UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4
to
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
nutrisystem.com inc.
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(Exact name of registrant as specified in its charter)
Delaware 23-3012204
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
202 Welsh Road, Horsham, PA 19044
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 215-706-5300
Securities to be registered pursuant to Section 12(b) of the Act
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
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INDEX
Page
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Item 1. Business...................................................... 1
Item 2. Financial Information......................................... 20
Item 3. Properties.................................................... 27
Item 4. Security Ownership of Certain Beneficial Owners
and Management.............................................. 27
Item 5. Directors and Executive Officers.............................. 30
Item 6. Executive Compensation........................................ 34
Item 7. Certain Relationships and Related Transactions................ 35
Item 8. Legal Proceedings............................................. 39
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters............... 40
Item 10. Recent Sales of Unregistered Securities....................... 41
Item 11. Description of Registrant's Securities to be Registered....... 42
Item 12. Indemnification of Directors and Officers..................... 44
Item 13. Financial Statements and Supplementary Data................... 45
Item 14. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 45
Item 15. Financial Statements and Exhibits............................. 45
(i)
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Item 1. Business.
(a) General Development of Business
On September 27, 1999, Ansama Corp. ("Ansama"), a Nevada corporation formed
in March 1988 with no active business operations, stockholders' equity of
approximately $72,235 at December 31, 1998 and approximately 200 stockholders of
record, merged (the "Merger") with and into nutrisystem.com inc. (the "Company")
for the purpose of reincorporating as a Delaware corporation under the name
"nutrisystem.com inc." Ansama formed the Company as a Delaware corporation for
this purpose in August 1999. As part of the Merger, each of the 2,039,337
outstanding shares of Common Stock of Ansama was converted into the right to
receive one share of the Company's Common Stock.
As a further consequence of the Merger, the Company succeeded to the rights
of Ansama under: (i) an August 16, 1999 Asset Purchase Agreement (the "Asset
Agreement") with Nutri/System L.P., a Delaware limited partnership (the
"Partnership"), whereby Ansama agreed to purchase specified assets of the
Partnership, including the right to the name "NutriSystem," and assume specified
liabilities of the Partnership, for $3,000,000 in cash and (ii) an August 16,
1999 Stock Exchange and Purchase Agreement (the "Stock Agreement") with HPF
Holdings, Inc., Brian D. Haveson, Joseph H. Boileau, Kathleen E. Simone, Deborah
A. Gallen and Frederick C. Tecce, whereby Ansama agreed to acquire all of the
beneficial interests of NutriSystem Direct, L.L.C. ("NSDirect"), a Pennsylvania
limited liability company, for $400,000 in cash and the issuance of 17,500,000
shares of Common Stock. See Item 7 hereof.
On September 30, 1999, the Company completed the sale of 4,363,985 shares
of its Common Stock at a price of $1.00 per share paid in cash on that date
($964,000 of which had been received by the Company on September 30, 1999 and
the remainder of which was received shortly thereafter) in a partial closing
under a private placement (the "Private Placement") for which Pennsylvania
Merchant Group acted as placement agent and, immediately thereafter, the Company
and the other parties to the Asset Agreement and the Stock Agreement consummated
the transactions contemplated by such agreements. The Company used a portion of
the proceeds of the Private Placement to satisfy its obligations under the Asset
Agreement and issued 17,500,000 shares of Common Stock pursuant to the Stock
Agreement; the remainder of such proceeds were used to pay the Company's
expenses incurred in connection with the Private Placement and for working
capital. On October 13, 1999, the Company completed the closing of the Private
Placement by the sale for $1.00 per share paid in cash on that date of an
additional 3,273,415 shares of its Common Stock. The proceeds from the Private
Placement, after payment of $3,400,000 pursuant to the Asset Agreement and the
Stock Agreement, are being used for working capital and to pursue the Company's
business strategy, including marketing and advertising initiatives, enhancements
to the Company's Web site, expanding the Company's capacity to fulfill orders
and increases in staff levels.
In March 2000, the Company completed the sale of 500,000 shares of Common
Stock in a private placement to CRX Investments I, L.P., a private investment
firm, at a price of $5.00 per share. Following the closing of this transaction
Donald R. Caldwell, a
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representative of CRX Investments I, L.P., was appointed to the Company's Board
of Directors. The private placement resulted in gross proceeds of $2.5 million.
The net proceeds of the private placement will be used for working capital and
to pursue the Company's business strategy, including marketing and advertising
initiatives, enhancements to the Company's Web site, expanding the Company's
capacity to fill orders and increases in staff levels.
In the next few months, the Company intends to commence discussions with
selected investment banking firms regarding a public offering of Common Stock
before the end of 2000. No assurance can be given that a public offering will
occur.
As a result of the foregoing transactions and the issuance of 65,000 shares
of Common Stock to two service providers at the rate of $5.00 per share, the
Company has 27,741,737 outstanding shares of Common Stock.
As used herein, unless the context otherwise requires, the term the
"Company" refers to nutrisystem.com inc. and its subsidiaries and their
respective predecessors.
"NutriSystem(R)" and "Nutrihance(R)" are the registered trademarks of the
Company.
(b) Financial Information About Industry Segments
The Company operates as a single industry segment within the meaning of
Statement of Financial Accounting Standards No. 131.
(c) Narrative Description of Business
Overview
By offering an interactive, Internet based solution to the $33 billion
weight loss industry, the Company has transferred its business model from weight
loss centers to homes via its Internet Web site, "www.nutrisystem.com" (the "Web
site"), providing dieters with a friendly and timesaving program. The Company
leverages the advantages of online commerce with specific focus on all aspects
of weight loss. The increasing percentage of Internet users who shop for
healthcare products online puts the Company in an optimal position for rapid and
profitable growth.
Traditional weight loss programs offered at physical retail centers are
inherently expensive, requiring up-front program fees that range from $60 to
$600. Participants attend mandatory weekly on-site meetings and are required to
purchase products and supplements. This traditional form of weight loss has lost
its luster and now represents an archaic business model. The Internet allows the
Company to be the low-cost provider in the weight loss industry, offering free
participation and products at value pricing. Without the constraints and
overhead costs of the bricks and mortar weight loss program, the Company is able
to expand its client base, offering a time-conscious and private experience,
while promoting quality and value to the consumer.
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The Company's online program offers dieters a comprehensive and anonymous
approach to dieting without sacrificing any program benefits. By providing
individualized calorie plans, portion-controlled food, one-on-one counseling,
behavior modification, exercise education and maintenance plans at the
participant's convenience, the online program meets the client's every need.
Comprehensive weight related information is offered in a participatory manner,
allowing clients to customize their weight loss programs and personalize their
meal and exercise plans.
The primary tool in promoting weight loss in the nutrisystem.com program is
pre-packaged, portion-controlled food. The food is specially formulated and
prepared using a state- of-the-art heating process. It requires no
refrigeration, making storage and shipping costs negligible. With over 100
shelf-stable food selections, the products offered by the Company are
particularly suited for e-commerce. Because orders can be placed 24 hours a day,
seven days a week through the Web site, customers find themselves having the
convenience of timely product selection and service fulfillment.
Once the Company achieves sufficient sales volume to realize economies of
scale, the Company believes that its high inventory turnover, lack of investment
in expensive retail centers and substantially lower warehousing expenses should
give it significant advantages relative to traditional weight loss centers.
Industry Background
Traditional Weight Loss Retailing. The traditional weight loss industry is
characterized by classroom style diet firms that charge initiation fees and have
mandatory weekly meetings. The two major classroom style diet firms are Jenny
Craig Inc., with approximately 800 owned and franchised centers in North
America, Australia and New Zealand, and Weight Watchers International, which was
recently sold to a private European investment firm by H.J. Heinz Company. On
average, a client spends 10 weeks in a program and loses 1 to 2 1/2 pounds per
week. Overweight individuals typically join a weight loss program for health and
cosmetic reasons and often stop and then re-enroll in a program several times.
The weight loss industry is characterized by a broad array of products,
services and supplements as well as rapid changes in trends and the broad
availability of diet literature and philosophies. The Company believes that the
business model of the traditional weight loss industry results in high overhead
costs that are passed on to clients through program fees ranging from $60 to
$600.
Recent studies reported in the Journal of the American Medical Association
indicate that approximately 100 million Americans are overweight and spend in
excess of $33 billion per year on weight control products and services. A recent
report released by Tufts University found that 63% of men and 55% of women over
the age of 25 are obese or overweight, the highest rate ever recorded. As
result, more Americans are now at risk for diabetes, cancer and heart disease
among other conditions. These statistics contribute to the rising health care
costs to treat obesity, which are now estimated at $70 billion per year. The
Company believes its Web site provides an attractive commercial medium to reach
the weight loss industry.
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e-Commerce. The Internet has become an important alternative to traditional
media, enabling millions of consumers to seek information, communicate with one
another and execute commercial transactions electronically. According to an
industry research firm, the number of World Wide Web users is expected to grow
from approximately 100 million in 1998 to approximately 320 million by 2002. The
Internet is distinct from traditional media in that it offers real-time access
to dynamic and interactive content and instantaneous communication among users.
These characteristics, combined with the fast growth of Internet users and
usage, have created a powerful, rapidly expanding direct marketing and sales
channel. Advertisers can target specific demographic groups, measure the
effectiveness of advertising campaigns and revise them in response to real-time
feedback. Similarly, the Internet offers online merchants the ability to reach a
large audience and operate with lower costs and greater economies of scale,
while offering consumers greater selection, lower prices and increased
convenience compared to conventional retailing.
Cyber Dialogue, Inc. estimates that the number of adults in the United
States searching for on-line health and medical information will grow to
approximately 30 million in the year 2000, and they will spend approximately
$150 billion for all types of health-related products and services off-line.
Accordingly, the Company believes that companies that establish a clear brand
identity as a trusted source of online consumer healthcare information and
services will have a significant opportunity to capitalize on multiple revenue
sources, including direct-to-consumer advertising and e-commerce.
Strategy
The Company's online marketing strategy is to attract clients through
informative up-to-date content, online counseling sessions, chat rooms and
personalized exercise programs, coupled with its NutriSystem food offerings. The
Company believes its Web site, which became operational on October 15, 1999,
attracts users who are health conscious and have the disposable income to
participate in weight loss activities but who are faced with time restrictions
from busy work and home schedules. The Web site is attractive to those who would
rather participate privately in an online weight loss program due to the
sensitivity of the subject matter or those who have a dislike for the mandatory
group session approach used by other weight loss firms. The Company plans to
capitalize on the $33 billion weight loss industry by combining the well-
established NutriSystem name and proven weight loss program with the Internet as
the medium of communications with its customers and potential customers. The
Company intends to facilitate this goal using the following strategies:
Leverage Strong Brand Name Recognition through Strategic Alliances. The
more than 30 years of experience of the Company's predecessors in the
weight loss industry under the NutriSystem name conveys strong brand
recognition and should substantially facilitate the Company's ability to
garner valuable advertising space and form strategic relationships. To
exploit the Company's brand name recognition and generate traffic to its
online store, the Company has focused its strategic alliances into three
categories: (i) Internet Portals: AOL.com, Lycos.com, Snap.com, About.com,
AltaVista.com, Excite.com, iVillage.com, Iwon.com and WebCrawler.com, (ii)
Health Content Sites: drkoop.com.,
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HeathCentral.com and OnHealth.com and (iii) Wedding Content Sites:
TheKnot.com, ModernBride.com and WeddingChannel.com.
Encourage Frequent Visits, Providing a Truly Interactive, Informative
Experience. The Company's Web site provides a highly participatory and
enjoyable experience. Unlike other sites which offer read only content,
the Company's Web site provides a virtual environment in which the user
calculates his/her health status, communicates in "real time" with a
personal counselor in the state-of-the-art counseling room and even
evaluates his/her progress using the Daily Diary. The Web site also
features weight loss product information and other health related content
provided by nutritionists and health experts, as well as live discussions
and lectures that encourage the user to talk to the experts.
Secure Customer Loyalty by Delivering a Compelling Value Proposition. The
Company offers value through the use of innovative technology, broad
product selection, high quality content, a high level of customer service,
competitive pricing and personalized services. Dieters are offered an
interactive and anonymous approach to dieting without sacrificing the
specifics of a successful program. Each customer is provided with an
individualized weight loss program as well as one-on-one behavior
modification counseling and exercise program development. The Company
offers over 100 food items that require no refrigeration, with a cost to
the consumer of less than $8.00 per day before shipping and handling for
breakfast, lunch, dinner and snacks. New food items are added on a
quarterly basis to ensure variety. Orders can be placed 24 hours a day and
will be shipped within the next 24 hours. Customers make person to person
inquiries by talking live to the Company's Online Help Consultant or by
calling the Customer Support toll-free number.
Generate Incremental Revenue. In addition to the products and services
offered as part of its weight loss program, the Company plans to derive
revenue from the sale of nutritional supplements and exercise equipment.
The Company currently markets a line of vitamins and supplements under the
name "Nutrihance," and plans to expand this line in the first quarter of
2000 to include brand name vitamins and supplements. The Company also
intends to offer exercise equipment as well as other diet and
health-related products and accessories beginning in the third quarter of
2000.
Broaden Potential Client Base. The Internet provides the Company with an
excellent distribution channel to attract overweight men. With over 48% of
overweight men trying to lose weight at any given time, the general
program design is intended to capitalize on the male population that is
traditionally reluctant to attend formal weight loss programs. Because of
the anonymous nature and personalized approach of the program, the Company
believes it can increase the percentage of male clients who currently
participate in structured weight loss programs from 5% to 30%.
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Continue to Service Dieters Without Internet Access. Through the Company's
NutriSystem Direct Program, independent representatives offer the
Company's products and services directly to clients or potential customers
who do not have Internet access. This approach offers these clients a
convenient and cost effective approach to the NutriSystem weight loss
program.
The nutrisystem.com Web site
The Company's nutrisystem.com Web site is designed to be informative,
helpful and encouraging, allowing customers to learn easily about, discover and
purchase weight loss products and other complementary products such as exercise
and nutritional aids. Management believes the Company's program is intuitive and
convenient to use and facilitates completion of the ordering process with a
minimum of customer effort. Customers entering the Web site can, in addition to
ordering weight loss products, read a weekly newsletter on dietary trends and
other featured products, sign up for one-on-one counseling sessions, create
individual calorie and exercise plans, search a "before and after" photo library
and check order status. In contrast to the "classroom style" approach used by
traditional diet centers, the consumer can accomplish the weight loss experience
in the comfort and convenience of his or her own home or office.
PERSONAL MEAL PLAN - The Company takes all the thinking, calculating and
measuring out of dieting. The Company's plan offers a wide variety of
convenient and appealing portion-controlled meals specifically designed to
provide the client with the important vitamins, minerals and other
nutrients the body needs without the excess fat and calories. Each week,
the client may choose from a variety of meals that can be delivered
directly to the client's home or office.
INNOVATIVE COUNSELING - The counseling room allows a client to meet and
chat with a personal counselor over the Internet in real time. The
one-on-one counseling is a private session, where the client can discuss
his or her progress and receive support. A client is assigned a counselor
who stays with the client throughout the program, allowing the client to
work with someone the client can learn to trust. If a client has a
question between sessions, or prefers to take a more independent approach,
the client can communicate with a counselor by e-mail and receive
personalized responses to questions and concerns.
FREE PERSONAL PROFILE - The Personal Profile takes information provided by
the client and identifies his or her overall weight status. The profile
charts the client's present weight and body mass index. The profile also
provides the client with a recommended calorie level and meal plan based
on the NutriSystem plan and gives an estimate in chart form of how long it
will take to lose the desired weight.
WEEKLY NEWSLETTER - The Weekly Newsletter is a free distribution that is
e-mailed to clients once a week and provides the latest information on
diet aids, fads and the current exercise craze. Experts on topics such as
childhood obesity
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and the role of diet in preventing disease are featured. Other topics
include fashion tips and a Dear NutriSystem column.
DISCUSSION AND LECTURE ROOM - Free lectures and discussions provide the
client with information from experts in topics ranging from weight loss to
women's and men's health as well as other articles describing beauty and
fashion issues and trends. A client is able to listen to and participate
in these monthly sessions that are hosted by book authors, doctors and
well-known personalities. A client is able to ask the experts questions
and receive immediate answers. Clients can also read how others are
dealing with the same issues.
PERSONALIZED EXERCISE PROGRAMS - A counselor designs an exercise program
that complements the client's specific physical condition, hobbies and
lifestyle. During the weekly counseling sessions, a client receives
information on how to walk effectively, which exercise equipment works
best and how to use everyday activities to help increase endurance.
Counselors help individuals design their own exercise programs, set
realistic goals and measure their progress.
TESTIMONIALS - "BEFORE AND AFTER" LIBRARY - Real photos of actual clients
are displayed on the Web site with brief testimonials as to their success
using the Company's weight loss program.
TRULY INTERACTIVE SITE - The Company's Web site is participatory in
nature. For example, if clients choose to take full advantage of the Web
site, they can log in their daily food intake and physical activity and
the Web site calculates the caloric intake and the calories burned and
recommends ways to improve the clients' progress. The Web site is user
friendly and provides motivational tools to keep a client focused and on
track with his or her program.
Strategic Relationships
The Company believes it can enhance its new customer acquisition efforts,
increase purchases by current customers and expand brand recognition through
strategic alliances with major online and traditional content and service
providers. Alliances with major Internet portal sites will build brand
recognition, increase market share and attract customers. In furtherance of this
strategy, the Company has successfully negotiated strategic alliances with
providers of leading Internet sites including AOL.com, Snap.com, Lycos.com,
Excite.com, WebCrawler.com and Netscape.com. The Company has teamed up with
TheKnot.com, one of the world's busiest content-based Web sites for wedding
planning, to be the exclusive weight loss brand advertised on its weight
management center and has an agreement with drkoop.com to be the premier sponsor
of and the exclusive weight loss program advertised on drkoop.com's Weight
Management Center.
The Internet-based alliances generally provide that the Company will be the
premier online weight loss program on the provider's Web site, with the
exclusive right to place banner advertisements and integrated links to the
nutrisystem.com Web site. These pages feature the nutrisystem.com branded link
that allows users to click through to the Company's
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Web site. As part of these arrangements, the Company typically purchases the
right to display its banners and hyperlinks, often in conjunction with specified
search keywords such as "diet" and "weight loss." To direct traffic to its Web
site, the Company created a number of inbound links that connect directly to
"www.nutrisystem.com" from other sites on the Web.
The Company carefully evaluates each potential alliance in order to ensure
that the associated fees are cost effective in terms of customer acquisition,
potential revenue to be generated, level of exclusivity and brand exposure.
Advertising and Marketing
The Company believes that the use of multiple marketing channels reduces
reliance on any one source of customers, lowers customer acquisition costs and
maximizes brand awareness. The marketing strategy is to promote, advertise and
increase its brand visibility and acquire new customers through multiple
channels and through various advertising and marketing media, including: (1)
Internet Advertising, (2) Affiliate Network Programs, (3) Traditional
Advertising Media and (4) Direct Marketing.
Internet Advertising
The following table lists the Company's Internet advertising agreements and
the number of impressions provided for under each such agreement in effect as of
March 10, 2000. In most instances, the number of impressions is "guaranteed"
during a specific contract term, and the term of the agreement is generally
extended until that number of impressions is provided.
Number of
Portal/Web site Impressions
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AOL.com including Netscape.com 102,669,000
AltaVista.com 2,723,000
ModernBride.com 11,900,000
drkoop.com 15,952,000
HealthCentral.com 3,700,000
TheKnot.com 15,000,000
Excite.com 22,249,000
OnHealth.com 11,842,000
About.com 1,444,000
Lycos.com 24,886,000
WeddingChannel.com 2,400,000
Snap.com 2,200,000
iVillage.com 1,000,000
Iwon.com 300,000,000
Go2Net 360,000
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Affiliate Network Programs
Affiliate programs provide the Company with an efficient way to market
products and services online. Under these agreements, partners agree to display
the Company's advertising for a percentage of the sales that originate on the
affiliate's site or pay-for-click. The Company currently has an affiliate
relationship with Microsoft's Link Exchange and is in negotiations with other
affiliate networks.
Traditional Advertising Media
The Company will use a combination of television, radio and print
advertising to complement the Internet campaign. The television commercials will
feature a "Before and After" campaign, a strategy that has been proven effective
throughout the weight loss industry. With the input of a leading advertising
agency, a campaign is being developed to capitalize on the highly recognized
brand name while introducing the "New" nutrisystem.com online weight loss
program. The national radio campaign will use testimonials featuring prominent
radio personalities who will participate in the NutriSystem program, lose weight
and then report via live spots regarding their success.
Direct Marketing
A direct mail campaign is being developed as a companion to the media
advertising and will include mailings to the existing database of over 1,000,000
historical customers of the Company's predecessors. The Company anticipates that
it will begin direct mail operations in the second quarter of 2000.
Customer Service
The Customer Service area of the Company's Web site contains extensive
information regarding shopping, ordering and returning products. Shipping
charges, payment options and other policies are explained to the customer. Help
buttons on every page of the site take customers to the specific customer
service topic they desire. Customers can track the current status of their
orders and can obtain shipper-tracking numbers. Because the concept of Internet
retail is new to many people, the Company offers live, interactive help using
NetAgent software and offers telephone assistance by customer service agents to
answer questions about products and the shopping process.
Detailed product information is available, including descriptions and
photographs. To purchase products, customers simply click on a button to add
products to their virtual shopping baskets. Customers can add and subtract
products from their shopping baskets as they browse, prior to making a final
purchase decision, just as in a physical store. To execute orders, customers
click on the "check out" button and are prompted to supply shipping and credit
card details online. For convenience, the Company enables customers to store
information on the Company's secure server, thereby avoiding the need to
re-enter this information when making future purchases. The Company
automatically confirms each order by e-mail within minutes after the order is
placed. The Company offers a money back return policy.
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Behind The Scenes
Warehousing and Fulfillment. Products are shipped from the Company's 27,000
square foot warehouse located in Horsham, Pennsylvania. The Company also plans
to establish a warehouse facility in Reno, Nevada by the end of the second
quarter of 2000. Orders placed by 6:00 p.m. Eastern Time are processed and
shipped via UPS or RPS the same day.
Infrastructure, Operations and Technology. The Company's technology
infrastructure provides for continuous availability of its online service. All
of the critical components of the system are redundant with locations in
Horsham, Pennsylvania and Allentown, Pennsylvania, allowing the Company to
withstand unexpected component failure and to undergo maintenance or upgrades.
The Company's operation is dependent on the ability to maintain its computer and
telecommunications systems in effective working order and to protect its systems
against damage from fire, natural disaster, power loss, telecommunications
failure or similar events. Systems administrators and network managers of a
third party under contract to the Company also monitor the Company's servers and
execute backups. The servers have access to auxiliary power during outages.
Systems are copied to backup tapes daily, which in turn are sent to the Company
for offsite storage. Database and Web servers are redundant and operate using
clustering technology for effective load balancing and fault tolerance.
Regular capacity planning allows for the quick upgrade of existing hardware
and integration of new hardware to react quickly to a rapidly expanding member
base and increased traffic to the Company's Web site. Key content management and
e-commerce components are designed, developed and deployed by the Company's
in-house technology group.
Several layers of security are employed to protect data transmission and
prevent unauthorized access. All production servers are behind firewalls and do
not allow for outside access at the operating systems level. Strict password
management and physical security measures are followed.
E-commerce transactions and browser-based administration screens employ
secure sockets layer encryption to secure data transmitted between clients and
servers. Credit card information captured during e-commerce transactions is
never shared with outside parties.
Information Gathering. Internet software technology allows the Company to
gather detailed information about the purchase and the customer. For example,
the Company can track the source of each sale in order to identify those Web
sites on which the Company advertises that are generating the most business.
This information, combined with customer profile information gathered throughout
the ordering process, creates a powerful direct marketing database which is
utilized to generate repeat business.
Competition
The market for Internet services and products is relatively new, intensely
competitive and rapidly changing. The number of Web sites on the Internet
competing for consumers' attention has proliferated and the Company expects that
competition will continue to intensify.
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The Company competes, directly and indirectly, for advertisements, viewers,
members and content providers with the following categories of companies:
o Traditional weight loss franchise centers including Jenny
Craig and Weight Watchers.
o Self-administered weight loss regimens and physician-monitored
programs.
o Online services or Web sites targeted to weight conscious
persons and health enthusiasts, such as eDiets.com and
Cyberdiet.com.
The Company believes its products, services and Web site content compare
favorably with those of its competitors, due to the fact many of them have
committed to relatively expensive multi-site retail operations that make it
difficult for them to leverage their overhead.
Intellectual Property
The Company pursues the registration of its trademarks and service marks in
the United States.
The Company has registered several trademarks with the United States Patent
and Trademark Office, including 1-800-321-THIN(R), NuSystem Cuisine(R),
NuCuisine(R), Nutri/Data(R), Nutrihance(R), NutriRX Weight Loss Program(R) and
multiple text and logo variations of Nutri/System(R). The registration of each
such trademark has a duration of either ten or twenty years after the date of
initial registration, depending on whether the initial registration was
effective on or after November 16, 1989. The Company intends, by complying with
applicable laws relating to the filing of trademark renewals and statements of
continued use, to ensure that all of its material trademarks remain actively
registered in its name.
The Company also has the rights to the Internet domain name
"nutrisystem.com" and various misspellings of this domain name, such as
"nutrisystems.com" and "nutrasystems.com." The Company registers its Internet
domain names through Network Solutions, Inc., which has been appointed by the
National Science Foundation to act as the current registrar for the ".com,"
".net" and ".org" generic top-level domains in the United States. Each of the
Company's domain name registrations other than "nutrisystem.com" has a duration
of two years. The Company's registration of "nutrisystem.com" has a duration of
one year. The Company has the right to renew each registration following the
initial registration period and intends to do so.
Employees
The Company believes its success depends to a significant extent on its
ability to attract, motivate and retain highly skilled vision-oriented
management and employees. To this end, the Company focuses on incentive programs
for its employees and fosters a corporate culture which is challenging,
rewarding and fun. As of March 10, 2000, the Company had 76
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full-time employees and one part-time employee and considers its employee
relations satisfactory.
Other
Expenditures for fundamental research and development activities are not
material to the Company's business, nor has compliance with federal, state or
local provisions regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment, had any material effect
upon the capital expenditures, earnings or competitive position of the Company.
However, the Company does anticipate continuing substantial investment in
additional computer software and hardware to enhance its Web site. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity, Capital Resources and Other Financial Data."
Financial Information About Foreign and Domestic Operations and Export Sales
The Company does not have material foreign operations, and has no export
sales.
Risk Factors
No Operating History; Anticipated Losses. The Company was incorporated in
August 1999, acquired the Partnership and NSDirect in September 1999 and
launched its Web site on October 15, 1999. Accordingly, the Company has no
operating history upon which an evaluation of the Company and its prospects can
be based. The Company anticipates that it will incur significant additional
costs to fund increased marketing initiatives, additional strategic alliances,
enhancements to the Company's Web site and technological and hardware
improvements. As a result of these costs, the Company anticipates significant
operating losses for the foreseeable future. To the extent that such costs do
not result in appropriate revenue increases, the Company's business, financial
condition, results of operations or prospects may be materially adversely
affected.
Need for Additional Financing. The capital resources required to implement
the Company's business plan are significant. The Company anticipates that it
will continue to need additional financing to accomplish its business plan.
There can be no assurance that any such financing will be available on terms
acceptable to the Company or at all. See "Recent Developments."
Competition. Both the e-commerce market and the weight loss business are
highly competitive. Since the introduction of e-commerce to the Internet, the
number of e-commerce Web sites competing for customer attention has increased
rapidly. The Company expects future competition to intensify given the relative
ease with which new Web sites can be developed. The Company believes that the
primary competitive factors in e-commerce are brand recognition, site content,
ease of use, price, fulfillment speed, customer support and reliability. The
Company believes that its success will depend heavily upon its ability to
provide a compelling and satisfying weight loss experience for its customers.
The Company believes that other factors that will affect the Company's success
include the Company's ability to attract experienced marketing, technology,
operations and management talent. The nature
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<PAGE>
of the Internet as an electronic marketplace which may, among other things,
facilitate competitive entry and comparison shopping, may render it inherently
more price competitive than traditional weight loss formats. The increase of
competitiveness among online weight loss businesses may result in reduced
operating margins, loss of market share and a diminished brand franchise.
Management of Growth. Future growth is expected to place a significant
strain on the Company's managerial, operational and technical resources. The
Company expects its operating expenses and staffing levels to increase
substantially in the future. To manage its anticipated growth, the Company must
expand its operational and technical capabilities and manage its employee base
while effectively administering multiple relationships with various third
parties. There can be no assurance that the Company will be able to manage the
expansion of its operations effectively. Any failure of the Company to implement
cohesive management and operating systems, add resources on a cost effective
basis or manage the Company's expansion could have a material adverse effect on
the Company's business, financial condition, results of operations or prospects.
Potential Fluctuations in Quarterly Results. The Company expects that it
will experience significant fluctuations in its future quarterly operating
results due to a variety of factors, many of which are outside of the Company's
control. The Company believes that factors that may adversely affect the
Company's quarterly operating results include: (i) the Company's ability to
retain existing customers, attract new customers at a steady rate and maintain
customer satisfaction; (ii) the Company's ability to acquire product and to
manage fulfillment operations; (iii) the Company's ability to maintain gross
margins in its existing business and in future product lines and markets; (iv)
the development, announcement or introduction of new Web sites, services and
products by the Company and its competitors; (v) price competition and (vi) the
Company's ability to upgrade and develop its systems and infrastructure.
Consequently, the Company believes that period-to-period comparisons of the
Company's operating results will not necessarily be meaningful and should not be
relied upon as an indication of future performance. The Company's future
quarterly operating results from time to time may not meet the expectations of
securities analysts or investors, which may have a material adverse effect on
the market price of the Common Stock.
Control by Principal Stockholders. The Company's directors and their
affiliates own beneficially approximately 65.0% of the Company's outstanding
Common Stock. As a result, the Company's directors and their affiliates will,
collectively, be able to exercise control over all matters requiring stockholder
approval, including the election of all directors and the approval of
significant corporate transactions. This ownership may have the effect of
delaying or preventing a change in control of the Company which could materially
adversely affect the price of the Common Stock.
Dependence upon Strategic Alliances. The Company relies on strategic
alliances with third-party Web sites and content providers to attract users to
its Web site. The Company has entered into various agreements with companies to
attract users from numerous other Web sites or online service providers which
are described in more detail in "Strategic Relationships." The Company believes
that such alliances will result in increased traffic to the Company's Web site.
The Company's ability to generate revenues from e-commerce may
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<PAGE>
depend on the increased traffic, purchases, advertising and sponsorships that
the Company expects to generate through such strategic alliances. There can be
no assurance that these agreements will be maintained beyond their initial terms
or that additional third-party agreements will be available to the Company on
acceptable commercial terms or at all. In addition, significant strategic
alliance agreements have traditionally been exclusive arrangements. The
inability to enter into new, and to maintain any one or more of its existing
strategic alliances could have a material adverse effect on the Company's
business, financial condition, results of operations or prospects.
Risks of the Internet as a Medium for Commerce. Consumer use of the
Internet as a medium for commerce is a recent phenomenon and is subject to a
high level of uncertainty. The Internet may not prove to be a viable commercial
marketplace because of inadequate development of the necessary infrastructure,
such as reliable network backbones, or complementary services, such as high
speed modems and security procedures for financial transactions. The viability
of the Internet or its viability for commerce may prove uncertain due to delays
in the development and adoption of new standards and protocols (for example, the
next generation Internet Protocol) to handle increased levels of Internet
activity or due to increased government regulation or taxation.
While the number of Internet users has been rising, the Internet
infrastructure may not expand fast enough to meet the increased levels of
demand. The increased use of the Internet as a medium for commerce raises
concerns regarding Internet security, reliability, pricing, accessibility and
quality of service. If use of the Internet does not continue to grow, or if the
necessary Internet infrastructure or complementary services are not developed to
support effectively growth that may occur, the Company's business, financial
condition, results of operations or prospects could be materially adversely
affected. In addition, the nature of the Internet as an electronic marketplace,
which may, among other things, facilitate competitive entry, comparison shopping
and advertising revenue supported business models, may render it inherently more
competitive than conventional retailing formats.
Rapid Technological Change. To remain competitive, the Company must
continue to enhance and improve the responsiveness, functionality and features
of its Web site. The Internet and the e-commerce industry are characterized by
rapid technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices that
could render the Company's Web site and proprietary technology and systems
obsolete. The Company's success will depend, in part, on its ability to license
leading technologies useful in its business, enhance its existing services,
develop new services and technology that address the increasingly sophisticated
and varied needs of its existing and prospective customers and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis.
The development of a Web site and other proprietary technology entails
significant technical, financial and business risks. Further, the adoption of
new Internet, networking or telecommunications technologies may require the
Company to devote substantial resources to modify and adapt its services. There
can be no assurance that the Company will successfully implement new
technologies or adapt its Web site, proprietary technology and
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<PAGE>
transaction-processing systems to customer requirements or emerging industry
standards. If the Company is unable, for technical, legal, financial or other
reasons, to adapt in a timely manner in response to changing market conditions
or customer requirements, such failure could have a material adverse effect on
the Company's business, financial condition, results of operations or prospects.
Security Risks. Public concern over Internet security has been, and may
continue to be, a hindrance to mass market commercial use of the Internet.
Despite the implementation of network security measures by the Company, its
infrastructure is potentially vulnerable to computer break-ins and similar
disruptive problems caused by its customers or others. Computer viruses,
break-ins or other security problems could lead to misappropriation of
proprietary information and interruptions, delays or cessation in service to the
Company's customers. Any computer break-in could affect consumer confidence in
the security of the Company and could seriously damage its business. Moreover,
until more comprehensive security technologies are developed, the security and
privacy concerns of existing and potential customers may hinder the growth of
the Internet as a mass market medium for commerce.
Risk of System Failure or Inadequacy. The Company's operations will be
dependent on its ability to maintain its computer and telecommunications
equipment in effective working order and to protect its systems against damage
from fire, natural disaster, power loss, telecommunications failure or similar
events. In addition, the growth of the Company's customer base may strain or
exceed the capacity of its computer and telecommunications systems and lead to
degradations in performance or systems failure. From time to time, the Company
may experience capacity constraints and failure of its information systems which
could result in decreased levels of service delivery or interruptions in service
to its customers. While the Company will continually review and seek to upgrade
its technical infrastructure and provide for system redundancies and backup
power to limit the likelihood of systems overload or failure, any damage,
failure or delay that causes interruptions in the Company's operations could
have a material adverse effect on the Company's business, financial condition,
results of operations or prospects.
Risks Associated with Domain Names. The Company currently holds various
Internet domain names, including "www.nutrisystem.com." Currently, the
acquisition and maintenance of domain names is regulated by governmental
agencies and their designees. For example, in the United States, the National
Science Foundation has appointed Network Solutions, Inc. as the current
registrar for the ".com," ".net" and ".org" generic top-level domains. The
regulation of domain names in the United States and in foreign countries will
change in the near future. Such changes in the United States will include a
transition from the current system to a system which is controlled by a
non-profit corporation and the possible creation of additional top-level
domains. Requirements for holding domain names will also be affected. As a
result, there can be no assurance that the Company will be able to acquire or
maintain relevant domain names in all countries in which it conducts business.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. The
Company, therefore, may be unable to prevent third parties from acquiring domain
names that are similar to, infringe upon or otherwise decrease the value of the
Company's trademarks and other proprietary
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<PAGE>
rights. Any such inability could have a material adverse effect on the Company's
business, financial condition, results of operations or prospects.
Government Regulation and Legal Uncertainties. E-commerce is new and
rapidly changing, and federal and state regulation relating to the Internet and
e-commerce is evolving. Currently, there are few laws or regulations directly
applicable to the access to the Internet or to e-commerce on the Internet. Due
to the increasing popularity of the Internet, it is possible that laws and
regulations may be enacted with respect to the Internet, covering issues such as
user privacy, pricing, taxation, content, copyrights, distribution, antitrust
and quality of products and services. In addition, the rapid growth of
e-commerce may trigger the development of more stringent consumer protection
laws. The adoption of such laws or regulations could reduce the rate of growth
of the Internet, which could potentially decrease the usage of the Company's Web
site or could otherwise have a material adverse effect on the Company's
business. In addition, applicability to the Internet of existing laws governing
issues such as property ownership, copyrights and other intellectual property
issues, taxation, libel, obscenity and personal privacy is uncertain. The vast
majority of such laws were adopted prior to the event of the Internet and
related technologies and, as a result, do not contemplate or address the unique
issues of the Internet and related technologies.
It should also be noted that several telecommunications carriers have
requested that the Federal Communications Commission ("FCC") regulate
telecommunications over the Internet. Due to the increasing use of the Internet
and the requirements it has placed on the current telecommunications
infrastructure, telephone carriers have requested that the FCC regulate Internet
service providers and online service providers and impose access fees on those
providers. If the FCC imposes access fees, the costs of using the Internet could
increase dramatically and result in the reduced use of the Internet as a medium
for commerce. A reduction in the use or availability of the Internet could have
a material adverse effect on the Company's business, financial condition,
results of operations or prospects.
Sales and Other Taxes. The Company, in accordance with current industry
practice, does not collect sales or other taxes in respect of shipments of goods
into states other than Pennsylvania. However, one or more states or foreign
countries may seek to impose sales or other tax collection obligations on
out-of-jurisdiction companies such as the Company which engage in e-commerce. A
successful assertion by one or more states or foreign countries that the Company
should collect sales or other taxes on the sale of merchandise could have a
material adverse effect on the Company's business, financial condition, results
of operations or prospects.
Recent federal legislation limits the imposition of state and local taxes
on Internet-related sales. In 1998, Congress passed the Internet Tax Freedom Act
which places a three-year moratorium on state and local taxes on (i) Internet
access, unless such tax was already imposed prior to October 1, 1998 and (ii)
discriminatory taxes on electronic commerce. There can be no assurance that
Congress will renew this legislation in 2001. If Congress does not renew this
legislation, state and local governments would be free to impose taxes on
electronically purchased goods which could have a material adverse effect on the
Company's business, financial condition, results of operations or prospects.
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<PAGE>
Risks of Possible Extreme Volatility of Market Price of Common Stock;
Limited Trading Market. The market price of the Common Stock may be extremely
volatile for many reasons, including: (i) actual or anticipated variations in
the Company's revenues and operating results; (ii) announcements of the
development of improved technology; (iii) the use of new sales formats by the
Company or its competitors; (iv) changes in the financial forecasts by
securities analysts; (v) new conditions or trends in the Internet and e-commerce
and (vi) general market conditions.
Recently, market prices for Internet-based companies have experienced
extreme price and volume fluctuations, particularly after initial public
offerings. These fluctuations are often unrelated or disproportionate to the
operating performance of those companies and may not be sustainable. Further,
market prices of the Common Stock in the future may bear no traditional
relationship to the Company's financial condition or performance.
An active trading market does not exist for the Common Stock, and there can
be no assurance that such a market will develop or how liquid that market might
become.
Anti-takeover Effects of Certificate of Incorporation, By-laws and Delaware
Law Provisions; Possible Issuance of Preferred Stock. The ownership by the
Company's directors and their affiliates of approximately 65.0% of the Company's
outstanding Common Stock gives them voting control of the Company and has the
effect of preventing a change in control of the Company without their consent
even if doing so would be beneficial to the Company's other stockholders. In
addition, the Company's Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock without any further vote or action by the
stockholders, and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, if any, of such shares. Since the
Preferred Stock could be issued with voting, liquidation, dividend and other
rights superior to those of the Common Stock, the rights of the holders of the
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of any such Preferred Stock. The issuance of Preferred Stock could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. Further, the provisions of the
Company's Certificate of Incorporation, including provisions of Delaware law,
could have the effect of delaying or preventing a change in control of the
Company, including transactions in which the unaffiliated holders of the Common
Stock might otherwise receive a premium for their shares over the current market
prices.
Cost of Food and Services. Because a large percentage of the Company's
revenues will be derived from sales of the Company's food products, increases in
the cost of food and food services could have a material adverse impact on the
Company.
Seasonality. The Company's revenues will be affected by a number of
factors, including the volume and timing of customer leads, success of marketing
and advertising programs, success of introductions of new services and products,
activities of competitors and the ability of the Company to penetrate new
markets. The Company's business is seasonal with revenues generally decreasing
in the quarter ending December 31 and during the summer months. The Company may
also choose to reduce prices or to increase spending in
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response to competition or to pursue new market opportunities, all or any of
which may materially adversely affect the Company's results of operations.
Reliance on Certain Suppliers. The Company carries inventory and is
improving its warehouse to enhance its inventory, but the Company relies to a
large extent on rapid fulfillment from vendors. The Company has no long-term
contracts with any of its vendors that guarantee the availability of
merchandise, the continuation of particular payment terms or the extension of
credit limits. There can be no assurance that the Company's current vendors will
continue to sell merchandise to the Company on current terms or that the Company
will be able to establish new or extend current vendor relationships to ensure
acquisition of merchandise in a timely and efficient manner and on acceptable
commercial terms. If the Company were unable to develop and maintain
relationships with vendors that would allow it to obtain sufficient quantities
of merchandise on acceptable commercial terms, its business, prospects,
financial condition and results of operations would be materially adversely
affected.
Risks Associated with Entry into New Business Areas. The Company may choose
to expand its operations by developing new Web sites, promoting new or
complementary products or sales formats, expanding the breadth and depth of
products and services offered or expanding its market presence through
relationships with third parties. There can be no assurance that the Company
would be able to expand its efforts and operations in a cost-effective or timely
manner or that any such efforts would increase overall market acceptance.
Furthermore, any new business or Web site launched by the Company that is not
favorably received by consumers could damage the Company's reputation. Expansion
of the Company's operations in this manner would also require significant
additional expenses and development, operations and editorial resources, and
would strain the Company's management, financial and operational resources. The
lack of market acceptance of such efforts or the Company's inability to generate
satisfactory revenues from such expanded services or products to offset their
cost could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
Dependence on Trademarks and Proprietary Rights. The Company regards its
copyrights, trademarks, trade secrets and similar intellectual property as
critical to its success, and relies on trademark and copyright law and trade
secret protection to protect its proprietary rights. The Company pursues the
registration of its trademarks in the United States. Effective trademark,
copyright and trade secret protection may not be available in every country in
which the Company's products and services are made available online. There can
be no assurance that third parties will not take actions that might materially
adversely affect the value of the Company's proprietary rights or reputation,
which could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. There can be no assurance that
the steps taken by the Company to protect its proprietary rights will be
adequate or that third parties will not infringe or misappropriate the Company's
copyrights, trademarks, trade secrets and similar proprietary rights. In
addition, there can be no assurance that other parties will not assert
infringement claims against the Company.
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<PAGE>
Dependence on Key Employees. The success of the Company depends to a
significant degree upon the contribution of its executive officers and other key
personnel, including Brian D. Haveson, the Company's President and Chief
Executive Officer. The Company does not have an employment agreement with any of
its executive officers. There can be no assurance that the Company will be able
to retain its managerial and other key personnel or to attract additional
managerial and other key personnel if required.
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<PAGE>
Item 2. Financial Information.
The following historical selected financial data are derived from the
Company's audited Consolidated Financial Statements and those of its
predecessors, Nutri/System L.P. and NutriSystem Direct, L.L.C. (the "Predecessor
Businesses"). The operating data and the balance sheet data set forth below
should be read in conjunction with the Company's Consolidated Financial
Statements and related notes thereto, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
document.
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
December 31
------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues (a)
Food sales $ 44,972 $ 39,000 $ 23,698 $ 8,415 $ 7,910
Other revenues 9,948 8,030 22,105 870 674
Total revenues 54,920 47,030 45,803 9,285 8,584
Cost of revenues 49,217 45,823 47,686 7,101 6,196
Other items 8,781(e) 367(b) (1,828)(c) -- 8,202(d)
Other operating expenses 2,995 2,318 2,873 2,332 4,083
Operating loss (6,073) (1,478) (2,928) (148) (9,897)
Net loss $ (6,095) $ (163) $ (1,598) $ (42) $ (9,633)
Net loss per share:
Basic $ (0.37) $ (0.00) $ (0.08) $ (0.00) $ (0.45)
Diluted $ (0.37) $ (0.00) $ (0.08) $ (0.00) $ (0.45)
Weighted average shares outstanding:
Basic 16,282,781 16,282,781 19,539,337 19,539,337 21,448,687
Diluted 16,282,781 16,282,781 19,539,337 19,539,337 21,448,687
Balance Sheet Data:
Total assets $ 10,146 $ 11,056 $ 4,826 $ 2,924 $ 5,856
Long-term liabilities 1,045 1,678 76 153 133
Minority interest 2,704 2,350 878 807 --
Equity 326 2,163 565 523 4,391
</TABLE>
- ------------
(a) In 1997, the Company sold its owned weight loss centers to Complete
Wellness Weight Management, Inc. As a result, beginning in 1998, the
Company experienced
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a significant decrease in revenues associated with food sales and weight
loss programs. Revenues generated from Company-owned weight loss centers
in 1997 were $33,484.
(b) In 1996, the Company sold some weight loss centers at a loss of $367.
(c) In 1997, the Company sold its weight loss centers (see note(a)) at a loss
of $5,347. In addition, in 1997, the Company received proceeds from its
insurance carrier associated with products liability litigation which
generated a net gain of $7,175.
(d) Compensation charges of $8,202 were recorded in the year ended December
31, 1999. See discussion relating thereto in the Notes to Consolidated
Financial Statements.
(e) In 1995, the Company disposed of its exercise weight loss centers at a
loss of $8,292.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
BACKGROUND
nutrisystem.com inc., a Delaware corporation, was formed to operate the
leading authoritative World Wide Web site for weight loss and related health
issues by providing a well-known diet program that incorporates pre-packaged
meals and a complete diet philosophy, in the convenience of one's own home.
The Company's predecessors, including the Predecessor Businesses, have
historically operated through company-owned and franchised weight loss centers.
Independent franchise weight loss center owners operate using the Company's
trade name, trademarks and programs for which a royalty is paid to the Company.
The Company's pre-packaged foods are sold to program participants through the
Internet, independent distribution and the franchised weight loss centers.
The Company plans to capitalize on the $33 billion weight loss industry by
combining the well-established NutriSystem name and proven weight loss program
with the Internet as the medium of communication using the following strategies:
o Leverage the strong brand name recognition through an aggressive
marketing campaign using traditional and Internet marketing
channels. On the Internet, the Company has focused its strategic
alliances into three categories: (1) Internet portals; (2) health
content sites and (3) wedding content sites.
o Encourage frequent visits by providing a truly interactive,
informative experience.
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o Offer a compelling value to the customer, including broad product
selection, excellent counseling and customer service and competitive
pricing.
o Broaden the potential customer base by attracting male clients who
traditionally are reluctant to attend formal weight loss programs.
o Generate incremental revenue through the sale of nutritional
supplements and exercise equipment.
o Servicing dieters without Internet access through the Company's
NutriSystem Direct program.
See additional discussion in Item 1 to this Form 10.
The Company has incurred significant losses and, as of December 31, 1999,
had an accumulated deficit of $12,740. For the years ended December 31, 1997,
1998 and 1999, the Company generated net losses of $1,598, $42 and $9,633,
respectively. The Company intends to invest heavily in marketing and promotion,
strategic alliances, Web site development and technology and development of its
administrative organization. In addition, as discussed in Note 1 to the
Consolidated Financial Statements, the Company acquired the Predecessor
Businesses for cash of $3,400 plus 17,500,000 shares of Common Stock. In order
to fund the planned investment and the Company's purchase of the Predecessor
Businesses, the Company effected a private placement of Common Stock which
raised proceeds of approximately $7,574. In March 2000, the Company completed a
private placement of 500,000 shares of Common Stock that raised gross proceeds
of $2,500. The net proceeds of this transaction will be used for working capital
and to pursue the Company's business strategy, including marketing and
advertising initiatives, enhancements to the Company's Web site, expanding the
Company's capacity to fill orders and increases in staff levels. In March 2000,
the Company also issued a total of 65,000 shares of Common Stock valued at $5.00
per share to two of its service providers in consideration for certain legal and
advertising services rendered to the Company. Future investment is expected to
be funded through the sale of additional equity securities in private and/or
public offerings in 2000. Achieving profitability depends upon the Company's
ability to: (1) raise the necessary funds to finance the planned marketing
program, technology and infrastructure investment and (2) generate and sustain
substantially increased revenue levels. There can be no assurance that the
Company will be able to raise the necessary capital or generate sufficient
revenues to achieve or sustain profitability in the future.
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RESULTS OF OPERATIONS
The following table illustrates for the periods indicated the historical
selected financial data, derived from the Company's audited Consolidated
Financial Statements and those of the Predecessors Businesses, for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended
December 31
------------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Food sales $ 23,698 $ 8,415 $ 7,910
Franchise royalty fees 1,766 633 403
Weight-loss programs 17,058 -- --
Other 3,281 237 271
-------- -------- --------
45,803 9,285 8,584
-------- -------- --------
COSTS AND EXPENSES:
Cost of revenues 47,686 7,101 6,196
General and administrative 1,056 2,253 3,853
Depreciation and amortization 1,235 79 99
Other 582 -- 131
Disposal of weight-loss centers 5,347 -- --
Non-cash compensation expense -- -- 8,202
Net gain on insurance settlement (7,175) -- --
-------- -------- --------
48,731 9,433 18,481
-------- -------- --------
Operating loss (2,928) (148) (9,897)
INTEREST (INCOME) EXPENSE (36) 31 56
-------- -------- --------
Loss before minority interest (2,964) (117) (9,841)
MINORITY INTEREST 1,366 75 208
-------- -------- --------
Net loss $ (1,598) $ (42) $ (9,633)
======== ======== ========
BASIC LOSS PER SHARE $ (0.08) $ (0.00) $ (0.45)
======== ======== ========
DILUTED LOSS PER SHARE $ (0.08) $ (0.00) $ (0.45)
======== ======== ========
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Sales. The Company's net sales decreased $701, or approximately 7.5%,
from $9,285 for the year ended December 31, 1998 to $8,584 for the year ended
December 31, 1999. The decrease was attributable primarily to a decline in food
sales ($505) and franchise royalty fees ($230).
Costs and Expenses. Cost of sales decreased $905 for the year ended
December 31, 1999 versus the prior year. As a percentage of revenues, cost of
sales decreased from 76% to 72% primarily due to a shift in mix toward higher
margin NutriSystem Direct sales and away from franchise food sales. General and
administrative expenses increased $1,600, or approximately
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71%, to $3,853 for the year ended December 31, 1999 primarily due to increased
advertising costs ($475), compensation ($310), expenses related to the web site
($215) and professional services ($185). During the year ended December 31,
1999, the Company recorded non-cash compensation expense of $8,202 primarily
associated with equity interests granted to an executive pursuant to the
purchase of NSDirect and stock options granted to management. See discussion
relating thereto in the Notes to Consolidated Financial Statements.
Pro Forma Income Tax Expense. The Predecessor Businesses were flow-through
entities that were not subject to federal or state income taxes and,
consequently, none have been reflected in the Company's financial statements for
the historical periods prior to the year ended December 31, 1999. For purposes
of pro forma presentation, due to the recurring losses incurred by the Company
and management's assessment of realization of the related tax deduction, no pro
forma tax benefit would be recorded during the years ended December 31, 1996,
1997, 1998, or 1999. Effective with the merger on September 30, 1999, the
Company became subject to corporate level income taxes. No income tax benefit on
the excess of the tax basis of Company's assets over the financial reporting
carrying amount has been recorded based on management's assessment that the net
deferred tax asset was not realizable through future taxable earnings.
Interest Income. Interest income increased $25 from $31 in the year ended
December 31, 1998 to $56 in the year ended December 31, 1999 primarily due to
higher average cash balances.
Net Loss. The Company's net loss increased to $9,633 for the year ended
December 31, 1999 versus $42 for the year ended December 31, 1998, primarily due
to the compensation expense charges and to higher general and administrative
expenses discussed above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales. The Company's net sales decreased $36,518 from $45,803 during
the year ended December 31, 1997 to $9,285 for the year ended December 31, 1998.
Management believes that the overriding factor contributing to the revenue
decline was the adverse publicity associated with a drug combination formerly
incorporated in the weight loss program that was shown to cause health problems.
Prior to the publicity, sales were increasing. After the publicity, sales
declined sharply. In part as a result of the decline in sales and its impact on
the demand for the Company's products and services, a decision was made to close
the Company-owned weight loss centers. In addition, franchise royalty fees
declined from $1,766 in 1997 to $633 in 1998 due to a reduction in the
percentage royalty fee and a decline in the number of franchise locations.
Weight loss program fees, which amounted to $17,058 in revenue in 1997, were
eliminated before 1998 as the Company-owned centers were disposed of. Other
revenues declined from $3,281 in 1997 to $237 in 1998 as a result of
discontinued sales of the drug combination mentioned above.
Costs and Expenses. Consistent with the decline in revenues, cost of sales
decreased $40,585 from $47,686 during the year ended December 31, 1997 to $7,101
for the year ended December 31, 1998. As a percentage of revenues, cost of sales
was 76% during the year ended December 31, 1998 versus 104% in 1997. The 1997
cost of sales includes additional costs
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<PAGE>
associated with opening and upgrading various Company-owned centers in early
1997. General administrative expenses increased $1,197, or approximately 113%,
from $1,056 during the year ended December 31, 1997 to $2,253 during the year
ended December 31, 1998. The increase is primarily due to a shift in the focus
of corporate support activity in 1998 away from the Company-owned centers
(recorded in cost of revenue) to general and administrative activity as the
Company-owned centers were closed. Depreciation and amortization expense was
$1,235 in 1997. Depreciation and amortization expense decreased to $79 in 1998
as the Company had written off substantially all of its property and equipment
in 1997 in connection with the sale of the weight loss centers.
Other Items. The results for the year ended December 31, 1997 include a
loss of $5,347 on the sale of the Company's weight loss centers. See additional
discussion relating thereto in the Notes to Consolidated Financial Statements.
In addition, in 1997, the Company recorded a gain, net of legal costs of $2,325,
of $7,175 on a settlement with an insurance company for coverage associated with
product liability litigation relating to the drug combination discussed above.
See additional discussion of these items in the Notes to the Consolidated
Financial Statements.
Interest Income (Expense). The Company recorded net interest income of $31
in the year ended December 31, 1998 arising from its cash balances, compared to
net interest expense of $36 in the year ended December 31, 1997 arising from
borrowings under a credit facility.
Net Loss. The Company's net loss decreased from $1,598 in the year ended
December 31, 1997 to $42 in the year ended December 31, 1998.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
In October 1999, the Company completed a private placement of 7,637,400
shares of Common Stock at $1 per share which, net of related expenses, resulted
in proceeds of $7,574.
At December 31, 1999, the Company had net working capital of $3,509. Cash
and cash equivalents were $2,902. The Company's principal source of liquidity is
the cash obtained from the private placement transaction. The Company currently
has no bank debt or term or revolving credit facilities to fund operating cash
flow or investment opportunities.
During 1998 and the first nine months of 1999, the Company generated small
cash flow deficits from operations which were funded from existing cash balances
Cash requirements for the fourth quarter of 1999 were funded by the proceeds
from the private placement completed in October 1999. Cash requirements in 1997
were funded from then existing credit facilities, which have since expired, and
capital contributions. Net cash used in operating activities was ($1,429) and
($402) for the years ended December 31, 1999 and 1998, respectively, and was
primarily attributable to the net losses generated in those periods, as well as
changes in working capital balances. The net cash provided by operations in 1997
was attributable primarily to net changes in working capital balances.
Net cash used by investing activities was $204, $180 and $2,849 for the
years ended December 31, 1999, 1998 and 1997, respectively, and consisted of
capital expenditures. The
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<PAGE>
1997 additions of $2,849 were incurred primarily in connection with the
establishment of the weight loss centers.
Net cash provided by financing activities was $4,174 for the year ended
December 31, 1999, and consisted entirely of net proceeds from a private
placement of equity securities net of a cash payment of $3,400 in connection
with the purchase of the Predecessor Businesses. Pursuant to a private placement
of Common Stock consummated in March 2000, the Company raised gross proceeds of
$2,500; the net proceeds of this transaction will be used for working capital
and to pursue the Company's business strategy.
Under marketing agreements, the Company is required to pay aggregate
minimum fixed fees of $4,755 and $319 for the years ending December 31, 2000 and
2001, respectively. Future cash obligations are expected to be funded from
financing activities which may include additional private or public offerings of
equity securities. As of December 31, 1999, the Company's principal commitments
consisted of obligations under its marketing agreements and operating leases.
Although the Company has no material commitments for capital expenditures, it
anticipates substantial increases in its capital expenditures consistent with
anticipated growth in operations, infrastructure and personnel.
The Company has no current plans or discussions in process relating to any
material acquisition that is probable in the foreseeable future.
FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. These issues are discussed more fully in the Risk
Factors section in Item 1 of this Form 10.
FINANCING AND CAPITAL STRUCTURE
Since inception in 1972, the Nutri/System businesses have operated in
various organizational and legal structures. In August 1999 Ansama, a
non-operating public shell corporation and the sole stockholder of the Company,
entered into: (1) an Asset Purchase Agreement to acquire the operating assets
and certain liabilities of Nutri/System L.P. for $3,000 and (2) a Stock Exchange
and Purchase Agreement to acquire the beneficial interest in NSDirect for $400
and 17,500,000 shares of Ansama Common Stock. Ansama was subsequently merged
into the Company. In order to fund the Company's resulting 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 September and 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 gross proceeds of $2,500, and also issued 65,000 shares
at the rate of $5.00 per share to two service providers. There can be no
assurance that the Company will be able to raise the necessary capital or
generate sufficient revenues to achieve or sustain profitability in the future.
The Company has no credit facilities available to fund working capital or
investment needs.
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<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material interest-bearing assets or liabilities, nor
does the Company have any current exposure for changes in foreign currency
exchange rates. The Company does not use derivatives or other financial
instruments. The Company's financial instruments consist of cash and
receivables. The market values of these financial instruments approximate book
value.
INFLATION
The 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 the
Company's business in the future. The ability to pass on inflation costs is an
uncertainty due to general economic conditions and competitive situations.
YEAR 2000 MATTERS
The Company has not itself experienced any computer problems since January
1, 2000 nor does it have any knowledge of any computer problems experienced by
any of its suppliers since January 1, 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated Financial Statements of the Company for a
discussion of recently issued accounting pronouncements.
Item 3. Properties.
The Company leases approximately 30,000 square feet of office and warehouse
space in Horsham, Pennsylvania pursuant to a lease expiring in 2004 at an annual
rate of $360,000. The Company also intends to establish a 27,000 square foot
warehouse in Reno, Nevada at an estimated annual rental of $100,000 by the end
of the second quarter of 2000.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 10, 2000, the number of shares
and percentage of the Company's Common Stock beneficially owned by (i) each
person who is known by the Company to own beneficially 5% or more of the
Company's outstanding Common Stock, (ii) each director of the Company, (iii)
each executive officer of the Company and (iv) all executive officers and
directors of the Company as a group.
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<PAGE>
<TABLE>
<CAPTION>
Percent of
Name of Individual Shares of Common Stock Outstanding
or Identity of Group Beneficially Owned (1)(2) Common Stock (3)
- -------------------- ------------------------- ----------------
<S> <C> <C>
5% Holders:
- ----------
HPF Holdings, Inc. (4)........................ 8,200,000 29.6%
Brian D. Haveson (5).......................... 7,507,500 27.1
Directors (6):
- -------------
Frederick C. Tecce (7)........................ 870,000 3.1
Michael E. Heisley (4)........................ 8,200,000 29.6
Donald R. Caldwell (13)....................... 600,000 2.2
Executive Officers (8):
- ----------------------
Deborah A. Gallen (9)......................... 185,000 *
James A. Brown (10)........................... 270,000 *
Brendon Perero (11)........................... 200,000 *
Karyn B. Pless (12)........................... 200,000 *
All executive officers and directors
as a group (8 persons) (14) ................ 18,032,500 65.0
</TABLE>
- --------------------
* less than 1%.
(1) Information furnished by the named persons.
(2) Under the rules of the Securities and Exchange Commission (the "SEC"), a
person is deemed to be the beneficial owner of securities if he has, or
shares, "voting power" which includes the power to vote, or to direct the
voting of, such securities or "investment power" which includes the power
to dispose, or to direct the disposition, of such securities. Under these
rules, more than one person may be deemed to be the beneficial owner of
the same securities. Securities beneficially owned also include securities
owned jointly, in whole or in part, or individually by the person's
spouse, minor children or other relatives who share the same home. The
information set forth in the above table includes all shares of Common
Stock over which the named individuals individually or together share
voting power or investment power, adjusted, however, to eliminate the
reporting of shares more than once in order not to overstate the aggregate
beneficial ownership of such persons and to reflect shares as to which the
named individuals disclaim beneficial ownership.
(3) Less than 1% unless otherwise indicated.
(4) Michael E. Heisley is the principal equity owner of HPF Holdings, Inc.
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<PAGE>
(5) Includes a total of 28,000 shares held by members of the immediate family
of Mr. Haveson as to which shares Mr. Haveson disclaims beneficial
ownership.
(6) Excludes directors listed under "5% Owners."
(7) Includes a total of 20,000 shares held by members of the immediate family
of Mr. Tecce, as to which shares Mr. Tecce disclaims beneficial ownership.
(8) Excludes executive officers listed under "Directors."
(9) Includes a total of 20,000 shares held by members of the immediate family
of Ms. Gallen, as to which shares Ms. Gallen disclaims beneficial
ownership.
(10) Includes an option granted to Mr. Brown in November 1999 to purchase
200,000 shares of Common Stock at a price of $1.75 per share and an option
granted to Mr. Brown in March 2000 to purchase 70,000 shares of Common
Stock at a price of $5.00 per share.
(11) Includes an option granted to Mr. Perero in October 1999 to purchase
200,000 shares of Common Stock at a price of $1.00 per share.
(12) Includes an option granted to Ms. Pless in February 2000 to purchase
200,000 shares of Common Stock at a price of $5.00 per share.
(13) Includes 500,000 shares held by CRX Investments I, L.P., a limited
partnership of which Mr. Caldwell is a limited partner and Cross Atlantic
Capital Partners, Inc. is the general partner. Mr. Caldwell is the Chief
Executive Officer of Cross Atlantic Capital Partners, Inc.
(14) Includes a total of 68,000 shares held by members of the immediate
families of such persons, as to which shares such persons disclaim
beneficial ownership.
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<PAGE>
Item 5. Directors and Executive Officers.
Certain information as to the directors and executive officers of the
Company is as follows:
<TABLE>
<CAPTION>
Principal Occupation
Name Age Positions with the Company for Past Five Years
- --------------------- --- ------------------------------------ ---------------------
<S> <C> <C> <C>
Brian D. Haveson 36 President, Chief Executive Officer President of the Part-
and a director of the Company nership from 1997 to
since August 1999 1999; Chief Financial
Officer of the Partnership
from 1993 to 1997; Arthur
Andersen LLP for five
years prior thereto
Deborah A. Gallen 41 Vice President of E-Commerce Vice President of Oper-
of the Company since ations for NSDirect
September 1999 from 1995 to 1999;
Director of Health Care
Services for the
Partnership from 1994 to
1995; Director of
Outpatient Programs for
the Mercy Health Care
System, a hospital system
in Philadelphia,
Pennsylvania, for ten
years prior thereto
James D. Brown 42 Chief Financial Officer of the Chief Financial Officer
Company since December 1999 of ImageMax, Inc., a
and Treasurer since January 2000 document management
company located in
Conshohocken,
Pennsylvania, from 1997 to
1999; from 1996 to 1997,
Chief Financial Officer of
LMR Holdings, a holding
company for textile
component manufacturers in
Brooklyn, New York;
President, Main Line
Management, a management
consulting
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<PAGE>
<CAPTION>
Principal Occupation
Name Age Positions with the Company for Past Five Years
- --------------------- --- ------------------------------------ ---------------------
<S> <C> <C> <C>
firm in Wynnewood,
Pennsylvania during 1995;
from 1990 to 1994, Chief
Financial Officer of
Liberty Broadcasting
Group, a consolidator of
radio broadcasting
properties, and Controller
of Lancer Industries,
Inc., a diversified
manufacturer
Brendon Perero 23 Chief Information Officer of Vice President and
the Company since August 1999 Senior Programmer/De-
veloper of INetU, Inc., a
firm engaged in Internet
hosting and consulting,
from 1997 to 1999; from
1997 to 1998, Mr. Perero
was a member of the Design
Council for IBM
Net.Commerce and
collaborated with IBM for
third party development of
e-commerce software;
student at Allentown
College of Saint Francis
DeSales from 1994 to 1998
(B.S.) and at present
(Masters candidate)
Karyn B. Pless 35 Vice President of Marketing/ Vice President of Mark-
Advertising of the Company eting, Zany Brainy, Inc./
since February 2000 ZanyBrainy.com, LLC, a
specialty toy retailer,
from September 1999 to
February 2000; Director of
Marketing, Zany Brainy,
Inc./ZanyBrainy.com, LLC,
from November 1997 to
September
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<PAGE>
<CAPTION>
Principal Occupation
Name Age Positions with the Company for Past Five Years
- --------------------- --- ------------------------------------ ---------------------
<S> <C> <C> <C>
1999; Director of
Marketing, The Electronics
Boutique, Inc./
EBWorld.com, Inc., a
speciality retail chain of
computer software and
video games, from November
1995 to November 1997;
Manager of Marketing, The
Electronics Boutique,
Inc./ EBWorld.com, Inc.,
from 1993 to November 1995
Michael E. Heisley 63 Director of the Company President and Chief
since August 1999 Executive Officer, Heico
Acquisitions; Chairman and
Chief Executive Officer,
The Heico Companies, LLC,
an industrial
conglomerate; Chairman of
the Board, Pettibone LLC,
a diversified
manufacturer; Chairman of
the Board, Davis Wire
Corporation, a wire
manufacturer; Chairman of
the Board, Tom's Foods,
Inc., a food manufacturer;
Vice Chairman, Robertson-
Ceco Corporation, a
manufacturer of pre-
engineered metal buildings
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<PAGE>
<CAPTION>
Principal Occupation
Name Age Positions with the Company for Past Five Years
- --------------------- --- ------------------------------------ ---------------------
<S> <C> <C> <C>
Frederick C. Tecce 64 Director of the Company Private investor; Of
since August 1999 Counsel, Klett Lieber
Rooney & Schorling,
attorneys at law, since
April 1997; Of Counsel,
Pepper Hamilton LLP,
attorneys at law, from
1993 to 1997
Donald R. Caldwell 54 Director of the Company Chairman and Chief
since March 2000 Executive Officer, Cross
Atlantic Capital
Partners, Inc., a venture
capital management
firm, since 1999;
President and Chief
Operating Officer,
Safeguard Scientifics,
Inc., an Internet holding
company, 1996 to 1999;
Executive Vice President,
Safeguard Scientifics,
Inc., 1993 to 1996.
</TABLE>
The Company's Board of Directors has an Audit Committee, consisting of
Messrs. Heisley, Tecce and Caldwell. The Audit Committee has responsibility for
recommending to the Board of Directors the selection of independent auditors,
reviewing the scope and results of the audit and reviewing the adequacy of the
Company's accounting, financial, internal and operating controls.
All directors hold office until their respective successors are elected, or
until death, resignation or removal. Officers serve at the discretion of the
Board of Directors. There are no family relationships between any directors or
executive officers of the Company.
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<PAGE>
Item 6. Executive Compensation.
Brian D. Haveson, President and Chief Executive Officer of the Company, is
being paid a salary at an annual rate of $250,000 and is the only executive
officer of the Company who received total annual salary and bonus compensation
in cash in excess of $100,000 for the Company's fiscal year ended December 31,
1999.
In addition to his cash compensation in 1999, pursuant to the terms of the
Stock Agreement, Mr. Haveson received 8,200,000 shares of the Company's Common
Stock in consideration for the transfer to the Company of his 7.5% interest in
NSDirect. The issuance of shares to Mr. Haveson was treated by the Company as a
compensation expense only for accounting purposes.
Other executive officers were granted incentive stock options to purchase
the Company's Common Stock. In 1999, James D. Brown, the Company's Chief
Financial Officer, was granted an option to purchase 200,000 shares at a price
of $1.75 per share and Brendan Perero, the Company's Chief Information Officer,
was granted an option to purchase 200,000 shares at $1.00 per share. In 2000,
Mr. Brown was granted an option to purchase 70,000 shares at $5.00 per share and
Karyn B. Pless, the Company's Vice President of Marketing/Advertising, was
granted an option to purchase 200,000 shares at $5.00 per share. In 1999 and
2000, other employees of the Company (none of whom is an executive officer) were
granted options to purchase shares at $1.00 per share and $2.50 per share
respectively for an aggregate of 218,500 shares.
The Company does not have an employment agreement with any of its employees
and does not anticipate entering into any employment agreements in the
foreseeable future.
Equity Incentive Plan
On August 20, 1999, the Company's Board of Directors adopted and the
Company's then stockholders approved the Company's 1999 Equity Incentive Plan
(the "Incentive Plan"). The purposes of the Incentive Plan are to attract and
retain key employees and certain other persons who are in a position to make
significant contributions to the success of the Company, to reward those
employees and other persons for their contributions, to provide additional
incentive to those employees and other persons to continue making similar
contributions and to align further the interests of those employees and other
persons with those of the Company's stockholders. To achieve these purposes, the
Incentive Plan permits grants of incentive stock options ("ISOs") and options
not intended to qualify as incentive stock options ("Non-ISOs"). ISOs and
Non-ISOs are collectively referred to herein as "Awards."
The Incentive Plan permits Awards to be granted for a total of 1,000,000
shares of Common Stock. Shares issuable pursuant to Awards that terminate or
expire unexercised will be available for future Awards under the Incentive Plan.
As of March 10, 2000, options to purchase an aggregate of 887,000 shares at
prices ranging from $1.00 per share to $5.00 per share were outstanding under
the Incentive Plan.
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<PAGE>
All current and future employees of the Company, and other persons who, in
the opinion of the Board of Directors, are in a position to make significant
contributions to the success of the Company, such as consultants and
non-employee directors, are eligible to receive Awards under the Incentive Plan.
However, the Company has no current intention of granting Awards to any member
of its Board of Directors.
The Incentive Plan is administered by the Board of Directors, which
determines, among other things and subject to certain conditions, the persons
eligible to receive Awards, the persons who actually receive Awards, the type of
each Award, the number of shares of Common Stock subject to each Award, the date
of grant, exercise schedule, vesting schedule and other terms and conditions of
each Award, whether to accelerate the exercise or vesting schedule or waive any
other terms or conditions of each Award, whether to amend or cancel an Award and
the form of any document used under the Incentive Plan. The Board of Directors
has the right to adopt rules for the administration of the Incentive Plan,
settle all controversies regarding the Incentive Plan or any Award and construe
and correct defects and omissions in the Incentive Plan or any Award. The
Incentive Plan may be amended, suspended or terminated by the Board of
Directors, subject to certain conditions, provided that stockholder approval
will be required whenever necessary for the Incentive Plan to continue to
satisfy the requirements of certain securities and tax laws, rules and
regulations.
Recipients of stock options under the Incentive Plan will have the right to
purchase shares of Common Stock at an exercise price, during a period of time
and on such other terms and conditions as are determined by the Board of
Directors. For ISOs, the recipient must be an employee, the exercise price must
be at least 100% (110% if issued to a 10% or greater stockholder of the Company)
of the fair market value of the Common Stock on the date of grant and the term
cannot exceed ten years (five years if issued to a 10% or greater stockholder of
the Company) from the date of grant. If permitted by the Board of Directors and
subject to certain conditions, an option exercise price may be paid by delivery
of shares of Common Stock that have been outstanding, a promissory note, a
broker's undertaking to deliver promptly the necessary funds or by a combination
of these methods. If permitted by the Board of Directors, options may be settled
by the Company paying to the recipient, in cash or in shares of Common Stock
valued at the then fair market value of the Common Stock, an amount equal to
such fair market value minus the exercise price of the option shares.
Generally, upon termination of a recipient's employment or other
relationship with the Company, stock options remain exercisable for a period of
three months (one year if termination is due to death or disability) to the
extent the stock options were exercisable at the date of expiration, except as
otherwise agreed between the employee and the Company.
Item 7. Certain Relationships and Related Transactions.
Following the Merger and the consummation of the transactions contemplated
by the Asset Agreement and the Stock Agreement in September 1999, Michael E.
Heisley, the principal owner of HPF Holdings, Inc., Brian D. Haveson, Irwin
Schneidmill and
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<PAGE>
Frederick C. Tecce, became directors of the Company; Brian D. Haveson, Deborah
A. Gallen, Joseph H. Boileau, Kathleen E. Simone and George Weatherstone were
executive officers of the Company at such time and HPF Holdings, Inc. and Brian
D. Haveson became owners of more than 5% of the Company's outstanding Common
Stock.
On August 16, 1999, Ansama entered into the Stock Agreement with HPF
Holdings, Inc., a Delaware corporation, Brian D. Haveson, Deborah A. Gallen,
Joseph H. Boileau, Kathleen E. Simone and Frederick C. Tecce (collectively, the
"Assignors") whereby the Assignors agreed to transfer to Ansama 100% of the
outstanding ownership interests in NSDirect in exchange for $400,000 in cash and
17,500,000 shares of Ansama's Common Stock. On the basis of unaudited financial
statements of NSDirect as of May 31, 1999, NSDirect had current assets of
$531,960, fixed assets of $105,855, current liabilities of $356,357 and members
equity of $282,058. For the five months ended May 31, 1999, NSDirect had
revenues of $1,833,282 and net income of $282,057. The Assignors acquired their
interests in NSDirect in January 1998 for an aggregate capital contribution of
$100,000.
On August 16, 1999, Ansama entered into the Asset Agreement with the
Partnership whereby Ansama agreed to purchase certain assets and assume certain
liabilities of the Partnership, as specified in the Asset Agreement, in
consideration for the payment to the Partnership of $3,000,000 in cash. The
principal assets purchased were (i) all equipment, fixtures, leasehold
improvements, furniture, computers and software of the Partnership, (ii) all of
the Partnership's rights and obligations to the lease (the "Lease") for the
Partnership's premises in Horsham, Pennsylvania, (iii) the Partnership's
telephone numbers and telephone equipment, (iv) all rental and utility deposits
of the Partnership relating to the Lease and deposits securing letters of credit
to food vendors, (v) all patents, trademarks, logos, copyrights, trade names,
trade secrets, testimonials, agreements of sale, assignments and all other
intellectual property related to the Partnership's business and goodwill
relating thereto, (vi) all financial and sales records, client and customer
lists, including all files and records relating thereto and all other
proprietary information used in connection with the Partnership's business,
(vii) all franchise agreements, (viii) all saleable and marketable foods,
vitamins and other perishable goods and inventory relating to the Partnership's
business located at its Horsham, Pennsylvania warehouse at the close of business
on the day preceding the consummation of the asset purchase and (ix) all cash
and accounts receivable of the Partnership on the date of consummation of the
asset purchase. The assets purchased excluded all rights, claims, causes of
action, judgments, awards, settlements and other benefits related to or arising
from the purchase, sale, prescription or other dealings with fenfluramine,
phentermine or Redux or any combination thereof, including, without limitation,
(i) those against American Home Products Company and any insurance company, (ii)
rising from loss of or injury to business, bad faith and failure to indemnify,
and (iii) any and all deposits for legal fees and services, prepayment for legal
fees and services and retainers for legal fees and services. The Asset Agreement
provided that Ansama was to assume all liabilities and obligations of the
Partnership and its business operations, of any type or nature, known or
unknown, absolute, contingent or otherwise, whether arising before or after the
consummation of the asset purchase, including without limitation all liabilities
and obligations of the Partnership (i) to employees, franchisees, customers,
suppliers and others having relationships with the Partnership, (ii) arising
under contracts, leases, agreements, benefit plans and other
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<PAGE>
obligations, (iii) for personal injury from products of the Partnership except
as hereinafter specifically not assumed, (iv) arising from any failure to comply
with any law, rule or regulation, (v) for any infringement of any third party's
intellectual property and arising from any suit, claim or proceeding, except
that the Partnership agreed to remain solely responsible for any debt or
liability of the Partnership or its business arising out of or related to any
claims for personal injury, fraud, breach of contract, false advertising or any
related advertising claim arising out of or related to the sale or prescription
by the Partnership or US Medical Weight Loss Company, Inc., their agents or
employees of fenfluramine, phentermine or Redux, including any claims arising
from specific lawsuits listed in a schedule to the Asset Agreement and (vi) for
sales taxes, franchise taxes, employment taxes, property taxes, utilities and
other amounts. Pursuant to the Asset Agreement, the Partnership also agreed for
three years to refrain from engaging in the business in which the Partnership
engaged with the assets being sold.
On the basis of unaudited financial statements of the Partnership as of May
31, 1999, the Partnership had current assets of $1,686,464, total fixed and
other assets of $313,756, total liabilities of $914,605 and total shareholders'
equity of $1,085,810. For the five months ended May 31, 1999, the Partnership
had total revenues of $2,851,105 and a net loss of $178,017. A brief discussion
of the history of the Partnership's business follows:
Nutri/System, Inc., a Pennsylvania business corporation, was incorporated
in September 1976 under the name Shape-Up Weight Control Centers of America,
Inc. The original name was changed to Weight Loss Medical Centers of America,
Inc. in June 1977, then to Nutri-System Weight Loss Medical Centers of America,
Inc. in May 1979, and to Nutri/System, Inc. in October 1980.
Nutri/System, Inc. opened its first center in 1971 under the name Shape-Up,
Inc., its predecessor. The first franchise was also sold by Nutri/System, Inc.'s
predecessor, Shape-Up, Inc. in 1972. Nutri/System, Inc. sold its first franchise
in 1976. Nutri/System, Inc. was the franchisor of Nutri/System weight loss
centers from 1976 until 1993. Nutri/System, Inc. also did business under the
trade name Nutri/System Weight Loss Centers.
The stock of Nutri/System, Inc. was publicly traded from 1980 through
August 1986 when a senior management group including A. Donald McCulloch, Jr.,
Reef C. Ivey, II, Albert J. DiMarco and John E. Sylvester acquired Nutri/System,
Inc. through a leveraged buy- out and merger. In August 1986, the shareholders
of Nutri/System, Inc. approved the merger among Nutri/System, Inc., Diversified
Services Group, Inc. ("DSG") and Management Acquisition Group, Inc. ("MAG"). At
the time, DSG, a Pennsylvania business corporation incorporated on January 15,
1986, became the parent of Nutri/System, Inc. DSG and MAG were formed solely for
the purpose of effecting the buy-out, and neither was previously involved in any
type of franchising business.
In July 1988, Nutri/System, Inc. refinanced the debt incurred in the
leveraged buy-out and merger through a repurchase of warrants and notes (the
"Refinancing"). DSG repurchased more than 95% of the 4,500,000 warrants to
acquire Nutri/System, Inc.'s common stock, and Nutri/System, Inc. repurchased
98% of its outstanding Subordinated
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Debentures and 12% Senior Notes. An aggregate of approximately $127,000,000 was
required to complete the Refinancing. Nutri/System, Inc. provided DSG
approximately $67,000,000 to finance the warrant purchase. Nutri/System, Inc.
obtained $100,000,000 in loans from lenders to accomplish the Refinancing. In
June 1989, John E. Sylvester retired from Nutri/System, Inc. for medical
reasons, and his shares in Nutri/System, Inc. were purchased by DSG. In
September 1989, Albert J. DiMarco resigned from Nutri/System, Inc. for personal
reasons, and his shares in Nutri/System, Inc. were purchased by the two
remaining shareholders, A. Donald McCulloch, Jr. and Reef C. Ivey, II.
Effective as of July 28, 1989, Nutri/System, Inc. was merged with the
following corporate subsidiaries: Nutri/System Delaware, Inc., Nutri-System
Investment Co., Inc., Nutri/System of Florida, Inc., Nutri/System of Georgia,
Inc., Nutri/System of Michigan, Inc., Nutri/System of Nevada, Inc. and Old York
Rydal Corp., and its parent company, DSG. Nutri/System, Inc. was the surviving
corporation. The mergers were effected to comply with the restructuring of
Nutri/System, Inc. to qualify as a Subchapter S corporation as defined by the
Internal Revenue Code of 1986, as amended.
In August 1989, Nutri/System, Inc. opted to localize its financial and
banking arrangements and changed from Citibank, N.A., New York, New York to a
group of six banks led by Fidelity Bank, National Association, Philadelphia,
Pennsylvania. Nutri/System, Inc., through Fidelity Bank, National Association,
paid off its loan to Citibank, N.A. and maintained a revolving line of credit of
up to $125,000,000 with the six banks led by Fidelity Bank, National Association
(collectively, the "Banks"). On April 27, 1993, the Banks swept all of
Nutri/System, Inc.'s bank accounts forcing Nutri/System, Inc. to close all 283
of its company centers as well as cease all operations for a two-week period. In
addition, there was a two-week interruption of the flow of food to franchise
owners. The Banks had perfected security interests in, or liens and/or
encumbrances on substantially all of the assets of Nutri/System, Inc. and the
capital stock of Nutri/System, Inc. pursuant to the terms of a U.S. $125,000,000
Credit Agreement dated as of August 17, 1989, as amended, and an Amended and
Restated Credit Agreement dated October 30, 1991, as amended.
Nutri/System, Inc. was served with a Summons to Debtor and Petition for
Relief under Chapter 7 of the United States Bankruptcy Code (in the United
States Bankruptcy Court for the Eastern District of Pennsylvania on May 4, 1993,
Case Number 93-12725S). The Case was converted to a Chapter 11 proceeding
effective June 4, 1993. Nutri/System, Inc. operated as a debtor in possession
through December 1993. Nutri/System, Inc. re-opened 75 of its 283 company owned
and operated weight loss centers in this period, and continued to provide
services, including food products, to its franchisees.
In addition, in July 1993, Nutri/System of Florida Associates, a Florida
general partnership ("NSF") and Nutri/System of Georgia Associates, a Florida
general partnership ("NSG") involuntarily filed for relief under Chapter 11 of
the U.S. Bankruptcy Code in the United States Bankruptcy Court, Eastern District
of Pennsylvania, Case Number 93-14121 and Case Number 93-14120, respectively.
All of the assets of NSF and NSG were also
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secured by the Banks, sold to NSI Debt, Inc. and subsequently assigned to the
Partnership. NSF and NSG together operated 60 Nutri/System weight loss centers
at the date of sale.
NSI Debt, Inc., a Nevada corporation, was formed on November 8, 1993 to
acquire the assets of Nutri/System, Inc. On December 1, 1993, NSI Debt, Inc.
purchased from the Banks all of the Banks' rights, claims and interests in and
to the Notes and Security Agreements and other documents perfecting the Banks'
interest in Nutri/System, Inc.'s assets, pursuant to the terms of an Assignment
of Nutri/System Interests (hereinafter referred to as the "Assignment
Agreement").
On December 29, 1993, NSI Debt, Inc., pursuant to a public auction which
took place in Philadelphia, Pennsylvania, bid part of its secured debt in return
for the assets of Nutri/System, Inc., and subsequently assigned all of its
rights and obligations under the Assignment Agreement to the Partnership.
Pursuant to the Assignment Agreement, the Partnership then became the owner of
the assets, properties and rights of Nutri/System, Inc., including but not
limited to, the trademarks, trade names and franchise agreements of
Nutri/System, Inc.
In December 1993, the United States Bankruptcy Court for the Eastern
District of Pennsylvania dismissed the bankruptcy action of NSG. On July 8,
1994, the United States Bankruptcy Court for the Eastern District of
Pennsylvania dismissed the bankruptcy actions for Nutri/System, Inc. and NSF.
The dismissal was appealed by several landlords of Nutri/System, Inc. and NSF.
The appeal was denied and no further appeals were taken.
From time to time, the Company purchases food from a vendor that is an
affiliate of certain partners of a Predecessor Business. Such transactions are
effected on terms no less favorable to the Company than those made available to
independent third parties.
In March 2000, the Company completed the sale of 500,000 shares of Common
Stock at a price of $5.00 per share in a private placement to CRX Investments I,
L.P., a limited partnership of which Cross Atlantic Capital Partners, Inc. is
the general partner. Mr. Caldwell is a limited partner of CRX Investments I,
L.P. and Chief Executive Officer of Cross Atlantic Capital Partners, Inc.
Following the closing of this transaction Mr. Caldwell was appointed to the
Company's Board of Directors.
Item 8. Legal Proceedings.
The Company is not a party to any material pending legal proceedings.
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Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
No established trading market exists for the Common Stock, although,
following the Merger, there has been some trading in the over-the-counter market
of the Common Stock issued to the former stockholders of Ansama. Before the end
of the first quarter of 2000, the Company intends to file an application to have
its Common Stock listed on either the Nasdaq National Market or SmallCap Market
under the symbol "THIN". The Company can provide no assurance as to whether or
when the Company's application may be approved, if at all.
The Company has not paid any dividends since its formation in August 1999
and does not intend to pay cash dividends on its Common Stock in the foreseeable
future. The Company currently intends to reinvest its earnings, if any, in the
development and expansion of the Company's business. Any future declaration of
cash dividends will be at the discretion of the Company's Board of Directors and
will depend upon all then relevant factors, including the earnings, capital
requirements and financial position of the Company as well as general economic
conditions.
As of March 10, 2000, there were approximately 487 holders of record of the
Common Stock.
Of the 27,741,737 shares of the Company's Common Stock outstanding as of
March 10, 2000, approximately 2,039,337 shares are freely transferable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Act") unless purchased by affiliates of the Company as that term is
defined in Rule 144 under the Act. The remaining outstanding shares of Common
Stock (the "Restricted Shares") are eligible to be sold publicly pursuant to an
effective registration statement under the Act or in accordance with an
applicable exemption from the registration requirements under the Act,
including, after October 1, 2000, Rule 144, assuming that the Common Stock has
become registered under the Securities Exchange Act of 1934, as amended, not
later than July 1, 2000. The Company is unable to estimate the amount of
Restricted Shares that may be sold under Rule 144 since this amount will depend
in part on the price for the Common Stock, the personal circumstances of the
sellers and other factors. Sales of a substantial number of Restricted Shares in
the public market, or the availability of such shares, could adversely affect
the price of the Common Stock.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated for purposes of Rule 144) who has beneficially owned
Restricted Shares for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i)
one percent of the number of shares of Common Stock then outstanding or (ii) the
average weekly trading volume of the Common Stock in the over-the-counter market
during the four calendar weeks preceding the date on which notice of sale is
filed with the SEC. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. However, a person (or persons whose shares are
aggregated for purposes of Rule 144) who is deemed not to have been an affiliate
of the
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Company at any time during the 90 days preceding a sale, and who has
beneficially owned the Restricted Shares for at least two years at the time of
sale, would be entitled to sell such shares under Rule 144(k) without regard to
the aforesaid limitations.
Item 10. Recent Sales of Unregistered Securities.
On August 17, 1999, in connection with the incorporation of the Company,
the Company issued 100 shares of Common Stock, $.001 par value (the "Common
Stock") to Ansama in exchange for $100 in cash. This issuance of Common Stock is
exempt from registration under Section 4(2) of the Act. The 100 shares of Common
Stock so issued were cancelled on September 27, 1999 when Ansama merged with and
into the Company in order to change the state of incorporation of Ansama from
Nevada to Delaware.
On September 27, 1999, Ansama merged with and into the Company pursuant to
an Agreement and Plan of Merger dated as of August 19, 1999 between Ansama and
the Company. The purpose of the Merger was to change the state of incorporation
of Ansama from Nevada to Delaware. Upon consummation of the Merger, each
outstanding share of common stock of Ansama was converted in the right to
receive one share of common stock of the Company, resulting in the issuance to
the former stockholders of Ansama of an aggregate of 2,039,337 shares of Common
Stock of the Company in exchange for 2,039,337 shares of common stock of Ansama.
No underwriters were involved in the Merger. The issuance of the 2,039,337
shares of Common Stock in the Merger was exempt from registration pursuant to
Rule 145(a)(2) of the SEC which provides that an exchange of securities pursuant
to a statutory merger the sole purpose of which is to change an issuer's
domicile solely within the United States does not constitute the offer or sale
of a security within the meaning of Section 2(3) of the Act.
On September 30, 1999, the Company completed the sale of 4,363,985 shares
of Common Stock at a price of $1.00 per share in cash ($964,000 of which had
been received by the Company on that date and the remainder of which was
received shortly thereafter) in a partial closing of a private placement
effected by the Company for which Pennsylvania Merchant Group acted as agent. On
October 13, 1999, the Company sold an additional 3,273,415 shares of Common
Stock at a price of $1.00 per share in the completion of this private placement.
The Company received an aggregate of $7,637,400 in cash from this private
placement and in consideration of the services of Pennsylvania Merchant Group as
placement agent, the Company issued a warrant to Pennsylvania Merchant Group
entitling it to purchase 763,740 shares of Common Stock at an exercise price of
$1.00 per share for five years from the date of issuance. In addition, the
Company reimbursed Pennsylvania Merchant Group for its out-of-pocket expenses
and incurred legal and other expenses amounting to approximately $63,000. The
7,637,400 shares issued in the private placement were sold to a total of 111
individuals and institutions, each of whom was an accredited investor. The
issuance of the 7,637,400 shares of Common Stock in the private placement was
exempt from registration under Section 4(2) of the Act and Regulation D
thereunder. The Company filed a Form D with the SEC on or about September 30,
1999 with respect to this private placement and an amended Form D on or about
October 27, 1999.
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<PAGE>
On September 30, 1999, the Company consummated the acquisition of all of
the beneficial interests in NutriSystem Direct, L.L.C., a Pennsylvania limited
liability company, pursuant to the August 16, 1999 Stock Exchange and Purchase
Agreement among HPF Holdings, Inc., Brian D. Haveson, Joseph H. Boileau,
Kathleen E. Simone, Deborah A. Gallen, Frederick C. Tecce and Ansama, to which
the Company had succeeded pursuant to the September 27, 1999 Merger of Ansama
with and into the Company. As consideration for the acquisition of all of the
beneficial interests in NutriSystem Direct, L.L.C., the Company paid $400,000 in
cash to HPF Holdings, Inc. and issued an aggregate of 17,500,000 shares of
Common Stock to HPF Holdings, Inc. (the principal owner of which is Michael E.
Heisley), Brian D. Haveson, Joseph H. Boileau, Kathleen E. Simone, Deborah A.
Gallen and Frederick C. Tecce, each of which individuals was a director or an
executive officer of the Company. The issuance of the 17,500,000 shares of
Common Stock to such six persons is exempt from registration under Section 4(2)
of the Act. No underwriters were utilized in connection with this acquisition.
Reference is also made to Item 7 hereof.
On March 2, 2000 the Company completed the sale of 500,000 shares of Common
Stock at a price of $5.00 per share to CRX Investments I, L.P., a private
investment firm, in a private placement that was exempt from registration under
Section 4(2) of the Act. This transaction generated gross proceeds to the
Company of $2.5 million.
On March 1, 2000 the Company issued 50,000 shares of Common Stock at a
price of $5.00 per share to Telamerica Media Incorporated in consideration of
certain advertising services rendered to the Company by Telamerica Media
Incorporated. This transaction was exempt from registration under Section 4(2)
of the Act.
On March 1, 2000 the Company issued 15,000 shares of Common Stock at a
price of $5.00 per share to Duane, Morris & Heckscher LLP, counsel to the
Company, in consideration of legal services rendered to the Company by Duane,
Morris & Heckscher LLP. This transaction was exempt from registration under
Section 4(2) of the Act.
Item 11. Description of Registrant's Securities to be Registered.
The authorized Common Stock of the Company consists of 55,000,000 shares,
par value $.001 per share, of which 27,741,737 shares were outstanding as of
March 10, 2000.
Each share of Common Stock is entitled to one vote on all matters submitted
to the stockholders of the Company. The shares of Common Stock do not have
cumulative voting rights and, therefore, the holders of more than 50% of the
voting power of the Company are able to elect all directors entitled to be
elected by the stockholders. The absence of cumulative voting, together with the
ownership of more than a majority of the Common Stock by Brian D. Haveson and
HPF Holdings, Inc. could be expected to have the effect of delaying, averting or
preventing a change in control of the Company unless Mr. Haveson and HPF
Holdings, Inc. were in favor of such a change.
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<PAGE>
Holders of Common Stock have equal rights, share for share, to receive
dividends when, as and if declared by the Board of Directors. The current policy
of the Company's Board of Directors is to retain all future earnings of the
Company, if any, and not to pay cash dividends which, under the Delaware General
Corporation Law (the "DGCL"), can only be paid from earnings. The payment of
future dividends, if any, will be at the discretion of the Board of Directors
and will depend upon many factors, including the Company's earnings, financial
position, capital requirements and other factors. Therefore, there can be no
assurance as to future dividends.
In the event of any liquidation, dissolution or winding-up of the Company,
holders of Common Stock will be entitled to share ratably in the assets of the
Company available for distribution to stockholders, subject to the rights of any
Preferred Stock which may be outstanding at the time. No holder of Common Stock
has any preemptive rights.
The Company also has authorized 5,000,000 shares of Preferred Stock
issuable in series upon resolution of the Board of Directors. The Board of
Directors is authorized to establish the relative terms, rights and other
provisions of any series of Preferred Stock. No Preferred Stock is outstanding,
and the Board of Directors has no current intention of issuing any Preferred
Stock. However, unless otherwise required by law in a particular circumstance,
the Board of Directors can, without stockholder approval, issue Preferred Stock
in the future with voting and conversion rights which could adversely affect the
voting power of the Common Stock. The issuance of Preferred Stock could be
expected to, and may have the effect of, delaying, averting or preventing a
change in control of the Company.
As permitted by the DGCL, the Company's Certificate of Incorporation
provides that directors of the Company will not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the DGCL relating to prohibited dividends,
distributions and repurchases or redemptions of stock or (iv) for any
transaction from which the director derives an improper personal benefit.
However, such limitation on liability would not generally apply to violations of
the federal securities laws, nor does it limit the availability of non-monetary
relief in any action or proceeding.
The Company intends to send to its stockholders annual reports containing
audited financial statements for each fiscal year and quarterly reports
containing unaudited financial statements for the first three quarters of each
fiscal year.
The transfer agent for the Company's Common Stock is StockTrans, Inc.,
Ardmore, Pennsylvania.
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Item 12. Indemnification of Directors and Officers.
Section 145(a) of the DGCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, other than an action by or in
the right of the corporation, by reason of the fact that he is or was a
director, officer, employee or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation or enterprise, against expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no cause
to believe his conduct was unlawful.
Section 145(b) of the DGCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted under similar standards, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the court in which such action or suit was brought shall
determine that, despite such adjudication of liability, such person is fairly
and reasonably entitled to be indemnified for such expenses which the court
shall deem proper.
Section 145 of the DGCL further provides that to the extent a director or
officer of a Delaware corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) or (b) of Section 145
or in the defense of any claim, issue or matter therein, he shall be indemnified
against any expenses actually and reasonably incurred by him in connection
therewith; that the indemnification provided for by Section 145 shall not be
deemed exclusive of any rights to which the indemnified party may be entitled
and the corporation may purchase and maintain insurance on behalf of a director
or officer of the corporation against any liability asserted against him or
incurred by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
As noted in Item 11, Section 102(b)(7) of the DGCL permits a Delaware
corporation to include a provision in its Certificate of Incorporation, and the
Company's Certificate of Incorporation contains such a provision, to the effect
that, subject to certain exceptions, a director of a Delaware corporation is not
personally liable to the corporation or its stockholders for monetary damages
for breach of his fiduciary duty as a director.
The Company's By-laws also provide that the Company shall indemnify its
directors and officers and, to the extent permitted by the Board of Directors,
the Company's
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employees and agents, to the full extent permitted by and in the manner
permissible under the laws of the State of Delaware. In addition, the Company's
By-laws permit the Board of Directors to authorize the Company to purchase and
maintain insurance against any liability asserted against any of the Company's
directors, officers, employees or agents arising out of their capacity as such.
Item 13. Financial Statements and Supplementary Data.
The financial statements and supplementary data required by this Item 13
are listed in Item 15(a) hereof and are included elsewhere in this Form 10.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 15. Financial Statements and Exhibits:
(a) Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1999
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
(b) Exhibits:
*2.1 Agreement and Plan of Merger dated August 19, 1999 between
nutrisystem.com inc. and Ansama Corp.
*2.2 Asset Purchase Agreement dated August 16, 1999 between Ansama Corp.
and Nutri/System L.P.
*2.3 Stock Exchange and Purchase Agreement dated August 16, 1999 among
Ansama Corp., HPF Holdings, Inc., Brian D. Haveson and NutriSystem
Direct, L.L.C. management (comprised of Joseph Boileau, Kathleen
Simone, Deborah Gallen and Frederick C. Tecce)
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*2.4 Assignments of NutriSystem Direct, L.L.C. Membership Interests dated
September 30, 1999 to nutrisystem.com inc. by each of HPF Holdings,
Inc., Brian D. Haveson, Joseph Boileau, Kathleen Simone, Deborah
Gallen and Frederick C. Tecce
*2.5 Operating Agreement of NutriSystem Direct, L.L.C. dated September 30,
1999
*2.6 Intellectual Property Assignment from Nutri/System L.P. to
nutrisystem.com inc. dated September 30, 1999
*2.7 Assignment of Franchise Agreements from Nutri/System L.P. to
nutrisystem.com inc. dated September 30, 1999
*3.1 Certificate of Incorporation of nutrisystem.com inc.
*3.2 By-laws of nutrisystem.com inc.
*4.1 Form of Common Stock certificate of nutrisystem.com inc.
*4.2 Form of warrant to purchase Common Stock of nutrisystem.com inc.
*10.1 Joint Defense and Indemnification Agreement dated September 27, 1999
between Wyeth Ayerst Laboratories Division of American Home Products
Corporation and Nutri/System L.P.
*10.2 Lease, dated December 11, 1997, between Teachers Insurance and
Annuity Association and nutrisystem.com inc. as amended by First
Amendment to Lease dated October 28, 1999
*10.3 Form of Nutri/System L.P. Franchise Agreement
*10.4 Form of NutriSystem Direct, L.L.C. Distributor Agreement
*10.5 1999 Equity Incentive Plan of nutrisystem.com inc.
**+10.6 Sponsorship Agreement dated August 16, 1999 between Nutri/System
L.P. and drkoop.com inc.
**+10.7 Insertion Order dated August 27, 1999 between nutrisystem.com inc.
and OnHealth Network Company
**+10.8 Insertion Order dated June 23, 1999 between NutriSystem Direct,
L.L.C. and The Knot, Inc.
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**+10.9 Confidential Shopping Channel Promotion Agreement dated September
28, 1999 between Nutri/System L.P. and America Online, Inc.
**+10.10 AOL Advertising Insertion Order dated July 20, 1999 between
Nutri/System L.P. and America Online, Inc.
**+10.11 AOL Advertising Insertion Order dated January 20, 2000 between
nutrisystem.com inc. and America Online, Inc.
10.12 Stock Purchase Agreement dated March 1, 2000 between C&R Investments
I, L.P. (name subsequently retroactively changed to "CRX Investments
I, L.P.") and nutrisystem.com inc.
10.13 Shareholders Agreement dated March 1, 2000 among C&R Investments I,
L.P. (name subsequently retroactively changed to "CRX Investments I,
L.P."), HPF Holdings, Inc. and Brian D. Haveson
***21.1 Subsidiaries of nutrisystem.com inc.
23.1 Consent of Arthur Andersen LLP
***27.1 Financial data schedule
- ---------------
* Previously filed with Form 10 Registration Statement.
** Previously filed with Amendment No. 1 to Registration Statement.
*** Previously filed with Amendment No. 2 to Registration Statement.
+ Confidential treatment requested pursuant to Rule 24b-2 promulgated under
the Act. Confidential portions of this document have been redacted and have
been filed separately with the Securities and Exchange Commission.
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NUTRISYSTEM.COM INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
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<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1998 and 1999 F-3
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1998 and 1999 F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1997,
1998 and 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
SCHEDULE:
Schedule II - Valuation and Qualifying Accounts S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To nutrisystem.com inc.:
We have audited the accompanying consolidated balance sheets of nutrisystem.com
inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of nutrisystem.com inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to the financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules, and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 28, 2000
F-2
<PAGE>
NUTRISYSTEM.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31
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1998 1999
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 361 $ 2,902
Restricted cash ................................................. 401 360
Trade receivables, less allowance of $341 in 1998 and $80 in 1999 527 140
Inventories ..................................................... 819 769
Prepaid expenses and other current assets ....................... 380 670
-------- --------
Total current assets ............................. 2,488 4,841
FIXED ASSETS, net .................................................. 299 295
GOODWILL, net ...................................................... -- 500
OTHER ASSETS ....................................................... 137 220
-------- --------
$ 2,924 $ 5,856
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................ $ 762 $ 870
Accrued payroll and related benefits ............................ 46 65
Other current liabilities ....................................... 633 397
-------- --------
Total current liabilities ........................ 1,441 1,332
NON-CURRENT LIABILITIES ............................................ 153 133
-------- --------
Total liabilities ................................ 1,594 1,465
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COMMITMENTS AND CONTINGENCIES (Note 8)
MINORITY INTEREST .................................................. 807 --
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock (5,000,000 shares authorized,
no shares outstanding) ........................................ -- --
Common stock, $.001 par value (55,000,000 shares
authorized; shares issued - 19,539,337 at December 31,
1998 and 27,176,737 at December 31, 1999) ..................... 20 27
Additional paid-in capital ...................................... 3,610 16,760
Warrants exercisable at $1 per share ............................ -- 344
Accumulated deficit ............................................. (3,107) (12,740)
-------- --------
Total shareholders' equity ....................... 523 4,391
-------- --------
$ 2,924 $ 5,856
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NUTRISYSTEM.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Food sales $ 23,698 $ 8,415 $ 7,910
Franchise royalty fees 1,766 633 403
Weight-loss programs 17,058 -- --
Other 3,281 237 271
------------ ------------ ------------
45,803 9,285 8,584
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of revenues 47,686 7,101 6,196
General and administrative 1,056 2,253 3,853
Depreciation and amortization 1,235 79 99
Other 582 -- 131
Disposal of weight-loss centers 5,347 -- --
Non-cash compensation expense (Notes 1 and 11) -- -- 8,202
Net gain on insurance settlement (7,175) -- --
------------ ------------ ------------
48,731 9,433 18,481
------------ ------------ ------------
Operating loss (2,928) (148) (9,897)
INTEREST INCOME (EXPENSE) (36) 31 56
------------ ------------ ------------
Loss before minority interest (2,964) (117) (9,841)
MINORITY INTEREST 1,366 75 208
------------ ------------ ------------
Net loss $ (1,598) $ (42) $ (9,633)
============ ============ ============
BASIC LOSS PER SHARE $ (0.08) $ (0.00) $ (0.45)
============ ============ ============
DILUTED LOSS PER SHARE $ (0.08) $ (0.00) $ (0.45)
============ ============ ============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 19,539,337 19,539,337 21,448,687
------------ ------------ ------------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 19,539,337 19,539,337 21,448,687
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NUTRISYSTEM.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Additional Common
Paid-in Stock Accumulated
Shares Common Stock Capital Warrants Deficit Total
------ ------------ ---------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 19,539,337 $ 20 $ 3,610 $ -- $ (1,467) $ 2,163
Net loss -- -- -- -- (1,598) (1,598)
------------ ---------- ---------- ---------- ------------- ---------
BALANCE, DECEMBER 31, 1997 19,539,337 20 3,610 -- (3,065) 565
Net loss -- -- -- -- (42) (42)
------------ ---------- ---------- ---------- ------------- ---------
BALANCE, DECEMBER 31, 1998 19,539,337 20 3,610 -- (3,107) 523
Net loss -- -- -- -- (9,633) (9,633)
Payment to shareholder in excess of
book value (Note 1) -- -- (2,275) -- -- (2,275)
Capital contribution of shares
issued to executive (Note 1) -- -- 8,202 -- -- 8,202
Issuance of warrants -- -- (344) 344 -- --
Issuance of common stock
(Note 1) 7,637,400 7 7,567 -- -- 7,574
------------ ---------- ---------- ---------- ------------- ---------
BALANCE, DECEMBER 31, 1999 27,176,737 $ 27 $ 16,760 $ 344 $ (12,740) $ 4,391
============ ========== ========== ========== ============= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NUTRISYSTEM.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,598) $ (42) $(9,633)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Compensation expense -- -- 8,202
Minority interest (1,366) (75) (208)
Depreciation and amortization 1,235 79 99
Loss on disposals 5,347 -- 115
Provisions for bad debts and inventory obsolescence 403 -- --
Changes in operating assets and liabilities-
Restricted cash (280) (121) 41
Receivables 1,100 1,214 387
Inventories 1,073 212 50
Prepaids and other assets 454 217 (373)
Accounts payable (608) (130) 108
Accrued payroll and related expenses (137) (286) 19
Other current liabilities (2,277) (1,470) (236)
------- ------- -------
Net cash provided by (used in) operating activities 3,346 (402) (1,429)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions (2,849) (180) (204)
------- ------- -------
Net cash used in investing activities (2,849) (180) (204)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of bank borrowing (1,000) -- --
Advance from shareholder -- 100 --
Distribution to partners -- -- (3,400)
Issuance of common shares, net of costs -- -- 7,574
------- ------- -------
Net cash provided by (used in) financing activities (1,000) 100 4,174
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (503) (482) 2,541
CASH AND CASH EQUIVALENTS,
beginning of period 1,346 843 361
------- ------- -------
CASH AND CASH EQUIVALENTS,
end of period $ 843 $ 361 $ 2,902
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NUTRISYSTEM.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. BACKGROUND:
Nature of the Business
nutrisystem.com inc. (a Delaware corporation) together with its subsidiaries
(the "Company") is a national provider of weight loss programs and distributor
of prepackaged foods. As discussed below, the Company was formed to offer
interactive, Internet-based weight loss solutions to the beauty, health,
wellness and personal care markets by providing well-known diet programs that
incorporate pre-packaged meals and a complete diet philosophy.
nutrisystem.com 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. Independent franchise weight loss center owners operate using the
Company's trade name, trademarks and programs for which a royalty is paid to the
Company. The Company's pre-packaged foods are sold to program participants
through the Internet, independent distribution and through franchised weight
loss centers.
Since the inception of the Nutri/System business in 1972, the Company has
operated in various organizational and legal structures. In early 1993, the
Company was party to a bankruptcy proceeding. This case was converted to a
Chapter 11 proceeding effective June 4, 1993. The Company operated as a debtor
in possession through December 1993. Since 1993, the Company has incurred
significant losses and, as of December 31, 1999, has an accumulated deficit of
$12,740. The Company intends to invest heavily in marketing and promotion,
strategic alliances, Web site development and technology and development of its
administrative organization. As a result, the Company believes that it will
incur further operating losses for the foreseeable future. In addition, the
Company acquired the Predecessor Businesses for cash of $3,400 plus 17,500,000
shares of common stock. In order to fund the planned investment and the
Company's purchase of the Predecessor Businesses, the Company completed a
private placement which raised net proceeds of approximately $7,574. In order to
make the future investments necessary to expand its business as described above
and to meet its cash flow requirements, the Company plans to raise capital
through an additional private placement and/or a public offering of its common
stock. Based on the variable nature of a portion of the Company's expenditures,
the cash balance at December 31, 1999 and management's belief that additional
equity financing can be raised, the Company believes that it has the ability to
continue in operations through the end of 2000. Achieving profitability depends
upon the Company's ability to: (1) raise the necessary capital to fund operating
needs and finance the planned marketing programs
F-7
<PAGE>
and technology investment, and (2) generate and sustain substantially increased
revenue levels. There can be no assurance that the Company will be able to
obtain the necessary capital to fund operating and investment needs to generate
sufficient revenues to achieve or sustain profitability in the future.
Merger Transaction
In August 1999, Ansama Corp. ("Ansama"), a non-operating public company with
minimal assets and liabilities and the sole shareholder of nutrisystem.com inc.,
entered into: (1) an Asset Purchase Agreement to acquire the operating assets
and certain liabilities of Nutri/System L.P. for $3,000, and (2) a Stock
Exchange and Purchase Agreement to acquire the stock of Nutrisystem Direct,
L.L.C. for $400 and 17,500,000 shares of Ansama common stock. The Asset Purchase
Agreement and Stock Exchange and Purchase Agreement are collectively referred to
as the Merger Agreements. The amount paid to the principal shareholder in excess
of the book value was treated as a dividend. The consideration paid for the
acquisition of the minority interest was allocated to the Company's assets and
liabilities in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations."
On September 27, 1999, Ansama was merged into the Company and the Company
completed the transactions contemplated in the Merger Agreements with proceeds
generated from the private placement. As a result of the transaction, the owners
of the Predecessor Businesses obtained a controlling interest in the common
stock of the Company. In addition, the management team of the Predecessor
Businesses became the officers and management of the Company. The transaction
was treated as a recapitalization with the assets and liabilities of the
Predecessor Businesses recorded at historical cost in the accompanying
consolidated financial statements.
In connection with the merger transaction, the president of the Company was
issued 8,200,000 shares of common stock of the Company. This issuance was
treated as compensation expense for accounting purposes. The compensation
expense recorded was based on a fair market value of $1 per share.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Presentation of Financial Statements
As of December 31, 1999, the Company's consolidated financial statements include
the accounts of nutrisystem.com inc. and its wholly owned subsidiaries. The
accompanying historical financial statements prior to September 27, 1999 include
the combined accounts of the Predecessor Businesses. The historical
shareholders' equity presented in the accompanying financial statements has been
retroactively restated to give effect to the shares and consideration issued in
the merger (see Note 1).
All significant intercompany accounts and transactions have been eliminated.
F-8
<PAGE>
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 no payments for income taxes
during the years ended December 31, 1997, 1998 or 1999. Payments for interest
were $104, $7 and $9 for the years ended December 31, 1997, 1998 and 1999,
respectively.
Restricted Cash
Restricted cash represents minimum cash deposited in banks required under
certain vendor arrangements.
Inventories
Inventories consist principally of packaged food at the Company's warehouse.
Inventories are priced using the lower of cost or market for which cost is
determined using the first-in, first-out (FIFO) method.
Goodwill
Goodwill represents the excess of the consideration paid over the fair value of
net assets, and was generated from the acquisition of the minority interest by
the Company. Goodwill is amortized over five years.
Advertising Costs
The Company follows the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP"), 93-7 "Reporting for 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 will be charged to
expense as incurred. All other advertising costs are expensed as incurred. At
December 31, 1997, 1998 and 1999, $0, $41 and $587 of prepaid advertising was
included in prepaid expenses. Advertising expense was $5,655, $65 and $520
during 1997, 1998 and 1999, respectively.
Internet Site Development Costs
Internet site development costs are accounted for in accordance with SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Internet site development costs, which began in 1999, totaled
$207 of which $3 was capitalized and is included in other assets.
F-9
<PAGE>
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 three to seven years. Leasehold improvements are amortized
on a straight-line basis over the related lease terms.
Other Assets
Other assets represent security deposits on leased facilities and equipment.
Revenue Recognition
Revenues from food sales and other are recognized when the related products are
shipped. Other revenues represent primarily the sale of vitamins and other
supplements to consumers, and the sales of print materials to franchises.
Until December 1997, franchise royalty fees were calculated at percentages
ranging from 3.4% to 7.0% of the franchisees' monthly net sales. The percentage
applied to the franchisees' revenue is contractual and based on factors such as
territory population size and annual revenue amounts. Beginning in December
1997, royalty income was fixed at 4% of franchisees' total net sales for all
franchises.
Minority Interest
Minority interest represents the minority shareholders' share of the equity and
results of operations of the Company based on their proportionate share of
capital contributions.
Income Taxes
The Predecessor Businesses were flow-through entities which were not subject to
federal or state income taxes and, consequently, none have been reflected in the
accompanying consolidated financial statements. The owners of the Predecessor
Business were required to include their respective share of the profits or
losses in their respective tax returns. (See Note 3.)
nutrisystem.com inc. is a "C" corporation which is subject to corporate level
income taxes. As a result of the reverse merger transaction discussed in Note 1,
the Company became subject to corporate income taxes, and began providing for
income taxes in the accompanying financial statements beginning on September 27,
1999 in accordance with Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." SFAS No. 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 the transaction discussed in Note 1, 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
F-10
<PAGE>
asset will not be realized through future taxable income. To the extent that the
existing deferred tax asset is realized, the related tax benefit will be
credited to equity.
Stock Options
The Company accounts for stock options plans under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" (See Note 11).
Fair Value of Financial Instruments
The carrying values of the Company's financial instruments approximate their
fair values.
Net Loss Per Common Share
The Company has presented net loss per common share pursuant to SFAS No. 128,
"Earnings per Share," and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98. Basic loss per common share was computed by dividing
net loss applicable to common shareholders by the weighted average number of
shares of Common Stock outstanding. The impact of common stock equivalents has
not been included in the weighted average shares for diluted loss per share
purposes since its effect would be anti-dilutive.
Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and disclosure of
comprehensive income. Also in June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement outlines standards for determining and disclosing information with
regards to operating segments. These pronouncements, which were required to be
adopted in 1998, had no impact as the Company has no other comprehensive income
items to report and is operated as a single segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
The Company is required to adopt this statement beginning in 2001. Currently,
management believes that SFAS No. 133 will have no impact on the Company's
consolidated financial statements.
F-11
<PAGE>
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.
Certain Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. PRO FORMA INFORMATION (UNAUDITED):
As discussed in Note 2, on September 27, 1999, the Company became subject to
federal and state income taxes. SEC disclosure rules require companies, for
informational purposes, to display a pro forma adjustment for the income taxes
which would have been recorded if the Company had not been a flow-through entity
during the periods presented in the accompanying statements of operations. Due
to the recurring losses incurred by the Company, and management's assessment of
realization of the related tax deduction, no pro forma tax benefit would be
recorded during the periods presented.
Also on September 27, 1999, the Company's principal shareholder group purchased
the remaining interest of the minority shareholder, which resulted in goodwill
of $527. The effect of goodwill amortization on results of operations would have
been to increase expenses by $105 for 1997 and 1998 and by $79 in 1999.
4. DISPOSITION OF COMPANY-OWNED WEIGHT LOSS CENTERS:
During 1997, the Company disposed of its 155 Company-owned centers. The assets
and certain liabilities of 53 of its centers were sold, and the remaining
centers were closed. Proceeds from the sale were $150. A loss on the disposition
reflected in the statement of operations of $5,347 has been recorded for closing
the centers, which includes primarily losses on fixed assets disposals of $3,064
and reserves for lease obligations, inventory obsolescence and other liabilities
of $2,283.
F-12
<PAGE>
5. FIXED ASSETS:
Fixed assets consist of the following:
December 31
--------------------
1998 1999
----- -----
Furniture and fixtures $ 150 $ 184
Equipment 360 330
----- -----
510 514
Accumulated depreciation (211) (219)
----- -----
$ 299 $ 295
===== =====
6. OTHER CURRENT LIABILITIES:
Other current liabilities consist of the following:
December 31
--------------------
1998 1999
----- -----
Lease commitment liability (Note 4) $491 $320
Deferred program revenue 25 --
Accrued expenses 98 62
Other 19 15
---- ----
$633 $397
==== ====
7. RELATED-PARTY TRANSACTIONS:
During 1997, 1998 and 1999, the Company purchased $424, $172 and $113,
respectively, of food from a vendor that is an affiliate of the partners of one
of the Predecessor Businesses.
For the years ended December 31, 1997, 1998 and 1999, the Company paid retainers
and professional fees of $618, $0 and $4, respectively, to a law firm whose
partner serves as a member of the Board of Directors of the Predecessor
Businesses.
For the years ended December 31, 1997, 1998 and 1999, the Company purchased
vitamins and supplements of $355, $51, and $17, respectively, from a vendor that
is owned by a shareholder.
At December 31, 1999, the Company had payables to related parties of which $13
are included in accounts payable.
Included in non-current liabilities is a loan from a shareholder of $100, with
interest accrued at the rate of 7% per annum.
F-13
<PAGE>
8. COMMITMENTS AND CONTINGENCIES:
The Company leases its warehouse, corporate headquarters and certain equipment.
These leases generally have initial terms of three to five years. 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 year
or more, consist of the following at December 31, 1999:
2000 $ 327
2001 355
2002 369
2003 380
2004 341
--------
$ 1,772
========
Total rent expense for the years ended December 31, 1997, 1998 and 1999, was
$4,762, $200 and $227, respectively.
The Company has committed to marketing, advertising and Internet site linking
agreements with various Internet companies. These arrangements extend through
October 31, 2001 with a total commitment of $5,074 payable in installments over
the related contract periods. In addition, the Company has various short- term
advertising arrangements relating to other media.
In September 1997, Nutri/System L.P., one of the Predecessor Businesses, removed
a drug combination from its weight loss program after it was shown to cause
health problems. Numerous suits were subsequently filed against Nutri/System
L.P. Also, in 1997, the Company obtained a settlement from its insurance carrier
for coverage associated with this matter. Consequently, the Company recorded a
gain, net of related legal costs of $2,325, of $7,175 in the accompanying 1997
statement of operations associated with this settlement. In September 1999, the
supplier of the drug combination agreed to indemnify Nutri/System L.P. with
respect to any further liability with respect to this matter. In the opinion of
management, the Company has no liability with respect to this matter.
The Company is also involved with certain other claims and routine litigation
matters. In the opinion of management, after consultation with legal counsel,
the outcome of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
9. EMPLOYEE BENEFIT PLAN:
During 1996, the Company adopted 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 defer
a certain percentage of their compensation. The Company matches 100% of an
employee contribution, up to a maximum Company match of 3% of the employee
annual salary. Employees vest immediately in their contributions and vest in the
Company contribution over a three-year period of service. The
F-14
<PAGE>
Company's expense for the years ended December 31, 1997, 1998 and 1999 was $60,
$13 and $24, respectively.
10. CAPITAL STOCK:
Common Stock
The Company's certificate of incorporation includes authorization to issue up to
55 million shares of common stock with a $.001 par value per share. As of
December 31, 1999, 27,176,737 shares were issued and outstanding.
Preferred Stock
The Company has also 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 shareholder 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
could be expected to, and may have the effect of, delaying, averting, or
preventing a change in control of the Company.
11. STOCK OPTIONS AND WARRANTS:
Stock Option Plan
In August 1999, the Company adopted the 1999 Equity Incentive Plan (the "Plan"),
under which options to purchase shares of the Company's common stock could be
granted to key employees. A maximum of 1,000,000 shares of common stock may be
issued pursuant to the Plan. These options could be either incentive stock
options or nonqualified stock options. 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. In October 1999, the Board granted
options to buy 294,500 shares at $1 that vest over a three-year period and
expire ten years from the grant date. Also in 1999, the Board granted options to
buy 200,000 shares at $1.75 that vest over a three-year period and expire 10
years from grant date. Compensation expense of $2 associated with these options
was recorded in 1999. No options were issued prior to 1999. The following table
summarizes the options granted in 1999:
<TABLE>
<CAPTION>
Remaining
Options Options Options Contractual Options Exercise
Date Issued Issued Forfeited Outstanding Life Exercisable Price
----------- ------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
October 7, 1999 294,500 1,000 293,500 9.8 years -0- $1.00
November 30, 1999 200,000 -0- 200,000 9.9 years -0- $1.75
</TABLE>
As permitted under SFAS No. 123, the Company has elected to continue to account
for stock-based compensation using the intrinsic value-based method of
accounting as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123 does require the
Company to disclose pro forma net income and pro forma earnings per share
amounts as if compensation expense were recognized for options granted based on
the fair value of the options issued. The fair value of the options issued in
1999 were as follows:
<TABLE>
<CAPTION>
Options Fair Market
Date Issued Issued Value
----------- ------- -----------
<S> <C> <C>
October 7, 1999 294,500 $0.45
November 30, 1999 200,000 $1.09
</TABLE>
Using this approach, the net loss in 1999 would have been $9,649 and basic
and diluted loss per share would have been $0.45.
For disclosure purposes, the fair value of stock options granted is estimated on
the date of the grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: no dividend yield; expected volatility
of 0.1%; risk-free interest rate of 6.04%; and expected life of 10 years. The
Black-Scholes option-pricing model was developed for
F-15
<PAGE>
use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option-pricing models
require the input of subjective assumptions, including the expected stock price
volatility.
Common Stock Warrants
In return for services in connection with the private placement, the placement
agent received warrants to purchase 763,740 common shares at $1.00 per share.
The fair value of the warrants of $344 was recorded as a reduction of the
proceeds from the offering. Fair value was computed using the Black-Scholes
option-pricing model as described above.
12. INCOME TAXES:
On September 30, 1999, the Company became subject to federal and state income
taxes. At that time, the Company recorded deferred income taxes which represent
the tax effect of the cumulative differences between the financial reporting and
income tax bases of assets and liabilities (see Note 2).
The significant items comprising the Company's deferred income tax assets and
liabilities as of December 31, 1999 are as follows:
Deferred tax asset-
Reserve for contingent liabilities $ 132
Goodwill 960
Net operating loss carryforward 640
Other 100
Valuation allowance (1,823)
---------
9
Deferred tax liability-
Property and equipment (9)
---------
$ --
========
The valuation allowance was established based on management's current assessment
that the net deferred tax asset will not be realized through future taxable
earnings. To the extent that the deferred tax assets are realized, $790 of the
related tax benefit would be recorded as a credit to equity (see Note 2).
F-16
<PAGE>
SCHEDULE II
NUTRISYSTEM.COM INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
<TABLE>
<CAPTION>
Balance at Additions Balance At
Beginning of Charged to End of
Period Write-offs Income Deductions Period
------------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful accounts $ 341 $ (261) -- -- $ 80
Year ended December 31, 1998:
Allowance for doubtful accounts 440 (99) -- -- 341
Year ended December 31, 1997:
Allowance for doubtful accounts 209 (116) 347 -- 440
</TABLE>
S-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Amendment No. 4 to registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
nutrisystem.com inc.
By: /s/Brian D. Haveson
---------------------------
Brian D. Haveson, President
and Chief Executive Officer
Date: March 14, 2000
-48-
<PAGE>
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit
Number Description of Exhibit
*2.1 Agreement and Plan of Merger dated August 19, 1999 between
nutrisystem.com inc. and Ansama Corp.
*2.2 Asset Purchase Agreement dated August 16, 1999 between Ansama Corp.
and Nutri/System L.P.
*2.3 Stock Exchange and Purchase Agreement dated August 16, 1999 among
Ansama Corp., HPF Holdings, Inc., Brian D. Haveson and NutriSystem
Direct, L.L.C. management (comprised of Joseph Boileau, Kathleen
Simone, Deborah Gallen and Frederick C. Tecce)
*2.4 Assignments of NutriSystem Direct, L.L.C. Membership Interests dated
September 30, 1999 to nutrisystem.com inc. by each of HPF Holdings,
Inc., Brian D. Haveson, Joseph Boileau, Kathleen Simone, Deborah
Gallen and Frederick C. Tecce
*2.5 Operating Agreement of NutriSystem Direct, L.L.C. dated September 30,
1999
*2.6 Intellectual Property Assignment from Nutri/System L.P. to
nutrisystem.com inc. dated September 30, 1999
*2.7 Assignment of Franchise Agreements from Nutri/System L.P. to
nutrisystem.com inc. dated September 30, 1999
*3.1 Certificate of Incorporation of nutrisystem.com inc.
*3.2 By-laws of nutrisystem.com inc.
*4.1 Form of Common Stock certificate of nutrisystem.com inc.
*4.2 Form of warrant to purchase Common Stock of nutrisystem.com inc.
*10.1 Joint Defense and Indemnification Agreement dated September 27, 1999
between Wyeth Ayerst Laboratories Division of American Home Products
Corporation and Nutri/System L.P.
*10.2 Lease, dated December 11, 1997, between Teachers Insurance and
Annuity Association and nutrisystem.com inc. as amended by First
Amendment to Lease dated October 28, 1999
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*10.3 Form of Nutri/System L.P. Franchise Agreement
*10.4 Form of NutriSystem Direct, L.L.C. Distributor Agreement
*10.5 1999 Equity Incentive Plan of nutrisystem.com inc.
**+10.6 Sponsorship Agreement dated August 16, 1999 between Nutri/System
L.P. and drkoop.com inc.
**+10.7 Insertion Order dated August 27, 1999 between nutrisystem.com inc.
and OnHealth Network Company
**+10.8 Insertion Order dated June 23, 1999 between NutriSystem Direct,
L.L.C. and The Knot, Inc.
**+10.9 Confidential Shopping Channel Promotion Agreement dated September
28, 1999 between Nutri/System L.P. and America Online, Inc.
**+10.10 AOL Advertising Insertion Order dated July 20, 1999 between
Nutri/System L.P. and America Online, Inc.
**+10.11 AOL Advertising Insertion Order dated January 20, 2000 between
nutrisystem.com inc. and America Online, Inc.
10.12 Stock Purchase Agreement dated March 1, 2000 between C&R Investments
I, L.P. (name subsequently retroactively changed to "CRX Investments
I, L.P.") and nutrisystem.com inc.
10.13 Shareholders Agreement dated March 1, 2000 among C&R Investments I,
L.P. (name subsequently retroactively changed to "CRX Investments I,
L.P."), HPF Holdings, Inc. and Brian D. Haveson
***21.1 Subsidiaries of nutrisystem.com inc.
23.1 Consent of Arthur Andersen LLP
***27.1 Financial data schedule
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* Previously filed with Form 10 Registration Statement.
** Previously filed with Amendment No. 1 to Registration Statement.
*** Previously filed with Amendment No. 2 to Registration Statement.
+ Confidential treatment requested pursuant to Rule 24b-2 promulgated under
the Act. Confidential portions of this document have been redacted and have
been filed separately with the Securities and Exchange Commission.
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Exhibit 10.12
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated March 1, 2000 between C&R INVESTMENTS I,
L.P., a Pennsylvania limited partnership ("Buyer") and NUTRISYSTEM.COM INC., a
Delaware corporation (the "Company").
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties, intending to be legally bound, hereby agree as follows:
1. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the meanings
specified or referred to in this Section 1:
"BALANCE SHEET" -- as defined in Section 3.6.
"BUYER" -- as defined in the first paragraph of this Agreement.
"COMPANY" -- as defined in the first paragraph of this Agreement.
"CONSENT" -- any approval, consent, ratification, permission, waiver or
other authorization (including any Governmental Authorization).
"CONTEMPLATED TRANSACTIONS" -- all of the transactions contemplated by this
Agreement, including, but not limited to:
(i) the issuance and sale of the Shares by the Company to Buyer;
(ii) the payment of the Purchase Price; and
(iii) the performance by Buyer and the Company of their respective
covenants and obligations hereunder.
"CONTRACT" -- any agreement, contract, instrument, indenture, guaranty,
power of attorney, commitment, promise, assurance, obligation or undertaking.
"DAMAGES" -- as defined in Section 6.2.
"DISCLOSURE LETTER" -- the disclosure letter delivered by the Company to
Buyer concurrently with the execution and delivery of this Agreement.
"GOVERNMENTAL AUTHORIZATION" -- any permit, license, franchise, approval,
consent, ratification, permission, confirmation, endorsement, waiver,
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certification, registration, qualification or other authorization issued,
granted, given or otherwise made available by or under the authority of any
Governmental Body or pursuant to any Legal Requirement.
"GOVERNMENTAL BODY" -- any:
(i) federal, state, local, municipal, foreign or other government;
(ii) governmental or quasi-governmental authority of any nature
(including any governmental division, subdivision, department,
agency, ministry, service, system, corps, administration,
bureau, branch, office, commission, council, board,
instrumentality, officer, official, representative,
organization, unit, organ, body or entity and any court or
other tribunal);
(iii) multi-national organization or body; or
(iv) body exercising, or entitled or purporting to exercise, any
executive, legislative, judicial, administrative, regulatory,
police or taxing authority or power of any nature.
"INDEMNIFIED PERSONS" -- as defined in Section 6.2.
"KNOWLEDGE" -- an individual shall be deemed to have "Knowledge" of a
particular fact or other matter if:
(i) such individual is actually aware of such fact or other
matter; or
(ii) a prudent individual could be expected to discover or
otherwise become aware of such fact or other matter in the
course of conducting a reasonably comprehensive investigation
concerning the truth or existence of such fact or other
matter.
A Person (other than an individual) shall be deemed to have "Knowledge" of a
particular fact or other matter if any individual who is serving as a director
or officer of such Person has Knowledge of such fact or other matter.
"LEGAL REQUIREMENT" -- any federal, state, local, municipal, foreign or
other law, statute, legislation, bill, act, enactment, constitution, resolution,
proposition, initiative, canon, ordinance, code, edict, decree, proclamation,
treaty, convention, rule, regulation, ruling, directive, or interpretation
applicable under the authority of any Governmental Body or by the eligible
voters of any jurisdiction.
"ORDER" -- any order, judgment, injunction, edict, decree, ruling,
pronouncement, determination, decision, opinion, sentence, subpoena, writ or
award issued, made, entered
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or rendered by any court, administrative agency or other Governmental Body or by
any arbitrator.
"ORDINARY COURSE OF BUSINESS" -- an action taken by a Person shall be
deemed to have been taken in the "Ordinary Course of Business" only if:
(i) such action is recurring in nature, is consistent with the
past practices of such Person and is taken in the ordinary
course of the normal day-to-day operations of such Person;
(ii) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons
exercising similar authority) and does not require any other
separate or special authorization of any nature; and
(iii) such action is similar in nature and magnitude to actions
customarily taken, without any separate or special
authorization, in the ordinary course of the normal day-to-day
operations of other Persons that are in the same line of
business as such Person.
"ORGANIZATIONAL DOCUMENTS" -- (i) the articles or certificate of
incorporation and the bylaws of a corporation; (ii) the partnership agreement
and any statement of partnership of a general partnership; (iii) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership; (iv) any charter or similar document adopted or filed in connection
with the formation, creation, constitution or organization of a Person,
including, without limitation, a Limited Liability Company; and (v) any
amendment to any of the foregoing.
"PERSON" -- any individual, corporation (including any non-profit
corporation), general partnership, limited partnership, joint venture, estate,
trust, cooperative, foundation, union, syndicate, league, consortium, coalition,
committee, society, firm, company or other enterprise, association, organization
or other entity or Governmental Body.
"PROCEEDING" -- any action, suit, litigation, arbitration, proceeding
(including any civil, criminal, administrative, investigative or appellate
proceeding and any informal proceeding), prosecution, contest, hearing, inquiry,
inquest, audit, examination, investigation commenced, brought, conducted or
heard by or before, or otherwise involving, any Governmental Body or arbitrator.
"SECURITIES ACT" -- the Securities Act of 1933, as amended.
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"SHARES" -- as defined in Section 2.1.
"SUBSIDIARY" -- with respect to any Person ("owner"), any corporation or
other Person of which securities or other interests having the power to elect a
majority of that corporation's or other Person's board of directors or similar
governing body, or otherwise having the power to direct the business and
policies of that corporation or other Person (other than securities or other
interests having that power only upon the happening of a contingency that has
not occurred) are owned by such Person; when used without reference to a
particular Person, "Subsidiary" means Subsidiary of the Company.
"TAX" -- any tax (including any income tax, franchise tax, capital gains
tax, gross receipts tax, value-added tax, surtax, excise tax, ad valorem tax,
transfer tax, stamp tax, sales tax, use tax, property tax, inventory tax,
occupancy tax, withholding tax, payroll tax, gift tax, estate tax or inheritance
tax), levy, assessment, tariff, impost, imposition, toll, duty (including any
customs duty), or tax deficiency and any related charge or amount (including any
fine, penalty or interest), imposed, assessed or collected by or under the
authority of any Governmental Body or payable pursuant to any tax-sharing
agreement or pursuant to any other Contract relating to the sharing or payment
of any such tax, levy, assessment, tariff, impost, imposition, toll, duty,
deficiency or fee.
"TAX RETURN" -- any return (including any information return), report,
statement, declaration, schedule, notice, notification, form, certificate or
other document or information filed with or submitted to, or required to be
filed with or submitted to, any Governmental Body in connection with the
determination, assessment, collection or payment of any Tax or in connection
with the administration, implementation or enforcement of or compliance with any
Legal Requirement relating to any Tax.
"THREATENED" -- a claim, Proceeding, dispute, action or other matter shall
be deemed to have been "Threatened" if any demand or statement shall have been
made (orally or in writing) or any notice shall have been given (orally or in
writing), or if any other event shall have occurred or any other circumstances
shall exist, that might lead a prudent Person to conclude that such a claim,
Proceeding, dispute, action or other matter might be asserted, commenced, taken
or otherwise pursued in the future.
2. SALE OF SHARES.
2.1. SHARES. Subject to the terms and conditions of this Agreement, the
Company, contemporaneously with the execution and delivery of this Agreement,
shall issue, sell and deliver to Buyer, and Buyer shall purchase from the
Company and pay for 500,000 shares of Common Stock (as defined) of the Company
(each a "Share", and collectively the "Shares").
2.2. PURCHASE PRICE. The purchase price (the "Purchase Price") for the
Shares shall be Two Million Five Hundred Thousand ($2,500,000.00) Dollars,
($5.00 for each Share) payable by Bank Treasurer's check or wire transfer.
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3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to Buyer:
3.1. ORGANIZATION AND GOOD STANDING. The Company and each Subsidiary is a
corporation (or a Limited Liability Company) duly organized, validly existing
and in good standing under the laws of its jurisdiction of organization with
full corporate (or Limited Liability Company) power and authority to carry on
its business as it is now being conducted, to own or hold under lease the
properties and assets which it owns or holds under lease and perform all its
obligations under the agreements and instruments to which it is a party or by
which it is bound. The Company and each of the Subsidiaries is duly qualified to
do business and is in good standing under the laws of each state or other
jurisdiction in which the ownership or leasing of the properties owned or leased
by it or the nature of the activities conducted by it requires such
qualification and the failure so to qualify would have a material adverse effect
on the Company's or such Subsidiary's business or rights. Section 3.1 of the
Disclosure Letter lists each such jurisdiction. The Company has delivered to
Buyer copies of the Organizational Documents of the Company and each of the
Subsidiaries, as currently in effect. The Company has no Subsidiaries except as
disclosed in Section 3.1 of the Disclosure Letter. The Company owns all of the
outstanding stock of or beneficial interests in each of the Subsidiaries.
3.2. AUTHORITY; NO CONFLICT. This Agreement constitutes the legal, valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms. The Company has the full right, power, authority and
capacity to execute and deliver this Agreement, to issue the Shares to Buyer,
and to perform its obligations hereunder. Neither the execution and delivery of
this Agreement nor the consummation or performance of any of the Contemplated
Transactions will, directly or indirectly:
(a) contravene, conflict with or result (with or without notice or
lapse of time) in a violation of (i) any of the provisions of
the Organizational Documents of the Company or (ii) any
resolution adopted by the board of directors or the
stockholders of the Company;
(b) contravene, conflict with or result (with or without notice or
lapse of time) in a violation of any Legal Requirement or any
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<PAGE>
Order to which the Company or any of the assets owned or used
by the Company, may be subject;
(c) contravene, conflict with or result (with or without notice or
lapse of time) in a violation of any of the terms or
requirements of, or give any Governmental Body the right (with
or without notice or lapse of time) to revoke, withdraw,
suspend, cancel, terminate or modify, any Governmental
Authorization that is held by the Company or that otherwise
relates to the business of, or any of the assets owned or used
by, the Company;
(d) contravene, conflict with or result (with or without notice or
lapse of time) in a violation or breach of any of the
provisions of, or give any Person the right (with or without
notice or lapse of time) to declare a default or exercise any
remedy under, or to accelerate the maturity or performance of
or cancel, terminate or modify, any Contract to which the
Company or any Subsidiary is a party or under which the
Company or any Subsidiary has any rights, or by which the
Company or any Subsidiary, or any of the assets owned or used
by the Company or any Subsidiary, may be bound; or
(e) result (with or without notice or lapse of time) in the
imposition or creation of any lien or encumbrance upon or with
respect to any of the assets owned or used by the Company or
any Subsidiary.
The Company and each Subsidiary is not and will not be required to give any
notice to or obtain any Consent from any Person in connection with the execution
and delivery of this Agreement or the consummation or performance of any of the
Contemplated Transactions.
3.3. ISSUANCE OF SHARES. The Shares, when issued to Buyer pursuant to this
Agreement will be duly and validly authorized and issued, fully paid and
nonassessable.
3.4. DISCLOSURE DOCUMENTS. Each of the Company's Registration Statement on
Form 10 filed with the Securities and Exchange Commission, as amended by
Amendment No. 1 and Amendment No. 2 thereto (the "Form 10"), and the Company's
Confidential Private Placement Memorandum dated August 20, 1999 did not contain
any untrue statement of a material fact or fail to state a material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. Since February 10,
2000, there has not been any change in the business, operations, properties,
prospects, assets or financial
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<PAGE>
condition of the Company which individually or in the aggregate is materially
adverse or any event, condition or contingency that is likely to result in such
material adverse change.
3.5. CAPITALIZATION. The authorized capital stock of the Company consists
of 5,000,000 shares of Preferred Stock, par value $.001, of which no shares are
outstanding, and 55,000,000 shares of Common Stock, par value $.001 per share
("Common Stock") of which 27,176,737 shares are issued and outstanding. All of
the outstanding equity securities of the Company have been duly authorized and
validly issued and are fully paid and nonassessable. Except as disclosed in
Section 3.5 of the Disclosure Letter, there are no outstanding options, rights,
conversion rights, agreements or commitments of any kind relating to the
issuance, sale or transfer of any equity securities or other securities of the
Company. None of the outstanding equity securities or other securities of the
Company was issued in violation of the Securities Act or the securities or blue
sky Legal Requirements of any state or other jurisdiction. Except for its
Subsidiaries the Company neither owns, nor has any option, right, agreement or
commitment of any kind to acquire, any equity securities or other securities of
any Person or any direct or indirect equity or ownership interest in any other
business.
3.6. FINANCIAL STATEMENTS AND PROJECTIONS.
(a) The Consolidated Balance Sheets of the Company at December 31, 1997,
1998 and 1999, as included the Company's Form 10, as attached to the Disclosure
Letter as Section 3.6(a) (the latter Balance Sheet being referred to herein as
the "Balance Sheet") and the related statements of operations for the respective
periods then ended, including in each case the notes thereto, fairly present the
financial condition and results of operations of the Company as at the
respective dates thereof and for the periods therein referred to. The financial
statements referred to in this Section reflect the consistent application of
accounting principles throughout the periods involved except as disclosed in the
notes to such financial statements.
(b) The financial information of the Company set forth as Section 3.6(b) of
the Disclosure Letter accurately reflects the books of account of the Company
and the application of accounting principles consistent with prior periods.
(c) The projections of revenue and expenses of the Company as set forth in
Section 3.6(c) of the Disclosure Letter are based upon estimates believed by the
Company as of the date of this Agreement to be realizable.
3.7. BOOKS AND RECORDS. The books of account, minute books, stock record
books and other records of the Company, all of which have been made available to
Buyer, are complete and correct and have been
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<PAGE>
maintained in accordance with sound business practices. The minute books of the
Company contain accurate and complete records of all meetings held of, and
corporate action taken by, the stockholders, the Board of Directors and
committees of the Board of Directors of the Company, and no meetings of any such
stockholders, Board of Directors or committee has been held for which minutes
have not been prepared and are not contained in such minute books.
3.8. NO UNDISCLOSED LIABILITIES.
(a) The Company and the Subsidiaries have no liabilities or obligations of
any nature (known or unknown, absolute, accrued, contingent or otherwise)
arising on the basis of facts in existence on the date of this Agreement that
were not fully reflected or reserved against in the Balance Sheet, except for
liabilities and obligations incurred in the Ordinary Course of Business of the
Company since the date of the Balance Sheet.
(b) The Company and the Subsidiaries own or have the contractual right to
use all of the assets, tangible and intangible (including, without limitation,
intellectual property assets), used by the Company and the Subsidiaries to
conduct their business as presently conducted.
3.9. TAXES. The Company has paid, or made provision for the payment of, all
Taxes that have or may have become due and payable by the Company (including,
without limitation, taxes which may be payable by the Company in respect of the
Tax liability of any predecessor entity of the Company). The charges, accruals
and reserves with respect to Taxes on the books of the Company and each
Subsidiary are adequate and are at least equal to the Company's and such
Subsidiary's liability for Taxes. All Taxes that the Company and any Subsidiary
is or was required by Legal Requirements to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to the proper
Governmental Body or other Person. All Tax Returns filed by the Company are
true, correct and complete.
3.10. COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS.
(a) The Company and each Subsidiary is in compliance with each Legal
Requirement that is applicable to it or to the conduct or operation of its
business or the ownership or use of any of its assets;
(b) No event has occurred, and no condition or circumstance exists, that
might (with or without notice or lapse of time) constitute or result directly or
indirectly in a violation by the Company or any Subsidiary of, or a failure to
comply with, any Legal Requirement;
(c) The Company and each Subsidiary is, and at all times has been, in
compliance with all of the terms and requirements of each
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<PAGE>
Governmental Authorization which is necessary to permit the Company or such
Subsidiary to conduct and operate its business as presently conducted; and
(d) No event has occurred, and no condition or circumstance exists, that
might (with or without notice or lapse of time) (A) constitute or result
directly or indirectly in a violation of or a failure by the Company or any
Subsidiary to comply with any term or requirement of any such Governmental
Authorization or (B) result directly or indirectly in the revocation,
withdrawal, suspension, cancellation or termination of, or any modification to,
any such Governmental Authorization.
3.11. LEGAL PROCEEDINGS; ORDERS.
(a) There is no pending Proceeding:
(i) that has been commenced by or against the Company or any
Subsidiary or that otherwise relates to or might affect in any
material respect the business of, or any of the assets owned
or used by, the Company or any Subsidiary; or
(ii) that challenges, or that might have the effect of preventing,
delaying, making illegal or otherwise interfering with, any of
the Contemplated Transactions.
To the Knowledge of the Company (1) no such Proceeding has been Threatened and
(2) no event has occurred, and no condition or circumstance exists, that might
give rise to or serve as a basis for the commencement of any such Proceeding.
(b) Except as set forth in Section 3.11(b) of the Disclosure Letter
(i) there is no Order to which the Company or any Subsidiary, or
any of the assets owned or used by the Company, is subject;
(ii) to the Knowledge of the Company or any Subsidiary, no officer,
director or employee of the Company or any Subsidiary is
subject to any Order that prohibits or restricts such officer,
director or employee from engaging in or continuing any
conduct, activity or practice relating to the business of the
Company or any Subsidiary;
(iii) the Company is, and at all times has been, in compliance in
all material respects with all of the terms and requirements
of each Order to which it, or any of the assets owned or used
by it, is or has been subject; and
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<PAGE>
(iv) no event has occurred, and no condition or circumstance
exists, that might (with or without notice or lapse of time)
constitute or result directly or indirectly in a violation of
or a failure to comply with any term or requirement of any
Order to which the Company, or any of the assets owned or used
by the Company, is subject.
3.12. INSURANCE. The Company maintains in force policies of insurance with
reputable carriers having coverages and policy limitations which in the opinion
of management of the Company are adequate for the business conducted by the
Company and the Subsidiaries.
3.13. DISCLOSURE.
(a) No representation or warranty of the Company contained in this
Agreement or statement in the Disclosure Letter contains any untrue statement of
a material fact or omits to state a material fact necessary in order to make the
statements herein or therein, in light of the circumstances under which they are
made, not misleading.
There is no fact known to the Company which has specific application to the
Company (other than general economic or industry conditions) and which
materially adversely affects or, so far as the Company can reasonably foresee,
materially Threatens, the assets, business, prospects, financial condition or
results of operations of the Company which has not been set forth in this
Agreement or the Disclosure Letter.
4. REPRESENTATIONS AND WARRANTIES BY BUYER.
Buyer hereby represents and warrants to the Company as follows:
4.1. ORGANIZATION AND GOOD STANDING. Buyer is a limited partnership duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania.
4.2. AUTHORITY; NO CONFLICT. Buyer has full partnership power and authority
to execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement has been duly authorized, executed, and delivered by Buyer and
constitutes the legal, valid and binding obligation of Buyer enforceable against
Buyer in accordance with its terms. Neither the execution and delivery of this
Agreement by Buyer nor the consummation of the Contemplated Transactions will,
directly or indirectly:
(a) violate or conflict with any provision of the Organizational Documents
of Buyer;
(b) violate or conflict with any provision of any Legal Requirement or
Order binding upon Buyer; or
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<PAGE>
(c) result in a breach of, or constitute a default under (or with notice or
lapse of time or both result in a breach of or constitute a default under) or
otherwise give any Person the right to terminate, any Contract to which Buyer is
a party or by which it is bound and which is material to the business or
condition of Buyer.
Buyer is not required to give prior notice to, or obtain any Consent of, any
Person in connection with the execution and delivery of this Agreement or the
consummation of the Contemplated Transactions.
4.3. INVESTMENT INTENT.
(a) Buyer is acquiring the Shares for its own account, not as nominee or
agent, for investment and not with a view to or for resale in connection with
any distribution or public offering thereof within the meaning of the Securities
Act, except pursuant to an effective registration statement or exemption from
registration under the Securities Act.
(b) Buyer understands that (i) the Shares have not been registered under
the Securities Act by reason of a specific exemption therefrom, and may not be
transferred or resold except pursuant to an effective registration statement or
exemption from registration; (ii) each certificate representing the Shares will
be endorsed with the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAW. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO OR
FOR RESALE IN CONNECTION WITH THE DISTRIBUTION THEREOF. NO DISPOSITION
OF THESE SECURITIES MAY BE MADE UNLESS (i) A REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAW IS THEN IN
EFFECT WITH RESPECT THERETO, (ii) A WRITTEN OPINION REASONABLY
SATISFACTORY TO THE COMPANY FROM COUNSEL FOR THE COMPANY OR OTHER
COUNSEL FOR THE HOLDER REASONABLY ACCEPTABLE TO THE COMPANY HAS BEEN
OBTAINED TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED OR (iii) A
"NO-ACTION" LETTER OR ITS THEN EQUIVALENT HAS BEEN ISSUED BY THE STAFF
OF THE SECURITIES AND EXCHANGE COMMISSION."
and (iii) the Company will instruct any transfer agent not to register the
transfer of any of the Shares unless the conditions specified in the foregoing
legend are satisfied.
(c) Buyer has been furnished with such materials and has been given access
to such information relating to the Company as it or its
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qualified representative has requested and has been afforded the opportunity to
ask questions regarding the Company and the Shares, all as Buyer has found
necessary to make an informed investment decision. Buyer has received no
representation or warranty from the Company or its officers, employees or agents
with respect to its investment and has received no information relating to the
operations or business of the Company and its Subsidiaries other than as set
forth in this Agreement or the Disclosure letter.
(d) Buyer has experience in investing in securities of companies in the
developmental stage, such as the Company, and acknowledges that Buyer is able to
fend for itself and to assess the economic risk of investment in the Shares and
has such knowledge and experience in financial and business matters that it can
be assumed to be capable of evaluating the merits and risks of an investment in
the Shares and of protecting its interests in such an investment.
(e) Each of the partners of Buyer is an "Accredited Investor" as such term
is defined in Rule 501 under the Securities Act.
(f) Buyer understands that its investment involves a high degree of risk
and that there is no assurance as to the future performance of the Company.
4.4. BROKERS OR FINDERS. Buyer and its agents have incurred no obligation
or liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other like payment in connection with this Agreement and will
indemnify and hold the Company harmless from any such payment alleged to be due
by or through Buyer as a result of the action of Buyer, its officers and agents.
5. COVENANTS OF PARTIES.
5.1. FURTHER ASSURANCES. Each party will, upon request of another party
from time to time after the Closing, execute and deliver, and use their
commercially reasonable efforts to cause other Persons to execute and deliver,
to another party all such further documents and instruments, and will do or use
their commercially reasonable efforts to cause to be done such other acts, as
such other party may reasonably request more completely to consummate and make
effective the Contemplated Transactions.
5.2. EXPENSES. Except as expressly otherwise provided herein, each party to
this Agreement shall bear its respective expenses incurred in connection with
the preparation, execution and performance of this Agreement and the
Contemplated Transactions, including all fees and expenses of agents,
representatives, counsel and accountants. Notwithstanding the foregoing, the
Company shall reimburse Buyer for Buyer's out of pocket expenses (including,
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without limitation, attorneys' fees and due diligence expenses), not to exceed
$25,000, in connection with the purchase of the Shares.
5.3. PUBLIC ANNOUNCEMENTS. Any public announcement or similar publicity
with respect to this Agreement shall be issued, if at all, at such time and in
such manner as Buyer and the Company mutually shall agree, provided, however,
that the foregoing provision shall not prohibit the Company from making only
such disclosure as counsel for the Company may advise the Company is necessary
to comply with federal and state securities laws.
5.4. REGISTRATION RIGHTS.
(a) (1) As used in this Section 5.4, the following terms have the following
respective meanings:
(i) "Commission" shall mean the Securities and Exchange
Commission.
(ii) "Holder" shall mean Buyer and each of its affiliates to whom
Buyer may transfer any of the Registrable Shares and any
person controlling any of the foregoing within the meaning of
the Securities Act.
(iii) "Registration Expenses" and "Selling Expenses" shall mean the
expenses so described in subsection (4) of this paragraph (a).
(iv) "Registrable Shares" shall mean 500,000 shares of Common Stock
purchased by Holder under this Agreement (subject to
appropriate adjustments for stock splits, stock dividends,
combinations and other recapitalizations).
(v) "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
(2) The Company shall:
(i) Subject to the provisions of paragraphs (d) and (e) of this
Section 5.4, upon the written request of Holder not earlier
than December 31, 2000, prepare and file with the Commission
not later than the earlier of 90 days after the date of such
request or the filing of a registration statement by the
Company under the Securities Act, a registration statement
with respect to not less than 175,000 nor more than 350,000 of
the Registrable Shares (the "Registration Statement") and use
its best efforts to cause the Registration Statement to become
and remain effective as soon thereafter as possible. In the
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event that the Company shall have filed a registration
statement before the expiration of 90 days, the Registrable
Shares shall be included in such Registration Statement on the
terms set forth in this subsection.
(ii) Prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus
used in connection therewith as may be necessary to keep the
Registration Statement effective for not more than six (6)
months from the date of its effectiveness (plus such
additional time during which Holder must cease making offers
and sales, as provided in subparagraph (v) below) or (unless
otherwise required by the Securities Act) until the
Registrable Shares covered thereunder have been sold,
whichever is earlier.
(iii) Furnish to Holder such number of copies of each prospectus
contained in the Registration Statement (other than a
preliminary prospectus), in conformity with the requirements
of the Securities Act, and such other documents as Holder may
reasonably request in order to facilitate the disposition of
the Registrable Shares owned by Holder.
(iv) If such registration or qualification is required, use its
best efforts to register or qualify the Registrable Shares
covered by the Registration Statement under the securities or
blue sky laws of such jurisdictions as Holder shall reasonably
request, and use its best efforts to do any and all other acts
and things which may be necessary or advisable so to register
or qualify the Registrable Shares to enable Holder to
consummate the disposition of the Registrable Shares owned by
Holder in such jurisdictions during the period covered in
subparagraph (ii) above; provided that the Company shall not
be obligated to qualify to do business in any jurisdiction
where it is not then so qualified or to take any action which
would subject it to the service of process in suits other than
those arising out of the offer or sale of the securities
covered by the Registration Statement in any jurisdiction
where it is not then so subject.
(v) Notify Holder at any time when a prospectus relating thereto
is required to be delivered under the Securities Act of the
happening of any event as a result of which the prospectus
contained in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading in the
light of the circumstances then existing. Holder agrees, upon
receipt of such notice, forthwith to cease making offers and
sales of the Registrable Shares pursuant to the Registration
Statement or deliveries of the prospectus contained therein
for any purpose and to return to the Company, for modification
and exchange, the copies of such prospectus not theretofore
delivered by Holder; provided, that the Company shall
forthwith prepare and furnish, after securing such approvals
as may be necessary, to Holder a reasonable number of copies
of any supplement to or
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amendment of such prospectus that may be necessary so that, as
thereafter delivered to the Holder of such Registrable Shares,
such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.
(vi) Promptly notify Holder of any stop order or similar proceeding
initiated by state or federal regulatory bodies and use its
best efforts to take all necessary steps expeditiously to
remove such stop order or similar proceeding.
(vii) Otherwise use reasonable efforts in good faith to comply with
all applicable rules and regulations of the Commission, and,
if required, make available to its security holders, as soon
as reasonably practicable, an earnings statement covering a
period of at least twelve months, but not more than eighteen
months, beginning with the first day of the Company's first
fiscal quarter after the effective date of the Registration
Statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158
thereunder; provided, however, that the Company shall not be
required to conduct a special audit in order to satisfy its
obligation under this paragraph (vii).
(viii) Upon receipt of such confidentiality agreements as the
Company may reasonably request, make available for inspection,
upon the written request of Holder, by Holder and by any
attorney, accountant or other agent retained by Holder, all
pertinent financial and other records, pertinent corporation
documents and properties of the Company and its Subsidiaries
as shall be reasonably necessary to enable Holder to exercise
and fulfill his due diligence responsibility, and cause all of
the Company's and its Subsidiaries, officers, directors and
employees to supply all information reasonably requested by
Holder, or his attorney, accountant or agent in connection
with the Registration Statement.
(3) As a condition to the Company's obligation hereunder to file and use
its best efforts to cause to become effective the Registration Statement, Holder
shall provide such information and execute such documents, including
questionnaires and indemnities not inconsistent herewith, as may reasonably be
required in connection with such registration.
(4) All expenses incurred by the Company in complying with any of the
foregoing provisions of this Paragraph (a), including without limitation all
federal (including the Commission and the National Association of Securities
Dealers, Inc.) and state registration, qualification and filing fees, printing
expenses, fees and disbursements of counsel for the Company, and accountants'
fees and expenses (but excluding the compensation of regular employees of the
Company which shall be paid in any event by the Company), incident to or
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required by any such registration are herein called "Registration Expenses". All
underwriting discounts, fees and disbursements of any counsel to the Holder,
selling commissions and transfer taxes applicable to the sale of Registrable
Shares hereunder are herein called "Selling Expenses". The Registration Expenses
and Selling Expenses in connection with the registration of the Registrable
Shares shall be borne as follows:
(i) All Registration Expenses shall be borne by the Company.
(ii) All Selling Expenses incurred in connection with the
Registration Statement shall be borne by Holder; provided,
however, that if other shares of capital stock of the Company
are included in the Registration Statement, such Selling
Expenses shall be borne by Holder pro rata with all other
Persons (including the Company) for whose account the
securities covered by the Registration Statement are offered
in accordance with the amount of securities being so offered
for the account of each such Person.
(5) (i) The Company agrees to indemnify and hold harmless Holder against
any and all losses, claims, damages, liabilities or expenses, joint or several
(including any investigation, legal and other expenses incurred in connection
with any action, suit or proceeding or any claim asserted), arising out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, or any prospectus included therein, or
any omission or alleged omission of any material fact required to be stated
therein or necessary to make the statements therein not misleading, unless such
statement or omission was made in reliance upon a statement in writing furnished
by or on behalf of Holder for inclusion therein or an omission or failure by
Holder to furnish any statement with respect to Holder required to be included
therein. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of Holder and shall survive the transfer of
the Registrable Shares. Promptly after receipt by Holder of written notice of
the commencement of any action in respect of which indemnity may be sought
against the Company, Holder shall notify the Company in writing of the
commencement thereof, and, subject to the provisions hereinafter stated and
Holder's reasonable cooperation, the Company shall assume the defense of such
action (including the employment of counsel, who shall be counsel reasonably
satisfactory to Holder and the payment of expenses and such counsel's fees)
insofar as such action shall relate to any alleged liability in respect of which
indemnity may be sought against the Company; provided, however, that the failure
of Holder to give written notice to the Company of the commencement of any
action shall not relieve the Company of its obligations hereunder except to the
extent that the Company is actually prejudiced by such failure to give notice.
Holder shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at
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the expense of the Company unless in the reasonable judgment of Holder, a
conflict of interest between the Company and Holder exists in respect of such
claim, in which event the fees and expenses of such counsel shall be at the
expense of the Company. In connection with any offering under this Paragraph (a)
which is to be underwritten, the Company further agrees to enter into an
underwriting agreement in usual and standard form respecting such offering;
provided that the terms of such underwriting agreement shall not be inconsistent
or conflict with the provisions of this Agreement.
(ii) The obligations of the Company under this Paragraph (a) are subject to
the following conditions, which Holder hereby agrees to fulfill: (i) that Holder
whose Registrable Shares are to be included in any registration referred to in
this Section agrees, in writing, prior to the filing of such registration or
qualification, and hereby does agree to indemnify and hold harmless the Company,
each Person, if any, who controls the Company within the meaning of the
Securities Act and the officers and directors of the Company, against any and
all losses, claims, damages, liabilities or expenses arising out of or based
upon any untrue statement or alleged untrue statement of a material fact in any
related registration statement, prospectus, offering circular, notification or
other document or any omission or alleged omission of any material fact required
to be stated therein or necessary to make the statements therein not misleading,
but only with reference to statements or omissions made in reliance upon a
statement in writing furnished by or on behalf of Holder (but only to the extent
such statement was made in Holder's capacity as a holder of Registrable Shares
and not in Holder's capacity as an officer or director of the Company, if
applicable) for inclusion therein and with reference to statements or omissions
made in reliance upon an omission or failure by Holder to furnish any statement
with respect to Holder required to be included therein (which indemnification
shall remain in full force and effect regardless of any investigation made by
the Company or any person controlling the Company and shall survive the transfer
of the Registrable Shares), and (ii) if such registration or qualification
relates to an offering which is to be underwritten, that Holder agrees to enter
into an underwriting agreement in usual and standard form respecting such
offering; provided that the terms of such underwriting agreement shall not be
inconsistent or conflict with the provisions of this Agreement. Promptly after
receipt of written notice of the commencement of any action in respect of which
indemnity may be sought against Holder, the Company will notify Holder in
writing of the commencement thereof, and Holder shall, subject to the provisions
hereinafter stated and the Company's reasonable cooperation, assume the defense
of such action (including the employment of counsel, who shall be counsel
reasonably satisfactory to the Company, and the payment of expenses and such
counsel's fees) insofar as such action shall relate to the alleged liability in
respect of which indemnity may be sought against Holder, provided, however, that
the failure of the Company to give written notice to Holder of the commencement
of any action shall not relieve Holder of its obligations hereunder except to
the
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extent that Holder is actually prejudiced by such failure to give notice. The
Company and each such director, officer, or controlling Person shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and expense of such counsel shall not be the
expense of Holder unless in the reasonable judgment of the Company or such
director or officer or controlling Person, a conflict of interest between Holder
and the Company or such director or officer or controlling Person exists in
respect of such claim, in which event the fees and expenses of such counsel
shall be at the expense of Holder.
(6) A party required to indemnify another party ("indemnifying party")
shall not be liable for any settlement of any action or claim relating to any
such liability or expense effected without its consent, but if any settlement is
effected with its consent or if a final judgment for the plaintiff is entered in
any such action, such indemnifying party agrees to indemnify and hold harmless
the indemnified party from and against any loss or liability by reason of any
such settlement or judgment.
(b) The rights to cause the Company to register Registrable Securities
pursuant to this Section 5.4 may be assigned (but only with all related
obligations) by a Holder, without the consent of the Company, to a transferee or
assignee of such securities who (a) after such assignment or transfer, holds at
least 200,000 shares of Registrable Securities (subject to appropriate
adjustment for stock splits, stock dividends, combinations and other
recapitalizations), (b) is a subsidiary, parent, general partner, limited
partner or retired partner of a Holder or (c) is a Holder's family member or
trust for the benefit of an individual Holder; provided (i) the Company is,
within a reasonable time after such transfer, furnished with written notice of
the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; (ii) such
transferee or assignee agrees in writing to be bound by and subject to the terms
and conditions of this Agreement, including without limitation the provisions of
paragraph (d) below; and (iii) such assignment shall be effective only if
immediately following such transfer the further disposition of such securities
by the transferee or assignee is restricted under the Securities Act.
(c) From and after the date of this Agreement, the Company shall not,
without the prior written consent of the Holders of a majority of the
outstanding Registrable Securities, enter into any agreement with any holder or
prospective holder of any securities of the Company which would allow such
holder or prospective holder (i) to include such securities in any registration
filed under Paragraph (a) hereof, unless under the terms of such agreement, such
holder or prospective holder may include such securities in any such
registration statement on no more than a pro-rata basis with the amount of the
Registrable Securities of the Holders which are included or (ii) to make a
demand registration which could result in such registration statement
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being declared effective prior to the expiration of one hundred twenty (120)
days of the effective date of any registration effected pursuant to Paragraph
(a) hereof.
(d) During the period of duration (not exceeding one hundred and eighty
(180) days) specified by the Company and an underwriter of common stock or other
securities of the Company following the effective date of a registration
statement of the Company filed under the Securities Act (other than on Form S-8
or Form S-4), Holder shall not, to the extent requested by the Company and such
underwriter, make any demand for registration under Paragraph (a) above or
directly or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase or otherwise transfer
or dispose of (other than to donees who agree to be similarly bound) any
securities of the Company held by it at any time during such period, except
Common Stock included in such registration; provided, however, that (i) such
agreement shall be applicable only to the first registration statement of the
Company which does not include any shares owned by selling shareholders to
become effective after the date of this Agreement, and (ii) all directors,
officers and affiliates of the Company and all other persons with registration
rights enter into similar agreements.
(e) No Holder shall be entitled to exercise any right provided for in this
Section 5.4 after three (3) years following the date of this Agreement.
5.5. RIGHT OF FIRST OFFER. Subject to the terms and conditions specified in
this Section 5.5, the Company hereby grants to each Holder a right of first
offer with respect to future sales by the Company of its Common Stock. A Holder
shall be entitled to apportion the right of first offer hereby granted to it
among itself and its partners and affiliates in such proportions as it deems
appropriate.
(a) Each time that the Company proposes to offer any shares of Common Stock
to any investor which is a venture capital fund, insurance company, pension
fund, investment partnership, or other non-strategic institutional investor, the
Company shall first make an offering of shares of such Common Stock to Holder in
accordance with the following provisions:
(i) The Company shall deliver a notice by certified mail
("Notice") to the Holders stating (i) its bona fide intention
to offer such shares, (ii) the number of shares of Common
Stock to be offered, and (iii) the price and terms, if any,
upon which it proposes to offer such Common Stock.
(ii) By written notification received by the Company, within 15
calendar days after giving of the Notice, the Holders may
elect to
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<PAGE>
purchase or obtain, at the price and on the terms specified in
the Notice, up to that percentage of such Common Stock which
equals a fraction, the numerator of which is the number of
shares of Common Stock held by such Holder, and the
denominator of which is the total number of shares of Common
Stock of the Company then outstanding.
(iii) The right of first offer in this Section 5.5 shall not be
applicable to (i) securities issued upon conversion or
exchange of securities outstanding on the date hereof, (ii)
securities offered to the public pursuant to a registration
statement filed under the Securities Act; (iii) securities
issued pursuant to the acquisition of another corporation by
the Company by merger, purchase of substantially all of the
assets, or other reorganization; or (iv) securities issued or
issuable at any time to employees, directors or consultants of
the Company, or any subsidiary, pursuant to any employee stock
option plan or arrangement.
5.6. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making
available to the Holders the benefits of Rule 144 under the Securities Act and
any other rule or regulation that may at any time permit a Holder to sell
securities of the Company to the public without registration or pursuant to a
registration, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144, and to file all reports and other documents
required by the Securities Exchange Act of 1934; and
(b) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, (ii) a copy of the
most recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested in availing any Holder of any rule or regulation which
permits the selling of any such securities without registration or pursuant to
such form.
5.7. COMPLETION OF PRIVATE PLACEMENT. Without the prior written consent of
Buyer, which shall not unreasonably be withheld, the Company will not sell
during the six months commencing March 1, 2000, (except pursuant to options and
warrants outstanding as of the date of this Agreement and except pursuant to an
offering registered under the Securities Act) any shares of its Common Stock for
a price less than $6.00 per share.
5.8. NOMINATION AS DIRECTOR. The Company will cause Donald Caldwell to be
elected as a director of the Company promptly after the date of this Agreement
and will cause Donald Caldwell to be a nominee for
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election as a director of the Company at all meetings of shareholders for the
election of directors at any time prior to December 31, 2001.
6. INDEMNIFICATION; REMEDIES.
6.1. SURVIVAL. All representations, warranties and agreements contained in
this Agreement shall survive the issuance and sale of the Shares notwithstanding
any investigation conducted with respect thereto or any knowledge acquired as to
the accuracy or inaccuracy of any such representation or warranty.
6.2. INDEMNIFICATION BY THE COMPANY. The Company shall indemnify and hold
harmless Buyer and its agents, representatives, employees, officers, directors,
stockholders, controlling persons and affiliates (collectively, the "Indemnified
Persons"), and shall reimburse the Indemnified Persons for, any loss, liability,
claim, damage, expense (including, but not limited to, costs of investigation
and defense and reasonable attorneys' fees) or diminution of value, whether or
not involving a third-party claim (collectively, "Damages") arising from or in
connection with (a) any inaccuracy in any of the representations and warranties
of the Company in this Agreement, (b) any failure by the Company to perform or
comply with any agreement in this Agreement, or (c) any claim by any Person for
brokerage or finder's fees or commissions or similar payments based upon any
agreement or understanding alleged to have been made by any such Person with the
Company (or any Person acting on its behalf) in connection with any of the
Contemplated Transactions.
6.3. INDEMNIFICATION BY BUYER. Buyer shall indemnify and hold harmless the
Company, and shall reimburse the Company for, any Damages arising from or in
connection with (a) any inaccuracy in any of the representations and warranties
of Buyer in this Agreement, (b) any failure by Buyer to perform or comply with
any agreement in this Agreement, and (c) any claim by any Person for brokerage
or finder's fees or commissions or similar payments based upon any agreement or
understanding alleged to have been made by such Person with Buyer (or any Person
acting on its behalf) in connection with any of the Contemplated Transactions.
7. MISCELLANEOUS.
7.1. NOTICES. All notices, consents and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given when
(a) delivered by hand, (b) sent by telecopier (with receipt confirmed), provided
that a copy is mailed by registered mail, return receipt requested, or (c) when
and telecopier numbers as a party may designate as to itself by notice to the
other parties):
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Company
nutrisystem.com inc.
202 Welsh Road
Horsham, PA 19044
Attn: Brian D. Haveson, President
and Chief Executive Officer
Telecopy No. (215) 706-5388
with a copy to:
Duane, Morris & Hecksher LLP
4200 One Liberty Place
Philadelphia, PA 19103
Attn: Frederick W. Dreher
Telecopy No. (215) 979-1213
Buyer
C&R Investments I, L.P.
c/o Cross Atlantic Capital Partners
Five Radnor Corporate Center
100 Matsonford Road
Radnor, PA 19087
Attn: President
Telecopy No. (610) 971-2062
with a copy to:
Joseph J. Connolly
Eckert, Seamans, Cherin & Mellott
1515 Market Street, Ninth Floor
Philadelphia, PA 19102-1909
Telecopy No. (215) 851-8383
7.2. JURISDICTION; SERVICE OF PROCESS. Any action or proceeding seeking to
enforce any provision of, or based on any right arising out of, this Agreement
may be brought against any of the parties in the courts of the Commonwealth of
Pennsylvania or, if it has or can acquire jurisdiction,
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in the United States District Court for the Eastern District of Pennsylvania,
and each of the parties hereby consents to the jurisdiction of such courts (and
of the appropriate appellate courts) in any such action or proceeding and waives
any objection to venue laid therein.
7.3. ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all prior
and contemporaneous agreements among the parties with respect to its subject
matter (including, without limitation that certain letter agreement between the
Company and Cross Atlantic Capital Partners Inc. dated February 3, 2000) and is
intended as a complete and exclusive statement of the terms of the agreement
among the parties with respect thereto. This Agreement may not be changed or
terminated except by a written agreement executed by Buyer and the Company.
7.4. GOVERNING LAW. This Agreement shall be governed by, and construed
under, the laws of the Commonwealth of Pennsylvania without regard to the
conflicts of laws principles thereof, all rights and remedies being governed by
such laws.
C&R INVESTMENTS I, L.P.
By Cross Atlantic Capital Partners, Inc.
-------------------------------------
its General Partner
By: /s/ Glenn T. Rieger
---------------------------
its President
NUTRISYSTEM.COM INC.
By: /s/ Brian D. Haveson
-------------------------------
Brian D. Haveson, President
and Chief Executive Officer
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Exhibit 10.13
SHAREHOLDERS AGREEMENT
AGREEMENT this 1st day of March 2000 by and among C & R Investments I, L.P.
("Buyer"), HPF Holdings, Inc. ("HPF") and Brian D. Haveson ("Haveson").
NOW THEREFORE, in consideration of the covenants contained and recited
herein, and for other good and valuable consideration, the parties hereto,
intending to be legally bound, agree as follows:
1. Background. HPF and Haveson (collectively the "Shareholders," and each a
"Shareholder") together own of record and beneficially more than 50% of the
outstanding Common Stock, par value of $.001 per share ("Common Stock") of
nutrisystem.com inc., a Delaware corporation ("Company"). Contemporaneously with
the execution and delivery of this Agreement, Buyer is purchasing 500,000 shares
of the Company's Common Stock (the "Purchased Stock") in reliance, among other
things, on the undertakings of the Shareholders in this Agreement.
2. At any meeting of the shareholders of the Company prior to December 31,
2001, at which the shareholders of the Company are entitled to vote for the
election of directors of the Company, each of the Shareholders agrees to vote
all shares of the Company's Common Stock controlled by such Shareholder in favor
of the election of Donald R. Caldwell as a director of the Company (or such
lesser number of shares as is required to cause such election). Nothing in this
Agreement shall be interpreted to require Donald R. Caldwell or any other
nominee of Buyer to serve as director. For so long as Donald R. Caldwell is
elected a director of the Company, the Shareholders shall use their best efforts
to cause the Company to allow a non-voting representative of Buyer to attend
meetings of the Board of Directors of the Company at which Donald R. Caldwell is
not present in person.
3. Each of the Shareholders further agrees that he or it will not prior to
the Termination Date (as defined below), sell all or substantially all (i.e. 80%
or more) of the shares of the Company's Common Stock then owned by such
Shareholder (other than in a public offering of such shares or a transfer to an
Affiliate (as defined below) who agrees to assume the obligations of a
Shareholder pursuant to this Agreement) without having offered to purchase, or
having required the purchaser of such shares to offer to purchase, all of the
Purchased Shares then owned by Buyer upon the same terms as are offered to such
Shareholder.
4. For purposes hereof the "Termination Date" shall mean the earlier of (i)
two years after the date hereof and (ii) the date on which Buyer owns less than
50% of the initial Purchased Shares. For purposes hereof an "Affiliate" shall
mean Michael E. Heisley, Brian D. Haveson or any parent, spouse, sibling,
descendant or other relative of Michael E. Heisley or Brian D. Haveson or any
trust or entity controlled by or created for the benefit of one or more of
Michael E. Heisley, Brian D. Haveson or one of such persons.
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<PAGE>
5. This Agreement shall be construed in accordance with the laws of the
State of Delaware, without regard to its principles of choice of law. Buyer may
not assign or transfer its rights under this Agreement; provided, however, that
the rights set forth in Section 3 hereof shall inure to the benefit of
transferees of the Purchased Shares who are either partners of Buyer or members
of such partners' immediate families and Buyer may exercise such rights on
behalf of such transferees. Neither Shareholder shall have any liability or
responsibility for any breach of this Agreement by the other Shareholder.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
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<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound have
executed this Agreement on the date first above written.
C & R INVESTMENTS I, L.P.
By Cross Atlantic Capital Partners, Inc.
-------------------------------------
its General Partner
By /s/ Glenn T. Rieger
--------------------------
its President
HPF HOLDINGS, INC.
By /s/ Michael E. Heisley
--------------------------
/s/ Brian D. Haveson
------------------------------
BRIAN D. HAVESON
- 3 -
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To nutrisystem.com inc.:
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
March 14, 2000
