NUTRACEUTICAL INTERNATIONAL CORP, 10-Q, 2000-05-15

NUTRACEUTICAL INTERNATIONAL CORP
10-Q, 2000-05-15
MEDICINAL CHEMICALS & BOTANICAL PRODUCTS

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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 MARCH 31, 2000

Commission file number 000-23731

NUTRACEUTICAL INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 87-0515089
(State of incorporation) (IRS Employer Identification No.)

1400 KEARNS BOULEVARD, 2ND FLOOR, PARK 84060
CITY, UTAH (Zip code)
(Address of principal executive office)
</TABLE>

(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 /X/ No / /

At May 15, 2000 the registrant had 11,715,099 shares of common stock
outstanding.

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NUTRACEUTICAL INTERNATIONAL CORPORATION
INDEX

<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
- ----------- --------
<S> <C> <C> <C>
Part I. Financial Information

Item 1. Financial Statements........................................ 3

Condensed Consolidated Balance Sheets--
September 30, 1999 and March 31, 2000....................... 3

Condensed Consolidated Statements of Operations--
Three Months and Six Months Ended March 31, 1999 and 2000... 4

Condensed Consolidated Statements of Cash Flows--
Six Months Ended March 31, 1999 and 2000.................... 5

Notes to Condensed Consolidated Financial Statements........ 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8

Part II. Other Information

Item 1. Legal Proceedings........................................... 14

Item 4. Submission of Matters to a Vote of Security Holders......... 14

Item 6. Exhibits and Reports on Form 8-K............................ 14
</TABLE>

2
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PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NUTRACEUTICAL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999(1) 2000
-------------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 869 $ 1,387
Accounts receivable, net.................................. 9,010 10,686
Inventories, net.......................................... 26,863 26,539
Prepaid expenses and other current assets................. 1,397 680
Deferred income taxes..................................... 1,231 1,231
-------- --------
Total current assets.................................... 39,370 40,523
Property, plant and equipment, net.......................... 14,752 15,861
Goodwill, net............................................... 53,422 52,573
Other non-current assets, net............................... 1,100 885
-------- --------
$108,644 $109,842
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............. $ 57 $ 51
Accounts payable.......................................... 6,879 8,407
Accrued expenses.......................................... 3,185 2,595
-------- --------
Total current liabilities............................... 10,121 11,053
Long-term debt.............................................. 38,750 35,500
Capital lease obligations................................... 23 1
Deferred income taxes, net.................................. 2,460 2,610
-------- --------
Total liabilities....................................... 51,354 49,164
-------- --------
Stockholders' equity:
Common stock.............................................. 118 118
Additional paid-in capital................................ 42,637 42,680
Retained earnings......................................... 14,504 17,847
Cumulative translation adjustment......................... 31 33
-------- --------
Total stockholders' equity.............................. 57,290 60,678
-------- --------
$108,644 $109,842
======== ========
</TABLE>

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(1) The condensed consolidated balance sheet as of September 30, 1999 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
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NUTRACEUTICAL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
------------------------------- -----------------------------
1999 2000 1999 2000
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales................................. $ 27,234 $ 28,674 $ 54,446 $ 56,324
Cost of sales............................. 14,416 14,938 29,440 29,456
----------- ----------- ----------- -----------
Gross profit............................ 12,818 13,736 25,006 26,868
----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative..... 8,902 9,754 17,114 19,154
Amortization of intangibles............. 437 429 874 870
----------- ----------- ----------- -----------
9,339 10,183 17,988 20,024
----------- ----------- ----------- -----------
Income from operations.................... 3,479 3,553 7,018 6,844
Interest expense, net..................... 649 709 1,240 1,364
----------- ----------- ----------- -----------
Income before provision for income
taxes................................... 2,830 2,844 5,778 5,480
Provision for income taxes................ 1,090 1,109 2,225 2,137
----------- ----------- ----------- -----------
Net income................................ $ 1,740 $ 1,735 $ 3,553 $ 3,343
=========== =========== =========== ===========
Net income per common share:
Basic................................... $ 0.15 $ 0.15 $ 0.30 $ 0.28
Diluted................................. $ 0.14 $ 0.14 $ 0.29 $ 0.27
Weighted average common shares
outstanding:
Basic................................... 11,674,994 11,803,655 11,673,703 11,798,080
Diluted................................. 12,419,806 12,509,519 12,459,256 12,510,719
</TABLE>

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)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 3,553 $ 3,343
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 2,812 3,019
Amortization of debt issuance costs....................... 108 108
Loss on disposal of property and equipment................ 34 30
Changes in assets and liabilities:
Accounts receivable..................................... (1,217) (1,676)
Inventories............................................. (2,170) 324
Prepaid expenses and other current assets............... 429 717
Deferred income taxes................................... 417 150
Other non-current assets................................ (12) 86
Accounts payable........................................ (1,696) 1,528
Accrued expenses........................................ (1,259) (593)
------- -------
Net cash provided by operating activities............. 999 7,036
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of property and equipment.............................. 38 --
Purchases of property and equipment......................... (4,467) (3,287)
------- -------
Net cash used in investing activities................. (4,429) (3,287)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt................................ 3,500 --
Payments on long-term debt.................................. (500) (3,250)
Payments on capital lease obligations....................... (26) (28)
Proceeds from issuance of common stock...................... 60 43
Purchase of treasury stock.................................. (391) --
------- -------
Net cash provided by (used in) financing activities... 2,643 (3,235)
------- -------
Effect of exchange rate changes on cash..................... 3 4
------- -------
Net increase (decrease) in cash............................. (784) 518
Cash at beginning of period................................. 1,967 869
------- -------
Cash at end of period....................................... $ 1,183 $ 1,387
======= =======
</TABLE>

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 financial position of
Nutraceutical International Corporation (the "Company") and its subsidiaries as
of March 31, 2000, the results of its operations for the three months and
six months ended March 31, 1999 and 2000 and its cash flows for the six months
ended March 31, 1999 and 2000, in conformity with generally accepted accounting
principles for interim financial information applied on a consistent basis. The
results for the three months and six months ended March 31, 2000 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 generally accepted accounting principles
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, 1999, which was filed with the Securities and Exchange Commission
on December 29, 1999.

2. INVENTORIES, NET

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

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 2000
-------------- ----------
<S> <C> <C>
Raw materials......................................... $ 7,491 $ 8,270
Work-in-process....................................... 7,151 5,200
Finished goods........................................ 12,221 13,069
------- -------
$26,863 $26,539
======= =======
</TABLE>

3. CAPITAL STOCK

The Company has adopted Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE. Under this statement, both "basic" earnings per share and
"diluted" earnings per share are presented on the face of the income statement.
The following table provides a reconciliation of both net income and the number
of common shares used in the computations of basic earnings per share, which
utilizes the

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NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

3. CAPITAL STOCK (CONTINUED)
weighted average number of common shares outstanding without regard to potential
common shares, and diluted earnings per share, which includes all such shares:

4. OPERATING SEGMENTS

For the fiscal year ended September 30, 1999, the Company adopted Statement
of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which requires the Company to report
information about its operating segments.

The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting. Accordingly, the Company
has two reportable segments: branded products and bulk materials. The Company
manufactures and markets quality branded products sold to health food stores in
the United States and to distributors worldwide. In addition to branded
products, the Company manufactures bulk materials for its own use and for sale
to other manufactures and marketers in the nutritional supplement industry.

The accounting policies for these segments are consistent with those of the
Company. The Company evaluates the financial performance of its segments based
on sales growth. Other performance measures beyond net sales, as well as balance
sheet components, are not tracked to individual segments.

Segment information for the three months and six months ended March 31, 1999
and 2000 was as follows:

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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 of this report.

The Company was formed in 1993 by key members of the current management team
and Bain Capital, Inc. to effect a consolidation strategy in the fragmented
vitamin, mineral, herbal and other nutritional supplements industry (the "VMS
Industry"). The Company purchased Solaray, Inc. in October 1993 with a view
toward using it as a platform for future acquisitions of businesses in the VMS
Industry. In fiscal 1995, the Company completed three significant acquisitions:
Premier One Products, Inc. in October 1994, Makers of KAL, Inc. in January 1995
and Monarch Nutritional Laboratories, Inc. in September 1995. In fiscal 1998,
the Company completed two acquisitions: Action Labs, Inc. in July 1998 and
Nutraforce (Canada) International, Inc. in August 1998. In fiscal 1999, the
Company completed two additional acquisitions: Woodland Publishing, Inc. and
Summit Graphics, Inc. in April 1999 (the "Fiscal 1999 Acquisitions").

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................ 52.9% 52.1% 54.1% 52.3%
------ ------ ------ ------
Gross profit............................................. 47.1% 47.9% 45.9% 47.7%
Selling, general and administrative...................... 32.7% 34.0% 31.4% 34.0%
Amortization of intangibles.............................. 1.6% 1.5% 1.6% 1.5%
------ ------ ------ ------
Income from operations................................... 12.8% 12.4% 12.9% 12.2%
Interest expense, net.................................... 2.4% 2.5% 2.3% 2.5%
------ ------ ------ ------
Income before provision for income taxes................. 10.4% 9.9% 10.6% 9.7%
Provision for income taxes............................... 4.0% 3.8% 4.1% 3.8%
------ ------ ------ ------
Net income............................................... 6.4% 6.1% 6.5% 5.9%
====== ====== ====== ======
EBITDA (1)............................................... 18.1% 17.7% 18.1% 17.5%
====== ====== ====== ======
</TABLE>

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(1) See "--EBITDA."

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 TO THE THREE MONTHS ENDED
MARCH 31, 1999

NET SALES. Net sales increased by $1.5 million, or 5.3%, to $28.7 million
for the three months ended March 31, 2000 ("second quarter of fiscal 2000") from
$27.2 million for the three months ended March 31, 1999 ("second quarter of
fiscal 1999"). Net sales of branded products increased by $1.7 million, or 6.7%,
to $25.6 million for the second quarter of fiscal 2000 from $23.9 million for
the second quarter of fiscal 1999. This increase in net sales of branded
products was primarily the result of increased sales volume. The Company
believes that the increased volume was primarily attributable to industry
growth, the success of new product introductions and, to a lesser extent, the
Fiscal 1999 Acquisitions. Net sales of bulk materials decreased by $0.2 million,
or 4.9%, to $3.1 million for the second quarter of fiscal 2000 from
$3.3 million

8
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for the second quarter of fiscal 1999. This decrease in net sales of bulk
materials was primarily attributable to reduced sales of certain commodity-based
materials to key customers.

GROSS PROFIT. Gross profit increased by $0.9 million, or 7.2%, to $13.7
million for the second quarter of fiscal 2000 from $12.8 million for the second
quarter of fiscal 1999. This increase in gross profit was primarily attributable
to an increase in sales volume. As a percentage of net sales, gross profit
increased to 47.9% for the second quarter of fiscal 2000 from 47.1% for the
second quarter of fiscal 1999. This increase in gross profit as a percentage of
net sales was primarily attributable to improvements in direct material pricing
and, to a lesser extent, a shift in sales mix to a higher proportion of branded
product sales, which have higher gross profit margins, relative to bulk material
sales, which have lower gross profit margins. During the second quarter of
fiscal 2000, direct material pricing improved due to new material sources,
increased supplier competition and reduced packaging costs, which were higher
during the second quarter of fiscal 1999 due to bottle and label conversions
associated with the Company's efforts to enhance quality and to comply with new
labeling laws mandated by the FDA.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.9 million, or 9.6%, to $9.8 million for
the second quarter of fiscal 2000 from $8.9 million for the second quarter of
fiscal 1999. As a percentage of net sales, selling, general and administrative
expenses increased to 34.0% for the second quarter of fiscal 2000 from 32.7% for
the second quarter of fiscal 1999. This increase in selling, general and
administrative expenses as a percentage of net sales was primarily attributable
to the Company's investment in sales force expansion, facility consolidation and
the addition of key management personnel.

AMORTIZATION OF INTANGIBLES. Amortization of intangibles was $0.4 million
for the second quarter of fiscal 2000 and $0.4 million for the second quarter of
fiscal 1999. As a percentage of net sales, amortization of intangibles was 1.5%
for the second quarter of fiscal 2000 compared to 1.6% for the second quarter of
fiscal 1999.

INTEREST EXPENSE, NET. Net interest expense was $0.7 million for the second
quarter of fiscal 2000 compared to $0.6 million for the second quarter of fiscal
1999. As a percentage of net sales, net interest expense was 2.5% for the second
quarter of fiscal 2000 compared to 2.4% for the second quarter of fiscal 1999.

PROVISION FOR INCOME TAXES. The Company's effective tax rate increased to
39.0% for the second quarter of fiscal 2000 from 38.5% for the second quarter of
fiscal 1999. In each fiscal quarter, the effective tax rate is higher than
statutory rates primarily due to the non-deductibility for tax purposes of
goodwill amortization arising from the Solaray, Inc. acquisition and, to a
lesser extent, the Woodland Publishing, Inc. acquisition. The impact of goodwill
arising from the Solaray, Inc. and Woodland Publishing, Inc. acquisitions on the
effective tax rate for the second quarter of fiscal 2000 increased compared to
the second quarter of fiscal 1999 as a result of the Company's mid-year
acquisition of Woodland Publishing, Inc. and the Company's lower year-to-date
income before provision for taxes.

COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2000 TO THE SIX MONTHS ENDED MARCH
31, 1999

NET SALES. Net sales increased by $1.9 million, or 3.4%, to $56.3 million
for the six months ended March 31, 2000 from $54.4 million for the six months
ended March 31, 1999. Net sales of branded products increased by $4.2 million,
or 9.1%, to $50.5 million for the six months ended March 31, 2000 from $46.3
million for the six months ended March 31, 1999. This increase in net sales of
branded products was primarily the result of increased sales volume. The Company
believes that the increased volume was primarily attributable to industry
growth, the success of new product introductions and, to a lesser extent, the
Fiscal 1999 Acquisitions. Net sales of bulk materials decreased by
$2.3 million, or 28.6%, to $5.8 million for the six months ended March 31, 2000
from $8.1 million for the six months ended March 31, 1999. This decrease in net
sales of bulk materials was primarily attributable to reduced sales of certain
commodity-based materials to key customers.

9
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GROSS PROFIT. Gross profit increased by $1.9 million, or 7.4%, to $26.9
million for the six months ended March 31, 2000 from $25.0 million for the six
months ended March 31, 1999. This increase in gross profit was primarily
attributable to an increase in sales volume. As a percentage of net sales, gross
profit increased to 47.7% for the six months ended March 31, 2000 from 45.9% for
the six months ended March 31, 1999. This increase in gross profit as a
percentage of net sales was primarily attributable to improvements in direct
material pricing and, to a lesser extent, a shift in sales mix to a higher
proportion of branded product sales, which have higher gross profit margins,
relative to bulk material sales, which have lower gross profit margins. During
the six months ended March 31, 2000, direct material pricing improved due to new
material sources, increased supplier competition and reduced packaging costs,
which were higher during the six months ended March 31, 1999 due to bottle and
label conversions associated with the Company's efforts to enhance quality and
to comply with new labeling laws mandated by the FDA.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $2.1 million, or 11.9%, to $19.2 million
for the six months ended March 31, 2000 from $17.1 million for the six months
ended March 31, 1999. As a percentage of net sales, selling, general and
administrative expenses increased to 34.0% for the six months ended March 31,
2000 from 31.4% for the six months ended March 31, 1999. This increase in
selling, general and administrative expenses as a percentage of net sales was
primarily attributable to the Company's investment in sales force expansion,
facility consolidation and the addition of key management personnel.

AMORTIZATION OF INTANGIBLES. Amortization of intangibles was $0.9 million
for the six months ended March 31, 2000 and $0.9 million for the six months
ended March 31, 1999. As a percentage of net sales, amortization of intangibles
was 1.5% for the six months ended March 31, 2000 compared 1.6% for the
six months ended March 31, 1999.

INTEREST EXPENSE, NET. Net interest expense was $1.4 million for the six
months ended March 31, 2000 compared to $1.2 million for the six months ended
March 31, 1999. As a percentage of net sales, net interest expense was 2.5% for
the six months ended March 31, 2000 compared to 2.3% for the six months ended
March 31, 1999. This increase in net interest expense was primarily attributable
to increased interest rates.

PROVISION FOR INCOME TAXES. The Company's effective tax rate increased to
39.0% for the six months ended March 31, 2000 from 38.5% for the six months
ended March 31, 1999. In each fiscal quarter, the effective tax rate is higher
than statutory rates primarily due to the non-deductibility for tax purposes of
goodwill amortization arising from the Solaray, Inc. acquisition and, to a
lesser extent, the Woodland Publishing, Inc. acquisition. The impact of goodwill
arising from the Solaray, Inc. and Woodland Publishing, Inc. acquisitions on the
effective tax rate for the six months ended March 31, 2000 increased compared to
the six months ended March 31, 1999 as a result of the Company's mid-year
acquisition of Woodland Publishing, Inc. and the Company's lower year-to-date
income before provision for taxes.

EBITDA

EBITDA (earnings before net interest expense, taxes, depreciation and
amortization) is a commonly reported standard measure that is widely used by
analysts and investors in the VMS Industry. The

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following EBITDA information provides additional information for determining the
ability of the Company to meet its debt service requirements and for other
comparative analyses of the Company's operating performance relative to other
nutritional supplement companies:

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED MARCH 31, MARCH 31,
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income.................................................. $1,740 $1,735 $3,553 $3,343
Provision for income taxes.................................. 1,090 1,109 2,225 2,137
Interest expense, net(1).................................... 649 709 1,240 1,364
Depreciation and amortization............................... 1,444 1,510 2,812 3,019
------ ------ ------ ------
EBITDA...................................................... $4,923 $5,063 $9,830 $9,863
====== ====== ====== ======
</TABLE>

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(1) Includes amortization of debt issuance costs.

The Company's EBITDA increased $0.2 million to $5.1 million for the second
quarter of fiscal 2000 from $4.9 million for the second quarter of fiscal 1999.
EBITDA as a percentage of net sales decreased to 17.7% for the second quarter of
fiscal 2000 from 18.1% for the second quarter of fiscal 1999. Increased selling,
general and administrative expenses attributable to the Company's sales force
expansion, facility consolidation and the addition of key management personnel
contributed to this decrease in EBITDA as a percentage of net sales.

The Company's EBITDA increased $0.1 million to $9.9 million for the
six months ended March 31, 2000 from $9.8 million for the six months ended
March 31, 1999. EBITDA as a percentage of net sales decreased to 17.5% for the
six months ended March 31, 2000 from 18.1% for the six months ended March 31,
1999. Increased selling, general and administrative expenses attributable to the
Company's investment in sales force expansion, facility consolidation and the
addition of key management personnel contributed to this decrease in EBITDA as a
percentage of net sales.

SEASONALITY

The Company believes that its business is characterized by minor
seasonality. Furthermore, sales to some customers 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 sales volume during
the second fiscal quarter due to increased interest in health-related products
among consumers following the holiday season. The Company does not believe that
the impact of seasonality on its results of operations is material. In addition,
the Company's sales of bulk materials are characterized by periodic shipments to
certain customers and can vary significantly from quarter to quarter.

YEAR 2000 ISSUE

Many existing computer programs use only two digits to identify years. These
programs were designed without consideration for the effect of the recent change
in century. Essentially all the Company's information technology-based systems,
as well as many non-information technology-based systems, may be affected by the
year 2000 issue.

As of May 15, 2000, the Company is not aware of any material year 2000
problems in any of its critical and non-critical systems potentially affected by
the year 2000 issue. In addition, the Company has not received any notification
from any supplier of critical systems of any material year 2000 related problems
in their businesses. In the event that any year 2000 related problems arise in
the future, the Company formulated year 2000 remediation plans to address such
issues. However, although the Company has year 2000 remediation plans, no
assurance can be given that such plans will be able to solve all year 2000
problems that might still arise or that the failure to solve any such year 2000
problem will not have a material adverse effect on the Company.

11
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LIQUIDITY AND CAPITAL RESOURCES

The Company had working capital of $29.5 million as of March 31, 2000
compared to $29.2 million as of September 30, 1999. This increase in working
capital was primarily the result of increases in accounts receivable and cash,
combined with a decrease in accrued expenses, which were somewhat offset by an
increase in accounts payable and decreases in prepaid expenses and other current
assets and inventory.

Net cash provided by operating activities for the six months ended
March 31, 2000 was $7.0 million compared to $1.0 million for the comparable
period in fiscal 1999. The increase in net cash provided by operating activities
for the six months ended March 31, 2000 was primarily attributable to reduced
inventory purchases, compared to the prior year, and changes in accounts payable
related to the timing of payments.

Net cash used in investing activities was $3.3 million for the six months
ended March 31, 2000 and $4.4 million for the comparable period in fiscal 1999.
During these periods, the Company's investing activities consisted primarily of
capital expenditures related to leasehold improvements for the Company's DDO
facility, as well as capital expenditures for information systems, distribution
equipment and manufacturing equipment to improve overall operating efficiency.

Net cash provided by (used in) financing activities was ($3.2) million for
the six months ended March 31, 2000 compared to $2.6 million for the comparable
period in fiscal 1999. Net cash used in financing activities increased primarily
due to the repayment of borrowings under the Company's revolving credit
facility.

A key component of the Company's business strategy is to seek to make
additional acquisitions, which will likely require the Company to utilize its
current credit facitly or obtain additional financing, which could include the
incurrence of substantial additional indebtedness. The Company believes that
borrowings under the Company's current credit facility, together with cash flows
from operating activities, will be sufficient to make required payments under
the current credit facility or any such replacement facility, and to make
anticipated capital expenditures and fund working capital needs for the
remaining months of fiscal 2000.

NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board issued SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, which became effective for fiscal years beginning after
December 15, 1997 and established standards for the way companies report and
display comprehensive income and its components in a full set of general purpose
financial statements. The Company has adopted SFAS No. 130, but the impact of
SFAS No. 130 on the Company's financial statements is immaterial for disclosure
in the periods presented.

The American Institute of Certified Public Accountants issued SOP 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE, which became effective for fiscal years beginning after December 15, 1998
and established standards for the way that public business enterprises account
for the costs of internal use computer software. The Company has adopted SOP
98-1 in its financial statements for the six months ended March 31, 2000.

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
for nutritional supplement sales somewhat limits the ability of the Company to
recover higher costs resulting from inflation by raising prices. Overall,
product prices have generally been stable, and the Company seeks to mitigate the
adverse effects of inflation primarily through improved productivity and cost
containment programs. The Company does not believe that inflation has had a
material impact on its results of operations for the periods presented.

12
<PAGE>
FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Such forward-looking
statements are based on the beliefs of the Company's management as well as on
assumptions made by and information currently available to the Company at the
time such statements were made. When used in this MD&A, the words "anticipate,"
"believe," "estimate," "expect," "intends" and similar expressions, as they
relate to the Company, are intended to identify forward-looking statements,
which include statements relating to, among other things: (i) the ability of the
Company to continue to successfully compete in the nutritional supplements
market; (ii) the anticipated benefits from new product introductions; (iii) the
continued effectiveness of the Company's sales and marketing strategy; and (iv)
the ability of the Company to continue to successfully develop and launch new
products. Actual results could differ materially from those projected in the
forward-looking statements as a result of the matters discussed herein and
certain economic and business factors, some of which may be beyond the control
of the Company.

13
<PAGE>
PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As discussed in the Company's previous filings, the Company is subject to
regulation by a number of federal, state and foreign agencies and is involved in
various legal matters that arise in the normal course of business. The Company
does not believe there are any recent material developments in regulatory and
legal matters referred to in previous filings, or any new material legal
proceedings.

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. There can be no assurance, however, that such
insurance coverage will be adequate to cover all losses that the Company may
incur in future periods or that coverage will be available for all of the types
of claims the Company faces or may face.

In the opinion of management, the Company's liability, if any, arising from
regulatory and legal proceedings related to these matters, and others in which
it is involved, is not expected to have a material adverse impact on the
Company's financial position, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The Annual Meeting of Stockholders of the Company was held on February 29,
2000, at which meeting the stockholders voted to elect individuals to serve
as part of Class II Directors of the Company and ratify the appointment of
PricewaterhouseCoopers LLP as the Company's independent certified public
accountants for the fiscal year ending September 30, 2000.

The results of the matters voted on at the Annual Meeting are shown below.

(b) The nominees for election as Class II Directors of the Company are listed
below, together with the number of votes cast for, against, and withheld
with respect to each such nominee, as well as the number of non-votes with
respect to each such nominee:

<TABLE>
<CAPTION>
NOMINEE FOR AGAINST WITHHELD NON-VOTING
- ------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C>
Michael D. Burke..................... 10,416,116 31,750 -- 1,349,852
James D. Stice, Ph.D................. 10,416,116 31,750 -- 1,349,852
</TABLE>

<TABLE>
<S> <C>
Frank W. Gay II Matthew S. Levin
Robert C. Gay Jon Steven Young
Jeffrey A. Hinrichs
</TABLE>

(d) Other matters voted upon at the meeting and the results of those votes are
as follows:

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN NON-VOTING
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
Ratification of PricewaterhouseCoopers LLP as
the Company's independent certified public
accountants................................. 10,437,738 10,078 50 1,349,852
</TABLE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

27.1 Financial Data Schedule

(b) Reports on Form 8-K:

None

14
<PAGE>
SIGNATURES

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.

<TABLE>
<S> <C> <C>
NUTRACEUTICAL INTERNATIONAL CORPORATION
(Registrant)

Dated: May 15, 2000 By: /s/ LESLIE M. BROWN, JR.
-----------------------------------------
Leslie M. Brown, Jr.
SENIOR VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER
</TABLE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
NUTRACEUTICAL INTERNATIONAL CORPORATION'S FINANCIAL POSITION AS OF MARCH 31,
2000 AND THE RESULTS OF ITS OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 1,387
<SECURITIES> 0
<RECEIVABLES> 11,927
<ALLOWANCES> 1,241
<INVENTORY> 26,539
<CURRENT-ASSETS> 40,523
<PP&E> 30,127
<DEPRECIATION> 14,266
<TOTAL-ASSETS> 109,842
<CURRENT-LIABILITIES> 11,053
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 60,560
<TOTAL-LIABILITY-AND-EQUITY> 109,842
<SALES> 56,324
<TOTAL-REVENUES> 56,324
<CGS> 29,456
<TOTAL-COSTS> 29,456
<OTHER-EXPENSES> 20,024
<LOSS-PROVISION> 64
<INTEREST-EXPENSE> 1,364
<INCOME-PRETAX> 5,480
<INCOME-TAX> 2,137
<INCOME-CONTINUING> 3,343
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,343
<EPS-BASIC> .28
<EPS-DILUTED> .27

</TABLE>