UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year endedDecember 31, 2013 |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 for the transition period from to |
Commission File Number 0-28551
Nutrisystem, Inc.
(Exact name of registrant as specified in its charter)
| | |
| Delaware | | 23-3012204 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| |
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| Fort Washington Executive Center | | |
| 600 Office Center Drive | | |
| Fort Washington, Pennsylvania | | 19034 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (215) 706-5300
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | | Name of each exchange on which registered |
| Common Stock, $.001 par value | | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).
Large Accelerated Filer ¨ Accelerated Filer x Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2013, was $333,618,093. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the NASDAQ Stock Market on June 28, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter).
Number of shares outstanding of the registrant’s common stock, $0.001 par value, as of February 28, 2014: 28,669,225 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed with the United States Securities and Exchange Commission (the “SEC”) for Nutrisystem, Inc.’s annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.
Nutrisystem, Inc.
Table of Contents
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Special Note Regarding Forward-Looking Statements
From time to time, information provided by us, including but not limited to statements in this Annual Report, or other statements made by or on our behalf, may contain “forward-looking” information within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “believe,” “estimate,” “will be,” “will,” “would,” “expect,” “anticipate,” “plan,” “project,” “intend,” “could,” “should,” or other similar words or expressions often identify forward-looking statements.
Such statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results, performance, or achievements may vary materially from those anticipated, estimated, or projected. Among the factors that could cause actual results to materially differ include:
| | • | | competition from other weight management industry participants or the development of more effective or more favorably perceived weight management methods; |
| | • | | our ability to continue to develop innovative new programs and enhance our existing programs, or the failure of our programs to continue to appeal to the market; |
| | • | | the effectiveness of our marketing and advertising programs; |
| | • | | loss, or disruption in the business of, any of our food suppliers; |
| | • | | loss, or disruption in the business, of our fulfillment provider; |
| | • | | disruptions in the shipping of our food products; |
| | • | | health or advertising related claims by consumers; |
| | • | | failure to attract or negative publicity with respect to any of our spokespersons; |
| | • | | our ability to successfully make acquisitions or enter into joint ventures, including our ability to successfully integrate, operate or realize the projected benefits of such businesses; |
| | • | | general business and economic conditions, particularly the pace, continuation, and possible reversal of the recovery in the worldwide economy; |
| | • | | the seasonal nature of our business; |
| | • | | our ability to enforce our intellectual property rights, as well as the impact of our involvement in any claims related to intellectual property rights; |
| | • | | uncertainties regarding the satisfactory operation of our information technology or systems; |
| | • | | risks associated with unauthorized penetration of our information security; |
| | • | | the impact of existing and future laws and regulations; |
| | • | | the impact of our debt service obligations and restrictive debt covenants; |
| | • | | our inability to recruit and retain key executive officers; and |
| | • | | other risks and uncertainties, including those detailed from time to time in our periodic reports filed with the SEC. |
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
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PART I
Overview
Nutrisystem, Inc. (together with its consolidated subsidiaries, “Nutrisystem,” the “Company,” “we,” “us,” or “our”) is a provider of structured home-delivered weight loss meal plans featuring low-calorie, portion-controlled and nutritionally balanced items. Typically, our customers purchase monthly food packages containing a 28-day supply of breakfasts, lunches, dinners, snacks and desserts, which they supplement with fresh fruits, vegetables and dairy. Most of our customers order on an auto-delivery basis (“Auto-Delivery”), in which we send a 28-day food supply on an ongoing basis until notified by the customer to stop our shipments. We offer personalized plans where customers can hand pick their entire menu or go with our pre-selected favorites food pack. Our meal plans feature more than 150 menu options at different price points including frozen and ready-to-go entrees, desserts, snacks and shakes. Additionally, we offer complimentary, optional counseling from trained weight loss counselors, registered dietitians and certified diabetes educators and provide further support through our online community and tools.
Our program is based on the following cornerstones that represent who we are to our customers:
Real Results.We believe our program enables our customers to lose weight successfully. Our program is portioned for weight loss and offers a balance of carbohydrate, protein and fat that meets national dietary guidelines. We also offer transition and maintenance plans, which include support tools and desired menu options that customers wish to continue to receive from Nutrisystem. These plans are designed to help our customers keep the weight off.
Sound Science.The Nutrisystem program is based on over 40 years of nutrition research and the science of the low Glycemic Index, and offers portion-controlled items that include relatively higher amounts of fiber, contain “good” carbohydrates and zero trans fats. The Glycemic Index is a measure of the quality of carbohydrates in foods. Foods on the lower end of the Glycemic Index are generally considered “good” carbohydrates.
Complete Convenience.We sell our weight management program primarily through a direct-to-consumer sales and distribution approach using the Internet and telephone. Our customers can order 24 hours a day, seven days a week on our website,www.nutrisystem.com, and the food is shipped directly to the customer’s door. Our customers can either choose our pre-selected favorites food pack or customize their monthly food orders for their specific tastes or dietary needs. Our program does not require customers to visit centers, measure foods or count calories. The entrees are individually packaged and food preparation time is minimal. The direct-to-consumer approach using the Internet and telephone provides the privacy that our customers value. We provide online and telephone counseling and support to our customers using our trained weight loss counselors, registered dietitians and other nutrition and dietary staff, and thus, our customers do not need to travel for a face-to-face meeting.
Value. We believe we are very competitively priced within the weight management industry. We do not charge membership fees. Various promotional offers and pricing are offered throughout the year.
Competitive Strengths
We believe our program offers consumers a sensible approach to losing weight without the use of faddish, unhealthy or unrealistic weight loss methods. We intend to capitalize on the following competitive strengths:
Product Efficacy. We believe most of our customers are very satisfied with our products and believe they have lost weight while using our program. Our customer research found that customers lost an average of 1.0 to 2.0 pounds per week and tended to stay on the program for 11 to 12 weeks. We believe our research indicates overall satisfaction with our program and a potential willingness to refer our program to others.
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We have also sponsored clinical trials at leading academic centers in patients with type 2 diabetes. Statistically significant and clinically meaningful weight loss and improvements in glycemic control were observed, in addition to improvements in secondary endpoints such as waist circumference, total plasma cholesterol and blood pressure.
Strong Brand Recognition. We believe that our brand is well recognized in the weight management industry. Our company and our predecessors have been in the weight management industry for over 40 years, and we estimate that our company and our predecessors have spent hundreds of millions of dollars in advertising over that time period.
Low Cost, Highly Scalable Model. Unlike traditional commercial weight loss programs, which primarily sell through franchisee and company-owned centers, we generate revenue in our direct channel through the Internet and telephone (including the redemption of prepaid program cards). Our method of distribution removes the fixed costs and capital investment associated with diet centers. We also minimize fixed costs and capital investments in food procurement and fulfillment: we outsource the production of our food products to a number of vendors and we outsource 100% of our fulfillment operations to a third party provider.
Superior Consumer Value Proposition. Our goal is to offer our customers a complete weight management program that is convenient, private and cost-effective. Our customers primarily place their orders through the Internet or over the telephone and have their food delivered directly to their homes. This affords our customers the convenience and anonymity that other diets, which rely on weight-loss centers, cannot ensure. Additionally, we provide our customers with a month of food, including daily breakfast, lunch, dinner and dessert, which removes the confusion of reading nutrition labels, measuring portions or counting calories, carbohydrates or points. We believe our weight management program offers our customers significant value and is priced below those of our competitors. In addition, we do not charge a membership fee, whereas many of our competitors do.
Our Industry
Weight management is a challenge for a significant portion of the U.S., as well as the global population. The 2011-2012 National Health and Nutrition Examination Study estimated that more than one-third of U.S. adults were obese in 2011-2012 and the World Health Organization projects that by 2015, 2.3 billion people will be overweight and 700 million of these will be obese. Obesity is increasingly prevalent in children and studies have shown for the first time significant emergence of diseases such as type 2 diabetes in adolescents and young adults.
According to the U.S. Department of Health and Human Services, overweight and obese individuals are increasingly at risk for diseases such as diabetes, heart disease, certain types of cancer, stroke, arthritis, sleep apnea and depression. However, there is evidence that weight loss may reduce the risk of developing these conditions, as well as improve the health and quality of life of people who have these conditions. Our clinical trial results suggest and analyses of real world customer results confirm that people who stay on the Nutrisystem program for at least three months have a high probability of achieving clinically meaningful weight loss.
In addition to the health risks, there are also cultural implications for those who are overweight or obese. U.S. consumers are inundated with imagery in media, fashion and entertainment that depicts the thin body as the ideal body type. Studies suggest that there is rampant discrimination against the obese. Despite the high percentage of overweight and obese individuals in the U.S., the popularity of dieting appears to indicate consumers’ desire to be thin.
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Competition
The weight loss industry is very competitive and consists of pharmaceutical products and weight loss programs, as well as a wide variety of diet foods and meal replacement bars and shakes, appetite suppressants and nutritional supplements. The weight loss market is served by a diverse array of competitors. Potential customers seeking to manage their weight can turn to traditional center-based competitors, online diet-oriented sites, self-directed dieting and self-administered products such as prescription drugs, over-the-counter drugs and other medically supervised programs. Our identified peers and competitors include, but are not limited to, Atkins Nutritionals, Inc., eDiets.com, Jenny Craig, Medifast, Inc. and Weight Watchers International, Inc.
We believe that the principal competitive factors in the weight loss market are:
| | • | | the availability, convenience, privacy and effectiveness of the weight reduction program; |
| | • | | brand recognition and trustworthiness; |
| | • | | the ability to attract and retain customers through promotion and personal referral. |
Based on these factors, we believe that we can compete effectively in the weight management industry. We, however, have no control over how successful competitors will be in addressing these factors. By providing a well-recognized food-based program using the direct channel, we believe that we have a competitive advantage in our market.
Our Products and Services
For over 40 years, the Nutrisystem name has been recognized as a leader in the weight loss industry. We provide a comprehensive weight management program, consisting primarily of a pre-packaged food program, online tools and counseling. Typically, our customers purchase monthly food packages of frozen and ready-to-go food containing 28 days of breakfasts, lunches, dinners, snacks and desserts, which they supplement with fresh fruits, vegetables and dairy. Most customers order through our Auto-Delivery feature. Trained counselors are available to answer questions and make recommendations to help each customer achieve and maintain his or her weight loss goal. Customers support and encourage each other and share information through hosted Internet chat rooms and bulletin boards. These services are complemented with relevant information on diet, nutrition and physical activity, including a personalized “My Daily 3®” physical activity program. Additionally, online weight management tools are available to our customers. These tools include the interactive Mindset Makeover® guide, a behavior modification program that is offered to our customers free of charge. This insightful and motivational guide walks customers through the program and can serve as an interactive tool for our counselors to use to facilitate communication and enhance weight loss success for our customers.
Our Nutrisystem® program consists of over 150 portion-controlled items that serve as the foundation of a low Glycemic Index diet. Our program is portioned for weight loss and offers a balance of carbohydrate, protein and fat that meets national dietary guidelines. We have also worked to reduce the sodium content of our meal program. Including grocery additions to supplement our meals, our plans contain 1800-2200 milligrams of sodium per day, consistent with national guidelines, and tailored versions of the plans are available that deliver as low as 1500 mg/day. In contrast, the average American consumes 2800-4000 milligrams of sodium per day. We constantly strive to meet or exceed nutritional guidelines as they are updated.
In December 2013, we launched Nutrisystem My Way, a program tailored to the individual’s metabolism, along with our Fast 5™ kit, a one-week kick start that can help customers lose five pounds in their first week of dieting. A large and growing body of scientific evidence suggests a key predictor of long-term weight loss
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success is quick, early results, which Fast 5 is designed to deliver. Fast 5 includes seven days of breakfasts, lunches, and dinners, plus all-new shakes with formulations for men and women to meet their unique nutritional needs. The Nutrisystem® My Way® program uses an algorithm to estimate each customer’s metabolic rate in order to create a customized program tailored to the amount of calories needed for healthy weight loss. Customers are given a meal plan and exercise suggestions and are encouraged to check in periodically with a Nutrisystem counselor as their needs change in response to weight loss. The Nutrisystem My Way program delivers a combination of portion-controlled foods and an eating plan based on slow digesting carbohydrates and fiber, designed to help keep blood sugar levels stable throughout the day minimizing hunger spikes and the feelings of deprivation that cause cravings.
Additionally, we introduced new 5-day Jumpstart Your Weight Loss Kits in 2013 which were available exclusively at Walmart and represent a significant departure from our traditional 28-day program. We offer a core 5-day kit, a “D” kit targeted to individuals with or at risk of type 2 diabetes, as well as SmartCarb and PowerFuel products including blueberry muffins, cinnamon buns, vanilla shakes, chocolate shakes and chocolate chip cookie packs, designed to complement the “D” kit. This partnership with Walmart provides us with great brand exposure, offering consumers who may not be aware of our program an opportunity to sample Nutrisystem at an attractive price point. We are seeing repeat business at Walmart as well as multiple kit purchases, indicating that customers are seeing results or enlisting other family members to diet with them. Also, we continue to offer our program at Costco through the use of prepaid program cards and gift cards. We are actively developing our retail product pipeline and we expect to have additional products/kits to launch in retail.
The Nutrisystem® D® Program is a weight loss program specifically designed to produce gradual weight loss in overweight persons with, or at risk for, diabetes. It provides nutrition consistent with the guidelines of the American Diabetes Association. Two randomized controlled trials published in peer-reviewed medical journals found the Nutrisystem D program, in combination with counseling sessions, produced statistically and clinically meaningful improvements in weight, HbA1c (a key measure of blood glucose control), and several other risk factors. Notably, improvements in diabetes control were observed despite a reduction in diabetes medications among participants who received the Nutrisystem D intervention. A third study, utilizing continuous glucose monitoring technology, found improvements in blood glucose control when subjects used the Nutrisystem D program, even before the achievement of significant weight loss.
By offering a variety of frozen and ready-to-go foods, we help our customers sustain their weight loss efforts. On our website, customers can order food 24 hours a day, seven days a week. The transition and maintenance plans allow customers the means to gradually increase their responsibility for grocery shopping and food preparation while adhering to the principles of the Nutrisystem approach. These lower cost programs help extend the supportive relationship and allow time to reinforce the dietary changes that produced the initial weight loss. These plans include recipes and portion-control tools in addition to a reduced number of Nutrisystem® entrees delivered each month.
The features of our weight loss program address many of the most common limitations of traditional weight loss programs, including high initiation and recurring membership fees, the inconvenience of traveling to weight loss centers for scheduled appointments and lack of privacy. In addition, our prepared meals provide our customers with a structured program with limited weighing and measuring of foods and no need to count calories, carbohydrates or points. We believe that the convenience of home delivery, reduced grocery shopping time and rapid food preparation also aid customer compliance with our weight loss program.
Our food items have accounted for 99% of our revenues for each of the years ended December 31, 2013, 2012 and 2011. No other product or service has accounted for more than 1% of our revenue in any of the last three years. In the years ended December 31, 2013, 2012 and 2011, approximately 99%, 98% and 97%, respectively, of our revenues were generated in the United States.
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The Customer Experience
Our sales, marketing, ecommerce, and service operations seek to understand our customers’ needs throughout their weight loss and management journey, so we can develop effective and compelling products and services. Through a combination of consumer research and data management, we personalize the introduction, on-boarding, weight loss, transition and maintenance phases of our customers’ experience.
We run an efficient and effective business and are committed to ongoing professional development for all of our team members.
Introduction/Acquisition
We attract new customers via direct response television, online marketing (search engine marketing, search engine optimization, affiliate marketing, display advertising, partnerships, retargeting and email), direct mail, print advertisements and a variety of other direct marketing efforts. We have a fully integrated acquisition enterprise. Response is tracked to the specific vehicle, and analytic models are used to attribute other orders back to the response source, in order to closely manage the effectiveness of our specific direct marketing efforts.
The majority of our new customers buy via our website. We consistently seek to refine our sales conversion funnel through thoughtful testing to improve the learning and buying experience for prospects and to increase conversion rates.
We also have an in-house call center. Staffing levels fluctuate seasonally and are aligned to marketing spend and consequent call volume. Sales agents, paid primarily on commission, take in-bound responses from our advertisements, and personalize the weight loss plan for each customer. They also make out-bound calls to our leads.
On-Boarding
To help customers get off to a strong, successful and simple start, we provide both printed materials in their shipments of food (including a My Way Made Easy magazine, a Quick-Start guide, a Dining Out booklet and a Daily Food Tracker) and a robust set of personalized online tools and trackers. Customers are encouraged to join our large online community of customers past and present and we are active in social media to engage in conversations with our customers.
On-Program
We use customer preferences to offer a variety of additional products and services that help customers while on the path to their weight loss goals. These sales are made via our website, emails and newsletters, and our call center.
We also offer complementary counseling services for our customers. We seek to hire counselors with backgrounds in psychology, sociology, nutrition, dietetics or other health-related fields and with suitable, compassionate personalities to help and support our customers as they begin their weight loss journey. Counselors are trained in our programs, motivational techniques and problem solving. Counselors take in-bound requests for help and also reach out to customers via email and phone.
Transition and Maintenance
As customers reach their weight loss goals, we offer transition and maintenance programs that provide products and guidance that combine the right amount of structure and flexibility. These programs are offered online, via email marketing, and via our call center’s retention agents.
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Return/Reactivation
Because we realize that weight management is a lifelong process, and that customers may need our programs again from time to time, we reach out to past customers to attempt to put them back on structured programs as needed. We attract past customers primarily via our advertising vehicles, targeted emails, and data-driven direct mail attempts.
Customer Service
We are committed to the highest levels of customer service. Our representatives are trained to answer questions and solve problems once a purchase has been made. Customers contact us via email and phone. Typical inquiries concern delivery dates, reported missing or damaged items, and requests for credits or exchanges. For email inquiries, we have a software system that scans the customer’s email for key words and automatically supplies the representative with a response that is then reviewed, edited, and sent to the customer. We regularly review customer satisfaction levels and improve our practices accordingly.
Public Relations
We conduct a proactive public relations program that is designed to garner positive coverage of Nutrisystem and our weight management programs across all media platforms including television, magazine, print, online news, bloggers and social media, particularly around the key dieting seasons. In addition, the public relations team supports an executive communication program to broadly support the Nutrisystem brand.
Fulfillment
An integrated order receipt, billing, picking, shipping and delivery tracking system comprised of proprietary and third party components is utilized for our orders. This system integrates the front end, or website customer interface, with order processing and shipping, and allows customers to access shippers’ order tracking numbers online. Our computer-assisted picking system allows for virtually paperless order picking in all warehouse facilities.
We utilize an integrated network of distribution facilities through an existing arrangement with our outside fulfillment provider. We work closely with our fulfillment provider to drive out waste and continuously improve processes. We currently utilize five outsourced distribution facilities. Three are located in Pennsylvania (Allentown, Bethlehem and Chambersburg) and two in Nevada (both in Sparks). As of December 31, 2013, all fulfillment was being handled by one outsourced provider.
We have a service agreement with our outside fulfillment provider, which provides for storage, handling of frozen and ready-to-go foods and other services, including pricing and minimum space commitments. The current contract expires on April 30, 2015, but may be terminated sooner upon 180 days written notice. We believe that other outside fulfillment providers could be utilized if needed and we continually evaluate the need for secondary fulfillment services.
We continue to partner with our fulfillment provider to reduce the warehouse order turn-around time for processing and shipping orders. In 2013, approximately 98% of all ready-to-go customer initial orders were shipped within three business days of the date the order was received. Additionally, approximately 97% of all frozen customer initial orders were shipped within four business days of the date the order was received. We can also deliver to approximately 99% of the domestic population within five business days using standard ground transportation.
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Direct customers are not charged for their orders until the ordered product is shipped. We do not charge customers for shipping and handling on Auto-Delivery food orders provided customers take receipt of their second order. If a customer cancels before receipt of a second order, the customer will be charged for shipping and the difference in pricing for an Auto-Delivery order versus a non Auto-Delivery order.
Product Development
All of our foods and supplements are currently outsourced from more than 30 manufacturers or vendors. We have entered into supply agreements with some of these food vendors. Several of these agreements provide for annual pricing, annual purchase obligations, as well as exclusivity in the production of certain products, with terms of five years or less. One agreement also provides for certain rebates to us if certain volume thresholds are exceeded. These contracts may be terminated by us upon written notice, generally between 30 and 180 days, or under certain circumstances only upon a default of the vendor. We anticipate meeting all annual purchase obligations.
In 2013, approximately 14% and 12%, respectively, of inventory purchases were from two vendors. We have supply arrangements with these vendors that require us to make certain minimum purchases. In 2012, these vendors supplied approximately 17% and 13%, respectively, of inventory purchases and in 2011, approximately 16% and 15%, respectively, of inventory purchases. Additionally, we were dependent on one frozen food vendor for less than 20% of our food costs in 2011. We had a supply agreement with this vendor that expired in November 2011, and we have found other frozen food supply options to replace this vendor.
Our product development team uses a number of sources – customer feedback, market trends, nutrition science, and breakthroughs in food technology – to create new ideas for our program. New foods are created to enhance the variety of our current offerings or to support the efforts of creating a new program. Typically, concepts are formulated in our test kitchen to meet our stringent demands for nutrition and stability. We then contract with food manufacturers who further develop viable new products based on our specifications. Alternatively, food manufacturers may suggest items. Regardless of a given food item’s pathway through development, that food is evaluated for nutrition, compliance with our program, taste (using testing panels), and cost considerations. The number of stock keeping units, or SKUs, we introduce each year varies depending on whether we are introducing a new program or simply updating an existing one.
Our Customers
We offer weight loss programs designed for women, men, seniors as well as people with type 2 diabetes who want to lose weight. Based on our customer research, our typical customer is female, approximately 50 years of age and weighs approximately 187 pounds. We believe that, on average, our customers want to lose approximately 44 pounds over a period of time. Additionally, based on our customer research, we believe our typical customers tend to stay on our program for 11 to 12 weeks, lose 1.0 to 2.0 pounds per week and have tried other popular diet programs. We believe that this research indicates a willingness to refer our program to others and that our customers value the following Nutrisystem program attributes:
| | • | | direct delivery to their door; |
| | • | | easy to follow and stay on the program; |
| | • | | food can be easily prepared in minutes; |
| | • | | wide variety of food; and |
| | • | | they do not feel hungry while on the program. |
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Information Systems
Our ecommerce and community websites, both of which are based primarily on third party software customized to meet our business needs, are each hosted in a top tier, co-location facility. These facilities provide redundant network connections, physical and fire security and diesel generated power back up for the equipment upon which our websites rely and are intended to provide an uninterruptible power supply. Our servers and our network are monitored 24 hours a day, seven days a week.
We use a variety of security techniques to protect our confidential customer data. When our customers place an order or access their account information, we secure that transaction by using some of the best available encryption technologies, including secure sockets layer, or SSL. Our customer data is protected against unauthorized access by security measures and we engage a variety of industry leading technology providers including VeriSign, CyberSource and SecureWorks to further ensure the security of our credit card transactions and the safety of our customers’ personal information.
Intellectual Property
We own numerous domestic and international trademarks and other proprietary rights that are important to our business. Depending upon the jurisdiction, trademarks are valid as long as they are used in the regular course of trade and/or their registrations are properly maintained. We believe the protection of our trademarks, copyrights, patents, domain names, trade dress, and trade secrets is important to our success. We aggressively protect our intellectual property rights by relying on a combination of watch services and trademark, copyright, patent, trade dress and trade secret laws, and through the domain name dispute resolution system.
Employees
As of December 31, 2013, we had approximately 430 employees and consider our relations with these employees to be good.
Seasonality
Typically in the weight loss industry, revenue is strongest in the first calendar quarter and lowest in the fourth quarter. We believe our business experiences seasonality, driven primarily by the predisposition of dieters to initiate a diet at certain times of the year and the placement of our advertising is based on the price and availability of certain media at such times.
Available Information
All periodic and current reports, registration statements, code of conduct and other material that we are required to file with the SEC, including our annual report on Form 10-K, quarterly reports on Form10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, are available free of charge through our investor relations page atwww.nutrisystem.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report.
The public may also read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site,www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file such information electronically with the SEC.
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Executive Officers of the Company
The Company’s current executive officers and their respective ages and positions are as follows:
| | | | | | |
Name | | Age | | | Position |
Dawn M. Zier | | | 48 | | | President and Chief Executive Officer |
| | |
Michael P. Monahan | | | 41 | | | Executive Vice President and Chief Financial Officer |
| | |
Keira Krausz | | | 48 | | | Executive Vice President and Chief Marketing Officer |
Dawn M. Zierhas served as our President and Chief Executive Officer and as a member of our Board of Directors since November 2012. Before joining us, Ms. Zier served as the President of International at RDA Holding Co., the holding company and parent of The Reader’s Digest Association, Inc., a global media and direct marketing company (the “Reader’s Digest Association”), since April 2011, as an Executive Vice President of the Reader’s Digest Association since February 2011 and as President, Europe of the Reader’s Digest Association since October 2009. Prior to serving in these roles, Ms. Zier served as the President of Global Consumer Marketing for the Reader’s Digest Association from June 2008 to October 2009 and as the President and Chief Executive Officer of Direct Holdings U.S. Corp., a marketer of audio and video products and at such time a subsidiary of the Reader’s Digest Association, from June 2009 to October 2009. From August 2005 to June 2008, Ms. Zier served as the President of North American Consumer Marketing for the Reader’s Digest Association.
Michael P. Monahan has served as our Executive Vice President and Chief Financial Officer since May 2013. Prior to joining us, Mr. Monahan served as the Chief Financial Officer of PetroChoice Holdings, Inc., a privately-held distributor of industrial, commercial and passenger car lubricants since January 2009. From April 2006 through January 2009, Mr. Monahan served as our Vice President of Finance. Prior to that, Mr. Monahan held positions with Exelon Corporation, Accenture and Arthur Andersen LLP.
Keira Krausz has served as our Executive Vice President and Chief Marketing Officer since February 2013. Prior to joining us, Ms. Krausz served as head of new business development for Animated Storyboards, a global independent provider of television test spots to the advertising industry, from April 2012 to January 2013. Prior to that, Ms. Krausz served as Vice President of Marketing for QSP, Inc., a subsidiary of Time, Inc. from 2005 until March 2012 as QSP was sold. Ms. Krausz started her career at Reader’s Digest Association in 1992, and held a number of progressively-responsible positions in product management, marketing, and business management, ultimately ascending to Vice President, Marketing and General Manager, of Reader’s Digest Association’s Books & Music Business.
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You should consider carefully the following risks and uncertainties when reading this Annual Report. If any of the events described below actually occurs, the Company’s business, financial condition and operating results could be materially adversely affected. You should understand that it is not possible to predict or identify all such risks and uncertainties. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.
Risks Related to Our Business
Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing expenditures and our ability to select effective markets and media in which to advertise.
Our marketing expenditures were $95.8 million, $111.1 million and $110.9 million in 2013, 2012 and 2011, respectively. Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing expenditures, including our ability to:
| | • | | create greater awareness of our brand and our program; |
| | • | | identify the most effective and efficient levels of spending in each market, media and specific media vehicle; |
| | • | | determine the appropriate creative messages and media mix for advertising, marketing and promotional expenditures; |
| | • | | effectively manage marketing costs (including creative and media) in order to maintain acceptable customer acquisition costs; |
| | • | | acquire cost-effective national television advertising; |
| | • | | select the most effective markets, media and specific media vehicles in which to advertise; and |
| | • | | convert consumer inquiries into actual orders. |
Our planned marketing expenditures may not result in increased revenue or generate sufficient levels of brand name and program awareness. We may not be able to manage our marketing expenditures on a cost-effective basis whereby our customer acquisition costs may exceed the contribution profit generated from each additional customer.
Our sales may be adversely impacted by the health and stability of the general economy.
Unfavorable changes in general economic conditions, such as a recession or prolonged economic slowdown, may reduce the demand for our products and otherwise adversely affect our sales. For example, economic forces, including general economic conditions, demographic trends, consumer confidence in the economy, changes in disposable consumer income and/or reductions in discretionary spending, may cause consumers to defer purchases of our program which could adversely affect our revenue, gross margins, and/or our overall financial condition and operating results.
We rely on third parties to provide us with adequate food supply, freight and fulfillment and Internet and networking services, the loss of any of which could cause our revenue, earnings or reputation to suffer.
Food Manufacturers. We rely solely on third party manufacturers to supply all of the food and other products we sell. In 2013, approximately 14% and 12%, respectively, of inventory purchases were from two vendors. If we are unable to obtain sufficient quantity, quality and variety of food and other products in a timely and low-cost manner from our manufacturers, we will be unable to fulfill our customers’ orders in a timely manner, which may cause us to lose revenue and market share or incur higher costs, as well as damage the value of the Nutrisystem brand.
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Freight and Fulfillment. In 2013, more than 95% of our orders were shipped by one third party provider and 100% of our order fulfillment was handled by one third party provider. Should these providers be unable to service our needs for even a short duration, our revenue and business could be harmed. Additionally, the cost and time associated with replacing these providers on short notice would add to our costs. Any replacement fulfillment provider would also require startup time, which could cause us to lose sales and market share.
Internet and Networking. Our business also depends on a number of third parties for Internet access and networking, and we have limited control over these third parties. Should our network connections go down, our ability to fulfill orders would be delayed. Further, if our website or call center become unavailable for a noticeable period of time due to Internet or communication failures, our business could be adversely affected, including harm to our brand and loss of sales.
Therefore, we are dependent on maintaining good relationships with these third parties. The services we require from these parties may be disrupted by a number of factors associated with their businesses, including the following:
| | • | | financial condition or results of operations; |
| | • | | internal inefficiencies; |
| | • | | natural or man-made disasters; and |
| | • | | with respect to our food suppliers, shortages of ingredients or United States Department of Agriculture (“USDA”) or United States Food and Drug Administration (“FDA”) compliance issues. |
We may be subject to claims that our personnel are unqualified to provide proper weight loss advice.
Some of our counselors for our weight management program do not have extensive training or certification in nutrition, diet or health fields and have only undergone the training they receive from us. We may be subject to claims from our customers alleging that our personnel lack the qualifications necessary to provide proper advice regarding weight loss and related topics. We may also be subject to claims that our personnel have provided inappropriate advice or have inappropriately referred or failed to refer customers to health care providers for matters other than weight loss. Such claims could result in lawsuits, damage to our reputation and divert management’s attention from our business, which would adversely affect our business.
We may be subject to health or advertising related claims from our customers.
Our weight loss program does not include medical treatment or medical advice, and we do not engage physicians or nurses to monitor the progress of our customers. Many people who are overweight suffer from other physical conditions, and our target consumers could be considered a high-risk population. A customer who experiences health problems could allege or bring a lawsuit against us on the basis that those problems were caused or worsened by participating in our weight management program. For example, our predecessor businesses suffered substantial losses due to health-related claims and related publicity. Further, customers who allege that they were deceived by any statements that we made in advertising or labeling could bring a lawsuit against us under consumer protection laws. Currently, we are neither subject to any such allegations nor have we been named in any such litigation. If we were subject to any such claims, while we would defend ourselves against such claims, we may ultimately be unsuccessful in our defense. Also, defending ourselves against such claims, regardless of their merit and ultimate outcome, would likely be lengthy and costly, and adversely affect our results of operations. Further, our general liability insurance may not cover claims of these types.
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The weight management industry is highly competitive. If any of our competitors or a new entrant into the market with significant resources pursues a weight management program similar to ours, our business could be significantly affected.
Competition is intense in the weight management industry and we must remain competitive in the areas of program efficacy, price, taste, customer service and brand recognition. Our competitors include companies selling pharmaceutical products and weight loss programs, as well as a wide variety of diet foods and meal replacement bars and shakes, appetite suppressants and nutritional supplements. Some of our competitors are significantly larger than we are and have substantially greater resources. Our business could be adversely affected if someone with significant resources decided to imitate our weight management program. For example, if a major supplier of pre-packaged foods decided to enter this market and made a substantial investment of resources in advertising and training diet counselors, our business could be significantly affected. Any increased competition from new entrants into our industry or any increased success by existing competition could result in reductions in our sales or prices, or both, which could have an adverse effect on our business and results of operations.
We are dependent on certain third party agreements for a percentage of revenue.
We have contractual agreements with certain third party retailers. Under the agreements, these third parties control when and how often our products and services are offered and we are not guaranteed any minimum level of sales or transactions. Additionally, some agreements contain exclusive rights in specified locations to promote our products during the contract term and for a specified period thereafter. If any third party elects not to renew their agreement with us or reduces the promotion of our products, our revenues will suffer. Additionally, in certain instances, we could be prohibited from selling our products through competitors of these third parties for a specified time after the termination of the agreements.
New weight loss products or services may put us at a competitive disadvantage.
On an ongoing basis, many existing and potential providers of weight loss solutions, including many pharmaceutical firms with significantly greater financial and operating resources than we have, are developing new products and services. The creation of a weight loss solution, such as a drug therapy, that is perceived to be safe, effective and “easier” than a portion-controlled meal plan would put us at a disadvantage in the marketplace and our results of operations could be negatively affected.
We may be subject to litigation from our competitors.
Our competitors may pursue litigation against us based on our advertising or other marketing practices regardless of its merit and chances of success, especially if we engage in competitive advertising, which includes advertising that directly or indirectly mentions a competitor or a competitor’s weight loss program in comparison to our program. While we would defend ourselves against any such claims, our defense may ultimately be unsuccessful. Also, defending against such claims, regardless of their merit and ultimate outcome, may be lengthy and costly, strain our resources and divert management’s attention from their core responsibilities, which would have a negative impact on our business.
Our business is subject to online security risks, including security breaches and identity theft.
Unauthorized users who penetrate our information security could misappropriate proprietary or customer information or data or cause interruptions to the product offerings on our website. As a result, it may become necessary to expend significant additional amounts of capital and resources to protect against, or to alleviate, problems caused by unauthorized users. These expenditures, however, may not prove to be a timely remedy against unauthorized users who are able to penetrate our information security. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could adversely affect our computer systems and, in turn, harm our business.
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A significant number of states require that customers be notified if a security breach results in the disclosure of their personal financial account or other information. Additional states and governmental entities are considering such “notice” laws. In addition, other public disclosure laws may require that material security breaches be reported. If we experience a security breach and such notice or public disclosure is required in the future, our reputation and our business may be harmed.
In the ordinary course of our business, we collect and utilize proprietary and customer information and data. Privacy concerns among prospective and existing customers regarding our use of such information or data collected on our website or through our services and products, such as weight management information, financial data, email addresses and home addresses, could keep them from using our website or purchasing our services or products. We currently face certain legal obligations regarding the manner in which we treat such information and data. Businesses have been criticized by privacy groups and governmental bodies for their use and handling of such information and data. Currently, a significant number of our customers authorize us to bill their credit cards directly for fees charged by us. We rely on third party software products to secure our credit card transactions. Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent payment transactions and other security breaches, failure to prevent or mitigate such fraud or breaches or changes in industry standards or regulations may adversely affect our business and operating results.
We may experience fluctuations in our operating results which may cause our stock price to be volatile.
We have experienced and expect to continue to experience fluctuations in our quarterly results of operations. Our business is seasonal, with revenues generally stronger in the first quarter and weaker in the fourth quarter. The market price of our common stock is subject to fluctuations in response to our operating results, general trends in the weight loss industry, announcements by our competitors, our ability to meet or exceed securities analysts’ expectations, recommendations by securities analysts, the condition of the financial markets and other factors. These fluctuations, as well as general economic and market conditions, may adversely affect the market price of our common stock and cause it to fluctuate significantly.
Future acquisitions and the pursuit of new business opportunities present risks, and we may be unable to achieve the financial and strategic goals of any acquisition or new business.
A component of our growth strategy may be to acquire existing businesses or pursue other business opportunities in the market for weight management and fitness products and services. Even if we succeed in acquiring or building such businesses, we will face a number of risks and uncertainties, including:
| | • | | difficulties in integrating newly acquired or newly started businesses into existing operations, which may result in increasing operating costs that would adversely affect our operating income and earnings; |
| | • | | the risk that our current and planned facilities, information systems, personnel and controls will not be adequate to support our future operations; |
| | • | | diversion of management time and capital resources from our existing businesses, which could adversely affect their performance and our operating results; |
| | • | | dependence on key management personnel of acquired or newly started businesses and the risk that we will be unable to integrate or retain such personnel; |
| | • | | the risk that the new products or services we may introduce or begin offering, whether as a result of internal expansion or business acquisitions, will not gain acceptance among consumers and existing customers; |
| | • | | the risk that new efforts may have a detrimental effect on our brand; |
| | • | | the risk that we will face competition from established or larger competitors in the new markets we may enter, which could adversely affect the financial performance of any businesses we might acquire or start; and |
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| | • | | the risk that the anticipated benefits of any acquisition or of the commencement of any new business may not be realized, in which event we will not be able to achieve any return on our investment in that new business. |
Consummating these transactions could also result in the incurrence of additional debt and related interest expense, as well as unforeseen contingent liabilities, all of which could have a material adverse effect on our business, financial condition or results of operations. We may also issue additional equity in connection with these transactions, which would dilute our existing stockholders.
If we do not continue to receive referrals from existing customers, our customer acquisition cost may increase.
We rely on word-of-mouth advertising for a portion of our new customers. If our brand suffers or the number of customers acquired through referrals drops due to other circumstances, our costs associated with acquiring new customers and generating revenue will increase, which will, in turn, have an adverse affect on our profitability.
We use third-party marketing vendors to promote our products. If the spokespersons affiliated with the third-party marketing vendors suffer adverse publicity, our revenue could be adversely affected.
Our marketing strategy depends in part on celebrity spokespersons, as well as customer spokespersons, to promote our weight management program. Any of these spokespersons may become the subject of adverse news reports, negative publicity or otherwise be alienated from a segment of our customer base, whether weight loss related or not. If so, such events may reduce the effectiveness of his or her endorsement and, in turn, adversely affect our revenue and results of operations.
Third parties may infringe on our brand, trademarks and other intellectual property rights, which may have an adverse impact on our business.
We currently rely on a combination of trademark and other intellectual property laws and confidentiality procedures to establish and protect our proprietary rights, including our brand. If we fail to successfully enforce our intellectual property rights, the value of our brand, services and products could be diminished and our business may suffer. Our precautions may not prevent misappropriation of our intellectual property. Any legal action that we may bring to protect our brand and other intellectual property could be unsuccessful and expensive and could divert management’s attention from other business concerns. In addition, legal standards relating to the validity, enforceability and scope of protection of intellectual property, especially in Internet-related businesses, are uncertain and evolving. We cannot assure you that these evolving legal standards will sufficiently protect our intellectual property rights in the future.
We may in the future be subject to intellectual property rights claims.
Third parties may in the future make claims against us alleging infringement of their intellectual property rights. Any intellectual property claims, regardless of merit, could be time-consuming and expensive to litigate or settle and could significantly divert management’s attention from other business concerns. In addition, if we were unable to successfully defend against such claims, we may have to pay damages, stop selling the service or product or stop using the software, technology or content found to be in violation of a third party’s rights, seek a license for the infringing service, product, software, technology or content or develop alternative non-infringing services, products, software, technology or content. If we cannot license on reasonable terms, develop alternatives or stop using the service, product, software, technology or content for any infringing aspects of our business, we may be forced to limit our service and product offerings. Any of these results could reduce our revenues and our ability to compete effectively, increase our costs or harm our business.
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Our credit agreement, as amended, contains financial and other covenants. The failure to comply with such covenants could have an adverse effect on us.
Our credit agreement, as amended, contains certain financial and other covenants including a minimum consolidated fixed charge ratio, a minimum consolidated tangible net worth and a minimum consolidated liquidity ratio, and includes limitations on, among other things, capital expenditures, additional indebtedness, acquisitions, stock repurchases and restrictions on paying dividends in certain circumstances. Any failure to comply with the restrictions of the credit agreement, as amended, may result in an event of default under the agreement.
We are dependent on our key executive officers for future success. If we lose the services of any of our key executive officers and we are unable to timely retain a qualified replacement, our business could be harmed.
Our future success depends to a significant degree on the skills, experience and efforts of our key executive officers. The loss of the services of any of these individuals could harm our business. We have not obtained life insurance on any key executive officers. If any key executive officers left us or were seriously injured and became unable to work, our business could be harmed.
Provisions in our certificate of incorporation may deter or delay an acquisition of us or prevent a change in control, even if an acquisition or a change of control would be beneficial to our stockholders.
Provisions of our certificate of incorporation (as amended) may have the effect of deterring unsolicited takeovers or delaying or preventing a third party from acquiring control of us, even if our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests.
Our certificate of incorporation (as amended) permits our Board of Directors to issue preferred stock without stockholder approval upon such terms as the Board of Directors may determine. The rights of the holders of our common stock will be junior to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding common stock. The issuance of a substantial number of preferred shares could adversely affect the price of our common stock.
Risks Related to Our Industry
Changes in consumer preferences could negatively impact our operating results.
Our program features pre-packaged food selections, which we believe offer convenience and value to our customers. Our continued success depends, to a large degree, upon the continued popularity of our program versus various other weight loss, weight management and fitness regimens, such as low carbohydrate diets, appetite suppressants and diets featured in the published media. Changes in consumer tastes and preferences away from our pre-packaged food and support and counseling services, and any failure to provide innovative responses to these changes, may have a materially adverse impact on our business, financial condition, operating results, cash flows and prospects.
Our success is also dependent on our food innovation including maintaining a robust array of food items and improving the quality of existing items. If we do not continually expand our food items or provide customers with items that are desirable in taste and quality, our business could be harmed.
The weight loss industry is subject to adverse publicity, which could harm our business.
The weight loss industry receives adverse publicity from time to time, and the occurrence of such publicity could harm us, even if the adverse publicity is not directly related to us. In the early 1990s, our predecessor
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businesses were subject to extremely damaging adverse publicity relating to a large number of lawsuits alleging that the Nutrisystem® weight loss program in use at that time led to gall bladder disease. This publicity was a factor that contributed to the bankruptcy of our predecessor businesses in 1993. More recently, our predecessor businesses were severely impacted by significant litigation and damaging publicity related to their customers’ use of fen-phen as an appetite suppressant, which the FDA ordered withdrawn from the market in September 1997. The significant decline in business resulting from the fen-phen problems caused our predecessor businesses to close all of their company-owned weight loss centers.
Congressional hearings about practices in the weight loss industry have also resulted in adverse publicity and a consequent decline in the revenue of weight loss businesses. Future research reports or publicity that is perceived as unfavorable or that question certain weight loss programs, products or methods could result in a decline in our revenue. Because of our dependence on consumer perceptions, adverse publicity associated with illness or other undesirable effects resulting from the consumption of our products or similar products by competitors, whether or not accurate, could also damage customer confidence in our weight loss program and result in a decline in revenue. Adverse publicity could arise even if the unfavorable effects associated with weight loss products or services resulted from the user’s failure to use such products or services appropriately.
Our industry is subject to governmental regulation that could increase in severity and hurt results of operations.
Our industry is subject to federal, state and other governmental regulation. Certain federal and state agencies, such as the Federal Trade Commission (the “FTC”), regulate and enforce such laws relating to advertising, disclosures to consumers, privacy, consumer pricing and billing arrangements and other consumer protection matters. A determination by a federal or state agency, or a court, that any of our practices do not meet existing or new laws or regulations could result in liability, adverse publicity, and restrictions of our business operations. Some advertising practices in the weight loss industry have led to investigations from time to time by the FTC and other governmental agencies. Many companies in the weight loss industry, including our predecessor businesses, have entered into consent decrees with the FTC relating to weight loss claims and other advertising practices. In October 2009, the FTC published its revised Guides concerning the Use of Endorsements and Testimonials in Advertising which now requires us to use a statement as to what the typical weight loss a customer can expect to achieve on our program when using a customer’s weight loss testimonial in advertising. Federal and state regulation of advertising practices generally, and in the weight loss industry in particular, may increase in scope or severity in the future, which could have a material adverse impact on our business.
Other aspects of our industry are also subject to government regulation. For example, the labeling and distribution of food products are subject to strict USDA and FDA requirements and food manufacturers are subject to rigorous inspection and other requirements of the USDA and FDA, and companies operating in foreign markets must comply with those countries’ requirements for proper labeling, controls on hygiene, food preparation and other matters. If federal, state, local or foreign regulation of our industry increases for any reason, then we may be required to incur significant expenses, as well as modify our operations to comply with new regulatory requirements, which could harm our operating results. Additionally, remedies available in any potential administrative or regulatory actions may include product recalls and requiring us to refund amounts paid by all affected customers or pay other damages, which could be substantial.
Laws and regulations directly applicable to communications, operations or commerce over the Internet such as those governing intellectual property, privacy, libel and taxation, are more prevalent and remain unsettled. If we are required to comply with new laws or regulations or new interpretations of existing laws or regulations, or if we are unable to comply with these laws, regulations or interpretations, our business could be adversely affected.
Future laws or regulations, including laws or regulations affecting our marketing and advertising practices, relations with consumers, employees, service providers, or our services and products, may have an adverse impact on us.
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The sale of ingested products involves product liability and other risks.
Like other distributors of products that are ingested, we face an inherent risk of exposure to product liability claims if the use of our products results in illness or injury. The foods that we resell in the U.S. are subject to laws and regulations, including those administered by the USDA and FDA that establish manufacturing practices and quality standards for food products. Product liability claims could have a material adverse effect on our business as existing insurance coverage may not be adequate. Distributors of weight loss food products, vitamins, nutritional supplements and minerals, including our predecessor businesses, have been named as defendants in product liability lawsuits from time to time. The successful assertion or settlement of an uninsured claim, a significant number of insured claims or a claim exceeding the limits of our insurance coverage would harm us by adding costs to the business and by diverting the attention of senior management from the operation of the business. We may also be subject to claims that our products contain contaminants, are improperly labeled, include inadequate instructions as to use or inadequate warnings covering interactions with other substances. Product liability litigation, even if not meritorious, is very expensive and could also entail adverse publicity for us and reduce our revenue. In addition, the products we distribute, or certain components of those products, may be subject to product recalls or other deficiencies. Any negative publicity associated with these actions would adversely affect our brand and may result in decreased product sales and, as a result, lower revenues and profits.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
We currently lease one location in Fort Washington, Pennsylvania. This location totals approximately 119,767 square feet of office space and expires in 2022. We also have a lease in Hoboken, New Jersey which is approximately 2,515 square feet of office space and expires in 2014. We have additional fulfillment capacity in Chambersburg, Pennsylvania, Allentown, Pennsylvania, Bethlehem, Pennsylvania and Sparks, Nevada through an outsourced provider. We have no lease obligations to any of our outsourced fulfillment providers; however, we are subject to minimum space commitments which we may reduce over a specified period of time. Management believes the outsourced fulfillment capacity is adequate to meet our needs for the foreseeable future.
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Litigation
On March 6, 2012, in response to the filing by a competitor of numerous trademark applications containing the term “NUTRILITE” in various weight-loss and weight-management classes, the Company sent a cease and desist letter to the competitor claiming that its use of such mark is very similar to the Company’s “NUTRISYSTEM” mark for very similar Company goods and services in the weight-loss and weight-management industries. The Company alleged that such use would result in confusion amongst consumers with respect to the source of such goods and services and would constitute an infringement of the Company’s mark in violation of the Trademark Act of 1946 (the Lanham Act), as well as various other federal and state laws governing trademarks, unfair competition and deceptive trade practices, and would likely cause dilution of the Company’s famous and distinctive mark. On March 16, 2012, the competitor responded to such letter by filing a complaint for declaratory relief against the Company in the United States District Court for the Western District of Michigan (listed under docket number 1:12-cv-00256-RHB) asking the Court to declare that plaintiff’s use and registration of its mark does not (i) constitute trademark infringement, federal unfair competition, federal dilution, (ii) violate certain Michigan statutes; and (iii) constitute common law trademark infringement or common law unfair competition. On April 27, 2012, the Company filed a motion to dismiss the complaint pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of subject matter jurisdiction. On May 29, 2012, plaintiff filed its brief in opposition to the Company’s motion to dismiss the complaint, and on June 15, 2012 the Company filed its reply brief in support of its motion to dismiss the complaint. On October 9, 2012, the Court denied the Company’s motion to dismiss for lack of subject matter jurisdiction. On October 23, 2012, the Company filed its answer and affirmative defenses to plaintiff’s complaint for declaratory relief and counterclaims for trademark infringement in which it (i) denied each of plaintiff’s counts in the complaint, (ii) set forth various affirmative defenses to plaintiff’s claims, and (iii) asserted by way of counterclaim claims for trademark infringement and dilution arising from plaintiff’s intentional use of a confusingly similar mark for the purpose of unlawfully trading upon the Company’s goodwill, good name, and valuable business identity. On December 20, 2012, the Court held a Rule 16 scheduling conference. On December 21, 2012, plaintiff filed its first request for production of documents and things to the Company and plaintiff’s first set of interrogatories to the Company. On February 1, 2013, the Company filed its first request for production of documents directed to plaintiff. On March 8, 2013, (i) plaintiff filed a motion for leave to file its first amended complaint and its memorandum in support thereof, and (ii) the Company moved for leave to file amended counterclaims and included its memorandum in support thereof. The Company opposed plaintiff’s request for leave to amend as futile, and after argument held April 3, 2013 on plaintiff’s motion, the Court granted both plaintiff and the Company leave to file their amended pleadings and declared the pleadings to be filed that same day. As a consequence, plaintiff’s amended complaint now asserts, in the alternative, affirmative claims for trademark infringement and unfair competition under federal law and for violation of the Michigan Consumer Protection Act, and the Company’s amended counterclaims now assert federal trademark infringement, false designation of origin and federal unfair competition, federal trademark dilution, federal cyberpiracy, and state law trademark infringement, unfair competition and other claims. The parties subsequently filed an agreed-upon motion for entry of a protective order, and on July 12, 2013, the Court issued an order extending the remaining dates in the action for an additional 90 days that, among other things, provides for completion of discovery by December 13, 2013. As of December 18, 2013, plaintiff and the Company entered into an Agreement settling all of the claims at issue under the lawsuit and under a related proceeding pending in the U.S. Patent and Trademark Office before the Trademark Trial and Appeal Board. On December 20, 2013, the parties jointly filed with the Trademark Trial and Appeal Board a stipulated motion to amend applications and stipulation to withdraw oppositions. On December 30, 2013, the Court issued an order approving the settlement of the lawsuit with prejudice.
The Company is also involved in other various claims and routine litigation matters. In the opinion of management, after consultation with legal counsel, the outcomes of such matters are not anticipated to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows in future years.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
The Company’s common stock has been traded on the NASDAQ Stock Market since June 22, 2005, under the symbol “NTRI.” The following table sets forth, for the periods indicated, the high and low sale prices for the Company’s common stock as reported on the NASDAQ Stock Market.
| | | | | | | | |
| | | High | | | Low | |
2014 First Quarter (through February 28, 2014) | | $ | 17.49 | | | $ | 13.62 | |
| | |
2013 First Quarter | | $ | 9.25 | | | $ | 7.96 | |
2013 Second Quarter | | | 11.89 | | | | 7.18 | |
2013 Third Quarter | | | 14.53 | | | | 11.03 | |
2013 Fourth Quarter | | | 20.54 | | | | 14.10 | |
| | |
2012 First Quarter | | $ | 15.55 | | | $ | 10.21 | |
2012 Second Quarter | | | 11.89 | | | | 10.07 | |
2012 Third Quarter | | | 11.75 | | | | 10.06 | |
2012 Fourth Quarter | | | 10.84 | | | | 7.21 | |
Holders
As of February 28, 2014, the Company had approximately 232 record holders of its common stock.
Dividends
Prior to 2008, we had not declared or paid any dividend since inception. We have paid a quarterly dividend of $0.175 per share beginning with the second quarter of 2008. The declaration and payment of dividends in the future will be determined by our Board of Directors in light of conditions then existing, including our earnings, financial condition, capital requirements and other factors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Other Financial Data.”
Securities Authorized for Issuance Under Equity Compensation Plans
The information under the heading “Securities Authorized for Issuance Under Equity Compensation Plans” to be filed in the Company’s definitive proxy statement for the 2014 annual meeting of stockholders is incorporated by reference.
Issuer Purchases of Equity Securities
There were no reportable purchases during the quarter ended December 31, 2013, provided however that 17,034 shares, at an average purchase price of $19.17, were surrendered by employees to the Company during such quarter for the payment of the minimum tax liability withholding obligations upon the vesting of shares of restricted stock.
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STOCK PRICE PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total return since December 31, 2008, for our common stock, the Russell 2000 Index and the Dow Jones US Specialized Consumer Services Index (a published industry index), each of which assumes an initial value of $100 and reinvestment of dividends. Our common stock trades on the NASDAQ Stock Market under the ticker symbol NTRI.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 12/08 | | | 12/09 | | | 12/10 | | | 12/11 | | | 12/12 | | | 12/13 | |
Nutrisystem, Inc. | | $ | 100 | | | $ | 224 | | | $ | 157 | | | $ | 102 | | | $ | 69 | | | $ | 149 | |
Russell 2000 | | | 100 | | | | 127 | | | | 161 | | | | 154 | | | | 180 | | | | 250 | |
Dow Jones US Specialized Consumer Services | | | 100 | | | | 122 | | | | 121 | | | | 130 | | | | 168 | | | | 196 | |
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| ITEM 6. | SELECTED FINANCIAL DATA |
The selected consolidated financial data presented below has been derived from our Consolidated Financial Statements for each of the periods indicated. The data set forth below is qualified by reference to and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements included as Items 7 and 8, respectively, in this Annual Report.
Selected Consolidated Financial Data
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2013 | | | 2012(c) | | | 2011 | | | 2010 | | | 2009 | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 358,086 | | | $ | 396,878 | | | $ | 401,336 | | | $ | 509,515 | | | $ | 524,618 | |
| | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
Cost of revenue | | | 184,210 | (a) | | | 213,095 | | | | 198,405 | | | | 224,806 | | | | 241,163 | |
Marketing | | | 95,784 | | | | 111,095 | | | | 110,922 | | | | 145,868 | | | | 146,426 | |
General and administrative | | | 58,227 | (b) | | | 66,332 | | | | 60,812 | | | | 73,853 | | | | 76,418 | |
Depreciation and amortization | | | 8,896 | | | | 10,724 | | | | 12,068 | | | | 11,773 | | | | 11,177 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income (loss) from continuing operations | | | 10,969 | | | | (4,368 | ) | | | 19,129 | | | | 53,215 | | | | 49,434 | |
Other expense (income) | | | 0 | | | | 78 | | | | 0 | | | | 32 | | | | (407 | ) |
Equity and impairment loss | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 4,000 | (e) |
Interest expense (income), net | | | 89 | | | | 2,034 | | | | 468 | | | | (5 | ) | | | (104 | ) |
Income tax expense (benefit) | | | 3,510 | | | | (3,675 | ) | | | 6,400 | | | | 19,309 | | | | 13,072 | |
Discontinued operations, net | | | 0 | | | | 0 | | | | 0 | | | | 242 | (d) | | | 4,083 | (d, f) |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 7,370 | | | $ | (2,805 | ) | | $ | 12,261 | | | $ | 33,637 | | | $ | 28,790 | |
| | | | | | | | | | | | | | | | | | | | |
Basic income (loss) per common share: | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 0.26 | | | $ | (0.10 | ) | | $ | 0.44 | | | $ | 1.14 | | | $ | 1.07 | |
Discontinued operations | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | (0.01 | ) | | | (0.14 | ) |
| | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.26 | | | $ | (0.10 | ) | | $ | 0.44 | | | $ | 1.13 | | | $ | 0.93 | |
| | | | | | | | | | | | | | | | | | | | |
Diluted income (loss) per common share: | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 0.25 | | | $ | (0.10 | ) | | $ | 0.43 | | | $ | 1.13 | | | $ | 1.06 | |
Discontinued operations | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | (0.01 | ) | | | (0.14 | ) |
| | | | | | | | | | | | | | | | | | | | |
Diluted | | $ | 0.25 | | | $ | (0.10 | ) | | $ | 0.43 | | | $ | 1.12 | | | $ | 0.92 | |
| | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | |
Basic | | | 28,013 | | | | 27,499 | | | | 27,033 | | | | 28,312 | | | | 29,458 | |
Diluted | | | 28,287 | | | | 27,499 | | | | 27,325 | | | | 28,686 | | | | 29,769 | |
| |
| | | December 31, | |
| | | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
Cash, cash equivalents and short term investments | | $ | 26,323 | | | $ | 19,391 | | | $ | 57,607 | | | $ | 41,219 | | | $ | 62,522 | |
Working capital | | | 21,772 | | | | 31,403 | | | | 76,239 | | | | 74,020 | | | | 103,341 | |
Total assets | | | 102,784 | | | | 98,406 | | | | 150,354 | | | | 149,953 | | | | 170,787 | |
Borrowings under credit facility | | | 0 | | | | 0 | | | | 30,000 | | | | 30,000 | | | | 0 | |
Non-current liabilities | | | 3,118 | | | | 3,525 | | | | 4,734 | | | | 5,313 | | | | 1,550 | |
Stockholders’ equity | | | 52,157 | | | | 60,109 | | | | 74,958 | | | | 74,976 | | | | 128,963 | |
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| (a) | In the third quarter of 2013, a charge of $5,000 was recorded to settle certain disputes that had arisen with a supplier over a legacy contract. |
| (b) | In 2013, we recorded $2,357 for severance, including $696 of non-cash expense related to the acceleration of previously awarded equity-based awards. |
| (c) | During 2012, we recorded $5,724 in severance in general and administrative expense, including $3,293 of non-cash expense related to the acceleration of previously awarded equity-based awards, for our former President and Chief Executive Officer’s cessation of employment. Additionally, we recorded an impairment charge of $2,100 related to advances paid to a frozen food supplier as the supplier was in default with its bank lender and negotiating a work out plan and a charge of $1,980 to vacate a facility. We also recorded a charge of $2,476 to restructure certain third party marketing vendor contracts and a charge of $1,079 to write off unamortized debt issuance costs. |
| (d) | In the first quarter of 2010, we committed to a plan to sell the business operations conducted by our subsidiary, Nutrisystem Fresh, Inc. (“NuKitchen”), as it was no longer aligned with the business direction of the Company. During the third quarter of 2010, this business was shut down as we were unsuccessful in locating a buyer. Accordingly, the operating results of this discontinued operation have been presented separately from continuing operations for all periods presented. The loss on discontinued operations during 2010 was primarily from operations. During the fourth quarter of 2009, an impairment charge of $4,541 was recorded in connection with the NuKitchen acquisition. This charge consisted of $2,717 of goodwill and $1,824 of identifiable intangible assets. |
| (e) | In June 2009, we abandoned our interest in Zero Technologies, LLC as management determined that the business was no longer aligned with our strategic direction. An equity and impairment loss of $4,000 was recorded during 2009 to write-off the remaining investment. |
| (f) | In the fourth quarter of 2007, we committed to a plan to sell our subsidiary Slim and Tone LLC. Accordingly, the operating results of this discontinued operation have been presented separately from continuing operations and are included in loss on discontinued operation, net of income tax in the accompanying consolidated statements of operations for all periods presented. |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with the financial information included elsewhere in this Annual Report.
Background
We provide weight management products and services and offer nutritionally balanced weight loss programs designed for women, men, and seniors, as well as our Nutrisystem® D® program specifically designed to help people with type 2 diabetes who want to lose weight and manage their diabetes. Our programs are based on over 40 years of nutrition research and on the science of the low Glycemic Index. Our pre-packaged foods are sold directly to weight loss program participants primarily through the Internet and telephone (including the redemption of prepaid program cards), referred to as the direct channel, through QVC, a television shopping network and through retail programs.
Revenue consists primarily of food sales. For 2013, 2012 and 2011, the direct channel accounted for 92%, 96% and 95%, respectively, of total revenue compared to 3%, 3% and 4%, respectively, for QVC. During 2013, 5% of total revenue came from retail. During 2012 and 2011, 1% of total revenue came from other channels. We incur significant marketing expenditures to support our brand as we continue to advertise across various media channels. New media channels are tested on a continual basis and we consider our media mix to be diverse. We market our weight management system through television, print, direct mail, Internet, public relations and social media. We review and analyze a number of key operating and financial metrics to manage our business, including the number of new customers, revenue per customer, total revenues, marketing per new customer, operating margins and reactivation revenue.
Our mix of revenue for the direct channel can be divided into three categories. First, new customer revenue is all revenue within a quarter from customers joining within that quarter. New customer revenue is the main driver of revenue growth. Second, on-program revenue is all revenue from customers who joined in previous quarters but who are still within their first nine months on the program. Third, reactivation revenue is all revenue generated from customers who are more than nine months from their initial purchase.
Our eCommerce, direct-to-consumer business model provides flexibility which allows us to manage marketing spend according to customer demand. We believe this flexibility is especially valuable due to the current instability in general economic conditions. Additionally, we initiated a concerted effort to improve lifetime customer economics, length of stay, and overall customer satisfaction and have recently upgraded our eCommerce platform and website. We are able to test new commercials and offers, as well as, improvements to our website to allow us to be more responsive to customer needs and attempt to drive conversion.
In December 2013, we launched Nutrisystem My Way, a program tailored to the individual’s metabolism, along with our Fast 5™ kit, a one-week kick start that can help customers lose five pounds in their first week of dieting. The Nutrisystem® My Way® program uses an algorithm to estimate each customer’s metabolic rate in order to create a customized program tailored to the amount of calories needed for healthy weight loss. Customers are given a meal plan and exercise suggestions and are encouraged to check in periodically with a Nutrisystem counselor as their needs change in response to weight loss.
Additionally, we introduced new 5-day Jumpstart Your Weight Loss Kits in 2013 which were available exclusively at Walmart and represent a significant departure from our traditional 28-day program. This partnership with Walmart provides us with great brand exposure, offering consumers who may not be aware of our program an opportunity to sample Nutrisystem at an attractive price point.
As we began 2013, we renewed our focus on the following key areas: 1) a return to direct marketing fundamentals including building and leveraging our database; 2) margin improvement; 3) product and program
26
innovation; and 4) prioritization of growth initiatives. During 2013, we have reduced the size of the senior management team and reorganized the workforce to align around key priorities resulting in approximately $2.4 million in severance, including $696,000 of non-cash expense related to the acceleration of previously awarded equity-based awards. Gross margins have been aided by eliminating unprofitable free promotional items and process re-engineering. These positive margin items have been partially offset by a $5.0 million charge recorded in 2013 to settle certain disputes that had arisen with a supplier over a legacy contract. Retail and reactivation revenue as well as the average selling price increased during 2013. Despite these improvements, as well as revenue growth in the second half of 2013 as compared to the comparable period of 2012, revenue remains down for the year ended December 31, 2013 as compared to the comparable period of 2012.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Our significant accounting policies are described in Note 2 of the consolidated financial statements included in Item 8.
The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management develops, and changes periodically, these estimates and assumptions based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management considers the following accounting estimates to be the most critical in preparing our consolidated financial statements. These critical accounting estimates are discussed with our audit committee quarterly.
Reserves for Returns. We review the reserves for customer returns at each reporting period and adjust them to reflect data available at that time. To estimate reserves for returns, we consider actual return rates in preceding periods and changes in product offerings or marketing methods that might impact returns going forward. To the extent the estimate of returns changes, we will adjust the reserve, which will impact the amount of product sales revenue recognized in the period of the adjustment. The provision for estimated returns for the years ended December 31, 2013, 2012 and 2011 was $10.8 million, $10.4 million and $12.9 million, respectively. The returns percentage has increased primarily due to the introduction of a tiered pricing strategy in 2012. The reserve for estimated returns incurred but not received and processed was $637,000 and $652,000 at December 31, 2013 and 2012, respectively, and has been included in other accrued expenses and current liabilities in the accompanying consolidated balance sheets.
Excess and Obsolete Inventory.We continually assess the quantities of inventory on hand to identify excess or obsolete inventory and a provision is recorded for any estimated loss. We estimate the reserve for excess and obsolete inventory based primarily on our forecasted demand and/or our ability to sell the products, introduction of new products, future production requirements and changes in our customers’ behavior. The reserve for excess and obsolete inventory was $725,000 and $636,000 at December 31, 2013 and 2012, respectively.
Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings and expectations of future taxable income and other relevant factors. We estimate the annual effective income tax rate at the beginning of each year and revise the estimate at each reporting period based on a number of factors including operating results, level of tax exempt interest income, charitable contributions and sales by state, among other items.
27
Results of Operations
Revenue and expenses consist of the following components:
Revenue.Revenue consists primarily of food sales. Food sales include sales of food, supplements, shipping and handling charges billed to customers and sales credits and adjustments, including product returns. No revenue is recorded for food products provided at no charge as part of promotions.
Cost of Revenue. Cost of revenue consists primarily of the cost of the products sold, including compensation related to fulfillment, the costs of outside fulfillment, incoming and outgoing shipping costs, charge card fees and packing material. Cost of products sold includes products provided at no charge as part of promotions and the non-food materials provided with customer orders.
Marketing Expense. Marketing expense includes media, advertising production, marketing and promotional expenses and payroll-related expenses, including share-based payment arrangements, for personnel engaged in these activities. Internet advertising expense is recorded based on either the rate of delivery of a guaranteed number of impressions over the advertising contract term or on a cost per customer acquired, depending upon the terms. Direct-mail advertising costs are capitalized if the primary purpose was to elicit sales to customers who could be shown to have responded specifically to the advertising and results in probable future economic benefits. The capitalized costs are amortized to expense over the period during which the future benefits are expected to be received. All other advertising costs are charged to expense as incurred or the first time the advertising takes place.
General and Administrative Expense. General and administrative expense consists of compensation for administrative, information technology, counselors, customer service and sales personnel, share-based payment arrangements for related employees, facility expenses, website development costs, professional service fees and other general corporate expenses.
Interest Expense, Net. Interest expense, net consists of interest expense on our outstanding indebtedness net of interest income earned on cash balances and short term investments.
Income Tax Expense (Benefit).We are subject to corporate level income taxes and record a provision for income taxes based on an estimated effective income tax rate for the year.
Overview of the Direct Channel
In 2013, 2012 and 2011, the direct channel represented 92%, 96% and 95%, respectively, of our revenue. Revenues through the direct channel were $327.8 million in 2013 compared to $380.8 million in 2012 and $382.8 million in 2011. Revenue is primarily generated through customer starts, reactivation of former customers and the customer ordering behavior, including length of time on our program and the diet program selection. The revenue decrease in 2013 was primarily attributable to declines in new customer starts and decreased on-program revenue partially offset by increased reactivation revenue and higher average selling prices. Critical to increasing customer starts is our ability to deploy marketing dollars while maintaining marketing effectiveness. Factors influencing our marketing effectiveness include the quality of the advertisements, promotional activity by our competitors, as well as the price and availability of appropriate media.
28
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2013 | | | 2012 | | | $ Change | | | % Change | |
| | | (in thousands) | |
REVENUE | | $ | 358,086 | | | $ | 396,878 | | | $ | (38,792 | ) | | | (10 | )% |
| | | | | | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | | | |
Cost of revenue | | | 184,210 | | | | 213,095 | | | | (28,885 | ) | | | (14 | )% |
Marketing | | | 95,784 | | | | 111,095 | | | | (15,311 | ) | | | (14 | )% |
General and administrative | | | 58,227 | | | | 66,332 | | | | (8,105 | ) | | | (12 | )% |
Depreciation and amortization | | | 8,896 | | | | 10,724 | | | | (1,828 | ) | | | (17 | )% |
| | | | | | | | | | | | | | | | |
Total costs and expenses | | | 347,117 | | | | 401,246 | | | | (54,129 | ) | | | (13 | )% |
| | | | | | | | | | | | | | | | |
Operating income (loss) | | | 10,969 | | | | (4,368 | ) | | | 15,337 | | | | 351 | % |
OTHER EXPENSE | | | 0 | | | | 78 | | | | (78 | ) | | | (100 | )% |
INTEREST EXPENSE, net | | | 89 | | | | 2,034 | | | | (1,945 | ) | | | (96 | )% |
| | | | | | | | | | | | | | | | |
Income (loss) before income tax expense (benefit) | | | 10,880 | | | | (6,480 | ) | | | 17,360 | | | | 268 | % |
INCOME TAX EXPENSE (BENEFIT) | | | 3,510 | | | | (3,675 | ) | | | 7,185 | | | | 196 | % |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 7,370 | | | $ | (2,805 | ) | | $ | 10,175 | | | | 363 | % |
| | | | | | | | | | | | | | | | |
| | | | |
% of revenue | | | | | | | | | | | | |
Gross margin | | | 48.6 | % | | | 46.3 | % | | | | | | | | |
Marketing | | | 26.7 | % | | | 28.0 | % | | | | | | | | |
General and administrative | | | 16.3 | % | | | 16.7 | % | | | | | | | | |
Operating income (loss) | | | 3.1 | % | | | (1.1 | )% | | | | | | | | |
Revenue. Revenue decreased to $358.1 million in 2013 from $396.9 million in 2012. The revenue decline occurred primarily due to declines in new customer starts and decreased on-program revenue partially offset by increased retail and reactivation revenue and higher average selling prices. In 2013, direct revenue accounted for 92% of total revenue compared to 3% for QVC and 5% for retail. In 2012, direct revenue accounted for 96% of total revenue compared to 3% for QVC and 1% for other channels.
Costs and Expenses. Cost of revenue decreased to $184.2 million in 2013 from $213.1 million in 2012. Gross margin as a percent of revenue increased to 48.6% in 2013 from 46.3% in 2012. The increase in the gross margin percent was primarily attributable to pricing discipline, the removal of certain promotional items and free food promotions and process re-engineering. These items offset a higher mix of lower margin products resulting from an increase in retail sales and a $5.0 million charge to settle certain disputes that had arisen with a supplier over a legacy contract.
Marketing expense decreased to $95.8 million in 2013 from $111.1 million in 2012. Marketing expense as a percent of revenue decreased to 26.7% in 2013 from 28.0% in 2012. Substantially all of the marketing spending in 2013 promoted the direct business. The decrease in marketing expense was attributable to decreased spending for media ($9.5 million) and for the production of television advertising ($1.4 million). There was also a decrease in public relations ($4.9 million) primarily due to the restructuring of certain third-party marketing vendor contracts in 2012. In total, media spending was $77.4 million in 2013 and $86.9 million in 2012.
General and administrative expense decreased to $58.2 million in 2013 from $66.3 million in 2012 and as a percent of revenue decreased to 16.3% in 2013 from 16.7% in 2012. The decrease was primarily attributable to lower non-cash expense for share-based payment arrangements of $3.6 million due to the acceleration of previously awarded equity-based awards in 2012 as certain employees terminated, a decrease in facilities expense of $2.5 million due to a charge incurred in 2012 to vacate a facility and an impairment charge of $2.1 million recorded in
29
2012 related to advances paid to a frozen food supplier. Additionally, recruiting fees decreased $697,000, professional, outside and computer services decreased $383,000 and miscellaneous taxes decreased $392,000. These decreases were offset by increased compensation, benefits and temporary help of $1.8 million and new product development expenses of $371,000 due to business initiatives.
Depreciation and amortization expense decreased to $8.9 million in 2013 from $10.7 million in 2012 as certain fixed assets for both our website and assets purchased when we relocated our corporate headquarters reached the end of their useful lives.
Interest Expense, Net. Interest expense, net, was $89,000 in 2013 compared to $2.0 million in 2012. No amounts were outstanding under the credit facility during 2013. During 2012, we had outstanding borrowings and additionally, in November 2012, we terminated and replaced our then existing credit facility. In connection with the termination, we wrote off the remaining unamortized debt issuance costs and also terminated the outstanding interest rate swap agreements resulting in a combined charge of $1.2 million.
Income Tax Expense (Benefit). In 2013, we recorded an income tax expense of $3.5 million, which reflects an effective tax rate of 32.3% as compared to $3.7 million of income tax benefit in 2012 with an effective tax rate of 56.7%. The change in the effective income tax rate was due to changes in executive compensation, reductions in tax reserves due to the lapse of the statute of limitations in 2013 and decreased levels of food donations which offset a charge to record a valuation allowance for charitable contributions that might not be realized due to the short carryforward period for this temporary difference.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | $ Change | | | % Change | |
| | | (in thousands) | |
REVENUE | | $ | 396,878 | | | $ | 401,336 | | | $ | (4,458 | ) | | | (1 | )% |
| | | | | | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | | | |
Cost of revenue | | | 213,095 | | | | 198,405 | | | | 14,690 | | | | 7 | % |
Marketing | | | 111,095 | | | | 110,922 | | | | 173 | | | | 0 | % |
General and administrative | | | 66,332 | | | | 60,812 | | | | 5,520 | | | | 9 | % |
Depreciation and amortization | | | 10,724 | | | | 12,068 | | | | (1,344 | ) | | | (11 | )% |
| | | | | | | | | | | | | | | | |
Total costs and expenses | | | 401,246 | | | | 382,207 | | | | 19,039 | | | | 5 | % |
| | | | | | | | | | | | | | | | |
Operating (loss) income | | | (4,368 | ) | | | 19,129 | | | | (23,497 | ) | | | (123 | )% |
OTHER EXPENSE | | | 78 | | | | 0 | | | | 78 | | | | NA | |
INTEREST EXPENSE, net | | | 2,034 | | | | 468 | | | | 1,566 | | | | 335 | % |
| | | | | | | | | | | | | | | | |
(Loss) income before income tax (benefit) expense | | | (6,480 | ) | | | 18,661 | | | | (25,141 | ) | | | (135 | )% |
INCOME TAX (BENEFIT) EXPENSE | | | (3,675 | ) | | | 6,400 | | | | (10,075 | ) | | | (157 | )% |
| | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (2,805 | ) | | $ | 12,261 | | | $ | (15,066 | ) | | | (123 | )% |
| | | | | | | | | | | | | | | | |
| | | | |
% of revenue | | | | | | | | | | | | |
Gross margin | | | 46.3 | % | | | 50.6 | % | | | | | | | | |
Marketing | | | 28.0 | % | | | 27.6 | % | | | | | | | | |
General and administrative | | | 16.7 | % | | | 15.2 | % | | | | | | | | |
Operating (loss) income | | | (1.1 | )% | | | 4.8 | % | | | | | | | | |
Revenue. Revenue decreased to $396.9 million in 2012 from $401.3 million in 2011. The revenue decline occurred primarily due to declines in new customer starts, decreased on-program revenue and lower average
30
selling prices partially offset by increased reactivation revenue. QVC revenue also decreased due to fewer shows and air time. In 2012, direct revenue accounted for 96% of total revenue compared to 3% for QVC and 1% for other channels. In 2011, direct revenue accounted for 95% of total revenue compared to 4% for QVC and 1% for other channels.
Costs and Expenses. Cost of revenue increased to $213.1 million in 2012 from $198.4 million in 2011. Gross margin as a percent of revenue decreased to 46.3% in 2012 from 50.6% in 2011. The decrease in gross margin was primarily attributable to the promotional inclusion of additional higher cost items with customer starts. Continued price promotions and the sale of our Nutrisystem Advanced inventory to a closeout retailer as we transitioned to the SUCCESS program also negatively impacted gross margins.
Marketing expense increased to $111.1 million in 2012 from $110.9 million in 2011. Marketing expense as a percent of revenue increased to 28.0% in 2012 from 27.6% in 2011. Substantially all of the marketing spending in 2012 promoted the direct business. The increase in marketing expense was attributable to increased spending for public relations ($3.2 million) primarily due to the restructuring of certain third-party marketing vendor contracts partially offset by decreased spending in media ($1.9 million) and for the production of television advertising ($2.6 million). In total, media spending was $86.9 million in 2012 and $88.8 million in 2011.
General and administrative expense increased to $66.3 million in 2012 from $60.8 million in 2011 and as a percent of revenue increased to 16.7% in 2012 from 15.2% in 2011. The increase was primarily attributable to higher compensation, benefits and temporary help ($879,000) and increased recruiting fees ($581,000) due to the cessation of Mr. Redling’s employment. In total, we recorded approximately $5.7 million in severance for Mr. Redling, including approximately $3.3 million of non-cash expense related to the acceleration of previously awarded equity-based awards. The increase in compensation, benefits and temporary help was partially offset by savings achieved from the workforce reduction in 2011. Also, there were increased professional and outside computer services expenses ($998,000) due to increased legal fees and increased facilities expense ($1.5 million) due mainly to charges incurred to vacate a facility. Additionally, we recorded an impairment charge ($2.1 million) related to advances paid to a frozen food supplier as the supplier was in default with its bank lender and was in the process of negotiating a work out plan and exploring other strategic alternatives.
Depreciation and amortization expense decreased to $10.7 million in 2012 from $12.1 million in 2011 due to the normal retirement of assets during 2012.
Interest Expense, Net. Interest expense, net, was $2.0 million in 2012 compared to $468,000 in 2011. In November 2012, we terminated and replaced our then existing credit facility. In connection with the termination, we wrote off the remaining unamortized debt issuance costs and also terminated the outstanding interest rate swap agreements resulting in a combined charge of $1.2 million. Additionally, interest rates increased during 2012 as compared to 2011.
Income Tax (Benefit) Expense. In 2012, we recorded an income tax benefit of $3.7 million, which reflects an effective tax rate of 56.7% as compared to $6.4 million of income tax expense in 2011 with an effective tax rate of 34.3%. The change in the effective income tax rate was due to favorable book to tax differences including the elimination of the limitation on executive compensation deductions, reductions in tax reserves and increased food donations combined with lower pre-tax income levels which resulted in income tax benefits.
Contractual Obligations and Commercial Commitments
As of December 31, 2013, our principal commitments consisted of obligations under supply agreements with food vendors, an agreement with our outside fulfillment provider, agreements with our internet and networking providers, operating leases and employment contracts. Although we have no material commitments for capital expenditures, we anticipate continuing requirements for capital expenditures.
31
Following is a summary of our contractual obligations.
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period (in millions) | |
Contractual obligations | | Total | | | Less Than
1 Year | | | 1-3 Years | | | 4-5 Years | | | More Than
5 Years | |
Purchase obligations | | $ | 69.1 | | | $ | 17.8 | | | $ | 28.1 | | | $ | 23.2 | | | $ | 0.0 | |
Operating leases | | | 24.6 | | | | 3.3 | | | | 5.4 | | | | 5.5 | | | | 10.4 | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 93.7 | | | $ | 21.1 | | | $ | 33.5 | | | $ | 28.7 | | | $ | 10.4 | |
| | | | | | | | | | | | | | | | | | | | |
We have entered into supply agreements with various food vendors. Several of these agreements provide for annual pricing, annual purchase obligations, as well as exclusivity in the production of certain products, with terms of five years or less. Purchase obligations may vary depending on product mix. One agreement also provides for certain rebates to us if certain volume thresholds are exceeded. Several agreements require us to purchase specified percentages of our annual requirements for certain products. Those commitments have not been estimated and are not included in the above table. We anticipate that we will meet all annual purchase obligations.
Off-Balance Sheet Arrangements
We have no off-balance sheet financing arrangements.
Liquidity, Capital Resources and Other Financial Data
At December 31, 2013, we had working capital of $21.8 million, a decrease of $9.6 million from the $31.4 million working capital balance at December 31, 2012. Cash and cash equivalents at December 31, 2013 were $9.8 million, a decrease of $6.4 million from the balance of $16.2 million at December 31, 2012. In addition, we had $16.6 million invested in short term investments at December 31, 2013 as compared to $3.2 million at December 31, 2012. Our principal sources of liquidity during 2013 were cash flows from operations.
On November 8, 2012, we entered into a $40.0 million secured revolving credit facility, as amended, with a lender. The credit facility provides for interest on borrowings at either a base rate or a London Inter-Bank Offered Rate, in each case plus an applicable margin and is also subject to an unused fee payable quarterly. The credit facility contains financial and other covenants, including a minimum consolidated fixed charge ratio, a minimum consolidated tangible net worth and a minimum consolidated liquidity ratio, and includes limitations on, among other things, capital expenditures, additional indebtedness, acquisitions, stock repurchases and restrictions on paying dividends in certain circumstances. The credit facility can be drawn upon through November 8, 2015, at which time all amounts must be repaid. There were no borrowings outstanding at December 31, 2013 and 2012.
In 2013, we generated cash flow of $35.4 million from operating activities, an increase of $12.6 million from 2012. The increase in cash flow from operations was primarily attributable to the net income in 2013 compared to a net loss in 2012 and changes in operating assets and liabilities.
In 2013, net cash used in investing activities was $21.0 million primarily from capital additions of $7.6 million and $13.4 million of net purchases of short term investments. We are continuing to invest in our ecommerce and web platform to incorporate new product initiatives.
In 2013, net cash used in financing activities was $20.8 million, a decrease of $30.6 million from 2012. During 2012, we repaid $30.0 million outstanding under our previous credit facility.
Our Board of Directors declared quarterly dividends of $0.175 per share, which were paid on March 25, 2013, May 23, 2013, August 19, 2013 and November 18, 2013. Subsequent to December 31, 2013, our Board of
32
Directors declared a quarterly dividend of $0.175 per share payable on March 20, 2014 to stockholders of record as of March 10, 2014. Although we intend to continue to pay regular quarterly dividends, the declaration and payment of future dividends are discretionary and will be subject to quarterly determination by our Board of Directors following its review of our financial performance.
We believe that our available capital resources are sufficient to fund our working capital requirements, capital expenditures, income tax obligations and dividends for the foreseeable future.
Seasonality
Typically in the weight loss industry, revenue is strongest in the first calendar quarter and lowest in the fourth calendar quarter. We believe our business experiences seasonality, driven by the predisposition of dieters to initiate a diet and the price and availability of certain media.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We believe that we are not subject to any material risks arising from changes in foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk instruments. Our cash and cash equivalents at December 31, 2013 of $9.8 million were maintained in bank and money market accounts. Additionally, we invested $16.6 million in short term investments, which are classified as available-for-sale securities and are reported at fair value in the accompanying consolidated balance sheets. As such, a change in interest rates of 1 percentage point would not have a material impact on our operating results and cash flows.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The information required by this Item is set forth on pages 37 through 59 hereto.
33
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
The SEC defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Based on the evaluation of the effectiveness of our disclosure controls and procedures by our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, as of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures at the end of the period covered by this report were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of the Company’s financial statements in accordance with generally accepted accounting principles and that the receipts and expenditures of the Company are being made in accordance with management and board of director authorization; and (iii) provide reasonable assurance that unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on its financial statements would be prevented or detected on a timely basis.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
There was no change in our internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management evaluated the effectiveness of the Company’s internal control over financial reporting based on the framework inInternal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon that evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013.
The Company’s independent registered public accounting firm, KPMG LLP, has audited the Company’s internal control over financial reporting as of December 31, 2013. Their report on the effectiveness of the Company’s internal control over financial reporting appears on page 35.
34
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Nutrisystem, Inc.:
We have audited Nutrisystem, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established inInternal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Nutrisystem, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Nutrisystem, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established inInternal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Nutrisystem, Inc. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and our report dated March 10, 2014 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 10, 2014
35
| ITEM 9B. | OTHER INFORMATION |
None.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information concerning directors and compliance with Section 16(a) of the Exchange Act and our Code of Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer or controller called for by Item 10 of Form 10-K will be set forth under the captions “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Conduct” in our definitive proxy statement for the 2014 annual meeting of stockholders, to be filed within 120 days after the end of the fiscal year covered by this annual report on Form 10-K, and is incorporated herein by reference.
The required information as to executive officers is set forth in Part I hereof.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in our definitive proxy statement for the 2014 annual meeting of stockholders.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in our definitive proxy statement for the 2014 annual meeting of stockholders.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in our definitive proxy statement for the 2014 annual meeting of stockholders.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by Item 14 of Form 10-K is incorporated by reference to the information contained in our definitive proxy statement for the 2014 annual meeting of stockholders.
PART IV
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) 1. Financial Statements
See Index to the Consolidated Financial Statements on page 37 of this Annual Report.
2. Financial Statement Schedules
None, as all information required in these schedules is included in the Notes to the Consolidated Financial Statements.
3. Exhibits
Reference is made to the Exhibit Index on page 60 of this Annual Report for a list of exhibits required by Item 601 of Regulation S-K to be filed as part of this Annual Report.
36
NUTRISYSTEM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
37
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Nutrisystem, Inc.:
We have audited the accompanying consolidated balance sheets of Nutrisystem, Inc. and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nutrisystem, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Nutrisystem, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 10, 2014
38
NUTRISYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
| | | | | | | | |
| | | December 31, | |
| | | 2013 | | | 2012 | |
ASSETS | | | | | | | | |
CURRENT ASSETS: | | | | | | | | |
Cash and cash equivalents | | $ | 9,772 | | | $ | 16,186 | |
Short term investments | | | 16,551 | | | | 3,205 | |
Receivables | | | 7,738 | | | | 8,487 | |
Inventories | | | 26,088 | | | | 23,637 | |
Prepaid income taxes | | | 2,167 | | | | 4,531 | |
Deferred income taxes | | | 931 | | | | 2,969 | |
Other current assets | | | 6,034 | | | | 7,160 | |
| | | | | | | | |
Total current assets | | | 69,281 | | | | 66,175 | |
FIXED ASSETS, net | | | 26,029 | | | | 28,003 | |
OTHER ASSETS | | | 7,474 | | | | 4,228 | |
| | | | | | | | |
Total assets | | $ | 102,784 | | | $ | 98,406 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | |
Accounts payable | | $ | 29,117 | | | $ | 23,192 | |
Accrued payroll and related benefits | | | 6,723 | | | | 1,326 | |
Deferred revenue | | | 4,228 | | | | 3,343 | |
Other accrued expenses and current liabilities | | | 7,441 | | | | 6,911 | |
| | | | | | | | |
Total current liabilities | | | 47,509 | | | | 34,772 | |
NON-CURRENT LIABILITIES | | | 3,118 | | | | 3,525 | |
| | | | | | | | |
Total liabilities | | | 50,627 | | | | 38,297 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES (Note 7) | | | | | | | | |
STOCKHOLDERS’ EQUITY: | | | | | | | | |
Preferred stock, $.001 par value (5,000 shares authorized, no shares issued and outstanding) | | | 0 | | | | 0 | |
Common stock, $.001 par value (100,000 shares authorized; shares issued – 28,866 at December 31, 2013 and 28,632 at December 31, 2012) | | | 29 | | | | 29 | |
Additional paid-in capital | | | 24,095 | | | | 18,466 | |
Treasury stock, at cost, 158 shares at December 31, 2013 and 73 shares at December 31, 2012 | | | (1,586 | ) | | | (636 | ) |
Retained earnings | | | 29,611 | | | | 42,254 | |
Accumulated other comprehensive income (loss) | | | 8 | | | | (4 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 52,157 | | | | 60,109 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 102,784 | | | $ | 98,406 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
39
NUTRISYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2013 | | | 2012 | | | 2011 | |
REVENUE | | $ | 358,086 | | | $ | 396,878 | | | $ | 401,336 | |
| | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | |
Cost of revenue | | | 184,210 | | | | 213,095 | | | | 198,405 | |
Marketing | | | 95,784 | | | | 111,095 | | | | 110,922 | |
General and administrative | | | 58,227 | | | | 66,332 | | | | 60,812 | |
Depreciation and amortization | | | 8,896 | | | | 10,724 | | | | 12,068 | |
| | | | | | | | | | | | |
Total costs and expenses | | | 347,117 | | | | 401,246 | | | | 382,207 | |
| | | | | | | | | | | | |
Operating income (loss) | | | 10,969 | | | | (4,368 | ) | | | 19,129 | |
OTHER EXPENSE | | | 0 | | | | 78 | | | | 0 | |
INTEREST EXPENSE, net | | | 89 | | | | 2,034 | | | | 468 | |
| | | | | | | | | | | | |
Income (loss) before income tax expense (benefit) | | | 10,880 | | | | (6,480 | ) | | | 18,661 | |
INCOME TAX EXPENSE (BENEFIT) | | | 3,510 | | | | (3,675 | ) | | | 6,400 | |
| | | | | | | | | | | | |
Net income (loss) | | $ | 7,370 | | | $ | (2,805 | ) | | $ | 12,261 | |
| | | | | | | | | | | | |
BASIC INCOME (LOSS) PER COMMON SHARE | | $ | 0.26 | | | $ | (0.10 | ) | | $ | 0.44 | |
| | | | | | | | | | | | |
DILUTED INCOME (LOSS) PER COMMON SHARE | | $ | 0.25 | | | $ | (0.10 | ) | | $ | 0.43 | |
| | | | | | | | | | | | |
WEIGHTED AVERAGE SHARES OUTSTANDING: | | | | | | | | | | | | |
Basic | | | 28,013 | | | | 27,499 | | | | 27,033 | |
Diluted | | | 28,287 | | | | 27,499 | | | | 27,325 | |
| | | |
DIVIDENDS DECLARED PER COMMON SHARE | | $ | 0.70 | | | $ | 0.70 | | | $ | 0.70 | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
40
NUTRISYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2013 | | | 2012 | | | 2011 | |
Net income (loss) | | $ | 7,370 | | | $ | (2,805 | ) | | $ | 12,261 | |
| | | | | | | | | | | | |
OTHER COMPREHENSIVE INCOME (LOSS): | | | | | | | | | | | | |
Foreign currency translation adjustment | | | 0 | | | | 78 | | | | (4 | ) |
| | | | | | | | | | | | |
Short term investments: | | | | | | | | | | | | |
Unrealized gain on short term investments, net of income tax expense of $4 in 2013 and $9 in 2012 | | | 8 | | | | 16 | | | | 0 | |
Reclassification adjustments, net of income tax expense (benefit) of $2 in 2013, $(11) in 2012 and $15 in 2011 | | | 4 | | | | (20 | ) | | | 26 | |
| | | | | | | | | | | | |
Short term investments, net | | | 12 | | | | (4 | ) | | | 26 | |
| | | | | | | | | | | | |
Interest rate swaps: | | | | | | | | | | | | |
Unrealized (loss) gain on interest rate swaps, net of income tax (benefit) expense of $(37) in 2012 and $20 in 2011 | | | 0 | | | | (73 | ) | | | 14 | |
Reclassification adjustments, net of income tax benefit of $45 in 2012 | | | 0 | | | | 87 | | | | 0 | |
| | | | | | | | | | | | |
Interest rate swaps, net | | | 0 | | | | 14 | | | | 14 | |
| | | | | | | | | | | | |
Other comprehensive income, net of tax | | | 12 | | | | 88 | | | | 36 | |
| | | | | | | | | | | | |
Comprehensive income (loss) | | $ | 7,382 | | | $ | (2,717 | ) | | $ | 12,297 | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
41
NUTRISYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common
Shares | | | Common
Stock | | | Additional
Paid-in
Capital | | | Treasury
Stock | | | Retained
Earnings | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Total | |
BALANCE, January 1, 2011 | | | 28,100 | | | $ | 28 | | | $ | 3,088 | | | $ | 0 | | | $ | 71,988 | | | $ | (128 | ) | | $ | 74,976 | |
Net income | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 12,261 | | | | 0 | | | | 12,261 | |
Share-based compensation expense, net | | | 56 | | | | 0 | | | | 7,793 | | | | 0 | | | | 0 | | | | 0 | | | | 7,793 | |
Exercise of stock options | | | 25 | | | | 0 | | | | 129 | | | | 0 | | | | 0 | | | | 0 | | | | 129 | |
Equity compensation awards, net | | | 0 | | | | 0 | | | | (919 | ) | | | 0 | | | | 0 | | | | 0 | | | | (919 | ) |
Cash dividends | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (19,318 | ) | | | 0 | | | | (19,318 | ) |
Other comprehensive income, net of tax | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 36 | | | | 36 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, December 31, 2011 | | | 28,181 | | | | 28 | | | | 10,091 | | | | 0 | | | | 64,931 | | | | (92 | ) | | | 74,958 | |
Net loss | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (2,805 | ) | | | 0 | | | | (2,805 | ) |
Share-based compensation expense, net | | | 444 | | | | 1 | | | | 8,958 | | | | 0 | | | | 0 | | | | 0 | | | | 8,959 | |
Exercise of stock options | | | 7 | | | | 0 | | | | 10 | | | | 0 | | | | 0 | | | | 0 | | | | 10 | |
Equity compensation awards, net | | | 0 | | | | 0 | | | | (593 | ) | | | 0 | | | | 0 | | | | 0 | | | | (593 | ) |
Cash dividends | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (19,872 | ) | | | 0 | | | | (19,872 | ) |
Employee tax withholdings related to the vesting of equity awards | | | 0 | | | | 0 | | | | 0 | | | | (636 | ) | | | 0 | | | | 0 | | | | (636 | ) |
Other comprehensive income, net of tax | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 88 | | | | 88 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, December 31, 2012 | | | 28,632 | | | | 29 | | | | 18,466 | | | | (636 | ) | | | 42,254 | | | | (4 | ) | | | 60,109 | |
Net income | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 7,370 | | | | 0 | | | | 7,370 | |
Share-based compensation expense | | | 233 | | | | 0 | | | | 5,832 | | | | 0 | | | | 0 | | | | 0 | | | | 5,832 | |
Exercise of stock options | | | 1 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
Equity compensation awards, net | | | 0 | | | | 0 | | | | (203 | ) | | | 0 | | | | 0 | | | | 0 | | | | (203 | ) |
Cash dividends | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (20,013 | ) | | | 0 | | | | (20,013 | ) |
Employee tax withholdings related to the vesting of equity awards | | | 0 | | | | 0 | | | | 0 | | | | (950 | ) | | | 0 | | | | 0 | | | | (950 | ) |
Other comprehensive income, net of tax | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 12 | | | | 12 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, December 31, 2013 | | | 28,866 | | | $ | 29 | | | $ | 24,095 | | | $ | (1,586 | ) | | $ | 29,611 | | | $ | 8 | | | $ | 52,157 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
42
NUTRISYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2013 | | | 2012 | | | 2011 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net income (loss) | | $ | 7,370 | | | $ | (2,805 | ) | | $ | 12,261 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 8,896 | | | | 10,724 | | | | 12,068 | |
Charge to vacate a facility | | | 0 | | | | 1,980 | | | | 0 | |
Loss (gain) on disposal of fixed assets | | | 145 | | | | 8 | | | | (62 | ) |
Share–based compensation expense | | | 5,832 | | | | 9,912 | | | | 9,758 | |
Deferred income tax benefit | | | (1,560 | ) | | | (4,125 | ) | | | (384 | ) |
Impairment of supplier advance | | | 0 | | | | 2,100 | | | | 0 | |
Write-off of debt issuance costs | | | 0 | | | | 1,079 | | | | 0 | |
Other non-cash charges | | | 48 | | | | 179 | | | | 41 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Receivables | | | 749 | | | | 2,711 | | | | (1,942 | ) |
Inventories | | | (2,451 | ) | | | 7,877 | | | | (2,767 | ) |
Other assets | | | 1,192 | | | | 2,466 | | | | 15,313 | |
Accounts payable | | | 6,018 | | | | (9,213 | ) | | | 6,777 | |
Accrued payroll and related benefits | | | 5,397 | | | | 647 | | | | (4,195 | ) |
Deferred revenue | | | 885 | | | | 427 | | | | (1,572 | ) |
Income taxes | | | 2,316 | | | | (764 | ) | | | 2,144 | |
Other accrued expenses and liabilities | | | 549 | | | | (413 | ) | | | (111 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 35,386 | | | | 22,790 | | | | 47,329 | |
| | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
Purchases of short term investments | | | (24,513 | ) | | | (10,549 | ) | | | (10,067 | ) |
Proceeds from sales of short term investments | | | 11,137 | | | | 17,382 | | | | 20,897 | |
Capital additions | | | (7,614 | ) | | | (9,601 | ) | | | (8,041 | ) |
Proceeds from the sale of fixed assets | | | 28 | | | | 0 | | | | 122 | |
| | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | (20,962 | ) | | | (2,768 | ) | | | 2,911 | |
| | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
Borrowings under credit facility | | | 0 | | | | 0 | | | | 30,000 | |
Repayments of borrowings under credit facility | | | 0 | | | | (30,000 | ) | | | (30,000 | ) |
Debt issuance costs | | | 0 | | | | (207 | ) | | | (991 | )�� |
Exercise of stock options | | | 0 | | | | 10 | | | | 129 | |
Taxes related to equity compensation awards, net | | | (825 | ) | | | (1,361 | ) | | | (2,842 | ) |
Payment of dividends | | | (20,013 | ) | | | (19,872 | ) | | | (19,318 | ) |
| | | | | | | | | | | | |
Net cash used in financing activities | | | (20,838 | ) | | | (51,430 | ) | | | (23,022 | ) |
| | | | | | | | | | | | |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | (6,414 | ) | | | (31,408 | ) | | | 27,218 | |
CASH AND CASH EQUIVALENTS, beginning of year | | | 16,186 | | | | 47,594 | | | | 20,376 | |
| | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS, end of year | | $ | 9,772 | | | $ | 16,186 | | | $ | 47,594 | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
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NUTRISYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Nature of the Business
Nutrisystem, Inc. (the “Company” or “Nutrisystem”), a provider of weight management products and services, offers nutritionally balanced weight loss programs designed for women, men, and seniors, as well as the Nutrisystem® D® program, specifically designed to help people with type 2 diabetes who want to lose weight and manage their diabetes. The Nutrisystem® programs are based on over 40 years of nutrition research and on the science of the low glycemic index. The Company’s pre-packaged foods are sold directly to weight loss program participants primarily through the Internet and telephone (including the redemption of prepaid program cards), referred to as the direct channel, through QVC, a television shopping network and retail programs. Approximately 99%, 98% and 97% of revenues for the years ended December 31, 2013, 2012 and 2011, respectively, were generated in the United States.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Presentation of Financial Statements
The Company’s consolidated financial statements include 100% of the assets and liabilities of Nutrisystem, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Cash Equivalents and Short Term Investments
Cash equivalents include only securities having a maturity of three months or less at the time of purchase. At December 31, 2013 and December 31, 2012, demand accounts and money market accounts comprised all of the Company’s cash and cash equivalents.
Short term investments consist of investments in government and agency securities, corporate debt securities and time deposits with original maturities of greater than three months at the time of purchase. The Company classifies these investments as available-for-sale securities. These investments are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of related tax effects.
The Company evaluates its investments for other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of the market value. There were no other-than-temporary impairments in 2013, 2012 or 2011.
Inventories
Inventories consist principally of packaged food held in outside fulfillment locations. Inventories are valued at the lower of cost or market, with cost determined using the first-in, first-out (FIFO) method. Quantities of inventory on hand are continually assessed to identify excess or obsolete inventory and a provision is recorded for any estimated loss. The reserve is estimated for excess and obsolete inventory based primarily on forecasted demand and/or the Company’s ability to sell the products, introduction of new products, future production requirements and changes in customers’ behavior. The reserve for excess and obsolete inventory was $725 and $636 at December 31, 2013 and 2012, respectively.
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Fixed Assets
Fixed assets are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, which are generally two to seven years. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the related lease term. Expenditures for repairs and maintenance are charged to expense as incurred, while major renewals and improvements are capitalized.
Included in fixed assets is the capitalized cost of internal-use software and website development incurred during the application development stage. Capitalized costs are amortized using the straight-line method over the estimated useful life of the asset, which is generally two to five years. Costs incurred related to planning or maintenance of internal-use software and website development are charged to expense as incurred. The net book value of capitalized software was $11,473 and $10,511 at December 31, 2013 and 2012, respectively.
Long-Lived Assets
The Company continually evaluates whether events or circumstances have occurred that would indicate that the remaining estimated useful lives of long-lived assets may warrant revision or that the remaining balance may not be recoverable. Long-lived assets are evaluated for indicators of impairment. When factors indicate that long-lived assets should be evaluated for possible impairment, an estimate of the related undiscounted cash flows over the remaining life of the long-lived assets is used to measure recoverability. If any impairment is indicated, measurement of the impairment will be based on the difference between the carrying value and fair value of the asset, generally determined based on the present value of expected future cash flows associated with the use of the asset. As of December 31, 2013, management believes that no reductions to the remaining useful lives or write-downs of long-lived assets are required.
Derivative Instruments
Interest rate swap agreements, a type of financial derivative instrument, have been utilized by the Company to reduce interest rate risk on credit facility borrowings. The Company designated and accounted for its interest rate swaps as cash flow hedges of variable-rate debt. The effective portion of the gain or loss on the derivative was reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity in the accompanying consolidated balance sheets, net of tax, and reclassified into earnings in the periods during which the hedged transactions affected earnings. To the extent that the change in value of the derivative did not perfectly offset the change in value of the items being hedged, that ineffective portion was immediately recognized in earnings. There were no interest rate swap agreements at December 31, 2013 and 2012.
Revenue Recognition
Revenue from direct to consumer product sales is recognized when the earnings process is complete, which is upon transfer of title to the product. Recognition of revenue upon shipment meets the revenue recognition criteria in that persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed and determinable and collection is reasonably assured. The Company also sells prepaid program cards to wholesalers and retailers. Revenue from these cards is recognized after the card is redeemed online at the Company’s website or via telephone by the customer and the product is shipped to the customer. Revenue from the retail programs is recognized when the product is received at the seller’s location.
Deferred revenue consists primarily of unredeemed prepaid gift cards and unshipped frozen foods. When a customer orders the frozen program, two separate shipments are delivered. The first shipment contains Nutrisystem’s standard shelf-stable food. The second shipment contains the frozen foods and is generally delivered within a week of a customer’s order. Both shipments qualify as separate units of accounting and the fair value is based on estimated selling prices of both units.
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Direct to consumer customers may return unopened shelf-stable products within 30 days of purchase in order to receive a refund or credit. Frozen products are non-returnable and non-refundable unless the order is canceled within 14 days of delivery. Estimated returns are accrued at the time the sale is recognized and actual returns are tracked monthly. The Company reviews its history of actual versus estimated returns to ensure reserves are appropriate.
Revenue from product sales includes amounts billed for shipping and handling and is presented net of estimated returns and billed sales tax. Revenue from the retail programs is also net of any trade allowances, reclamation reserves or broker commissions. Revenue from shipping and handling charges was $2,000, $2,394 and $2,867 in 2013, 2012 and 2011, respectively. Shipping-related costs are included in cost of revenue in the accompanying consolidated statements of operations.
Dependence on Suppliers
In 2013, approximately 14% and 12%, respectively, of inventory purchases were from two suppliers. The Company has supply arrangements with these suppliers that require the Company to make minimum purchases. In 2012, these suppliers provided approximately 17% and 13%, respectively, of inventory purchases and in 2011, approximately 16% and 15%, respectively, of inventory purchases (see Note 7). Additionally, the Company was dependent on one frozen food supplier for less than 20% of its food costs in 2011. The Company had a supply agreement with this supplier that expired in November 2011, and the Company found other frozen food supply options to replace this supplier. In 2013, a charge of $5,000 was recorded to settle certain disputes that had arisen with a supplier over a legacy contract. This charge is included in cost of revenue in the accompanying consolidated statements of operations.
The Company outsources 100% of its fulfillment operations to a third party provider and more than 95% of its orders are shipped by one third party provider.
Vendor Rebates
One of the Company’s suppliers provides for rebates based on purchasing levels. The Company accounts for this rebate on an accrual basis as purchases are made at a rebate percentage determined based upon the estimated total purchases from the vendor. The estimated rebate is recorded as a receivable from the vendor with a corresponding reduction in the carrying value of purchased inventory, and is reflected in the consolidated statements of operations when the associated inventory is sold. The rebate period is June 1 through May 31 of each year. For the years ended December 31, 2013, 2012 and 2011, the Company reduced cost of revenue by $1,068, $1,496 and $1,401, respectively, for these rebates. A receivable of $182 and $637 at December 31, 2013 and 2012, respectively, has been recorded in receivables in the accompanying consolidated balance sheets. Historically, the actual rebate received from the vendor has closely matched the estimated rebate recorded. An adjustment is made to the estimate upon determination of the final rebate.
Marketing Expense
Marketing expense includes media, advertising production, marketing and promotional expenses and payroll-related expenses, including share-based payment arrangements, for personnel engaged in these activities. Media expense was $77,396, $86,948 and $88,828 in 2013, 2012 and 2011, respectively. Direct-mail advertising costs are capitalized if the primary purpose was to elicit sales to customers who could be shown to have responded specifically to the direct mailing and results in probable future economic benefits. The capitalized costs are amortized to expense over the period during which the future benefits are expected to be received. Typically, this period falls within 40 days of the initial direct mailing. All other advertising costs are charged to expense as incurred or the first time the advertising takes place. At December 31, 2013 and 2012, $1,010 and $1,998, respectively, of costs have been prepaid for future advertisements and promotions.
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Lease Related Expenses
Certain of the Company’s lease contracts contain rent holidays, various escalation clauses, or landlord/tenant incentives. The Company records rental costs, including costs related to fixed rent escalation clauses and rent holidays, on a straight-line basis over the lease term. Lease allowances utilized for space improvement are recorded as leasehold improvement assets and amortized over the shorter of the economic useful life of the asset or the lease term. Tenant lease incentive allowances received are recorded as deferred rent and amortized as reductions to rent expense over the lease term. Included in the accompanying consolidated balance sheets is $2,956 of a tenant improvement allowance at December 31, 2013, of which $345 is included in other accrued expenses and current liabilities and $2,611 in non-current liabilities. At December 31, 2012, the tenant improvement allowance was $3,301, of which $345 was included in other accrued expenses and current liabilities and $2,956 in non-current liabilities.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. In assessing the ability to realize deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
A tax benefit from an uncertain tax position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information. The liability for unrecognized tax benefits is classified as noncurrent unless the liability is expected to be settled in cash within 12 months of the reporting date. The Company records accrued interest and penalties related to unrecognized tax benefits as part of interest expense, net.
Segment Information
The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer. Revenue consists primarily of food sales.
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Earnings Per Share
The Company uses the two-class method to calculate earnings per share (“EPS”) as the unvested restricted stock issued under the Company’s equity incentive plans are participating shares with nonforfeitable rights to dividends. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the number of weighted average shares outstanding during the period. Undistributed losses are not allocated to unvested restricted stock as the restricted stockholders are not obligated to share in the losses. The following table sets forth the computation of basic and diluted EPS:
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2013 | | | 2012 | | | 2011 | |
Net income (loss) | | $ | 7,370 | | | $ | (2,805 | ) | | $ | 12,261 | |
Net income allocated to unvested restricted stock | | | (183 | ) | | | 0 | | | | (460 | ) |
| | | | | | | | | | | | |
Net income (loss) allocated to common shares | | $ | 7,187 | | | $ | (2,805 | ) | | $ | 11,801 | |
| | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | |
Basic | | | 28,013 | | | | 27,499 | | | | 27,033 | |
Effect of dilutive securities | | | 274 | | | | 0 | | | | 292 | |
| | | | | | | | | | | | |
Diluted | | | 28,287 | | | | 27,499 | | | | 27,325 | |
| | | | | | | | | | | | |
Basic income (loss) per common share | | $ | 0.26 | | | $ | (0.10 | ) | | $ | 0.44 | |
| | | | | | | | | | | | |
Diluted income (loss) per common share | | $ | 0.25 | | | $ | (0.10 | ) | | $ | 0 .43 | |
| | | | | | | | | | | | |
In 2012, diluted loss per common share is identical to basic loss per common share as the Company was in a net loss position and the impact of including common stock equivalents is anti-dilutive. In 2013, 2012 and 2011, common stock equivalents representing 786, 1,637 and 657 shares of common stock, respectively, were excluded from weighted average shares outstanding for diluted income per common share purposes because the effect would be anti-dilutive.
Share-Based Payment Awards
The cost of all share-based awards to employees and non-employees, including grants of stock options, restricted stock and restricted stock units, is recognized in the financial statements based on the fair value of the awards at grant date. The fair value of stock option awards is determined using the Black-Scholes valuation model on the date of grant. The fair value of restricted stock and performance-based restricted stock unit awards is equal to the market price of the Company’s common stock on the date of grant. The fair value of market-based restricted stock unit awards is determined using the Monte Carlo simulation model on the date of grant.
The fair value of share-based awards is recognized on a straight-line basis over the requisite service period (derived service period for market-based restricted stock unit awards), net of estimated forfeitures. The Company relies primarily upon historical experience to estimate expected forfeitures and recognizes compensation expense on a straight-line basis from the date of grant. The Company issues new shares upon exercise of stock options, granting of restricted stock or vesting of restricted stock units.
Cash Flow Information
The Company made payments for income taxes of $2,842, $1,250 and $6,049 in 2013, 2012, and 2011, respectively. Interest payments in 2013, 2012 and 2011 were $116, $954 and $655, respectively. During 2013, 2012 and 2011, the Company had non-cash capital additions of $42, $561 and $1,198, respectively, of unpaid invoices in accounts payable and accrued expenses.
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Recently Issued Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11 which provides that an unrecognized tax benefit, or portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. If an applicable deferred tax asset is not available or the tax law does not require the company to use and the company does not expect to use the applicable deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with an unrelated deferred tax asset. ASU 2013-11 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date; however, retrospective application is permitted. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and operating expenses during the reporting period. Actual results could differ from these estimates.
| 3. | CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS |
At December 31, 2013, cash, cash equivalents and short term investments consisted of the following:
| | | | | | | | | | | | | | | | |
| | | Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Estimated
Fair
Value | |
Cash | | $ | 9,660 | | | $ | 0 | | | $ | 0 | | | $ | 9,660 | |
Money market account | | | 112 | | | | 0 | | | | 0 | | | | 112 | |
Government and agency securities | | | 9,857 | | | | 20 | | | | (10 | ) | | | 9,867 | |
Corporate debt securities | | | 6,682 | | | | 35 | | | | (33 | ) | | | 6,684 | |
| | | | | | | | | | | | | | | | |
| | $ | 26,311 | | | $ | 55 | | | $ | (43 | ) | | $ | 26,323 | |
| | | | | | | | | | | | | | | | |
At December 31, 2012, cash, cash equivalents and short term investments consisted of the following:
| | | | | | | | | | | | | | | | |
| | | Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Estimated
Fair
Value | |
Cash | | $ | 9,323 | | | $ | 0 | | | $ | 0 | | | $ | 9,323 | |
Money market account | | | 6,863 | | | | 0 | | | | 0 | | | | 6,863 | |
Corporate debt securities | | | 1,692 | | | | 14 | | | | (24 | ) | | | 1,682 | |
Time deposits | | | 1,519 | | | | 4 | | | | 0 | | | | 1,523 | |
| | | | | | | | | | | | | | | | |
| | $ | 19,397 | | | $ | 18 | | | $ | (24 | ) | | $ | 19,391 | |
| | | | | | | | | | | | | | | | |
| 4. | FAIR VALUE MEASUREMENTS |
A three-tier fair value hierarchy has been established by the FASB to prioritize the inputs used in measuring fair value. These tiers are as follows:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
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The fair values of the Company’s Level 1 instruments are based on quoted prices in active exchange markets for identical assets. The Company had no Level 2 or 3 instruments at December 31, 2013 and 2012.
The following table summarizes the Company’s financial assets measured at fair value at December 31, 2013:
| | | | | | | | |
| | | Total Fair Value | | | Quoted Prices in Active
Markets for Identical
Assets (Level 1) | |
Money market account | | $ | 112 | | | $ | 112 | |
Government and agency securities | | | 9,867 | | | | 9,867 | |
Corporate debt securities | | | 6,684 | | | | 6,684 | |
| | | | | | | | |
Total assets | | $ | 16,663 | | | $ | 16,663 | |
| | | | | | | | |
The following table summarizes the Company’s financial assets measured at fair value at December 31, 2012:
| | | | | | | | |
| | | Total Fair Value | | | Quoted Prices in Active
Markets for Identical
Assets (Level 1) | |
Money market account | | $ | 6,863 | | | $ | 6,863 | |
Corporate debt securities | | | 1,682 | | | | 1,682 | |
Time deposits | | | 1,523 | | | | 1,523 | |
| | | | | | | | |
Total assets | | $ | 10,068 | | | $ | 10,068 | |
| | | | | | | | |
Fixed assets consist of the following:
| | | | | | | | |
| | | December 31, | |
| | | 2013 | | | 2012 | |
Furniture and fixtures | | $ | 5,687 | | | $ | 5,730 | |
Computer hardware and software | | | 56,244 | | | | 50,992 | |
Equipment | | | 2,622 | | | | 2,613 | |
Leasehold improvements | | | 11,215 | | | | 11,171 | |
| | | | | | | | |
| | | 75,768 | | | | 70,506 | |
Accumulated depreciation | | | (49,739 | ) | | | (42,503 | ) |
| | | | | | | | |
| | $ | 26,029 | | | $ | 28,003 | |
| | | | | | | | |
Depreciation and amortization expense was $8,896, $10,724 and $12,068 in 2013, 2012 and 2011, respectively.
| 6. | CREDIT FACILITY AND INTEREST RATE SWAPS |
On November 8, 2012, the Company entered into a $40,000 secured revolving credit facility, as amended, (the “Credit Facility”) with a lender. The Credit Facility can be drawn upon through November 8, 2015, at which time all amounts must be repaid. There were no borrowings outstanding at December 31, 2013 and 2012.
The Credit Facility provides for interest at either a base rate or a LIBOR rate, in each case plus an applicable margin. The base rate will be the highest of (i) the Administrative Agent’s prime rate, (ii) 0.50% percent above the Federal Funds Rate and (iii) the LIBOR rate for deposits in dollars for a one-month interest period as determined three business days prior to such date, plus 1.50%. The LIBOR rate is equal to the London Inter-Bank Offered Rate for the relevant term. The applicable margin is subject to adjustment based on the Company’s
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consolidated fixed charge coverage ratio and ranges from 0.25-1.25% per year for base rate loans and from1.75-2.75% per year for LIBOR rate loans. The Company will also pay an unused line fee. The unused line fee is subject to adjustment based on the Company’s consolidated fixed charge coverage ratio and ranges from0.25-0.375% per year. During 2013, 2012 and 2011, the Company incurred $0, $764 and $417 in interest, respectively, and $140, $159 and $279 in an unused line fee, respectively, under the Credit Facility and prior financing arrangements. Interest payments and unused line fees are classified within interest expense, net in the accompanying consolidated statements of operations.
The Credit Facility contains financial and other covenants including a minimum consolidated fixed charge ratio, a minimum consolidated tangible net worth and a minimum consolidated liquidity ratio, and includes limitations on, among other things, capital expenditures, additional indebtedness, acquisitions, stock repurchases and restrictions on paying dividends in certain circumstances. As of December 31, 2013, the Company was in compliance with all covenants contained in the Credit Facility. Any obligations under the Credit Facility by the Company, as well as certain banking services and hedging obligations, are secured by substantially all of the assets of the Company and certain subsidiaries.
At December 31, 2013, the Company had $170 of unamortized debt issuance costs associated with the Credit Facility that are being amortized over the remaining term of the Credit Facility.
The Company has used interest rate swaps, a type of derivative financial instrument, to manage interest costs and minimize the effects of interest rate fluctuations on cash flows associated with its variable-rate debt. The Company did not use interest rate derivatives for trading or speculative purposes. While interest rate swaps are subject to fluctuations in value, these fluctuations are generally offset by the value of the underlying exposures being hedged. The Company minimized the risk of credit loss by entering into these agreements with financial institutions that have high credit ratings.
In January and June 2012, respectively, the Company entered into two separate $10,000 notional value forward-starting interest rate swaps. The objective of the hedges was to eliminate the variability of cash flows in interest payments for $20,000 of floating rate debt. The swaps were terminated and expensed during 2012 upon the termination of a previous $100,000 credit facility and repayment of outstanding borrowings thereunder. In addition, the Company had two separate $10,000 notional values floating to fixed interest rate swap agreements that matured on August 3, 2012 and September 28, 2012, respectively. As of December 31, 2013 and 2012, the Company had no outstanding interest rate swaps.
| 7. | COMMITMENTS AND CONTINGENCIES |
Operating Leases
The Company leases its corporate headquarters and certain equipment. These leases generally have initial terms of one to 12 years and have renewal options for additional periods. Certain of the leases also contain escalation clauses based upon increases in costs related to the properties. Lease obligations, with initial or remaining terms of one or more years, consist of the following at December 31, 2013:
| | | | |
2014 | | $ | 3,281 | |
2015 | | | 2,668 | |
2016 | | | 2,692 | |
2017 | | | 2,724 | |
2018 | | | 2,784 | |
Thereafter | | | 10,463 | |
| | | | |
| | $ | 24,612 | |
| | | | |
Total rent expense for 2013, 2012 and 2011 was $2,261, $4,807 and $3,136, respectively.
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Litigation
On March 6, 2012, in response to the filing by a competitor of numerous trademark applications containing the term “NUTRILITE” in various weight-loss and weight-management classes, the Company sent a cease and desist letter to the competitor claiming that its use of such mark is very similar to the Company’s “NUTRISYSTEM” mark for very similar Company goods and services in the weight-loss and weight-management industries. The Company alleged that such use would result in confusion amongst consumers with respect to the source of such goods and services and would constitute an infringement of the Company’s mark in violation of the Trademark Act of 1946 (the Lanham Act), as well as various other federal and state laws governing trademarks, unfair competition and deceptive trade practices, and would likely cause dilution of the Company’s famous and distinctive mark. On March 16, 2012, the competitor responded to such letter by filing a complaint for declaratory relief against the Company in the United States District Court for the Western District of Michigan (listed under docket number 1:12-cv-00256-RHB) asking the Court to declare that plaintiff’s use and registration of its mark does not (i) constitute trademark infringement, federal unfair competition, federal dilution, (ii) violate certain Michigan statutes; and (iii) constitute common law trademark infringement or common law unfair competition. On April 27, 2012, the Company filed a motion to dismiss the complaint pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of subject matter jurisdiction. On May 29, 2012, plaintiff filed its brief in opposition to the Company’s motion to dismiss the complaint, and on June 15, 2012 the Company filed its reply brief in support of its motion to dismiss the complaint. On October 9, 2012, the Court denied the Company’s motion to dismiss for lack of subject matter jurisdiction. On October 23, 2012, the Company filed its answer and affirmative defenses to plaintiff’s complaint for declaratory relief and counterclaims for trademark infringement in which it (i) denied each of plaintiff’s counts in the complaint, (ii) set forth various affirmative defenses to plaintiff’s claims, and (iii) asserted by way of counterclaim claims for trademark infringement and dilution arising from plaintiff’s intentional use of a confusingly similar mark for the purpose of unlawfully trading upon the Company’s goodwill, good name, and valuable business identity. On December 20, 2012, the Court held a Rule 16 scheduling conference. On December 21, 2012, plaintiff filed its first request for production of documents and things to the Company and plaintiff’s first set of interrogatories to the Company. On February 1, 2013, the Company filed its first request for production of documents directed to plaintiff. On March 8, 2013, (i) plaintiff filed a motion for leave to file its first amended complaint and its memorandum in support thereof, and (ii) the Company moved for leave to file amended counterclaims and included its memorandum in support thereof. The Company opposed plaintiff’s request for leave to amend as futile, and after argument held April 3, 2013 on plaintiff’s motion, the Court granted both plaintiff and the Company leave to file their amended pleadings and declared the pleadings to be filed that same day. As a consequence, plaintiff’s amended complaint now asserts, in the alternative, affirmative claims for trademark infringement and unfair competition under federal law and for violation of the Michigan Consumer Protection Act, and the Company’s amended counterclaims now assert federal trademark infringement, false designation of origin and federal unfair competition, federal trademark dilution, federal cyberpiracy, and state law trademark infringement, unfair competition and other claims. The parties subsequently filed an agreed-upon motion for entry of a protective order, and on July 12, 2013, the Court issued an order extending the remaining dates in the action for an additional 90 days that, among other things, provides for completion of discovery by December 13, 2013. As of December 18, 2013, plaintiff and the Company entered into an Agreement settling all of the claims at issue under the lawsuit and under a related proceeding pending in the U.S. Patent and Trademark Office before the Trademark Trial and Appeal Board. On December 20, 2013 the parties jointly filed with the Trademark Trial and Appeal Board a stipulated motion to amend applications and stipulation to withdraw oppositions. On December 30, 2013, the Court issued an order approving the settlement of the lawsuit with prejudice.
The Company is also involved in other various claims and routine litigation matters. In the opinion of management, after consultation with legal counsel, the outcomes of such matters are not anticipated to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows in future years.
52
Contractual Commitments
The Company has entered into supply agreements with various food vendors. The majority of these agreements provide for annual pricing and annual purchase obligations, as well as exclusivity in the production of certain products, with terms of five years or less. One agreement also provides rebates if certain volume thresholds are exceeded. The Company has total purchase obligations of $69,078 as of December 31, 2013. The Company anticipates it will meet all annual purchase obligations outstanding at December 31, 2013.
Certain agreements with frozen food suppliers required advance payments to the supplier. The Company was notified during 2012 that one of these suppliers was in default with its bank lender and was in the process of negotiating a work out plan and exploring other strategic alternatives. The Company recorded an impairment charge in 2012 of $2,100 related to this advance due to the work out plan. The impairment was recorded in general and administrative expense in the accompanying statement of operations. At December 31, 2012, the remaining advances to this supplier were $690. During 2013, the Company received payment of these outstanding advances and entered into agreements with other vendors to replace this supplier.
Common Stock
In 2013, the Company issued 1 share of common stock upon the exercise of stock options. During 2013, employees surrendered to the Company 85 shares of common stock valued at $950 in satisfaction of minimum tax withholding obligations associated with the vesting of equity awards. These shares are included in treasury stock. Also, in 2013, the Company issued 50 shares of common stock as compensation to board members. During each of the four quarters of 2013, the Company paid a dividend of $0.175 per share to all stockholders of record. Subsequent to December 31, 2013, the Board of Directors declared a quarterly dividend of $0.175 per share payable on March 20, 2014 to stockholders of record as of March 10, 2014.
In 2012, the Company issued 7 shares of common stock upon the exercise of stock options and received proceeds of $10. During 2012, employees surrendered to the Company 158 shares of common stock valued at $1,590 in satisfaction of minimum tax withholding obligations associated with the vesting of equity awards. Subsequent to the approval of the Amended and Restated 2008 Long-Term Incentive Plan in September 2012, any of such shares were included in treasury stock. Previously, these shares were retired. Included in 158 shares surrendered during 2012 are 73 shares of common stock which are held in treasury. Also, in 2012, the Company issued 65 shares of common stock as compensation to board members and third-party marketing vendors pursuant to their respective contracts. During each of the four quarters of 2012, the Company paid a dividend of $0.175 per share to all stockholders of record.
In 2011, the Company issued 25 shares of common stock upon the exercise of stock options and received proceeds of $129. During 2011, employees surrendered to the Company 148 shares of common stock valued at $1,923 in satisfaction of minimum tax withholding obligations associated with the vesting of equity awards. These shares were retired. Also, in 2011, the Company issued 155 shares of common stock as compensation to board members and third-party marketing vendors pursuant to their respective contracts. During each of the four quarters of 2011, the Company paid a dividend of $0.175 per share to all stockholders of record.
Preferred Stock
The Company has authorized 5,000 shares of preferred stock issuable in series upon resolution of the Board of Directors. Unless otherwise required by law, the Board of Directors can, without stockholder approval, issue preferred stock in the future with voting and conversion rights that could adversely affect the voting power of the common stock. The issuance of preferred stock may have the effect of delaying, averting or preventing a change in control of the Company.
53
Income tax expense (benefit) consist of the following:
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2013 | | | 2012 | | | 2011 | |
Current: | | | | | | | | | | | | |
Federal | | $ | 5,080 | | | $ | 886 | | | $ | 7,493 | |
State | | | (10 | ) | | | (436 | ) | | | (555 | ) |
Foreign | | | 0 | | | | 0 | | | | (154 | ) |
| | | | | | | | | | | | |
| | | 5,070 | | | | 450 | | | | 6,784 | |
| | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | |
Federal | | | (435 | ) | | | (3,837 | ) | | | (412 | ) |
State | | | (1,125 | ) | | | (288 | ) | | | 28 | |
| | | | | | | | | | | | |
| | | (1,560 | ) | | | (4,125 | ) | | | (384 | ) |
| | | | | | | | | | | | |
| | $ | 3,510 | | | $ | (3,675 | ) | | $ | 6,400 | |
| | | | | | | | | | | | |
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2013 | | | 2012 | | | 2011 | |
Statutory federal income tax rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
State income taxes, net of federal benefit | | | (0.6 | ) | | | 3.8 | | | | 0.0 | |
Executive compensation limitation | | | 1.6 | | | | 0.0 | | | | 7.9 | |
Executive stock-based compensation | | | 0.0 | | | | 13.5 | | | | 0.0 | |
Food donations | | | (2.8 | ) | | | 8.9 | | | | (3.9 | ) |
Fixed assets | | | 0.0 | | | | (7.5 | ) | | | 0.0 | |
Changes in reserves | | | (6.7 | ) | | | 4.5 | | | | (2.0 | ) |
Tax credits | | | (1.7 | ) | | | (1.4 | ) | | | (1.2 | ) |
Other | | | 0.4 | | | | (0.1 | ) | | | (1.5 | ) |
Valuation allowance | | | 7.1 | | | | 0.0 | | | | 0.0 | |
| | | | | | | | | | | | |
| | | 32.3 | % | | | 56.7 | % | | | 34.3 | % |
| | | | | | | | | | | | |
The change in the effective tax rate from 2012 to 2013 was due to the changes in executive compensation, decreased levels of food donations and the reduction in tax reserves due to the lapse of the statute of limitations which offset a charge to record a valuation allowance for charitable contributions carryforwards that might not be realized due to the short carryforward period for this temporary difference. The change in the effective tax rate from 2011 to 2012 was due to favorable book to tax differences including the elimination of the limitation on executive compensation deductions due to the nonrenewal of an executive’s employment agreement in April 2012, reductions in tax reserves and increased food donations combined with lower pre-tax income levels resulted in income tax benefits for 2012 versus expense for 2011.
54
The significant items comprising the Company’s deferred income tax assets and liabilities are as follows:
| | | | | | | | |
| | | December 31, | |
| | | 2013 | | | 2012 | |
Deferred tax asset: | | | | | | | | |
Reserves and accruals | | $ | 813 | | | $ | 1,395 | |
Goodwill/Intangible assets | | | 316 | | | | 407 | |
Net operating loss carryforward | | | 1,942 | | | | 788 | |
Stock-based compensation | | | 2,002 | | | | 1,667 | |
Charitable contribution carryforward | | | 3,795 | | | | 3,706 | |
Other | | | 1,008 | | | | 1,197 | |
| | | | | | | | |
| | | 9,876 | | | | 9,160 | |
Valuation allowance | | | (800 | ) | | | 0 | |
| | | | | | | | |
Deferred tax asset | | | 9,076 | | | | 9,160 | |
Deferred tax liability: | | | | | | | | |
Property and equipment | | | (1,882 | ) | | | (3,240 | ) |
| | | | | | | | |
Net deferred tax asset | | $ | 7,194 | | | $ | 5,920 | |
| | | | | | | | |
At December 31, 2013, the net deferred tax asset of $7,194 is comprised of $931 included in current assets and $6,263 included in other assets in the accompanying consolidated balance sheet. At December 31, 2012, the net deferred tax asset of $5,920 is comprised of $2,969 included in current assets and $2,951 included in other assets in the accompanying consolidated balance sheet.
At December 31, 2013 and 2012, the Company had net operating loss carryforwards of approximately $29,684 and $14,526, respectively, for state tax purposes. The increase from 2012 to 2013 is due to the release of a tax reserve due to the lapse of the statute of limitations. For state tax purposes, there is a limitation on the amount of net operating loss carryforwards that can be utilized in a given year to offset state taxable income. Net operating losses will begin to expire in 2025.
In 2013, the Company recorded a valuation allowance of $800 against its deferred tax asset generated for charitable contributions. The Company recorded the valuation allowance to reduce the deferred tax asset to an amount it expects is more likely than not to be realized due to the short carryforward period for this temporary difference. Based on the projected level of future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the remaining net deferred tax assets. An analysis of the activity of the valuation allowance for the year ended December 31, 2013 is as follows:
| | | | |
Balance at beginning of year | | $ | 0 | |
Additions charged to expense | | | 800 | |
Deductions | | | 0 | |
| | | | |
Balance at end of year | | $ | 800 | |
| | | | |
The total amount of gross unrecognized tax benefits as of December 31, 2013 and 2012 was $311 and $1,474, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is approximately $202 and $958 as of December 31, 2013 and 2012, respectively. The Company records accrued interest and penalties related to unrecognized tax benefits as part of interest expense, net. During 2013, 2012 and 2011, the Company recognized interest income of $71, $13 and $133, respectively, from interest and penalties. The Company’s federal income tax returns for 2010 through 2013 are open and are subject to examination by the Internal Revenue Service. State tax jurisdictions that remain open to examination range from 2010 through 2013. The Company does not believe that that there will be any material changes to unrecognized tax positions over the next 12 months.
55
A reconciliation of the beginning and ending amounts of the total unrecognized tax benefit is as follows:
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2013 | | | 2012 | | | 2011 | |
Balance at beginning of year | | $ | 1,474 | | | $ | 1,919 | | | $ | 2,478 | |
Increase related to current year tax positions | | | 60 | | | | 67 | | | | 85 | |
Reductions related to settlement of tax matters | | | 0 | | | | (224 | ) | | | 0 | |
Decrease due to lapse of statute of limitations | | | (1,223 | ) | | | (288 | ) | | | (644 | ) |
| | | | | | | | | | | | |
Balance at end of year | | $ | 311 | | | $ | 1,474 | | | $ | 1,919 | |
| | | | | | | | | | | | |
Equity Incentive Plans
The Company has three equity incentive plans: the 1999 Equity Incentive Plan, the 2000 Equity Incentive Plan and the Amended and Restated 2008 Long-Term Incentive Plan (collectively, the “Equity Incentive Plans”). The Amended and Restated 2008 Long-Term Incentive Plan is currently the only plan under which new awards may be granted. Under that plan, a variety of equity instruments can be granted to key employees and directors including incentive and nonqualified stock options to purchase shares of the Company’s common stock, restricted stock, restricted stock units or shares of common stock. The 1999 Equity Incentive Plan, the 2000 Equity Incentive Plan and the Amended and Restated 2008 Long-Term Incentive Plan authorize up to 1,000, 5,600 and 5,400 shares of common stock, respectively, for issuance. At December 31, 2013, the Amended and Restated 2008 Long-Term Incentive Plan had 1,999 shares available for grant.
Under each of the plans, the Board of Directors determines the term of each award, but no award can be exercisable more than 10 years from the date the award is granted. To date, all of the stock options issued under the Equity Incentive Plans expire between seven and 10 years from the grant date. The Board also determines the vesting provisions of all awards and the exercise price per share of stock options issued under the plans, which is the fair market value at date of grant. Awards issued to employees generally vest over terms ranging from two to five years.
The following table summarizes the Company’s stock option activity for 2011, 2012 and 2013:
| | | | | | | | | | | | | | | | |
| | | Number
of Shares | | | Weighted-
Average
Exercise
Price Per
Share | | | Weighted-
Average
Remaining
Contractual
Life (years) | | | Aggregate
Intrinsic Value | |
Outstanding, January 1, 2011 | | | 53 | | | $ | 12.10 | | | | | | | | | |
Granted | | | 327 | | | $ | 14.37 | | | | | | | | | |
Exercised | | | (25 | ) | | $ | 5.17 | | | | | | | | | |
Forfeited | | | (19 | ) | | $ | 19.22 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding, December 31, 2011 | | | 336 | | | $ | 14.43 | | | | | | | | | |
Granted | | | 305 | | | $ | 8.92 | | | | | | | | | |
Exercised | | | (7 | ) | | $ | 1.46 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding, December 31, 2012 | | | 634 | | | $ | 11.92 | | | | | | | | | |
Granted | | | 536 | | | $ | 8.68 | | | | | | | | | |
Exercised | | | (1 | ) | | $ | 0.58 | | | | | | | | | |
Forfeited/expired | | | (375 | ) | | $ | 13.70 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding, December 31, 2013 | | | 794 | | | $ | 8.91 | | | | 6.02 | | | $ | 6,091 | |
| | | | | | | | | | | | | | | | |
Exercisable at December 31, 2013 | | | 87 | | | $ | 11.10 | | | | 5.29 | | | $ | 570 | |
| | | | | | | | | | | | | | | | |
Expected to vest at December 31, 2013 | | | 774 | | | $ | 8.90 | | | | 6.02 | | | $ | 5,941 | |
| | | | | | | | | | | | | | | | |
56
In May 2013, the Company determined that 40 stock options granted in 2012 were void as they exceeded a per person annual award limit and entered into a corrected stock option agreement with respect to those stock options. The change did not have a material impact on the Company’s consolidated financial statements but did reduce the number of stock options outstanding as of January 1, 2013. In 2013, 2012 and 2011, the Company recorded compensation charges of $382, $1,163 and $150, respectively, for stock option awards. The weighted-average grant date fair value of stock options granted in 2013, 2012 and 2011 was $1.61, $1.96 and $4.50, respectively. The total intrinsic value of stock options exercised in 2013, 2012 and 2011 was $7, $67 and $204, respectively.
The fair value of each stock option was estimated on the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions:
| | | | | | | | | | | | |
| | | 2013 | | | 2012 | | | 2011 | |
Expected dividend yield | | | 7.78 | % | | | 8.02 | % | | | 4.76 | % |
Expected volatility | | | 44.08 | % | | | 49.82 | % | | | 53.15 | % |
Risk-free interest rate | | | 0.79 | % | | | 0.72 | % | | | 1.38 | % |
Expected life (in years) | | | 4.71 | | | | 4.75 | | | | 4.75 | |
In 2013, 2012 and 2011, the Company authorized the issuance of 50, 43 and 30 fully vested shares of common stock, respectively, as compensation to the Board of Directors resulting in compensation expense of $455 in each year. In addition, in 2012 and 2011, the Company issued a total of 22 and 125 shares of common stock, respectively, to non-employees for services. No shares were issued to non-employees during 2013, although the shares issued in 2012 vested during 2013 resulting in expense upon vesting. Costs recognized for shares issued to non-employees for services were $195, $573 and $841 in 2013, 2012 and 2011, respectively, and approximated fair value.
The Company has issued restricted stock to employees generally with vesting terms ranging from two to five years. The fair value is equal to the market price of the Company’s common stock on the date of grant. Expense for restricted stock is amortized ratably over the vesting period. The following table summarizes the restricted stock activity for 2011, 2012 and 2013:
| | | | | | | | | | | | |
| | | Number
of Shares | | | Weighted-
Average
Grant-Date
Fair Value | | | Aggregate
Intrinsic
Value | |
Nonvested, January 1, 2011 | | | 1,311 | | | $ | 19.52 | | | | | |
Granted | | | 337 | | | $ | 13.70 | | | | | |
Vested | | | (497 | ) | | $ | 22.68 | | | | | |
Forfeited | | | (288 | ) | | $ | 16.53 | | | | | |
| | | | | | | | | | | | |
Nonvested, December 31, 2011 | | | 863 | | | $ | 16.43 | | | | | |
Granted | | | 510 | | | $ | 10.50 | | | | | |
Vested | | | (497 | ) | | $ | 15.25 | | | | | |
Forfeited | | | (46 | ) | | $ | 12.49 | | | | | |
| | | | | | | | | | | | |
Nonvested, December 31, 2012 | | | 830 | | | $ | 13.71 | | | | | |
Granted | | | 312 | | | $ | 8.84 | | | | | |
Vested | | | (293 | ) | | $ | 12.72 | | | | | |
Forfeited | | | (163 | ) | | $ | 12.64 | | | | | |
| | | | | | | | | | | | |
Nonvested, December 31, 2013 | | | 686 | | | $ | 12.17 | | | $ | 11,285 | |
| | | | | | | | | | | | |
Additionally, the Company grants performance-based and market-based restricted stock units. The performance-based units have performance conditions and service-based vesting conditions. Each vesting tranche is treated as an individual award and the compensation expense is recognized on a straight-line basis over the requisite service period for each tranche. The requisite service period is a combination of the performance period and the subsequent vesting period based on continued service. The level of achievement of such goals may cause the actual amount of
57
units that ultimately vest to range from 0% to 150% of the original units granted, which is reflected as performance factor adjustment in the table below. The Company recognizes expense ratably over the vesting period for performance-based restricted stock units when it is probable that the performance criteria specified will be achieved. The fair value is equal to the market price of the Company’s common stock on the date of grant.
In 2012, grants of restricted stock units contained market-based conditions. Market-based awards entitle employees to vest in a number of units determined by the Company’s stock price return as compared to a set of comparator companies over a period, and will range from 0% to 200% of the original units granted. The fair value is calculated using a Monte Carlo simulation model on the date of grant. Compensation expense is recognized over the derived service periods using the straight-line method regardless of the outcome of the market conditions, so long as the award holder remains an employee through the requisite service period. These awards contained different measurement periods.
The fair value of the market-based restricted stock units utilized the following inputs and assumptions:
| | | | | | | | | | | | | | | | |
| | | 1 Year | | | 2 Years | | | 3 Years | | | 3.1 Years | |
Closing stock price on grant date | | $ | 11.23 | | | $ | 11.23 | | | $ | 11.23 | | | $ | 7.31 | |
Performance period starting price | | $ | 12.78 | | | $ | 12.78 | | | $ | 12.78 | | | $ | 8.17 | |
Term of award (in years) | | | 1 | | | | 2 | | | | 3 | | | | 3.1 | |
Volatility | | | 45.91 | % | | | 50.99 | % | | | 51.66 | % | | | 48.29 | % |
Risk-free interest rate | | | 0.17 | % | | | 0.30 | % | | | 0.47 | % | | | 0.34 | % |
Expected dividend yield | | | 6.05 | % | | | 6.05 | % | | | 6.05 | % | | | 9.15 | % |
Fair value | | $ | 6.68 | | | $ | 10.70 | | | $ | 12.34 | | | $ | 7.40 | |
The performance period starting price is measured as the average closing price over the last 20 trading days prior to the performance period start.
The following table summarizes the restricted stock unit activity:
| | | | | | | | | | | | |
| | | Number of
Restricted
Stock Units | | | Weighted-
Average
Grant-Date
Fair Value | | | Aggregate
Intrinsic
Value | |
Nonvested, January 1, 2011 | | | 56 | | | $ | 17.35 | | | | | |
Granted | | | 55 | | | $ | 14.49 | | | | | |
Performance factor adjustment | | | (55 | ) | | $ | 14.49 | | | | | |
Vested | | | (20 | ) | | $ | 17.03 | | | | | |
| | | | | | | | | | | | |
Nonvested, December 31, 2011 | | | 36 | | | $ | 17.53 | | | | | |
Granted | | | 146 | | | $ | 8.82 | | | | | |
Performance factor adjustment | | | (47 | ) | | $ | 6.68 | | | | | |
Forfeited | | | (2 | ) | | $ | 17.53 | | | | | |
| | | | | | | | | | | | |
Nonvested, December 31, 2012 | | | 133 | | | $ | 11.76 | | | | | |
Granted | | | 162 | | | $ | 8.68 | | | | | |
Performance factor adjustment | | | (1 | ) | | $ | 10.70 | | | | | |
Vested | | | (34 | ) | | $ | 17.53 | | | | | |
Forfeited | | | (29 | ) | | $ | 12.01 | | | | | |
| | | | | | | | | | | | |
Nonvested, December 31, 2013 | | | 231 | | | $ | 8.74 | | | $ | 3,803 | |
| | | | | | | | | | | | |
The Company recorded compensation expense of $4,800, $7,721 and $8,312 in the accompanying consolidated statements of operations for 2013, 2012 and 2011, respectively, in connection with the issuance of the restricted shares and restricted stock units. As of December 31, 2013, 656 shares of restricted stock and 224 restricted stock units were expected to vest.
58
The Company recognized an increase in taxes payable of $203, $593 and $919 in 2013, 2012 and 2011, respectively, from the exercise of certain stock options and restricted stock and payment of certain dividends and recorded these amounts as decreases to additional paid-in capital in the accompanying consolidated statements of stockholders’ equity.
As of December 31, 2013, there was $7,935 of total unrecognized compensation expense related to unvested share-based compensation arrangements, including market-based units, which is expected to be recognized over a weighted-average period of 1.2 years. The total unrecognized compensation expense will be fully recognized as expense through the third quarter of 2017.
The Company maintains a qualified tax deferred defined contribution retirement plan (the “Plan”). Under the provisions of the Plan, substantially all employees meeting minimum age and service requirements are entitled to contribute on a before and after-tax basis a certain percentage of their compensation. The Company matched 100% of employees’ first 3% contribution and 50% of the employees’ next 2% contribution. Employees vest immediately in their contributions and the Company’s contribution. The Company’s contributions in 2013, 2012 and 2011 were $633, $614 and $692, respectively.
Following is an analysis for the returns reserve:
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2013 | | | 2012 | | | 2011 | |
Balance at beginning of year | | $ | 652 | | | $ | 726 | | | $ | 1,009 | |
Provision for estimated returns | | | 10,838 | | | | 10,394 | | | | 12,881 | |
Actual returns | | | (10,853 | ) | | | (10,468 | ) | | | (13,164 | ) |
| | | | | | | | | | | | |
Balance at end of year | | $ | 637 | | | $ | 652 | | | $ | 726 | |
| | | | | | | | | | | | |
| 13. | QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) |
| | | | | | | | | | | | | | | | | | | | |
| | | Quarter | | | | |
| | | First | | | Second | | | Third | | | Fourth | | | Year | |
| (In thousands, except per share amounts) | | | | | | | | | | | | | | | |
2013: | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 105,384 | | | $ | 97,469 | | | $ | 85,360 | | | $ | 69,873 | | | $ | 358,086 | |
Gross margin | | $ | 53,031 | | | $ | 49,753 | | | $ | 37,733 | | | $ | 33,359 | | | $ | 173,876 | |
Net (loss) income | | $ | (640 | ) | | $ | 6,359 | | | $ | 356 | | | $ | 1,295 | | | $ | 7,370 | |
Basic (loss) income per common share | | $ | (0.02 | ) | | $ | 0.22 | | | $ | 0.01 | | | $ | 0.04 | | | $ | 0.26 | |
| | | | | | | | | | | | | | | | | | | | |
Diluted (loss) income per common share | | $ | (0.02 | ) | | $ | 0.22 | | | $ | 0.01 | | | $ | 0.04 | | | $ | 0.25 | |
| | | | | | | | | | | | | | | | | | | | |
2012: | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 128,517 | | | $ | 124,560 | | | $ | 81,276 | | | $ | 62,525 | | | $ | 396,878 | |
Gross margin | | $ | 57,988 | | | $ | 58,141 | | | $ | 37,441 | | | $ | 30,213 | | | $ | 183,783 | |
Net (loss) income | | $ | (4,481 | ) | | $ | 4,115 | | | $ | 2,590 | | | $ | (5,029 | ) | | $ | (2,805 | ) |
Basic (loss) income per common share | | $ | (0.16 | ) | | $ | 0.14 | | | $ | 0.09 | | | $ | (0.18 | ) | | $ | (0.10 | ) |
| | | | | | | | | | | | | | | | | | | | |
Diluted (loss) income per common share | | $ | (0.16 | ) | | $ | 0.14 | | | $ | 0.09 | | | $ | (0.18 | ) | | $ | (0.10 | ) |
| | | | | | | | | | | | | | | | | | | | |
The sum of the quarterly basic and diluted per share amounts may not equal amounts reported for the year. This is due to the effects of rounding and changes in weighted average shares outstanding for each period.
In the fourth quarter of 2012, the Company recorded a charge of $2,476 to restructure certain third party marketing vendor contracts, a charge of $1,980 to vacate a facility and a charge of $1,079 to write off unamortized debt issuance costs.
59
INDEX TO EXHIBITS
| | |
No. | | Description |
| |
| *3.1 | | Certificate of Incorporation. |
| |
| 3.2 | | Amended and Restated Bylaws incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on July 22, 2009. |
| |
| +10.1 | | Amended and Restated Nutrisystem, Inc. 2008 Long Term Incentive Plan incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on September 6, 2012. |
| |
| +**10.2 | | 2000 Equity Incentive Plan of the Company. |
| |
| +**10.3 | | 2000 Equity Incentive Plan for Outside Directors and Consultants of the Company. |
| |
| 10.4 | | Agreement dated December 21, 2004 between Nutrisystem, Inc. and QVC, Inc. incorporated by reference to the designated exhibit of the Company’s Report on Form 10-K filed on March 14, 2006. |
| |
| +10.5 | | Compensation Policy For Non-Employee Directors incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on March 6, 2008. |
| |
| 10.6 | | Credit Agreement dated November 8, 2012, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on November 14, 2012. |
| |
| 10.7 | | First Amendment and Modification to Credit Agreement dated December 31, 2012, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on January 18, 2013. |
| |
| 10.8 | | Second Amendment and Modification to Credit Agreement effective as of August 13, 2013, among Nutrisystem, Inc., certain subsidiaries of the Company, Manufacturers and Traders Trust Company, as Administrative Agent, and certain other Lenders parties thereto, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on August 15, 2013. |
| |
| 10.9 | | Third Amendment and Modification to Credit Agreement dated November 4, 2013, effective September 30, 2013, among the Company, certain subsidiaries of the Company, Manufacturers and Traders Trust Company, as Administrative Agent, and certain other Lenders, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on November 4, 2013. |
| |
| 10.10 | | Security and Pledge Agreement dated November 8, 2012, among Nutrisystem, Inc., certain subsidiaries of Nutrisystem, Inc., as grantors, and Manufactures and Traders Trust Company in its capacity as Administrative Agent, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on November 14, 2012. |
| |
| +10.11 | | Letter Agreement dated November 1, 2012, between Nutrisystem, Inc. and Dawn Zier, the Company’s President and Chief Executive Officer, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on November 7, 2012. |
| |
| +10.12 | | Form of Restricted Stock Agreement for Dawn Zier, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on November 7, 2012. |
| |
| +10.13 | | Form of Stock Option Agreement for Dawn Zier, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on November 7, 2012. |
| |
| +10.14 | | Form of Performance-Based Restricted Stock Unit Agreement for Dawn Zier, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on November 7, 2012. |
60
| | |
No. | | Description |
| |
| +10.15 | | Letter Agreement, dated May 21, 2013, between Nutrisystem, Inc. and Dawn Zier, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on May 28, 2013. |
| |
| +10.16 | | Letter Agreement, dated April 4, 2012, between Nutrisystem, Inc. and Joseph Redling, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on April 5, 2012. |
| |
| +10.17 | | Letter Agreement Amendment, dated September 27, 2012, between Nutrisystem, Inc. and Joseph Redling, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on September 27, 2012. |
| |
| +10.18 | | Letter Agreement Amendment, dated November 1, 2012, between Nutrisystem, Inc. and Joseph Redling, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on November 7, 2012. |
| |
| +10.19 | | Separation and Release Agreement Amendment, dated November 12, 2012, between Nutrisystem, Inc. and Joseph Redling, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on November 15, 2012. |
| |
| +10.20 | | Letter Agreement, dated April 19, 2013, between Nutrisystem, Inc. and Michael Monahan, incorporated by reference to the designated exhibit of the Company’s Report on Form 10-Q filed on May 8, 2013. |
| |
| +10.21 | | Performance-Based Restricted Stock Unit Grant Agreement for Michael Monahan, incorporated by reference to the designated exhibit of the Company’s Report on Form 10-Q filed on August 6, 2013. |
| |
| +10.22 | | Separation and Release Agreement Amendment, dated March 6, 2013, between Nutrisystem, Inc. and Michael R. Amburgey, incorporated by reference to the designated exhibit on the Company’s Report on Form 10-K filed on March 12, 2013. |
| |
| 10.23 | | Lease Agreement, dated October 13, 2009, between B.R. Properties Owner, LP and Nutrisystem, Inc., incorporated by reference to the designated exhibit of the Company’s Report on Form 10-Q filed on August 5, 2010. |
| |
| +10.24 | | Employment Agreement, dated February 5, 2013 between Nutrisystem, Inc. and Keira Krausz, the Company’s Executive Vice President and Chief Marketing Officer, incorporated by reference to the designated exhibit on the Company’s Report on Form 10-K filed on March 12, 2013. |
| |
| +10.25 | | Form of Restricted Stock Agreement for Keira Krausz, incorporated by reference to the designated exhibit on the Company’s Report on Form 10-K filed on March 12, 2013. |
| |
| +10.26 | | Form of Nonqualified Stock Option Agreement for Keira Krausz, incorporated by reference to the designated exhibit on the Company’s Report on Form 10-K filed on March 12, 2013. |
| |
| +10.27 | | Performance-Based Restricted Stock Unit Agreement for Keira Krausz, incorporated by reference to the designated exhibit of the Company’s Report on Form 10-Q filed on August 6, 2013. |
| |
| +10.28 | | Form of Restricted Stock Agreement for Executives, incorporated by reference to the designated exhibit on the Company’s Report on Form 10-K filed on March 12, 2013. |
| |
| +10.29 | | Form of Nonqualified Stock Option Agreement for Executives, incorporated by reference to the designated exhibit on the Company’s Report on Form 10-K filed on March 12, 2013. |
| |
| +10.30 | | Form of Performance-Based Restricted Stock Unit Grant Agreement, incorporated by reference to the designated exhibit of the Company’s Report on Form 10-Q filed on August 6, 2013. |
61
| | |
No. | | Description |
| |
| 10.31 | | Mutual Release and Settlement Agreement, effective October 28, 2013, between Nutrisystem, Inc. and Hormel Food Sales, LLC., incorporated by reference to the designated exhibit on the Company’s Report on Form 8-K filed on October 29, 2013. |
| |
| 21.1 | | Subsidiaries of Nutrisystem, Inc. |
| |
| 23.1 | | Consent of KPMG LLP. |
| |
| 31.1 | | Certifying Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 31.2 | | Certifying Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 32.1 | | Certifying Statement of the Chief Executive Officer pursuant to Section 1350 of Title 18 of the United States Code. |
| |
| 32.2 | | Certifying Statement of the Chief Financial Officer pursuant to Section 1350 of Title 18 of the United States Code. |
| |
| 101.INS* | | XBRL Instance Document |
| |
| 101.SCH* | | XBRL Taxonomy Extension Schema Document |
| |
| 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
| 101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document |
| |
| 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document |
| |
| 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document |
| * | Incorporated by reference to the designated exhibit of the Company’s Registration Statement on Form 10 filed on December 17, 1999 (file number 0-28551). |
| ** | Incorporated by reference to the designated exhibit of the Company’s Form PRE 14A filed on May 12, 2000 (file number 0-28551). |
| + | Management contract or compensatory plan or arrangement. |
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| | |
| Nutrisystem, Inc. |
| |
| By: | | /S/ DAWN M. ZIER |
| | Dawn M. Zier, President and |
| | Chief Executive Officer |
Dated: March 10, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capabilities indicated.
| | | | |
| BY: | | /S/ DAWN M. ZIER | | March 10, 2014 |
Dawn M. Zier President and Chief Executive Officer and Director | | |
| | |
| BY: | | /S/ MICHAEL P. MONAHAN | | March 10, 2014 |
Michael P. Monahan Executive Vice President, Chief Financial Officer and Principal Accounting Officer | | |
| | |
| BY: | | /S/ ROBERT F. BERNSTOCK | | March 10, 2014 |
Robert F. Bernstock Director | | |
| | |
| BY: | | /S/ PAUL GUYARDO | | March 10, 2014 |
Paul Guyardo Director | | |
| | |
| BY: | | /S/ MICHAEL J. HAGAN | | March 10, 2014 |
Michael J. Hagan Director | | |
| | |
| BY: | | /S/ JAY HERRATTI | | March 10, 2014 |
Jay Herratti Director | | |
| | |
| BY: | | /S/ BRIAN P. TIERNEY | | March 10, 2014 |
Brian P. Tierney Director | | |
| | |
| BY: | | /S/ ANDREA WEISS | | March 10, 2014 |
Andrea Weiss Director | | |
| | |
| BY: | | /S/ STEPHEN T. ZARRILLI | | March 10, 2014 |
Stephen T. Zarrilli Director | | |
63
