NUTR Nutraceutical International Corp. (MM)

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UNITED STATES
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, 2008

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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one):

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  o     NO  ý

        At January 29, 2009 the registrant had 10,862,782 shares of common stock outstanding.

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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)

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(1)

The condensed consolidated balance sheet as of September 30, 2008 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 to present fairly the consolidated financial position of Nutraceutical International Corporation and its subsidiaries (the "Company") as of December 31, 2008, the results of their operations and cash flows for the three months ended December 31, 2007 and 2008, in conformity with accounting principles generally accepted in the United States of America for interim financial information applied on a consistent basis. Results for the three months ended December 31, 2008 are not necessarily indicative of the results to be expected for the full fiscal year.

        Certain information and footnote disclosures normally included in the annual 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, 2008, which was filed with the Securities and Exchange Commission on November 20, 2008.

2. ACCOUNTS RECEIVABLE, NET

        Accounts receivable, net of allowances for sales returns and doubtful accounts, consisted of the following:

3. INVENTORIES, NET

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

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NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

4. GOODWILL AND INTANGIBLE ASSETS

        The change in the carrying amount of goodwill from September 30, 2008 to December 31, 2008 was as follows:

        The carrying amounts of intangible assets at September 30, 2008 and December 31, 2008 were as follows:

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(1)

Amounts include the impact of foreign currency translation adjustments.

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NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

4. GOODWILL AND INTANGIBLE ASSETS (Continued)

        Estimated future amortization expense related to the December 31, 2008 net carrying amount of $2,614 for intangible assets subject to amortization is as follows:

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(1)

Estimated amortization expense for the year ending September 30, 2009 includes only amortization to be recorded after December 31, 2008.

        Goodwill and non-amortizable intangible assets are tested annually for impairment and are tested for impairment between annual tests if an event occurs that would cause the Company to believe that value is impaired. The Company performs its annual impairment testing as of September 30 each year, which is the last day of the Company's fiscal year. Reporting unit fair values are determined using the income and market approaches. At December 31, 2008, the Company had goodwill allocated to its branded reporting unit and its natural food markets reporting unit. Amortizable intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.

        During the year ended September 30, 2008, the Company recorded a non-cash goodwill impairment charge of $2,875 ($1,811 after tax, or $0.16 per diluted share) related to its health food stores reporting unit.

        The ongoing uncertainty in general economic and market conditions negatively impacted retail and consumer demand, as well as the market price of the Company's common stock, during the three months ended December 31, 2008 and could continue to negatively impact the Company's future operating performance, cash flow and/or stock price and could increase the likelihood of significant additional goodwill or intangible asset impairment charges being recorded in future periods which could materially impact the Company's consolidated financial statements. Triggering events in future periods that could potentially warrant an interim review of goodwill and intangible assets to determine whether or not additional impairments exist include a prolonged decrease in the Company's stock price and market capitalization, a sustained decrease in the Company's net sales and/or a sustained decrease in the Company's income from operations. The valuation of goodwill and intangible assets is subject to a high degree of judgment and complexity.

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NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

        In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in prior accounting pronouncements. In November 2007, the FASB decided to postpone for one year the effective date of SFAS 157 for assets and liabilities measured at fair value on a non-recurring basis. The Company adopted SFAS 157 as of October 1, 2008 for assets and liabilities measured at fair value on a recurring basis. The adoption of this standard did not have a material impact on the Company's consolidated financial statements. The Company will adopt SFAS 157 for assets and liabilities measured at fair value on a non-recurring basis as of October 1, 2009.

        On a quarterly basis, the Company measures at fair value certain financial assets and liabilities, including cash equivalents and an interest rate swap. SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's own assumptions. The following fair value hierarchy prioritizes the inputs into three broad levels:

•

Level 1—Quoted prices for identical instruments in active markets;



•

Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and



•

Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

        This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. The fair value of the Company's financial assets and liabilities at December 31, 2008 was determined using the following levels of inputs:

        The fair value for the money market fund, classified as Level 1, was obtained from a quoted market price. The fair value for the interest rate swap, classified as Level 2, was derived based on the notional amount of the interest rate swap and observable market inputs including time to maturity, interest rates and credit spreads.

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NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

6. SHARE REPURCHASES

        During the three months ended December 31, 2008, the Company did not purchase or retire any shares of common stock. During the three months ended December 31, 2007, the Company purchased 67,731 shares of common stock for an aggregate price of $858, which shares were held in treasury until being retired on December 31, 2007. As of December 31, 2008, the Company was permitted to purchase up to 563,915 additional shares under its approved purchase plan. The Company accounts for treasury shares using the cost method.

7. STOCK OPTIONS

        The following table summarizes stock option activity during the three months ended December 31, 2008:

        Options to purchase 163,365 and 305,300 shares of common stock for the three months ended December 31, 2007 and 2008, respectively, were excluded from 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.

        During the three months ended December 31, 2008, the Company received proceeds of $89 related to the exercise of stock options. During this same period, the Company recorded a tax benefit of $13 and optionees realized an aggregate pre-tax gain of $32 from these stock option exercises. During the three months ended December 31, 2007, there were no stock options exercised.

8. 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.

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NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

8. OPERATING SEGMENTS (Continued)

        Net sales attributed to customers in the United States and foreign countries for the three months ended December 31, 2007 and 2008 were as follows:

        Certain net sales attributed to customers in the United States are sold to customers who in turn may sell such products to customers in foreign countries while certain net sales attributed to customers in foreign countries are sold to customers who in turn may sell such products to customers in the United States.

        The Company's net sales by product group for the three months ended December 31, 2007 and 2008 were as follows:

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(1)

Net sales for any other product or group of similar products are less than 10% of consolidated net sales.

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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.

        We are an integrated manufacturer, marketer, distributor and retailer of branded nutritional supplements and other natural products sold primarily to and through domestic health and natural food stores. Internationally, we market and distribute branded nutritional supplements and other natural products to and through health and natural product distributors and retailers. Our core business strategy is to acquire, integrate and operate, from beginning to end, the manufacturing, marketing and distribution of branded nutritional supplement businesses in the natural products industry. We believe that the consolidation and integration of these acquired businesses provides ongoing financial synergies through increased scale and market penetration, as well as strengthened customer relationships.

        We sell branded nutritional supplements and other natural products under the trademarks Solaray ®, VegLife ®, KAL ®, Nature's Life ®, Sunny Green ®, Action Labs ®, Natural Balance ® , NaturalMax ®, bioAllers ®, Herbs for Kids ™, Natra-Bio ®, NaturalCare ®, Zand ®, Health from the Sun ®, Life-flo ®, Larenim ®, Living Flower Essences ®, Pioneer ®, Thompson ®, Natural Sport ®, Supplement Training Systems ®, Premier One ®, Montana Big Sky ™, ActiPet ®, FunFresh Foods ™, Dowd & Rogers ™, CompliMed ®, AllVia ™, Oakmont Labs ®, Healthway ®, Body Gold ®, Sayge BioSciences ™ , Monarch Nutraceuticals ™ and Great Basin Botanicals ™. Under the name Woodland Publishing ™, we publish, print and market a line of books and booklets to, among others, book distributors, national retail bookstores and health and natural food stores. We also distribute branded products of certain third parties.

        We own neighborhood natural food markets, which operate under the trade names The Real Food Company ™, Thom's Natural Foods ™ and Cornucopia Community Market™ . We also own health food stores, which operate under the trade names Fresh Vitamins ™, Granola's ™ and Pilgrim's Natureway ™.

        We were 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 our formation, we have completed twenty-five acquisitions of assets or stock. As a result of acquisitions, internal growth and cost management, we believe that we are well positioned to continue to capitalize on acquisition opportunities that arise in the VMS Industry.

Critical Accounting Policies

        The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America required us to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods. Significant estimates included values and lives assigned to acquired intangible assets, reserves for customer returns and allowances, uncollectible accounts receivable, slow moving and obsolete and/or damaged inventory and valuation and recoverability of long-lived assets. Actual results may differ from these estimates.

        Our estimates and judgments related to our critical accounting policies, including factors and assumptions considered in making these estimates and judgments, did not vary significantly for the periods presented and had no material impact on the consolidated financial statements as reported. Our critical accounting policies include the following:

         Accounts Receivable —Provision is made for estimated bad debts based on periodic analysis of individual customer balances, including an evaluation of days sales outstanding, payment history, recent payment trends and perceived credit worthiness. If general economic conditions and/or customer

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financial condition were to change, additional provisions for bad debts may be required, which could have a material impact on the consolidated financial statements.

         Inventories —Provision is made for slow moving, obsolete and/or damaged inventory based on periodic analysis of individual inventory items, including an evaluation of historical usage and/or movement, age, expiration date and general condition. If market demand and/or consumer preferences are less favorable than historical trends or future expectations, additional provisions for slow moving, obsolete and/or damaged inventory may be required, which could have a material impact on the consolidated financial statements.

         Property, Plant and Equipment —Depreciation and amortization expense is impacted by our judgments regarding the estimated useful lives of assets placed in service. If the actual lives of assets are significantly less than expected, depreciation and amortization expense would be accelerated, which could have a material impact on the consolidated financial statements.

        We evaluate the recoverability of our property, plant and equipment in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . We review property, plant and equipment for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of the asset by comparison of its carrying amount to the future undiscounted cash flows we expect the asset to generate. If we consider the asset to be impaired, we measure the amount of any impairment as the difference between the carrying amount and the fair value of the impaired asset.

         Goodwill and Intangible Assets —Statement of Financial Accounting Standards No. 141, Business Combinations , and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), require estimates and judgments in determining the initial recognition and measurement of goodwill and intangible assets, including factors and assumptions used in determining fair values and useful lives. Intangible assets with finite useful lives are amortized, while intangible assets with indefinite useful lives are not amortized. Amortizable intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill and non-amortizable intangible assets are tested annually for impairment and are tested for impairment between annual tests if an event occurs that would cause us to believe that value is impaired. We perform our annual impairment testing as of September 30 each year, which is the last day of our fiscal year. Reporting unit fair values are determined using the income and market approaches. At December 31, 2008, we had goodwill allocated to our branded reporting unit and our natural food markets reporting unit.

        During the year ended September 30, 2008, we recorded a non-cash goodwill impairment charge of $2.9 million ($1.8 million after tax, or $0.16 per diluted share). This charge represented the entire carrying value of goodwill related to our health food stores reporting unit.

        The ongoing uncertainty in general economic and market conditions negatively impacted retail and consumer demand, as well as the market price of our common stock, during the three months ended December 31, 2008 and could continue to negatively impact our future operating performance, cash flow and/or stock price and could increase the likelihood of significant additional goodwill or intangible asset impairment charges being recorded in future periods which could materially impact our consolidated financial statements. Triggering events in future periods that could potentially warrant an interim review of goodwill and intangible assets to determine whether or not additional impairments exist include a prolonged decrease in our stock price and market capitalization, a sustained decrease in our net sales and/or a sustained decrease in our income from operations. The valuation of goodwill and intangible assets is subject to a high degree of judgment and complexity.

         Revenue Recognition —Revenue is recognized in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition , which states that revenue should be recognized when the following criteria are

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met: (1) persuasive evidence of an arrangement exists; (2) the product has been shipped and the customer takes ownership and assumes the risk of loss; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. We believe that these criteria are satisfied upon shipment from our facilities or, in the case of our neighborhood natural food markets and health food stores, at the point of sale within these stores. Revenue is reduced by provisions for estimated returns and allowances, which are based on historical averages that have not varied significantly for the periods presented, as well as specific known claims, if any. No other significant deductions from revenue must be estimated at the point in time that revenue is recognized.

Results of Operations

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

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(1)

See "—EBITDA."

Comparison of the Three Months Ended December 31, 2008 to the Three Months Ended December 31, 2007

        Net Sales.     Net sales decreased by $1.5 million, or 3.5%, to $39.6 million for the three months ended December 31, 2008 ("first quarter of fiscal 2009") from $41.1 million for the three months ended December 31, 2007 ("first quarter of fiscal 2008"). Net sales of branded nutritional supplements and other natural products decreased by $1.3 million, or 3.6%, to $35.5 million for the first quarter of fiscal 2009 compared to $36.8 million for the first quarter of fiscal 2008. The decrease in net sales of branded nutritional supplements and other natural products was primarily related to a decrease in sales volume of branded products to many customers due in large part to the U.S. and global economic recession which seemed to be more pronounced during the first quarter of fiscal 2009. This decrease in net sales volume was partially offset by a $1.3 million increase in net sales related to price changes as well as the net sales contributions of businesses acquired during fiscal 2008. Other net sales remained relatively flat at $4.1 million for the first quarter of fiscal 2009 compared to $4.3 million for the first quarter of fiscal 2008. Management believes that the VMS Industry contracted during the first quarter of fiscal 2009 and continues to remain very competitive.

        Gross Profit.     Gross profit decreased by $0.9 million, or 3.9%, to $21.4 million for the first quarter of fiscal 2009 from $22.3 million for the first quarter of fiscal 2008. This decrease in gross profit was

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primarily attributable to the decrease in net sales. As a percentage of net sales, gross profit remained relatively flat at 54.1% for the first quarter of fiscal 2009 compared to 54.3% for the first quarter of fiscal 2008.

        Selling, General and Administrative.     Selling, general and administrative expenses decreased by $0.8 million, or 5.1%, to $15.8 million for the first quarter of fiscal 2009 from $16.6 million for the first quarter of fiscal 2008. As a percentage of net sales, selling, general and administrative expenses decreased to 39.8% for the first quarter of fiscal 2009 compared to 40.5% for the first quarter of fiscal 2008. This decrease in selling, general and administrative expenses was primarily attributable to a reduction in operational and transitional costs related to businesses acquired in fiscal 2007 and fiscal 2008 as well as year-over-year cost improvements in most areas.

        Amortization of Intangibles.     Amortization of intangibles was $0.2 million for the first quarter of fiscal 2009 and 2008. For each period, amortization expense was primarily related to intangible assets recorded in connection with acquisitions.

        Interest and Other (Income)/Expense, Net.     Net interest and other (income)/expense was $0.5 million for the first quarter of fiscal 2009 and $0.4 million for the first quarter of fiscal 2008 and primarily consisted of interest expense on indebtedness under our revolving credit facility, with the increase being primarily related to additional borrowings for the fiscal 2008 acquired businesses partially offset by a reduction in interest rates.

        Provision for Income Taxes.     Our effective tax rate was 37.6% for the first quarter of fiscal 2009 and 37.5% for the first quarter of fiscal 2008. In each period, our effective tax rate was higher than the federal statutory rate primarily due to state taxes.

EBITDA

        EBITDA (a non-GAAP measure) is defined in our debt covenants and performance measures as earnings before net interest and other (income)/expense, taxes, depreciation and amortization. EBITDA has some inherent limitations in measuring operating performance due to the exclusion of certain financial elements such as depreciation and amortization and is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. Furthermore, EBITDA is not intended to be a substitute for cash flows from operating activities, as a measure of liquidity, or an alternative to net income in determining our operating performance in accordance with generally accepted accounting principles. Our use of EBITDA should be considered within the following context:

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We acknowledge that plant and equipment (while less important in our line of business due to outsourcing alternatives) are necessary to earn revenue based on our current business model.



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Our use of EBITDA as a measure of operating performance is not based on any belief about the reasonableness of excluding depreciation and amortization when measuring financial performance.



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Our use of EBITDA is supported by the importance of EBITDA to the following key stakeholders:  




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Analysts —who estimate our projected EBITDA and other EBITDA-based metrics in their independently developed financial models for investors;



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Creditors —who evaluate our operating performance based on compliance with certain EBITDA-based debt covenants;



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Investment Bankers —who use EBITDA and other EBITDA-based metrics in their written evaluations and comparisons of companies within our industry; and

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Board of Directors and Executive Management —who use EBITDA as an essential metric for evaluating management performance relative to our operating budget and bank covenant compliance, as well as our ability to service debt and raise capital for growth opportunities, including acquisitions, which are a critical component of our stated strategy. Historically, we have recorded a monthly accrual for incentive compensation as a percentage of EBITDA, which has been paid out to executive management, as well as other employees, upon completion of our annual audit.

        The following table sets forth a reconciliation of net income to EBITDA for each period included herein:

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(1)

Includes amortization of deferred financing fees.

        Our EBITDA increased to $7.1 million for the first quarter of fiscal 2009 from $6.8 million for the first quarter of fiscal 2008. EBITDA as a percentage of net sales increased to 18.0% for the first quarter of fiscal 2009 from 16.6% for the first quarter of fiscal 2008.

Seasonality

        We believe that our business is characterized by minor seasonality. However, sales to any particular customer or sales of any particular product can vary substantially from one quarter to the next based on such factors as industry trends, timing of promotional discounts, domestic and international economic conditions and acquisition-related activities. Excluding the effect of acquisitions, we have historically recorded higher branded products sales volume during the second fiscal quarter (January thru March) due to increased interest in health-related products among consumers following the holiday season.

Liquidity and Capital Resources

        We had working capital of $37.6 million as of December 31, 2008 compared to $36.3 million as of September 30, 2008. This increase in working capital was primarily the result of decreases in accounts payable and accrued expenses partially offset by decreases in accounts receivable, inventories and prepaid expenses and other current assets.

        Net cash provided by operating activities for the three months ended December 31, 2008 was $3.1 million compared to $2.8 million for the comparable period in fiscal 2008. This increase in net cash provided by operating activities for the three months ended December 31, 2008 was primarily attributable to changes in assets and liabilities.

        Net cash used in investing activities was $4.8 million for the three months ended December 31, 2008 compared to $4.1 million for the comparable period in fiscal 2008. Our investing activities during these periods primarily consisted of capital expenditures primarily for building improvements related to facility consolidation efforts, distribution and manufacturing equipment and information systems.

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        Net cash provided by financing activities was $1.6 million for the three months ended December 31, 2008 compared to $0.2 million for the comparable period in fiscal 2008. During these periods, financing activities primarily related to borrowings and repayments under our revolving credit facility, purchases of common stock for treasury and proceeds from the issuance of common stock related to stock option exercises and the direct stock purchase plan.

        In October 2007, we registered a direct stock purchase plan with the Securities and Exchange Commission. The purpose of this direct stock purchase plan is to provide a convenient way for existing stockholders, as well as new investors, to purchase shares of our common stock. A total of 1,500,000 shares of our common stock were registered under the plan with 5,856 shares purchased during the three months ended December 31, 2008. As of December 31, 2008, there were 1,481,101 shares of common stock available for purchase under this plan.

        Our current revolving credit facility has available credit borrowings of $60.0 million with no automatic reductions and provides an accordion feature which can increase the available credit borrowings to $90.0 million, subject to approval by the lenders and compliance with certain covenants and conditions.

        At December 31, 2008, we had outstanding revolving credit borrowings of $29.5 million. Borrowings under the revolving credit facility are collateralized by certain of our assets. At our election, borrowings under the 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, 2008, the applicable weighted-average interest rate for outstanding borrowings was 3.65%, exclusive of any interest rate swap agreements. We are also required to pay a variable quarterly fee on the unused balance under the revolving credit facility. At December 31, 2008, the applicable rate was 0.18%. 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 September 7, 2011, and we are required to repay all principal outstanding under the revolving credit facility on such date.

        The revolving credit facility contains restrictive covenants, including limitations on incurring certain other indebtedness and requirements that we maintain certain financial ratios. As of December 31, 2008, we were in compliance with the restrictive covenants. Upon the occurrence of a default, the lender has various remedies or rights, which may include proceeding against the collateral or requiring us to repay all amounts outstanding under the revolving credit facility.

        On August 10, 2008, we entered into a one-year interest rate swap agreement covering $15.0 million of our outstanding revolving credit borrowings. The interest rate swap has a fixed interest rate of 3.17% plus a variable margin of 0.75% at December 31, 2008 for an all-in rate of 3.92%. This interest rate swap was not designated as a hedge in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). For the three months ended December 31, 2008, the interest rate swap had an unfavorable change in fair value of $186 thousand, which was included as a component of interest and other (income)/expense in the Condensed Consolidated Statements of Operations and Comprehensive Income.

        In the current volatile credit market, there is risk that any lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to: extending credit up to the maximum permitted by a credit facility, allowing access to additional credit features and otherwise accessing capital and/or honoring loan commitments. The lenders on our credit facility are Rabobank International and Wells Fargo. If our lenders failed to honor their legal commitments under our credit facility, it could be difficult in this environment to replace our credit facility on similar terms.

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        A key component of our business strategy is to seek to make additional acquisitions, which may require that we obtain additional financing, which could include the incurrence of substantial additional indebtedness or the issuance of additional stock. We believe that borrowings under our 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 any such replacement facility, and to make anticipated capital expenditures and fund working capital needs for fiscal 2009.

        Our significant non-cancelable contractual obligations as of December 31, 2008 were as follows:

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(a)

Represents estimated interest obligations associated with our outstanding revolving credit facility balance of $29.5 million at December 31, 2008, assuming no principal payments are made before maturity, a weighted-average interest rate of 3.65% and an underutilization fee rate of 0.18%, offset by a one-year interest rate swap covering $15.0 million of our outstanding revolving credit borrowings at an all-in rate of 3.92%.

New Accounting Standards

        In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in prior accounting standards. In November 2007, the FASB decided to postpone for one year the effective date of SFAS 157 for assets and liabilities measured at fair value on a non-recurring basis. SFAS 157 was effective for us as of October 1, 2008 for assets and liabilities measured at fair value on a recurring basis. Our adoption of SFAS 157 did not have a material impact on our consolidated financial statements. SFAS 157 is effective for us as of October 1, 2009 for assets and liabilities measured at fair value on a non-recurring basis.

        In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 was effective for us as of October 1, 2008, however, we did not elect to apply the fair value option to any financial instruments or other items upon adoption or during the three months ended December 31, 2008. As a result, the adoption of SFAS 159 did not have a material impact on our consolidated financial statements.

        In December 2007, the FASB issued Statement of Financial Accounting Standard No. 141 (Revised 2007), Business Combinations ("SFAS 141(R)"). SFAS 141(R) addresses fair value accounting and the related disclosure for assets and liabilities acquired in a business combination. SFAS 141(R) is effective for our 2010 fiscal year. We are currently evaluating the impact this standard may have on our consolidated financial statements.

        In December 2007, the FASB issued Statement of Financial Accounting Standard No. 160, Noncontrolling Interests in Consolidated Financial Statements ("SFAS 160"). SFAS 160 changes the

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accounting and reporting for the noncontrolling interests in a subsidiary in consolidated financial statements. SFAS 160 recharacterizes minority interests as noncontrolling interests and requires noncontrolling interests to be classified as a component of shareholders' equity. SFAS 160 is effective for us as of October 1, 2009 and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. We do not expect the adoption of SFAS 160 to have a material impact on our consolidated financial statements.

        In March 2008, the FASB issued Statement of Financial Accounting Standard No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of SFAS No. 133 ("SFAS 161"). This Standard requires enhanced disclosures regarding derivatives and hedging activities. SFAS 161 is effective for us beginning January 1, 2009. SFAS 161 will not have a material impact on our consolidated financials statements.

        In April 2008, the FASB issued Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets ("FSP 142-3"). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. FSP 142-3 is effective for us as of October 1, 2009. Early adoption is prohibited. We are currently evaluating the impact FSP 142-3 may have on our consolidated financial statements.

        We periodically review new accounting standards that are issued from time to time. Although some of these accounting standards may be applicable to us, we have not identified any other new standards that we believe merit further discussion, and we expect that none would have a significant impact on our consolidated financial statements.

Inflation

        Inflation affects the cost of raw materials, goods and services used by us. In recent years, inflation has been modest. The competitive environment somewhat limits our ability to recover higher costs resulting from inflation by raising prices. We seek to mitigate the adverse effects of inflation primarily through improved productivity and cost containment programs. We do not believe that inflation has had a material impact on our results of operations for the periods presented, except with respect to increased costs in manufacturing, packaging and distribution resulting from increased fuel and other petrochemical costs, as well as payroll-related costs, insurance premiums and other costs arising from or related to government imposed regulations.

Forward-Looking Statements

        This Form 10-Q contains 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. These forward-looking statements can be identified by the use of terms such as "believe," "expects," "plan," "intend," "may," "will," "should," "can," or "anticipates," or the negative thereof, or variations thereon, or comparable terminology, or by discussions of strategy. Although these statements are believed to be reasonable, they are inherently uncertain. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date this Form 10-Q was first filed with the SEC. Important factors that may cause our results to differ from these forward-looking statements include, but are not limited to: (i) slow or negative growth in the nutritional supplement industry or the healthy foods channel, (ii) interruption of business or negative impact on sales and earnings due to acts of God, acts of war, terrorism, bio-terrorism or civil unrest, (iii) adverse publicity or negative consumer perception regarding nutritional supplements, (iv) changes in government regulations, (v) product liability claims and litigation, (vi) insurance coverage issues,

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(vii) increased competition or costs, (viii) intellectual property rights of other parties, (ix) the loss of key personnel, (x) disruptions from acquisitions, (xi) issues with obtaining raw materials of adequate quality or quantity, (xii) problems with information management systems, manufacturing efficiencies and operations, (xiii) changes in general worldwide economic or political conditions, (xiv) the volatility of the stock market generally and of our stock specifically, (xv) litigation generally, and (xvi) other factors indicated from time to time in our SEC reports, copies of which are available upon request from our investor relations group or which may be obtained at the SEC's website ( www.sec.gov ).

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

        At our election, borrowings under our 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, 2008, the applicable weighted-average interest rate for borrowings was 3.65% and we had total borrowings outstanding of $29.5 million.

        On August 10, 2008, we entered into a one-year interest rate swap agreement covering $15.0 million of our outstanding revolving credit borrowings. At December 31, 2008, the interest rate swap had an all-in interest rate of 3.92% and was not designated as a hedge in accordance with SFAS 133. For the three months ended December 31, 2008, the interest rate swap had an unfavorable change in fair value of $186 thousand, which was included as a component of interest and other (income)/expense in the Condensed Consolidated Statements of Operations and Comprehensive Income.

        With respect to our international operations, we are subject to currency fluctuations; however, we do not believe that these fluctuations would have a material adverse impact on our financial position because the majority of our net sales to foreign countries are transacted in U.S. dollars. Net sales to foreign countries not transacted in U.S. dollars include sales to customers in Norway, Sweden, the U.K., the Netherlands and Japan. To date, we have not hedged any of our potential foreign currency exposures.

Item 4.    Controls and Procedures

        Evaluation of Disclosure Controls and Procedures.     We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow for timely decisions regarding required disclosure.

        In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.

        As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision of and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our principal executive and principal financial officers have concluded that our disclosure controls and procedures were effective.

        Changes in Internal Control Over Financial Reporting.     There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1.    Legal Proceedings

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

        We carry insurance coverage in the types and amounts that we consider reasonably adequate to cover the risks we face in the industry in which we compete. However, our current liability policy excludes claims related to certain ingredients, including products containing kava.

        In our opinion, the outcomes of individual regulatory and legal matters in which we are presently involved are not probable and no estimate can be made of the range of potential gains or losses. While incapable of estimation, in the opinion of management, the individual regulatory and legal matters in which we are involved are not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 1A.    Risk Factors

        There have been no material changes in our risk factors from those disclosed in our 2008 Annual Report on Form 10-K.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

        We did not sell any unregistered equity securities during the period covered by this Form 10-Q for the Quarterly Period Ended December 31, 2008.

        Under our share purchase program which was initially approved on June 22, 2000, we are authorized to buy up to 2,500,000 shares of our common stock, of which 563,915 shares may yet be purchased as of December 31, 2008. The shares available for purchase under this program have no expiration date. There were no purchases under this program during the three months ended December 31, 2008.

Item 6.    Exhibits

31.1

Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



32.1

Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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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