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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, 2003

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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        At July 29, 2003, the registrant had 11,191,310 shares of common stock outstanding.

NUTRACEUTICAL INTERNATIONAL CORPORATION

INDEX

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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, 2002 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.

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NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

(unaudited)

(dollars in thousands, except per share data)

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

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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.

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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 accompanying unaudited condensed consolidated financial statements include all necessary adjustments (consisting of normal recurring accruals) to present fairly the consolidated financial position of Nutraceutical International Corporation and its subsidiaries (the "Company") as of June 30, 2003, the results of their operations for the three months and nine months ended June 30, 2002 and 2003 and their cash flows for the nine months ended June 30, 2002 and 2003, 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, 2003 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, 2002, which was filed with the Securities and Exchange Commission on December 12, 2002.

2.     INVENTORIES, NET

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

3.     ACQUISITONS

        On June 13, 2003, the Company acquired the Nature's Life® brand of nutritional supplements, which are sold in health and natural food stores, by purchasing 100% of the stock of M.K. Health Food Distributors, Inc. On June 30, 2003, the Company acquired the Arizona Health Foods™ chain of 11 health food stores, by purchasing substantially all of the operating assets of Arizona Health Foods, Inc. These acquisitions are in keeping with the Company's business strategy of consolidating the fragmented industry where it competes.

        The aggregate purchase price of these two acquisitions was approximately $15,009. These acquisitions were accounted for using the purchase method of accounting. Accordingly, the aggregate purchase price was assigned to the assets acquired and liabilities assumed based on their fair market values at the respective dates of acquisition. The excess of aggregate purchase price over the fair market values of the assets acquired and liabilities assumed was classified as goodwill. The Company's Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) presented herein include the activities of these acquired businesses from their respective dates of acquisition. The

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following reflects the allocation of the aggregate purchase price for these acquisitions to the aggregate assets acquired and liabilities assumed:

        Acquired intangible assets, which have an aggregate value of $3,340, represent trademarks and tradenames that have indefinite lives and are not subject to amortization.

        In connection with these acquisitions, the Company entered into certain non-compete and consulting arrangements. The non-compete agreements are classified as intangible assets at June 30, 2003 and are being amortized over the terms of the respective agreements.

4.     GOODWILL

        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 at that date. 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 financial statements. 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, for the nine months ended June 30, 2002, on the Company's Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

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        The change in the carrying amount of goodwill from September 30, 2001 to June 30, 2003 was as follows:

        Based on the Company's adoption of SFAS 142 effective October 1, 2001, no amortization of goodwill was recorded for the three months and nine months ended June 30, 2002 and 2003.

5.     CAPITAL STOCK

        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) is provided on the Company's Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

        Stock options to purchase 209,040 and 218,744 shares of common stock that were outstanding at June 30, 2002 and 2003, respectively, were not included in the computation of diluted earnings per share because the exercise prices of these stock options were greater than the average share price of the Company's common stock and, therefore, the effect would have been antidilutive.

6.     STOCK REPURCHASE

        In fiscal 2000, the Company's Board of Directors approved a stock repurchase program authorizing the Company to buy up to 1.5 million shares of its outstanding common stock. Under this approved stock repurchase program, the Company may purchase common stock from time to time on the open market and in individually negotiated transactions. During the nine months ended June 30, 2003, the Company repurchased a total of 110,990 shares of common stock, which are currently held as treasury stock, at an aggregate price of $882. Total repurchases under this stock repurchase program from inception to June 30, 2003 were 629,277 shares of common stock at an aggregate price of $2,566.

7.     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 owns and operates neighborhood natural food markets and health food stores. Based on the Company's method of internal reporting, the Company has one operating segment. Other than net sales, the Company does not review operating results on a disaggregated basis.

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        For informational purposes only, 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, 2002 and 2003:

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

8.     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 as partial settlement of price-fixing litigation to which the Company was 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 as partial settlement of this price-fixing litigation.

9.     STOCK-BASED COMPENSATION

        The Company accounts for its stock-based employee compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. No stock-based employee compensation cost is reflected in net income, as all options granted under those stock-based employee compensation plans had exercise prices equal to the market values of the underlying common shares on the dates of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition

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provisions of Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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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®, Nature's Life®, 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 3,000 stock keeping units ("SKUs"), including over 600 SKUs exclusively sold internationally.

        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 distributes branded products of certain third parties, and owns and operates neighborhood natural food markets under the trade names The Real Food Company™ and Thom's Natural Foods™ and health food stores under the trade name Arizona Health 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. and Summit Graphics, Inc., Thompson Nutritionals, Inc., The Real Food Company, Inc., Thom's Natural Foods, M.K. Health Food Distributors, Inc., and Arizona Health Foods, Inc. 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.

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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, 2003 to the Three Months Ended June 30, 2002

        Net Sales.    Net sales increased by $0.2 million, or 0.7%, to $29.7 million for the three months ended June 30, 2003 ("third quarter of fiscal 2003") from $29.5 million for the three months ended June 30, 2002 ("third quarter of fiscal 2002"). Net sales of branded products decreased by $0.1 million, or 0.7%, to $24.7 million for the third quarter of fiscal 2003 from $24.8 million for the third quarter of fiscal 2002. The decrease in net sales of branded products was primarily the result of decreased sales volume. Net sales of bulk materials decreased by $0.2 million, or 9.2%, to $2.0 million for the third quarter of fiscal 2003 from $2.2 million for the third quarter of fiscal 2002. The decrease in net sales of bulk materials was primarily the result of decreased sales volume. Net sales of neighborhood natural food markets, the last of which was acquired in June 2002, were $3.0 million for the third quarter of fiscal 2003 and $2.5 million for the third quarter of fiscal 2002.

        Gross Profit.    Gross profit increased by $0.5 million, or 3.4%, to $15.5 million for the third quarter of fiscal 2003 from $15.0 million for the third quarter of fiscal 2002. This increase in gross profit was attributable to, among other things, the increase in net sales and improvements in direct material pricing. As a percentage of net sales, gross profit increased to 52.2% for the third quarter of fiscal 2003 from 50.8% for the third quarter of fiscal 2002 despite a change in sales mix. Sales for the neighborhood natural food markets, which were $3.0 million for the third quarter of fiscal 2003 compared to $2.5 million for the third quarter of fiscal 2002, have lower gross profit margins than sales of branded products.

        Selling, General and Administrative.    Selling, general and administrative expenses increased by $0.4 million, or 3.6%, to $10.2 million for the third quarter of fiscal 2003 from $9.8 million for the third quarter of fiscal 2002. As a percentage of net sales, selling, general and administrative expenses

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increased to 34.3% for the third quarter of fiscal 2003 from 33.2% for the third quarter of fiscal 2002. This increase in selling, general and administrative expenses was primarily attributable to the fiscal 2002 and fiscal 2003 acquisitions, as well as general labor and cost increases and facility consolidation efforts.

        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 partial settlement of price fixing litigation to which the Company was a plaintiff. Exclusive of this litigation settlement, net interest and other (income)/expense decreased by $0.2 million, or 54.9%, to $0.1 million for the third quarter of fiscal 2003 from $0.3 million for the third quarter of fiscal 2002. As a percentage of net sales, net interest and other (income)/expense was 0.4% for the third quarter of fiscal 2003 compared to 1.0% for the third quarter of fiscal 2002. This decrease in net interest and other (income)/expense for the third quarter of fiscal 2003 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 38.0% for the third quarter of fiscal 2003 and 37.5% for the third quarter of fiscal 2002. This increase in the Company's effective tax rate was due to an increase in the Company's marginal federal income tax rate. 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, 2003 to the Nine Months Ended June 30, 2002

        Net Sales.    Net sales increased by $7.6 million, or 9.3%, to $89.2 million for the nine months ended June 30, 2003 from $81.6 million for the nine months ended June 30, 2002. Net sales of branded products increased by $2.8 million, or 3.9%, to $75.0 million for the nine months ended June 30, 2003 from $72.2 million for the nine months ended June 30, 2002. 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 14.6%, to $5.3 million for the nine months ended June 30, 2003 from $6.2 million for the nine months ended June 30, 2002. The decrease in net sales of bulk materials was primarily the result of decreased sales volume. Net sales of neighborhood natural food markets, the first of which were acquired in March 2002, were $8.9 million for the nine months ended June 30, 2003 and $3.2 million for the nine months ended June 30, 2002.

        Gross Profit.    Gross profit increased by $4.2 million, or 10.0%, to $46.2 million for the nine months ended June 30, 2003 from $42.0 million for the nine months ended June 30, 2002. This increase in gross profit was primarily attributable to the increase in net sales. As a percentage of net sales, gross profit increased to 51.8% for the nine months ended June 30, 2003 from 51.5% for the nine months ended June 30, 2002, despite a change in sales mix. Sales for the neighborhood natural food markets, which were $8.9 million for the nine months ended June 30, 2003 and $3.2 million for the nine months ended June 30, 2002, have lower gross profit margins than sales of branded products.

        Selling, General and Administrative.    Selling, general and administrative expenses increased by $2.4 million, or 8.7%, to $30.6 million for the nine months ended June 30, 2003 from $28.2 million for the nine months ended June 30, 2002. This increase in selling, general and administrative expenses was primarily attributable to the fiscal 2002 and fiscal 2003 acquisitions, as well as general labor and cost increases and facility consolidation efforts. As a percentage of net sales, selling, general and administrative expenses decreased to 34.4% for the nine months ended June 30, 2003 from 34.6% for the nine months ended June 30, 2002. This decrease in selling, general and administrative expenses as a percentage of net sales was primarily attributable to operating leverage associated with increased sales levels.

        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

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partial settlement of price fixing litigation to which the Company was a plaintiff. Exclusive of this litigation settlement, net interest and other (income)/expense decreased by $0.6 million, or 59.7%, to $0.5 million for the nine months ended June 30, 2003 from $1.1 million for the nine months ended June 30, 2002. As a percentage of net sales, net interest and other (income)/expense was 0.5% for the nine months ended June 30, 2003 compared to 1.4% for the nine months ended June 30, 2002. This decrease in net interest and other (income)/expense for the nine months ended June 30, 2003 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 38.0% for the nine months ended June 30, 2003 and 37.5% for the nine months ended June 30, 2002. This increase in the Company's effective tax rate was due to an increase in the Company's marginal federal income tax rate. 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 financial statements. 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 was net of tax benefit of $16.5 million, for the nine months ended June 30, 2002, on its Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

EBITDA

        EBITDA (earnings before net interest and other (income)/expense, taxes, depreciation and amortization) is a commonly reported standard measure that is 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 publicly traded nutritional supplement companies.

(1)

EBITDA includes an add-back for amortization of deferred financing fees and, for the three months and nine months ended June 30, 2002, EBITDA excludes other income of $1,759 and $2,574, respectively, for payments received as partial settlement of price-fixing litigation to which the Company was a plaintiff.

(2)

EBITDA includes an add-back for 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 $0.1 million to $6.3 million for the third quarter of fiscal 2003 from $6.2 million for the third quarter of fiscal 2002. EBITDA as a percentage of net sales increased to 21.1% for the third quarter of fiscal 2003 from 21.0% for the third quarter of fiscal 2002.

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        The Company's EBITDA increased $1.4 million to $18.4 million for the nine months ended June 30, 2003 from $17.0 million for the nine months ended June 30, 2002. EBITDA as a percentage of net sales decreased to 20.7% for the nine months ended June 30, 2003 from 20.9% for the nine months ended June 30, 2002. This decrease in EBITDA as a percentage of net sales was primarily attributable to the acquisition of the neighborhood natural food markets which have lower operating margins than sales of branded products and bulk materials.

        The Company understands that while EBITDA is frequently used by analysts and investors 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. However, 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, international economic conditions and acquisition-related activities.

        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's sales of bulk materials are characterized by periodic shipments to certain customers and can vary significantly from quarter to quarter. In addition, the Company's sales through its neighborhood natural food markets and health food stores are characterized by minor seasonality.

Liquidity and Capital Resources

        The Company had working capital of $23.7 million as of June 30, 2003 compared to $20.5 million as of September 30, 2002. This increase in working capital, which was primarily the result of the fiscal 2003 acquisitions, reflects an increase in cash, inventory and prepaid expenses and other current assets. These changes were partially offset by an increase in accrued expenses.

        Net cash provided by operating activities for the nine months ended June 30, 2003 was $15.6 million compared to $17.4 million for the comparable period in fiscal 2002. The decrease in net cash provided by operating activities for the nine months ended June 30, 2003 was primarily attributable to cash used for accounts payable, which was partially offset by a change in cash provided by accounts receivable.

        Net cash used in investing activities was $17.4 million for the nine months ended June 30, 2003 and $9.1 million for the comparable period in fiscal 2002. The increase in net cash used in investing activities was primarily the result of the fiscal 2003 acquisitions. Capital expenditures during these periods related primarily to distribution and manufacturing equipment, building improvements related to facility consolidation efforts and, to a lesser extent, information systems.

        Net cash provided by (used in) financing activities was $3.1 million for the nine months ended June 30, 2003 compared to $(8.0) million for the comparable period in fiscal 2002. The increase in net cash provided by financing activities was primarily attributable to additional borrowings under the Company's revolving credit facility to finance the fiscal 2003 acquisitions.

        The Company's current revolving credit facility had available credit borrowings of sixty million dollars at June 30, 2003. The available credit borrowings are reduced quarterly by $1.25 million

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beginning in March 2004 and continuing through September 2006, which represents an aggregate reduction of $13.75 million. Borrowings under the revolving credit facility are collateralized by substantially all assets of the Company. At the Company's election, borrowings 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, 2003, the applicable weighted-average interest rate for borrowings was 2.49%. The Company is also required to pay a variable quarterly fee on the unused balance under the revolving credit facility. At June 30, 2003, 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 revolving credit facility matures on January 28, 2007, and the Company is required to repay all principal outstanding under the revolving credit facility on such date. Accordingly, the outstanding principal balance of $18.0 million at June 30, 2003 was classified as long-term debt.

        The revolving credit facility 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, 2003, 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 revolving credit facility.

        The Company believes that borrowings under its revolving credit facility, together with cash flows from operations, will be sufficient to fund working capital needs and make anticipated capital expenditures during fiscal 2003, to continue to make certain acquisitions and to make payments under its revolving credit facility as required.

        The Company's significant non-cancelable operating lease obligations as of June 30, 2003 are as follows:

(1)

The amounts for the year ending September 30, 2003 include only payments to be made after June 30, 2003.

New Accounting Standards

        Based on the Company's review of new accounting standards released during the third quarter ended June 30, 2003, the Company did not identify any standard requiring adoption that would have a significant impact on its condensed consolidated financial statements for the periods reported.

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. The Company seeks to mitigate the adverse effects of inflation primarily through

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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, payroll-related costs and federal, state and other government imposed regulations.

Forward-Looking Statements

        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, (i) changing domestic and international market and political conditions; (ii) interruption of business or negative impact on sales and earnings due to acts of war, terrorism, bio-terrorism, civil unrest or disruption of mail service; (iii) changes in laws and regulations, including adverse federal, state or foreign legislation or regulation or adverse determinations or actions by regulators; (iv) import/export controls with respect to products sold into foreign markets, as well as other restrictions on the sale of the Company's products in such countries; (v) the unavailability of or interruption in the supply of utilities, including electricity and telecommunications; (vi) slow or negative growth in the nutritional supplement industry; (vii) increased product competition; (viii) adverse publicity regarding the consumption of nutritional supplements; (ix) increased costs, including raw material and labor costs; (x) the inability of the Company to gain and/or hold market share of its health and natural food store customers and bulk material customers; (xi) loss or retirement of key members of management; (xii) inability of the Company to successfully implement its business strategy or plan or otherwise manage growth, including the Company's ability to locate and consummate advantageous acquisitions, or otherwise integrate acquired operations, including the ability to retain customers of existing and acquired operations; (xiii) product development efforts and consumer acceptance of the Company's products; (xiv) the absence of clinical trials for many of the Company's products; (xv) availability and price of raw materials; (xvi) the Company's ability to manufacture its products efficiently; (xvii) the mix of the Company's products and their related profit margins; (xviii) dependence on distributors and customers; (xix) sales and earnings volatility; (xx) adequacy and availability of insurance coverage, and any losses or damages sustained by the Company not covered by insurance; (xxi) exposure to and expense of prosecuting, defending and/or resolving and defending claims or litigation, including but not limited to product liability claims, class action suits, stockholder derivative suits, patent or trademark infringement suits and other litigation which may arise from time to time; (xxii) other factors discussed in the Company's filings with the Securities and Exchange Commission or referenced in its press releases and (xxiii) other factors beyond the Company's control.

        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 and readers are cautioned not to place undue reliance on forward-looking statements or historical results of the Company. 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.

        The SEC maintains an Internet site (http://www.sec.gov) which contains reports, proxy and information statements, and other information regarding the Company. Copies of this Form 10-Q are available without charge upon request. Please contact the Company to request copies of this Form 10-Q (435-655-6106).

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

        At the Company's election, borrowings under the Company's revolving credit facility 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, 2003, the applicable weighted-average interest rate for borrowings was 2.49% and the Company had total borrowings outstanding of $18.0 million. To date, the Company has not obtained interest rate protection with respect to these borrowings.

Item 4. Controls and Procedures

        Evaluation of Disclosure Controls and Procedures.    The Company's chief executive officer and its chief financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days of the filing date of the quarterly report (the "Evaluation Date"), have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective to ensure that material information related to the Company and its consolidated subsidiaries would be made known to them by others within those entities. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures.

        Changes in Internal Controls.    There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to the Evaluation Date.

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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 certain ingredients, including 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

Certifications of Quarterly Financial Report



(b)

Reports on Form 8-K

The following reports were filed on Form 8-K during the quarter for which this Report is filed:

(i)

On May 1, 2003, the Company reported sales and income results for the fiscal 2003 second quarter and six months ended March 31, 2003.



(ii)

On May 30, 2003, the Company reported that it had entered into a purchase and sale agreement to acquire all of the stock of M.K. Health Food Distributors, Inc., dba Nature's Life ("M.K. Health Food").



(iii)

On June 16, 2003, the Company announced that it had completed the previously reported acquisition of M.K. Health Food and filed a copy of the purchase agreement.



(iv)

On June 19, 2003, the Company announced that it had entered into a purchase and sale agreement to acquire substantially all of the operating assets of Arizona Health Foods, Inc. ("Arizona Health").

In addition to these reports, each of which were filed on Form 8-K during the quarter, the Company filed a report on Form 8-K on July 2, 2003 to announce that it had acquired substantially all of the operating assets of Arizona Health.

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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.

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I, Frank W. Gay II, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Nutraceutical International Corporation;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

4.

The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:

a)

designed such disclosure controls and procedures to ensure that material information            relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or person performing the equivalent functions):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and

6.

The Registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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I, Leslie M. Brown, Jr., certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Nutraceutical International Corporation;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

4.

The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:

a)

designed such disclosure controls and procedures to ensure that material information            relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or person performing the equivalent functions):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and

6.

The Registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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