent. In either case, they have been included in common operating
expense.

Other leases cover transportation equipment, data processing equipment,
distribution facilities and corporate headquarters.

32
<PAGE> 35
The composition of the Company's rental expense for all periods
presented included the following components:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 1, February 6, February 5,
1992 1993 1994
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
Retail Stores:
Rent on long-term
operating leases $33,893 $32,255 $33,905
Common operating expense 11,396 10,841 11,509
Percent rent 2,006 2,191 2,818
------- ------- -------
47,295 45,287 48,232
Other 5,638 5,696 6,168
------- ------- -------
Total $52,933 $50,983 $54,400
======= ======= =======
</TABLE>

Minimum future obligations for noncancellable operating leases
(including closed stores) with initial or remaining terms of at least one year
in effect at February 5, 1994 were as follows:

<TABLE>
<CAPTION>
Year Retail Stores Other Combined
- - ---- ------------- ----- --------
(In thousands)
<S> <C> <C> <C>
1994 $ 41,657 $ 3,914 $ 45,571
1995 38,918 3,007 41,925
1996 35,685 2,640 38,325
1997 31,723 2,038 33,761
1998 27,200 1,461 28,661
Thereafter 74,552 6,608 81,160
Minimum sublease (1,513) -- (1,513)
--------- ------- ---------
Total $248,222 $19,668 $267,890
========= ======= =========
</TABLE>

In some instances, GNI guarantees franchisee leases. At February 5,
1994, GNI guaranteed $2,154,500 at the net present value of future minimum
franchisee lease payments. At February 5, 1994, GNI was not making lease
payments on the behalf of any franchisee leases.

NOTE 11. INCOME TAXES (TAX BENEFITS)

Effective February 7, 1993, the Company changed its method of accounting
for income taxes from the deferred method to the liability method required by
FASB Statement No. 109, "Accounting for Income Taxes." As permitted under the
new rules, prior years' financial statements have not been restated.

Significant components of the Company's deferred tax assets and
liabilities as of February 5, 1994 are as follows:

<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Deferred Tax:
Current assets:
Operating reserves $2,340
Inventory capitalization 2,159
Deferred revenue 1,145
Deferred compensation 40
Other (37)
-------
5,647
Non-current liabilities:
Fixed assets 4,272
-------
Total deferred taxes $1,375
=======
</TABLE>

33
<PAGE> 36
Income taxes (tax benefits) for all periods consist of the following
components, including income taxes provided on the extraordinary gains
(losses):

Deferred:
Federal (995) (1,522) (1,711)
State (33) (287) (38)
-------- -------- --------
(1,028) (1,809) (1,749)
-------- -------- --------
Total $ 2,565 $ 7,993 $20,609
======== ======== ========
</TABLE>

The sources of deferred tax benefits are summarized as follows:

<TABLE>
<CAPTION>
Year Ended Year Ended
February 1, February 6,
1992 1993
---------------- -----------------
(In thousands)
<S> <C> <C>
Depreciation and amortization $ -- $(1,240)
Installment sale (434) (115)
Inventory capitalization 104 121
Deferred revenue (203) 9
Other (495) (584)
-------- --------
$(1,028) $(1,809)
======== ========
</TABLE>

The Company's effective tax rate differed from the statutory tax rate
for the following reasons:

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 1, February 6, February 5,
1992 1993 1994
--------------- ---------------- ---------------
(In thousands)
<S> <C> <C> <C>
Percent of pretax earnings (loss):
Statutory federal tax rate (34.0)% 34.0% 35.0%
Increase (decrease):
Goodwill amortization 49.4 7.7 5.2
Asset basis differences
depreciation and gains 15.9 .3 --
State income tax, net of
federal tax benefit 2.2 2.8 3.3
Pension plan reversion 11.7 .1 --
Other 9.8 1.0 1.3
------- ----- -----
Effective income tax rate 55.0 % 45.9% 44.8%
======= ===== =====
</TABLE>

34
<PAGE> 37
NOTE 12. LEGAL PROCEEDINGS AND SETTLEMENTS

Numerous unrelated manufacturers, distributors, suppliers, importers
and retailers of manufactured L-Tryptophan or products containing manufactured
L-Tryptophan are or were defendants in an estimated 2,000 actions brought in
federal and state courts seeking compensatory and, in some cases, punitive
damages for alleged personal injuries resulting from the ingestion of certain
products containing manufactured L-Tryptophan. At least one of GNI, General
Nutrition Corporation or General Nutrition Products, Inc. (collectively, the
"GNC Companies") was named as of April 15, 1994 in approximately 183 of these
actions and non-litigated claims, and it is expected that one, two or all three
may be named in additional suits and claims. The GNC Companies are defending
these actions vigorously and believe that they should be entitled to
indemnification from Showa Denko America, Inc. ("SDA") and its parent, Showa
Denko, K.K. ("SDK"), the Japanese manufacturer of the bulk L-Tryptophan which
the plaintiffs allege caused their personal injuries. In August 1990, GNI
entered into a joint defense agreement with SDA, which agreement was amended
and restated in October 1992. Unlike the original joint defense agreement
which was terminable at will by either party, the amended and restated joint
defense agreement (the "Agreement") is terminable only under limited, specified
circumstances. Under the Agreement, SDA has agreed to pay all legal fees
incurred and indemnify the GNC Companies against liability in any claim if it
is determined that a proximate cause of the injury sustained by the plaintiff
was a constituent of the raw material sold by SDA to the GNC Companies or was a
factor for which SDA or any of its affiliates was responsible, except to the
extent that actions by the GNC Companies proximately contributed to the injury.
Based on the facts known to date, the GNC Companies believe that, under the
Agreement, they should be entitled to indemnification in all actions arising
out of the ingestion of products containing L-Tryptophan manufactured by SDK
and that contribution by the GNC Companies would not be warranted. The
substantial majority of all the cases in which a claimant is able to identify
the L-Tryptophan ingested implicated L-Tryptophan manufactured by SDK. Under
the Agreement, the GNC Companies must refrain from bringing cross-claims
against or joining SDA or SDK. The Company believes that SDA can only meet its
obligations under the Agreement with the financial support of SDK and pursuant
to the Agreement, SDK has provided in a separate agreement, an unconditional
and irrevocable guaranty of all the performance and payment obligations of SDA
under the Agreement.

35
<PAGE> 38
The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that, among other things, the use of its products
results in injury. With respect to product liability coverage, the Company
currently has a $3 million self-insured retention per occurrence and aggregate,
followed by a primary products liability policy of $2 million per occurrence
and aggregate, and an additional $60 million of umbrella liability insurance
coverage. There can be no assurance that such insurance will continue to be
available at a reasonable cost, or if available will be adequate to cover
liabilities.

NOTE 13. RELATED PARTY TRANSACTIONS

The Company had entered into transactions to sell products and provide
services to Gymees, Inc. and purchase products from Nutri-Science Inc., both of
which are 50%-owned joint ventures. The joint ventures are accounted for using
the equity method of accounting giving recognition to GNI's guarantee of any
losses or liabilities incurred by the joint ventures. Revenue from sales and
services to the joint ventures in 1991 and 1992 was $1,244,000 and $478,000,
respectively. Product purchases from the joint venture in 1991 and 1992 were
$457,000 and $775,000, respectively. There were no sales or purchases from
these joint ventures in 1993.

In 1992 and 1993, the Company paid the Thomas H. Lee Company $250,000
per year pursuant to a five-year management agreement for management and other
consulting services rendered.

GNI has a management agreement with AHC, an entity related through
common ownership, under which GNI provides to AHC accounting, human resource,
purchasing and management information support services for a monthly fee. GNI
also provided product manufacturing and product distribution services for AHC.
For the years ended February 1, 1992, February 6, 1993 and February 5, 1994,
such management services, product manufacturing and product distribution
resulted in revenue to GNI of approximately $3,549,000, $2,719,000 and $611,000
respectively. At February 1, 1992, February 6, 1993 and February 5, 1994, GNI
had a receivable in the amount of $116,000, $106,000 and $12,000, respectively,
due from AHC resulting from the above management, services and product
agreement.

NOTE 14. DISCONTINUED OPERATIONS

In 1990, WLC Acquisition Corp., a subsidiary of GNI, had acquired 35
weight management clinics from an unrelated entity. In December 1990, due to
the incurrence of approximately $1.8 million in operating losses for the six
month period following the acquisition of the clinics, WLC Acquisition Corp.,
sold 18 of the clinics to a subsidiary of American Health Companies Inc. (AHC),
a related party, for $111,000 and discontinued operations for the remaining 17
clinics. The activities of the weight management clinics have been reported as
discontinued operations in the Company's 1990 and 1991 consolidated financial
statements.

36
<PAGE> 39
NOTE 15. SEGMENT INFORMATION

The following table represents key financial information of the
Company's business segments; Retail, Franchising and Manufacturing and should
be read in conjunction with Part I, Item 1. Business, on Form 10-K.

<TABLE>
<CAPTION>
1991 1992 1993
---- ---- ----
(In thousands)

RETAIL (A)
<S> <C> <C> <C>
Net revenue $351,744 $385,500 $428,799
Operating earnings 38,687 51,146 67,669
Depreciation/amortization 16,914 17,484 17,727
Identifiable assets 346,780 359,359 386,686
Capital expenditures 17,284 17,653 23,831

FRANCHISING

Net revenue 21,218 38,845 70,262
Operating earnings 2,488 4,806 8,481
Depreciation 9 17 41
Identifiable assets 10,550 16,365 25,609
Capital expenditures 9 208 61

MANUFACTURING

Net revenue
Intersegment sales 38,514 50,481 66,609
Third party sales 19,144 28,048 46,576
Operating earnings 6,609 9,898 17,172
Depreciation 1,187 1,878 1,819
Identifiable assets 26,045 27,668 37,609
Capital expenditures 1,124 2,703 2,831

CORPORATE/OTHER

Net revenue 1,462 1,134 616
Operating earnings (14,519) (16,381) (17,482)
Depreciation 378 416 584
Identifiable assets 14,568 57,371 16,733
Capital expenditures 405 322 1,260

CONSOLIDATED

Net revenue 393,568 453,527 546,253
Operating earnings 33,265 49,469 75,840
Interest net 38,153 28,159 20,394
Earnings (loss) before taxes (4,888) 21,310 55,446
Income taxes (benefit) 2,471 9,320 23,904
Loss from discontinued operations (55) -- --
Extraordinary gain (loss) from early
retirement of debt (net of tax) 182 (2,576) (6,119)
Net earnings (loss) (7,232) 9,414 25,423
Identifiable assets 397,943 460,763 466,637
Depreciation/amortization 18,488 19,795 20,171
Capital expenditures 18,822 20,886 27,983
</TABLE>

(A) Retail operating income includes expenses for amortization of goodwill of
$6.8 million in each year. Retail identifiable assets includes goodwill,
net of accumulated amortization, of $254.1 million in 1991, $247.3 million
in 1992 and $240.5 million in 1993.

37
<PAGE> 40
NOTE 16. FINANCIAL INSTRUMENTS

The following table presents the estimated fair value of the Company's
financial instruments as of February 5, 1994:

<TABLE>
<CAPTION>
Carrying Fair
Value Value
--------- -----
(In thousands)
<S> <C> <C>
Restricted cash $ 1,144 $ 1,144
Long-term receivables 10,951 10,951
Senior subordinated notes 70,867 78,485
Bank term loan 69,578 71,265
Bank revolving credit facility 35,500 35,500
</TABLE>

Fair value was estimated as follows:

The senior subordinated notes were valued at quoted year-end market
prices. The bank term loan reflects estimated rates of borrowing at current
prices.

NOTE 17. QUARTERLY FINANCIAL DATA

Unaudited quarterly financial information is as follows:

<TABLE>
<CAPTION>
1993
FIRST SECOND THIRD FOURTH TOTAL
------ ------ ------ ------ ------
12 WEEKS 12 WEEKS 12 WEEKS 16 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
05/01/93 07/24/93 10/16/93 02/05/94 02/05/94
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenue $124,007 $122,403 $121,993 $177,850 $546,253
Operating margin 48,365 46,495 43,911 66,753 205,524
Earnings from continuing operations
before extraordinary item 6,737 7,119 6,801 10,885 31,542
Net earnings $ 6,737 3,550 $ 5,366 $ 9,770 $ 25,423
</TABLE>

<TABLE>
<CAPTION>
1992
FIRST SECOND THIRD FOURTH TOTAL
------ ------ ------ ------ ------
12 WEEKS 12 WEEKS 12 WEEKS 17 WEEKS 53 WEEKS
ENDED ENDED ENDED ENDED ENDED
04/25/92 07/18/92 10/10/92 02/06/93 02/06/93
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenue $106,972 $100,253 $97,314 $148,988 $453,527
Operating margin 40,055 36,030 34,235 54,872 165,192
Earnings from continuing
operations before extraordinary
item 1,767 2,355 1,786 6,082 11,990
Net earnings $ 955 $ 2,355 $ 1,786 $ 4,318 $ 9,414
</TABLE>

The second quarter of 1992 was negatively impacted by a nonrecurring
loss on the discontinuance of the Gymees retail joint venture of $700,000.

38
<PAGE> 41
SCHEDULE V

PROPERTY, PLANT AND EQUIPMENT
General Nutrition, Incorporated and Subsidiaries
(In thousands)

<TABLE>
<CAPTION>
Balance at Other Balance
Beginning Additions Charges at end
Description of Period at Cost Retirements Add (Deduct) of Period
----------- ----------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED FEBRUARY 1, 1992:
Land and land improvements . . . . . . . . . $556 $-- $-- $-- $556
Building and building improvements . . . . . 4,379 20 -- (1) 4,398
Leasehold improvements . . . . . . . . . . . 23,812 4,213 (2,114) -- 25,911
Machinery and equipment . . . . . . . . . . . 12,423 539 (48) 460 13,374
Furniture and fixtures . . . . . . . . . . . 20,450 13,349 (2,659) (58) 31,082
Construction in progress . . . . . . . . . . 754 700 -- (415) 1,039
------------ ------------ ------------ ----------- ------------
$62,374 $18,821 $(4,821) $(14) $ 76,360
============ ============ ============ =========== ============

YEAR ENDED FEBRUARY 6, 1993:
Land and land improvements . . . . . . . . . $556 $-- $-- $-- $556
Building and building improvements . . . . . 4,398 10 -- -- 4,408
Leasehold improvements . . . . . . . . . . . 25,911 6,423 (3,150) -- 29,184
Machinery and equipment . . . . . . . . . . . 13,374 671 (294) 436 14,187
Furniture and fixtures . . . . . . . . . . . 31,082 10,841 (2,947) -- 38,976
Construction in progress . . . . . . . . . . 1,039 2,941 -- (436) 3,544
------------ ------------ ------------ ----------- ------------
$76,360 $20,886 $(6,391) $-- $ 90,855
============ ============ ============ =========== ============

YEAR ENDED FEBRUARY 5, 1994:
Land and land improvements . . . . . . . . . $556 $-- $-- $-- $556
Building and building improvements . . . . . 4,408 521 -- 692 5,621
Leasehold improvements . . . . . . . . . . . 29,184 8,354 (2,741) -- 34,797
Machinery and equipment . . . . . . . . . . . 14,187 3,647 (43) 869 18,660
Furniture and fixtures . . . . . . . . . . . 38,976 14,206 (2,126) (494) 50,562
Construction in progress . . . . . . . . . . 3,544 1,255 -- (1,561) 3,238
------------ ------------ ------------ ----------- ------------
$90,855 $27,983 $(4,910) $ (494)* $113,434
============ ============ ============ =========== ============
</TABLE>

* Represents the reclassification of inventory held for resale to the inventory
account.

- - -----------

DEPRECIATION AND AMORTIZATION
The provisions for depreciation and amortization have been computed principally
in accordance with the following ranges of useful lives, applied on the
straight-line method:

<TABLE>
<CAPTION>
Years
-----
<S> <C>
Building and building improvements . . . . . . . . . . 10-33
Leasehold improvements . . . . . . . . . . . . . . . . . 7-10
Machinery and equipment . . . . . . . . . . . . . . . . 5-10
Furniture and fixtures . . . . . . . . . . . . . . . . . 3-10
</TABLE>

39
<PAGE> 42
SCHEDULE VI

ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
GENERAL NUTRITION, INCORPORATED AND SUBSIDIARIES
(In thousands)

<TABLE>
<CAPTION>
Balance at Balance
Beginning Additions Other Charges at End
Description of Period at Cost Retirements Add (Deduct) of Period
- - ----------- ------------ -------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED FEBRUARY 1, 1992:
Land and land improvements . . . . . . . . . . $14 $5 $-- $1 $20
Building and building improvements . . . . . . 558 (126) -- 253 685
Leasehold improvements . . . . . . . . . . . . 6,144 3,950 (1,454) -- 8,640
Machinery and equipment . . . . . . . . . . . . 2,550 2,177 (48) (249) 4,430
Furniture and fixtures . . . . . . . . . . . . 6,108 5,696 (2,319) (19) 9,466
------------ ------------ ------------ ----------- ------------
$15,374 $11,702 $(3,821) ($14) $23,241
============ ============ ============ =========== ============

YEAR ENDED FEBRUARY 6, 1993:
Land and land improvements . . . . . . . . . . $20 $5 $-- $-- $25
Building and building improvements . . . . . . 685 612 -- -- 1,297
Leasehold improvements . . . . . . . . . . . . 8,640 3,945 (2,635) -- 9,950
Machinery and equipment . . . . . . . . . . . . 4,430 1,905 (229) -- 6,106
Furniture and fixtures . . . . . . . . . . . . 9,466 6,560 (2,709) -- 13,317
------------ ------------ ------------ ----------- ------------
$23,241 $13,027 $(5,573) $-- $30,695
============ ============ ============ =========== ============

YEAR ENDED FEBRUARY 5, 1994:
Land and land improvements . . . . . . . . . . $25 $5 $-- $-- $30
Building and building improvements . . . . . . 1,297 260 -- -- 1,557
Leasehold improvements . . . . . . . . . . . . 9,950 4,120 (2,651) -- 11,419
Machinery and equipment . . . . . . . . . . . . 6,106 2,333 (37) -- 8,402
Furniture and fixtures . . . . . . . . . . . . 13,317 6,686 (2,027) -- 17,976
------------ ------------ ------------ ----------- ------------
$30,695 $13,404 $(4,715) $-- $39,384
============ ============ ============ =========== ============
</TABLE>

40
<PAGE> 43
SCHEDULE X

SUPPLEMENTARY INCOME STATEMENT INFORMATION
General Nutrition, Incorporated and Subsidiaries
(In thousands)

<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
February 1, February 6, February 5,
1992 1993 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Advertising costs . . . . . . . . . . . . $12,127 $16,890 $22,808
============== ============== ==============

Amortization of goodwill . . . . . . . . $ 6,784 $ 6,768 $ 6,768
============== ============== ==============

Real estate taxes . . . . . . . . . . . . $ 3,448 $ 3,363 $ 3,451
============== ============== ==============
</TABLE>

Maintenance and repairs are not presented because they do not exceed one
percent of revenue.

41
<PAGE> 44
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

GENERAL NUTRITION, INCORPORATED
AND SUBSIDIARIES

(Registrant)

DATE: May 3, 1994 By: /s/ William E. Watts
--------------------------------------
William E. Watts
President & Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Jerry D. Horn Chairman of the Board May 3, 1994
- - ---------------------------------
Jerry D. Horn

/s/ William E. Watts Director, President and May 3, 1994
- - --------------------------------- Chief Executive Officer
William E. Watts

/s/ Thomas H. Lee Director May 3, 1994
- - ---------------------------------
Thomas H. Lee

/s/ John W. Childs Director May 3, 1994
- - ---------------------------------
John W. Childs

/s/ Thomas R. Shepherd Director May 3, 1994
- - ---------------------------------
Thomas R. Shepherd

/s/ Harrison Wellford Director May 3, 1994
- - ---------------------------------
Harrison Wellford

/s/ Edwin J. Kozlowski Senior Vice President, Chief May 3, 1994
- - --------------------------------- Financial Officer, and Principal
Edwin J. Kozlowski Accounting Officer

</TABLE>