NUTR Nutraceutical International Corp. (MM)

Table of Contents

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 June 30, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o     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:

        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 July 30, 2009, the registrant had 10,919,820 shares of common stock outstanding.

---

Table of Contents

NUTRACEUTICAL INTERNATIONAL CORPORATION

INDEX

2

---

Table of Contents

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, 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.

3

---

Table of Contents

NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(unaudited)

(dollars in thousands, except per share data)

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

4

---

Table of Contents

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.

5

---

Table of Contents

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 June 30, 2009, the results of their operations for the three and nine months ended June 30, 2008 and 2009 and their cash flows for the nine months ended June 30, 2008 and 2009, 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 and nine months ended June 30, 2009 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:

6

---

Table of Contents

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

4. GOODWILL AND INTANGIBLE ASSETS

        In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), 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. Amortizable intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.

        Under SFAS 142, a two step process is used to test for goodwill impairment. The first step is to determine if there is an indication of impairment by comparing the estimated fair value of each reporting unit to its carrying value, including existing goodwill. Goodwill is considered impaired if the carrying value of a reporting unit exceeds the estimated fair value. Upon an indication of impairment, a second step is performed to measure the amount of the impairment by comparing the implied fair value of the reporting unit's goodwill with its carrying value.

        Primarily as a result of the ongoing U.S. and global economic recession and the related turmoil in the equity markets, there was a significant and prolonged decrease in the Company's stock price and related market capitalization during the six months ended March 31, 2009. The ongoing economic recession also negatively impacted the Company during the six months ended March 31, 2009, both domestically and internationally. Based on these factors, the Company determined that an interim goodwill impairment analysis was necessary and performed this goodwill impairment analysis on each of its reporting units during the second quarter of fiscal 2009. Reporting unit fair values were determined using an equal weighting of the income approach, which estimates fair value based on expected future discounted cash flows, and the market approach, which estimates fair value based on comparable market prices. The income approach included assumptions for, among others, forecasted revenues, gross profit margins, operating profit margins, working capital cash flow and long-term discount rates, all of which required significant judgments by management. Long-term discount rates used in the estimation of reporting unit fair values were determined based on the expected weighted average cost of capital for each reporting unit. Long-term discount rates had increased since the Company's last annual impairment test (in the fourth quarter of fiscal 2008) due to increased risk premiums and significant tightening of the credit markets. Based on the valuation findings, the Company determined that it had an indication of goodwill impairment related to its branded reporting unit and its natural food markets reporting unit in accordance with the first step of the goodwill impairment test described in SFAS 142.

        The Company then performed the second step of the impairment test under SFAS 142 to measure the amount of the non-cash impairment charge which was determined to be $37,519 ($27,288 after tax, or $2.51 per diluted share for the nine months ended June 30, 2009). Of this total non-cash impairment charge, $35,412 related to the Company's branded reporting unit and $2,107 related to the Company's natural food markets reporting unit. The charge related to the Company's branded reporting unit represented the entire carrying value of its goodwill. The Company's natural food markets reporting unit had a remaining goodwill carrying value of $332 and represented the only reporting unit with a remaining goodwill carrying value at June 30, 2009. The non-cash impairment charge had no impact on the Company's compliance with debt covenants, cash flows or available liquidity.

7

---

Table of Contents

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

4. GOODWILL AND INTANGIBLE ASSETS (Continued)

        The change in the carrying amount of goodwill from September 30, 2008 to June 30, 2009 was as follows:

        Prior to the interim assessment of goodwill impairment performed during the second quarter of fiscal 2009, the Company also assessed its non-amortizable intangible assets in accordance with SFAS 142 and performed recoverability testing of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , and determined there was no additional impairment.

8

---

Table of Contents

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

4. GOODWILL AND INTANGIBLE ASSETS (Continued)

        The carrying amounts of intangible assets at September 30, 2008 and June 30, 2009 were as follows:

---

(1)

Amounts include the impact of foreign currency translation adjustments.

9

---

Table of Contents

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 June 30, 2009 net carrying amount of $2,423 for intangible assets subject to amortization is as follows:

---

(1)

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

        The ongoing uncertainty in general and economic conditions may continue to impact retail and consumer demand, as well as the market price of the Company's common stock, and could negatively impact the Company's future operating performance, cash flow and/or stock price and could result in additional goodwill and/or intangible asset impairment charges being recorded in future periods which could materially impact the Company's consolidated financial statements. The valuation of goodwill and intangible assets is subject to a high degree of judgment and complexity.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

        In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards 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

10

---

Table of Contents

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

5. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

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 June 30, 2009 was determined using the following levels of inputs:

        The fair value of the money market fund, classified as Level 1, was obtained from a quoted market price. The fair value of 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.

        The Company adopted Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of SFAS No. 133 ("SFAS 161"), as of January 1, 2009. The Company has one derivative financial instrument, an interest rate swap, to manage its exposure to interest rate risks. The Company does not use derivatives for trading or speculative purposes and is not a party to leveraged derivatives.

        Long-term debt was comprised of the following:

        The Company's current revolving credit facility has available credit borrowings of sixty million with no automatic reductions and provides an accordion feature that can increase the available credit borrowings to ninety million, subject to approval by the lenders and compliance with certain covenants and conditions. The lenders under the revolving credit facility are Rabobank International and

11

---

Table of Contents

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

5. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Wells Fargo. To date, the Company has not experienced any difficulties in accessing the available funds under the revolving credit facility.

        At June 30, 2009, the Company had outstanding revolving credit borrowings of $18,500. Borrowings under the revolving credit facility are collateralized by certain 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 June 30, 2009, the applicable weighted-average interest rate for outstanding borrowings was 1.90%, exclusive of any interest rate swap agreements. The Company is also required to pay a variable quarterly fee on the unused balance under the revolving credit facility. At June 30, 2009, 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 the Company is required to repay all principal and interest outstanding under the revolving credit facility on such date.

6. SHARE REPURCHASES

        During the three and nine months ended June 30, 2009, the Company did not purchase or retire any shares of common stock. During the three months ended June 30, 2008, the Company purchased and retired 161,127 shares of common stock for an aggregate price of $2,097. During the nine months ended June 30, 2008, the Company purchased and retired 326,353 shares of common stock for an aggregate price of $4,217. As of June 30, 2009, 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 (Note 10).

7. STOCK OPTIONS

        The following table summarizes stock option activity during the nine months ended June 30, 2009:

        Options to purchase 52,500 and 275,300 shares of common stock for the three months ended June 30, 2008 and 2009, respectively, and options to purchase 89,455 shares of common stock for the nine months ended June 30, 2008 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. All outstanding

12

---

Table of Contents

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

7. STOCK OPTIONS (Continued)

options to purchase shares of common stock were excluded from the computation of diluted earnings per share for the nine months ended June 30, 2009 because the Company recognized a net loss.

        During the nine months ended June 30, 2009, the Company received proceeds of $256 related to the exercise of stock options. During this same period the Company recorded a tax benefit of $81 and optionees realized an aggregate pre-tax gain of $210 from these stock option exercises. During the nine months ended June 30, 2008, the Company received proceeds of $237 related to the exercise of stock options, the Company recorded a tax benefit of $19 related to these option exercises and optionees realized an aggregate pre-tax gain of $50 from these stock option exercises.

8. 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 attributed to customers in the United States and foreign countries for the three and nine months ended June 30, 2008 and 2009 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.

13

---

Table of Contents

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

8. SEGMENTS (Continued)

        The Company's net sales by product group for the three and nine months ended June 30, 2008 and 2009 were as follows:

---

(1)

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

9. INCOME TAXES

        The Company's effective tax rate was 36.0% for the three months ended June 30, 2009. During the second quarter of fiscal 2009, the Company recorded a non-cash goodwill impairment charge of $37,519 of which $10,997 related to non-tax-deductible goodwill and reduced the Company's effective tax rate from 37.2% to (19.9%) for the nine months ended June 30, 2009. As a result of this goodwill impairment charge, the Company recognized a deferred tax benefit of $10,231 due to the impairment of $26,522 of tax-deductible goodwill. As of June 30, 2009, the Company had a remaining goodwill balance of $332, all of which is tax deductible. The Company's effective tax rate was 38.3% and 37.7% for the three and nine months ended June 30, 2008, respectively.

10. SUBSEQUENT EVENTS

        On July 1, 2009, the Company acquired substantially all the operating assets of AJG Brands, Inc. ("Alan James Group"), a subsidiary of Interleukin Genetics, Inc., for approximately $4,700 in cash. Alan James Group products include Ginsana ®, Ginkoba ® and Venastat ®. The expected long-term sales and expense synergies of this acquisition are not expected to be realized immediately following acquisition as certain transition and integration matters must be completed.

        On July 24, 2009, the Company entered into a purchase and sale agreement with Nutritional Specialties, Inc. and its parent corporation, Baywood International Inc., to purchase substantially all of the assets of the LifeTime Products nutritional supplement business. The purchase price is $8,250 and is subject to adjustment based on the final net asset value of the assets transferred at closing. If the conditions to closing as outlined in the purchase agreement are satisfied, the closing date is likely to be in September or October 2009.

        On July 28, 2009, the Company's Board of Directors approved the addition of 1,000,000 shares to the Company's previously approved share purchase program. As a result, the Company is currently authorized to buy up to 1,563,915 total shares of its outstanding common stock.

        The Company has performed an evaluation of subsequent events through July 30, 2009, which is the date the financial statements were issued.

14

---

Table of Contents

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 primarily sold 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 ™ , 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 ™ and Granola's ™.

        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 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 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

15

---

Table of Contents

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 ("SFAS 144"). 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. Under SFAS 142, 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. Amortizable intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.

        Under SFAS 142, a two step process is used to test for goodwill impairment. The first step is to determine if there is an indication of impairment by comparing the estimated fair value of each reporting unit to its carrying value, including existing goodwill. Goodwill is considered impaired if the carrying value of a reporting unit exceeds the estimated fair value. Upon an indication of impairment, a second step is performed to measure the amount of the impairment by comparing the implied fair value of the reporting unit's goodwill with its carrying value.

        Primarily as a result of the ongoing U.S. and global economic recession and the related turmoil in the equity markets, there was a significant and prolonged decrease in our stock price and related market capitalization during the six months ended March 31, 2009. The ongoing economic recession also negatively impacted us during the six months ended March 31, 2009, both domestically and internationally. Based on these factors, we determined that an interim goodwill impairment analysis was necessary and performed this goodwill impairment analysis on each of our reporting units during the second quarter of fiscal 2009. Reporting unit fair values were determined using an equal weighting of the income approach, which estimates fair value based on expected future discounted cash flows, and the market approach, which estimates fair value based on comparable market prices. The income approach included assumptions for, among others, forecasted revenues, gross profit margins, operating profit margins, working capital cash flow and long-term discount rates, all of which required significant judgments by management. Long-term discount rates used in the estimation of reporting unit fair values were determined based on the expected weighted average cost of capital for each reporting unit. Long-term discount rates had increased since our last annual impairment test (in the fourth quarter of fiscal 2008) due to increased risk premiums and significant tightening of the credit markets. Based on

16

---

Table of Contents

the valuation findings, we determined that we had an indication of goodwill impairment related to our branded reporting unit and our natural food markets reporting unit in accordance with the first step of the goodwill impairment test described in SFAS 142.

        We then performed the second step of the impairment test under SFAS 142 to measure the amount of the non-cash impairment charge which was determined to be $37.5 million ($27.3 million after tax, or $2.51 per diluted share for the nine months ended June 30, 2009). Of this total non-cash impairment charge, $35.4 million related to our branded reporting unit and $2.1 million related to our natural food markets reporting unit. The charge related to our branded reporting unit represented the entire carrying value of its goodwill. Our natural food markets reporting unit had a remaining goodwill carrying value of $0.3 million and represented the only reporting unit with a remaining goodwill carrying value at June 30, 2009. The non-cash impairment charge had no impact on our compliance with debt covenants, cash flows or available liquidity.

        Prior to the interim assessment of goodwill impairment performed during the second quarter of fiscal 2009, the Company also assessed its non-amortizable intangible assets in accordance with SFAS 142 and performed recoverability testing of its long-lived assets in accordance with SFAS 144 and determined there was no additional impairment.

        The ongoing uncertainty in general and economic conditions may continue to impact retail and consumer demand, as well as the market price of our common stock, and could negatively impact our future operating performance, cash flow and/or stock price and could result in additional goodwill and/or intangible asset impairment charges being recorded in future periods which could materially impact our consolidated financial statements. 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 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.

        Other than our previous discussion of goodwill impairment, 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.

17

---

Table of Contents

Results of Operations

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

---

(1)

See "—Adjusted EBITDA."

Comparison of the Three Months Ended June 30, 2009 to the Three Months Ended June 30, 2008

        Net Sales.     Net sales decreased by $1.1 million, or 2.6%, to $39.4 million for the three months ended June 30, 2009 ("third quarter of fiscal 2009") from $40.5 million for the three months ended June 30, 2008 ("third quarter of fiscal 2008"). Net sales of branded nutritional supplements and other natural products decreased by $0.7 million, or 2.0%, to $35.4 million for the third quarter of fiscal 2009 compared to $36.1 million for the third 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 continuing U.S. and global economic recession. Net sales of branded products attributable to price increases were $1.4 million for the third quarter of fiscal 2009. Other net sales remained relatively flat at $4.0 million for the third quarter of fiscal 2009 compared to $4.4 million for the third quarter of fiscal 2008.

        Gross Profit.     Gross profit decreased by $1.8 million, or 8.2%, to $20.2 million for the third quarter of fiscal 2009 from $22.0 million for the third quarter of fiscal 2008. This decrease in gross profit was primarily attributable to the decrease in net sales. As a percentage of net sales, gross profit decreased to 51.1% for the third quarter of fiscal 2009 from 54.3% for the third quarter of fiscal 2008. This decrease in gross profit percentage was primarily attributable to increased material costs, primarily related to vendor price increases, as well as an increase in overhead costs as a percentage of net sales.

        Selling, General and Administrative.     Selling, general and administrative expenses decreased by $1.8 million, or 10.8%, to $15.1 million for the third quarter of fiscal 2009 from $16.9 million for the third quarter of fiscal 2008. As a percentage of net sales, selling, general and administrative expenses decreased to 38.3% for the third quarter of fiscal 2009 compared to 41.8% for the third 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

18

---

Table of Contents

2008 as well as year-over-year cost improvements in many selling, general and administrative expense areas.

        Amortization of Intangible Assets.     Amortization of intangible assets was $0.2 million for the third 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 $0.2 million for the third quarter of fiscal 2009 and 2008 and primarily consisted of interest expense on indebtedness under our revolving credit facility.

        Provision (Benefit) for Income Taxes.     Our effective tax rate was 36.0% for the third quarter of fiscal 2009 and 38.3% for the third quarter of fiscal 2008. In each period, our effective tax rate was higher than the federal statutory rate primarily due to state taxes.

Comparison of the Nine Months Ended June 30, 2009 to the Nine Months Ended June 30, 2008

        Net Sales.     Net sales decreased by $5.0 million, or 4.0%, to $121.0 million for the nine months ended June 30, 2009 from $126.0 million for the nine months ended June 30, 2008. Net sales of branded nutritional supplements and other natural products decreased by $4.2 million, or 3.6%, to $108.8 million for the nine months ended June 30, 2009 compared to $113.0 million for the nine months ended June 30, 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 continuing U.S. and global economic recession partially offset by the net sales contributions of the businesses acquired during fiscal 2008. Net sales of branded products attributable to price increases were $4.5 million for the nine months ended June 30, 2009. Other net sales were $12.2 million for the nine months ended June 30, 2009 compared to $13.0 million for the nine months ended June 30, 2008.

        Gross Profit.     Gross profit decreased by $4.8 million, or 6.9%, to $64.0 million for the nine months ended June 30, 2009 from $68.8 million for the nine months ended June 30, 2008. This decrease in gross profit was primarily attributable to the decrease in net sales. As a percentage of net sales, gross profit decreased to 52.9% for the nine months ended June 30, 2009 from 54.6% for the nine months ended June 30, 2008. This decrease in gross profit percentage was primarily attributable to increased material costs, primarily related to vendor price increases, as well as an increase in overhead costs as a percentage of net sales.

        Selling, General and Administrative.     Selling, general and administrative expenses decreased by $3.9 million, or 7.8%, to $46.6 million for the nine months ended June 30, 2009 from $50.5 million for the nine months ended June 30, 2008. As a percentage of net sales, selling, general and administrative expenses decreased to 38.5% for the nine months ended June 30, 2009 compared to 40.1% for the nine months ended June 30, 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 many selling, general and administrative expense areas.

        Amortization of Intangible Assets.     Amortization of intangible assets was $0.5 million for the nine months ended June 30, 2009 and 2008. For each period, amortization expense was primarily related to intangible assets recorded in connection with acquisitions.

        Impairment of Goodwill.     Primarily as a result of the ongoing U.S. and global economic recession and the related turmoil in the equity markets, there was a significant and prolonged decrease in our stock price and related market capitalization during the six months ended March 31, 2009. The ongoing economic recession also negatively impacted us during this period, both domestically and

19

---

Table of Contents

internationally. Based on these factors, we determined that an interim goodwill impairment analysis was necessary under SFAS 142 and performed this goodwill impairment analysis on each of our reporting units during the second quarter of fiscal 2009. Based on the valuation findings, we determined that we had an indication of goodwill impairment related to our branded reporting unit and our natural food markets reporting unit in accordance with the first step of the goodwill impairment test described in SFAS 142.

        We then performed the second step of the impairment test under SFAS 142 to measure the amount of the non-cash impairment charge which was determined to be $37.5 million ($27.3 million after tax, or $2.51 per diluted share for the nine months ended June 30, 2009). Of this total non-cash impairment charge, $35.4 million related to our branded reporting unit and $2.1 million related to our natural food markets reporting unit. The charge related to our branded reporting unit represented the entire carrying value of its goodwill. Our natural food markets reporting unit had a remaining goodwill carrying value of $0.3 million and represented the only reporting unit with a remaining carrying value at June 30, 2009. The non-cash impairment charge had no impact on our compliance with debt covenants, cash flows or available liquidity.

        Interest and Other (Income) Expense, Net.     Net interest and other (income) expense was $1.0 million for the nine months ended June 30, 2009 and 2008 and primarily consisted of interest expense on indebtedness under our revolving credit facility.

        Provision (Benefit) for Income Taxes.     During the second quarter of fiscal 2009, we recorded a non-cash goodwill impairment charge of $37.5 million of which $11.0 million related to non-tax-deductible goodwill and reduced our effective tax rate from 37.2% to (19.9%) for the nine months ended June 30, 2009. As a result of this goodwill impairment charge, we recognized a deferred tax benefit of $10.2 million due to the impairment of $26.5 million of tax-deductible goodwill. Our effective tax rate was 37.7% for the nine months ended June 30, 2008.

Adjusted EBITDA

        Adjusted 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, amortization and goodwill and intangible asset impairment. Adjusted 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, Adjusted 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 an EBITDA-based metric should be considered within the following context:

•

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.



•

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



•

Our use of an EBITDA-based measure is supported by its importance to the following key stakeholders:



•

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

20

---

Table of Contents

•

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



•

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



•

Board of Directors and Executive Management —who use EBITDA-based metrics 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 Adjusted 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 (loss) to Adjusted EBITDA for each period included herein:

---

(1)

Includes amortization of deferred financing fees.

(2)

For the nine months ended June 30, 2009, a non-cash goodwill impairment charge of $37,519 was recorded related to our branded and natural food markets reporting units.

        Our Adjusted EBITDA increased to $6.6 million for the third quarter of fiscal 2009 from $6.4 million for the third quarter of fiscal 2008. Adjusted EBITDA as a percentage of net sales increased to 16.7% for the third quarter of fiscal 2009 from 15.7% for the third quarter of fiscal 2008.

        Our Adjusted EBITDA decreased to $21.9 million for the nine months ended June 30, 2009 from $22.0 million for the nine months ended June 30, 2008. Adjusted EBITDA as a percentage of net sales increased to 18.1% for the nine months ended June 30, 2009 from 17.5% for the nine months ended June 30, 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 $35.3 million as of June 30, 2009 compared to $36.3 million as of September 30, 2008. This decrease in working capital was primarily the result of decreases in accounts receivable, inventories and prepaid expenses and other current assets partially offset by an increase in cash and decreases in accounts payable and accrued expenses.

21

---

Table of Contents

        Net cash provided by operating activities for the nine months ended June 30, 2009 was $17.2 million compared to $14.4 million for the comparable period in fiscal 2008. This increase in net cash provided by operating activities for the nine months ended June 30, 2009 was primarily attributable to changes in assets and liabilities, net of effects of acquisitions.

        Net cash used in investing activities was $7.4 million for the nine months ended June 30, 2009 compared to $19.9 million for the comparable period in fiscal 2008. Our investing activities during these periods primarily consisted of acquisitions of businesses and capital expenditures primarily related to building improvements related to facility consolidation efforts, distribution and manufacturing equipment and information systems.

        During the nine months ended June 30, 2008, we acquired two businesses for $5.9 million in cash. On December 12, 2007, we acquired certain assets of Dowd and Rogers, Inc. for $0.1 million in cash and on March 20, 2008, we acquired selected assets of Arkopharma, LLC for $5.8 million in cash. We did not acquire any businesses during the nine months ended June 30, 2009.

        Net cash used in financing activities was $9.0 million for the nine months ended June 30, 2009 compared to net cash provided by financing activities of $6.1 million for the comparable period in fiscal 2008. During these periods, financing activities 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 18,706 shares purchased during the nine months ended June 30, 2009. As of June 30, 2009, there were 1,468,251 shares of common stock available for purchase.

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

        At June 30, 2009, we had outstanding revolving credit borrowings of $18.5 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 June 30, 2009, the applicable weighted-average interest rate for outstanding borrowings was 1.90%, 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 June 30, 2009, 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 and interest 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 June 30, 2009, 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 June 30, 2009 for an all-in rate of 3.92%. This

22

---

Table of Contents

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 nine months ended June 30, 2009, the interest rate swap had an unfavorable change in fair value of $157 thousand, which was included as a component of interest and other (income) expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

        We adopted Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of SFAS No. 133 ("SFAS 161"), as of January 1, 2009. We have one derivative financial instrument, an interest rate swap, to manage our exposure to interest rate risks. We do not use derivatives for trading or speculative purposes and we are not a party to leveraged derivatives.

        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 under 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. To date, we have not experienced any difficulties in accessing the available funds under our credit facility.

        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 the next twelve months.

        Our significant non-cancelable contractual obligations as of June 30, 2009 were as follows:

---

(a)

Represents estimated interest obligations associated with our outstanding revolving credit facility balance of $18.5 million at June 30, 2009, assuming no principal payments are made before maturity, a weighted-average interest rate of 1.90% 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 Standards 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

23

---

Table of Contents

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 and we are currently evaluating the impact this may have on our consolidated financial statements.

        In February 2007, the FASB issued Statement of Financial Accounting Standards 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 nine months ended June 30, 2009. 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 Standards 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 Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements ("SFAS 160"). SFAS 160 changes the 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 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.

        In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events ("SFAS 165"). SFAS 165 establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. This standard was effective for us for the quarter ended June 30, 2009. Our adoption of SFAS 165 did not have a material impact on our consolidated financial statements.

        In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162 ("SFAS 168"). SFAS 168 establishes the FASB Accounting Standards Codification ™ as the source of authoritative accounting and reporting standards recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP) in the United States. Rules and interpretive releases of the Securities and Exchange Commission (SEC) are also sources of authoritative GAAP for SEC registrants. SFAS 168 is not intended to create new accounting and reporting guidance but rather to organize and simplify existing authoritative literature. This standard is effective for financial statements issued for interim and annual periods ending after September 15,

24

---

Table of Contents

2009, which for us is our fiscal year ending September 30, 2009. We do not expect the adoption of SFAS 168 to have a material impact 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, (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 June 30, 2009, the applicable weighted-average interest rate for borrowings was 1.90%, exclusive of any interest rate swap agreements, and we had total borrowings outstanding of $18.5 million.

25

---

Table of Contents

        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 an all-in fixed interest rate of 3.92% and was not designated as a hedge in accordance with SFAS 133. For the nine months ended June 30, 2009, the interest rate swap had an unfavorable change in fair value of $157 thousand, which was included as a component of interest and other (income) expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

        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.

26

---

Table of Contents

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 June 30, 2009.

        Under our share purchase program, initially approved on June 22, 2000, we were authorized to buy up to 2,500,000 shares of our common stock. There were 563,915 shares available for purchase under this program as of June 30, 2009. On July 28, 2009, our Board of Directors approved the addition of 1,000,000 shares to our share purchase program, which increased the available shares under the share purchase program to 1,563,915 as of that date. The shares available for purchase under this program have no expiration date. There were no purchases under this program during the three months ended June 30, 2009.

Item 6.    Exhibits

27

---

Table of Contents

SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NUTRACEUTICAL INTERNATIONAL CORPORATION
(Registrant)

28

---