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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 December 31, 2003

Commission file number 000-23731

NUTRACEUTICAL INTERNATIONAL CORPORATION
(Exact name of registrant as 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) 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 January 29, 2004, the registrant had 11,162,323 shares of common stock outstanding.





NUTRACEUTICAL INTERNATIONAL CORPORATION

INDEX

        

Description

Part I.   Financial Information

 

 

Item 1.

 

Financial Statements

 

 

 

 

Condensed Consolidated Balance Sheets—September 30, 2003 and December 31, 2003

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income—Three Months Ended December 31, 2002 and 2003

 

 

 

 

Condensed Consolidated Statements of Cash Flows—Three Months Ended December 31, 2002 and 2003

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

 

Item 4.

 

Controls and Procedures

Part II.

 

Other Information

 

 

Item 1.

 

Legal Proceedings

 

 

Item 6.

 

Exhibits and Reports on Form 8-K

2



PART I—FINANCIAL INFORMATION

Item 1. Financial Statements


NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands)

 
  September 30,
2003(1)

  December 31,
2003

 
ASSETS              
Current assets              
  Cash   $ 2,196   $ 1,740  
  Accounts receivable, net     10,514     9,678  
  Inventories, net     20,054     21,193  
  Prepaid expenses and other current assets     2,040     1,941  
  Deferred income taxes     1,190     1,176  
   
 
 
    Total current assets     35,994     35,728  
Property, plant and equipment, net     21,148     21,438  
Goodwill     10,083     9,929  
Intangible assets, net     4,386     4,294  
Other non-current assets, net     1,007     1,024  
Deferred income taxes, net     9,165     8,847  
   
 
 
    $ 81,783   $ 81,260  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities              
  Accounts payable   $ 8,530   $ 8,069  
  Accrued expenses     5,201     5,748  
   
 
 
    Total current liabilities     13,731     13,817  
Long-term debt     12,500     9,000  
Other non-current liabilities     450     450  
   
 
 
    Total liabilities     26,681     23,267  
   
 
 
Stockholders' equity              
  Common stock     113     113  
  Additional paid-in capital     39,431     39,530  
  Retained earnings     16,846     20,014  
  Accumulated other comprehensive income     139     161  
  Treasury stock     (1,427 )   (1,825 )
   
 
 
    Total stockholders' equity     55,102     57,993  
   
 
 
    $ 81,783   $ 81,260  
   
 
 

(1)
The condensed consolidated balance sheet as of September 30, 2003 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.

3



NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(unaudited)

(dollars in thousands, except per share data)

 
  Three months ended December 31,
 
  2002
  2003
Net sales   $ 28,901   $ 33,187
Cost of sales     14,082     16,171
   
 
  Gross profit     14,819     17,016
Operating expenses            
  Selling, general and administrative     10,384     11,569
  Amortization of intangible assets         94
   
 
Income from operations     4,435     5,353
Interest and other expense, net     199     202
   
 
Income before provision for income taxes     4,236     5,151
Provision for income taxes     1,610     1,983
   
 
Net income   $ 2,626   $ 3,168

Other comprehensive income

 

 

 

 

 

 
  Foreign currency translation adjustment     17     22
   
 
Comprehensive income   $ 2,643   $ 3,190
   
 
Net income per common share            
  Basic   $ 0.23   $ 0.28
  Diluted     0.23     0.27

Weighted average common shares outstanding

 

 

 

 

 

 
  Basic     11,178,784     11,174,311
  Dilutive effect of stock options and warrants     397,901     435,531
   
 
  Diluted     11,576,685     11,609,842
   
 

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

4



NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

 
  Three months ended December 31,
 
 
  2002
  2003
 
Cash flows from operating activities              
Net income   $ 2,626   $ 3,168  
Adjustments to reconcile net income to net cash provided by operating activities              
  Depreciation and amortization     974     1,041  
  Amortization of deferred financing fees     46     46  
  Loss on disposals of property and equipment     14     12  
  Deferred income taxes     252     332  
  Tax benefit from stock option exercises     18     16  
  Changes in assets and liabilities, net of effects from acquisitions              
    Accounts receivable, net     377     836  
    Inventories, net     800     (1,139 )
    Prepaid expenses and other current assets     (105 )   99  
    Other non-current assets, net     (18 )   (65 )
    Accounts payable     (426 )   (461 )
    Accrued expenses     583     732  
   
 
 
      Net cash provided by operating activities     5,141     4,617  
   
 
 
Cash flows from investing activities              
Purchases of property and equipment     (651 )   (1,267 )
   
 
 
      Net cash used in investing activities     (651 )   (1,267 )
   
 
 
Cash flows from financing activities              
Payments on long-term debt     (4,000 )   (3,500 )
Proceeds from issuances of common stock     133     83  
Purchases of common stock for treasury         (398 )
   
 
 
      Net cash used in financing activities     (3,867 )   (3,815 )
   
 
 
Effect of exchange rate changes on cash     4     9  
   
 
 
Net increase (decrease) in cash     627     (456 )
Cash at beginning of period     1,257     2,196  
   
 
 
Cash at end of period   $ 1,884   $ 1,740  
   
 
 

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

5



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 December 31, 2003, the results of their operations for the three months ended December 31, 2002 and 2003 and their cash flows for the three months ended December 31, 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 ended December 31, 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, 2003, which was filed with the Securities and Exchange Commission on November 25, 2003.

2.     INVENTORIES, NET

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

 
  September 30,
2003

  December 31,
2003

Raw materials   $ 5,619   $ 6,378
Work-in-process     2,715     3,138
Finished goods     11,720     11,677
   
 
    $ 20,054   $ 21,193
   
 

3.     GOODWILL AND INTANGIBLE ASSETS

        The change in the carrying amount of goodwill from September 30, 2003 to December 31, 2003 was as follows:

 
  Goodwill
 
Balance as of September 30, 2003   $ 10,083  
Purchase accounting adjustments related to fiscal 2003 acquisitons     (154 )
   
 
Balance as of December 31, 2003   $ 9,929  
   
 

6


        The carrying amount of intangible assets at September 30, 2003 and December 31, 2003 was as follows:

 
  September 30, 2003
  December 31, 2003
   
 
  Weighted-
Average
Amortization
Period (Years)

 
  Gross
Carrying
Amount

  Accumulated
Amortization

  Net
Carrying
Amount

  Gross
Carrying
Amount

  Accumulated
Amortization

  Net
Carrying
Amount

Intangible assets subject to amortization:                                        
  Non-compete agreements   $ 1,000   $ (83 ) $ 917   $ 1,000   $ (167 ) $ 833   3
  Trademarks/trade names/patents     277     (166 )   111     279     (176 )   103   5
   
 
 
 
 
 
   
      1,277     (249 )   1,028     1,279     (343 )   936    
Intangible assets not subject to amortization:                                        
  Trademarks/trade names/licenses     3,358         3,358     3,358         3,358    
   
 
 
 
 
 
   
    $ 4,635   $ (249 ) $ 4,386   $ 4,637   $ (343 ) $ 4,294    
   
 
 
 
 
 
   

        Estimated amortization expense related to the net carrying amount of $936 for intangible assets subject to amortization at December 31, 2003 is as follows:

Year Ending September 30,(1)

  Estimated
Amortization
Expense

2004   $ 279
2005     369
2006     274
2007     11
2008     3
   
    $ 936
   

(1)
The amount for the year ending September 30, 2004 includes only amortization to be recorded after December 31, 2003.

        Aggregate amortization expense related to intangible assets subject to amortization totaled $0 and $94 for the three months ended December 31, 2002 and 2003, respectively.

4.     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.

7



        Stock options to purchase 193,794 and 436,440 shares of common stock that were outstanding at December 31, 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.

5.     SHARE PURCHASE

        During fiscal 2000, the Company's Board of Directors approved a share purchase program authorizing the Company to buy up to 1,500,000 shares of its outstanding common stock. Under this program, the Company purchased 35,800 shares during the three months ended December 31, 2003 at an aggregate price of $398. Total purchases under this share purchase program from inception to December 31, 2003 were 711,212 shares of common stock at an aggregate price of $3,510.

6.     OPERATING SEGMENTS

        Segment identification and selection is consistent with the management structure used by the Company to evaluate performance and make decisions regarding resource allocation, as well as the availability and materiality of financial results consistent with that structure. Based on the Company's management structure and method of internal reporting, the Company has one operating segment. The Company does not review operating results on a disaggregated basis; rather, management reviews operating results on an aggregate basis.

        Net sales outside the United States were less than 10% of consolidated net sales for the three months ended December 31, 2002 and 2003.

7.     STOCK-BASED COMPENSATION

        The Company accounted 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 was 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

8



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

 
  Three months ended December 31,
 
 
  2002
  2003
 
Net income, as reported   $ 2,626   $ 3,168  

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

 

 

(60

)

 

(153

)
   
 
 
Pro forma net income   $ 2,566   $ 3,015  
   
 
 
Earnings per share              
  Basic—as reported   $ 0.23   $ 0.28  
  Basic—pro forma     0.23     0.27  
 
Diluted—as reported

 

$

0.23

 

$

0.27

 
  Diluted—pro forma     0.22     0.26  

9



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 an integrated marketer, distributor, retailer and manufacturer of branded nutritional supplements and other natural products sold primarily to and through domestic health and natural food stores. Internationally, the Company sells its branded products to and through natural product distributors and retailers. The Company was formed with a core business strategy of acquiring, integrating and operating, from beginning to end, the marketing, distribution, retailing and manufacturing operations of businesses in the natural products industry. The Company believes that the consolidation and integration of acquired businesses provides ongoing financial synergies through increased scale and market penetration.

        The Company sells its branded products under the trademarks Solaray®, KAL®, Nature's Life®, NaturalMax®, VegLife®, Premier One®, Sunny Green®, Natural Sport®, ActiPet®, Action Labs®, Thompson® and FunFresh Foods™. The Company also sells branded bulk products and unbranded custom blends under the trademarks Monarch Nutritional Laboratories™ and Great Basin Botanicals™. 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's neighborhood natural food markets operate under the trade names The Real Food Company™ and Thom's Natural Foods™ and its health food stores operate under the trade name Arizona Health Foods™. The Company also distributes the branded products of certain third parties.

        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. (dba Nature's Life), 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.

10



Results of Operations

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

 
  Three months ended December 31,
 
 
  2002
  2003
 
Net sales   100.0 % 100.0 %
  Cost of sales   48.7 % 48.7 %
   
 
 
Gross profit   51.3 % 51.3 %
  Selling, general and administrative   35.9 % 34.9 %
  Amortization of intangible assets   0.0 % 0.3 %
   
 
 
Income from operations   15.4 % 16.1 %
  Interest and other expense, net   0.7 % 0.6 %
   
 
 
Income before provision for income taxes   14.7 % 15.5 %
  Provision for income taxes   5.6 % 6.0 %
   
 
 
Net income   9.1 % 9.5 %
   
 
 
EBITDA (1)   18.7 % 19.3 %
   
 
 

(1)
See "—EBITDA."

Comparison of the Three Months Ended December 31, 2003 to the Three Months Ended December 31, 2002

        Net Sales.    Net sales increased by $4.3 million, or 14.8%, to $33.2 million for the three months ended December 31, 2003 ("first quarter of fiscal 2004") from $28.9 million for the three months ended December 31, 2002 ("first quarter of fiscal 2003"). Net sales of branded products increased by $2.9 million, or 12.0%, to $27.4 million for the first quarter of fiscal 2004 from $24.5 million for the first quarter of fiscal 2003. The increase in net sales of branded products was primarily related to the integration of the fiscal 2003 third quarter acquisition of the Nature's Life brand into the Company's existing operations. Other net sales increased by $1.4 million, or 30.5%, to $5.8 million for the first quarter of fiscal 2004 from $4.4 million for the first quarter of fiscal 2003. This increase was primarily the result of the fiscal 2003 acquisition of Arizona Health Foods, Inc., which was completed during the third quarter of fiscal 2003, partially offset by the temporary closure for remodeling of one of the Company's neighborhood natural food markets.

        Gross Profit.    Gross profit increased by $2.2 million, or 14.8%, to $17.0 million for the first quarter of fiscal 2004 from $14.8 million for the first quarter of fiscal 2003. This increase in gross profit was primarily attributable to the increase in net sales. As a percentage of net sales, gross profit was 51.3% for both the first quarter of fiscal 2004 and the first quarter of fiscal 2003.

        Selling, General and Administrative.    Selling, general and administrative expenses increased by $1.2 million, or 11.4%, to $11.6 million for the first quarter of fiscal 2004 from $10.4 million for the first quarter of fiscal 2003. This increase in selling, general and administrative expenses was primarily attributable to the 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 34.9% for the first quarter of fiscal 2004 from 35.9% for the first quarter of fiscal 2003. This decrease in selling, general and administrative expenses as a percentage of net sales was primarily related to the increase in net sales.

11


        Amortization of Intangibles.    Amortization of intangibles was $0.1 million for the first quarter of fiscal 2004 compared to $0.0 million for the first quarter of fiscal 2003. Amortization expense for the first quarter of fiscal 2004 was primarily related to intangible assets subject to amortization, which were recorded in connection with the fiscal 2003 acquisitions.

        Interest and Other Expense, Net.    Net interest and other expense was $0.2 million for both the first quarter of fiscal 2004 and the first quarter of fiscal 2003 and primarily consisted of interest expense on indebtedness under the Company's revolving credit facility.

        Provision for Income Taxes.    The Company's effective tax rate was 38.5% for the first quarter of fiscal 2004 compared to 38.0% for the first quarter of fiscal 2003. This increase in the Company's effective tax rate was primarily 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.

EBITDA

        EBITDA (earnings before net interest and other expense, taxes, depreciation and amortization) is a commonly reported standard measure that is used by analysts and investors in the VMS Industry. Management believes that EBITDA, as presented, represents a useful measure for assessing the performance of the Company's ongoing operating activities, as it reflects the earnings trends of the Company without the impact of purchase accounting applied in connection with the Company's history of acquisitions, the financing required to consummate such transactions and other non-recurring items. Targets and trends in EBITDA are used as a performance measure for determining management's bonus compensation and are also used by the Company's creditors in assessing debt covenant compliance. 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 generally accepted accounting principles. The following table sets forth a reconciliation of net income to EBITDA for each period included herein:

 
  Three months ended December 31,
 
  2002
  2003
Net income   $ 2,626   $ 3,168
Provision for income taxes     1,610     1,983
Interest and other expense, net(1)     199     202
Depreciation and amortization     974     1,041
   
 
EBITDA   $ 5,409   $ 6,394
   
 

(1)
Includes amortization of deferred financing fees.

        The Company's EBITDA increased to $6.4 million for the first quarter of fiscal 2004 from $5.4 million for the first quarter of fiscal 2003. EBITDA as a percentage of net sales increased to 19.3% for the first quarter of fiscal 2004 from 18.7% for the first quarter of fiscal 2003.

12


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.

        Excluding the effects of acquisitions, the Company historically 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.

Liquidity and Capital Resources

        The Company had working capital of $21.9 million as of December 31, 2003 compared to $22.3 million as of September 30, 2003. This decrease in working capital was primarily the result of decreases in cash and accounts receivable and an increase in accrued expenses, partially offset by an increase in inventory and a decrease in accounts payable.

        Net cash provided by operating activities for the three months ended December 31, 2003 was $4.6 million compared to $5.1 million for the comparable period in fiscal 2003. The decrease in net cash provided by operating activities for the three months ended December 31, 2003 was primarily attributable to a change in cash provided by inventories, which was partially offset by an increase in net income and changes in cash provided by accounts receivable and prepaid expenses and other current assets.

        Net cash used in investing activities was $1.3 million for the three months ended December 31, 2003 and $0.7 million for the comparable period in fiscal 2003. Capital expenditures during these periods related primarily to distribution and manufacturing equipment, building improvements related to facility consolidation efforts and information systems.

        Net cash used in financing activities was $3.8 million for the three months ended December 31, 2003 compared to $3.9 million for the comparable period in fiscal 2003. During these periods, net cash used in financing activities primarily related to repayments under the Company's revolving credit facility.

        The Company's current revolving credit facility had available credit borrowings of sixty million dollars at December 31, 2003. The available credit borrowings are reduced quarterly by $1.25 million beginning in March 2004. 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 a base rate, which is the higher of the Federal Funds Rate plus 0.5% or the Prime Lending Rate, plus a variable margin. At December 31, 2003, the applicable weighted-average interest rate for borrowings was 2.54%. The Company is also required to pay a variable quarterly fee on the unused balance under the revolving credit facility. At December 31, 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 $9.0 million at December 31, 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 December 31, 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.

13



        A key component of the Company's business strategy is to seek to make additional acquisitions, which may require that the Company obtain additional financing, which could include the occurrence of substantial additional indebtedness. The Company believes that borrowings under its current revolving credit facility or a replacement credit facility, together with cash flows from operations, will be sufficient to make required payments under the current credit facility or a replacement credit facility, and to make anticipated capital expenditures and fund working capital needs for fiscal 2004.

        The Company's significant non-cancelable operating lease obligations as of December 31, 2003 are as follows:

Year Ending September 30,(1)

  Operating
Leases

2004   $ 858
2005     841
2006     405
2007     339
2008     137
Thereafter     240
   
    $ 2,820
   

(1)
The amount for the year ending September 30, 2004 includes only payments to be made after December 31, 2003.

New Accounting Standards

        Based on the Company's review of new accounting standards released during the first quarter ended December 31, 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 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, insurance premiums and other costs arising from or related to 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," "estimates" and similar expressions or the negative thereof, or variations thereon, or similarly, discussions of strategy, although believed 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 the Company's actual results to differ materially from those indicated by such forward-looking statements, including, without limitation, (i) changing domestic and international

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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 or purchased from foreign countries, as well as other restrictions on the purchase or sale of the Company's products to or from such countries; (v) 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 nutritional supplements; (ix) increased costs, including raw material and labor costs, as well as increases in the costs of borrowing (or the unavailability of adequate credit); (x) inability of the Company to gain and/or hold market share of its health and natural food store customers and bulk branded products 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 or profitably manage 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) absence of clinical trials for many of the Company's products; (xv) availability and price of raw materials, including increased costs; (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, employment or labor related suits or investigations, 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. 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).


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 a base rate, which is the higher of the Federal Funds Rate plus 0.5% or the Prime Lending Rate, plus a variable margin. At December 31, 2003, the applicable weighted-average interest rate for borrowings was 2.54% and the Company had total borrowings outstanding of $9.0 million. To date, the Company has not obtained interest rate protection with respect to these borrowings.

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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 disclosure 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

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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.


 

 

NUTRACEUTICAL INTERNATIONAL CORPORATION
(Registrant)

Date: January 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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