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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _________ to _________
Commission File Number 0-28551
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Nutri/System, Inc.
------------------
(Exact name of Registrant as specified in its charter)
Delaware 23-3012204
-------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
202 Welsh Road,
Horsham, Pennsylvania 19044
--------------------- -----
(Address of principal executive offices) (Zip Code)
(215) 706-5300
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 6, 2002:
Common Stock, $.001 par value 26,219,037 shares
Nutri/System, Inc.
INDEX TO FORM 10-Q
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets ....................................... 1
Consolidated Statements of Operations ............................. 2
Consolidated Statements of Cash Flows ............................. 3
Notes to Consolidated Financial Statements ........................ 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................... 10
Item 3 - Quantitative and Qualitative Disclosure About Market Risk .... 16
Item 4 - Controls and Procedures ...................................... 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ............................................ 17
Item 2 - Changes in Securities and Use of Proceeds .................... 17
Item 3 - Defaults Upon Senior Securities .............................. 17
Item 4 - Submission of Matters to a Vote of Security Holders .......... 17
Item 5 - Other Information ............................................ 17
Item 6 - Exhibits and Reports on Form 8-K ............................. 17
SIGNATURES ................................................................ 19
CERTIFICATIONS ............................................................ 20
NUTRI/SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands, except share data)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 3,526 $ 1,118
Restricted cash 328 528
Trade receivables 678 222
Inventories 1,733 2,758
Other current assets 628 460
-------- --------
Total current assets 6,893 5,086
FIXED ASSETS, net 664 852
GOODWILL 290 290
OTHER ASSETS 298 159
-------- --------
$ 8,145 $ 6,387
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,182 $ 2,346
Accrued payroll and related benefits 190 113
Liabilities of discontinued operation 107 161
Other current liabilities 258 156
-------- --------
Total current liabilities 1,737 2,776
NON-CURRENT LIABILITIES 117 123
-------- --------
Total liabilities 1,854 2,899
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value
(5,000,000 shares authorized, no shares outstanding) -- --
Common stock, $.001 par value (100,000,000 shares authorized;
shares issued - 28,735,794; shares outstanding-26,236,037 at
September 30, 2002 and 27,065,394 at December 31, 2001) 29 29
Additional paid-in capital 29,361 29,333
Warrants 324 324
Accumulated deficit (22,029) (25,475)
Treasury stock, at cost (2,499,757 shares at September 30, 2002
and 1,670,400 at December 31, 2001) (1,394) (723)
-------- --------
Total stockholders' equity 6,291 3,488
-------- --------
$ 8,145 $ 6,387
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
1
NUTRI/SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30 September 30
-----------------------------------------------------------
2002 2001 2002 2001
----------- ---------- ---------- ---------
REVENUES $ 5,458 $ 6,329 $ 23,459 $ 19,531
COSTS AND EXPENSES:
Cost of revenues 3,061 3,589 13,242 10,828
Advertising and marketing 184 730 1,087 3,244
General and administrative 1,669 1,620 5,220 4,904
Depreciation and amortization 82 106 255 311
Non-cash compensation expense 5 8 28 25
-------- -------- -------- --------
Total costs and expenses 5,001 6,053 19,832 19,312
-------- -------- -------- --------
Operating income from continuing operations 457 276 3,627 219
OTHER INCOME -- 77 -- 77
EQUITY IN LOSSES OF INVESTEE (61) -- (61) --
INTEREST INCOME, net 13 17 29 87
-------- -------- -------- --------
Income before income taxes and
discontinued operation 409 370 3,595 383
INCOME TAXES 44 -- 149 --
-------- -------- -------- --------
Income before discontinued operation 365 370 3,446 383
INCOME FROM DISCONTINUED OPERATION -- -- -- 813
-------- -------- -------- --------
Net income $ 365 $ 370 $ 3,446 $ 1,196
======== ======== ======== ========
BASIC AND DILUTED INCOME PER SHARE:
Continuing operations $ 0.01 $ 0.01 $ 0.13 $ 0.01
Discontinued operation -- -- -- 0.03
-------- -------- -------- --------
$ 0.01 $ 0.01 $ 0.13 $ 0.04
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 26,297 27,831 26,561 28,345
Diluted 26,845 27,831 27,151 28,345
The accompanying notes are an integral part of these consolidated
financial statements.
2
NUTRI/SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
Nine Months Ended
September 30
------------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,446 $ 1,196
Adjustments to reconcile net income to net cash provided by
operating activities-
Income from discontinued operation -- (813)
Net cash from (paid for) discontinued operation (54) 543
Equity in losses of investee 61 --
Depreciation and amortization 255 311
Loss on disposals -- 16
Non-cash compensation expense 28 25
Changes in operating assets and liabilities-
Restricted cash 200 (3)
Trade receivables (456) (226)
Inventories 1,025 (979)
Prepaid expenses and other assets (236) 210
Accounts payable (1,164) 220
Accrued payroll and related benefits 77 55
Other liabilities 96 (23)
-------- --------
Net cash provided by operating activities 3,278 532
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions (67) (83)
Investment made in investee (132) --
-------- --------
Net cash used for investing activities (199) (83)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock purchases, at cost (671) (522)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,408 (73)
CASH AND CASH EQUIVALENTS,
beginning of period 1,118 1,638
-------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 3,526 $ 1,565
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
NUTRI/SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
(Unaudited)
1. BACKGROUND
Nature of the Business
Nutri/System, Inc. (a Delaware corporation) together with its subsidiaries (the
"Company") provides weight loss programs and distributes pre-packaged foods. As
discussed below, the Company was formed to combine the well-established
Nutri/System name and proven weight loss program with the Internet as a medium
of communication. In September 2000, the Company changed its name from
nutrisystem.com inc. to Nutri/System, Inc.
Nutri/System, Inc. and its predecessor businesses, including Nutri/System L.P.
and NutriSystem Direct, L.L.C. (collectively, the "Predecessor Businesses"),
have historically operated through Company-owned and franchised weight loss
centers. Currently, the territories of the nine remaining independent franchised
weight loss centers encompass less than 1% of the United States population and
there are no Company-operated centers. In 1998, the Company initiated
NutriSystem Direct, L.L.C., a direct marketing program of independent
distributors of the Company's diet program. In 2001, the Company began selling
foods through QVC, a shopping television network. The Company's pre-packaged
foods are now sold to weight loss program participants through the Internet,
QVC, independent distributors and the remaining franchised weight loss centers.
Since the inception of the Nutri/System business in 1972, the Company and the
Predecessor Businesses have operated in various organizational and legal
structures. In early 1993, the business was party to a bankruptcy proceeding.
This case was converted to a Chapter 11 proceeding effective June 4, 1993. One
of the Company's predecessors operated as a debtor in possession through
December 1993. In 1999, the Company acquired the Predecessor Businesses for cash
of $3,400 plus 17,500,000 shares of common stock. In order to fund the Company's
purchase of the Predecessor Businesses and planned investments, the Company
completed a private placement in 1999 that raised net proceeds of approximately
$7,574. The Company completed another private placement in 2000 that raised net
proceeds of $2,462.
From 1993 to 2000, the Company, together with its Predecessor Businesses,
incurred significant losses. In 2001, the Company generated net income of $1,249
and in the first nine months of 2002 the Company had net income of $3,446. There
can be no assurance that the Company will be able to sustain profitability or,
if necessary, obtain the capital to fund operating and investment needs in the
future. However, based on the Company's ability to generate earnings, the
variable nature of a portion of the Company's expenditures, the cash balance at
September 30, 2002 and management's belief that additional equity financing, if
required, can be raised, management believes that the Company has the ability to
continue operations through the end of 2003.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Presentation of Financial Statements
As of December 31, 2001 and September 30, 2002, the Company's consolidated
financial statements include the accounts of Nutri/System, Inc. and its wholly
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
Interim Financial Statements (Unaudited)
The accompanying consolidated financial statements as of September 30, 2002 and
for the three and nine months ended September 30, 2001 and 2002 are unaudited
and, in the opinion of management, include all adjustments (consisting only
4
of normal recurring adjustments) necessary for a fair presentation of the
Company's financial position and results of operations for these interim
periods. The results of operations for the three and nine months ended September
30, 2001 and 2002 are not necessarily indicative of the results to be expected
for any other interim period or the year ending December 31, 2002.
Restricted Cash
Restricted cash represents minimum cash deposited in banks required under
certain vendor arrangements.
Inventories
Inventories consist principally of packaged food held in the Company's
warehouses. Inventories are valued at the lower of cost or market, with cost
determined using the first-in, first-out (FIFO) method.
Fixed Assets
Fixed assets are stated at cost. Depreciation, including amortization of capital
leases, is provided using the straight-line method over the estimated useful
lives of the related assets, which are generally three to seven years. Leasehold
improvements and equipment under capital leases are amortized on a straight-line
basis over the lesser of the estimated useful life of the asset or the related
lease terms. Expenditures for repairs and maintenance are charged to expense as
incurred, while major renewals and improvements are capitalized.
Goodwill
Goodwill represents the excess of the consideration paid over the fair value of
net assets acquired, and was generated from the acquisition of a minority
interest in the Company. As of December 31, 2001, goodwill was $527 and
accumulated amortization was $237. Consistent with the Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), effective January 1, 2002, the Company no longer amortizes
goodwill on a periodic basis. See Recently Issued Accounting Pronouncements
below.
Investment Carried Under the Equity Method
For any investment where the Company has the ability to exercise significant
influence over the operating and financial policies of the investee, the
investment is accounted for under the equity method. The Company invested $132
for a 25% interest in Turning Point Weight Loss Centers, LLC, a start up company
formed to provide diet and fitness programs in center locations. For the three
months ended September 30, 2002, the Company recorded a loss of $61 in the
statement of operations under the caption "Equity in losses of investee". The
net investment of $71 at September 30, 2002 is included in "Other assets" in the
accompanying consolidated balance sheet. As of September 30, 2002, the Company
had no commitments to make further investments in Turning Point Weight Loss
Centers, LLC.
Valuation of Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long Lived Assets" ("SFAS 144"), the Company continually evaluates whether
events or circumstances have occurred that indicate that the remaining useful
lives of its long-lived assets, primarily fixed assets, should be revised or
that the remaining balance of such assets may not be recoverable using objective
methodologies. Such methodologies include evaluations based on the undiscounted
cash flows generated by the underlying assets or other determinants of fair
value. As of December 31, 2001 and September 30, 2002, management believes that
no reductions to the remaining useful lives or write-downs of long-lived assets
are required.
Revenue Recognition
Revenues are recognized when the related products are shipped. Revenues are
primarily from pre-packaged food sales, which include amounts billed for
shipping and handling, and are presented net of returns and free food products
provided to consumers. Revenues also include the sale of print materials to
franchisees and independent distributors as well as franchise royalty fees.
5
Advertising Costs
The Company follows the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 93-7, "Reporting on Advertising Costs"
to account for its Internet site linking agreements. Under SOP 93-7, the Company
amortizes the costs associated with its linking agreements over the contract
terms, with the amortization method primarily based on the rate of delivery of a
guaranteed number of impressions to be received during the contract term. To the
extent additional payments are required to be made based on factors such as
click-throughs and new customers generated, such payments are charged to expense
as incurred. All other advertising costs are charged to expense as incurred. At
December 31, 2001 and September 30, 2002, $53 and $304, respectively, of prepaid
advertising was included in prepaid expenses. Advertising expense was $3,153 and
$1,002 during the nine months ended September 30, 2001 and 2002, respectively.
Income Taxes
Nutri/System, Inc. is a "C" corporation subject to corporate level income taxes
and provides for income taxes in the accompanying financial statements in
accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities.
As a result of a merger transaction, the tax basis of the assets acquired from
the Predecessor Businesses exceeded the financial statement carrying amount by
$1,751, resulting in a net deferred tax asset of $790 as of September 30, 1999.
A valuation allowance of $790 was recorded based on management's current
assessment that the net deferred tax asset will not be realized given the
uncertainty of future operating results. To the extent that the existing
deferred tax asset is realized, the related tax benefit will be credited to
equity. In addition, a full valuation allowance has been recorded for the other
net deferred tax asset that exists at December 31, 2001 and September 30, 2002.
Stock Options
The Company accounts for stock option plans under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has adopted only the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation." See Note 5.
Fair Value of Financial Instruments
The carrying values of the Company's financial instruments, including cash, cash
equivalents, trade receivables, inventories and accounts payable, approximate
their fair values due to the short-term nature of these instruments.
Net Income Per Common Share
Basic income per common share is computed by dividing net income applicable to
common stockholders by the weighted average number of shares of common stock
outstanding. Diluted income per common share reflects the potential dilution
from the exercise of outstanding options into common stock.
Cash Flow Information
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments purchased with original maturities of three months
or less as cash equivalents. The Company made payments for income taxes of $0
and $4 during the nine months ended September 30, 2001 and 2002, respectively.
Payments for interest were $4 and $2 for the nine months ended September 30,
2001 and 2002 and interest income was $96 and $38 for these periods,
respectively.
Recently Issued Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146
addresses the recognition, measurement and reporting of costs associated
6
with exit and disposal activities, including restructuring activities. SFAS 146
also addresses recognition of certain costs related to terminating a contract
that is not a capital lease, costs to consolidate facilities or relocate
employees and termination of benefits provided to employees that are
involuntarily terminated under the terms of a one-time benefit arrangement that
is not an ongoing benefit arrangement or an individual deferred compensation
contract. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. Adoption of SFAS 146 is not expected to have
an impact on the financial position or results of operations of the Company.
In 2002, the Company adopted SFAS 144, which replaces SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Assets to Be Disposed of." SFAS 144
changes the accounting for long-lived assets by requiring that all long-lived
assets be measured at the lower of the carrying amount or fair value less cost
to sell, whether reported in continuing or discontinued operations. The adoption
of SFAS 144 did not have an impact on the Company's consolidated financial
statements.
SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which
was released in August 2001, addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and for
the associated asset retirement costs. SFAS 143 requires an enterprise to record
the fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development or
normal use of the assets. The enterprise is also required to record a
corresponding increase to the carrying amount of the related long-lived asset
(i.e., the associated asset retirement cost) and to depreciate that cost over
the life of the asset. The liability is changed at the end of each period to
reflect the passage of time (i.e., accretion expense) and changes in the
estimated future cash flows underlying the initial fair value measurement. The
Company is required to adopt SFAS 143 for its fiscal year beginning January 1,
2003, but it is not expected to have an impact on the consolidated financial
position or results of operations of the Company.
The Company adopted SFAS No. 141, "Business Combinations" ("SFAS 141") in 2001
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") in 2002.
SFAS 141 prohibits pooling-of-interests accounting for acquisitions. SFAS 142
specifies that goodwill and some intangible assets will no longer be amortized
but instead will be subject to periodic impairment testing. The Company no
longer amortizes goodwill and management has determined that there has been no
impairment in its carrying value. Had the Company excluded goodwill amortization
expense in the three months and nine months ended September 30, 2001, net income
would have increased by $23 and $70, respectively, and income per share for the
three months and nine months ended September 30, 2001 would not change from the
amounts reported.
Use of Estimates
The preparation of financial statements in accordance with 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 revenues and operating expenses
during the reporting period. Actual results could differ from these estimates.
3. DISCONTINUED OPERATION
On August 25, 2000, the Company acquired certain assets of the Sweet Success
product line from Nestle USA, Inc. (the "Seller") in exchange for 900,000 shares
of the Company's common stock, representing 3.1% of the shares outstanding after
the transaction. The acquisition was recorded using the purchase method of
accounting. In the transaction, the Company acquired certain assets directly
related to the Sweet Success product line, including inventory, books and
records, contracts and intellectual property such as trademarks and product
specifications. The Company did not acquire any customer receivables or fixed
assets, and the Company did not assume any liabilities, beyond those obligations
associated with certain contracts, in connection with the acquisition. The
shares of common stock issued to the Seller are unregistered and restricted. The
Company entered into a registration rights agreement with the Seller that
provides demand registration rights after April 15, 2001.
As a result of a determination made in December 2000, the Company discontinued
sales of the Sweet Success product line by June 30, 2001. The results of the
Sweet Success product line have been reported separately as a discontinued
operation in the Company's consolidated financial statements. For the three and
nine months ended September 30, 2001,
7
Sweet Success generated sales of $0 and $3,350 and operating income of $280 and
$813, respectively. For the three months and nine months ended September 30,
2002, Sweet Success was inactive. The liabilities of the discontinued operation
have been recorded at fair value under the caption "Liabilities of discontinued
operation" in the accompanying consolidated balance sheet at December 31, 2001
and September 30, 2002.
4. CAPITAL STOCK
Common Stock
The Company did not issue any shares of common stock in 2001 or in the first
nine months of 2002.
Treasury stock is accounted for using the cost method. During 2001, the Company
repurchased 1,670,400 shares of common stock for an aggregate cost of $723 (an
average price of $0.43 per share). For the nine months ended September 30, 2002,
the Company repurchased 829,357 additional shares of common stock for an
aggregate cost of $671 (an average price of $0.81 per share). The Company
accounts for the repurchased shares as treasury stock.
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.
5. STOCK OPTIONS
In August 1999, the Company adopted the 1999 Equity Incentive Plan and in June
2000, the Company adopted the 2000 Equity Incentive Plan, under which options to
purchase shares of the Company's common stock could be granted to key employees.
Currently, 1,000,000 and 4,100,000 shares of common stock may be issued pursuant
to the 1999 Equity Incentive Plan and the 2000 Equity Incentive Plan,
respectively. Under the terms of the 2000 Equity Incentive Plan, the number of
shares reserved can be adjusted quarterly so that the total number of shares
subject to outstanding options plus the shares available for grant will equal
14% of the then-outstanding shares of the Company's common stock. These options
could be either incentive stock options or nonqualified stock options. In June
2000, the Company also adopted the 2000 Equity Incentive Plan for Outside
Directors and Consultants (the "Director Plan"), under which nonqualified stock
options to purchase shares of the Company's common stock could be granted to
non-employee directors and consultants to the Company. A maximum of 500,000
shares of common stock may be issued pursuant to the Director Plan. Under each
of the plans, the Board of Directors determines the term of each option, but no
option can be exercisable more than ten years from the date the option was
granted. The Board also determines the option exercise price per share and
vesting provisions.
6. CONTINGENCIES
In July 2002, certain franchise operators filed a suit against the Company
alleging that the Company has violated the terms of its franchise agreements and
certain other trade laws. The suit requests an undefined amount of damages.
Management has indicated its plans to vigorously contest this suit and believes
that the loss, if any, resulting from the suit will not have a material impact
on the Company's consolidated financial position, results of operations or cash
flows in future years.
8
7. INCOME TAXES
At December 31, 2001, the Company had net operating loss carryforwards of
approximately $8.9 million for federal and state tax purposes. In addition,
deferred income taxes were recorded for other differences in bases of assets and
liabilities for financial reporting and income tax purposes. A valuation
allowance was established for the net deferred tax asset based on management's
assessment that the net deferred tax asset will not be realized given the
uncertainty of future operating results.
In 2002, the Company will offset taxable income for federal tax purposes with
net operating loss carryforwards. 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. Accordingly, the Company has recorded
a state income tax provision of $149 for the estimated state taxes currently
payable on the income earned through September 30, 2002.
8. NET INCOME PER SHARE
The table below sets forth the reconciliation of the basic and diluted net
income per share computations:
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 365 $ 370 $ 3,446 $ 1,196
======= ======== ======= =======
Shares used in computing basic net
income per share 26,297 27,831 26,561 28,345
Dilutive effect of stock options 548 -- 590 --
------- -------- ------- -------
Shares used in computing diluted net
income per share 26,845 27,831 27,151 28,345
======= ======== ======= =======
For both the three and nine months ended September 30, 2001, options to purchase
2,262,834 shares of common stock at exercise prices ranging from $0.45 to $13.50
per share were outstanding but were not included in the computation of diluted
net income per share as the result would be anti-dilutive. For both the
corresponding periods ended September 30, 2002, the options excluded from the
computation of diluted net income per share were 1,110,500 at exercise prices
ranging from $0.75 to $13.50.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, this Report on
Form 10-Q contains certain forward-looking statements that involve substantial
risks and uncertainties. When used in this Report, the words "anticipate,"
"believe," "estimate," "expect", and similar expressions, as they relate to
Nutri/System, Inc. or its management, are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include those set forth in "Business--Risk Factors" as
disclosed in the Company's Form 10K filed March 1, 2002 with the Securities and
Exchange Commission. Accordingly, there is no assurance that the results in the
forward-looking statements will be achieved.
The following discussion should be read in conjunction with the
financial information included elsewhere in this Report on Form 10-Q. Dollar
amounts are stated in thousands except share data.
Background
Nutri/System provides weight loss programs and distributes pre-packaged
foods. The Company was formed to combine the well-established Nutri/System name
and proven weight loss program with the Internet as a medium of communication.
The Nutri/System diet program was originally developed by the Company's
Predecessor Businesses that operated through company-owned and franchised weight
loss centers. Currently, nine owners of independent, franchised weight loss
centers remain, with territories encompassing less than 1% of the United States
population. In 1998, the Company initiated NutriSystem Direct, L.L.C., a direct
marketing program of independent distributors of the Company's diet program. In
2001, the Company began selling foods through QVC, a shopping television
network. The Company's pre-packaged foods are now sold to weight loss program
participants through the Internet, QVC, independent distributors and the
remaining franchised weight loss centers. In September 2000, the Company changed
its name from nutrisystem.com inc. to Nutri/System, Inc.
Since the Nutri/System businesses began in 1972, they have operated in
various organizational and legal structures and they were subject to a
bankruptcy proceeding in 1993, which was discharged in 1994. In August 1999,
Ansama, a non-operating public corporation, entered into an Asset Purchase
Agreement to acquire the operating assets and certain liabilities of
Nutri/System L.P. for $3,000 and a Stock Exchange and Purchase Agreement to
acquire the beneficial interests in NutriSystem Direct, L.L.C. for $400 and
17,500,000 shares of Ansama common stock. Ansama was subsequently merged into
the Company and the Company assumed the Asset Purchase Agreement and the Stock
Exchange and Purchase Agreement. In order to fund its cash obligations of $3,400
under the Asset Purchase and Stock Exchange and Purchase Agreements and the
planned marketing program and technology investment, the Company completed a
private placement of 7,637,400 shares of common stock in October 1999, which,
net of related expenses, resulted in proceeds of $7,574. In March 2000, the
Company completed a private placement of 500,000 shares of common stock, which
resulted in net proceeds of $2,462. In 2000, the Company also issued a total of
115,000 shares of common stock valued at an aggregate of $625 to service
providers. During 2001, the Company repurchased 1,670,400 shares of common stock
for an aggregate cost of $723 (an average price of $0.43 per share). For the
nine months ended September 30, 2002, the Company repurchased 829,357 additional
shares of common stock for an aggregate cost of $671 (an average price of $0.81
per share).
From 1993 to 2000, the Company, together with its Predecessor
Businesses, incurred significant losses, including net losses of $9,633 and
$13,984 in 1999 and 2000, respectively. In 2001, the Company generated net
income of $1,249 and in the first nine months of 2002, the Company generated net
income of $3,446. There can be no assurance that the Company will be able to
sustain profitability or, if necessary, obtain the capital to fund operating and
investment needs in the future. However, based on the Company's ability to
generate earnings, the variable nature of a portion of the Company's
expenditures, the cash balance at September 30, 2002 and management's belief
that additional equity financing, if required, can be raised, management
believes that the Company has the ability to continue operations through the end
of 2003.
Discontinued Operation
On August 25, 2000, the Company acquired certain assets of the Sweet
Success product line from Nestle USA,
10
Inc. (the "Seller") in exchange for 900,000 shares of the Company's common
stock, representing 3.1% of the shares outstanding after the transaction. Sweet
Success is a diet meal replacement product line distributed in traditional
retail outlets such as drug and grocery stores and price clubs. In the
transaction, the Company acquired certain assets directly related to the Sweet
Success product line, including inventory, books and records, contracts and
intellectual property such as trademarks and product specifications. The Company
did not acquire any customer receivables or fixed assets, and the Company did
not assume any liabilities, beyond those obligations associated with certain
contracts, in connection with the acquisition. The shares of common stock issued
to the Seller are unregistered and restricted. The Company entered into a
registration rights agreement with the Seller that provides demand registration
rights after April 15, 2001.
As a result of a determination made in December 2000, the Company
discontinued sales of the Sweet Success product line in June 2001. Under
existing market conditions, the Company was unable to obtain the funding
required to rebuild the Sweet Success brand through consumer promotion. However,
in 2000 and 2001, the Sweet Success product line resulted a positive $1,212 and
$541 net cash flow, respectively, as cash generated through the operation of the
product line and the disposal of inventory exceeded payments related to the shut
down of the product line.
The results of the Sweet Success product line have been reported
separately as a discontinued operation in the accompanying consolidated
financial statements. For the three months and nine months ended September 30,
2001, Sweet Success generated sales of $0 and $3,350 and operating income of $0
and $813, respectively. For the nine months ended September 30, 2002, Sweet
Success did not have any operating activity. The liabilities of the discontinued
operation have been recorded at fair value under the caption "Liabilities of
discontinued operation" in the accompanying consolidated balance sheet at
December 31, 2001 and September 30, 2002.
Critical Accounting Policies and Estimates
The Company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States.
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 revenues and expenses
during the reporting period. Management develops, and challenges 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.
The Company's significant accounting policies are described in Note 2
to the consolidated financial statements included in Item 8 of its Form 10-K for
the year ended December 31, 2001. Management considers the following policies to
be the most critical in understanding the more complex judgments that are
involved in preparing the consolidated financial statements and the
uncertainties that could impact results of operations, financial position and
cash flows.
Revenue recognition. The Company recognizes revenues, net of a reserve
for returns, when the related products are shipped. Management reviews the
return reserves at each reporting period and adjusts them to reflect data
available at that time. To the extent the estimate of returns is inaccurate,
management will adjust the reserve, which will impact the amount of product
sales revenue recognized in the period of the adjustment. To date, product
returns have not been material.
Valuation of Fixed Assets and Goodwill. The Company records fixed
assets and goodwill at cost. Fixed assets are being amortized on a straight-line
basis over the estimated useful life of those assets. Under the guidance of SFAS
142, goodwill is not being amortized. In conjunction with acquisitions of
businesses or product rights, management allocates the purchase price based upon
the relative fair values of the assets acquired and liabilities assumed.
Management continually assesses the impairment of long-lived assets and goodwill
whenever events or changes in circumstances indicate that the carrying value of
the assets may not be recoverable. Judgments regarding the existence of
impairment indicators are based on legal factors, market conditions and
operating performance of the Company's fixed assets and acquired businesses and
products. Future events could cause management to conclude that impairment
indicators exist and the carrying values of fixed assets or goodwill are
impaired. Any resulting impairment loss could have a material adverse impact on
the Company's financial position and results of operations.
11
Income taxes. Nutri/System has a history of losses, which has generated
significant federal and state tax net operating loss (NOL) carryforwards of
approximately $9 million as of December 31, 2001. Generally accepted accounting
principles require the Company to record a valuation allowance against the
deferred tax asset associated with this NOL carryforward if it is more likely
than not that the Company will not be able to utilize the NOL carryforward to
offset future taxes. Due to the size of the NOL carryforward in relation to the
Company's history of unprofitable operations, the Company has not recognized a
net deferred tax asset.
Prior to 2001, the Company and the Predecessor Businesses incurred net
losses for over eight years. Continued profitability in future periods could
cause management to conclude that it is more likely than not that the Company
will realize all or a portion of the NOL carryforward. Upon reaching such a
conclusion, which is subject to management's judgment, the Company would
immediately record the estimated net realizable value of the deferred tax asset
at that time and would then begin to provide for income taxes at a rate equal to
the combined federal and state effective rates. Subsequent revisions to the
estimated net realizable value of the deferred tax asset could cause the
Company's provision for income taxes to vary significantly from period to
period.
Results of Operations
Revenues and expenses consist of the following components:
Revenues. Revenues consist primarily of food sales and franchise
royalty fees. 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. Revenues from product sales are recorded when
shipped.
Cost of Revenues. Cost of revenues consists primarily of the cost of
the products sold, incoming and outgoing shipping costs, charge card discounts
and packing material. Cost of products sold includes products provided at no
charge as part of promotions. Cost of direct sales includes the fees paid to
independent distributors.
Advertising and Marketing Expense. Advertising and marketing expense
includes advertising, marketing and promotional expenses and payroll related
expenses for personnel engaged in these activities. The Company follows the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position 93-7, "Reporting for Advertising Costs" to account for Internet
site-linking arrangements. Internet advertising expense is recognized 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
payment terms. All other advertising costs are charged to expense as incurred.
General and administrative expenses. General and administrative
expenses consist of payroll and related expenses for administrative, information
technology, fulfillment and customer service personnel, facility expenses, web
site development costs, professional service fees and other general corporate
expenses. Web site development costs are accounted for in accordance with the
AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use."
Non-cash compensation expense. Non-cash compensation expense represents
the amortization of deferred compensation related to stock options granted to
management, directors and consultants over a one to four-year vesting period.
Interest income/expense. Interest consists of interest income earned on
cash balances, net of interest expense.
Income taxes. Effective with the merger on September 27, 1999 (see
Background for discussion), the Company became subject to corporate level income
taxes. No income tax benefit on the excess of the tax basis of assets over the
financial reporting carrying amount has been recorded from September 1999 to
date in light of the uncertainty of future operating results.
Internet Operations
The Company launched its web site on October 15, 1999. In pursuing its
Internet business strategy, the Company's primary financial objectives are to
generate growth while maintaining profit margins. The Company
12
measures growth in terms of the number of new customers, revenues per customer
and total revenues. A customer is defined as an individual who has purchased
food through the web site. Profit margins are measured in terms of gross margin
(revenues less cost of revenues as a percentage of revenues), and total
advertising and marketing expense as a percentage of revenues.
SELECTED FINANCIAL AND OPERATING STATISTICS FOR INTERNET OPERATIONS
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
Revenues (000's) $3,481 $3,885 $13,320 $13,663
Cost of revenues (000's) 1,596 1,796 6,047 6,442
------ ------ ------- -------
Gross margin (000's) $1,885 $2,089 $ 7,273 $ 7,221
% of revenue 54.2% 53.8% 54.6% 52.9%
Advertising and marketing (000's) $ 184 $ 730 $ 1,087 $ 3,244
% of revenue 5.3% 18.8% 8.2% 23.7%
New customers 5,417 10,248 23,699 37,207
Advertising and marketing/ $ 34 $ 71 $ 46 $87
new customer
Total revenues/new customer $ 643 $ 379 $ 562 $ 367
Internet revenues decreased 10.4% from the third quarter of 2001 to the
third quarter of 2002. Internet revenues are largely a function of the number of
new customers acquired, the revenues generated from each new customer and the
revenues generated from returning customers (customers that initially purchased
food in a prior year). From the third quarter of 2001 to the third quarter of
2002, the number of new customers acquired dropped by 4,831 or 47.1%. The
decline in new customers was caused by a large reduction in advertising and
marketing spending, which declined by $546 or 74.8% from the third quarter of
2001 to 2002. Total revenues per new customer increased 69.7% from $379 for the
third quarter in 2001 to $643 for the third quarter of 2002. The increase in
total revenues per new customer is primarily attributable to a) an increase in
the average weeks on program per new customer and b) revenues generated by
returning customers that totaled approximately $0.8 million in the third quarter
of 2002 as compared to $0.5 million in the third quarter of 2001. In the fourth
quarter of 2001, Nutri/System began offering an autoship program in which it
sends monthly food packages to customers automatically until customers cancel.
Management believes this has contributed to the increase in the average weeks on
program per new customer.
The 74.8% decline in advertising spending from the third quarter of
2001 to 2002 was attributable to a sharp decline in television advertising
offset by a small increase in cost per acquisition Internet advertising.
Advertising spending as a percent of sales declined from 18.8% in the third
quarter of 2001 to 5.3% in the third quarter of 2002, and advertising spending
per new customer acquired declined from $71 in the third quarter of 2001 to $34
in the third quarter of 2002, a drop of 52.1%. Management believes the Company
obtains new customers through a) word-of-mouth referrals generated by an
expanding base of former clients, b) people who learned about Nutri/System while
watching QVC (see below), c) Internet advertising and Internet searches and d)
television advertising.
Internet revenues decreased $343 from the first nine months of 2001 to
the first nine months of 2002. The spending on advertising and marketing
declined 66.5% in the same period, resulting in a decline in advertising and
marketing cost as a percentage of revenues from 23.7% in the first nine months
of 2001 to 8.2% in the first nine months of 2002. Advertising and marketing per
new customer (customer acquisition cost) declined 47.1% from $87 to $46 from
13
the first nine months of 2001 to 2002. Gross margin as a percentage of sales
increased from 52.9% in the first nine months of 2001 to 54.6% in the first nine
months of 2002, primarily as a result of the reduction in promotional sales.
Television Infomercial Distribution
In the second quarter of 2001, the Company began distribution of its
proprietary prepackaged food through QVC, the shopping television network. On
the QVC network, the Company reaches a large, incremental audience in a 50
minute, infomercial format that enables the Company to convey fully the benefits
of the Nutri/System diet foods. Under the terms of the Company's agreement with
QVC, QVC viewers purchase Nutri/System products directly from QVC and are not
directed to the Nutri/System web site. Retail prices (including shipping and
handling) offered on QVC to consumers are similar to prices offered on the web
site. The Company generates a lower gross margin (as a percent of sales) on
sales to QVC relative to Internet sales, but QVC sales require no incremental
advertising and marketing expense and, management believes, exposure on QVC
raises consumer awareness of the Nutri/System brand. Net sales through the
television infomercial distribution channel were $1,408 and $2,236 for the three
and nine months ended September 30, 2001, respectively, versus $1,024 and $6,888
for the comparable periods in 2002.
Three Months Ended September 30, 2001 Compared to Three Months Ended
September 30, 2002
Revenues. Revenues decreased from $6,329 for the third quarter ended
September 30, 2001 to $5,458 for the third quarter ended September 30, 2002. The
revenue decrease of $871 or 13.8%, resulted from decreased sales from the
Internet ($404), QVC ($384), and the franchise network and N/S Direct ($83). In
the third quarter of 2002, Internet sales accounted for 64% of total revenues,
while QVC, N/S Direct and franchise revenues accounted for 19%, 9% and 8% of
total revenues, respectively. In 2001, these percents were 62%, 22%, 8% and 8%,
respectively.
Costs and Expenses. Cost of revenues decreased $528 from $3,589 to
$3,061 for the quarters ended September 30, 2001 and 2002, respectively. Gross
margin as a percent of revenues was 43.3% and 43.9% for the quarters ended
September 30, 2001 and 2002, respectively. Advertising and marketing expenses
decreased $546 from $730 to $184 from the third quarter of 2001 to the third
quarter 2002. All advertising spending promoted the Internet operations, and, as
discussed above, the decline in advertising is attributable to a large decrease
in television advertising spending. General and administrative expenses ($1,620
and $1,669 in the third quarter 2001 and 2002, respectively) increased $49 due
to higher expenses in a variety of areas.
Interest Income. Interest income net of interest expense decreased $4
from $17 in 2001 to $13 in 2002 primarily due to lower interest rates offered on
cash balances.
Net Income. From the third quarter 2001 to the third quarter 2002, net
income decreased by $5 from net income of $370 to net income of $365. The
decrease in net income is due to higher general and administrative expenses and
income tax expense offset by lower advertising spending.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2002
Revenues. Revenues increased from $19,531 for the nine months ended
September 30, 2001 to $23,459 for the nine months ended September 30, 2002. The
revenue increase of $3,928, or 20.1%, resulted primarily from the growth of QVC
sales ($4,651) offset by lower Internet food sales ($343), and Franchise and
Direct revenue ($380). Sales to QVC began in April 2001.
Costs and Expenses. Cost of revenues increased from $10,828 to $13,242
for the nine months ended September 30, 2001and 2002, respectively. Gross margin
(revenues less cost of revenues as a percentage of revenues) decreased from
44.6% for the nine months ended September 30, 2001 to 43.6% for the nine months
ended September 30, 2002. This decrease was attributable to the impact of sales
to QVC, which lowered gross margins. Advertising and marketing expense decreased
from $3,244 to $1,087 from the first nine months of 2001 to the first nine
months of 2002. Virtually all advertising in these quarters promoted the
Internet program. General and administrative expenses increased from $4,904 to
$5,220 from the first nine months of 2001 compared to the first nine months of
2002 but declined as a percent of sales from 25.1% to 22.3% from 2001 to 2002.
This increase of $316 is due primarily to an increase in costs for compensation
expense and professional services.
14
Interest Income. Interest income (net of interest expense) decreased
$58 from $87 in the first nine months of 2001 to $29 in the first nine months of
2002 primarily due to lower interest rates offered on cash balances.
Net Income. The Company generated net income of $1,196 for the nine
months ended September 30, 2001 as compared to net income of $3,446 for the nine
months ended September 30, 2002. This variance of $2,250 was due primarily to
increased QVC sales and decreased advertising costs. For the nine months ended
September 30, 2001, the Company's net income included income from discontinued
operations of $813, and the Company generated income before discontinued
operations of $383.
Liquidity, Capital Resources and Other Financial Data
At September 30, 2002, the Company had net working capital of $5,156.
Cash and cash equivalents were $3,526. The Company's principal source of
liquidity is from cash flow from operations. The Company currently has no bank
debt or term or revolving credit facilities to fund operating cash flow or
investment opportunities.
In the nine months ended September 30, 2002, the Company generated a
positive cash flow of $3,278 from operations, primarily attributable to net
income adjusted for non-cash items partially offset by increases in working
capital.
In the nine months ended September 30, 2002, net cash used in investing
activities was $199, which consisted of a minority investment in an operating
company and capital expenditures incurred to increase web site capacity.
In the nine months ended September 30, 2002, net cash used in financing
activities was $671, representing the purchase of 829,357 shares of common stock
in open market and privately negotiated transactions.
Over the first nine months of 2001, the Company eliminated virtually
all marketing agreements requiring future minimum fixed fees. As of September
30, 2002, the Company's principal commitments consisted of obligations under
operating leases. These commitments have not materially changed from those
disclosed in the consolidated financial statements filed as part of the 2001
Form 10-K. Although the Company has no material commitments for capital
expenditures, it anticipates continuing requirements for capital expenditures
consistent with anticipated growth in operations, infrastructure and personnel.
Based on the Company's ability to generate earnings in 2001 and in the
first nine months of 2002, the variable nature of a portion of the Company's
expenditures, the cash balance at September 30, 2002 and management's belief
that additional equity financing, if required, can be raised, management
believes that the Company has the ability to continue operations through the end
of 2003. However, there can be no assurance that the Company will be able to
sustain profitability or, if necessary, obtain the capital to fund operating and
investment needs in the future. There are no credit facilities available to fund
working capital or investment needs.
There are no current plans or discussions in process relating to any
material acquisition that is probable in the foreseeable future.
Factors Affecting Business and Prospects
The Company expects to experience significant fluctuations in future
quarterly operating results due to a variety of factors, many of which are
outside its control, including the historical seasonality of customer purchases.
Inflation
The Company's financial statements are presented on a historical cost
basis and do not fully reflect the impact of prior years' inflation. While the
U.S. inflation rate has been modest for several years, inflation issues may
impact business in the future. The ability to pass on inflation costs is an
uncertainty due to general economic conditions and competitive situations.
15
Recently Issued Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company does not hold any investments in market risk sensitive
instruments. Accordingly, the Company believes that it is not subject to any
material risks arising from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices or other market changes that affect
market risk instruments.
Item 4. Controls and Procedures
Within ninety days prior to the filing of this Report, the Company
evaluated the effectiveness of the design and operations of its disclosure
controls and procedures. The Company's disclosure controls and procedures are
designed to insure that the Company records, processes, summarizes and reports
in a timely and effective manner the information required to be disclosed in
reports filed with or submitted to the Securities and Exchange Commission. The
Company's Chief Executive Officer and Chief Financial Officer reviewed and
participated in this evaluation. Based upon this evaluation, they concluded
that, as of the date of this evaluation, the Company's disclosure controls are
effective. Since the date of this evaluation, there have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect those controls.
16
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On July 3, 2002, certain franchise operators filed a suit against the
Company and certain of its affiliates alleging that the Company has violated the
terms of its franchise agreements and certain other trade laws. The suit was
filed in the Circuit Court of the First Judicial Circuit, County of Jackson,
State of Illinois. It requests an undefined amount of damages. Management has
indicated its plans to vigorously contest this suit and believes that the loss,
if any, resulting from the suit will not have a material impact on the Company's
consolidated financial position, results of operations or cash flows in future
years.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Nutri/System held its Annual Meeting of Stockholders on April 22, 2002.
(1) The stockholders elected each of the five nominees to the Board of
Directors for a one-year term:
DIRECTOR FOR ABSTAIN
Brian D. Haveson 21,137,875 15,030
Michael E. Heisley 21,139,770 13,135
Frederick C. Tecce 21,139,770 13,135
Donald R. Caldwell 21,139,770 13,135
Dean J. Bozzano 21,138,170 14,735
(2) The stockholders ratified the appointment of Arthur Andersen LLP as
independent public accountants of the Company:
FOR 20,932,502
AGAINST 194,084
ABSTAIN 26,319
----------
TOTAL 21,152,905
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
99.1 Certifying Statement of the Chief Executive Officer pursuant to
Section 1350 of Title 18 of the United States Code
99.2 Certifying Statement of the Chief Financial Officer pursuant to
Section 1350 of Title 18 of the United States Code
17
b. Reports on Form 8-K:
Report dated July 3, 2002 on a change in the Company's independent
public accountants for the fiscal year 2002.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Nutri/System, Inc.
BY: /S/ BRIAN D. HAVESON November 6, 2002
-------------------- ----------------
Brian D. Haveson
President and Chief Executive Officer
BY: /S/ JAMES D. BROWN November 6, 2002
------------------ ----------------
James D. Brown
Chief Financial Officer and Principal Accounting Officer
19
Statement of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Brian D. Haveson, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Nutri/System, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 6, 2002
/S/ BRIAN D. HAVESON
- -----------------------
Brian D. Haveson
Chief Executive Officer
20
Statement of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James D. Brown, certify that:
7) I have reviewed this quarterly report on Form 10-Q of Nutri/System, Inc.;
8) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
9) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
10) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
11) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
12) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 6, 2002
/S/ JAMES D. BROWN
- -----------------------
James D. Brown
Chief Financial Officer
21
Exhibit Index
- -------------
No. Description
--- -----------
99.1 Certifying Statement of the Chief Executive Officer pursuant to
Section 1350 of Title 18 of the United States Code
99.2 Certifying Statement of the Chief Financial Officer pursuant to
Section 1350 of Title 18 of the United States Code
22