**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

**FORM 10-Q**

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHESECURITIES EXCHANGE ACT OF 1934**

**Forthe quarterly period ended December 31, 2004**

**Commissionfile number 000-23731**

**NUTRACEUTICAL INTERNATIONAL CORPORATION**

(Exact name of registrantas specified in its charter)

| **Delaware**(State of incorporation)                                                          | **87-0515089**(IRS Employer Identification No.) |
|-----------------------------------------------------------------------------------------------|-------------------------------------------------|
| **1400 Kearns Boulevard, 2nd Floor,  Park City, Utah**(Address of principal executive office) | **84060**(Zip code)                             |
| **(435) 655-6106**(Registrant’s telephone number, including area code)                   |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

YES  x    NO  o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

YES  x    NO*  *o

At January 27,2005, the registrant had 11,580,504 shares of common stockoutstanding.

 

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**NUTRACEUTICALINTERNATIONAL CORPORATION**

**INDEX**
| Description   | ** **            | **Page No.**                                                                                                                  |
|---------------|-----------------------|------------------------------------------------------------------------------------------------------------------------------------|
| Part I.  | Financial Information | 3                                                                                                                                  |   |
|          | Item 1.               | Financial  Statements                                                                                                              | 3 |   |
|          |                  | Condensed  Consolidated Balance Sheets—September 30, 2004 and December 31,  2004                                    | 3 |   |
|          |                  | Condensed  Consolidated Statements of Operations and Comprehensive  Income—Three Months Ended December 31, 2003 and 2004 | 4 |   |
|          |                  | Condensed  Consolidated Statements of Cash Flows—Three Months Ended December 31,  2003 and 2004                          | 5 |   |
|          |                  | Notes  to Condensed Consolidated Financial Statements                                                                              | 6 |   |
|          | Item 2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              | 10 |   |
|          | Item 3.               | Quantitative  and Qualitative Disclosures about Market Risk                                                                        | 15 |   |
|          | Item 4.               | Controls  and Procedures                                                                                                           | 16 |   |
| Part II. | Other  Information    | 17                                                                                                                                 |   |
|          | Item 1.               | Legal  Proceedings                                                                                                                 | 17 |   |
|          | Item 6.               | Exhibits  and Reports on Form 8-K                                                                                             | 17 |   |
|               |                       |                                                                                                                                    |  |  |  |

 

 

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**PART I**—FINANCIALINFORMATION

**Item 1.**   Financial Statements

**NUTRACEUTICAL INTERNATIONAL CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(unaudited)(dollars in thousands)**
| ** **                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2004(1)**            | ** ** | **2004**              | ** ** |
| **ASSETS**                                    |       |                   |       |                  |       |   |   |   |   |
| Current assets                                |       |                   |       |                  |       |   |   |   |   |
| Cash                                          |       |                   | $          | 2,134                 |       |   |   | $ | 1,108 |   |   |
| Accounts receivable, net                      |       |                   | 10,567     |                  |       |   | 10,754 |   |   |
| Inventories, net                              |       |                   | 24,058     |                  |       |   | 25,248 |   |   |
| Prepaid expenses and other current assets     |       |                   | 3,372      |                  |       |   | 1,588 |   |   |
| Deferred income taxes                         |       |                   | 1,118      |                  |       |   | 1,107 |   |   |
| Total current assets                          |       |                   | 41,249     |                  |       |   | 39,805 |   |   |
| Property, plant and equipment, net            |       |                   | 22,657     |                  |       |   | 22,841 |   |   |
| Goodwill                                      |       |                   | 14,108     |                  |       |   | 15,476 |   |   |
| Intangible  assets, net                       |       |                   | 7,055      |                  |       |   | 6,972 |   |   |
| Other non-current  assets, net                |       |                   | 796        |                  |       |   | 747 |   |   |
| Deferred income  taxes, net                   |       |                   | 7,522      |                  |       |   | 7,178 |   |   |
|                                          |       |                   | $          | 93,387                |       |   |   | $ | 93,019 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** |       |                   |       |                  |       |   |   |   |   |
| Current liabilities                           |       |                   |       |                  |       |   |   |   |   |
| Accounts payable                              |       |                   | $          | 9,844                 |       |   |   | $ | 9,806 |   |   |
| Accrued expenses                              |       |                   | 4,950      |                  |       |   | 3,089 |   |   |
| Total current liabilities                     |       |                   | 14,794     |                  |       |   | 12,895 |   |   |
| Long-term debt                                |       |                   | 6,500      |                  |       |   | 5,000 |   |   |
| Other non-current  liabilities                |       |                   | 494        |                  |       |   | 494 |   |   |
| Total liabilities                             |       |                   | 21,788     |                  |       |   | 18,389 |   |   |
| Stockholders’  equity                    |       |                   |       |                  |       |   |   |   |   |
| Common stock                                  |       |                   | 119        |                  |       |   | 119 |   |   |
| Additional paid-in capital                    |       |                   | 45,530     |                  |       |   | 45,726 |   |   |
| Retained earnings                             |       |                   | 30,380     |                  |       |   | 33,186 |   |   |
| Accumulated other comprehensive income        |       |                   | 173        |                  |       |   | 202 |   |   |
| Treasury stock                                |       |                   | (4,603     | )                     |       |   | (4,603 | ) |   |
| Total stockholders’ equity               |       |                   | 71,599     |                  |       |   | 74,630 |   |   |
|                                          |       |                   | $          | 93,387                |       |   |   | $ | 93,019 |   |   |

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(1)          The condensedconsolidated balance sheet as of September 30, 2004 has been preparedusing information from the audited financial statements at that date.

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

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**NUTRACEUTICALINTERNATIONAL CORPORATIONCONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**ANDCOMPREHENSIVE INCOME**

**(unaudited)(dollars in thousands, except per share data)**
| ** **                                          | ** ** | **Three months ended  December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                          | ** ** | **2003**                                            | ** ** | **2004** | ** ** |
| Net sales                                           |       | $                                                   | 33,187     |   | $ | 35,299 |   |
| Cost of sales                                       |       | 16,171                                              |       | 16,900 |   |
| Gross profit                                        |       | 17,016                                              |       | 18,399 |   |
| Operating expenses                                  |       |                                                |       |   |   |
| Selling, general and administrative                 |       | 11,569                                              |       | 13,590 |   |
| Amortization of intangible assets                   |       | 94                                                  |       | 94 |   |
| Income from  operations                             |       | 5,353                                               |       | 4,715 |   |
| Interest and  other expense, net                    |       | 202                                                 |       | 152 |   |
| Income before  provision for income taxes           |       | 5,151                                               |       | 4,563 |   |
| Provision for  income taxes                         |       | 1,983                                               |       | 1,757 |   |
| Net income                                          |       | $                                                   | 3,168      |   | $ | 2,806 |   |
| Other  comprehensive income                         |       |                                                |       |   |   |
| Foreign currency translation adjustment, net of tax |       | 22                                                  |       | 29 |   |
| Comprehensive  income                               |       | $                                                   | 3,190      |   | $ | 2,835 |   |
| Net income per  common share                        |       |                                                |       |   |   |
| Basic                                               |       | $                                                   | 0.28       |   | $ | 0.24 |   |
| Diluted                                             |       | 0.27                                                |       | 0.24 |   |
| Weighted average  common shares outstanding         |       |                                                |       |   |   |
| Basic                                               |       | 11,174,311                                          |       | 11,496,692 |   |
| Dilutive effect of stock options and warrants       |       | 435,531                                             |       | 327,001 |   |
| Diluted                                             |       | 11,609,842                                          |       | 11,823,693 |   |

 

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

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**NUTRACEUTICAL INTERNATIONAL CORPORATIONCONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS(unaudited)(dollars in thousands)**
| ** **                                                                        | ** ** | **Three months ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2003**                                            | ** ** | **2004** | ** ** |
| **Cash flows from operating  activities**                                         |       |                                                |       |   |   |
| Net income                                                                        |       | $                                                   | 3,168      |   | $ | 2,806 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities |       |                                                |       |   |   |
| Depreciation and amortization                                                     |       | 1,041                                               |       | 1,119 |   |
| Amortization of deferred financing fees                                           |       | 46                                                  |       | 46 |   |
| Losses on disposals of property and equipment                                     |       | 12                                                  |       | — |   |
| Deferred income taxes                                                             |       | 332                                                 |       | 361 |   |
| Tax benefit from stock option exercises                                           |       | 16                                                  |       | 70 |   |
| Changes in assets  and liabilities, net of effects of acquisitions                |       |                                                |       |   |   |
| Accounts receivable, net                                                          |       | 836                                                 |       | (187 | ) |
| Inventories, net                                                                  |       | (1,139                                              | )          | (656 | ) |
| Prepaid expenses and other current assets                                         |       | 99                                                  |       | 1,784 |   |
| Other non-current assets, net                                                     |       | (65                                                 | )          | (6 | ) |
| Accounts payable                                                                  |       | (461                                                | )          | (38 | ) |
| Accrued expenses                                                                  |       | 732                                                 |       | (1,852 | ) |
| Net cash provided by operating activities                                         |       | 4,617                                               |       | 3,447 |   |
| **Cash  flows from investing activities**                                         |       |                                                |       |   |   |
| Acquisition of  business, net of cash acquired                                    |       | —                                              |       | (1,895 | ) |
| Purchases of  property and equipment                                              |       | (1,267                                              | )          | (1,209 | ) |
| Net cash used in investing activities                                             |       | (1,267                                              | )          | (3,104 | ) |
| **Cash  flows from financing activities**                                         |       |                                                |       |   |   |
| Payments on  long-term debt                                                       |       | (3,500                                              | )          | (1,500 | ) |
| Proceeds from  issuances of common stock                                          |       | 83                                                  |       | 126 |   |
| Purchases of  common stock for treasury                                           |       | (398                                                | )          | — |   |
| Net cash used in financing activities                                             |       | (3,815                                              | )          | (1,374 | ) |
| Effect of exchange rate changes on cash                                           |       | 9                                                   |       | 5 |   |
| Net decrease in cash                                                              |       | (456                                                | )          | (1,026 | ) |
| Cash at beginning  of period                                                      |       | 2,196                                               |       | 2,134 |   |
| Cash at end of period                                                             |       | $                                                   | 1,740      |   | $ | 1,108 |   |

 

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

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**NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (dollars in thousands, except per share data)**

**1.**   INTERIM CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

In the opinion of management, the accompanyingunaudited condensed consolidated financial statements include all necessaryadjustments (consisting of normal recurring accruals) to present fairly the consolidatedfinancial position of Nutraceutical International Corporation and itssubsidiaries (the “Company”) as of December 31, 2004, the results of theiroperations for the three months ended December 31, 2003 and 2004 and theircash flows for the three months ended December 31, 2003 and 2004, inconformity with accounting principles generally accepted in the United Statesof America for interim financial information applied on a consistent basis. Theresults for the three months ended December 31, 2004 are not necessarilyindicative of the results to be expected for the full fiscal year.

Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been omitted. Accordingly, these financial statements should beread in conjunction with the Company’s Form 10-K for the fiscal year endedSeptember 30, 2004, which was filed with the Securities and ExchangeCommission on December 3, 2004.

2.   ACCOUNTS RECEIVABLE, NET

Accounts receivable, net of reserves for salesreturns and doubtful accounts, consisted of the following:
| ** **          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------|------------|------------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2004**               | ** ** | **2004**              | ** ** |
| Accounts receivable |       |                   | $          | 12,300                |       |   |   | $ | 12,516 |   |   |
| Less allowances     |       |                   | (1,733     | )                     |       |   | (1,762 | ) |   |
|                |       |                   | $          | 10,567                |       |   |   | $ | 10,754 |   |   |

 

**3.   INVENTORIES,NET**

Inventories,net of reserves for slow moving, obsolete and/or damaged inventory, werecomprised of the following:
| ** **      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2004**               | ** ** | **2004**              | ** ** |
| Raw materials   |       |                   | $          | 7,477                 |       |   |   | $ | 8,457 |   |   |
| Work-in-process |       |                   | 6,162      |                  |       |   | 6,201 |   |   |
| Finished goods  |       |                   | 12,290     |                  |       |   | 12,713 |   |   |
|            |       |                   | 25,929     |                  |       |   | 27,371 |   |   |
| Less reserves   |       |                   | (1,871     | )                     |       |   | (2,123 | ) |   |
|            |       |                   | $          | 24,058                |       |   |   | $ | 25,248 |   |   |

 

**4.   ACQUISITIONS**

On November 18, 2004, the Company acquiredsubstantially all of the operating assets of Pilgrim’s Natureway LLC, a chainof health food stores in the Seattle, Washington area, for approximately $1,895in 

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**NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (unaudited) (dollars in thousands, except per share data)**

cash. This acquisition is in keeping with the Company’sbusiness strategy of consolidating the fragmented industry where it competes.

Thisacquisition was accounted for using the purchase method of accounting.Accordingly, the aggregate purchase price was assigned to the assets acquiredand liabilities assumed based on their fair market values at the date ofacquisition. The excess of aggregate purchase price over the fair market valuesof the assets acquired and liabilities assumed was classified as goodwill. TheCompany’s Condensed Consolidated Statements of Operations and ComprehensiveIncome presented herein include the activities of this acquired business fromthe date of acquisition. The following reflects the allocation of the aggregatepurchase price for this acquisition to the aggregate assets acquired andliabilities assumed:
| Current assets            |   | $     | 540    |   |
|---------------------------|--------|-------|--------|--------|
| Goodwill                  |   | 1,368 |   |
| Other non-current  assets |   | 2     |   |
| Current  liabilities      |   | (15   | )      |
|                      |   | $     | 1,895  |   |

 

**5.   GOODWILL AND INTANGIBLEASSETS**

Thechange in the carrying amount of goodwill from September 30, 2004 to December 31,2004 was as follows:
| ** **                                        | ** ** | **Goodwill** | ** ** |
|---------------------------------------------------|------------|--------------|------------|
| Balance as of September 30,  2004            |       | $            | 14,108     |   |
| Goodwill  attributable to fiscal 2005 acquisition |       | 1,368        |       |
| Balance as of  December 31, 2004             |       | $            | 15,476     |   |

 

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**NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (unaudited) (dollars in thousands, except per share data)**

Thecarrying amounts of intangible assets at September 30, 2004 and December 31,2004 were as follows:
| ** **                                     | ** ** | **September 30, 2004** | ** ** | **December 31, 2004** | ** ** | **Weighted-**            | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| ** **                                     | ** ** | **Gross**                        | ** ** | ** **                      | ** ** | **Net**                  | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** | **Average** | ** ** |
| ** **                                     | ** ** | ** Carrying **         | ** ** | **Accumulated**                 | ** ** | ** Carrying ** | ** ** | ** Carrying ** | ** ** | **Accumulated** | ** ** | ** Carrying ** | ** ** | **Amortization** | ** ** |
| ** **                                     | ** ** | **Amount**                       | ** ** | **Amortization**                | ** ** | **Amount**               | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Period (Years)** | ** ** |
| Intangible assets subject to amortization:     |       |                             |       |                            |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-compete  agreements                        |       |                             | $          | 1,000                           |       |                     |       | $ | (417 | ) |   |   | $ | 583 |   |   |   | $ | 1,000 |   |   |   | $ | (500 | ) |   |   | $ | 500 |   |   |   | 3 |   |   |
| Trademarks/trade  names/patents                |       |                             | 300        |                            |       |                     | (206       | ) |   |   | 94 |   |   |   | 311 |   |   |   | (217 | ) |   |   | 94 |   |   |   | 5 |   |   |
|                                           |       |                             | 1,300      |                            |       |                     | (623       | ) |   |   | 677 |   |   |   | 1,311 |   |   |   | (717 | ) |   |   | 594 |   |   |   |   |   |   |
| Intangible assets not subject to amortization: |       |                             |       |                            |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trademarks/trade  names/licenses               |       |                             | 6,378      |                            |       |                     | —     |   |   |   | 6,378 |   |   |   | 6,378 |   |   |   | — |   |   |   | 6,378 |   |   |   |   |   |   |
|                                           |       |                             | $          | 7,678                           |       |                     |       | $ | (623 | ) |   |   | $ | 7,055 |   |   |   | $ | 7,689 |   |   |   | $ | (717 | ) |   |   | $ | 6,972 |   |   |   |   |   |   |

 

Estimatedamortization expense related to the net carrying amount of $594 for intangibleassets subject to amortization at December 31, 2004 is as follows:
| ** **                                   | ** ** | **Estimated**    | ** ** |
|----------------------------------------------|------------|------------------|------------|
| ** **                                   | ** ** | **Amortization** | ** ** |
| **Year Ending September 30,** | ** ** | ** **       | ** ** | **Expense(1)** | ** ** |
| 2005                                         |       |             | $          | 281 |   |   |
| 2006                                         |       |             | 281        |   |   |
| 2007                                         |       |             | 17         |   |   |
| 2008                                         |       |             | 9          |   |   |
| 2009                                         |       |             | 5          |   |   |
| Thereafter                                   |       |             | 1          |   |   |
|                                         |       |             | $          | 594 |   |   |
|                                              |            |                  |            |  |  |  |  |  |

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(1)          Estimatedamortization expense for the year ending September 30, 2005 includes onlyamortization to be recorded after December 31, 2004.

**6.   CAPITAL STOCK**

Stock options to purchase436,440 and 141,665 shares of common stock that were outstanding at December 31,2003 and 2004, respectively, were not included in the computation of dilutedearnings per share because the exercise prices of these stock options weregreater than the average share price of the Company’s common stock and,therefore, the effect would have been antidilutive. All warrants outstanding atDecember 31, 2003 and 2004 were included in the computation of dilutedearnings per share.

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**NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (unaudited) (dollars in thousands, except per share data)**

**7.   OPERATING SEGMENTS**

Segment identification and selection is consistentwith the management structure used by the Company to evaluate performance andmake decisions regarding resource allocation, as well as the materiality offinancial results consistent with that structure. Based on the Company’smanagement structure and method of internal reporting, the Company has oneoperating segment. The Company does not review operating results on adisaggregated basis; rather, management reviews operating results on anaggregate basis.

Net sales outside theUnited States were less than 10% of consolidated net sales for the three monthsended December 31, 2003 and 2004.

**8.   STOCK-BASED COMPENSATION**

TheCompany accounted for its stock-based employee compensation plans using theintrinsic value method prescribed by Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*.No stock-based employee compensation cost was reflected in net income for thethree months ended December 31, 2003 and 2004, as all options grantedunder those stock-based employee compensation plans had exercise prices equalto the market values of the underlying common shares on the dates of grant. Thefollowing table illustrates the effect on net income and earnings per share asif the Company had applied the fair value recognition provisions of Statementof Financial Accounting Standards No. 123, *Accountingfor Stock-Based Compensation*, to stock-based employee compensation.
| ** **                                                                                                                                         | ** ** | **Three months ended  December 31,**                  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **     2003     ** | ** ** | **     2004     ** | ** ** |
| Net income, as  reported                                                                                                                           |       |                                                                 | $          | 3,168 |   |   |   | $ | 2,806 |   |   |
| Deduct: Total  stock-based employee compensation expense determined under   the fair value based method for all awards, net of related tax effects |       |                                                                 | (153       | ) |   |   | (134 | ) |   |
| Pro forma net income                                                                                                                               |       |                                                                 | $          | 3,015 |   |   |   | $ | 2,672 |   |   |
| Earnings per  share                                                                                                                                |       |                                                                 |       |   |   |   |   |   |   |
| Basic—as reported                                                                                                                             |       |                                                                 | $          | 0.28 |   |   |   | $ | 0.24 |   |   |
| Diluted—as reported                                                                                                                           |       |                                                                 | 0.27       |   |   |   | 0.24 |   |   |
| Basic—pro forma                                                                                                                               |       |                                                                 | $          | 0.27 |   |   |   | $ | 0.23 |   |   |
| Diluted—pro forma                                                                                                                             |       |                                                                 | 0.26       |   |   |   | 0.23 |   |   |

 

In December 2004, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards No. 123R,*Share-Based Payment* (“SFAS 123R”). SFAS123R requires companies to expense the value of employee stock options andsimilar awards. SFAS 123R is effective for interim and annual financialstatements beginning after June 15, 2005 and will apply to all outstandingand unvested share-based payments at the time of adoption. The Company is currentlyevaluating the impact SFAS 123R will have on its consolidated financialstatements and will adopt such standard as required.

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**Item2.   Management’s Discussion and Analysis of Financial Condition andResults of Operations**

**General**

The following discussion and analysis should be readin conjunction with this report on Form 10-Q, including Part I, Item1.

Nutraceutical International Corporation (the “Company”)is an integrated marketer, distributor, retailer and manufacturer of brandednutritional supplements and other natural products sold primarily to andthrough domestic health and natural food stores. Internationally, the Company sellsits branded products to and through health and natural product distributors andretailers. The Company’s core business strategy is to acquire, integrate andoperate, from beginning to end, the marketing, distribution, retailing andmanufacturing operations of businesses in the natural products industry. TheCompany believes that the consolidation and integration of acquired businessesprovides ongoing financial synergies through increased scale and marketpenetration, as well as strengthened customer relationships.

The Company sells its branded products under thetrademarks *Solaray**®*, *KAL**®*, *Nature’s Life**®*,*Natural Balance**®*,*NaturalMax**®*,*VegLife**®*,*Premier One**®*,*Sunny Green**®*,*Natural Sport**®*,*FunFresh FoodsTM*, *ActiPet**®*,*Action Labs**®*,*Thompson**®*,*Montana Big SkyTM*and *Body Gold**®.* The Company also sells branded bulkproducts and custom blends under the trademark *MonarchNutritional LaboratoriesTM.* Under the name *WoodlandPublishingTM*, the Company publishes, prints and markets a line ofbooks and booklets to, among others, book distributors, national retailbookstores and health and natural food stores. The Company’s neighborhoodnatural food markets operate under the trade names *The RealFood CompanyTM*, *Thom’s Natural FoodsTM*and *Cornucopia Community MarketTM*and itshealth food stores operate under the trade names *ArizonaHealth FoodsTM*,*Granola’sTM* and*Pilgrim’s NaturewayTM.* The Company also distributes thebranded products of certain third parties.

The Company was formed in1993 by senior management and Bain Capital, Inc. to effect a consolidationstrategy in the fragmented vitamin, mineral, herbal and other nutritionalsupplements industry (the “VMS Industry”). Since its formation, the Company hascompleted the following acquisitions: Solaray, Inc., Premier One Products, Inc.,Makers of KAL, Inc. and Makers of KAL, B.V., Monarch NutritionalLaboratories, Inc., Action Labs, Inc., NutraForce (Canada)International, Inc., Woodland Publishing, Inc. and Summit Graphics, Inc.,Thompson Nutritionals, Inc., The Real Food Company, Inc., Thom’sNatural Foods, M.K. Health Food Distributors, Inc. (dba Nature’s Life),Arizona Health Foods, Inc., Natural Balance, Inc., Montana Naturals, Inc.,Cornucopia Community Market, Inc. and Pilgrim’s Natureway LLC. As a resultof these acquisitions, internal growth and cost management, management believesthat the Company is well positioned to continue to capitalize on theconsolidation the Company believes is occurring in the VMS Industry.

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**Results of Operations**

Thefollowing table sets forth certain consolidated statements of operations dataas a percentage of net sales for the periods indicated:
| ** **                                | ** ** | **Three months ended  December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2003**                                            | ** ** | **2004** | ** ** |
| Net sales                                 |       | 100.0                                               | %          | 100.0 | % |
| Cost of sales                             |       | 48.7                                                | %          | 47.9 | % |
| Gross profit                              |       | 51.3                                                | %          | 52.1 | % |
| Selling, general and administrative       |       | 34.9                                                | %          | 38.5 | % |
| Amortization of intangible assets         |       | 0.3                                                 | %          | 0.3 | % |
| Income from  operations                   |       | 16.1                                                | %          | 13.3 | % |
| Interest and other expense, net           |       | 0.6                                                 | %          | 0.4 | % |
| Income before  provision for income taxes |       | 15.5                                                | %          | 12.9 | % |
| Provision for income taxes                |       | 6.0                                                 | %          | 5.0 | % |
| Net income                                |       | 9.5                                                 | %          | 7.9 | % |
| EBITDA(1)                                 |       | 19.3                                                | %          | 16.5 | % |

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(1)          See“—EBITDA.”

**Comparisonof the Three Months Ended December 31, 2004 to the Three Months Ended December 31, 2003**

*NetSales.*   Net sales increased by $2.1 million, or6.4%, to $35.3 million for the three months ended December 31, 2004 (“firstquarter of fiscal 2005”) from $33.2 million for the three months ended December 31,2003 (“first quarter of fiscal 2004”). Net sales of branded products increasedby $1.7 million, or 6.1%, to $29.1 million for the first quarter of fiscal 2005from $27.4 million for the first quarter of fiscal 2004. The increase in netsales of branded products was related to the integration of the fiscal 2004third quarter acquisitions of the *NaturalBalance**®* and *Montana Big Sky*TM brands, partially offset by a softness insales in certain areas and customers within health and natural food stores.Net sales of other products increased by $0.4 million, or 7.6%, to $6.2 millionfor the first quarter of fiscal 2005 from $5.8 million for the first quarter offiscal 2004. This increase was primarily the result of the fiscal 2004acquisition of Cornucopia Community Market, Inc. and the fiscal 2005acquisition of Pilgrim’s Natureway LLC.

*GrossProfit.*   Gross profit increased by $1.4 million,or 8.1%, to $18.4 million for the first quarter of fiscal 2005 from $17.0million for the first quarter of fiscal 2004. This increase in gross profit wasprimarily attributable to the increase in net sales. As a percentage of netsales, gross profit was 52.1% for the first quarter of fiscal 2005 and 51.3%for the first quarter of fiscal 2004. This increase in gross profit as apercentage of net sales was primarily attributable to modest improvements inraw material pricing and manufacturing costs, as well as some changes in salesmix.

*Selling,General and Administrative.*   Selling, general andadministrative expenses increased by $2.0 million, or 17.5%, to $13.6million for the first quarter of fiscal 2005 from $11.6 million for the firstquarter of fiscal 2004. As a percentage of net sales, selling, general andadministrative expenses increased to 38.5% for the first quarter of fiscal 2005from 34.9% for the first quarter of fiscal 2004. This increase in selling,general and administrative expenses was primarily attributable to the fiscal2004 acquisitions of the *NaturalBalance**®* and *Montana Big Sky*TM brands and Cornucopia CommunityMarket, Inc., as well as the fiscal 2005 acquisition of Pilgrim’sNatureway LLC. Additionally, increased costs associated with legal, shipping,insurance and corporate governance impacted the Company in first quarter of fiscal2005.

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*Amortizationof Intangibles.*   Amortization of intangibles was$0.1 million for the first quarter of fiscal 2005 compared to $0.1 million forthe first quarter of fiscal 2004. For each period, amortization expense wasprimarily related to intangible assets recorded in connection withacquisitions.

*Interestand Other Expense, Net.*   Net interest and otherexpense was $0.2 million for the first quarter of fiscal 2005 and $0.2 millionfor the first quarter of fiscal 2004 and primarily consisted of interestexpense on indebtedness under the Company’s revolving credit facility.

*Provision for Income Taxes.*   TheCompany’s effective tax rate was 38.5% for both the first quarter of fiscal2005 and for the first quarter of fiscal 2004. In each period, the Company’seffective tax rate was higher than the federal statutory rate primarily due tostate taxes.

**EBITDA**

EBITDA(earnings before net interest and other expense, taxes, depreciation andamortization) is a commonly reported standard measure that is used by analystsand investors in the VMS Industry. Management believes that EBITDA, aspresented, represents a useful measure for assessing the performance of theCompany’s ongoing operating activities, as it reflects the earnings trends ofthe Company. Targets and trends in EBITDAare used as a measure for determining management’s performance compensation andare also used by the Company’s creditors in assessing debt covenant compliance.The Company understands that while EBITDA is used by analysts in the evaluationof nutritional supplement companies, it is not necessarily comparable to othersimilarly titled captions of other companies due to potential inconsistenciesin the method of calculation. EBITDA is not intended as an alternative to cashflows from operating activities, as a measure of liquidity or as an alternativeto net income as an indicator of the Company’s operating performance or anyother measure of performance in accordance with generally accepted accountingprinciples. The following table sets forth a reconciliation of net income toEBITDA for each period included herein:
| ** **                          | ** ** | **Three months ended  December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2003**                                            | ** ** | **2004** | ** ** |
| Net income                          |       | $                                                   | 3,168      |   | $ | 2,806 |   |
| Provision for  income taxes         |       | 1,983                                               |       | 1,757 |   |
| Interest and  other expense, net(1) |       | 202                                                 |       | 152 |   |
| Depreciation and  amortization      |       | 1,041                                               |       | 1,119 |   |
| EBITDA                              |       | $                                                   | 6,394      |   | $ | 5,834 |   |

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(1)          Includes amortization ofdeferred financing fees and losses associated with fixed asset disposals.

The Company’s EBITDAdecreased to $5.8 million for the first quarter of fiscal 2005 from $6.4 millionfor the first quarter of fiscal 2004. EBITDA as a percentage of net salesdecreased to 16.5% for the first quarter of fiscal 2005 from 19.3% for thefirst quarter of fiscal 2004. This decrease in EBITDA was primarily related toincreases in selling, general and administrative expenses (see—“Results ofOperations”).

**Seasonality**

The Company believes that its business ischaracterized by minor seasonality. However, sales to any particular customercan vary substantially from one quarter to the next based on such factors asindustry trends, timing of promotional discounts, international economicconditions and acquisition-related activities. Excluding the effects ofacquisitions, the Company historically has recorded higher branded productssales volume during the second fiscal quarter due to increased interest inhealth-related products among consumers following the holiday season.

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**Liquidity and Capital Resources**

The Company had working capital of $26.9 million as ofDecember 31, 2004 compared to $26.5 million as of September 30,2004. This increase in working capital was primarily the result of increases inaccounts receivable and inventories and a decrease in accrued expenses,partially offset by decreases in cash and prepaid expenses and other currentassets.

Net cash provided by operating activities for thethree months ended December 31, 2004 was $3.4 million compared to$4.6 million for the comparable period in fiscal 2004.The decrease in net cash provided by operating activities for the three monthsended December 31, 2004 was primarily attributable to the change in cashprovided by accounts receivable and accrued expenses, as well as a decrease innet income, which was partially offset by decreases in cash used forinventories, other non-current assets and accounts payable and an increase incash provided by prepaid expenses and other current assets.

Net cash used in investing activities was $3.1 millionfor the three months ended December 31, 2004 and $1.3 million for thecomparable period in fiscal 2004. The Company’s investingactivities consisted primarily of the acquisition of a business in the firstquarter of fiscal 2005 and capital expenditures. Capital expenditures duringthese periods related primarily to distribution and manufacturing equipment,building improvements related to facility consolidation efforts and informationsystems. The Company intends to finance anticipated capital expendituresthrough internally generated cash flow and, if necessary, through fundsprovided under its revolving credit facility.

Net cash used in financing activities was $1.4 millionfor the three months ended December 31, 2004 compared to $3.8 million forthe comparable period in fiscal 2004. During these periods, net cashused in financing activities primarily related to repayments under the Company’srevolving credit facility and purchases of common stock for treasury, partiallyoffset by proceeds from the issuance of common stock.

The Company’s current revolving credit facility hadavailable credit borrowings of $55.0 million at December 31, 2004. Theavailable credit borrowings are reduced quarterly by $1.25 million with thenext reduction occurring in March 2005. Borrowings under the revolvingcredit facility are collateralized by substantially all assets of the Company.At the Company’s election, borrowings bear interest at the applicableEurodollar Rate plus a variable margin or at a base rate, which is the higherof the Federal Funds Rate plus 0.5% or the Prime Lending Rate, plus a variablemargin. At December 31, 2004, the applicable weighted-average interestrate for borrowings was 3.73%. The Company is also required to pay a variablequarterly fee on the unused balance under the revolving credit facility. At December 31,2004, the applicable rate was 0.25%. Accrued interest on Eurodollar Rateborrowings is payable based on elected intervals of one, two or three months.Accrued interest on base rate borrowings is payable quarterly. The revolvingcredit facility matures on January 28, 2007, and the Company is requiredto repay all principal outstanding under the revolving credit facility on suchdate.

The revolving credit facility contains restrictivecovenants, including restrictions on incurring other indebtedness, limitationson capital expenditures and requirements that the Company maintain certainfinancial ratios. As of December 31, 2004, the Company was in compliancewith these restrictive covenants. Upon the occurrence of a default or an eventof default, the lender has various remedies or rights, which may includeproceeding against the collateral or requiring the Company to repay all amountsoutstanding under the revolving credit facility.

A key component of the Company’s business strategy isto seek to make additional acquisitions, which may require that the Companyobtain additional financing, which could include the incurrence of substantialadditional indebtedness. The Company believes that borrowings under its currentrevolving credit facility or a replacement credit facility, together with cashflows from operations, will be sufficient to make required payments under thecurrent credit facility or a replacement credit facility, and to makeanticipated capital expenditures and fund working capital needs for fiscal2005.

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TheCompany’s significant non-cancelable operating lease obligations as of December 31,2004 were as follows:
| ** **                                   | ** ** | **Operating** | ** ** |
|----------------------------------------------|------------|---------------|------------|
| **Year Ending September 30,** | ** ** | ** **    | ** ** | **Leases(1)** | ** ** |
| 2005                                         |       |          | $          | 1,377 |   |   |
| 2006                                         |       |          | 1,074      |   |   |
| 2007                                         |       |          | 894        |   |   |
| 2008                                         |       |          | 370        |   |   |
| 2009                                         |       |          | 161        |   |   |
| Thereafter                                   |       |          | 150        |   |   |
|                                         |       |          | $4,026     |   |   |
|                                              |            |               |            |  |  |  |  |  |

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(1)          Theamount for the year ending September 30, 2005 includes only payments to bemade after December 31, 2004.

**New Accounting Standards**

In December 2004, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards No. 123R,*Share-Based Payment* (“SFAS 123R”). SFAS123R requires companies to expense the value of employee stock options andsimilar awards. SFAS 123R is effective for interim and annual financialstatements beginning after June 15, 2005 and will apply to all outstandingand unvested share-based payments at the time of adoption. The Company iscurrently evaluating the impact SFAS 123R will have on its consolidatedfinancial statements and will adopt such standard as required.

Based on the Company’sreview of other new accounting standards released during the quarter ended December 31,2004, the Company did not identify any standard requiring adoption that wouldhave a significant impact on its consolidated financial statements for the periods reported.

**Inflation**

Inflation affects the costof raw materials, goods and services used by the Company. In recent years,inflation has been modest. The competitive environment somewhat limits theability of the Company to recover higher costs resulting from inflation byraising prices. Overall, product prices have generally been stable. The Companyseeks to mitigate the adverse effects of inflation primarily through improvedproductivity and cost containment programs. The Company does not believe thatinflation has had a material impact on its results of operations for theperiods presented, except with respect to payroll-related costs, insurancepremiums and other costs arising from or related to government imposedregulations.

**Forward-Looking Statements**

The Securities and Exchange Commission (“SEC”)encourages companies to disclose forward-looking information so thatinvestors can better understand a company’s future prospects and make informedinvestment decisions. Information contained in this Form 10-Qcontains certain forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995 with respect to our financialcondition, results of operations and business. Any statements contained hereinthat are not statements of historical fact may be deemed to be forward-lookingstatements. Without limitation, the words “may,” “will,” “should,” “believes,” “anticipates,”“plans,” “expects,” “intends,” “estimates” and similar expressions or thenegative thereof, or variations thereon, or similarly, discussions of strategy,although believed to be reasonable are intended to identify forward-lookingstatements, although not all forward-looking statements contain these words ordiscussions. There are a number of important factors that could cause actualevents or the Company’s actual results to differ materially from thoseindicated by 

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such forward-lookingstatements, including, without limitation, (i) changing domestic andinternational market and political conditions; (ii) interruption ofbusiness or negative impact on sales and earnings due to acts of war,terrorism, bio-terrorism, civil unrest or disruption of mail service; (iii) slowor negative growth in the nutritional supplement industry; (iv) changes inlaws and regulations, including adverse federal, state or foreign legislationor regulation or adverse determinations or actions by regulators; (v) import/exportcontrols with respect to products sold into or purchased from foreigncountries, as well as other restrictions on the purchase or sale of the Company’sproducts to or from such countries; (vi) unavailability of or interruptionin the supply of utilities, including electricity and telecommunications; (vii) increasedproduct competition; (viii) adverse publicity regarding nutritionalsupplements; (ix) increased costs, including raw material and labor costs,as well as increases in the costs of borrowing (or the unavailability ofadequate credit); (x) inability of the Company to gain and/or hold market shareof its health and natural food store customers and bulk branded productscustomers; (xi) loss or retirement of key members of management; (xii)inability of the Company to successfully implement its business strategy orplan or otherwise manage growth, including the Company’s ability to locate andconsummate advantageous acquisitions, or otherwise integrate or profitablymanage acquired operations, including the ability to retain customers ofexisting and acquired operations; (xiii) product development efforts andconsumer acceptance of the Company’s products; (xiv) adequacy and availabilityof insurance coverage, and any losses or damages sustained by the Company notcovered by insurance; (xv) availability and price of raw materials, includingincreased costs; (xvi) the Company’s ability to manufacture its productsefficiently; (xvii) the mix of the Company’s products and their related profitmargins; (xviii) dependence on distributors and customers; (xix) sales andearnings volatility; (xx) absence of clinical trials for many of the Company’sproducts; (xxi) exposure to and expense of prosecuting, defending and/orresolving and defending claims or litigation, including but not limited toproduct liability claims, class action suits, stockholder derivative suits,employment or labor related suits or investigations, patent or trademarkinfringement suits and other litigation which may arise from time to time;(xxii) inability of the Company’s retail stores to attain or maintainprofitability; (xxiii) other factors discussed in the Company’s filings withthe Securities and Exchange Commission or referenced in its press releases, and(xxiv) other factors beyond the Company’s control.

In addition, any forward-looking statements representthe Company’s estimates only as of the day this Form 10-Q was firstfiled with the SEC and should not be relied upon as representing the Company’sestimates as of any subsequent date. No assurance can be given that the futureresults covered by such forward-looking statements will be achieved and readersare cautioned not to place undue reliance on forward-looking statements. Whilethe Company may elect to update forward-looking statements at some point in thefuture, the Company specifically disclaims any obligation to do so.

The SEC maintains anInternet site (*http://www.sec.gov*) whichcontains reports, proxy and information statements, and other informationregarding the Company. Copies of this Form 10-Q are availablewithout charge upon request. Please contact the Company to request copies ofthis Form 10-Q (435-655-6106).

**Item3.   Quantitative and Qualitative Disclosures about Market Risk**

At the Company’s election, borrowings under theCompany’s revolving credit facility bear interest at the applicable EurodollarRate plus a variable margin or at a base rate, which is the higher of theFederal Funds Rate plus 0.5% or the Prime Lending Rate, plus a variable margin.At December 31, 2004, the applicable weighted-average interest rate forborrowings was 3.73% and the Company had total borrowings outstanding of $5.0million. To date, the Company has not obtained interest rate protection withrespect to these borrowings.

With respect to itsinternational operations, the Company is subject to currency fluctuations;however, the Company does not believe that these fluctuations would have amaterial adverse impact on the 

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Company’sfinancial position. To date, the Company has not hedged any of its potentialforeign currency exposures.

**Item 4.   Controls and Procedures**

*Evaluationof Disclosure Controls and Procedures.*   TheCompany’s chief executive officer and its chief financial officer, afterevaluating the effectiveness of the Company’s disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))as of the end of the period covered bythe quarterly report (the “Evaluation Date”), have concluded that, as of theEvaluation Date, the Company’s disclosure controls and procedures wereeffective to ensure that material information related to the Company and itsconsolidated subsidiaries would be made known to them by others within thoseentities. In designing and evaluating the disclosure controls and procedures,management recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and management necessarily was required to applyits judgment in evaluating and implementing possible disclosure controls andprocedures.

*Changesin Internal Controls.**  *Therehave been no significant changes in the Company’s internal controls or in otherfactors that could significantly affect the Company’s internal controlssubsequent to the Evaluation Date.

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**PART II—OTHER INFORMATION**

**Item 1.   Legal Proceedings**

As discussed in other filings, the Company is subjectto regulation by a number of federal, state and foreign agencies and isinvolved in various legal matters arising in the normal course of business.

The Company carries insurance coverage in the typesand amounts that management considers reasonably adequate to cover the risks itfaces in the industry in which it competes. However, the Company’s currentliability policy excludes claims related to certain ingredients, includingproducts containing ephedra.

In the opinion ofmanagement, the Company’s liability, if any, arising from individual regulatoryand legal proceedings in which it is involved is not expected to have amaterial adverse effect on the Company’s financial position, results ofoperations or cash flows. However, the aggregate liability of the Companyarising from regulatory and legal proceedings related to these matters couldhave a material effect on the Company’s financial position, results ofoperations or cash flows. In the opinion of management, the outcomes of legalmatters in which the Company is presently involved are not probable andreasonably estimable.

**Item6.   Exhibits and Reports on Form 8-K**

(a)          Exhibits

31.1          Certifications Pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

32.1          Certifications Pursuantto 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

(b)         Reports on Form 8-K

The following reports were filed on Form 8-Kduring the last quarter covered by this report:

(i)             On October 22,2004, the Company announced that it had entered into a purchase and saleagreement to acquire substantially all of the operating assets of Pilgrim’sNatureway LLC.

(ii)         On December 3, 2004,the Company reported results for the fourth quarter and fiscal year ended September 30,2004.

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                                         | NUTRACEUTICAL INTERNATIONAL  CORPORATION |                                                                                            |
|-----------------------------------------|------------------------------------------|-------------------------------------------------------------------------------------------------|
|                                    | (Registrant)                             |                                                                                            |
| Date:  January 27,  2005 | By:                                      | /s/ LESLIE M. BROWN, JR.                                                                   |   |
|                                    |                                     | Leslie M. Brown, Jr.*Senior Vice President, Finance,*                                      |
|                                    | * *                                 | *Chief Financial Officer and Assistant Secretary  (Principal Financial and Accounting Officer)* |
|                                         |                                          |                                                                                                 |  |  |

 

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