**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

**FORM 10-Q**

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

**forthe Quarterly Period Ended June 30, 2006**

**Commissionfile number 000-23731**

**NUTRACEUTICAL INTERNATIONAL CORPORATION**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                   | **87-0515089**                     |
|----------------------------------------------------------------|------------------------------------|
| (State of incorporation)                                       | (IRS Employer  Identification No.) |
| **1400 Kearns Boulevard, 2****nd Floor, Park City, Utah** | **84060**                          |
| (Address of principal executive office)                        | (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 a large accelerated filer, an accelerated filer or anon-accelerated filer as defined in Rule 12b-2 of the Exchange Act(check one):

Large accelerated filer*    *o*       *Accelerated filer*    *x*       *Non-acceleratedfiler*    *o*  *

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

YES  o   NO  x

At July 27, 2006, the registrant had 11,250,667shares of common stock outstanding.

 

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**NUTRACEUTICALINTERNATIONAL CORPORATIONINDEX**

| Description | ** ** | **Page No.**           |
|-------------|------------|------------------------|
| Part I.     |       | Financial  Information |   | 3 |   |
|        |       | Item 1.                |   | Financial  Statements |   | 3 |   |
|        |       |                   |   | Condensed  Consolidated Balance Sheets—September 30, 2005 and June 30, 2006 |   | 3 |   |
|        |       |                   |   | Condensed  Consolidated Statements of Operations and Comprehensive Income—Three Months  and Nine Months Ended June 30, 2005 and 2006 |   | 4 |   |
|        |       |                   |   | Condensed  Consolidated Statements of Cash Flows—Nine Months Ended June 30, 2005 and  2006 |   | 5 |   |
|        |       |                   |   | Notes  to Condensed Consolidated Financial Statements |   | 6 |   |
|        |       | Item 2.                |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 11 |   |
|        |       | Item 3.                |   | Quantitative  and Qualitative Disclosures about Market Risk |   | 18 |   |
|        |       | Item 4.                |   | Controls  and Procedures |   | 18 |   |
| Part II.    |       | Other  Information     |   | 20 |   |
|        |       | Item 1.                |   | Legal  Proceedings |   | 20 |   |
|        |       | Item 1A.               |   | Risk Factors |   | 20 |   |
|        |       | Item 2.                |   | Unregistered  Sales of Equity Securities and Use of Proceeds |   | 20 |   |
|        |       | Item 6.                |   | Exhibits |   | 20 |   |

 

2

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**PART I—FINANCIALINFORMATION**

**Item 1.**                        FinancialStatements

**NUTRACEUTICAL INTERNATIONAL CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(unaudited)(dollars in thousands)**

| ** **                                    | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                    | ** ** | **2005(1)**            | ** ** | **2006**          | ** ** |
| **ASSETS**                                    | ** ** |                   | ** ** | ** **        |       | ** ** | ** ** |
| Current assets                                |       |                   |       | ** **        |       |   |   |
| Cash                                          |       |                   | $          | 3,371             | ** ** |   | $ | 2,150 |   |
| Accounts receivable, net                      |       |                   | 10,586     | ** **        |       | 10,750 |   |
| Inventories, net                              |       |                   | 25,434     | ** **        |       | 30,669 |   |
| Prepaid expenses and other current assets     |       |                   | 2,060      | ** **        |       | 1,601 |   |
| Deferred income taxes                         |       |                   | 1,416      | ** **        |       | 1,394 |   |
| Total current assets                          |       |                   | 42,867     | ** **        |       | 46,564 |   |
| Property, plant and equipment, net            |       |                   | 25,808     | ** **        |       | 31,886 |   |
| Goodwill                                      |       |                   | 18,387     | ** **        |       | 18,366 |   |
| Intangible  assets, net                       |       |                   | 7,016      | ** **        |       | 6,750 |   |
| Other non-current  assets, net                |       |                   | 616        | ** **        |       | 468 |   |
| Deferred income  taxes, net                   |       |                   | 6,211      | ** **        |       | 5,311 |   |
|                                          |       |                   | $          | 100,905           | ** ** |   | $ | 109,345 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** | ** ** |                   | ** ** | ** **        |       | ** ** | ** ** |
| Current liabilities                           |       |                   |       | ** **        |       |   |   |
| Accounts payable                              |       |                   | $          | 10,733            | ** ** |   | $ | 10,215 |   |
| Accrued expenses                              |       |                   | 5,341      | ** **        |       | 4,175 |   |
| Current portion of long-term debt             |       |                   | —     | ** **        |       | 3,500 |   |
| Total current liabilities                     |       |                   | 16,074     | ** **        |       | 17,890 |   |
| Long-term debt                                |       |                   | 2,000      | ** **        |       | — |   |
| Other non-current  liabilities                |       |                   | 364        | ** **        |       | 359 |   |
| Total liabilities                             |       |                   | 18,438     | ** **        |       | 18,249 |   |
| Stockholders’  equity                    |       |                   |       | ** **        |       |   |   |
| Common stock                                  |       |                   | 115        | ** **        |       | 113 |   |
| Additional paid-in capital                    |       |                   | 39,317     | ** **        |       | 36,059 |   |
| Retained earnings                             |       |                   | 42,900     | ** **        |       | 54,754 |   |
| Accumulated other comprehensive income        |       |                   | 135        | ** **        |       | 170 |   |
| Total stockholders’ equity               |       |                   | 82,467     | ** **        |       | 91,096 |   |
|                                          |       |                   | $          | 100,905           | ** ** |   | $ | 109,345 |   |

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(1)   Thecondensed consolidated balance sheet as of September 30, 2005 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.

3

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**NUTRACEUTICALINTERNATIONAL CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME**

**(unaudited)**

**(dollars in thousands, except per share data)**

| ** **                                          | ** ** | **Three months ended June 30,** | ** ** | **Nine months ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                            | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net sales                                           |       | $                                                   | 37,233     |                                               | $          | 36,985 |   | $ | 111,381 |   | $ | 114,714 |   |
| Cost of sales                                       |       | 18,092                                              |       | 17,414                                             |       | 53,929 |   | 54,246 |   |
| Gross profit                                        |       | 19,141                                              |       | 19,571                                             |       | 57,452 |   | 60,468 |   |
| Operating expenses                                  |       |                                                |       |                                               |       |   |   |   |   |
| Selling, general and administrative                 |       | 13,676                                              |       | 13,876                                             |       | 41,188 |   | 41,807 |   |
| Amortization of intangible assets                   |       | 94                                                  |       | 92                                                 |       | 282 |   | 280 |   |
| Income from  operations                             |       | 5,371                                               |       | 5,603                                              |       | 15,982 |   | 18,381 |   |
| Interest and  other (income)/expense, net           |       | 162                                                 |       | 138                                                |       | 542 |   | (893 | ) |
| Income before  provision for income taxes           |       | 5,209                                               |       | 5,465                                              |       | 15,440 |   | 19,274 |   |
| Provision for  income taxes                         |       | 2,006                                               |       | 2,104                                              |       | 5,945 |   | 7,420 |   |
| Net income                                          |       | $                                                   | 3,203      |                                               | $          | 3,361 |   | $ | 9,495 |   | $ | 11,854 |   |
| Other  comprehensive income/(loss)                  |       |                                                |       |                                               |       |   |   |   |   |
| Foreign currency translation adjustment, net of tax |       | (73                                                 | )          | 40                                                 |       | (50 | ) | 35 |   |
| Comprehensive  income                               |       | $                                                   | 3,130      |                                               | $          | 3,401 |   | $ | 9,445 |   | $ | 11,889 |   |
| Net income per  common share                        |       |                                                |       |                                               |       |   |   |   |   |
| Basic                                               |       | $                                                   | 0.28       |                                               | $          | 0.30 |   | $ | 0.82 |   | $ | 1.04 |   |
| Diluted                                             |       | 0.27                                                |       | 0.29                                               |       | 0.80 |   | 1.02 |   |
| Weighted average  common shares outstanding         |       |                                                |       |                                               |       |   |   |   |   |
| Basic                                               |       | 11,560,503                                          |       | 11,272,259                                         |       | 11,539,643 |   | 11,383,996 |   |
| Dilutive effect of stock options and warrants       |       | 199,073                                             |       | 205,561                                            |       | 264,315 |   | 185,303 |   |
| Diluted                                             |       | 11,759,576                                          |       | 11,477,820                                         |       | 11,803,958 |   | 11,569,299 |   |

 

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

4

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**NUTRACEUTICAL INTERNATIONAL CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)(dollars in thousands)**

| ** **                                                                        | ** ** | **Nine months ended June 30,**                               | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **      2005      ** | ** ** | **      2006      ** | ** ** |
| **Cash flows from operating  activities**                                         | ** ** |                                                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income                                                                        |       |                                                                             | $          | 9,495 |   |   |   | $ | 11,854 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities |       |                                                                             |       |   |   |   |   |   |   |
| Depreciation and  amortization                                                    |       |                                                                             | 3,279      |   |   |   | 3,476 |   |   |
| Amortization of  deferred financing fees                                          |       |                                                                             | 137        |   |   |   | 137 |   |   |
| Losses/(gain) on  disposals of property and equipment                             |       |                                                                             | 40         |   |   |   | (1,099 | ) |   |
| Deferred income  taxes                                                            |       |                                                                             | 1,003      |   |   |   | 922 |   |   |
| Tax benefit from  stock option exercises                                          |       |                                                                             | 333        |   |   |   | 5 |   |   |
| Changes in assets and liabilities, net of effects of  acquisitions                |       |                                                                             |       |   |   |   |   |   |   |
| Accounts  receivable, net                                                         |       |                                                                             | 416        |   |   |   | (164 | ) |   |
| Inventories, net                                                                  |       |                                                                             | (387       | ) |   |   | (5,235 | ) |   |
| Prepaid expenses  and other current assets                                        |       |                                                                             | 1,311      |   |   |   | 459 |   |   |
| Other non-current  assets, net                                                    |       |                                                                             | (18        | ) |   |   | (3 | ) |   |
| Accounts payable                                                                  |       |                                                                             | (1,314     | ) |   |   | (518 | ) |   |
| Accrued expenses                                                                  |       |                                                                             | (257       | ) |   |   | (803 | ) |   |
| Other non-current  liabilities                                                    |       |                                                                             | (24        | ) |   |   | (5 | ) |   |
| Net cash provided  by operating activities                                        |       |                                                                             | 14,014     |   |   |   | 9,026 |   |   |
| **Cash  flows from investing activities**                                         | ** ** |                                                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Acquisitions of  businesses, net of cash acquired                                 |       |                                                                             | (5,821     | ) |   |   | (95 | ) |   |
| Proceeds from  sale of property and equipment                                     |       |                                                                             | —     |   |   |   | 4,500 |   |   |
| Purchases of  property and equipment                                              |       |                                                                             | (4,350     | ) |   |   | (12,675 | ) |   |
| Net cash used in investing activities                                             |       |                                                                             | (10,171    | ) |   |   | (8,270 | ) |   |
| **Cash  flows from financing activities**                                         | ** ** |                                                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Payments on other  non-current liabilities                                        |       |                                                                             | (225       | ) |   |   | (225 | ) |   |
| Proceeds from long-term  debt                                                     |       |                                                                             | 5,500      |   |   |   | 11,500 |   |   |
| Payments on  long-term debt                                                       |       |                                                                             | (7,000     | ) |   |   | (10,000 | ) |   |
| Proceeds from  issuances of common stock                                          |       |                                                                             | 831        |   |   |   | 142 |   |   |
| Purchases of  common stock for treasury                                           |       |                                                                             | (3,050     | ) |   |   | (3,414 | ) |   |
| Tax benefit from  stock option exercises                                          |       |                                                                             | —     |   |   |   | 7 |   |   |
| Net cash used in financing activities                                             |       |                                                                             | (3,944     | ) |   |   | (1,990 | ) |   |
| Effect of exchange rate changes on cash                                           |       |                                                                             | (6         | ) |   |   | 13 |   |   |
| Net decrease in cash                                                              |       |                                                                             | (107       | ) |   |   | (1,221 | ) |   |
| Cash at beginning  of period                                                      |       |                                                                             | 2,134      |   |   |   | 3,371 |   |   |
| Cash at end of period                                                             |       |                                                                             | $          | 2,027 |   |   |   | $ | 2,150 |   |   |

 

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

5

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

**1.**                 INTERIMCONDENSED CONSOLIDATED FINANCIAL 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 June 30, 2006, the results of theiroperations for the three months and nine months ended June 30, 2005 and2006 and their cash flows for the nine months ended June 30, 2005 and2006, in conformity with accounting principles generally accepted in the UnitedStates of America for interim financial information applied on a consistentbasis. Results for the three and nine months ended June 30, 2006 are notnecessarily indicative 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 YearEnded September 30, 2005, which was filed with the Securities and ExchangeCommission on December 1, 2005.

**2.**                 ACCOUNTSRECEIVABLE, NET

Accountsreceivable, net of allowances for sales returns and doubtful accounts,consisted of the following:

| ** **           | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|----------------------|------------|------------------------|------------|-------------------|------------|
| ** **           | ** ** | **2005**               | ** ** | **2006**          | ** ** |
| Accounts  receivable |       |                   | $          | 12,476            |       |   | $ | 12,738 |   |
| Less allowances      |       |                   | (1,890     | )                 |       | (1,988 | ) |
|                 |       |                   | $          | 10,586            |       |   | $ | 10,750 |   |

 

**3.**                 INVENTORIES,NET

Inventories,net of reserves for slow moving, obsolete and/or damaged inventory, werecomprised of the following:

| ** **      | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|-----------------|------------|------------------------|------------|-------------------|------------|
| ** **      | ** ** | **2005**               | ** ** | **2006**          | ** ** |
| Raw materials   |       |                   | $          | 9,495             |       |   | $ | 12,528 |   |
| Work-in-process |       |                   | 6,800      |              |       | 6,746 |   |
| Finished goods  |       |                   | 11,123     |              |       | 13,203 |   |
|            |       |                   | 27,418     |              |       | 32,477 |   |
| Less reserves   |       |                   | (1,984     | )                 |       | (1,808 | ) |
|            |       |                   | $          | 25,434            |       |   | $ | 30,669 |   |

 

**4.**                 PROPERTY,PLANT AND EQUIPMENT

On January 20, 2006, the Company sold its 31,340square foot building located in Park City, Utah for approximately $4,500 incash. At the time of sale, the building had a book value of $3,395. A gain of$1,105 

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

($680 after tax, or $0.06per diluted share) was included in interest and other (income)/expense for thenine months ended June 30, 2006.

On March 31, 2006,the Company purchased the Rapid Response Center in Ogden, Utah, which (whenfully converted) will provide approximately 410,000 square feet of grossbuilding space located on approximately 19.2 acres, which includes availableland for expansion, for $4,160 in cash. The Rapid Response Center is thecentral facility where the Company is, and has been, consolidating operations,including raw material warehousing, manufacturing, packaging, distribution andadministrative offices. The Company was previously leasing most of thisfacility.

**5.**                 GOODWILL

Thechange in the carrying amount of goodwill from September 30, 2005 to June 30,2006 was as follows:

| ** **                                                       | ** ** | **Goodwill** | ** ** |
|------------------------------------------------------------------|------------|--------------|------------|
| Balance as of  September 30, 2005                                |       | $            | 18,387     |   |
| Goodwill attributable to fiscal 2006 second quarter  acquisition |       | 95           |       |
| Purchase accounting adjustments related to prior  acquisitions   |       | (116         | )          |
| Balance as of June 30,  2006                                     |       | $            | 18,366     |   |

 

**6.**                 INTANGIBLEASSETS

Thecarrying amounts of intangible assets at September 30, 2005 and June 30,2006 were as follows:

| ** **                                      | ** ** | **September 30, 2005** | ** ** | **June 30, 2006** | ** ** | **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                       |       |          |       | $ | (750 | ) |   |   | $ | 250 |   |   |   | $ | 1,000 |   |   |   | $ | (1,000 | ) |   |   | $ | — |   |   |   | 3 |   |   |
| Trademarks/trade names/patents                  |       |                             | 338        |                        |       |          | (250       | ) |   |   | 88 |   |   |   | 352 |   |   |   | (280 | ) |   |   | 72 |   |   |   | 5 |   |   |
|                                            |       |                             | 1,338      |                        |       |          | (1,000     | ) |   |   | 338 |   |   |   | 1,352 |   |   |   | (1,280 | ) |   |   | 72 |   |   |   |   |   |   |
| Intangible assets not  subject to amortization: |       |                             |       |                        |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trademarks/trade names/licenses                 |       |                             | 6,678      |                        |       |          | —     |   |   |   | 6,678 |   |   |   | 6,678 |   |   |   | — |   |   |   | 6,678 |   |   |   |   |   |   |
|                                            |       |                             | $          | 8,016                       |       |          |       | $ | (1,000 | ) |   |   | $ | 7,016 |   |   |   | $ | 8,030 |   |   |   | $ | (1,280 | ) |   |   | $ | 6,750 |   |   |   |   |   |   |

 

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

Estimatedfuture amortization expense related to the June 30, 2006 net carryingamount of $72 for intangible assets subject to amortization is as follows:

| ** **                                   | ** ** | **Estimated**    | ** ** |
|----------------------------------------------|------------|------------------|------------|
| ** **                                   | ** ** | **Amortization** | ** ** |
| **Year Ending September 30,** | ** ** | ** **       | ** ** | **Expense(1)** | ** ** |
| 2006                                         |       |             | $          | 8 |   |   |
| 2007                                         |       |             | 26         |   |   |
| 2008                                         |       |             | 17         |   |   |
| 2009                                         |       |             | 13         |   |   |
| 2010                                         |       |             | 7          |   |   |
| Thereafter                                   |       |             | 1          |   |   |
|                                         |       |             | $          | 72 |   |   |
|                                              |            |                  |            |  |  |  |  |  |

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(1)          Estimatedamortization expense for the year ending September 30, 2006 includes onlyamortization to be recorded after June 30, 2006.

**7.**                 SHAREPURCHASES

During the three monthsended June 30, 2006, the Company purchased 95,741 shares of common stockfor an aggregate price of $1,445, which shares were held in treasury untilbeing retired on June 28, 2006. During the nine months ended June 30,2006, the Company purchased a total of 234,350 shares of common stock for anaggregate price of $3,414. As of June 30, 2006, the Company was permittedto purchase up to 150,428 additional shares under its approved purchase plan.

**8.**                 OPERATINGSEGMENTS

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.

Netsales attributed to customers in the United States and foreign countries forthe three and nine months ended June 30, 2005 and 2006 were as follows:

| ** **        | ** ** | **Three months ended  June 30,** | ** ** | **Nine months ended  June 30,** | ** ** |
|-------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **        | ** ** | **2005**                                        | ** ** | **2006**                                       | ** ** | **2005** | ** ** | **2006** | ** ** |
| United States     |       | $                                               | 33,815     |                                           | $          | 32,698 |   | $ | 101,683 |   | $ | 103,041 |   |
| Foreign countries |       | 3,418                                           |       | 4,287                                          |       | 9,698 |   | 11,673 |   |
|              |       | $                                               | 37,233     |                                           | $          | 36,985 |   | $ | 111,381 |   | $ | 114,714 |   |

 

Certain net salesattributed to customers in the United States are sold to customers who in turnmay sell such products to customers in foreign countries while certain netsales attributed to customers in 

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

foreign countriesare sold to customers who in turn may sell such products to customers in theUnited States.

**9.**                 STOCK-BASEDCOMPENSATION

The Company adopted Statement of Financial AccountingStandards No. 123R, *Share-Based Payment*(“SFAS 123R”) effective October 1, 2005, using the modified prospectiveapplication method. SFAS 123R requires companies to record compensation expensefor the value of all outstanding and unvested share-based payments,including employee stock options and similar awards. At the date of adoption, October 1,2005, the Company had no outstanding and unvested share-based payments. On September 30, 2005,the Company terminated the 1995 Stock Option Plan, the 1998 Stock IncentivePlan and the 1998 Non-Employee Director Stock Option Plan. After September 30,2005, no new awards of any kind will be granted under any of these plans. As aresult, the Company did not recognize any share-based compensation expense inits consolidated financial statements for the three and nine months ended June 30,2006.

Priorto the adoption of SFAS 123R, the Company accounted for its stock-basedemployee compensation plans using the intrinsic value method prescribed byAccounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees*. No stock-based employee compensationcost was reflected in net income as all options granted under those stock-basedemployee compensation plans had exercise prices equal to the market values ofthe underlying common shares on the dates of grant. The following tableillustrates the effect on net income and earnings per share as if the Companyhad applied the fair value recognition provisions of SFAS 123 to stock-basedemployee compensation.

| ** **                                                                                                                                             | ** ** | **Three months  ended June 30,** | ** ** | **Nine months  ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **2005**                                        | ** ** | **2006**                                       | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net income, as  reported                                                                                                                               |       | $                                               | 3,203      |                                           | $          | 3,361 |   | $ | 9,495 |   | $ | 11,854 |   |
| Deduct: Total  stock-based employee compensation expense determined under the fair value  based method for all awards, net of related tax effects |       | (124                                            | )          | —                                         |       | (371 | ) | — |   |
| Pro forma net income                                                                                                                                   |       | $                                               | 3,079      |                                           | $          | 3,361 |   | $ | 9,124 |   | $ | 11,854 |   |
| Earnings per share                                                                                                                                     |       |                                            |       |                                           |       |   |   |   |   |
| Basic—as reported                                                                                                                                 |       | $                                               | 0.28       |                                           | $          | 0.30 |   | $ | 0.82 |   | $ | 1.04 |   |
| Diluted—as reported                                                                                                                               |       | 0.27                                            |       | 0.29                                           |       | 0.80 |   | 1.02 |   |
| Basic—pro forma                                                                                                                                   |       | $                                               | 0.27       |                                           | $          | 0.30 |   | $ | 0.79 |   | $ | 1.04 |   |
| Diluted—pro forma                                                                                                                                 |       | 0.26                                            |       | 0.29                                           |       | 0.77 |   | 1.02 |   |

 

Stock options to purchase 836,897 and 875,836 sharesof common stock were outstanding at June 30, 2005 and 2006, respectively. Ofthese outstanding stock options, 140,340 and 139,140 options to purchase commonstock at June 30, 2005 and 2006, respectively, were excluded from thecomputation of diluted earnings per share because the exercise prices of thesestock options were greater than the average share price of the Company’s commonstock and, therefore, the effect would have been antidilutive. Based on theapplication of the treasury stock method, the dilutive effect of stock optionsand warrants was 199,073 

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

and 205,561 additionalshares for the three months ended June 30, 2005 and 2006, respectively,and 264,315 and 185,303 additional shares for the nine months ended June 30,2005 and 2006, respectively. No warrants were outstanding at June 30, 2005and 2006.

Thefollowing table summarizes stock option activity during the nine months ended June 30,2006:

| ** **                                                 | ** ** | ** **         | ** ** | **Weighted-Average** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                 | ** ** | **Number of** | ** ** | **Exercise**         | ** ** |
| ** **                                                 | ** ** | **Options**        | ** ** | **Price**            | ** ** |
| Options  outstanding and exercisable at September 30, 2005 |       |               | 883,253    |                 |       |   | $ | 9.95 |   |   |
| Exercised                                                  |       |               | (6,367     | )                    |       |   | 9.44 |   |   |
| Forfeited or  expired                                      |       |               | (1,050     | )                    |       |   | 17.50 |   |   |
| Options outstanding and  exercisable at June 30, 2006      |       |               | 875,836    |                 |       |   | $ | 9.95 |   |   |

 

The weighted-average contractual life of stock optionsoutstanding and exercisable at June 30, 2006 was 5.5 years. At June 30,2006, the aggregate intrinsic value of stock options outstanding andexercisable was $4,712. The intrinsic value is the amount by which the marketvalue of the underlying common stock exceeds the exercise price of therespective stock option.

During the nine monthsended June 30, 2005 and 2006, optionees realized aggregate gains of $865and $31, respectively, from stock option exercises.

**10.**          SUBSEQUENTEVENT

On July 26, 2006, the Company’s Board ofDirectors approved the addition of 1,000,000 shares to the Company’s previouslyapproved share repurchase program, which means the Company is currentlyauthorized to buy up to 1,150,428 total shares of its outstanding common stock.Under this approved share repurchase program, the Company may purchase commonstock from time to time on the open market and in individually negotiatedtransactions. The amount and timing of any purchases will be dependent upon anumber of factors, including the price and availability of the Company’s sharesand general market conditions.

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**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**General**

The following discussion and analysis should be readin conjunction with this report on Form 10-Q, including Part I,Item 1.

We are an integrated manufacturer, marketer,distributor and retailer of branded nutritional supplements and other naturalproducts sold primarily to and through domestic health and natural food stores.Internationally, we market and distribute branded nutritional supplements andother natural products to and through health and natural product distributorsand retailers. Our core business strategy is to acquire, integrate and operate,from beginning to end, the manufacturing, marketing and distribution of brandednutritional supplement businesses in the natural products industry. We believethat the consolidation and integration of these acquired businesses providesongoing financial synergies through increased scale and market penetration, aswell as strengthened customer relationships.

We sell branded nutritional supplements and othernatural products under the trademarks *Solaray®, KAL®, Nature’sLife®, Natural Balance®, NaturalMax®, VegLife®, Premier One®, Pioneer®, SunnyGreen®, Natural Sport®, FunFresh FoodsTM, ActiPet®, Action Labs®, Thompson®,Montana Big Sky*TM*, Body Gold®, Healthway®, LivingFlower Essences®* and *Monarch NutritionalLaboratoriesTM.* Under the name*Woodland PublishingTM,*we publish, print and market a line of books and booklets to, among others,book distributors, national retail bookstores and health and natural foodstores. We also distribute branded products of certain third parties.

We own neighborhood natural food markets, whichoperate under the trade names *The Real FoodCompany* TM, *Thom’s Natural Foods*TMand *Cornucopia Community MarketTM*.We also own health food stores, which operate under the trade names *Arizona Health Foods*TM, *Granola’s*TM and *Pilgrim’s Natureway*TM.

We were formed in 1993 bysenior management and Bain Capital, Inc. to effect a consolidationstrategy in the fragmented vitamin, mineral, herbal and other nutritionalsupplements industry (the “VMS Industry”). Since our formation, we havecompleted 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’sLife), Arizona Health Foods, Inc., Natural Balance, Inc., MontanaNaturals, Inc., Cornucopia Community Market, Inc., Pilgrim’sNatureway LLC, Pioneer Nutritional Formulas, Inc. and Living FlowerEssences, LLC. As a result of these acquisitions, internal growth and costmanagement, we believe that we are well positioned to continue to capitalize onthe consolidation that we believe is occurring in the VMS Industry.

**Critical AccountingPolicies**

The preparation of our financial statements inconformity with accounting principles generally accepted in the United Statesof America required us to make estimates and assumptions that affected thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the dates of the financial statements and the reportedamounts of net sales and expenses during the reported periods. Significantestimates included values and lives assigned to acquired intangible assets,reserves for customer returns and allowances, uncollectible accountsreceivable, slow moving and obsolete and/or damaged inventory. Actual resultsmay differ from these estimates.

Our estimates and judgments related to our criticalaccounting policies, including factors and assumptions considered in makingthese estimates and judgments, did not vary significantly for the periods 

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presented and had nomaterial impact on the consolidated financial statements as reported. Ourcritical accounting policies include the following:

*AccountsReceivable—**Provision* is made for estimated baddebts based on periodic analysis of individual customer balances, including anevaluation of days sales outstanding, payment history, recent payment trendsand perceived credit worthiness. If general economic conditions and/or customerfinancial condition were to change, additional provisions for bad debts may berequired, which could have a material impact on the consolidated financialstatements.

*Inventories—**Provision*is made forslow moving, obsolete and/or damaged inventory based on periodic analysis ofindividual inventory items, including an evaluation of historical usage and/ormovement, age, expiration date and general condition. If market demand and/orconsumer preferences are less favorable than historical trends or futureexpectations, additional provisions for slow moving, obsolete and/or damagedinventory may be required, which could have a material impact on theconsolidated financial statements.

*Property,Plant and Equipment—**Depreciation* and amortizationexpense is impacted by our judgments regarding the estimated useful lives ofassets placed in service. If the actual lives of assets are significantly lessthan expected, depreciation and amortization expense would be accelerated,which could have a material impact on the consolidated financial statements.

*Goodwilland Intangible Assets—**Statement***ofFinancial Accounting Standards No. 141, *BusinessCombinations*,**and Statementof Financial Accounting Standards No. 142, *Goodwill andOther Intangible Assets* (“SFAS 142”), require estimates andjudgments in determining the initial recognition and measurement of goodwilland intangible assets, including factors and assumptions used in determiningfair values and useful lives. Intangible assets with finite useful lives are amortized,while intangible assets with indefinite useful lives are not amortized. Inaddition, SFAS 142 requires ongoing, periodic impairment testing, which relieson such factors and assumptions as identified reporting units, as well asexpected future net cash flows relative to recorded book values. If an assetimpairment were identified, a loss would be recorded, which could have amaterial impact on the consolidated financial statements.

*Revenue Recognition—**Revenue***is recognized in accordance with Staff Accounting Bulletin No. 104,*Revenue Recognition*, which states thatrevenue should be recognized when the following criteria are met: (1) persuasiveevidence of an arrangement exists; (2) the product has been shipped andthe customer takes ownership and assumes the risk of loss; (3) the sellingprice is fixed or determinable; and (4) collection of the resultingreceivable is reasonably assured. We believe that these criteria are satisfiedupon shipment from our facilities or, in the case of our neighborhood naturalfood markets and health food stores, at the point of sale within these stores. Revenueis reduced by provisions for estimated returns and allowances, which are basedon historical averages that have not varied significantly for the periodspresented, as well as specific known claims, if any. No other significantdeductions from revenue must be estimated at the point in time that revenue isrecognized.

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**Results ofOperations**

Thefollowing table sets forth certain consolidated statements of operations dataas a percentage of net sales for the periods indicated:

| ** **                                | ** ** | **Three months  ended June 30,** | ** ** | **Nine months  ended June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                        | ** ** | **2006**                                       | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net sales                                 |       | 100.0                                           | %          | 100.0                                          | %          | 100.0 | % | 100.0 | % |
| Cost of sales                             |       | 48.6                                            | %          | 47.1                                           | %          | 48.4 | % | 47.3 | % |
| Gross profit                              |       | 51.4                                            | %          | 52.9                                           | %          | 51.6 | % | 52.7 | % |
| Selling, general and administrative       |       | 36.7                                            | %          | 37.5                                           | %          | 37.0 | % | 36.5 | % |
| Amortization of intangible assets         |       | 0.3                                             | %          | 0.2                                            | %          | 0.3 | % | 0.2 | % |
| Income from  operations                   |       | 14.4                                            | %          | 15.2                                           | %          | 14.3 | % | 16.0 | % |
| Interest and other (income)/expense, net  |       | 0.4                                             | %          | 0.4                                            | %          | 0.4 | % | (0.8 | )% |
| Income before  provision for income taxes |       | 14.0                                            | %          | 14.8                                           | %          | 13.9 | % | 16.8 | % |
| Provision for  income taxes               |       | 5.4                                             | %          | 5.7                                            | %          | 5.4 | % | 6.5 | % |
| Net income                                |       | 8.6                                             | %          | 9.1                                            | %          | 8.5 | % | 10.3 | % |
| EBITDA(1)                                 |       | 17.3                                            | %          | 18.2                                           | %          | 17.3 | % | 19.1 | % |

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(1)          See“—EBITDA.”

**Comparison of theThree Months Ended June 30, 2006 to the Three Months Ended June 30,2005**

*NetSales.*   Net sales decreased by $0.2 million, or0.7%, to $37.0 million for the three months ended June 30, 2006 (“thirdquarter of fiscal 2006”) from $37.2 million for the three months ended June 30,2005 (“third quarter of fiscal 2005”). Net sales of branded nutritionalsupplements and other natural products were relatively flat at $32.6 millionfor the third quarter of fiscal 2006 compared to $32.7 million for the thirdquarter of fiscal 2005. Other net sales were also relatively flat at $4.4million for the third quarter of fiscal 2006 compared to $4.5 million for thethird quarter of fiscal 2005. Management believes that the VMS Industrycontinues to have low growth rates and remains very competitive.

*GrossProfit.*   Gross profit increased by $0.5 million,or 2.2%, to $19.6 million for the third quarter of fiscal 2006 from $19.1million for the third quarter of fiscal 2005. As a percentage of net sales,gross profit increased to 52.9% for the third quarter of fiscal 2006 comparedto 51.4% for the third quarter of fiscal 2005. This increase in grossprofit was primarily attributable to decreased material costs as a percentageof net sales.

*Selling,General and Administrative.*   Selling, general andadministrative expenses were relatively flat at $13.9 million for the thirdquarter of fiscal 2006 compared to $13.7 million for the third quarter offiscal 2005.

*Amortizationof Intangibles.*   Amortization of intangibles was$0.1 million for the third quarter of fiscal 2006 and 2005. For each period,amortization expense was primarily related to intangible assets recorded inconnection with acquisitions.

*Interestand Other (Income)/Expense, Net.*   Net interestand other (income)/expense was $0.1 million for the third quarter of fiscal2006 and $0.2 million for the third quarter of fiscal 2005 and primarilyconsisted of interest expense on indebtedness under our revolving creditfacility.

*Provision for Income Taxes.*   Oureffective tax rate was 38.5% for the third quarter of fiscal 2006 and for the thirdquarter of fiscal 2005. In each period, our effective tax rate was higher thanthe federal statutory rate primarily due to state taxes.

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**Comparison of the Nine Months Ended June 30, 2006to the Nine Months Ended June 30, 2005**

*Net Sales.*   Netsales increased by $3.3 million, or 3.0%, to $114.7 million for the nine monthsended June 30, 2006 from $111.4 million for the nine months ended June 30,2005. Net sales of branded nutritional supplements and other natural productsincreased by $3.3 million, or 3.4%, to $101.6 million for the nine months endedJune 30, 2006 from $98.3 million for the nine months ended June 30,2005. This increase in net sales was primarily related to the integration ofthe March 2005 acquisition of the *Pioneer®* brand and to an increase in sales in certainbrands and customers within health and natural food stores. Other netsales remained flat at $13.1 million for both the nine months ended June 30,2006 and the nine months ended June 30, 2005, which included the benefitof the November 2004 acquisition of Pilgrim’s Natureway LLC.

*Gross Profit.*   Grossprofit increased by $3.0 million, or 5.2%, to $60.5 million for the nine monthsended June 30, 2006 from $57.5 million for the nine months ended June 30,2005. This increase in gross profit was primarily attributable to the increasein net sales. As a percentage of net sales, gross profit increased to 52.7% forthe nine months ended June 30, 2006 compared to 51.6% for the nine monthsended June 30, 2005. This increase in gross profit as a percentage of netsales was primarily attributable to decreased material costs as a percentage ofnet sales.

*Selling, General andAdministrative.*   Selling, general andadministrative expenses remained relatively flat at $41.8 million for the ninemonths ended June 30, 2006 compared to $41.2 million for the nine monthsended June 30, 2005. As a percentage of net sales, selling, general andadministrative expenses decreased to 36.5% for the nine months ended June 30,2006 from 37.0% for the nine months ended June 30, 2005. This decrease inselling, general and administrative expenses as a percentage of net sales wasprimarily attributable to the increase in net sales.

*Amortization ofIntangibles.*   Amortization of intangibles was$0.3 million for the nine months ended June 30, 2006 and 2005. For eachperiod, amortization expense was primarily related to intangible assetsrecorded in connection with acquisitions.

*Interest and Other(Income)/Expense, Net.*   Net interest and other(income)/expense for the nine months ended June 30, 2006 included otherincome of $1.1 million ($0.7 million after tax, or $0.06 per diluted share)related to the gain on the sale of our 31,340 square foot building located inPark City, Utah as well as $0.1 million for payments received assettlement of litigation to which we were a plaintiff. Exclusive of theseitems, net interest and other (income)/expense was $0.3 million for the ninemonths ended June 30, 2006 and $0.5 million for the nine months ended June 30,2005 and primarily consisted of interest expense on indebtedness under ourrevolving credit facility.

*Provision for Income Taxes.*   Oureffective tax rate was 38.5% for the nine months ended June 30, 2006 andfor the nine months ended June 30, 2005. In each period, our effective taxrate was higher than the federal statutory rate primarily due to state taxes.

**EBITDA**

EBITDA(a non-GAAP measure) is defined as earnings before net interest and other(income)/expense, taxes, depreciation and amortization. EBITDA has some inherent limitations in measuring operating performancedue to the exclusion of certain financial elements such as depreciation andamortization and is not necessarily comparable to other similarly titledcaptions of other companies due to potential inconsistencies in the method ofcalculation. Furthermore, EBITDA is not intended to be a substitute for cashflows from operating activities, as a measure of liquidity, or an alternativeto net income in determining our operating performance in accordance withgenerally accepted accounting principles. Our use of EBITDA should beconsidered within the following context:

·       Weacknowledge that plant and equipment (while less important in our line ofbusiness due to outsourcing alternatives) are necessary to earn revenue basedon our current business model.

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·       Ouruse of EBITDA as a measure of operating performance is not based on any beliefabout the reasonableness of excluding depreciation and amortization when measuring financial performance.

·       Ouruse of EBITDA is supported by the importance of EBITDA to the following keystakeholders:

·        **Analysts**—who estimate our projected EBITDA and otherEBITDA-based metrics in their independently developed financial models forinvestors;

·        **Creditors**—who evaluate our operating performance based oncompliance with certain EBITDA-based debt covenants;

·        **Investment Bankers**—who use EBITDA and other EBITDA-basedmetrics in their written evaluations and comparisons of companies within ourindustry; and

·        **Board of Directors and Executive Management**—who use EBITDAas an essential metric for evaluating management performance relative to ouroperating budget and bank covenant compliance, as well as our ability toservice debt and raise capital for growth opportunities, includingacquisitions, which are a critical component to our business strategy. Historically,we have recorded a monthly accrual for incentive compensation as a percentageof EBITDA, which has been paid out to executive management, as well as otheremployees upon completion of our annual audit.

Thefollowing table sets forth a reconciliation of net income to EBITDA for eachperiod included herein:

| ** **                                   | ** ** | **Three months  ended June 30,** | ** ** | **Nine months  ended June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                        | ** ** | **2006**                                       | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net income                                   |       | $                                               | 3,203      |                                           | $          | 3,361 |   | $ | 9,495 |   | $ | 11,854 |   |
| Provision for  income taxes                  |       | 2,006                                           |       | 2,104                                          |       | 5,945 |   | 7,420 |   |
| Interest and  other (income)/expense, net(1) |       | 162                                             |       | 138                                            |       | 542 |   | (893 | ) |
| Depreciation and  amortization               |       | 1,059                                           |       | 1,138                                          |       | 3,279 |   | 3,476 |   |
| EBITDA                                       |       | $                                               | 6,430      |                                           | $          | 6,741 |   | $ | 19,261 |   | $ | 21,857 |   |

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(1)          Includes amortization ofdeferred financing fees and losses associated with fixed asset disposals. Thenine months ended June 30, 2006 also includes a gain of $1,105 on the sale of abuilding, which gain was excluded in determining EBITDA.

Our EBITDA increased to $6.7 million for the thirdquarter of fiscal 2006 from $6.4 million for the third quarter of fiscal 2005. EBITDAas a percentage of net sales increased to 18.2% for the third quarter of fiscal2006 from 17.3% for the third quarter of fiscal 2005.

Our EBITDA increased to$21.9 million for the nine months ended June 30, 2006 from $19.3 millionfor the nine months ended June 30, 2005. EBITDA as a percentage of netsales increased to19.1% for the nine months ended June 30, 2006 from 17.3%for the nine months ended June 30, 2005.

**Seasonality**

We believe that ourbusiness is characterized by minor seasonality. However, sales to anyparticular customer can vary substantially from one quarter to the next basedon such factors as industry trends, timing of promotional discounts,international economic conditions and acquisition-related activities. Excludingthe effect of acquisitions, we have historically recorded higher brandedproducts sales volume during the second fiscal quarter (January thruMarch) due to increased interest in health-related products among consumersfollowing the holiday season.

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**Liquidity andCapital Resources**

We had working capital of $28.7 million as of June 30,2006 compared to $26.8 million as of September 30, 2005. This increase inworking capital was primarily the result of an increase in inventories and adecrease in accrued expenses, partially offset by a decrease in cash and anincrease in the current portion of long-term debt.

Net cash provided by operating activities for the ninemonths ended June 30, 2006 was $9.0 million compared to $14.0 million forthe comparable period in fiscal 2005. This decrease in net cash provided byoperating activities for the nine months ended June 30, 2006 was primarilyattributable to a decrease in cash provided by changes in assets andliabilities, net of effects of acquisitions, as well as the gain related to thesale of our building located in Park City, Utah, partially offset by anincrease in net income.

Net cash used in investing activities was $8.3 millionfor the nine months ended June 30, 2006 compared to $10.2 million for thecomparable period in fiscal 2005. Our investing activities during these periodsconsisted primarily of acquisitions of businesses, capital expenditures and forthe nine months ended June 30, 2006, proceeds of $4.5 million related tothe sale of our building. Capital expenditures during these periods relatedprimarily to real estate, distribution and manufacturing equipment, buildingimprovements related to facility consolidation efforts and information systems,including retail technology.

On March 31, 2006, we purchased the RapidResponse Center in Ogden, Utah, which (when fully converted) will provide usapproximately 410,000 square feet of gross building space located onapproximately 19.2 acres, which includes available land for expansion, for $4.2 millionin cash. The Rapid Response Center is the central facility where we are, andhave been, consolidating operations, including raw material warehousing,manufacturing, packaging, distribution and administrative offices. We werepreviously leasing most of this facility. We intend to finance anticipatedcapital expenditures through internally generated cash flow and, if necessary,through funds provided under our revolving credit facility.

Net cash used in financing activities was $2.0 millionfor the nine months ended June 30, 2006 compared to $3.9 million for thecomparable period in fiscal 2005. During these periods, financing activitiesprimarily related to borrowings and repayments under our revolving creditfacility, purchases of common stock for treasury and proceeds from the issuanceof common stock. During the nine months ended June 30, 2006, we purchaseda total of 234,350 shares of our common stock for an aggregate price of $3.4 million.

On July 26, 2006, our Board of Directors approvedthe addition of 1 million shares to our previously approved share repurchaseprogram, which means we are currently authorized to buy up to 1.15 milliontotal shares of our outstanding common stock. Under this approved sharerepurchase program, we may purchase common stock from time to time on the openmarket and in individually negotiated transactions. The amount and timing ofany purchases will be dependent upon a number of factors, including the priceand availability of our shares and general market conditions.

Our current revolving credit facility had a totalcredit limit of $47.5 million at June 30, 2006. The total credit limitwill be reduced by $1.25 million in September 2006. Borrowings under therevolving credit facility are collateralized by substantially all our assets.At our election, borrowings bear interest at the applicable Eurodollar Rateplus a variable margin or at a base rate, which is the higher of the FederalFunds Rate plus 0.5% or the Prime Lending Rate, plus a variable margin. AtJune 30, 2006, the applicable weighted-average interest rate forborrowings was 6.66%. We are also required to pay a variable quarterly fee onthe unused balance under the revolving credit facility. At June 30, 2006,the applicable rate was 0.25%. Accrued interest on Eurodollar Rate borrowingsis payable based on elected intervals of one, two or three months. Accruedinterest on base rate borrowings is payable quarterly. The revolving creditfacility matures on January 28, 2007, and we are required to repay allprincipal outstanding under the revolving credit facility on such date. We arein the process of amending or replacing this credit facility.

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The revolving credit facility contains restrictivecovenants, including restrictions on incurring other indebtedness, limitationson capital expenditures and requirements that we maintain certain financialratios. As of June 30, 2006, we were in compliance with these restrictivecovenants. Upon the occurrence of a default, the lender has various remedies orrights, which may include proceeding against the collateral or requiring us torepay all amounts outstanding under the revolving credit facility.

A key component of our business strategy is to seek tomake additional acquisitions, which may require that we obtain additionalfinancing, which could include the incurrence of substantial additionalindebtedness or the issuance of additional stock. We believe that borrowingsunder our current revolving credit facility or a replacement credit facility,together with cash flows from operations, will be sufficient to make requiredpayments under the current credit facility or a replacement credit facility,and to make anticipated capital expenditures and fund working capital needs forfiscal 2006.

Oursignificant non-cancelable contractual obligations as of June 30, 2006were as follows:

| ** **                                | ** ** | **Payments Due By Period** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | ** **                 | ** ** | **Less Than** | ** ** | **1-3** | ** ** | **4-5** | ** ** | **After** | ** ** |
| **Contractual Obligations**          | ** ** | ** **                 | ** ** | **Total** | ** ** | **1 Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)** | ** ** |
| Revolving credit  facility                |       | $                          | 3,500      |   |   | $ | 3,500 |   |   | $ | — |   | $ | — |   |   | $ | — |   |   |
| Interest on revolving  credit facility(a) |       | 217                        |       |   | 217 |   |   | — |   | — |   |   | — |   |   |
| Operating leases                          |       | 4,813                      |       |   | 1,971 |   |   | 1,867 |   | 872 |   |   | 103 |   |   |
| Total                                     |       | $                          | 8,530      |   |   | $ | 5,688 |   |   | $ | 1,867 |   | $ | 872 |   |   | $ | 103 |   |   |
|                                           |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)     Represents estimated interestobligations associated with our outstanding revolving credit facility balanceof $3.5 million at June 30, 2006, assuming no principal payments are madebefore maturity, a weighted-average interest rate of 6.66% and anunderutilization fee rate of 0.25%.

**New AccountingStandards**

We adopted Statement of Financial Accounting StandardsNo. 123R, *Share-Based Payment* (“SFAS 123R”)effective October 1, 2005, using the modified prospective applicationmethod. SFAS 123R requires companies to record compensation expense for thevalue of all outstanding and unvested share-based payments, including employeestock options and similar awards. As of October 1, 2005, we had nooutstanding and unvested share-based payments. Also, on September 30,2005, we terminated the 1995 Stock Option Plan, the 1998 Stock Incentive Planand the 1998 Non-Employee Director Stock Option Plan. After September 30,2005, no new awards of any kind will be granted under any of these plans. As aresult, we did not recognize any compensation expense related to share-basedpayments in our consolidated financial statements for the three and nine monthsended June 30, 2006.

Based on our review ofother new accounting standards released during the quarter ended June 30,2006, we did not identify any standard requiring adoption that would have asignificant impact on our consolidated financial statements for the periodsreported.

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**Inflation**

Inflation affects the costof raw materials, goods and services used by us. In recent years, inflation hasbeen modest. The competitive environment somewhat limits our ability to recoverhigher costs resulting from inflation by raising prices. We seek to mitigatethe adverse effects of inflation primarily through improved productivity andcost containment programs. We do not believe that inflation has had a materialimpact on our results of operations for the periods presented, except withrespect to increased costs in manufacturing, packaging and distributionresulting from increased fuel and other petrochemical costs, as well aspayroll-related costs, insurance premiums and other costs arising from orrelated to government imposed regulations.

**Forward-LookingStatements**

This Form 10-Qcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934. These statements relate to our future plans, objectives, expectations,intentions and financial performance and the assumptions that underlie thesestatements. These statements involve known and unknown risks, uncertainties andother factors that may cause actual results, level of activity, performance orachievements to be materially different from any future results, levels ofactivity, performance or achievements expressed or implied by these statements.We undertake no obligation to update forward-looking statements to reflectevents or circumstances occurring after the date this Form 10-Q wasfirst filed with the SEC. Important factors that may cause results to differfrom these forward-looking statements include, but are not limited to,government regulations, product liability claims and litigation, insurance coverageissues, a decrease in or slowing of the growth rate of the vitamin, mineral andsupplement market, the success of the healthy foods channel, consumerperception of the safety and quality of our products and similar products,competition, intellectual property rights of other parties, the loss of keypersonnel, disruptions from acquisitions, issues with obtaining raw materialsof adequate quality or quantity, problems with information management systems,manufacturing efficiencies and operations, litigation generally, the volatilityof the stock market generally and of our stock specifically, a general lack ofadequate industry analyst coverage, and other factors indicated from time totime in our SEC reports, copies of which are available upon request from ourinvestor relations group or which may be obtained at the SEC’s website(www.sec.gov).

**Item 3.**                        Quantitativeand Qualitative Disclosures about Market Risk

At our election, borrowings under our revolving creditfacility bear interest at the applicable Eurodollar Rate plus a variable marginor at a base rate, which is the higher of the Federal Funds Rate plus 0.5% orthe Prime Lending Rate, plus a variable margin. At June 30, 2006, theapplicable weighted-average interest rate for borrowings was 6.66% and wehad total borrowings outstanding of $3.5 million. To date, we have not obtainedinterest rate protection with respect to these borrowings.

With respect to ourinternational operations, we are subject to currency fluctuations; however, wedo not believe that these fluctuations would have a material adverse impact onour financial position because the majority of our net sales to foreigncountries are transacted in U.S. dollars. To date, we have not hedged any ofour potential foreign currency exposures.

**Item 4.**                        Controlsand Procedures

*Evaluationof Disclosure Controls and Procedures.**  *We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in ourExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to 

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our management, includingour principal executive and principal financial officers, as appropriate, toallow for timely decisions regarding required disclosure.

In designing and evaluating the disclosure controlsand procedures, we recognize that any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance of achievingthe desired control objectives, and we are required to apply our judgment inevaluating the cost-benefit relationship of possible controls andprocedures.

As required by SEC Rule 13a-15(b), wecarried out an evaluation, under the supervision of and with the participationof our management, including our principal executive and principal financialofficers, of the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the period covered by this report.Based on the foregoing, our principal executive and principal financialofficers have concluded that our disclosure controls and procedures wereeffective.

*Changesin Internal Control Over Financial Reporting.*   Therewere no changes in our internal control over financial reporting that occurredduring the last fiscal quarter that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

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**PART II—OTHERINFORMATION**

**Item 1.**                        LegalProceedings

As discussed in our other filings, we are subject toregulation by a number of federal, state and foreign agencies and are involvedin various legal matters arising in the normal course of business.

We carry insurance coverage in the types and amountsthat we consider reasonably adequate to cover the risks we face in the industryin which we compete. However, our current liability policy excludes claimsrelated to certain ingredients, including products containing ephedra.

In our opinion, theoutcomes of individual regulatory and legal matters in which we are presentlyinvolved are not probable and no estimate can be made of the range of potentialgains or losses. While incapable of estimation, in the opinion of management,the individual regulatory and legal matters in which we are involved are notexpected to have a material adverse effect on our financial position, resultsof operations or cash flows.

**Item 1A.**                RiskFactors

There have been nomaterial changes in our risk factors from those disclosed in our 2005 AnnualReport on Form 10-K.

**Item 2.**                        UnregisteredSales of Equity Securities and Use of Proceeds

We did not sell any unregistered equity securitiesduring the period covered by this Form 10-Q for the Quarterly PeriodEnded June 30, 2006.

Duringfiscal 2000, our Board of Directors approved a share purchase programauthorizing us to buy up to 1,500,000 shares of our common stock, of which150,428 shares may yet be purchased as of June 30, 2006. Purchases underthis program during the three months ended June 30, 2006 occurred in April andJune as follows:

| ** **        | ** ** | ** **            | ** ** | ** **             | ** ** | **Total Number** | ** ** | ** **               | ** ** |
|-------------------|------------|-----------------------|------------|------------------------|------------|-----------------------|------------|--------------------------|------------|
| ** **        | ** ** | ** **            | ** ** | ** **             | ** ** | **of Shares**    | ** ** | **Maximum**              | ** ** |
| ** **        | ** ** | ** **            | ** ** | ** **             | ** ** | **Purchased as** | ** ** | **Number of**       | ** ** |
| ** **        | ** ** | ** **            | ** ** | ** **             | ** ** | **Part of**      | ** ** | **Shares that**     | ** ** |
| ** **        | ** ** | **Total Number** | ** ** | **Average Price** | ** ** | **Publicly**          | ** ** | **May Yet Be** | ** ** |
| ** **        | ** ** | **of Shares**    | ** ** | **Paid Per**      | ** ** | **Announced**         | ** ** | **Purchased Under** | ** ** |
| **Period**        | ** ** | ** **            | ** ** | **Purchased**          | ** ** | **Share**             | ** ** | **Plan**                 | ** ** | **the Plan** | ** ** |
| 4/1/06 to 4/30/06 |       |                  | 80,000     |                   |       |                  | $          | 15.09                    |       |   |   | 80,000 |   |   |   |   |   |   |
| 6/1/06 to 6/30/06 |       |                  | 15,741     |                   |       |                  | 15.10      |                     |       |   | 15,741 |   |   |   |   |   |   |
| Total             |       |                  | 95,741     |                   |       |                  | $          | 15.09                    |       |   |   | 95,741 |   |   |   | 150,428 |   |   |
|                   |            |                       |            |                        |            |                       |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

**OnJuly 26, 2006, our Board of Directors approved the addition of 1,000,000shares to our previously approved share repurchase program, which means we arecurrently authorized to buy up to 1,150,428 total shares of our outstandingcommon stock. Under this approved share repurchase program, we may purchasecommon stock from time to time on the open market and in individuallynegotiated transactions. The amount and timing of any purchases will bedependent upon a number of factors, including the price and availability of ourshares and general market conditions.**

**Item6.**                        Exhibits

| 31.1 |   | Certifications Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                      |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------|
| 32.1 |   | Certifications  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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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:                                   | July 27, 2006 |   | 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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