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NUTRACEUTICAL INTERNATIONAL CORPORATION INDEX

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2002

Commission file number 000-23731

NUTRACEUTICAL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)

(435) 655-6106
(Registrant's telephone number, including area code)

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

        At August 2, 2002, the registrant had 11,163,504 shares of common stock outstanding.

NUTRACEUTICAL INTERNATIONAL CORPORATION

INDEX

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands)

(1)

The condensed consolidated balance sheet as of September 30, 2001 has been prepared using information from the audited financial statements at that date.

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

NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME

(unaudited)

(dollars in thousands, except per share data)

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

NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

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

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 accompanying unaudited condensed consolidated financial statements include all necessary adjustments (consisting of normal recurring accruals) to present fairly the financial position of Nutraceutical International Corporation and its subsidiaries (the "Company") as of June 30, 2002, the results of its operations for the three months and nine months ended June 30, 2001 and 2002 and its cash flows for the nine months ended June 30, 2001 and 2002, in conformity with accounting principles generally accepted in the United States of America for interim financial information applied on a consistent basis. The results for the three months and nine months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full fiscal year.

        Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. Accordingly, these financial statements should be read in conjunction with the Company's Form 10-K for the fiscal year ended September 30, 2001, which was filed with the Securities and Exchange Commission on December 14, 2001.

2. INVENTORIES, NET

        Inventories, net of reserves for obsolete and slow moving inventory, are comprised of the following:

3. ADOPTION OF NEW ACCOUNTING STANDARD

        The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), effective October 1, 2001. In accordance with SFAS 142, the Company determined that it had one reporting unit. The fair value of this reporting unit was determined using a market approach based on quoted market prices (Nasdaq: NUTR). Other valuation methods such as the income and cost approaches to value were also considered.

        Based on the valuation findings, the Company determined that it had a goodwill impairment in accordance with the first step of the goodwill impairment test described in SFAS 142. The Company then performed the second step of the goodwill impairment test described in SFAS 142 to measure the amount of the impairment loss, which was determined by comparing the implied fair value of the reporting unit goodwill to the carrying amount of that goodwill.

        The implied fair value of goodwill was determined to be $0 at October 1, 2001, and a non-cash goodwill impairment equal to the goodwill carrying amount of $51,765 was recognized in the Company's condensed consolidated balance sheet. As prescribed by SFAS 142, the Company treated this non-cash goodwill impairment as a cumulative effect of change in accounting principle, which resulted in a non-cash charge of $35,311, net of tax benefit of $16,454, on the Company's condensed consolidated statement of operations and comprehensive income for the nine months ended June 30, 2002.

        The change in the carrying amount of goodwill for the nine months ended June 30, 2002 was as follows:

        The Company had no other material intangible assets recorded on its condensed consolidated balance sheets as of June 30, 2002.

        Based on the Company's adoption of SFAS 142 effective October 1, 2001, no amortization of intangibles was recorded for the nine months ended June 30, 2002. For the three months and nine months ended June 30, 2001, the Company recorded amortization of intangibles of $443 ($326 after tax effect) and $1,326 ($955 after tax effect), respectively, related to goodwill.

        The following table presents what reported net income and earnings per share would have been for the three months and nine months ended June 30, 2001 and 2002 before change in accounting principle and exclusive of amortization expense:

4. CAPITAL STOCK

        The following table provides a reconciliation of basic weighted average common shares (which represent the weighted average number of common shares outstanding without regard to potential common shares) to diluted weighted average common shares (which include potential common shares in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share):

        As of September 30, 2001, the Company held 918,287 shares of stock in treasury with an aggregate value of $3,309. During the quarter ended December 31, 2001, the Company cancelled and retired these shares.

5. OPERATING SEGMENTS

        The Company is a manufacturer and marketer of quality branded products sold to health and natural food stores in the United States, and to distributors and stores worldwide. In addition to branded products, the Company manufactures bulk materials for use in its own products and for sale to other manufacturers and marketers in the nutritional supplement industry. The Company also operates neighborhood natural food markets.

        Based on the Company's method of internal reporting, the Company has one operating segment. The Company does not review operating results on a disaggregated basis. Following the acquisition of the bulk materials business in 1995, the Company maintained separate manufacturing operations which allowed for the identification of operating results through the gross profit line for two operating segments: branded products and bulk materials. However, manufacturing operations for the bulk materials operating segment were subsequently consolidated with manufacturing operations for the branded products operating segment, which resulted in a single operating segment. Currently, management reviews operating results on an aggregate basis.

        For informational purposes, net sales for branded products, bulk materials and neighborhood natural food markets are presented below for the three months and nine months ended June 30, 2001 and 2002:

        The Company sells products worldwide. Net sales to distributors and customers outside the United States are less than 10% of consolidated net sales.

6. NEW CREDIT AGREEMENT

        On January 28, 2002, the Company closed a new five-year, sixty million dollar reducing revolving credit facility (the "New Credit Agreement"). Initial borrowings of $23,500 under the New Credit Agreement were used to repay the Company's $23,500 outstanding balance owed under its prior credit agreement, which was scheduled to mature in January 2003. Deferred financing fees of $863 related to the New Credit Agreement were capitalized at closing.

        The available revolving credit borrowings of sixty million dollars under the New Credit Agreement are reduced quarterly by $1,250 beginning in March of 2004. Borrowings under the New Credit Agreement are collateralized by substantially all assets of the Company and bear interest at the applicable Eurodollar Rate plus a variable margin or at the base rate, which is the higher of the Federal Funds Rate plus 0.5% or the Prime Lending Rate, plus a variable margin. At June 30, 2002, the applicable weighted-average interest rate for borrowings was 3.64%. The Company is also required to pay a variable quarterly fee on the unused balance under the New Credit Agreement. At June 30, 2002, the applicable rate was 0.25%. Accrued interest on Eurodollar Rate borrowings is payable based on elected intervals of one, two or three months. Accrued interest on base rate borrowings is payable quarterly. The New Credit Agreement matures on January 28, 2007, and the Company is required to repay all principal and interest outstanding under the New Credit Agreement on such date. Accordingly, the outstanding principal balance at June 30, 2002 was classified as long-term debt.

        The New Credit Agreement contains restrictive covenants, including restrictions on incurring other indebtedness, limitations on capital expenditures and requirements that the Company maintain certain financial ratios. As of June 30, 2002, the Company was in compliance with these restrictive covenants. Upon the occurrence of a default or an event of default, the lender has various remedies or rights, which may include proceeding against the collateral or requiring the Company to repay all amounts borrowed under the New Credit Agreement.

7. LEGAL SETTLEMENT

        For the three months ended June 30, 2002, the Company recognized pre-tax other income of $1,759 ($1,099 after tax effect), or $0.10 per share as diluted earnings after tax, for payment received in settlement of price-fixing litigation to which the Company is a plaintiff. For the nine months ended June 30, 2002, the Company recognized total pre-tax other income of $2,574 ($1,609 after tax effect), or $0.14 per share as diluted earnings after tax, for payments received in settlement of this price-fixing litigation.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

        The following discussion and analysis should be read in conjunction with the response to Part I, Item 1-Financial Statements of this report.

        The Company is one of the nation's largest manufacturers and marketers of quality branded nutritional supplements sold to health and natural food stores. The Company sells its branded products under the brand names Solaray®, KAL®, NaturalMax®, VegLife®, Premier One®, Sunny Green™, Natural Sport®, ActiPet®, Action Labs® and Thompson® to health and natural food stores in the United States, and to distributors and stores worldwide. Under the name Woodland Publishing™, the Company publishes, prints and markets a line of books and booklets to, among others, book distributors, national retail bookstores and health and natural food stores. The Company manufactures and/or distributes one of the broadest branded product lines in the industry with over 2,500 stock keeping units ("SKUs"), including over 400 SKUs exclusively sold internationally. The Company believes that as a result of its emphasis on innovation, quality, loyalty, education and customer service, the Company's brands are widely recognized in health and natural food stores and among their customers. The Company also distributes branded products of certain third parties.

        In addition to its branded products, the Company manufactures bulk materials for use in its own products and for sale to other manufacturers and marketers in the nutritional supplement industry under the tradenames Monarch Nutritional Laboratories™ and Great Basin Botanicals™. The Company also has retail operations under the tradenames The Real Food Company™ and Thom's Natural Foods™.

        The Company was formed in 1993 by senior management and Bain Capital, Inc. to effect a consolidation strategy in the fragmented vitamin, mineral, herbal and other nutritional supplements industry (the "VMS Industry"). Since its formation, the Company has completed the following acquisitions: Solaray, Inc., Premier One Products, Inc., Makers of KAL, Inc. and Makers of KAL, B.V., Monarch Nutritional Laboratories, Inc., Action Labs, Inc., NutraForce (Canada) International, Inc., Woodland Publishing, Inc., Summit Graphics, Inc., Thompson Nutritionals, Inc., The Real Food Company, Inc. and Thom's Natural Foods. As a result of these acquisitions, internal growth and cost management, management believes that the Company is well positioned to continue to capitalize on the consolidation the Company believes is occurring in the VMS Industry.

Results of Operations

        The following table sets forth certain consolidated statements of operations data as a percentage of net sales for the periods indicated:

(1)

See ""—EBITDA."

Comparison of the Three Months Ended June 30, 2002 to the Three Months Ended June 30, 2001

        Net Sales.    Net sales increased by $2.8 million, or 10.6%, to $29.5 million for the three months ended June 30, 2002 ("third quarter of fiscal 2002") from $26.7 million for the three months ended June 30, 2001 ("third quarter of fiscal 2001"). Net sales of branded products increased by $1.2 million, or 5.3%, to $24.8 million for the third quarter of fiscal 2002 from $23.6 million for the third quarter of fiscal 2001. The increase in net sales of branded products was primarily the result of increased sales volume. Net sales of bulk materials decreased by $0.9 million, or 28.2%, to $2.2 million for the third quarter of fiscal 2002 from $3.1 million for the third quarter of fiscal 2001. The decrease in net sales of bulk materials was primarily the result of decreased sales volume related to decreased customer orders. Net sales of neighborhood natural food markets, which were acquired during fiscal 2002, were $2.5 million for the third quarter of fiscal 2002.

        Gross Profit.    Gross profit increased by $1.5 million, or 11.0%, to $15.0 million for the third quarter of fiscal 2002 from $13.5 million for the third quarter of fiscal 2001. As a percentage of net sales, gross profit increased to 50.8% for the third quarter of fiscal 2002 from 50.6% for the third quarter of fiscal 2001. This increase in gross profit was primarily attributable to improvements in direct material pricing for branded products, offset by sales of the neighborhood natural food markets, which have lower gross profit margins than sales of branded products. Direct material pricing for branded products improved primarily due to enhanced purchasing management, new material sources and increased supplier competition.

        Selling, General and Administrative.    Selling, general and administrative expenses increased by $0.7 million, or 8.1%, to $9.8 million for the third quarter of fiscal 2002 from $9.1 million for the third quarter of fiscal 2001. This increase in selling, general and administrative expenses was primarily attributable to a new sales promotion which ended in June 2002 as well as expenses related to the recently acquired neighborhood natural food markets. As a percentage of net sales, selling, general and administrative expenses decreased to 33.2% for the third quarter of fiscal 2002 from 34.0% for the third quarter of fiscal 2001.

        Amortization of Intangibles.    Based on the Company's adoption of SFAS 142 effective October 1, 2001, no amortization of intangibles was recorded for the third quarter of fiscal 2002 as compared to $0.4 million for the third quarter of fiscal 2001. As a percentage of net sales, amortization of intangibles was 1.6% for the third quarter of fiscal 2001.

        Interest and Other (Income)/Expense, Net.    Net interest and other (income)/expense for the third quarter of fiscal 2002 includes other income of $1.8 million for payment received as settlement of price-fixing litigation to which the Company is a plaintiff. Exclusive of this litigation settlement, net interest and other (income)/expense was $0.3 million for the third quarter of fiscal 2002 and $0.7 million for the third quarter of fiscal 2001. As a percentage of net sales, net interest and other (income)/expense was 1.0% for the third quarter of fiscal 2002 compared to 2.6% for the third quarter of fiscal 2001. This decrease in net interest and other (income)/expense for the third quarter of fiscal 2002 was primarily attributable to decreased indebtedness resulting from repayments made under the Company's revolving credit facility as well as decreased interest rates.

        Provision for Income Taxes.    The Company's effective tax rate was 37.5% for the third quarter of fiscal 2002 and 39.0% for the third quarter of fiscal 2001. This decrease in the Company's effective tax rate was due to the Company's adoption of SFAS 142 effective October 1, 2001. In each period, the Company's effective tax rate was higher than the federal statutory rate primarily due to state tax considerations.

Comparison of the Nine Months Ended June 30, 2002 to the Nine Months Ended June 30, 2001

        Net Sales.    Net sales increased by $2.6 million, or 3.3%, to $81.6 million for the nine months ended June 30, 2002 from $79.0 million for the nine months ended June 30, 2001. Net sales of branded products increased by $1.2 million, or 1.7%, to $72.2 million for the nine months ended June 30, 2002 from $71.0 million for the nine months ended June 30, 2001. The increase in net sales of branded products was primarily the result of increased sales volume. Net sales of bulk materials decreased by $1.8 million, or 22.8%, to $6.2 million for the nine months ended June 30, 2002 from $8.0 million for the nine months ended June 30, 2001. The decrease in net sales of bulk materials was primarily the result of decreased sales volume related to decreased customer orders. Net sales of neighborhood natural food markets, which were acquired during fiscal 2002, were $3.2 million for the nine months ended June 30, 2002.

        Gross Profit.    Gross profit increased by $3.0 million, or 7.7%, to $42.0 million for the nine months ended June 30, 2002 from $39.0 million for the nine months ended June 30, 2001. As a percentage of net sales, gross profit increased to 51.5% for the nine months ended June 30, 2002 from 49.4% for the nine months ended June 30, 2001. This increase in gross profit was primarily attributable to improvements in direct material pricing for branded products, offset by sales of the neighborhood natural food markets, which have lower gross profit margins than sales of branded products. Direct material pricing for branded products improved primarily due to enhanced purchasing management, new material sources and increased supplier competition.

        Selling, General and Administrative.    Selling, general and administrative expenses increased by $1.2 million, or 4.3%, to $28.2 million for the nine months ended June 30, 2002 from $27.0 million for the nine months ended June 30, 2001. As a percentage of net sales, selling, general and administrative expenses increased to 34.6% for the nine months ended June 30, 2002 from 34.2% for the nine months ended June 30, 2001. This increase in selling, general and administrative expenses was primarily attributable to a new sales promotion which ended in June 2002 as well as expenses related to the recently acquired neighborhood natural food markets.

        Amortization of Intangibles.    Based on the Company's adoption of SFAS 142 effective October 1, 2001, no amortization of intangibles was recorded for the nine months ended June 30, 2002 as compared to $1.3 million for the nine months ended June 30, 2001. As a percentage of net sales, amortization of intangibles was 1.7% for the nine months ended June 30, 2001.

        Interest and Other (Income)/Expense, Net.    Net interest and other (income)/expense for the nine months ended June 30, 2002 includes other income of $2.6 million for payments received as settlement of price-fixing litigation to which the Company is a plaintiff. Exclusive of this litigation settlement, net interest and other (income)/expense was $1.1 million for the nine months ended June 30, 2002 and $2.2 million for the nine months ended June 30, 2001. As a percentage of net sales, net interest and other (income)/expense was 1.4% for the nine months ended June 30, 2002 compared to 2.8% for the nine months ended June 30, 2001. This decrease in net interest and other (income)/expense for the nine months ended June 30, 2002 was primarily attributable to decreased indebtedness resulting from repayments made under the Company's revolving credit facilities as well as decreased interest rates.

        Provision for Income Taxes.    The Company's effective tax rate was 37.5% for the nine months ended June 30, 2002 and 39.0% for the nine months ended June 30, 2001. This decrease in the Company's effective tax rate was due to the Company's adoption of SFAS 142 effective October 1, 2001. In each period, the Company's effective tax rate was higher than the federal statutory rate primarily due to state tax considerations.

        Cumulative Effect of Change in Accounting Principle.    As a result of the Company's adoption of SFAS 142 effective October 1, 2001, the Company recognized a non-cash goodwill impairment of $51.8 million in its condensed consolidated balance sheet as of December 31, 2001. As prescribed by SFAS 142, the Company treated this non-cash goodwill impairment as a cumulative effect of change in accounting principle, which resulted in a non-cash charge of $35.3 million, which is net of tax benefit of $16.5 million, on its condensed consolidated statement of operations and comprehensive income for the nine months ended June 30, 2002.

EBITDA

        EBITDA (earnings before net interest and other (income)/expense, taxes, depreciation and amortization) is a commonly reported standard measure that is widely used by analysts and investors in the VMS Industry. Management considers EBITDA to be an important measure of the Company's operating performance. In addition, EBITDA provides additional information for determining the ability of the Company to meet its debt service requirements and for other comparative analyses of the Company's operating performance relative to other nutritional supplement companies.

(1)

Includes amortization of capitalized debt issuance costs and, for the three months and nine months ended June 30, 2002, other income of $1,759 and $2,574, respectively, for payments received in settlement of price-fixing litigation to which the Company is a plaintiff.

(2)

Includes non-recurring amortization of inventory write-up for the three months and nine months ended June 30, 2002 of $19 and $63, respectively.

        The Company's EBITDA increased $0.6 million to $6.2 million for the third quarter of fiscal 2002 from $5.6 million for the third quarter of fiscal 2001. EBITDA as a percentage of net sales decreased to 21.0% for the third quarter of fiscal 2002 from 21.2% for the third quarter of fiscal 2001.

        The Company's EBITDA increased $1.7 million to $17.0 million for the nine months ended June 30, 2002 from $15.3 million for the nine months ended June 30, 2001. EBITDA as a percentage of net sales increased to 20.9% for the nine months ended June 30, 2002 from 19.4% for the nine months ended June 30, 2001.

        The Company understands that while EBITDA is frequently used by securities analysts in the evaluation of nutritional supplement companies, it is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. EBITDA is not intended as an alternative to cash flows from operating activities, as a measure of liquidity or as an alternative to net income as an indicator of the Company's operating performance or any other measure of performance in accordance with accounting principles generally accepted in the United States of America.

Seasonality

        The Company believes that its business is characterized by minor seasonality. Furthermore, sales to any particular customer can vary substantially from one quarter to the next based on such factors as industry trends, timing of promotional discounts and international economic conditions. Historically, the Company has recorded higher branded products sales volume during the second fiscal quarter due to increased interest in health-related products among consumers following the holiday season. The Company does not believe that the impact of seasonality on its results of operations is material. In addition, the Company's sales of bulk materials are characterized by periodic orders from certain customers and can vary significantly from quarter to quarter.

Liquidity and Capital Resources

        The Company had working capital of $23.4 million as of June 30, 2002 compared to $25.9 million as of September 30, 2001. This decrease in working capital was primarily the result of a decrease in inventories and increases in accounts payable and accrued expenses. These changes were partially offset by increases in cash and prepaid expenses and other current assets.

        Net cash provided by operating activities for the nine months ended June 30, 2002 was $17.4 million compared to $11.6 million for the comparable period in fiscal 2001. The increase in net cash provided by operating activities for the nine months ended June 30, 2002 was primarily attributable to an increase in net income before change in accounting principle as well as changes in cash provided by accounts receivable, deferred income taxes, accounts payable and accrued expenses which were partially offset by changes in cash used for inventories and prepaid expenses and other current assets.

        Net cash used in investing activities was $9.1 million for the nine months ended June 30, 2002 and $4.5 million for the comparable period in fiscal 2001. The increase in net cash used in investing activities was primarily the result of acquisitions of substantially all of the assets of four San Francisco area neighborhood natural food markets as well as the purchase of a note receivable relating to the potential acquisition of a corporate office building.

        Net cash used in financing activities was $8.0 million for the nine months ended June 30, 2002 compared to $6.9 million for the comparable period in fiscal 2001. Net cash used in financing activities was primarily related to repayments of borrowings under the Company's current and prior revolving credit facilities.

        On January 28, 2002, the Company closed a new, five-year, sixty million dollar reducing revolving credit facility (the "New Credit Agreement"). Initial borrowings of $23,500 under the New Credit Agreement were used to repay the Company's $23,500 outstanding balance owed under its prior credit agreement, which was scheduled to mature in January 2003. Deferred financing fees of $863 related to the New Credit Agreement were capitalized at closing.

        The available revolving credit borrowings of sixty million dollars under the New Credit Agreement are reduced quarterly by $1,250 beginning in March of 2004. Borrowings under the New Credit Agreement are collateralized by substantially all assets of the Company and bear interest at the applicable Eurodollar Rate plus a variable margin or at the base rate, which is the higher of the Federal Funds Rate plus 0.5% or the Prime Lending Rate, plus a variable margin. At June 30, 2002, the applicable weighted-average interest rate for borrowings was 3.64%. The Company is also required to pay a variable quarterly fee on the unused balance under the New Credit Agreement. At June 30, 2002, the applicable rate was 0.25%. Accrued interest on Eurodollar Rate borrowings is payable based on elected intervals of one, two or three months. Accrued interest on base rate borrowings is payable quarterly. The New Credit Agreement matures on January 28, 2007, and the Company is required to repay all principal outstanding under the New Credit Agreement on such date. Accordingly, the outstanding principal balance at June 30, 2002 was classified as long-term debt.

        The New Credit Agreement contains restrictive covenants, including restrictions on incurring other indebtedness, limitations on capital expenditures and requirements that the Company maintain certain financial ratios. As of June 30, 2002, the Company was in compliance with these restrictive covenants. Upon the occurrence of a default or an event of default, the lender has various remedies or rights, which may include proceeding against the collateral or requiring the Company to repay all amounts borrowed under the New Credit Agreement.

        The Company believes that borrowings under the New Credit Agreement, together with cash flows from operations, will be sufficient to fund working capital needs and make anticipated capital expenditures during fiscal 2002, to continue to make certain acquisitions and to make required payments under the New Credit Agreement.

        The Company's significant non-cancelable operating lease obligations as of June 30, 2002 are as follows:

(1)

The amounts for the year ended September 30, 2002 include only payments to be made after June 30, 2002.

New Accounting Standards

        The Financial Accounting Standards Board issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). Among other things, SFAS 145 eliminates the requirement that gains and losses from the extinguishment of debt be classified as extraordinary items. SFAS 145 is effective for fiscal years beginning after May 15, 2002, with early adoption permitted. The Company does not expect the adoption of this standard to have a significant impact on its financial statements.

Inflation

        Inflation affects the cost of raw materials, goods and services used by the Company. In recent years, inflation has been modest. The competitive environment somewhat limits the ability of the Company to recover higher costs resulting from inflation by raising prices. Overall, product prices have generally been stable, and the Company seeks to mitigate the adverse effects of inflation primarily through improved productivity and cost containment programs. The Company does not believe that inflation has had a material impact on its results of operations for the periods presented, except with respect to payroll-related costs.

Forward-Looking Statements

        This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limitation, the words "may," "will," "should," "believes," "anticipates," "plans," "expects," "intends" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words. There are a number of important factors that could cause actual events or the Company's actual results to differ materially from those indicated by such forward-looking statements, including, without limitation, changing domestic and international market and political conditions, product competition, the nature of product development, adverse publicity regarding the consumption of nutritional supplements, changes in laws and regulations, adequacy and availability of insurance coverage, availability of raw materials, dependence on distributors and customers, litigation, limitations on future earnings, increased costs, the Company's ability to manufacture its products efficiently, sales and earnings volatility, acts of war and terrorist activities and the uncertainties relating to acquisitions. In addition, any forward-looking statements represent the Company's estimates only as of the day this Form 10-Q was first filed with the SEC and should not be relied upon as representing the Company's estimates as of any subsequent date. No assurance can be given that the future results covered by such forward-looking statements will be achieved. While the Company may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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

        The Company carries insurance coverage in the types and amounts that management considers reasonably adequate to cover the risks it faces in the industry in which it competes. However, the Company's current liability policy excludes claims related to products containing ephedra.

        In the opinion of management, the Company's liability, if any, arising from individual regulatory and legal proceedings in which it is involved is not expected to have a material adverse effect on the Company's financial position, results of operations or cash flows. However, the aggregate liability of the Company arising from regulatory and legal proceedings related to these matters could have a material effect on the Company's financial position, results of operations or cash flows. The outcomes of legal matters in which the Company is presently involved are not probable and reasonably estimable.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits:



99.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




(b)

Reports on Form 8-K:

        None

SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.