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

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

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.

Results of Operations

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

                                                Three Months            Nine Months
                                               Ended June 30,         Ended June 30,
                                               2008       2009        2008       2009
   Net sales                                    100.0 %    100.0 %     100.0 %    100.0 %
      Cost of sales                              45.7 %     48.9 %      45.4 %     47.1 %

   Gross profit                                  54.3 %     51.1 %      54.6 %     52.9 %
      Selling, general and administrative        41.8 %     38.3 %      40.1 %     38.5 %
      Amortization of intangible assets           0.5 %      0.4 %       0.4 %      0.4 %
      Impairment of goodwill                      0.0 %      0.0 %       0.0 %     31.0 %

   Income (loss) from operations                 12.0 %     12.4 %      14.1 %    (17.0 )%
      Interest and other (income) expense,        0.5 %      0.4 %       0.8 %      0.8 %
      net

   Income (loss) before provision                11.5 %     12.0 %      13.3 %    (17.8 )%
   (benefit) for income taxes
      Provision (benefit) for income taxes        4.4 %      4.3 %       5.0 %     (3.6 )%

   Net income (loss)                              7.1 %      7.7 %       8.3 %    (14.2 )%

   Adjusted EBITDA(1)                            15.7 %     16.7 %      17.5 %     18.1 %

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

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

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:

º •
º 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.

º •
º 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.

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

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

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

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

º •
º 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:

                                                   Three Months          Nine Months
                                                  Ended June 30,        Ended June 30,
                                                  2008      2009       2008       2009
                                                         (dollars in thousands)
  Net income (loss)                              $ 2,853   $ 3,019   $ 10,416   $ (17,228 )
  Provision (benefit) for income taxes             1,771     1,698      6,309      (4,279 )
  Interest and other (income) expense, net(1)        223       177      1,008         951
  Depreciation and amortization                    1,514     1,683      4,256       4,959
  Impairment of goodwill(2)                            -         -          -      37,519

  Adjusted EBITDA                                $ 6,361   $ 6,577   $ 21,989   $  21,922

º (2)
º 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.

. . .