**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, 2004**

**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, 2nd 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 mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

YES   x     NO   o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES   x     NO   o

At July 29, 2004, the registrant had 11,678,068shares 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,  2003 and June 30, 2004                                                    |   |   | 3 |   |
|          |       |                  |       | Condensed Consolidated  Statements of Operations and Comprehensive Income—Three Months and Nine Months  Ended June 30, 2003 and 2004 |   |   | 4 |   |
|          |       |                  |       | Condensed Consolidated  Statements of Cash Flows—Nine  Months Ended June 30, 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                                                    |   |   | 11 |   |
|          |       | Item 3.               |       | Quantitative  and Qualitative Disclosures about Market Risk                                                                                    |   |   | 17 |   |
|          |       | Item 4.               |       | Controls and  Procedures                                                                                                                       |   |   | 17 |   |
| Part II. |       | Other Information     |       |                                                                                                                                           | 19 |   |
|          |       | Item 1.               |       | Legal Proceedings                                                                                                                              |   |   | 19 |   |
|          |       | Item  6.              |       | Exhibits and Reports on Form 8-K                                                                                                          |   |   | 19 |   |
|               |            |                       |            |                                                                                                                                                |  |  |  |  |  |  |

 

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**PART I**—FINANCIAL INFORMATION

**Item1.**   FinancialStatements

**NUTRACEUTICALINTERNATIONAL CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(unaudited)(dollars in thousands)**
| ** **                                | ** ** | **September 30,  2003(1)** | ** ** | **June 30,  2004** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|-------------------------|------------|
| **ASSETS**                                |       |                            |       |                    |       |   |   |
| Current assets                            |       |                            |       |                    |       |   |   |
| Cash                                      |       |                            | $          | 2,196                   |       |   | $ | 3,077 |   |
| Accounts receivable, net                  |       |                            | 10,514     |                    |       | 10,135 |   |
| Inventories, net                          |       |                            | 20,054     |                    |       | 24,072 |   |
| Prepaid expenses and other current assets |       |                            | 2,040      |                    |       | 4,651 |   |
| Deferred income taxes                     |       |                            | 1,190      |                    |       | 1,265 |   |
| Total current assets                      |       |                            | 35,994     |                    |       | 43,200 |   |
| Property, plant and equipment, net        |       |                            | 21,148     |                    |       | 22,335 |   |
| Goodwill                                  |       |                            | 10,083     |                    |       | 13,827 |   |
| Intangible  assets, net                   |       |                            | 4,386      |                    |       | 7,114 |   |
| Other non-current  assets, net            |       |                            | 1,007      |                    |       | 841 |   |
| Deferred income  taxes, net               |       |                            | 9,165      |                    |       | 8,213 |   |
|                                      |       |                            | $          | 81,783                  |       |   | $ | 95,530 |   |

 
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** |   |   |   |   |   |   |   |
|-----------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Current liabilities                           |   |   |   |   |   |   |   |
| Accounts payable                              |   |   | $      | 8,530  |   |   | $      | 9,423 |   |
| Accrued expenses                              |   |   | 5,201  |   |   | 5,546  |   |
| Total current liabilities                     |   |   | 13,731 |   |   | 14,969 |   |
| Long-term debt                                |   |   | 12,500 |   |   | 9,500  |   |
| Other non-current  liabilities                |   |   | 450    |   |   | 225    |   |
| Total liabilities                             |   |   | 26,681 |   |   | 24,694 |   |
| Stockholders’  equity                    |   |   |   |   |   |   |   |
| Common stock                                  |   |   | 113    |   |   | 119    |   |
| Additional paid-in capital                    |   |   | 39,431 |   |   | 45,323 |   |
| Retained earnings                             |   |   | 16,846 |   |   | 27,084 |   |
| Accumulated other comprehensive income        |   |   | 139    |   |   | 162    |   |
| Treasury stock                                |   |   | (1,427 | )      |   | (1,852 | )      |
| Total stockholders’ equity               |   |   | 55,102 |   |   | 70,836 |   |
|                                          |   |   | $      | 81,783 |   |   | $      | 95,530 |   |

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(1)          The condensedconsolidated balance sheet as of September 30, 2003 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 CONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME(unaudited)(dollars in thousands, except per share data)**
| ** **                                          | ** ** | **Three months ended June 30,** | ** ** | **Nine months ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2003**                                            | ** ** | **2004**                                           | ** ** | **2003** | ** ** | **2004** | ** ** |
| Net sales                                           |       | $                                                   | 29,690     |                                               | $          | 33,787 |   | $ | 89,177 |   | $ | 104,614 |   |
| Cost of sales                                       |       | 14,205                                              |       | 15,984                                             |       | 42,968 |   | 49,785 |   |
| Gross profit                                        |       | 15,485                                              |       | 17,803                                             |       | 46,209 |   | 54,829 |   |
| Operating expenses                                  |       |                                                |       |                                               |       |   |   |   |   |
| Selling, general and administrative                 |       | 10,152                                              |       | 12,808                                             |       | 30,637 |   | 37,251 |   |
| Amortization of intangible assets                   |       | 39                                                  |       | 93                                                 |       | 39 |   | 281 |   |
| Income from  operations                             |       | 5,294                                               |       | 4,902                                              |       | 15,533 |   | 17,297 |   |
| Interest and  other expense, net                    |       | 129                                                 |       | 172                                                |       | 457 |   | 650 |   |
| Income before  provision for income taxes           |       | 5,165                                               |       | 4,730                                              |       | 15,076 |   | 16,647 |   |
| Provision for  income taxes                         |       | 1,963                                               |       | 1,821                                              |       | 5,729 |   | 6,409 |   |
| Net income                                          |       | $                                                   | 3,202      |                                               | $          | 2,909 |   | $ | 9,347 |   | $ | 10,238 |   |
| Other  comprehensive income                         |       |                                                |       |                                               |       |   |   |   |   |
| Foreign currency translation adjustment, net of tax |       | 47                                                  |       | (3                                                 | )          | 81 |   | 23 |   |
| Comprehensive  income                               |       | $                                                   | 3,249      |                                               | $          | 2,906 |   | $ | 9,428 |   | $ | 10,261 |   |
| Net income per  common share                        |       |                                                |       |                                               |       |   |   |   |   |
| Basic                                               |       | $                                                   | 0.29       |                                               | $          | 0.25 |   | $ | 0.84 |   | $ | 0.91 |   |
| Diluted                                             |       | 0.28                                                |       | 0.24                                               |       | 0.81 |   | 0.87 |   |
| Weighted average  common shares outstanding         |       |                                                |       |                                               |       |   |   |   |   |
| Basic                                               |       | 11,152,473                                          |       | 11,496,923                                         |       | 11,179,020 |   | 11,290,942 |   |
| Dilutive effect of stock options and warrants       |       | 385,707                                             |       | 526,193                                            |       | 401,059 |   | 499,120 |   |
| Diluted                                             |       | 11,538,180                                          |       | 12,023,116                                         |       | 11,580,079 |   | 11,790,062 |   |

 

 

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

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**NUTRACEUTICALINTERNATIONAL CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)(dollars in thousands)**
| ** **                                                                        | ** ** | **Nine months ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2003**                                           | ** ** | **2004** | ** ** |
| **Cash flows from operating  activities**                                         |       |                                               |       |   |   |
| Net income                                                                        |       | $                                                  | 9,347      |   | $ | 10,238 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities |       |                                               |       |   |   |
| Depreciation and amortization                                                     |       | 2,888                                              |       | 3,207 |   |
| Amortization of deferred financing fees                                           |       | 137                                                |       | 137 |   |
| Loss on disposals of property and equipment                                       |       | 15                                                 |       | 88 |   |
| Deferred income taxes                                                             |       | 795                                                |       | 964 |   |
| Tax benefit from stock option exercises                                           |       | 55                                                 |       | 3,193 |   |
| Changes in assets  and liabilities, net of effects of acquisitions                |       |                                               |       |   |   |
| Accounts receivable, net                                                          |       | 899                                                |       | 1,372 |   |
| Inventories, net                                                                  |       | 1,904                                              |       | (2,725 | ) |
| Prepaid expenses and other current assets                                         |       | (244                                               | )          | (2,540 | ) |
| Other non-current assets, net                                                     |       | (61                                                | )          | 20 |   |
| Accounts payable                                                                  |       | (1,158                                             | )          | 893 |   |
| Accrued expenses                                                                  |       | 1,029                                              |       | 494 |   |
| Net cash provided by operating activities                                         |       | 15,606                                             |       | 15,341 |   |
| **Cash  flows from investing activities**                                         |       |                                               |       |   |   |
| Acquisitions of  businesses, net of cash acquired                                 |       | (15,009                                            | )          | (9,388 | ) |
| Payments on  non-compete agreements                                               |       | (325                                               | )          | — |   |
| Purchases of  property and equipment                                              |       | (2,027                                             | )          | (4,132 | ) |
| Net cash used in investing activities                                             |       | (17,361                                            | )          | (13,520 | ) |
| **Cash  flows from financing activities**                                         |       |                                               |       |   |   |
| Payments on other  non-current liabilities                                        |       | —                                             |       | (225 | ) |
| Proceeds from  long-term debt                                                     |       | 13,500                                             |       | 9,000 |   |
| Payments on  long-term debt                                                       |       | (10,000                                            | )          | (12,000 | ) |
| Proceeds from  issuances of common stock                                          |       | 450                                                |       | 2,705 |   |
| Purchases of  common stock for treasury                                           |       | (882                                               | )          | (425 | ) |
| Net cash provided by (used in) financing activities                               |       | 3,068                                              |       | (945 | ) |
| Effect of exchange rate changes on cash                                           |       | 33                                                 |       | 5 |   |
| Net increase in cash                                                              |       | 1,346                                              |       | 881 |   |
| Cash at beginning  of period                                                      |       | 1,257                                              |       | 2,196 |   |
| Cash at end of period                                                             |       | $                                                  | 2,603      |   | $ | 3,077 |   |

 

 

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 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, 2004, the results of theiroperations for the three months and nine months ended June 30, 2003 and2004 and their cash flows for the nine months ended June 30, 2003 and2004, in conformity with accounting principles generally accepted in the UnitedStates of America for interim financial information applied on a consistentbasis. The results for the three months and nine months ended June 30,2004 are not necessarily indicative of the results to be expected for the fullfiscal 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, 2003, which was filed with the Securities and ExchangeCommission on November 25, 2003.

**2.**   INVENTORIES,NET

Inventories,net of reserves for slow moving, obsolete and/or damaged inventory, werecomprised of the following:
| ** **      | ** ** | **September 30,  2003** | ** ** | **June 30,  2004** | ** ** |
|-----------------|------------|------------------------------|------------|-------------------------|------------|
| Raw materials   |       |                         | $          | 5,619                   |       |   | $ | 6,924 |   |
| Work-in-process |       |                         | 2,715      |                    |       | 5,932 |   |
| Finished goods  |       |                         | 11,720     |                    |       | 11,216 |   |
|            |       |                         | $          | 20,054                  |       |   | $ | 24,072 |   |

 

**3.**   ACQUISITIONS

On May 14, 2004, the Company acquired the *Natural Balance*® brand of nutritional supplements bypurchasing substantially all of the operating assets of Natural Balance, Inc.On June 8, 2004, the Company acquired the *Montana BigSky*TM brand of nutritional supplements by purchasing selected assetsof Montana Naturals, Inc. These acquisitions are in keeping with theCompany’s business strategy of consolidating the fragmented industry where itcompetes.

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

Theaggregate purchase price of these two acquisitions was approximately $9,529. Theseacquisitions were accounted for using the purchase method of accounting. Accordingly,the aggregate purchase price was assigned to the assets acquired andliabilities assumed based on their fair market values at the respective datesof acquisition. The excess of aggregate purchase price over the fair marketvalues of the assets acquired and liabilities assumed was classified asgoodwill. The Company’s Condensed Consolidated Statements of Operations andComprehensive Income presented herein include the activities of these acquiredbusinesses from their respective dates of acquisition. The following reflectsthe allocation of the aggregate purchase price for these acquisitions to theaggregate assets acquired and liabilities assumed:
| Current assets                 |   | $     | 2,520  |   |
|--------------------------------|--------|-------|--------|--------|
| Property, plant  and equipment |   | 86    |   |
| Goodwill                       |   | 4,150 |   |
| Intangible assets              |   | 3,000 |   |
| Current  liabilities           |   | (227  | )      |
|                           |   | $     | 9,529  |   |

 

During the nine months ended June 30, 2004, theCompany recorded purchase price reductions of $141 and non-cash purchaseaccounting adjustments of $265 related to its fiscal 2003 acquisitions.

The acquired intangibleassets represent trademarks and tradenames, which have indefinite lives and arenot subject to amortization.

**4.**   GOODWILLAND INTANGIBLE ASSETS

Thechange in the carrying amount of goodwill from September 30, 2003 to June 30,2004 was as follows:
| ** **                                                          | ** ** | **Goodwill** | ** ** |
|---------------------------------------------------------------------|------------|--------------|------------|
| Balance as of September 30, 2003                               |       | $            | 10,083     |   |
| Purchase  accounting adjustments related to fiscal 2003 acquisitons |       | (406         | )          |
| Goodwill  attributable to fiscal 2004 acquisitions                  |       | 4,150        |       |
| Balance as of  June 30, 2004                                   |       | $            | 13,827     |   |

 

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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, 2003 and June 30,2004 were as follows:
| ** **                                      | ** ** | **September 30, 2003** | ** ** | **June 30, 2004**   | ** ** | **Weighted-**             | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|-------------------------------|------------|---------------------------|------------|
| ** **                                      | ** ** | **Gross  Carrying  Amount**      | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Average  Amortization  Period (Years)** | ** ** |
| Intangible assets subject to amortization:      |       |                             |       |                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-compete agreements                          |       |                             | $          | 1,000                         |       |                      |       | $ | (83 | ) |   |   | $ | 917 |   |   |   | $ | 1,000 |   |   |   | $ | (333 | ) |   |   | $ | 667 |   |   |   | 3 |   |   |
| Trademarks/trade  names/patents                 |       |                             | 277        |                          |       |                      | (166       | ) |   |   | 111 |   |   |   | 286 |   |   |   | (197 | ) |   |   | 89 |   |   |   | 5 |   |   |
|                                            |       |                             | 1,277      |                          |       |                      | (249       | ) |   |   | 1,028 |   |   |   | 1,286 |   |   |   | (530 | ) |   |   | 756 |   |   |   |   |   |   |
| Intangible  assets not subject to amortization: |       |                             |       |                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trademarks/trade  names/licenses                |       |                             | 3,358      |                          |       |                      | —     |   |   |   | 3,358 |   |   |   | 6,358 |   |   |   | — |   |   |   | 6,358 |   |   |   |   |   |   |
|                                            |       |                             | $          | 4,635                         |       |                      |       | $ | (249 | ) |   |   | $ | 4,386 |   |   |   | $ | 7,644 |   |   |   | $ | (530 | ) |   |   | $ | 7,114 |   |   |   |   |   |   |

 

Estimatedamortization expense related to the net carrying amount of $756 for intangibleassets subject to amortization at June 30, 2004 is as follows:
| **Year Ending September 30,** | ** ** | ** ** | ** ** | **Estimated  Amortization  Expense(1)** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------------------------|------------|
| 2004                                         |       |       | $          | 93                                      |       |   |
| 2005                                         |       |       | 370        |                                    |       |
| 2006                                         |       |       | 276        |                                    |       |
| 2007                                         |       |       | 12         |                                    |       |
| 2008                                         |       |       | 4          |                                    |       |
| Thereafter                                   |       |       | 1          |                                    |       |
|                                         |       |       | $          | 756                                     |       |   |

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(1)          Estimated amortizationexpense for the year ending September 30, 2004 includes only amortizationto be recorded after June 30, 2004.

**5.**   CAPITALSTOCK

Stock options to purchase218,744 shares of common stock that were outstanding at June 30, 2003 werenot included in the computation of diluted earnings per share because theexercise prices of these stock options were greater than the average shareprice of the Company’s common stock and, therefore, the effect would have beenantidilutive. All stock options outstanding at June 30, 2004 were includedin the computation of diluted earnings per share. All warrants outstanding atJune 30, 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)**

**6.**   SHAREPURCHASE

During fiscal 2000, theCompany’s Board of Directors approved a share purchase program authorizing theCompany to buy up to 1,500,000 shares of its outstanding common stock. Underthis program, the Company purchased 37,716 shares during the nine months ended June 30,2004 at an aggregate cost of $425. Total purchases under this share purchaseprogram from inception to June 30, 2004 were 713,128 shares of commonstock at an aggregate cost of $3,536.

**7.**   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.

Net sales outside theUnited States were less than 10% of consolidated net sales for the three monthsand nine months ended June 30, 2003 and 2004.

**8.**   STOCK-BASEDCOMPENSATION

The Company accounted for its stock-based employeecompensation plans using the intrinsic value method prescribed by AccountingPrinciples Board Opinion No. 25, *Accounting for StockIssued to Employees*. No stock-based employee compensation cost wasreflected in net income for the three and nine months ended June 30, 2003and 2004, as all options granted under those stock-based employee compensationplans had exercise prices equal to the market values of the underlying commonshares on the dates of grant. The following table illustrates the effect on netincome and earnings per share as if the Company had applied the fair valuerecognition provisions of Statement of Financial Accounting Standards No. 123,*Accounting for Stock-Based Compensation*,to stock-based employee compensation.

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**NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (unaudited) (dollars in thousands, except per share data)**
| ** **                                                                                                                                        | ** ** | **Three months ended June 30,**                                          | ** ** | **Nine months ended June 30,**                                           | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                        | ** ** | **       2003       ** | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** | **       2004       ** | ** ** |
| Net income, as reported                                                                                                                           |       |                                                                                         | $          | 3,202                                                                                        |       |   |   | $ | 2,909 |   |   |   | $ | 9,347 |   |   |   | $ | 10,238 |   |   |
| Add: Stock-based employee compensation expense  included in reported net income, net of related tax effects                                       |       |                                                                                         | —     |                                                                                         |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Deduct: Total stock-based employee compensation  expense determined under the fair value based method for all awards, net of  related tax effects |       |                                                                                         | (59        | )                                                                                            |       |   | (161 | ) |   |   | (177 | ) |   |   | (471 | ) |   |
| Pro forma net income                                                                                                                              |       |                                                                                         | $          | 3,143                                                                                        |       |   |   | $ | 2,748 |   |   |   | $ | 9,170 |   |   |   | $ | 9,767 |   |   |
| Earnings per  share                                                                                                                               |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic—as reported                                                                                                                            |       |                                                                                         | $          | 0.29                                                                                         |       |   |   | $ | 0.25 |   |   |   | $ | 0.84 |   |   |   | $ | 0.91 |   |   |
| Diluted—as reported                                                                                                                          |       |                                                                                         | 0.28       |                                                                                         |       |   | 0.24 |   |   |   | 0.81 |   |   |   | 0.87 |   |   |
| Basic—pro forma                                                                                                                              |       |                                                                                         | $          | 0.28                                                                                         |       |   |   | $ | 0.24 |   |   |   | $ | 0.82 |   |   |   | $ | 0.87 |   |   |
| Diluted—pro forma                                                                                                                            |       |                                                                                         | 0.27       |                                                                                         |       |   | 0.23 |   |   |   | 0.79 |   |   |   | 0.83 |   |   |

 

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**Item 2.**   Management’s Discussion andAnalysis 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, Item1.

The Company is an integrated marketer, distributor,retailer and manufacturer of branded nutritional supplements and other naturalproducts sold primarily to and through domestic health and natural food stores.Internationally, the Company sells its branded products to and through healthand natural product distributors and retailers. The Company’s core businessstrategy is to acquire, integrate and operate, from beginning to end, themarketing, distribution, retailing and manufacturing operations of businessesin the natural products industry. The Company believes that the consolidationand integration of acquired businesses provides ongoing financial synergiesthrough increased scale and market penetration, as well as strengthenedcustomer relationships.

The Company sells its branded products under thetrademarks *Solaray*®*, KAL*®*, Nature’s Life*®*, Natural Balance*®*, NaturalMax*®*, VegLife*®*, Premier One*®*, Sunny Green*®*, Natural Sport*®*, ActiPet*®*, Action Labs*®*, Thompson*®*, Body Gold*®*, Montana Big Sky*TMand *FunFresh Foods*TM. The Company also sellsbranded bulk products and unbranded custom blends under the trademarks *Monarch Nutritional Laboratories*TM and *Great BasinBotanicalsTM*. Under the name *Woodland Publishing*TM,the Company publishes, prints and markets a line of books and booklets to,among others, book distributors, national retail bookstores and health andnatural food stores. The Company’s neighborhood natural food markets operateunder the trade names *The Real Food Company*TMand *Thom’s Natural Foods*TM and its healthfood stores operate under the trade name *Arizona Health Foods*TM.The Company also distributes the branded 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. and MontanaNaturals, Inc. As a result of these acquisitions, internal growth and costmanagement, management believes that the Company is well positioned to continueto capitalize on the consolidation the Company believes is occurring in the VMSIndustry.

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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 June 30,**                        | ** ** | **Nine months ended June 30,**                               | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **      2003     ** | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** | **      2004      ** | ** ** |
| Net sales                                 |       |                                                                       | 100.0      | %                                                                                |       |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of sales                             |       |                                                                       | 47.8       | %                                                                                |       |   | 47.3 | % |   |   | 48.2 | % |   |   | 47.6 | % |   |
| Gross profit                              |       |                                                                       | 52.2       | %                                                                                |       |   | 52.7 | % |   |   | 51.8 | % |   |   | 52.4 | % |   |
| Selling, general and administrative       |       |                                                                       | 34.3       | %                                                                                |       |   | 37.9 | % |   |   | 34.4 | % |   |   | 35.6 | % |   |
| Amortization of intangible assets         |       |                                                                       | 0.1        | %                                                                                |       |   | 0.3 | % |   |   | 0.0 | % |   |   | 0.3 | % |   |
| Income from  operations                   |       |                                                                       | 17.8       | %                                                                                |       |   | 14.5 | % |   |   | 17.4 | % |   |   | 16.5 | % |   |
| Interest and other expense, net           |       |                                                                       | 0.4        | %                                                                                |       |   | 0.5 | % |   |   | 0.5 | % |   |   | 0.6 | % |   |
| Income before  provision for income taxes |       |                                                                       | 17.4       | %                                                                                |       |   | 14.0 | % |   |   | 16.9 | % |   |   | 15.9 | % |   |
| Provision for income taxes                |       |                                                                       | 6.6        | %                                                                                |       |   | 5.4 | % |   |   | 6.4 | % |   |   | 6.1 | % |   |
| Net income                                |       |                                                                       | 10.8       | %                                                                                |       |   | 8.6 | % |   |   | 10.5 | % |   |   | 9.8 | % |   |
| EBITDA(1)                                 |       |                                                                       | 21.1       | %                                                                                |       |   | 17.7 | % |   |   | 20.7 | % |   |   | 19.6 | % |   |

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(1)          See“—EBITDA.”

**Comparison of the Three Months Ended June 30,2004 to the Three Months Ended June 30, 2003**

*NetSales.*   Net sales increased by $4.1 million, or13.8%, to $33.8 million for the three months ended June 30, 2004 (“thirdquarter of fiscal 2004”) from $29.7 million for the three months ended June 30,2003 (“third quarter of fiscal 2003”). Net sales of branded products increasedby $3.6 million, or 14.8%, to $28.3 million for the third quarter of fiscal2004 from $24.7 million for the third quarter of fiscal 2003. The increase innet sales of branded products was related to the integration of the June 13,2003 acquisition of the *Nature’sLife*® brand and, to alesser extent, the integration of the fiscal 2004 third quarter acquisitions ofthe *Natural Balance*® and *Montana Big Sky*TMbrands, partially offset by a softness in sales in certain areas andcustomers within health and natural food stores. Net sales of other productsincreased by $0.5 million, or 8.9%, to $5.5 million for the third quarter offiscal 2004 from $5.0 million for the third quarter of fiscal 2003. Thisincrease was primarily the result of the fiscal 2003 acquisition of ArizonaHealth Foods, Inc., which was completed on June 30, 2003, partiallyoffset by the closure for remodeling of one of the Company’s neighborhoodnatural food markets.

*GrossProfit.*   Gross profit increased by $2.3 million,or 15.0%, to $17.8 million for the third quarter of fiscal 2004 from $15.5million for the third quarter of fiscal 2003. This increase in gross profit wasprimarily attributable to the increase in net sales. As a percentage of netsales, gross profit was 52.7% for the third quarter of fiscal 2004 and 52.2%for the third quarter of fiscal 2003. This increase in gross profit as apercentage of net sales was primarily attributable to modest improvements ininventory management, manufacturing costs, raw material pricing, as well as somechanges in sales mix.

*Selling,General and Administrative.*   Selling, general andadministrative expenses increased by $2.6 million, or 26.2%, to $12.8 millionfor the third quarter of fiscal 2004 from $10.2 million for the third quarterof fiscal 2003. As a percentage of net sales, selling, general andadministrative expenses increased to 37.9% for the third quarter of fiscal 2004from 34.3% for the third quarter of fiscal 2003. This increase in selling,general and administrative expenses was primarily attributable to the fiscal2003 and 2004 acquisitions. Additionally, increased costs associated withshipping, insurance, legal and corporate governance impacted the Company.

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*Amortizationof Intangibles.*   Amortization of intangibles was$0.1 million for the third quarter of fiscal 2004 compared to $0.0 million forthe third quarter of fiscal 2003. Amortization expense for the third quarter offiscal 2004 was primarily related to intangible assets recorded in connectionwith the fiscal 2003 acquisitions.

*Interestand Other Expense, Net.*   Net interest and otherexpense was $0.2 million for the third quarter of fiscal 2004 and $0.1 millionfor the third quarter of fiscal 2003 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 the third quarter of fiscal 2004compared to 38.0% for the third quarter of fiscal 2003. This increase in theCompany’s effective tax rate was primarily due to an increase in the Company’smarginal federal income tax rate. In each period, the Company’s effective taxrate was higher than the federal statutory rate primarily due to state taxes.

**Comparison of the Nine Months Ended June 30, 2004to the Nine Months Ended June 30, 2003**

*NetSales.*   Net sales increased by $15.4 million, or17.3%, to $104.6 million for the nine months ended June 30, 2004 from$89.2 million for the nine months ended June 30, 2003. Net sales ofbranded products increased by $12.4 million, or 16.5%, to $87.4 million for thenine months ended June 30, 2004 from $75.0 million for the nine monthsended June 30, 2003. The increase in net sales of branded products wasprimarily related to the integration of the June 13, 2003 acquisition ofthe *Nature’s Life*® brand and, to a lesser extent, theintegration of the fiscal 2004 third quarter acquisitions of the *Natural Balance*® and *Montana Big Sky*TMbrands as well as increased sales of the Company’s core branded products.Net sales of other products increased by $3.0 million, or 21.4%, to $17.2million for the nine months ended June 30, 2004 from $14.2 million for thenine months ended June 30, 2003. This increase was primarily the result ofthe fiscal 2003 acquisition of Arizona Health Foods, Inc., which wascompleted on June 30, 2003, partially offset by the closure for remodelingof one of the Company’s neighborhood natural food markets.

*GrossProfit.*   Gross profit increased by $8.6 million,or 18.7%, to $54.8 million for the nine months ended June 30, 2004 from$46.2 million for the nine months ended June 30, 2003. This increase ingross profit was primarily attributable to the increase in net sales. As apercentage of net sales, gross profit was 52.4% for the nine months ended June 30,2004 and 51.8% for the nine months ended June 30, 2003. This increase ingross profit as a percentage of net sales was primarily attributable to modestimprovements in inventory management, manufacturing costs, raw materialpricing, as well as some changes in sales mix.

*Selling,General and Administrative.*   Selling, general andadministrative expenses increased by $6.7 million, or 21.6%, to $37.3 millionfor the nine months ended June 30, 2004 from $30.6 million for the ninemonths ended June 30, 2003. As a percentage of net sales, selling, generaland administrative expenses increased to 35.6% for the nine months ended June 30,2004 from 34.4% for the nine months ended June 30, 2003. This increase inselling, general and administrative expenses was primarily attributable to thefiscal 2003 and 2004 acquisitions. Additionally, increased costs associatedwith shipping, insurance, legal and corporate governance impacted the Company.

*Amortizationof Intangibles.*   Amortization of intangibles was$0.3 million for the nine months ended June 30, 2004 compared to $0.0million for the nine months ended June 30, 2003. Amortization expense forthe nine months ended June 30, 2004 was primarily related to intangibleassets recorded in connection with the fiscal 2003 acquisitions.

*Interestand Other Expense, Net.*   Net interest and otherexpense was $0.7 million for the nine months ended June 30, 2004 and $0.5million for the nine months ended June 30, 2003 and primarily consisted ofinterest expense on indebtedness under the Company’s revolving credit facilityand losses associated with fixed asset disposals.

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*Provision for Income Taxes.*   TheCompany’s effective tax rate was 38.5% for the nine months ended June 30,2004 compared to 38.0% for the nine months ended June 30, 2003. Thisincrease in the Company’s effective tax rate was primarily due to an increasein the Company’s marginal federal income tax rate. 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 accounting principles generallyaccepted in the United States of America. The following table sets forth areconciliation of net income to EBITDA for each period included herein:
| ** **                          | ** ** | **Three months ended June 30,**                                                                  | ** ** | **Nine months ended June 30,**                                                                   | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **         2003         ** | ** ** | **         2004         ** | ** ** | **         2003         ** | ** ** | **         2004         ** | ** ** |
| Net income                          |       |                                                                                                                 | $          | 3,202                                                                                                                |       |   |   | $ | 2,909 |   |   |   | $ | 9,347 |   |   |   | $ | 10,238 |   |   |
| Provision for  income taxes         |       |                                                                                                                 | 1,963      |                                                                                                                 |       |   | 1,821 |   |   |   | 5,729 |   |   |   | 6,409 |   |   |
| Interest and  other expense, net(1) |       |                                                                                                                 | 129        |                                                                                                                 |       |   | 172 |   |   |   | 457 |   |   |   | 650 |   |   |
| Depreciation and  amortization      |       |                                                                                                                 | 970        |                                                                                                                 |       |   | 1,092 |   |   |   | 2,888 |   |   |   | 3,207 |   |   |
| EBITDA                              |       |                                                                                                                 | $          | 6,264                                                                                                                |       |   |   | $ | 5,994 |   |   |   | $ | 18,421 |   |   |   | $ | 20,504 |   |   |

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

The Company’s EBITDA decreased to $6.0 million for thethird quarter of fiscal 2004 from $6.3 million for the third quarter of fiscal2003. EBITDA as a percentage of net sales decreased to 17.7% for the thirdquarter of fiscal 2004 from 21.1% for the third quarter of fiscal 2003.

The Company’s EBITDAincreased to $20.5 million for the nine months ended June 30, 2004 from$18.4 million for the nine months ended June 30, 2003. EBITDA as apercentage of net sales decreased to 19.6% for the nine months ended June 30,2004 from 20.7% for the nine months ended June 30, 2003.

**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.

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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.

**Liquidity andCapital Resources**

The Company had working capital of $28.2 million as ofJune 30, 2004 compared to $22.3 million as of September 30, 2003. Thisincrease in working capital was primarily the result of increases in cash,inventories and prepaid expenses and other current assets, partially offset bya decrease in accounts receivable and increases in accounts payable and accruedexpenses.

Net cash provided by operating activities for the ninemonths ended June 30, 2004 was $15.3 million compared to $15.6 million forthe comparable period in fiscal 2003. The decrease in net cash provided byoperating activities for the nine months ended June 30, 2004 was primarilyattributable to the change in cash provided by inventories, prepaid expensesand other current assets and accrued expenses, which was partially offset byincreases in net income and the tax benefit from stock option exercises, aswell as the change in cash provided by accounts receivable and accountspayable.

Net cash used in investing activities was $13.5million for the nine months ended June 30, 2004 and $17.4 million for thecomparable period in fiscal 2003. The Company’s investing activities consistedprimarily of acquisitions of businesses and capital expenditures. Capitalexpenditures during these periods related primarily to distribution andmanufacturing equipment, building improvements related to facilityconsolidation efforts and information systems.

Net cash provided by (used in) financing activitieswas ($0.9) million for the nine months ended June 30, 2004 compared to$3.1 million for the comparable period in fiscal 2003. During these periods,net cash used in financing activities primarily related to borrowings andrepayments under the Company’s revolving credit facility, as well as proceedsfrom the issuance of common stock and purchases of common stock for treasury.

The Company’s current revolving credit facility hadavailable credit borrowings of $57.5 million dollars at June 30, 2004. Theavailable credit borrowings are reduced quarterly by $1.25 million with thenext reduction occurring in September 2004. Borrowings under the revolvingcredit facility are collateralized by substantially all assets of the Company. Atthe Company’s election, borrowings 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 June 30, 2004, the applicable weighted-average interest rate forborrowings was 2.59%. The Company is also required to pay a variable quarterlyfee on the unused balance under the revolving credit facility. At June 30,2004, 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. Accordingly, the outstanding principal balance of $9.5 million at June 30,2004 was classified as long-term debt.

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 June 30, 2004, the Company was in compliance withthese restrictive covenants. Upon the occurrence of a default or an event ofdefault, the lender has various remedies or rights, which may includeproceeding against the collateral or requiring the Company to repay all amountsborrowed 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 occurrence of 

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substantial additionalindebtedness. The Company believes that borrowings under its current revolvingcredit facility or a replacement credit facility, together with cash flows fromoperations, will be sufficient to make required payments under the currentcredit facility or a replacement credit facility, and to make anticipatedcapital expenditures and fund working capital needs for fiscal 2004.

TheCompany’s significant non-cancelable operating lease obligations as of June 30,2004 are as follows:
| **Year Ending September 30,** | ** ** | ** ** | ** ** | **Operating  Leases(1)** | ** ** |
|----------------------------------------------|------------|------------|------------|--------------------------|------------|
| 2004                                         |       |       | $          | 549                      |       |   |
| 2005                                         |       |       | 1,287      |                     |       |
| 2006                                         |       |       | 682        |                     |       |
| 2007                                         |       |       | 498        |                     |       |
| 2008                                         |       |       | 247        |                     |       |
| Thereafter                                   |       |       | 311        |                     |       |
|                                         |       |       | $          | 3,574                    |       |   |

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

**New AccountingStandards**

Based on the Company’sreview of new accounting standards released during the quarter ended June 30,2004, the Company did not identify any standard requiring adoption that wouldhave a significant impact on its condensed consolidated financial statementsfor 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. Any statements contained herein that are not statementsof historical fact may be deemed to be forward-looking statements. Withoutlimitation, the words “may,” “will,” “should,” “believes,” “anticipates,” “plans,”“expects,” “intends,” “estimates” and similar expressions or the negativethereof, or variations thereon, or similarly, discussions of strategy, althoughbelieved to be reasonable are intended to identify forward-looking statements,although not all forward-looking statements contain these words or discussions.There are a number of important factors that could cause actual events or theCompany’s actual results to differ materially from those indicated by suchforward-looking statements, including, without limitation, (i) changingdomestic and international market and political conditions; (ii) interruptionof business or negative impact on sales and earnings due to acts of war,terrorism, bio-terrorism, civil unrest, earthquake or disruption of mailservice; (iii) changes in laws and regulations, including adverse federal,state or foreign legislation or regulation or adverse determinations or actionsby 

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regulators; (iv) 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; (v) unavailability of or interruptionin the supply of utilities, including electricity and telecommunications; (vi) slowor negative growth in the nutritional supplement industry; (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) absence of clinical trialsfor many of the Company’s products; (xv) availability and price of rawmaterials, including increased costs; (xvi) the Company’s ability tomanufacture its products efficiently; (xvii) the mix of the Company’s productsand their related profit margins; (xviii) dependence on distributors andcustomers; (xix) sales and earnings volatility; (xx) adequacy and availabilityof insurance coverage, and any losses or damages sustained by the Company notcovered by insurance; (xxi) exposure to and expense of prosecuting, defendingand/or resolving and defending claims or litigation, including but not limitedto product 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) other factors discussed in the Company’s filings with the Securities andExchange Commission or referenced in its press releases, and (xxiii) other factorsbeyond 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).

**Item 3.**   Quantitative and QualitativeDisclosures about Market Risk

At the Company’s election,borrowings under the Company’s revolving credit facility bear interest at theapplicable Eurodollar Rate plus a variable margin or at a base rate, which isthe higher of the Federal Funds Rate plus 0.5% or the Prime Lending Rate, plusa variable margin. At June 30, 2004, the applicable weighted-averageinterest rate for borrowings was 2.59% and the Company had total borrowingsoutstanding of $9.5 million. To date, the Company has not obtained interestrate protection with respect to these borrowings.

**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 a date within 90 days of the filing date of the quarterly report (the “EvaluationDate”), have concluded that, as of the Evaluation Date, the Company’sdisclosure controls and procedures were effective to ensure that materialinformation related to the Company and its consolidated subsidiaries would bemade known to them by others within those entities. 

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In designing andevaluating the disclosure controls and procedures, management recognized thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management necessarily was required to apply its judgment in evaluating andimplementing possible disclosure controls and procedures.

*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—OTHERINFORMATION**

**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.

**Item 6.**   Exhibits and Reports on Form 8-K
| (a)    | 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. |
| (b)    | Reports on Form 8-K                                                                            |
|   | The following reports  were filed on Form 8-K during the last quarter covered by this  report: |
|   | (i)                                                                                                 |   | On April 29, 2004,  the Company reported sales and income results for the fiscal second quarter  and six months ended March 31, 2004. |
|   | (ii)                                                                                                |   | On April 29, 2004,  the Company announced that it had entered into a purchase and sale agreement  to acquire substantially all of the operating assets of Natural  Balance, Inc. |
|   | (iii)                                                                                               |   | On May 14, 2004,  the Company announced that it had completed the previously reported  acquisition of Natural Balance, Inc. and filed a copy of the purchase  agreement. |
|        |                                                                                                     |  |  |  |  |

 

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**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|        |                | Nutraceutical International Corporation |
|--------|---------------------|---------------------------------------------------|
|   |                | (Registrant)                                      |
| Date:  | July 29,  2004 |                                              |   | 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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