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NUTRACEUTICAL INTERNATIONAL CORPORATION INDEX

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

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 ý    NO o

        At April 28, 2005, the registrant had 11,596,689 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, 2004 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

(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 March 31, 2005, the results of their operations for the three months and six months ended March 31, 2004 and 2005 and their cash flows for the six months ended March 31, 2004 and 2005, 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 six months ended March 31, 2005 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, 2004, which was filed with the Securities and Exchange Commission on December 3, 2004.

2.     CASH

        As of March 31, 2005, the Company's cash balance included $1,654 held by the Company's captive insurance subsidiary, American Nutritional Casualty Insurance, Inc., which is restricted to use by this subsidiary.

3.     ACCOUNTS RECEIVABLE, NET

        Accounts receivable, net of allowances for sales returns and doubtful accounts, were as follows:

4.     INVENTORIES, NET

        Inventories, net of reserves for slow moving, obsolete and/or damaged inventory, were as follows:

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5.     ACQUISITIONS

        On March 4, 2005, the Company acquired the Pioneer® brand of nutritional supplements, which are sold in health and natural food stores, by purchasing 100% of the stock of Pioneer Nutritional Formulas, Inc. for approximately $4,016 in cash. This acquisition is in keeping with the Company's business strategy of consolidating the fragmented industry in which it competes.

        This acquisition was 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 estimated fair market values at the date 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 presented herein include the activities of this acquired business from the date of acquisition. The following reflects the allocation of the aggregate purchase price for this acquisition to the aggregate assets acquired and liabilities assumed:

        The acquired intangible assets represent trademarks and tradenames, which have indefinite lives and are not subject to amortization.

6.     GOODWILL AND INTANGIBLE ASSETS

        The change in the carrying amount of goodwill from September 30, 2004 to March 31, 2005 was as follows:

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        The carrying amounts of intangible assets at September 30, 2004 and March 31, 2005 were as follows:

        Estimated future amortization expense related to the net carrying amount of $507 for intangible assets subject to amortization at March 31, 2005 is as follows:

(1)

Estimated amortization expense for the year ending September 30, 2005 includes only amortization to be recorded after March 31, 2005.

7.     CAPITAL STOCK

        Stock options to purchase 155,965 and 140,915 shares of common stock that were outstanding at March 31, 2004 and 2005, 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. All warrants outstanding at March 31, 2004 were included in the computation of diluted earnings per share. No warrants were outstanding at March 31, 2005.

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8.     SHARE PURCHASES

        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 common stock of the Company. Under this program, the Company purchased 28,495 shares during the three months ended March 31, 2005 for an aggregate price of $437. Total purchases under this stock purchase program from inception to March 31, 2005 were 915,922 shares of common stock for an aggregate price of $6,387. During this time period, the Company also repurchased and cancelled 690,446 warrants related to the Company's common stock for an aggregate purchase price of $1,726. In addition, 55,848 warrants related to the Company's common stock were surrendered and retired in connection with certain exercises.

        On March 31, 2005, the Company retired 453,483 shares of its common stock, which were held in treasury, with an aggregate value of $5,507.

9.     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 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 and six months ended March 31, 2004 and 2005.

10.   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 for the three months and six months ended March 31, 2004 and 2005, 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 provisions of Statement of Financial

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Accounting Standards No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

        In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment ("SFAS 123R"). SFAS 123R requires companies to expense the value of employee stock options and similar awards. SFAS 123R is effective for annual financial statements beginning after June 15, 2005 and will apply to all outstanding and unvested share-based payments at the time of adoption. The Company is currently evaluating the impact SFAS 123R will have on its consolidated financial statements and will adopt such standard as required.

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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 this report on Form 10-Q, including Part I, Item 1.

        Nutraceutical International Corporation (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 health and natural product distributors and retailers. The Company's core business strategy is to acquire, integrate and operate, 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, as well as strengthened customer relationships.

        The Company sells its branded products under the trademarks Solaray®, KAL®, Nature's Life®, Natural Balance®, NaturalMax®, VegLife®, Premier One®, Sunny Green®, Natural Sport®, FunFresh Foods™, ActiPet®, Action Labs®, Thompson®, Montana Big Sky™, Body Gold® and Pioneer®. The Company also sells branded bulk products and custom blends under the trademark Monarch Nutritional Laboratories™. 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™, Thom's Natural Foods™ and Cornucopia Community Market™ and its health food stores operate under the trade names Arizona Health Foods™, Granola's™ and Pilgrim's Natureway™. 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), Arizona Health Foods, Inc., Natural Balance, Inc., Montana Naturals, Inc., Cornucopia Community Market, Inc., Pilgrim's Natureway LLC and Pioneer Nutritional Formulas, 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 statement of operations data as a percentage of net sales for the periods indicated:

(1)

See "—EBITDA."

Comparison of the Three Months Ended March 31, 2005 to the Three Months Ended March 31, 2004

        Net Sales.    Net sales increased by $1.2 million, or 3.2%, to $38.8 million for the three months ended March 31, 2005 ("second quarter of fiscal 2005") from $37.6 million for the three months ended March 31, 2004 ("second quarter of fiscal 2004"). Net sales of branded products increased by $0.2 million, or 0.5%, to $31.8 million for the second quarter of fiscal 2005 from $31.6 million for the second quarter of fiscal 2004. The increase in net sales of branded products was related to the integration of the fiscal 2004 third quarter acquisitions of the Natural Balance® and Montana Big Sky™ brands, as well as the March 2005 acquisition of the Pioneer® brand, partially offset by a softness in sales in certain brands and customers within health and natural food stores. Net sales of other products increased by $1.0 million, or 17.6%, to $7.0 million for the second quarter of fiscal 2005 from $6.0 million for the second quarter of fiscal 2004. This increase was related to the integration of the fiscal 2004 acquisition of Cornucopia Community Market, Inc. and the fiscal 2005 acquisition of Pilgrim's Natureway LLC, partially offset by a softness in comparable store sales, which the Company believes is primarily related to decreased low-carb consumer interest and demand.

        Gross Profit.    Gross profit decreased by $0.1 million, or 0.5%, to $19.9 million for the second quarter of fiscal 2005 from $20.0 million for the second quarter of fiscal 2004. As a percentage of net sales, gross profit was 51.3% for the second quarter of fiscal 2005 and 53.2% for the second quarter of fiscal 2004. This decrease in gross profit as a percentage of net sales was primarily attributable to increased material cost as a percentage of net sales, as well as a change in sales mix to lower margin non-branded products, including retail and bulk.

        Selling, General and Administrative.    Selling, general and administrative expenses increased by $1.0 million, or 8.1%, to $13.9 million for the second quarter of fiscal 2005 from $12.9 million for the second quarter of fiscal 2004. As a percentage of net sales, selling, general and administrative expenses increased to 35.8% for the second quarter of fiscal 2005 from 34.2% for the second quarter of fiscal 2004. This increase in selling, general and administrative expenses was primarily attributable to the timing of acquisition and integration-related expenses, including technology and employee transition,

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for the fiscal 2004 acquisitions of the Natural Balance® and Montana Big Sky™ brands and Cornucopia Community Market, Inc., as well as the fiscal 2005 acquisitions of Pilgrim's Natureway LLC and the Pioneer® brand. Additionally, increased costs associated with litigation and corporate governance impacted the Company in the second quarter of fiscal 2005.

        Amortization of Intangibles.    Amortization of intangibles was $0.1 million for the second quarter of fiscal 2005 and 2004. For each period, amortization expense was primarily related to intangible assets recorded in connection with acquisitions.

        Interest and Other Expense, Net.    Net interest and other expense was $0.2 million for the second quarter of fiscal 2005 and $0.3 million for the second quarter of fiscal 2004 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 both the second quarter of fiscal 2005 and for the second quarter of fiscal 2004. In each period, the Company's effective tax rate was higher than the federal statutory rate primarily due to state taxes.

Comparison of the Six Months Ended March 31, 2005 to the Six Months Ended March 31, 2004

        Net Sales.    Net sales increased by $3.3 million, or 4.7%, to $74.1 million for the six months ended March 31, 2005 from $70.8 million for the six months ended March 31, 2004. Net sales of branded products increased by $1.8 million, or 3.1%, to $60.9 million for the six months ended March 31, 2005 from $59.1 million for the six months ended March 31, 2004. The increase in net sales of branded products was related to the integration of the fiscal 2004 third quarter acquisitions of the Natural Balance® and Montana Big Sky™ brands, as well as the March 2005 acquisition of the Pioneer® brand, partially offset by a softness in sales in certain brands and customers within health and natural food stores. Net sales of other products increased by $1.5 million, or 12.7%, to $13.2 million for the six months ended March 31, 2005 from $11.7 million for the six months ended March 31, 2004. This increase was related to the integration of the fiscal 2004 acquisition of Cornucopia Community Market, Inc. and the fiscal 2005 acquisition of Pilgrim's Natureway LLC partially offset by a softness in comparable store sales, which the Company believes is primarily related to decreased low-carb consumer interest and demand.

        Gross Profit.    Gross profit increased by $1.3 million, or 3.5%, to $38.3 million for the six months ended March 31, 2005 from $37.0 million for the six months ended March 31, 2004. This increase in gross profit was primarily attributable to the increase in net sales. As a percentage of net sales, gross profit was 51.7% for the six months ended March 31, 2005 and 52.3% for the six months ended March 31, 2004. This decrease in gross profit as a percentage of net sales was primarily attributable to increased material cost as a percentage of net sales, as well as a change in sales mix to lower margin non-branded products, including retail and bulk.

        Selling, General and Administrative.    Selling, general and administrative expenses increased by $3.1 million, or 12.6%, to $27.5 million for the six months ended March 31, 2005 from $24.4 million for the six months ended March 31, 2004. As a percentage of net sales, selling, general and administrative expenses increased to 37.1% for the six months ended March 31, 2005 from 34.5% for the six months ended March 31, 2004. This increase in selling, general and administrative expenses was primarily attributable to the timing of acquisition and integration-related expenses, including technology and employee transition, for the fiscal 2004 acquisitions of the Natural Balance® and Montana Big Sky™ brands and Cornucopia Community Market, Inc., as well as the fiscal 2005 acquisition of Pilgrim's Natureway LLC and the Pioneer® brand. Additionally, increased costs associated with litigation and corporate governance impacted the Company during the six months ended March 31, 2005.

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        Amortization of Intangibles.    Amortization of intangibles was $0.2 million for the six months ended March 31, 2005 and 2004. For each period, amortization expense was primarily related to intangible assets recorded in connection with acquisitions.

        Interest and Other Expense, Net.    Net interest and other expense was $0.4 million for the six months ended March 31, 2005 and $0.5 million for the six months ended March 31, 2004 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 both the six months ended March 31, 2005 and for the six months ended March 31, 2004. In each period, the Company's effective tax rate was higher than the federal statutory rate primarily due to state taxes.

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. Targets and trends in EBITDA are used as a measure for determining management's performance compensation and are also used by the Company's creditors in assessing debt covenant compliance. The Company understands that while EBITDA is used by 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:

(1)

Includes amortization of deferred financing fees and losses associated with fixed asset disposals.

        The Company's EBITDA decreased to $7.0 million for the second quarter of fiscal 2005 from $8.1 million for the second quarter of fiscal 2004. EBITDA as a percentage of net sales decreased to 18.0% for the second quarter of fiscal 2005 from 21.6% for the second quarter of fiscal 2004. This decrease in EBITDA was primarily related to increases in selling, general and administrative expenses (see—"Results of Operations").

        The Company's EBITDA decreased to $12.8 million for the six months ended March 31, 2005 from $14.5 million for the six months ended March 31, 2004. EBITDA as a percentage of net sales decreased to 17.3% for the six months ended March 31, 2005 from 20.5% for the six months ended March 31, 2004. This decrease in EBITDA was primarily related to increases in selling, general and administrative expenses (see—"Results of Operations").

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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 $29.2 million as of March 31, 2005 compared to $26.5 million as of September 30, 2004. This increase in working capital was primarily the result of increases in cash, accounts receivable and inventories and decreases in accounts payable and accrued expenses, partially offset by a decrease in prepaid expenses and other current assets.

        Net cash provided by operating activities for the six months ended March 31, 2005 was $9.7 million compared to $8.8 million for the comparable period in fiscal 2004. The increase in net cash provided by operating activities for the six months ended March 31, 2005 was primarily attributable to the change in cash provided by accounts receivable, inventories, prepaid expenses and other current assets and accrued expenses, partially offset by decreases in net income and the tax benefit from stock option exercises, as well as the change in cash used for accounts payable.

        Net cash used in investing activities was $8.0 million for the six months ended March 31, 2005 and $2.9 million for the comparable period in fiscal 2004. The Company's investing activities consisted primarily of acquisitions of businesses during the six months ended March 31, 2005 and capital expenditures. Capital expenditures during these periods related primarily to distribution and manufacturing equipment, building improvements related to facility consolidation efforts and information systems, including retail technology. The Company intends to finance anticipated capital expenditures through internally generated cash flow and, if necessary, through funds provided under its revolving credit facility.

        Net cash provided by (used in) financing activities was $0.2 million for the six months ended March 31, 2005 compared to $(6.1) million for the comparable period in fiscal 2004. During these periods, financing activities primarily related to borrowings and repayments under the Company's revolving credit facility, purchases of common stock for treasury and proceeds from the issuance of common stock.

        The Company's current revolving credit facility had available credit borrowings of $53.75 million at March 31, 2005. The available credit borrowings are reduced quarterly by $1.25 million with the next reduction occurring in June 2005. 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 March 31, 2005, the applicable weighted-average interest rate for borrowings was 4.30%. The Company is also required to pay a variable quarterly fee on the unused balance under the revolving credit facility. At March 31, 2005, 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.

        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 March 31, 2005, the Company was in compliance with these restrictive covenants.

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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 outstanding under the revolving credit facility.

        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 incurrence 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 2005.

        The Company's significant non-cancelable operating lease obligations as of March 31, 2005 were as follows:

(1)

The amount for the year ending September 30, 2005 includes only payments to be made after March 31, 2005.

New Accounting Standards

        In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment ("SFAS 123R"). SFAS 123R requires companies to expense the value of employee stock options and similar awards. SFAS 123R is effective for annual financial statements beginning after June 15, 2005 and will apply to all outstanding and unvested share-based payments at the time of adoption. The Company is currently evaluating the impact SFAS 123R will have on its consolidated financial statements and will adopt such standard as required.

        Based on the Company's review of other new accounting standards released during the quarter ended March 31, 2005, the Company did not identify any standard requiring adoption that would have a significant impact on its 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. 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.

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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. Information contained in this Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business. 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 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) slow or negative growth in the nutritional supplement industry; (iv) changes in laws and regulations, including adverse federal, state or foreign legislation or regulation or adverse determinations or actions by regulators; (v) 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; (vi) unavailability of or interruption in the supply of utilities, including electricity and telecommunications; (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) adequacy and availability of insurance coverage, and any losses or damages sustained by the Company not covered by insurance; (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) absence of clinical trials for many of the Company's products; (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) inability of the Company's retail stores to attain or maintain profitability; (xxiii) other factors discussed in the Company's filings with the Securities and Exchange Commission or referenced in its press releases, and (xxiv) 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.

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        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 March 31, 2005, the applicable weighted-average interest rate for borrowings was 4.30% and the Company had total borrowings outstanding of $7.0 million. To date, the Company has not obtained interest rate protection with respect to these borrowings.

        With respect to its international operations, the Company is subject to currency fluctuations; however, the Company does not believe that these fluctuations would have a material adverse impact on the Company's financial position. To date, the Company has not hedged any of its potential foreign currency exposures.

Item 4. Controls and Procedures

        Evaluation of Disclosure Controls and Procedures.    The Company's chief executive officer and chief financial officer evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on this evaluation, the chief executive officer and chief financial officer concluded that the Company's disclosure controls and procedures were effective to provide reasonable assurance that material information related to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this report was prepared.

        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, not absolute, assurances 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 were no significant changes in the Company's internal controls over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

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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. In the opinion of management, the outcomes of legal matters in which the Company is presently involved are not probable and reasonably estimable.

Item 4. Submission of Matters to a Vote of Security Holders

        The Annual Meeting of Stockholders of the Company was held on February 14, 2005, at which meeting the stockholders voted to elect two individuals to serve as Class I Directors of the Company and to ratify the appointment of PricewaterhouseCoopers LLP as the Company's independent auditors for the fiscal year ending September 30, 2005.

        The nominees for election as Class I Directors of the Company are listed below. The results were as follows:

        The names of other Directors of the Company whose term of office continued after the meeting are as follows:

Gregory M. Benson
Michael D. Burke
Frank W. Gay II
James D. Stice
J. Steven Young

        Other matters voted upon at the meeting and the results of those votes were as follows:

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Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

(b)

Reports on Form 8-K

        The following reports were filed on Form 8-K during the last quarter covered by this report:

(i)

On January 26, 2005, the Company reported additional information on tax fees paid to PricewaterhouseCoopers LLP for the years ended September 30, 2003 and 2004.



(ii)

On January 27, 2005, the Company reported results for the fiscal 2005 first quarter ended December 31, 2004.



(iii)

On February 11, 2005, the Company announced the withdrawal of Proposal III of its Proxy Statement from vote or other action at the 2005 Annual Meeting of Stockholders held February 14, 2005. Proposal III related to approval of the 2005 Long-Term Equity Incentive Plan.

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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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