NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and 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 40 years of nutrition research and on the science of the low glycemic index. The
Companys 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 a new retail line. Approximately 100%, 99% and 98% of revenues for the years ended December 31, 2012, 2011 and 2010, respectively, were generated in the United States.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Presentation of Financial Statements
The
Companys 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, 2012 and December 31, 2011, demand accounts and money market accounts
comprised all of the Companys cash and cash equivalents.
Short term investments consist of investments in corporate debt securities,
time deposits with original maturities of greater than three months at the time of purchase and a municipal income fund. The Company classifies these as available-for-sale securities. These investments are reported at fair value with the related
unrealized gains and losses included in accumulated other comprehensive 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 Companys
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 2012, 2011 or 2010.
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 Companys 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 $636 and $769 at December 31, 2012 and 2011, respectively.
49
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 $10,511 and $10,285 at December 31, 2012 and 2011, 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, 2012, 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, were utilized by the Company to reduce interest rate risk on credit facility borrowings. The Company recognized the interest rate swaps in the accompanying consolidated balance sheets at fair value. 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 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 does not perfectly offset the change in value of
the items being hedged, that ineffective portion was immediately recognized in earnings.
Revenue Recognition
Revenue from 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 Companys website by the customer and the product is shipped to the customer.
Deferred revenue consists primarily of unredeemed prepaid program cards and unshipped frozen foods. When a customer orders the
Nutrisystem
®
Select
®
program, two separate shipments are delivered. The first shipment contains Nutrisystems standard shelf-stable food. The second shipment contains the frozen
foods and is generally delivered within a week of a customers order. Both shipments qualify as separate units of accounting and the fair value is based on estimated selling prices of both units.
50
Customers may return unopened product 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 returns and billed sales tax. Revenue from shipping and handling charges was $2,394, $2,867 and $5,763 in 2012, 2011 and 2010, respectively. Shipping-related costs are included in cost of revenue in the accompanying
consolidated statements of operations.
Dependence on Suppliers
In 2012, approximately 17% and 13%, respectively, of inventory purchases were from two suppliers. The Company has a supply arrangement with one of these vendors that requires the Company to make minimum
purchases. In 2011, these vendors supplied approximately 16% and 15%, respectively, of inventory purchases and in 2010, approximately 17% and 18%, 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. The amount
provided from this supplier in 2010 was negligible.
The Company outsources 100% of its fulfillment operations to a third party provider and
more than 90% of its orders were shipped by one third party provider.
Vendor Rebates
One of the Companys 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 reduction in the carrying value of purchased inventory and is reflected in the consolidated statements of
operations when the associated inventory is sold. A receivable is recorded for the estimate of the rebate earned. The rebate period is June 1 through May 31 of each year. For the years ended December 31, 2012, 2011 and 2010, the
Company reduced cost of revenue by $1,496, $1,401 and $1,912, respectively, for these rebates. A receivable of $637 and $686 at December 31, 2012 and 2011, 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 $86,948, $88,828 and $127,597 in 2012,
2011 and 2010, 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, 2012 and 2011, $1,998 and $4,800, respectively, of costs have been prepaid for future advertisements and promotions.
Lease Related Expenses
Certain of the
Companys 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
51
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 $3,301
of a tenant improvement allowance at December 31, 2012, of which $345 is included in other accrued expenses and current liabilities and $2,956 in non-current liabilities. At December 31, 2011, the tenant improvement allowance was $3,646,
of which $345 was included in other accrued expenses and current liabilities and $3,301 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) income, 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.
52
Earnings Per Share
The Company uses the two-class method to calculate earnings per share (EPS) as the unvested restricted stock issued under the Companys 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,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
(Loss) income from continuing operations
|
|
$
|
(2,805
|
)
|
|
$
|
12,261
|
|
|
$
|
33,879
|
|
Income allocated to unvested restricted stock
|
|
|
0
|
|
|
|
(460
|
)
|
|
|
(1,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations allocated to common shares
|
|
|
(2,805
|
)
|
|
|
11,801
|
|
|
|
32,259
|
|
Loss on discontinued operation allocated to common shares
|
|
|
0
|
|
|
|
0
|
|
|
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income allocated to common shares
|
|
$
|
(2,805
|
)
|
|
$
|
11,801
|
|
|
$
|
32,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,499
|
|
|
|
27,033
|
|
|
|
28,312
|
|
Effect of dilutive securities
|
|
|
0
|
|
|
|
292
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
27,499
|
|
|
|
27,325
|
|
|
|
28,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(0.10
|
)
|
|
$
|
0.44
|
|
|
$
|
1.14
|
|
Loss on discontinued operation
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.10
|
)
|
|
$
|
0.44
|
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(0.10
|
)
|
|
$
|
0.43
|
|
|
$
|
1.13
|
|
Loss on discontinued operation
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.10
|
)
|
|
$
|
0 .43
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2012, diluted loss per common share is identical to basic loss per common share as the Company is in a net loss
position and the impact of including common stock equivalents is anti-dilutive. In 2012, 2011 and 2010, common stock equivalents representing 1,637,400, 656,871 and 167,158 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 Companys 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.
53
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 $1,250, $6,049 and
$16,660 in 2012, 2011, and 2010, respectively. Interest payments in 2012, 2011 and 2010 were $954, $655 and $283, respectively. During 2012 and 2011, the Company had non-cash capital additions of $561 and $1,198, respectively, of unpaid invoices in
accounts payable and accrued expenses. During 2010, the Company had non-cash capital additions of $3,991 through a tenant improvement allowance and $1,664 of unpaid invoices in accounts payable and accrued expenses.
Recently Issued Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05 for
the presentation of comprehensive income thereby amending ASC 220, Comprehensive Income. The amendment requires that all non-owner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or
in two separate but consecutive statements. The amendment is effective for fiscal years beginning after December 15, 2011, and should be applied retrospectively. The Company has added separate consolidated statements of comprehensive
(loss) income to the accompanying financial statements.
In February 2013, the FASB issued ASU No. 2013-02 which requires companies to
present information about reclassifications out of accumulated other comprehensive income in a single note or on the face of the financial statements. The updated standard is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2012, with early adoption permitted. The adoption of this standard update is not expected to have a material impact on the Companys 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, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
At December 31, 2011, cash, cash equivalents and short term investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Cash
|
|
$
|
12,465
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
12,465
|
|
Money market account
|
|
|
35,129
|
|
|
|
0
|
|
|
|
0
|
|
|
|
35,129
|
|
Municipal income fund
|
|
|
10,013
|
|
|
|
0
|
|
|
|
0
|
|
|
|
10,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,607
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
57,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 1Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2Valuations 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 3Valuations based on unobservable inputs reflecting the Companys own assumptions, consistent with reasonably available assumptions
made by other market participants. These valuations require significant judgment.
The fair values of the Companys Level 1 instruments
are based on quoted prices in active exchange markets for identical assets. The fair values of the Companys Level 2 instruments were based on quoted prices in less active markets. The fair values of the Companys derivative instruments
were determined using pricing models that took into account contract terms and certain observable current market information such as London Inter-Bank Offered Rate (LIBOR) interest rates. The Company had no Level 3 instruments at
December 31, 2012 and December 31, 2011.
The following table summarizes the Companys 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
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys financial assets and liabilities measured at fair value at
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
Money market account
|
|
$
|
35,129
|
|
|
$
|
35,129
|
|
|
$
|
0
|
|
Municipal income fund
|
|
|
10,013
|
|
|
|
10,013
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
45,142
|
|
|
$
|
45,142
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
(22
|
)
|
|
$
|
0
|
|
|
$
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
Fixed assets consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Furniture and fixtures
|
|
$
|
5,730
|
|
|
$
|
5,709
|
|
Computer hardware and software
|
|
|
50,992
|
|
|
|
45,246
|
|
Equipment
|
|
|
2,613
|
|
|
|
2,977
|
|
Leasehold improvements
|
|
|
11,171
|
|
|
|
11,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,506
|
|
|
|
65,033
|
|
Accumulated depreciation
|
|
|
(42,503
|
)
|
|
|
(35,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,003
|
|
|
$
|
29,771
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $10,724, $12,068 and $11,773 in 2012, 2011 and 2010, respectively.
6.
|
CREDIT FACILITY AND INTEREST RATE SWAPS
|
On November 8, 2012, the Company entered into a new $40,000 secured revolving credit facility, as amended, (the $40,000 Facility) with a
new lender which replaced the amended and restated credit agreement that provided for a $100,000 unsecured revolving credit facility (the $100,000 Facility). The $40,000 Facility can be drawn upon through November 8, 2015, at which
time all amounts must be repaid, and there were no borrowings outstanding at December 31, 2012. All outstanding amounts under the $100,000 Facility were repaid and in connection with the termination of the facility, the Company wrote off the
remaining unamortized debt issuance costs of $1,079 and also terminated the outstanding interest rate swap agreements resulting in a charge of $132 during 2012. These amounts are included within interest (expense) income, net in the accompanying
consolidated statements of operations.
The $40,000 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 Agents 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 Companys consolidated fixed
charge coverage ratio and ranges from 0.25-1.25% per year for base rate loans and from 1.75-2.75% 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
Companys consolidated fixed charge coverage ratio and ranges from 0.25-0.375% per year. During 2012, 2011 and 2010, the Company incurred $764, $417 and $87 in interest, respectively, and $159, $279 and $294 in an unused line fee,
respectively. Interest payments and unused line fees are classified within interest (expense) income, net in the accompanying consolidated statements of operations.
The $40,000 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, 2012, the Company was in compliance
with all covenants contained in the $40,000 Facility.
The Company incurred $207 of debt issuance costs associated with the $40,000 Facility.
These costs are being amortized over the remaining three year term of the $40,000 Facility.
The Company 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
56
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 the $100,000 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.
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, 2012:
|
|
|
|
|
2013
|
|
$
|
3,988
|
|
2014
|
|
|
2,623
|
|
2015
|
|
|
2,621
|
|
2016
|
|
|
2,664
|
|
2017
|
|
|
2,724
|
|
Thereafter
|
|
|
13,247
|
|
|
|
|
|
|
|
|
$
|
27,867
|
|
|
|
|
|
|
Included in the table above are charges of $1,980 accrued during 2012 to vacate a facility, which will be paid in 2013.
Total rent expense for 2012, 2011 and 2010 was $4,807, $3,136 and $3,540, respectively.
Litigation
On August 4, 2011, a lawsuit was filed by a stockholder in the United States District Court for the Eastern District of Pennsylvania naming
Nutrisystem, Inc., certain of its officers and directors, and one of its former officers as defendants and alleging breaches by defendants of their fiduciary duties of candor, good faith and loyalty, unjust enrichment, and aiding and abetting from
2010 to the present in connection with the award of allegedly excessive and unwarranted 2010 executive compensation. Plaintiff specifically claimed the action to be a failed say-on-pay shareholder derivative action stemming from the
advisory, non-binding vote of the Companys stockholders at its May 12, 2011 annual meeting in which the Companys stockholders did not approve the Companys 2010 executive compensation. The complaint is listed under docket
number 2:11-cv-05036-PD and specifically alleged that (1) defendants breached their fiduciary duties in connection with the issuance of certain false and misleading statements contained in Nutrisystems Proxy Statement; (2) defendants
breached their fiduciary duties in connection with the Board of Directors compensation practices; (3) defendants breached their fiduciary duties in connection with the Companys failure to respond to the negative
say-on-pay vote; and (4) as a result of the foregoing defendants were unjustly enriched at the expense of the Company. Accordingly, the complaint asked the court to (1) award judgment against defendants and in favor of the
Company for an unspecified amount of damages sustained by the Company as a result of defendants violation of state law, (2) grant extraordinary equitable and/or injunctive relief as necessary or permitted by law, equity and the statutory
provisions cited in the complaint, including disgorgement, attachment, impoundment, imposition of a constructive trust on or otherwise restricting the disposition/exercise of improvidently awarded executive
57
compensation based upon false financial reporting and/or the proceeds of defendants trading activities or their other assets so as to ensure that plaintiff on behalf of the Company has an
effective remedy; (3) order the implementation and administration of internal controls and systems at the Company designed to prohibit and prevent excessive and/or unwarranted executive compensation payments to the Companys chief
executive, chief financial, and other senior executive officers; (4) award to plaintiff the costs and disbursements of the action, including reasonable attorneys fees, and accountants and expert fees, costs and expenses; and
(5) grant such other and further relief as the court deems just and proper. On October 21, 2011, defendants filed a motion to dismiss the complaint pursuant to Rules 12(b)(6) and 23.1 of the Federal Rules of Civil Procedure for failure to
state a claim upon which relief can be granted and for failure to adequately plead demand futility. On November 21, 2011, plaintiff filed his brief in opposition to defendants motion to dismiss the complaint and alleged that the directors
issued false and misleading statements in the Companys proxy statement by stating that the Company adhered to a pay-for-performance policy when in fact it did not. In its opposition brief, plaintiff abandoned the count contained in its
complaint that defendants breached their fiduciary duties in connection with the Companys failure to respond to the negative say-on-pay vote. On December 5, 2011, defendants filed their reply brief in support of their motion
to dismiss the complaint. On March 8, 2012, the court held a preliminary pretrial conference, and on May 16, 2012, the court held a settlement conference. Although the Company believed that the claims were without merit, on
September 5, 2012 plaintiff, defendants and the plaintiff in the related state court lawsuit discussed in the following paragraph entered into a Stipulation and Agreement of Settlement with respect to all of the claims at issue under the
respective lawsuits, and on September 13, 2012, the court issued an order preliminarily approving the settlement. On November 15, 2012, the court held a hearing on the final approval of the settlement, and on December 12, 2012, the
court issued a final order and judgment approving the settlement. The Companys entire exposure for these matters has been expensed as of December 31, 2012.
On September 1, 2011, a lawsuit was filed by another stockholder in the Court of Common Pleas of Montgomery County, Pennsylvania naming Nutrisystem, Inc., certain of its officers and directors, and
one of its former officers as defendants and alleging breaches by defendants of their fiduciary duties of care, candor, good faith and loyalty, unjust enrichment, and aiding and abetting from 2010 to the present in connection with the award of
excessive and unwarranted 2010 executive compensation. This action stemmed from the same failed say-on-pay advisory, non-binding vote of the Companys stockholders at its May 12, 2011 annual meeting in which the Companys
stockholders did not approve the Companys 2010 executive compensation. The complaint is listed under docket number 2011-24985-0 and specifically alleged that (1) defendants breached their fiduciary duties in connection with the issuance
of certain materially false and misleading statements and omissions of fact in Nutrisystems Proxy Statement; (2) defendants breached their fiduciary duties in connection with the Companys allegedly excessive 2010 executive
compensation and the failure to rescind such compensation in response to the negative say-on-pay vote; and (3) as a result of the foregoing the executive defendants were unjustly enriched at the expense of the Company. Accordingly,
the complaint asked the court to (1) determine that the action was a proper derivative action maintainable under the law and that demand was excused; (2) award judgment against defendants and in favor of the Company for an unspecified
amount of damages sustained by the Company as a result of defendants breaches of fiduciary duties; (3) grant injunctive and other equitable relief as necessary or permitted by law, equity and the statutory provisions cited in the
complaint, including disgorgement, attachment, impoundment, imposition of a constructive trust on or otherwise restricting the disposition/exercise of disloyally awarded 2010 executive compensation; (4) direct the Company to take all necessary
actions to reform and improve its corporate governance and internal procedures to comply with all applicable laws and to protect the Company and its stockholders from a repeat of the allegedly damaging events described in the Complaint;
(5) award to plaintiff the costs and disbursements of the action, including reasonable allowance of fees and costs for plaintiffs attorneys, experts and accountants; and (6) grant such other and further relief as the court deems just
and proper. Plaintiff participated in the settlement conference on May 16, 2012 in connection with the lawsuit described in the preceding paragraph that was filed by another stockholder in the United States District Court for the Eastern
District of Pennsylvania stemming from the same failed say-on-pay advisory, non-binding vote of the Companys stockholders at its May 12, 2011 annual meeting in which the Companys stockholders did not approve the
Companys 2010 executive compensation. Although the Company believed that
58
the claims were without merit, on September 5, 2012 plaintiff, defendants and the plaintiff in the related federal court lawsuit discussed in the preceding paragraph entered into a
Stipulation and Agreement of Settlement with respect to all of the claims at issue under the respective lawsuits, and on September 13, 2012, the federal court issued an order preliminarily approving the settlement. The federal court held a
settlement hearing on November 15, 2012 to finally approve the settlement. Additionally, the state court asked the parties to the state action to submit a proposed order dismissing the state action for the state court to sign upon the federal
courts dismissal of the federal action. The parties to the state action submitted the proposed order to settle, discontinue, and end on October 2, 2012. On December 12, 2012, the federal court issued a final order and judgment
approving the settlement. On December 20, 2012 the state court judge issued an order to settle, discontinue, and end, and dismissed the state action 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 Companys consolidated financial position, results of operations or cash flows in future years.
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 purchase obligations of $46,645 as of December 31, 2012. The Company anticipates it will meet all annual purchase obligations outstanding at
December 31, 2012.
Certain agreements with frozen food suppliers require advance payments to the supplier. As of December 31, 2012
and December 31, 2011, advances were $690 and $2,907, respectively. A portion of the supplier advances as of December 31, 2011 was classified as other assets in the accompanying consolidated balance sheets. The Company had been 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. As of December 31, 2012 and December 31, 2011, advances to
this frozen food supplier were $690 and $2,313, respectively. During 2012, the Company recorded an impairment charge 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. Subsequent to December 31, 2012, the Company received payment of these outstanding advances.
Common
Stock
In 2012, the Company issued 7,068 shares of common stock upon the exercise of stock options and received proceeds of $10. During
2012, employees surrendered to the Company 157,671 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 will now be included in treasury stock. Previously, these shares were retired. Included in the 157,671 shares surrendered during 2012 are 72,561 shares of common stock which are
held in treasury. Also, in 2012, the Company issued 64,508 shares of common stock as compensation to board members and third-party marketing vendors pursuant to their respective contracts. As of December 31, 2012, 21,626 shares of common stock
issued to third-party marketing vendors remain unvested, and additional expense for these shares will be recognized upon vesting. During each of the four quarters of 2012, the Company paid a dividend of $0.175 per share to all stockholders of
record. Subsequent to December 31, 2012, the Board of Directors declared a quarterly dividend of $0.175 per share payable on March 25, 2013 to stockholders of record as of March 15, 2013.
In 2011, the Company issued 25,001 shares of common stock upon the exercise of stock options and received proceeds of $129. During 2011, employees
surrendered to the Company 147,848 shares of common stock valued
59
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 154,836 shares of
common stock as compensation to board members and third-party marketing vendors pursuant to their respective contracts. As of December 31, 2011, 70,313 shares of common stock issued to third-party marketing vendors remain unvested and
additional expense for these shares was recognized upon vesting. During each of the four quarters of 2011, the Company paid a dividend of $0.175 per share to all stockholders of record.
In 2010, the Company issued 54,927 shares of common stock upon the exercise of stock options and received proceeds of $124. During 2010, employees surrendered to the Company 154,585 shares of common stock
valued at $3,497 in satisfaction of minimum tax withholding obligations associated with the vesting of equity awards. These shares were retired. Also, in 2010, the Company issued 30,700 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 2010, the Company paid a dividend of $0.175 per share to all stockholders of record.
In 2011, the Board of Directors of the Company authorized a stock repurchase program of up to $150,000 of the Companys outstanding shares of common stock in open-market transactions on the NASDAQ
Stock Market or through privately negotiated transactions, including block transactions. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, limitations under
the credit facility, alternative investment opportunities and other market conditions. This stock repurchase program has an expiration date of June 30, 2013, but may be limited or terminated at any time by the Board of Directors without prior
notice. No shares of common stock were repurchased during 2012 and 2011.
Under previously authorized stock repurchase plans, the Company
purchased and retired 3,270,429 shares of common stock for an aggregate cost of $74,997 during 2010. The cost of the purchased shares was reflected in the accompanying statement of stockholders equity as a reduction of common stock (equal to
par value of purchased shares), additional paid-in capital (APIC) (equal to balance in APIC) with the excess recorded as a reduction in retained earnings.
Preferred Stock
The Company has authorized 5,000,000 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.
The (benefit) provision for
income taxes from continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
886
|
|
|
$
|
7,493
|
|
|
$
|
14,635
|
|
State
|
|
|
(436
|
)
|
|
|
(555
|
)
|
|
|
405
|
|
Foreign
|
|
|
0
|
|
|
|
(154
|
)
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450
|
|
|
|
6,784
|
|
|
|
15,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,837
|
)
|
|
|
(412
|
)
|
|
|
4,053
|
|
State
|
|
|
(288
|
)
|
|
|
28
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,125
|
)
|
|
|
(384
|
)
|
|
|
4,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,675
|
)
|
|
$
|
6,400
|
|
|
$
|
19,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
The income tax benefit attributable to the discontinued operation was $(566) for the year ended
December 31, 2010.
A reconciliation of the statutory federal income tax rate to the Companys effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
|
|
3.8
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Executive compensation limitation
|
|
|
0.0
|
|
|
|
7.9
|
|
|
|
3.5
|
|
Executive stock-based compensation
|
|
|
13.5
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Food donations
|
|
|
8.9
|
|
|
|
(3.9
|
)
|
|
|
(2.2
|
)
|
Fixed assets
|
|
|
(7.5
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
Changes in reserves
|
|
|
4.5
|
|
|
|
(2.0
|
)
|
|
|
0.0
|
|
Tax credits
|
|
|
(1.4
|
)
|
|
|
(1.2
|
)
|
|
|
0.0
|
|
Other
|
|
|
(0.1
|
)
|
|
|
(1.5
|
)
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56.7
|
%
|
|
|
34.3
|
%
|
|
|
36.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 executives 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. The change in the effective tax rate from 2010 to 2011 was due to the impact of limitations on executive compensation deductions and food donations in comparison to pre-tax income, as
well as reductions in tax reserves due to the lapse of the statute of limitations during the fourth quarter of 2011 and tax credits and other miscellaneous adjustments occurring throughout the year.
The significant items comprising the Companys deferred income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Reserves and accruals
|
|
$
|
1,395
|
|
|
$
|
834
|
|
Goodwill/Intangible assets
|
|
|
407
|
|
|
|
494
|
|
Net operating loss carryforward
|
|
|
788
|
|
|
|
1,043
|
|
Stock-based compensation
|
|
|
1,667
|
|
|
|
868
|
|
Charitable contribution carryforward
|
|
|
3,706
|
|
|
|
2,549
|
|
Other
|
|
|
1,197
|
|
|
|
1,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,160
|
|
|
|
6,821
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(3,240
|
)
|
|
|
(3,782
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
5,920
|
|
|
$
|
3,039
|
|
|
|
|
|
|
|
|
|
|
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, 2011, the net deferred tax asset of $3,039 is comprised of $1,584 included in current assets and $1,455 included in other assets in the accompanying
consolidated balance sheet.
At December 31, 2012 and 2011, the Company had net operating loss carryforwards of approximately $14,526 and
$12,832, respectively, for state tax purposes. 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.
61
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 net deferred tax assets.
The total amount of
gross unrecognized tax benefits as of December 31, 2012 and 2011 was $1,474 and $1,919, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is approximately $958 and $1,247
as of December 31, 2012 and 2011, respectively. The Company records accrued interest and penalties related to unrecognized tax benefits as part of interest (expense) income, net. During 2012 and 2011, the Company recognized interest income of
$13 and $133, respectively, and $99 of interest expense in 2010 from interest and penalties. The Companys federal income tax returns for 2009 through 2012 are open and are subject to examination by the Internal Revenue Service. State tax
jurisdictions that remain open to examination range from 2001 through 2012. The Company does not believe that that there will be any material changes to unrecognized tax positions over the next 12 months.
A reconciliation of the beginning and ending amounts of the total unrecognized tax benefit is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Balance at beginning of year
|
|
$
|
1,919
|
|
|
$
|
2,478
|
|
|
$
|
1,375
|
|
Increase related to current year tax positions
|
|
|
67
|
|
|
|
85
|
|
|
|
1,184
|
|
Reductions related to settlement of tax matters
|
|
|
(224
|
)
|
|
|
0
|
|
|
|
(42
|
)
|
Decrease due to lapse of statute of limitations
|
|
|
(288
|
)
|
|
|
(644
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,474
|
|
|
$
|
1,919
|
|
|
$
|
2,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
DISCONTINUED OPERATION
|
On July 1,
2008, the Company acquired certain assets of Power Chow, LLC (d/b/a NuKitchen) (NuKitchen), a provider of freshly prepared meals designed to promote weight management and healthy living.
In 2010, the Company committed to a plan to sell the business operations conducted by NuKitchen, as it was no longer aligned with the business direction
of the Company. The Company was unsuccessful in locating a buyer for the NuKitchen business and, therefore, it closed the business during 2010. NuKitchen has been treated as a discontinued operation. Accordingly, the operating results of this
discontinued operation have been presented separately from continuing operations for all periods presented. NuKitchen had revenues of $1,707 and a pre-tax loss of $808 for the year ended December 31, 2010.
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 Companys 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 1,000,000, 5,600,000 and 5,400,000 shares of common stock, respectively, for issuance. At December 31, 2012, the
Amended and Restated 2008 Long-Term Incentive Plan had 2,423,551 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 7 and 10 years from the grant date.
The Board also determines the
62
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 Companys stock option activity for 2010, 2011 and
2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding, January 1, 2010
|
|
|
127,760
|
|
|
$
|
6.92
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(54,927
|
)
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(20,000
|
)
|
|
$
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2010
|
|
|
52,833
|
|
|
$
|
12.10
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
327,280
|
|
|
$
|
14.37
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(25,001
|
)
|
|
$
|
5.17
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(18,805
|
)
|
|
$
|
19.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2011
|
|
|
336,307
|
|
|
$
|
14.43
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
344,843
|
|
|
$
|
8.73
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(7,068
|
)
|
|
$
|
1.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2012
|
|
|
674,082
|
|
|
$
|
11.65
|
|
|
|
6.08
|
|
|
$
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2012
|
|
|
276,235
|
|
|
$
|
14.77
|
|
|
|
5.46
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at December 31, 2012
|
|
|
665,194
|
|
|
$
|
11.64
|
|
|
|
6.08
|
|
|
$
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2012 and 2011, the Company recorded pre-tax compensation charges of $1,163 and $150, respectively, for stock option
awards. In 2010, the Company did not record any compensation charges for stock option awards as all outstanding awards were fully vested. The weighted-average grant date fair value of stock options granted in 2012 and 2011 was $1.96 and $4.50,
respectively. There were no option grants in 2010. The total intrinsic value of stock options exercised in 2012, 2011 and 2010 was $67, $204 and $1,001, 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:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Expected dividend yield
|
|
|
8.02
|
%
|
|
|
4.76
|
%
|
Expected volatility
|
|
|
49.82
|
%
|
|
|
53.15
|
%
|
Risk-free interest rate
|
|
|
0.72
|
%
|
|
|
1.38
|
%
|
Expected life (in years)
|
|
|
4.75
|
|
|
|
4.75
|
|
In 2012, 2011 and 2010, the Company authorized the issuance of 42,882, 30,275 and 19,124 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, 2011 and 2010, the Company issued a total of 21,626, 124,561, and 11,576 shares of common stock,
respectively, to non-employees for services. Costs recognized for shares issued to non-employees for services were $573, $841 and $167 in 2012, 2011 and 2010, respectively, and approximated fair value.
63
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 Companys 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
2010, 2011 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Nonvested, January 1, 2010
|
|
|
1,317,023
|
|
|
$
|
20.12
|
|
|
|
|
|
Granted
|
|
|
569,705
|
|
|
$
|
18.13
|
|
|
|
|
|
Vested
|
|
|
(499,287
|
)
|
|
$
|
19.59
|
|
|
|
|
|
Forfeited
|
|
|
(76,623
|
)
|
|
$
|
19.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2010
|
|
|
1,310,818
|
|
|
$
|
19.52
|
|
|
|
|
|
Granted
|
|
|
337,256
|
|
|
$
|
13.70
|
|
|
|
|
|
Vested
|
|
|
(496,864
|
)
|
|
$
|
22.68
|
|
|
|
|
|
Forfeited
|
|
|
(288,352
|
)
|
|
$
|
16.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2011
|
|
|
862,858
|
|
|
$
|
16.43
|
|
|
|
|
|
Granted
|
|
|
510,056
|
|
|
$
|
10.50
|
|
|
|
|
|
Vested
|
|
|
(497,023
|
)
|
|
$
|
15.25
|
|
|
|
|
|
Forfeited
|
|
|
(45,763
|
)
|
|
$
|
12.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2012
|
|
|
830,128
|
|
|
$
|
13.71
|
|
|
$
|
6,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, the Company grants restricted stock units. The restricted stock units granted during 2010 and 2011 were
primarily performance-based 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 units that ultimately vest to range from 0% to 200% of the original units granted, which is reflected as performance factor adjustment in the table below. The Company recognizes expense for performance-based restricted stock units
when it is probable that the performance criteria specified will be achieved and then recognizes ratably over the vesting period. The fair value is equal to the market price of the Companys 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 Companys 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 including one that begins in 2013.
64
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
|
|
|
|
NA
|
|
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, 2010
|
|
|
5,500
|
|
|
$
|
14.84
|
|
|
|
|
|
Granted
|
|
|
67,496
|
|
|
$
|
17.53
|
|
|
|
|
|
Performance factor adjustment
|
|
|
(14,999
|
)
|
|
$
|
17.53
|
|
|
|
|
|
Vested
|
|
|
(1,833
|
)
|
|
$
|
14.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2010
|
|
|
56,164
|
|
|
$
|
17.35
|
|
|
|
|
|
Granted
|
|
|
54,999
|
|
|
$
|
14.49
|
|
|
|
|
|
Performance factor adjustment
|
|
|
(54,999
|
)
|
|
$
|
14.49
|
|
|
|
|
|
Forfeited
|
|
|
(19,848
|
)
|
|
$
|
17.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2011
|
|
|
36,316
|
|
|
$
|
17.53
|
|
|
|
|
|
Granted
|
|
|
146,322
|
|
|
$
|
8.82
|
|
|
|
|
|
Performance factor adjustment
|
|
|
(46,670
|
)
|
|
$
|
6.68
|
|
|
|
|
|
Forfeited
|
|
|
(2,778
|
)
|
|
$
|
17.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2012
|
|
|
133,190
|
|
|
$
|
11.76
|
|
|
$
|
1,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded compensation expense of $7,721, $8,312 and $10,329 in the accompanying consolidated statements of
operations for 2012, 2011 and 2010, respectively, in connection with the issuance of the restricted shares and restricted stock units. As of December 31, 2012, 794,095 shares of restricted stock and 128,560 restricted stock units were expected
to vest.
The Company recognized an (increase)/decrease in taxes payable of ($593), ($919) and $418 in 2012, 2011 and 2010, respectively, from
the exercise of certain stock options and restricted stock and payment of certain dividends and recorded these amounts as decreases and increases to APIC in the accompanying consolidated statements of stockholders equity.
As of December 31, 2012, there was $9,836 of total unrecognized compensation expense related to unvested share-based compensation arrangements,
which is expected to be recognized over a weighted-average period of 1.4 years.
12.
|
EMPLOYEE BENEFIT PLAN
|
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
65
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. Effective June 1, 2009, the Company elected to suspend its matching contribution. Effective April 1, 2010, the Company reinstated its matching contribution of 100% of employees first 3% contribution and 50% of the
employees next 2% contribution. Employees vest immediately in their contributions and the Companys contribution. The Companys contributions in 2012, 2011 and 2010 were $614, $692 and $528, respectively.
Following is an analysis
for the returns reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Balance at beginning of year
|
|
$
|
726
|
|
|
$
|
1,009
|
|
|
$
|
1,850
|
|
Provision for estimated returns
|
|
|
10,394
|
|
|
|
12,881
|
|
|
|
24,114
|
|
Actual returns
|
|
|
(10,468
|
)
|
|
|
(13,164
|
)
|
|
|
(24,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
652
|
|
|
$
|
726
|
|
|
$
|
1,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
|
|
(In thousands, except per share amounts)
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
132,672
|
|
|
$
|
116,129
|
|
|
$
|
85,643
|
|
|
$
|
66,892
|
|
|
$
|
401,336
|
|
Gross margin
|
|
$
|
68,845
|
|
|
$
|
58,502
|
|
|
$
|
44,386
|
|
|
$
|
31,198
|
|
|
$
|
202,931
|
|
Net (loss) income
|
|
$
|
(3,424
|
)
|
|
$
|
10,767
|
|
|
$
|
6,068
|
|
|
$
|
(1,150
|
)
|
|
$
|
12,261
|
|
Basic (loss) income per common share
|
|
$
|
(0.12
|
)
|
|
$
|
0.39
|
|
|
$
|
0.22
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per common share
|
|
$
|
(0.12
|
)
|
|
$
|
0.38
|
|
|
$
|
0.21
|
|
|
$
|
(0.04
|
)
|
|
$
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0.43
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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.
66