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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _________ to _________
Commission File Number 0-28551
______________________
nutrisystem.com inc.
(Exact name of Registrant as specified in its charter)
Delaware 23-3012204
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
202 Welsh Road,
Horsham, Pennsylvania 19044
(Address of principal executive offices) (Zip Code)
(215) 706-5300
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __ No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of July 27, 2000:
Common Stock,$.001 par value 27,794,737 shares
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nutrisystem.com inc.
INDEX TO FORM 10-Q
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<CAPTION>
Page
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PART I - FINANCIAL INFORMATION
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Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets...................................... 1
Consolidated Statements of Operations............................ 2
Consolidated Statements of Cash Flows............................ 3
Notes to Consolidated Financial Statements....................... 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 10
Item 3 - Quantitative and Qualitative Disclosure About Market Risk.. 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.......................................... 15
Item 2 - Changes in Securities and Use of Proceeds.................. 15
Item 3 - Defaults Upon Senior Securities............................ 15
Item 4 - Submission of Matters to a Vote of Security Holders........ 15
Item 5 - Other Information.......................................... 15
Item 6 - Exhibits and Reports on Form 8-K........................... 16
SIGNATURES........................................................... 17
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NUTRISYSTEM.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited, dollars in thousands, except share data)
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<CAPTION>
December 31, June 30,
1999 2000
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,902 $ 2,515
Restricted cash 360 784
Trade receivables, less allowance of
$80 and $73 in 1999 and 2000, respectively 140 158
Inventories 769 1,423
Prepaid expenses and other current assets 670 480
-------- --------
Total current assets 4,841 5,360
FIXED ASSETS, net 295 720
GOODWILL, net 500 448
OTHER ASSETS 220 784
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$ 5,856 $ 7,312
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 870 $ 2,131
Accrued payroll and related benefits 65 111
Other current liabilities 397 396
-------- --------
Total current liabilities 1,332 2,638
NON-CURRENT LIABILITIES 133 127
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Total liabilities 1,465 2,765
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COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred stock $.001 par value
(5,000,000 shares authorized, no shares outstanding) -- --
Common stock, $.001 par value (100,000,000 shares
authorized; shares issued - 27,176,737 at December 31, 1999 and
27,794,737 at June 30, 2000) 27 28
Additional paid-in capital 16,760 19,860
Warrants exercisable at $1 per share 344 343
Accumulated deficit (12,740) (15,684)
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Total stockholders' equity 4,391 4,547
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$ 5,856 $ 7,312
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The accompanying notes are an integral part of these consolidated financial statements.
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NUTRISYSTEM.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in thousands, except per share amounts)
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<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------- ---------------------------------
1999 2000 1999 2000
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REVENUES:
Food sales $ 2,309 $ 5,466 $ 4,442 $10,532
Franchise royalty fees 133 45 268 128
Other 132 10 181 32
------- ------- ------- -------
2,574 5,521 4,891 10,692
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of revenues 1,834 3,038 3,560 5,873
Advertising and marketing 21 2,515 49 5,120
General and administrative 627 1,420 1,274 2,623
Depreciation and amortization 17 62 34 111
Other 7 -- 13 --
Non-cash compensation expense -- 5 -- 10
------- ------- ------- -------
2,506 7,040 4,930 13,737
------- ------- ------- -------
Operating income (loss) 68 (1,519) (39) (3,045)
INTEREST INCOME 6 53 12 101
------- ------- ------- -------
Income (loss) before minority 74 (1,466) (27) (2,944)
interest
MINORITY INTEREST (2) -- -- --
------- ------- ------- -------
Net income (loss) $ 72 $(1,466) $ (27) $(2,944)
======= ======= ======= =======
BASIC AND DILUTED
INCOME (LOSS) PER SHARE $ 0.00 $ (0.05) $ (0.00) $ (0.11)
======= ======= ======= =======
BASIC AND DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 19,539 27,768 19,539 27,565
------- ------- ------- -------
The accompanying notes are an integral part of these consolidated financial statements.
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NUTRISYSTEM.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
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<CAPTION>
Six Months Ended
June 30
-----------------------------
1999 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss $ (27) $(2,944)
Adjustments to reconcile net loss to net cash (used in) operating
activities-
Other non-cash expense -- 635
Depreciation and amortization 34 111
Loss on disposals 53 7
Changes in operating assets and liabilities-
Restricted cash 46 (424)
Trade receivables 60 (18)
Inventories (32) (654)
Prepaid expenses and other assets 165 (374)
Accounts payable (368) 1,261
Accrued payroll and related expenses 60 46
Other current liabilities (77) (1)
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Net cash (used in) operating activities
(86) (2,355)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions (34) (497)
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Net cash used in investing activities (34) (497)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common shares, net of costs -- 2,465
------ -------
Net cash provided by financing activities
-- 2,465
------ -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (120) (387)
CASH AND CASH EQUIVALENTS,
beginning of period 361 2,902
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CASH AND CASH EQUIVALENTS,
end of period $ 241 $ 2,515
====== =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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NUTRISYSTEM.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
( Unaudited)
1. BACKGROUND:
Nature of the Business
nutrisystem.com inc. (a Delaware corporation) together with its subsidiaries
(the "Company") is a provider of weight loss programs and distributor of pre-
packaged 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 comprehensive 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 and its
predecessors have operated in various organizational and legal structures. In
early 1993, the business was party to a bankruptcy proceeding. This case was
converted to a Chapter 11 proceeding effective June 4, 1993. One of the
Company's predecessors operated as a debtor in possession through December 1993.
In 1999, the Company acquired the Predecessor Businesses for cash of $3,400 plus
17,500,000 shares of common stock. In order to fund the Company's purchase of
the Predecessor Businesses and planned investments, the Company completed a
private placement that raised net proceeds of approximately $7,574.
Since 1993, the Company has incurred significant losses and, as of June 30,
2000, has an accumulated deficit of $15,684. 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 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 June 30, 2000 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 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.
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Merger Transaction
In August 1999, Ansama Corp. ("Ansama"), a non-operating public company with
minimal assets and liabilities and the sole stockholder of nutrisystem.com inc.,
entered into: (1) an Asset Purchase Agreement to acquire the operating assets
and assume certain liabilities of Nutri/System L.P. for $3,000 and (2) a Stock
Exchange and Purchase Agreement to acquire the beneficial interest 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 and the transactions
contemplated by the Merger Agreements are referred to as the Merger. The amount
paid to the principal stockholder 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 Merger with proceeds generated from the private placement. As a
result of the Merger, 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 Merger 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, the Company issued 8,200,000 shares of common
stock to the president of the Company. This issuance was treated as
compensation expense for accounting purposes. The compensation expense was
recorded in 1999 and 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 and June 30, 2000, 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 stockholders' 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.
Interim Financial Statements (Unaudited)
The accompanying consolidated financial statements as of June 30, 2000 and for
the three and six months ended June 30, 1999 and 2000 are unaudited and, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial position and results of operations for those interim periods. The
results of operations for the three and six months ended June 30, 1999 and 2000
are not necessarily indicative of the results to be expected for any other
interim period or the year ending December 31, 2000.
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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 six months ended June 30, 2000. Payments for interest were $4 for
each of the six months ended June 30, 1999 and 2000.
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 warehouses.
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 are
charged to expense as incurred. All other advertising costs are expensed as
incurred. At December 31, 1999 and June 30, 2000, $587 and $406, respectively,
of prepaid advertising were included in prepaid expenses. Advertising expense
was $49 and $5,034 during the six months ended June 30, 1999 and 2000,
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 totaled $207 in 1999 of which $3
was capitalized and is included in other assets.
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.
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Other Assets
Other assets represent security deposits for leased facilities, equipment and
credit card processors.
Revenue Recognition
Revenues from food sales and other are recognized when the related products are
shipped. Other revenues represent primarily the sale of print materials to
franchisees and independent distributors.
Franchise royalty fees are contractually set at 4% of franchisees' total net
sales.
Minority Interest
Minority interest represents the minority stockholders' 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.
nutrisystem.com inc. is a "C" corporation which is subject to corporate level
income taxes. As a result of the Merger discussed in Note 1, the Company became
subject to corporate income taxes, and began providing for income taxes in the
accompanying consolidated 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 Merger 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 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 option plans under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." See Note 4.
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 stockholders by the
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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 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
This statement established standards for reporting and disclosure of
comprehensive income. The pronouncement had no impact on the Company because it
has no other comprehensive income items to report.
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. Management
currently believes that the adoption of SFAS No. 133 will have no impact on the
Company's consolidated financial statements.
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. CAPITAL STOCK:
Common Stock
In June 2000, the Company's certificate of incorporation was amended to increase
the number of shares authorized for issue to 100 million shares of common stock
with a $.001 par value per share. As of December 31, 1999 and June 30, 2000,
27,176,737 and 27,794,737 shares, respectively, were issued and outstanding.
In October 1999, the Company completed a private placement of 7,637,400 shares
of common stock which, net of related expenses, resulted in proceeds of $7,574.
In March 2000, the Company completed a private placement of 500,000 shares of
common stock, which resulted in net proceeds of $2,462. The Company issued
65,000 shares valued at $5.00 per share in March 2000 and 50,000 shares valued
at $6.00 per share in May 2000 in payments to service providers. The Company
also issued 3,000 shares of stock in March 2000 upon the exercise of common
stock warrants.
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 stockholder approval, issue preferred
stock in the future with voting and conversion rights that could adversely
affect the voting power of the common stock. The issuance of preferred stock
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may have the effect of delaying, averting or preventing a change in control of
the Company.
4. STOCK OPTIONS AND WARRANTS:
Stock Option Plans
In August 1999, the Company adopted the 1999 Equity Incentive Plan and in June
2000, the Company adopted the 2000 Equity Incentive Plan, under which options to
purchase shares of the Company's common stock could be granted to key employees.
Currently 1,000,000 and 4,100,000 shares of common stock may be issued pursuant
to the 1999 Equity Incentive Plan and the 2000 Equity Incentive Plan,
respectively. Under the terms of the 2000 Equity Incentive Plan, the number of
shares reserved will be adjusted quarterly so that the total number of shares
subject to outstanding options plus the shares available for grant will equal
14% of the then-outstanding shares of the Company's common stock. These options
could be either incentive stock options or nonqualified stock options. In June
2000, the Company also adopted the 2000 Equity Incentive Plan for Outside
Directors and Consultants (the "Director Plan"), under which nonqualified stock
options to purchase shares of the Company's common stock could be granted to
non-employee directors and consultants to the Company. A maximum of 500,000
shares of common stock may be issued pursuant to the Director Plan. Under each
of the plans, the Board of Directors determines the term of each option, but no
option can be exercisable more than ten years from the date the option was
granted. The Board also determines the option exercise price per share and
vesting provisions. No options were issued prior to 1999.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, this Report on Form
10-Q contains certain forward-looking statements that involve substantial risks
and uncertainties. When used in this Report, the words "anticipate," "believe,"
"estimate," "expect", and similar expressions, as they relate to nutrisystem.com
or its management, are intended to identify such forward-looking statements. Our
actual results, performance or achievements could differ materially from the
results expressed in, or implied by, these forward-looking statements. Factors
that could cause or contribute to such differences include those set forth in
"Business--Risk Factors" as disclosed in our Form 10 (Amendment 4) filed March
14, 2000 with the Securities and Exchange Commission, and risks associated with
the results of our continuing operations. Accordingly, there is no assurance
that the results in the forward-looking statements will be achieved.
The following discussion should be read in conjunction with the financial
information included elsewhere in this Report on Form 10-Q.
Background
We formed nutrisystem.com inc., a Delaware corporation, in August 1999 to
combine the well-established NutriSystem name and proven weight loss program
with the Internet as a medium of communication between ourselves and our members
and potential members. The NutriSystem diet program was originally developed by
our predecessor businesses that operated through company-owned and franchised
weight loss centers. Currently, 20 owners of independent, franchised weight
loss centers remain, with territories encompassing less than 2% of the United
States population. In 1998, we initiated NutriSystem Direct, L.L.C. a multi-
level marketing program of independent distributors of our diet program. Our
pre-packaged foods are now sold to program participants through the Internet,
independent distributors and the remaining franchised weight loss centers.
Since the NutriSystem businesses began in 1972, they have operated in
various organizational and legal structures and they were subject to a
bankruptcy proceeding in 1993 which was discharged in 1994. In August 1999,
Ansama, a non-operating public shell corporation and the sole stockholder of
nutrisystem.com, 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 interests in
NutriSystem Direct, L.L.C. for $400 and 17,500,000 shares of Ansama common
stock. Ansama was subsequently merged into us. In order to fund our resulting
cash obligations of $3,400 under the Asset Purchase and Stock Exchange and
Purchase Agreements and the planned marketing program and technology investment,
we completed a private placement of 7,637,400 shares of common stock in October
1999, which, net of related expenses, resulted in proceeds of $7,574. In March
2000, we completed a private placement of 500,000 shares of common stock, which
resulted in net proceeds of $2,462. We also issued 65,000 shares valued at
$5.00 per share in March 2000 and 50,000 shares valued at $6.00 in May 2000 to
service providers. The net proceeds of these equity sale transactions will be
used for working capital and to pursue our business strategy, including
advertising and promotion, international expansion, web site enhancements and
the development of our administrative infrastructure.
We believe that potential profit margins and revenue growth justify the
expenditures required to pursue our business strategy. However, achieving these
returns depends upon our ability to raise the necessary funds to execute our
business strategy successfully. To date we have incurred significant losses and,
as of June 30, 2000, had an accumulated deficit of $15,684. In the six months
<PAGE>
ended June 30, 2000, our net loss was $2,944. We anticipate that we will incur
additional losses in future periods. We expect future capital needs to be funded
through the sale of additional equity securities in private and/or public
offerings in 2000. There can be no assurance that we will be able to raise the
necessary capital or generate sufficient revenues to achieve or sustain
profitability in the future.
In pursuing our business strategy, our primary financial objectives are to
generate rapid growth while maintaining and improving profit margins. We
measure growth in terms of total membership, the number of new customers,
revenues per customer and total revenues. We measure profit margins in terms of
gross margin (revenues less cost of revenues) as a percentage of revenues, total
advertising and marketing expense as a percentage of revenues and operating
profit or loss. In order to remove the effects of seasonality, we will compare
current period results to the same period in prior years. However, because we
started our Internet business so recently, we will initially evaluate our
business by comparing current results to immediately prior periods.
Our revenues and expenses consist of the following components:
Revenues. Revenues consist of food sales, franchise royalty fees and other
revenues. Food sales include sales of food, supplements, shipping and handling
charges billed to members and sales adjustments including product returns.
Prior to October 1999, all revenues related to company-owned or franchised
weight loss centers and independent distribution (direct sales). Internet
revenues began with the launch of our web site in October 1999. Revenues from
product sales are recorded when shipped.
Cost of revenues. Cost of revenues consists primarily of the cost of the
products sold to members, fees paid to independent distributors on their sales,
incoming and outgoing shipping costs, charge card discounts and packing
material. Cost of products sold includes products provided at no charge as part
of promotions.
Advertising and marketing expense. Advertising and marketing expense
includes advertising, marketing and promotional expenses and payroll and related
expenses for personnel engaged in these activities. We follow the AICPA
Statement of Position 93-7, "Reporting for Advertising Costs" to account for
Internet site linking arrangements. Generally Internet advertising expense is
recognized based on the rate of delivery of a guaranteed number of impressions
over the advertising contract term. All other advertising costs are expensed as
incurred.
General and administrative expenses. General and administrative expenses
consist of payroll and related expenses for administrative, information
technology, fulfillment and customer service personnel, facility expenses,
Internet site development costs, professional service fees and other general
corporate expenses. Internet site development costs are accounted for in
accordance with the AICPA Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." Internet site
development cost in 1999 (when the site was launched) totaled $207, of which $3
was capitalized and the remainder was expensed.
Non-cash compensation expense. Non-cash compensation expense recorded in
2000 represents the amortization of deferred compensation related to stock
options granted to our management over the three-year vesting period.
Interest income/expense. Interest consists of interest income earned on
cash balances, net of interest expense.
<PAGE>
Income taxes. Our predecessor companies were flow-through entities, which
were not subject to federal or state income taxes and, consequently, none have
been reflected in our financial statements for the historical periods prior to
September 30, 1999. For purposes of pro forma presentation, due to the
recurring losses incurred by the predecessor companies and management's
assessment of realization of the related tax deduction, no pro forma tax benefit
was recorded during the year ended December 31, 1999. Effective with the Merger
on September 27, 1999, we became subject to corporate level income taxes. No
income tax benefit on the excess of the tax basis of our assets over the
financial reporting carrying amount has been recorded based on management's
assessment that the net deferred tax asset is not realizable through future
taxable earnings.
Internet Operations
We launched our web site on October 15, 1999. Developing our Internet
operations is central to our business strategy. However, because of our web
site's limited operating history, we believe that historical period-to-period
comparisons should not be relied upon as an indication of future performance.
Our Internet operations generated revenue of $275, $3,183 and $3,700 in the
three months ended December 31, 1999, March 31, 2000 and June 30, 2000,
respectively. In the three months ended December 31, 1999, our Internet-based
program gained 5,487 new members and attracted 1,416 new customers. In the
three months ended March 31 and June 30, 2000, respectively, we gained 59,949
and 45,530 new members and attracted 13,384 and 12,448 new customers. We
attribute the substantial gains in the first half of 2000 to (a) seasonality
(dieting falls off from mid-November through December and in the summer months),
(b) greater advertising spending and (c) greater awareness of our web site over
time. In the three months ended December 31, 1999, advertising and marketing
expense amounted to $465, or 27% of total revenues and 169% of Internet
revenues. In the three months ended March 31, 2000, advertising and marketing
expense amounted to $2,605, or 50% of total revenues and 82% of Internet
revenues, while in the three months ended June 30, 2000, advertising and
marketing expense amounted to $2,515, or 46% of total revenues and 68% of
Internet revenues. We timed the initiation of a number of advertising programs
to begin on January 1, 2000, generally the start of a popular dieting period.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 2000
Revenues. Our revenues increased from $2,574 for the quarter ended June
30, 1999 to $5,521 for the quarter ended June 30, 2000. The revenue increase of
$2,947, or 114%, resulted from a $3,157 increase in food sales related to the
commencement of Internet sales.
Costs and Expenses. Cost of revenues increased from $1,834 to $3,038 for
the quarters ended June 30, 1999 and 2000, respectively. Gross margin (revenues
less cost of revenues as a percentage of revenues) increased from 29% to 45% for
the quarters ended June 30, 1999 and 2000, respectively. This increase is due
primarily to the shift in mix toward higher-margin Internet food sales and away
from franchise and independent distribution food sales. Advertising and
marketing expense increased from $21 to $2,515 from the second quarter of 1999
to the second quarter of 2000. Virtually all advertising in the second quarter
of 2000 promoted the Internet program. General and administrative expenses
increased from $627 to $1,420 from the second quarter of 1999 compared to the
second quarter of 2000. This increase of $793 is due primarily to an increase
in compensation expense ($609), professional services ($98), rent ($53) and
other costs which were connected to establishing our Internet business.
<PAGE>
Interest Income. Interest income (net of interest expense) increased $47
from $6 in the second quarter of 1999 to $53 in the second quarter of 2000
primarily due to higher cash balances.
Net Income and Loss. We incurred a net loss of $1,466 for the quarter
ended June 30, 2000 as compared to net income of $72 for the quarter ended June
30, 1999. This variance of $1,538 was due primarily to an increase in
advertising and compensation costs associated with the launch of our Internet
business.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 2000
Revenues. Our revenues increased from $4,891 for the six months ended June
30, 1999 to $10,692 for the six months ended June 30, 2000. The revenue
increase of $5,801, or 119%, resulted from $6,090 in food sales related to the
commencement of Internet sales.
Costs and Expenses. Cost of revenues increased from $3,560 to $5,873 for
the six months ended June 30, 1999 and 2000, respectively. Gross margin
(revenues less cost of revenues as a percentage of revenues) increased from 27%
to 45% for the six months ended June 30, 1999 and 2000, respectively. This
increase is due primarily to the shift in mix toward higher-margin Internet food
sales and away from franchise and independent distribution food sales.
Advertising and promotional expense increased from $49 to $5,120 from the first
half of 1999 to the first half of 2000. Virtually all advertising in the first
half of 2000 promoted the Internet program. General and administrative expenses
increased from $1,274 to $2,623 from the first half of 1999 compared to the
first half of 2000. This increase of $1,349 is due primarily to an increase in
compensation expense ($1,105), professional services ($191), rent ($97) and
other costs which were connected to establishing our Internet business.
Interest Income. Interest income (net of interest expense) increased $89
from $12 in the first half of 1999 to $101 in the first half of 2000 primarily
due to higher cash balances.
Net Loss. Our net loss increased $2,917 from $27 to $2,944 for the six
months ended June 30, 1999 and 2000, respectively. This increase is due
primarily to an increase in advertising and compensation costs associated with
the launch of our Internet business.
Liquidity, Capital Resources and Other Financial Data
At June 30, 2000, we had net working capital of $2,722. Cash and cash
equivalents were $2,515. Our principal source of liquidity is the cash obtained
from the private placement transactions. We currently have no bank debt or term
or revolving credit facilities to fund operating cash flow or investment
opportunities.
In the six months ended June 30, 2000, we generated a $2,355 cash flow
deficit from operations, primarily attributable to net losses.
In the six months ended June 30, 2000, net cash used by investing
activities was $497 which consisted of capital expenditures incurred primarily
to increase web site and fulfillment capacity.
In the six months ended June 30, 2000, net cash provided by financing
activities amounted to $2,465. These funds were raised in a private placement
of equity securities and from the exercise of warrants. The proceeds from these
transactions will be used for working capital and to pursue our business
strategy.
<PAGE>
Under marketing agreements, we are required to pay aggregate minimum fixed
fees of $3,557 and $536 for the six months ending December 31, 2000 and the
twelve months ending December 31, 2001, respectively. As of June 30, 2000, our
principal commitments consisted of obligations under our marketing agreements
and operating leases. Although we have no material commitments for capital
expenditures, we anticipate substantial increases in capital expenditures
consistent with anticipated growth in our operations, infrastructure and
personnel.
We expect future cash obligations to be funded from financing activities,
which may include additional private and/or public offerings of equity
securities. Based on the variable nature of a portion of our expenditures, the
cash balance at June 30, 2000 and our belief that additional equity financing
can be raised, we believe that we have the ability to continue operations
through the end of 2000. However, there can be no assurance that we will be
able to raise the necessary capital or generate sufficient revenues to achieve
or sustain profitability in the future. We have no credit facilities available
to fund working capital or investment needs.
We have no current plans or discussions in process relating to any material
acquisition that is probable in the foreseeable future.
Factors Affecting Our Business and Prospects
We expect to experience significant fluctuations in our future quarterly
operating results due to a variety of factors, many of which are outside our
control.
Inflation
Our 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 our 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
We have not experienced any computer problems since January 1, 2000 nor do
we have any knowledge of any computer problems experienced by any of our
suppliers since January 1, 2000.
Recently Issued Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We have no material interest-bearing assets or liabilities, nor do we have
any current exposure for changes in foreign currency exchange rates. We do not
use derivatives or other financial instruments. Our financial instruments
consist of cash and receivables. The market values of these financial
instruments approximate book value.
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
The Company sold the following securities that were not registered under
the Securities Act of 1933, as amended (the "Act"), during the period January 1,
2000 through March 31, 2000.
(a) On March 2, 2000, the Company sold 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 exempt from registration under Section 4(2) of the Act.
The gross proceeds of $2.5 million from the private placement were added to the
Company's working capital and are being used to pursue the Company's business
strategy, including payment of advertising and marketing expenses and
enhancements to the Company's web site. No underwriters were used in connection
with this private placement.
(b) On March 1, 2000, the Company issued 50,000 shares of Common Stock
valued at $5.00 per share to Telamerica Media Incorporated in payment for
certain advertising services rendered to the Company by Telamerica Media
Incorporated. The issuance of these shares was exempt from registration pursuant
to Section 4(2) of the Act.
(c) On March 1, 2000, the Company issued 15,000 shares of Common Stock
valued at $5.00 per share to Duane, Morris & Heckscher LLP in payment for legal
services rendered to the Company by Duane, Morris & Heckscher LLP. The issuance
of these shares was exempt from registration pursuant to Section 4(2) of the
Act.
(d) On May 19, 2000, the Company issued 50,000 shares of Common Stock
valued at $6.00 per share to Telamerica Media Incorporated in payment for
certain advertising services rendered to the Company by Telamerica Media
Incorporated. The issuance of these shares was exempt from registration pursuant
to Section 4(2) of the Act.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
27.1 Financial data schedule
b. Reports on Form 8-K:
No report on Form 8-K was filed by the registrant during the fiscal
quarter for which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
nutrisystem.com inc.
BY: /S/ BRIAN D. HAVESON July 31, 2000
----------------------------
Brian D. Haveson
President and Chief Executive Officer
BY: /S/ JAMES D. BROWN July 31, 2000
----------------------------
James D. Brown
Chief Financial Officer and Principal Accounting Officer
<PAGE>
Exhibit Index
27.1 Financial data schedule
