NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Nature of the Business
Nutrisystem, Inc. (the Company or Nutrisystem), a provider of weight management products and
services, offers nutritionally balanced weight loss programs designed for women, men, and seniors, as well as the
Nutrisystem
®
D
®
program, specifically designed to help people with type 2 diabetes who want to lose weight and manage their diabetes. The Nutrisystem
®
programs are based on over 40 years of nutrition research and on the science of the low glycemic index. The
Companys pre-packaged foods are sold directly to weight loss program participants primarily through the Internet and telephone (including the redemption of prepaid program cards), referred to as the direct channel, through QVC, a television
shopping network and retail programs. Approximately 99%, 98% and 97% of revenues for the years ended December 31, 2013, 2012 and 2011, respectively, were generated in the United States.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Presentation of Financial Statements
The
Companys consolidated financial statements include 100% of the assets and liabilities of Nutrisystem, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Cash Equivalents and Short Term Investments
Cash equivalents include only securities having a maturity of three months or less at the time of purchase. At December 31, 2013 and December 31, 2012, demand accounts and money market accounts
comprised all of the Companys cash and cash equivalents.
Short term investments consist of investments in government and agency
securities, corporate debt securities and time deposits with original maturities of greater than three months at the time of purchase. The Company classifies these investments as available-for-sale securities. These investments are reported at fair
value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders equity, net of related tax effects.
The Company evaluates its investments for other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis and the Companys
ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of the market value. There were no other-than-temporary impairments in 2013, 2012 or 2011.
Inventories
Inventories consist
principally of packaged food held in outside fulfillment locations. Inventories are valued at the lower of cost or market, with cost determined using the first-in, first-out (FIFO) method. Quantities of inventory on hand are continually assessed to
identify excess or obsolete inventory and a provision is recorded for any estimated loss. The reserve is estimated for excess and obsolete inventory based primarily on forecasted demand and/or the Companys ability to sell the products,
introduction of new products, future production requirements and changes in customers behavior. The reserve for excess and obsolete inventory was $725 and $636 at December 31, 2013 and 2012, respectively.
44
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, which are generally two to seven years. Leasehold
improvements are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the related lease term. Expenditures for repairs and maintenance are charged to expense as incurred, while major renewals and
improvements are capitalized.
Included in fixed assets is the capitalized cost of internal-use software and website development incurred
during the application development stage. Capitalized costs are amortized using the straight-line method over the estimated useful life of the asset, which is generally two to five years. Costs incurred related to planning or maintenance of
internal-use software and website development are charged to expense as incurred. The net book value of capitalized software was $11,473 and $10,511 at December 31, 2013 and 2012, respectively.
Long-Lived Assets
The Company
continually evaluates whether events or circumstances have occurred that would indicate that the remaining estimated useful lives of long-lived assets may warrant revision or that the remaining balance may not be recoverable. Long-lived assets are
evaluated for indicators of impairment. When factors indicate that long-lived assets should be evaluated for possible impairment, an estimate of the related undiscounted cash flows over the remaining life of the long-lived assets is used to measure
recoverability. If any impairment is indicated, measurement of the impairment will be based on the difference between the carrying value and fair value of the asset, generally determined based on the present value of expected future cash flows
associated with the use of the asset. As of December 31, 2013, management believes that no reductions to the remaining useful lives or write-downs of long-lived assets are required.
Derivative Instruments
Interest rate swap agreements, a type of financial derivative
instrument, have been utilized by the Company to reduce interest rate risk on credit facility borrowings. The Company designated and accounted for its interest rate swaps as cash flow hedges of variable-rate debt. The effective portion of the gain
or loss on the derivative was reported as a component of accumulated other comprehensive income (loss) in stockholders equity in the accompanying consolidated balance sheets, net of tax, and reclassified into earnings in the periods during
which the hedged transactions affected earnings. To the extent that the change in value of the derivative did not perfectly offset the change in value of the items being hedged, that ineffective portion was immediately recognized in earnings. There
were no interest rate swap agreements at December 31, 2013 and 2012.
Revenue Recognition
Revenue from direct to consumer product sales is recognized when the earnings process is complete, which is upon transfer of title to the product.
Recognition of revenue upon shipment meets the revenue recognition criteria in that persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed and determinable and collection is reasonably assured. The Company
also sells prepaid program cards to wholesalers and retailers. Revenue from these cards is recognized after the card is redeemed online at the Companys website or via telephone by the customer and the product is shipped to the customer.
Revenue from the retail programs is recognized when the product is received at the sellers location.
Deferred revenue consists
primarily of unredeemed prepaid gift cards and unshipped frozen foods. When a customer orders the frozen program, two separate shipments are delivered. The first shipment contains Nutrisystems standard shelf-stable food. The second shipment
contains the frozen foods and is generally delivered within a week of a customers order. Both shipments qualify as separate units of accounting and the fair value is based on estimated selling prices of both units.
45
Direct to consumer customers may return unopened shelf-stable products within 30 days of purchase in order
to receive a refund or credit. Frozen products are non-returnable and non-refundable unless the order is canceled within 14 days of delivery. Estimated returns are accrued at the time the sale is recognized and actual returns are tracked monthly.
The Company reviews its history of actual versus estimated returns to ensure reserves are appropriate.
Revenue from product sales includes
amounts billed for shipping and handling and is presented net of estimated returns and billed sales tax. Revenue from the retail programs is also net of any trade allowances, reclamation reserves or broker commissions. Revenue from shipping and
handling charges was $2,000, $2,394 and $2,867 in 2013, 2012 and 2011, respectively. Shipping-related costs are included in cost of revenue in the accompanying consolidated statements of operations.
Dependence on Suppliers
In 2013,
approximately 14% and 12%, respectively, of inventory purchases were from two suppliers. The Company has supply arrangements with these suppliers that require the Company to make minimum purchases. In 2012, these suppliers provided approximately 17%
and 13%, respectively, of inventory purchases and in 2011, approximately 16% and 15%, respectively, of inventory purchases (see Note 7). Additionally, the Company was dependent on one frozen food supplier for less than 20% of its food costs in 2011.
The Company had a supply agreement with this supplier that expired in November 2011, and the Company found other frozen food supply options to replace this supplier. In 2013, a charge of $5,000 was recorded to settle certain disputes that had arisen
with a supplier over a legacy contract. This charge is included in cost of revenue in the accompanying consolidated statements of operations.
The Company outsources 100% of its fulfillment operations to a third party provider and more than 95% of its orders are shipped by one third party
provider.
Vendor Rebates
One of the Companys suppliers provides for rebates based on purchasing levels. The Company accounts for this rebate on an accrual basis as purchases
are made at a rebate percentage determined based upon the estimated total purchases from the vendor. The estimated rebate is recorded as a receivable from the vendor with a corresponding reduction in the carrying value of purchased inventory, and is
reflected in the consolidated statements of operations when the associated inventory is sold. The rebate period is June 1 through May 31 of each year. For the years ended December 31, 2013, 2012 and 2011, the Company reduced cost of
revenue by $1,068, $1,496 and $1,401, respectively, for these rebates. A receivable of $182 and $637 at December 31, 2013 and 2012, respectively, has been recorded in receivables in the accompanying consolidated balance sheets. Historically,
the actual rebate received from the vendor has closely matched the estimated rebate recorded. An adjustment is made to the estimate upon determination of the final rebate.
Marketing Expense
Marketing expense includes media, advertising production, marketing and
promotional expenses and payroll-related expenses, including share-based payment arrangements, for personnel engaged in these activities. Media expense was $77,396, $86,948 and $88,828 in 2013, 2012 and 2011, respectively. Direct-mail advertising
costs are capitalized if the primary purpose was to elicit sales to customers who could be shown to have responded specifically to the direct mailing and results in probable future economic benefits. The capitalized costs are amortized to expense
over the period during which the future benefits are expected to be received. Typically, this period falls within 40 days of the initial direct mailing. All other advertising costs are charged to expense as incurred or the first time the advertising
takes place. At December 31, 2013 and 2012, $1,010 and $1,998, respectively, of costs have been prepaid for future advertisements and promotions.
46
Lease Related Expenses
Certain of the Companys lease contracts contain rent holidays, various escalation clauses, or landlord/tenant incentives. The Company records rental costs, including costs related to fixed rent
escalation clauses and rent holidays, on a straight-line basis over the lease term. Lease allowances utilized for space improvement are recorded as leasehold improvement assets and amortized over the shorter of the economic useful life of the asset
or the lease term. Tenant lease incentive allowances received are recorded as deferred rent and amortized as reductions to rent expense over the lease term. Included in the accompanying consolidated balance sheets is $2,956 of a tenant improvement
allowance at December 31, 2013, of which $345 is included in other accrued expenses and current liabilities and $2,611 in non-current liabilities. At December 31, 2012, the tenant improvement allowance was $3,301, of which $345 was
included in other accrued expenses and current liabilities and $2,956 in non-current liabilities.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and the respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the
enactment date. In assessing the ability to realize deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
A tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the position is sustainable, based on
its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant
information. The liability for unrecognized tax benefits is classified as noncurrent unless the liability is expected to be settled in cash within 12 months of the reporting date. The Company records accrued interest and penalties related to
unrecognized tax benefits as part of interest expense, net.
Segment Information
The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive
officer. Revenue consists primarily of food sales.
47
Earnings Per Share
The Company uses the two-class method to calculate earnings per share (EPS) as the unvested restricted stock issued under the Companys equity incentive plans are participating shares
with nonforfeitable rights to dividends. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the
weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the number of weighted average shares outstanding
during the period. Undistributed losses are not allocated to unvested restricted stock as the restricted stockholders are not obligated to share in the losses. The following table sets forth the computation of basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Net income (loss)
|
|
$
|
7,370
|
|
|
$
|
(2,805
|
)
|
|
$
|
12,261
|
|
Net income allocated to unvested restricted stock
|
|
|
(183
|
)
|
|
|
0
|
|
|
|
(460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) allocated to common shares
|
|
$
|
7,187
|
|
|
$
|
(2,805
|
)
|
|
$
|
11,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,013
|
|
|
|
27,499
|
|
|
|
27,033
|
|
Effect of dilutive securities
|
|
|
274
|
|
|
|
0
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
28,287
|
|
|
|
27,499
|
|
|
|
27,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share
|
|
$
|
0.26
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share
|
|
$
|
0.25
|
|
|
$
|
(0.10
|
)
|
|
$
|
0 .43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2012, diluted loss per common share is identical to basic loss per common share as the Company was in a net loss
position and the impact of including common stock equivalents is anti-dilutive. In 2013, 2012 and 2011, common stock equivalents representing 786, 1,637 and 657 shares of common stock, respectively, were excluded from weighted average shares
outstanding for diluted income per common share purposes because the effect would be anti-dilutive.
Share-Based Payment Awards
The cost of all share-based awards to employees and non-employees, including grants of stock options, restricted stock and restricted
stock units, is recognized in the financial statements based on the fair value of the awards at grant date. The fair value of stock option awards is determined using the Black-Scholes valuation model on the date of grant. The fair value of
restricted stock and performance-based restricted stock unit awards is equal to the market price of the Companys common stock on the date of grant. The fair value of market-based restricted stock unit awards is determined using the Monte Carlo
simulation model on the date of grant.
The fair value of share-based awards is recognized on a straight-line basis over the requisite service
period (derived service period for market-based restricted stock unit awards), net of estimated forfeitures. The Company relies primarily upon historical experience to estimate expected forfeitures and recognizes compensation expense on a
straight-line basis from the date of grant. The Company issues new shares upon exercise of stock options, granting of restricted stock or vesting of restricted stock units.
Cash Flow Information
The Company made payments for income taxes of $2,842, $1,250 and
$6,049 in 2013, 2012, and 2011, respectively. Interest payments in 2013, 2012 and 2011 were $116, $954 and $655, respectively. During 2013, 2012 and 2011, the Company had non-cash capital additions of $42, $561 and $1,198, respectively, of unpaid
invoices in accounts payable and accrued expenses.
48
Recently Issued Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-11 which provides that an unrecognized tax benefit, or portion of an
unrecognized tax benefit, should be presented in the financial statements as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. If an applicable deferred tax asset is not
available or the tax law does not require the company to use and the company does not expect to use the applicable deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability in the financial statements and
should not be combined with an unrelated deferred tax asset. ASU 2013-11 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all
unrecognized tax benefits that exist at the effective date; however, retrospective application is permitted. The adoption of this update is not expected to have a material impact on the Companys consolidated financial statements.
Use of Estimates
The preparation of
financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the
reported amounts of revenue and operating expenses during the reporting period. Actual results could differ from these estimates.
3.
|
CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
|
At December 31, 2013, cash, cash equivalents and short term investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Cash
|
|
$
|
9,660
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
9,660
|
|
Money market account
|
|
|
112
|
|
|
|
0
|
|
|
|
0
|
|
|
|
112
|
|
Government and agency securities
|
|
|
9,857
|
|
|
|
20
|
|
|
|
(10
|
)
|
|
|
9,867
|
|
Corporate debt securities
|
|
|
6,682
|
|
|
|
35
|
|
|
|
(33
|
)
|
|
|
6,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,311
|
|
|
$
|
55
|
|
|
$
|
(43
|
)
|
|
$
|
26,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012, cash, cash equivalents and short term investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Cash
|
|
$
|
9,323
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
9,323
|
|
Money market account
|
|
|
6,863
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6,863
|
|
Corporate debt securities
|
|
|
1,692
|
|
|
|
14
|
|
|
|
(24
|
)
|
|
|
1,682
|
|
Time deposits
|
|
|
1,519
|
|
|
|
4
|
|
|
|
0
|
|
|
|
1,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,397
|
|
|
$
|
18
|
|
|
$
|
(24
|
)
|
|
$
|
19,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
FAIR VALUE MEASUREMENTS
|
A three-tier
fair value hierarchy has been established by the FASB to prioritize the inputs used in measuring fair value. These tiers are as follows:
Level 1Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and
liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3Valuations based on unobservable inputs reflecting the Companys own assumptions, consistent with reasonably available assumptions
made by other market participants. These valuations require significant judgment.
49
The fair values of the Companys Level 1 instruments are based on quoted prices in active exchange
markets for identical assets. The Company had no Level 2 or 3 instruments at December 31, 2013 and 2012.
The following table summarizes
the Companys financial assets measured at fair value at December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
Money market account
|
|
$
|
112
|
|
|
$
|
112
|
|
Government and agency securities
|
|
|
9,867
|
|
|
|
9,867
|
|
Corporate debt securities
|
|
|
6,684
|
|
|
|
6,684
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,663
|
|
|
$
|
16,663
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys financial assets measured at fair value at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
Money market account
|
|
$
|
6,863
|
|
|
$
|
6,863
|
|
Corporate debt securities
|
|
|
1,682
|
|
|
|
1,682
|
|
Time deposits
|
|
|
1,523
|
|
|
|
1,523
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,068
|
|
|
$
|
10,068
|
|
|
|
|
|
|
|
|
|
|
Fixed assets consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Furniture and fixtures
|
|
$
|
5,687
|
|
|
$
|
5,730
|
|
Computer hardware and software
|
|
|
56,244
|
|
|
|
50,992
|
|
Equipment
|
|
|
2,622
|
|
|
|
2,613
|
|
Leasehold improvements
|
|
|
11,215
|
|
|
|
11,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,768
|
|
|
|
70,506
|
|
Accumulated depreciation
|
|
|
(49,739
|
)
|
|
|
(42,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,029
|
|
|
$
|
28,003
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $8,896, $10,724 and $12,068 in 2013, 2012 and 2011, respectively.
6.
|
CREDIT FACILITY AND INTEREST RATE SWAPS
|
On November 8, 2012, the Company entered into a $40,000 secured revolving credit facility, as amended, (the Credit Facility) with a
lender. The Credit Facility can be drawn upon through November 8, 2015, at which time all amounts must be repaid. There were no borrowings outstanding at December 31, 2013 and 2012.
The Credit Facility provides for interest at either a base rate or a LIBOR rate, in each case plus an applicable margin. The base rate will be the highest of (i) the Administrative Agents prime
rate, (ii) 0.50% percent above the Federal Funds Rate and (iii) the LIBOR rate for deposits in dollars for a one-month interest period as determined three business days prior to such date, plus 1.50%. The LIBOR rate is equal to the London
Inter-Bank Offered Rate for the relevant term. The applicable margin is subject to adjustment based on the Companys
50
consolidated fixed charge coverage ratio and ranges from 0.25-1.25% per year for base rate loans and from
1.75-2.75% per
year for LIBOR rate
loans. The Company will also pay an unused line fee. The unused line fee is subject to adjustment based on the Companys consolidated fixed charge coverage ratio and ranges from
0.25-0.375% per
year.
During 2013, 2012 and 2011, the Company incurred $0, $764 and $417 in interest, respectively, and $140, $159 and $279 in an unused line fee, respectively, under the Credit Facility and prior financing arrangements. Interest payments and unused line
fees are classified within interest expense, net in the accompanying consolidated statements of operations.
The Credit Facility contains
financial and other covenants including a minimum consolidated fixed charge ratio, a minimum consolidated tangible net worth and a minimum consolidated liquidity ratio, and includes limitations on, among other things, capital expenditures,
additional indebtedness, acquisitions, stock repurchases and restrictions on paying dividends in certain circumstances. As of December 31, 2013, the Company was in compliance with all covenants contained in the Credit Facility. Any obligations
under the Credit Facility by the Company, as well as certain banking services and hedging obligations, are secured by substantially all of the assets of the Company and certain subsidiaries.
At December 31, 2013, the Company had $170 of unamortized debt issuance costs associated with the Credit Facility that are being amortized over the remaining term of the Credit Facility.
The Company has used interest rate swaps, a type of derivative financial instrument, to manage interest costs and minimize the effects of interest rate
fluctuations on cash flows associated with its variable-rate debt. The Company did not use interest rate derivatives for trading or speculative purposes. While interest rate swaps are subject to fluctuations in value, these fluctuations are
generally offset by the value of the underlying exposures being hedged. The Company minimized the risk of credit loss by entering into these agreements with financial institutions that have high credit ratings.
In January and June 2012, respectively, the Company entered into two separate $10,000 notional value forward-starting interest rate swaps. The objective
of the hedges was to eliminate the variability of cash flows in interest payments for $20,000 of floating rate debt. The swaps were terminated and expensed during 2012 upon the termination of a previous $100,000 credit facility and repayment of
outstanding borrowings thereunder. In addition, the Company had two separate $10,000 notional values floating to fixed interest rate swap agreements that matured on August 3, 2012 and September 28, 2012, respectively. As of
December 31, 2013 and 2012, the Company had no outstanding interest rate swaps.
7.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Leases
The Company leases its
corporate headquarters and certain equipment. These leases generally have initial terms of one to 12 years and have renewal options for additional periods. Certain of the leases also contain escalation clauses based upon increases in costs related
to the properties. Lease obligations, with initial or remaining terms of one or more years, consist of the following at December 31, 2013:
|
|
|
|
|
2014
|
|
$
|
3,281
|
|
2015
|
|
|
2,668
|
|
2016
|
|
|
2,692
|
|
2017
|
|
|
2,724
|
|
2018
|
|
|
2,784
|
|
Thereafter
|
|
|
10,463
|
|
|
|
|
|
|
|
|
$
|
24,612
|
|
|
|
|
|
|
Total rent expense for 2013, 2012 and 2011 was $2,261, $4,807 and $3,136, respectively.
51
Litigation
On March 6, 2012, in response to the filing by a competitor of numerous trademark applications containing the term NUTRILITE in various weight-loss and weight-management classes, the
Company sent a cease and desist letter to the competitor claiming that its use of such mark is very similar to the Companys NUTRISYSTEM mark for very similar Company goods and services in the weight-loss and weight-management
industries. The Company alleged that such use would result in confusion amongst consumers with respect to the source of such goods and services and would constitute an infringement of the Companys mark in violation of the Trademark Act of 1946
(the Lanham Act), as well as various other federal and state laws governing trademarks, unfair competition and deceptive trade practices, and would likely cause dilution of the Companys famous and distinctive mark. On March 16, 2012, the
competitor responded to such letter by filing a complaint for declaratory relief against the Company in the United States District Court for the Western District of Michigan (listed under docket number 1:12-cv-00256-RHB) asking the Court to declare
that plaintiffs use and registration of its mark does not (i) constitute trademark infringement, federal unfair competition, federal dilution, (ii) violate certain Michigan statutes; and (iii) constitute common law trademark
infringement or common law unfair competition. On April 27, 2012, the Company filed a motion to dismiss the complaint pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of subject matter jurisdiction. On May 29,
2012, plaintiff filed its brief in opposition to the Companys motion to dismiss the complaint, and on June 15, 2012 the Company filed its reply brief in support of its motion to dismiss the complaint. On October 9, 2012, the Court
denied the Companys motion to dismiss for lack of subject matter jurisdiction. On October 23, 2012, the Company filed its answer and affirmative defenses to plaintiffs complaint for declaratory relief and counterclaims for trademark
infringement in which it (i) denied each of plaintiffs counts in the complaint, (ii) set forth various affirmative defenses to plaintiffs claims, and (iii) asserted by way of counterclaim claims for trademark infringement
and dilution arising from plaintiffs intentional use of a confusingly similar mark for the purpose of unlawfully trading upon the Companys goodwill, good name, and valuable business identity. On December 20, 2012, the Court held a
Rule 16 scheduling conference. On December 21, 2012, plaintiff filed its first request for production of documents and things to the Company and plaintiffs first set of interrogatories to the Company. On February 1, 2013, the Company
filed its first request for production of documents directed to plaintiff. On March 8, 2013, (i) plaintiff filed a motion for leave to file its first amended complaint and its memorandum in support thereof, and (ii) the Company moved
for leave to file amended counterclaims and included its memorandum in support thereof. The Company opposed plaintiffs request for leave to amend as futile, and after argument held April 3, 2013 on plaintiffs motion, the Court
granted both plaintiff and the Company leave to file their amended pleadings and declared the pleadings to be filed that same day. As a consequence, plaintiffs amended complaint now asserts, in the alternative, affirmative claims for trademark
infringement and unfair competition under federal law and for violation of the Michigan Consumer Protection Act, and the Companys amended counterclaims now assert federal trademark infringement, false designation of origin and federal unfair
competition, federal trademark dilution, federal cyberpiracy, and state law trademark infringement, unfair competition and other claims. The parties subsequently filed an agreed-upon motion for entry of a protective order, and on July 12, 2013,
the Court issued an order extending the remaining dates in the action for an additional 90 days that, among other things, provides for completion of discovery by December 13, 2013. As of December 18, 2013, plaintiff and the Company entered
into an Agreement settling all of the claims at issue under the lawsuit and under a related proceeding pending in the U.S. Patent and Trademark Office before the Trademark Trial and Appeal Board. On December 20, 2013 the parties jointly filed
with the Trademark Trial and Appeal Board a stipulated motion to amend applications and stipulation to withdraw oppositions. On December 30, 2013, the Court issued an order approving the settlement of the lawsuit with prejudice.
The Company is also involved in other various claims and routine litigation matters. In the opinion of management, after consultation with legal counsel,
the outcomes of such matters are not anticipated to have a material adverse effect on the Companys consolidated financial position, results of operations or cash flows in future years.
52
Contractual Commitments
The Company has entered into supply agreements with various food vendors. The majority of these agreements provide for annual pricing and annual purchase obligations, as well as exclusivity in the
production of certain products, with terms of five years or less. One agreement also provides rebates if certain volume thresholds are exceeded. The Company has total purchase obligations of $69,078 as of December 31, 2013. The Company
anticipates it will meet all annual purchase obligations outstanding at December 31, 2013.
Certain agreements with frozen food suppliers
required advance payments to the supplier. The Company was notified during 2012 that one of these suppliers was in default with its bank lender and was in the process of negotiating a work out plan and exploring other strategic
alternatives. The Company recorded an impairment charge in 2012 of $2,100 related to this advance due to the work out plan. The impairment was recorded in general and administrative expense in the accompanying statement of operations. At
December 31, 2012, the remaining advances to this supplier were $690. During 2013, the Company received payment of these outstanding advances and entered into agreements with other vendors to replace this supplier.
Common
Stock
In 2013, the Company issued 1 share of common stock upon the exercise of stock options. During 2013, employees surrendered to the
Company 85 shares of common stock valued at $950 in satisfaction of minimum tax withholding obligations associated with the vesting of equity awards. These shares are included in treasury stock. Also, in 2013, the Company issued 50 shares of common
stock as compensation to board members. During each of the four quarters of 2013, the Company paid a dividend of $0.175 per share to all stockholders of record. Subsequent to December 31, 2013, the Board of Directors declared a quarterly
dividend of $0.175 per share payable on March 20, 2014 to stockholders of record as of March 10, 2014.
In 2012, the Company issued
7 shares of common stock upon the exercise of stock options and received proceeds of $10. During 2012, employees surrendered to the Company 158 shares of common stock valued at $1,590 in satisfaction of minimum tax withholding obligations associated
with the vesting of equity awards. Subsequent to the approval of the Amended and Restated 2008 Long-Term Incentive Plan in September 2012, any of such shares were included in treasury stock. Previously, these shares were retired. Included in 158
shares surrendered during 2012 are 73 shares of common stock which are held in treasury. Also, in 2012, the Company issued 65 shares of common stock as compensation to board members and third-party marketing vendors pursuant to their respective
contracts. During each of the four quarters of 2012, the Company paid a dividend of $0.175 per share to all stockholders of record.
In 2011,
the Company issued 25 shares of common stock upon the exercise of stock options and received proceeds of $129. During 2011, employees surrendered to the Company 148 shares of common stock valued at $1,923 in satisfaction of minimum tax withholding
obligations associated with the vesting of equity awards. These shares were retired. Also, in 2011, the Company issued 155 shares of common stock as compensation to board members and third-party marketing vendors pursuant to their respective
contracts. During each of the four quarters of 2011, the Company paid a dividend of $0.175 per share to all stockholders of record.
Preferred Stock
The Company has
authorized 5,000 shares of preferred stock issuable in series upon resolution of the Board of Directors. Unless otherwise required by law, the Board of Directors can, without stockholder approval, issue preferred stock in the future with voting and
conversion rights that could adversely affect the voting power of the common stock. The issuance of preferred stock may have the effect of delaying, averting or preventing a change in control of the Company.
53
Income tax expense
(benefit) consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,080
|
|
|
$
|
886
|
|
|
$
|
7,493
|
|
State
|
|
|
(10
|
)
|
|
|
(436
|
)
|
|
|
(555
|
)
|
Foreign
|
|
|
0
|
|
|
|
0
|
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,070
|
|
|
|
450
|
|
|
|
6,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(435
|
)
|
|
|
(3,837
|
)
|
|
|
(412
|
)
|
State
|
|
|
(1,125
|
)
|
|
|
(288
|
)
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,560
|
)
|
|
|
(4,125
|
)
|
|
|
(384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,510
|
|
|
$
|
(3,675
|
)
|
|
$
|
6,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax rate to the Companys effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
|
|
(0.6
|
)
|
|
|
3.8
|
|
|
|
0.0
|
|
Executive compensation limitation
|
|
|
1.6
|
|
|
|
0.0
|
|
|
|
7.9
|
|
Executive stock-based compensation
|
|
|
0.0
|
|
|
|
13.5
|
|
|
|
0.0
|
|
Food donations
|
|
|
(2.8
|
)
|
|
|
8.9
|
|
|
|
(3.9
|
)
|
Fixed assets
|
|
|
0.0
|
|
|
|
(7.5
|
)
|
|
|
0.0
|
|
Changes in reserves
|
|
|
(6.7
|
)
|
|
|
4.5
|
|
|
|
(2.0
|
)
|
Tax credits
|
|
|
(1.7
|
)
|
|
|
(1.4
|
)
|
|
|
(1.2
|
)
|
Other
|
|
|
0.4
|
|
|
|
(0.1
|
)
|
|
|
(1.5
|
)
|
Valuation allowance
|
|
|
7.1
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.3
|
%
|
|
|
56.7
|
%
|
|
|
34.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the effective tax rate from 2012 to 2013 was due to the changes in executive compensation, decreased levels
of food donations and the reduction in tax reserves due to the lapse of the statute of limitations which offset a charge to record a valuation allowance for charitable contributions carryforwards that might not be realized due to the short
carryforward period for this temporary difference. The change in the effective tax rate from 2011 to 2012 was due to favorable book to tax differences including the elimination of the limitation on executive compensation deductions due to the
nonrenewal of an executives employment agreement in April 2012, reductions in tax reserves and increased food donations combined with lower pre-tax income levels resulted in income tax benefits for 2012 versus expense for 2011.
54
The significant items comprising the Companys deferred income tax assets and liabilities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Reserves and accruals
|
|
$
|
813
|
|
|
$
|
1,395
|
|
Goodwill/Intangible assets
|
|
|
316
|
|
|
|
407
|
|
Net operating loss carryforward
|
|
|
1,942
|
|
|
|
788
|
|
Stock-based compensation
|
|
|
2,002
|
|
|
|
1,667
|
|
Charitable contribution carryforward
|
|
|
3,795
|
|
|
|
3,706
|
|
Other
|
|
|
1,008
|
|
|
|
1,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,876
|
|
|
|
9,160
|
|
Valuation allowance
|
|
|
(800
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
9,076
|
|
|
|
9,160
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(1,882
|
)
|
|
|
(3,240
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
7,194
|
|
|
$
|
5,920
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013, the net deferred tax asset of $7,194 is comprised of $931 included in current assets and
$6,263 included in other assets in the accompanying consolidated balance sheet. At December 31, 2012, the net deferred tax asset of $5,920 is comprised of $2,969 included in current assets and $2,951 included in other assets in the accompanying
consolidated balance sheet.
At December 31, 2013 and 2012, the Company had net operating loss carryforwards of approximately $29,684 and
$14,526, respectively, for state tax purposes. The increase from 2012 to 2013 is due to the release of a tax reserve due to the lapse of the statute of limitations. For state tax purposes, there is a limitation on the amount of net operating loss
carryforwards that can be utilized in a given year to offset state taxable income. Net operating losses will begin to expire in 2025.
In
2013, the Company recorded a valuation allowance of $800 against its deferred tax asset generated for charitable contributions. The Company recorded the valuation allowance to reduce the deferred tax asset to an amount it expects is more likely than
not to be realized due to the short carryforward period for this temporary difference. Based on the projected level of future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than
not that the Company will realize the remaining net deferred tax assets. An analysis of the activity of the valuation allowance for the year ended December 31, 2013 is as follows:
|
|
|
|
|
Balance at beginning of year
|
|
$
|
0
|
|
Additions charged to expense
|
|
|
800
|
|
Deductions
|
|
|
0
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
800
|
|
|
|
|
|
|
The total amount of gross unrecognized tax benefits as of December 31, 2013 and 2012 was $311 and $1,474,
respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is approximately $202 and $958 as of December 31, 2013 and 2012, respectively. The Company records accrued interest and
penalties related to unrecognized tax benefits as part of interest expense, net. During 2013, 2012 and 2011, the Company recognized interest income of $71, $13 and $133, respectively, from interest and penalties. The Companys federal income
tax returns for 2010 through 2013 are open and are subject to examination by the Internal Revenue Service. State tax jurisdictions that remain open to examination range from 2010 through 2013. The Company does not believe that that there will be any
material changes to unrecognized tax positions over the next 12 months.
55
A reconciliation of the beginning and ending amounts of the total unrecognized tax benefit is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Balance at beginning of year
|
|
$
|
1,474
|
|
|
$
|
1,919
|
|
|
$
|
2,478
|
|
Increase related to current year tax positions
|
|
|
60
|
|
|
|
67
|
|
|
|
85
|
|
Reductions related to settlement of tax matters
|
|
|
0
|
|
|
|
(224
|
)
|
|
|
0
|
|
Decrease due to lapse of statute of limitations
|
|
|
(1,223
|
)
|
|
|
(288
|
)
|
|
|
(644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
311
|
|
|
$
|
1,474
|
|
|
$
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive
Plans
The Company has three equity incentive plans: the 1999 Equity Incentive Plan, the 2000 Equity Incentive Plan and the Amended and
Restated 2008 Long-Term Incentive Plan (collectively, the Equity Incentive Plans). The Amended and Restated 2008 Long-Term Incentive Plan is currently the only plan under which new awards may be granted. Under that plan, a variety of
equity instruments can be granted to key employees and directors including incentive and nonqualified stock options to purchase shares of the Companys common stock, restricted stock, restricted stock units or shares of common stock. The 1999
Equity Incentive Plan, the 2000 Equity Incentive Plan and the Amended and Restated 2008 Long-Term Incentive Plan authorize up to 1,000, 5,600 and 5,400 shares of common stock, respectively, for issuance. At December 31, 2013, the Amended and
Restated 2008 Long-Term Incentive Plan had 1,999 shares available for grant.
Under each of the plans, the Board of Directors determines the
term of each award, but no award can be exercisable more than 10 years from the date the award is granted. To date, all of the stock options issued under the Equity Incentive Plans expire between seven and 10 years from the grant date. The Board
also determines the vesting provisions of all awards and the exercise price per share of stock options issued under the plans, which is the fair market value at date of grant. Awards issued to employees generally vest over terms ranging from two to
five years.
The following table summarizes the Companys stock option activity for 2011, 2012 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding, January 1, 2011
|
|
|
53
|
|
|
$
|
12.10
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
327
|
|
|
$
|
14.37
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(25
|
)
|
|
$
|
5.17
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(19
|
)
|
|
$
|
19.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2011
|
|
|
336
|
|
|
$
|
14.43
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
305
|
|
|
$
|
8.92
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(7
|
)
|
|
$
|
1.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2012
|
|
|
634
|
|
|
$
|
11.92
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
536
|
|
|
$
|
8.68
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1
|
)
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(375
|
)
|
|
$
|
13.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2013
|
|
|
794
|
|
|
$
|
8.91
|
|
|
|
6.02
|
|
|
$
|
6,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2013
|
|
|
87
|
|
|
$
|
11.10
|
|
|
|
5.29
|
|
|
$
|
570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at December 31, 2013
|
|
|
774
|
|
|
$
|
8.90
|
|
|
|
6.02
|
|
|
$
|
5,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
In May 2013, the Company determined that 40 stock options granted in 2012 were void as they exceeded a per
person annual award limit and entered into a corrected stock option agreement with respect to those stock options. The change did not have a material impact on the Companys consolidated financial statements but did reduce the number of stock
options outstanding as of January 1, 2013. In 2013, 2012 and 2011, the Company recorded compensation charges of $382, $1,163 and $150, respectively, for stock option awards. The weighted-average grant date fair value of stock options granted in
2013, 2012 and 2011 was $1.61, $1.96 and $4.50, respectively. The total intrinsic value of stock options exercised in 2013, 2012 and 2011 was $7, $67 and $204, respectively.
The fair value of each stock option was estimated on the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected dividend yield
|
|
|
7.78
|
%
|
|
|
8.02
|
%
|
|
|
4.76
|
%
|
Expected volatility
|
|
|
44.08
|
%
|
|
|
49.82
|
%
|
|
|
53.15
|
%
|
Risk-free interest rate
|
|
|
0.79
|
%
|
|
|
0.72
|
%
|
|
|
1.38
|
%
|
Expected life (in years)
|
|
|
4.71
|
|
|
|
4.75
|
|
|
|
4.75
|
|
In 2013, 2012 and 2011, the Company authorized the issuance of 50, 43 and 30 fully vested shares of common stock,
respectively, as compensation to the Board of Directors resulting in compensation expense of $455 in each year. In addition, in 2012 and 2011, the Company issued a total of 22 and 125 shares of common stock, respectively, to non-employees for
services. No shares were issued to non-employees during 2013, although the shares issued in 2012 vested during 2013 resulting in expense upon vesting. Costs recognized for shares issued to non-employees for services were $195, $573 and $841 in 2013,
2012 and 2011, respectively, and approximated fair value.
The Company has issued restricted stock to employees generally with vesting terms
ranging from two to five years. The fair value is equal to the market price of the Companys common stock on the date of grant. Expense for restricted stock is amortized ratably over the vesting period. The following table summarizes the
restricted stock activity for 2011, 2012 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Weighted-
Average
Grant-Date
Fair
Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Nonvested, January 1, 2011
|
|
|
1,311
|
|
|
$
|
19.52
|
|
|
|
|
|
Granted
|
|
|
337
|
|
|
$
|
13.70
|
|
|
|
|
|
Vested
|
|
|
(497
|
)
|
|
$
|
22.68
|
|
|
|
|
|
Forfeited
|
|
|
(288
|
)
|
|
$
|
16.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2011
|
|
|
863
|
|
|
$
|
16.43
|
|
|
|
|
|
Granted
|
|
|
510
|
|
|
$
|
10.50
|
|
|
|
|
|
Vested
|
|
|
(497
|
)
|
|
$
|
15.25
|
|
|
|
|
|
Forfeited
|
|
|
(46
|
)
|
|
$
|
12.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2012
|
|
|
830
|
|
|
$
|
13.71
|
|
|
|
|
|
Granted
|
|
|
312
|
|
|
$
|
8.84
|
|
|
|
|
|
Vested
|
|
|
(293
|
)
|
|
$
|
12.72
|
|
|
|
|
|
Forfeited
|
|
|
(163
|
)
|
|
$
|
12.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2013
|
|
|
686
|
|
|
$
|
12.17
|
|
|
$
|
11,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, the Company grants performance-based and market-based restricted stock units. The performance-based units
have performance conditions and service-based vesting conditions. Each vesting tranche is treated as an individual award and the compensation expense is recognized on a straight-line basis over the requisite service period for each tranche. The
requisite service period is a combination of the performance period and the subsequent vesting period based on continued service. The level of achievement of such goals may cause the actual amount of
57
units that ultimately vest to range from 0% to 150% of the original units granted, which is reflected as performance factor adjustment in the table below. The Company recognizes expense ratably
over the vesting period for performance-based restricted stock units when it is probable that the performance criteria specified will be achieved. The fair value is equal to the market price of the Companys common stock on the date of grant.
In 2012, grants of restricted stock units contained market-based conditions. Market-based awards entitle employees to vest in a number of
units determined by the Companys stock price return as compared to a set of comparator companies over a period, and will range from 0% to 200% of the original units granted. The fair value is calculated using a Monte Carlo simulation model on
the date of grant. Compensation expense is recognized over the derived service periods using the straight-line method regardless of the outcome of the market conditions, so long as the award holder remains an employee through the requisite service
period. These awards contained different measurement periods.
The fair value of the market-based restricted stock units utilized the
following inputs and assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
2 Years
|
|
|
3 Years
|
|
|
3.1 Years
|
|
Closing stock price on grant date
|
|
$
|
11.23
|
|
|
$
|
11.23
|
|
|
$
|
11.23
|
|
|
$
|
7.31
|
|
Performance period starting price
|
|
$
|
12.78
|
|
|
$
|
12.78
|
|
|
$
|
12.78
|
|
|
$
|
8.17
|
|
Term of award (in years)
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
3.1
|
|
Volatility
|
|
|
45.91
|
%
|
|
|
50.99
|
%
|
|
|
51.66
|
%
|
|
|
48.29
|
%
|
Risk-free interest rate
|
|
|
0.17
|
%
|
|
|
0.30
|
%
|
|
|
0.47
|
%
|
|
|
0.34
|
%
|
Expected dividend yield
|
|
|
6.05
|
%
|
|
|
6.05
|
%
|
|
|
6.05
|
%
|
|
|
9.15
|
%
|
Fair value
|
|
$
|
6.68
|
|
|
$
|
10.70
|
|
|
$
|
12.34
|
|
|
$
|
7.40
|
|
The performance period starting price is measured as the average closing price over the last 20 trading days prior to the
performance period start.
The following table summarizes the restricted stock unit activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted
Stock Units
|
|
|
Weighted-
Average
Grant-Date
Fair
Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Nonvested, January 1, 2011
|
|
|
56
|
|
|
$
|
17.35
|
|
|
|
|
|
Granted
|
|
|
55
|
|
|
$
|
14.49
|
|
|
|
|
|
Performance factor adjustment
|
|
|
(55
|
)
|
|
$
|
14.49
|
|
|
|
|
|
Vested
|
|
|
(20
|
)
|
|
$
|
17.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2011
|
|
|
36
|
|
|
$
|
17.53
|
|
|
|
|
|
Granted
|
|
|
146
|
|
|
$
|
8.82
|
|
|
|
|
|
Performance factor adjustment
|
|
|
(47
|
)
|
|
$
|
6.68
|
|
|
|
|
|
Forfeited
|
|
|
(2
|
)
|
|
$
|
17.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2012
|
|
|
133
|
|
|
$
|
11.76
|
|
|
|
|
|
Granted
|
|
|
162
|
|
|
$
|
8.68
|
|
|
|
|
|
Performance factor adjustment
|
|
|
(1
|
)
|
|
$
|
10.70
|
|
|
|
|
|
Vested
|
|
|
(34
|
)
|
|
$
|
17.53
|
|
|
|
|
|
Forfeited
|
|
|
(29
|
)
|
|
$
|
12.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2013
|
|
|
231
|
|
|
$
|
8.74
|
|
|
$
|
3,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded compensation expense of $4,800, $7,721 and $8,312 in the accompanying consolidated statements of
operations for 2013, 2012 and 2011, respectively, in connection with the issuance of the restricted shares and restricted stock units. As of December 31, 2013, 656 shares of restricted stock and 224 restricted stock units were expected to vest.
58
The Company recognized an increase in taxes payable of $203, $593 and $919 in 2013, 2012 and 2011,
respectively, from the exercise of certain stock options and restricted stock and payment of certain dividends and recorded these amounts as decreases to additional paid-in capital in the accompanying consolidated statements of stockholders
equity.
As of December 31, 2013, there was $7,935 of total unrecognized compensation expense related to unvested share-based
compensation arrangements, including market-based units, which is expected to be recognized over a weighted-average period of 1.2 years. The total unrecognized compensation expense will be fully recognized as expense through the third quarter of
2017.
11.
|
EMPLOYEE BENEFIT PLAN
|
The Company
maintains a qualified tax deferred defined contribution retirement plan (the Plan). Under the provisions of the Plan, substantially all employees meeting minimum age and service requirements are entitled to contribute on a before and
after-tax basis a certain percentage of their compensation. The Company matched 100% of employees first 3% contribution and 50% of the employees next 2% contribution. Employees vest immediately in their contributions and the
Companys contribution. The Companys contributions in 2013, 2012 and 2011 were $633, $614 and $692, respectively.
Following is an analysis
for the returns reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Balance at beginning of year
|
|
$
|
652
|
|
|
$
|
726
|
|
|
$
|
1,009
|
|
Provision for estimated returns
|
|
|
10,838
|
|
|
|
10,394
|
|
|
|
12,881
|
|
Actual returns
|
|
|
(10,853
|
)
|
|
|
(10,468
|
)
|
|
|
(13,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
637
|
|
|
$
|
652
|
|
|
$
|
726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
105,384
|
|
|
$
|
97,469
|
|
|
$
|
85,360
|
|
|
$
|
69,873
|
|
|
$
|
358,086
|
|
Gross margin
|
|
$
|
53,031
|
|
|
$
|
49,753
|
|
|
$
|
37,733
|
|
|
$
|
33,359
|
|
|
$
|
173,876
|
|
Net (loss) income
|
|
$
|
(640
|
)
|
|
$
|
6,359
|
|
|
$
|
356
|
|
|
$
|
1,295
|
|
|
$
|
7,370
|
|
Basic (loss) income per common share
|
|
$
|
(0.02
|
)
|
|
$
|
0.22
|
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per common share
|
|
$
|
(0.02
|
)
|
|
$
|
0.22
|
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
128,517
|
|
|
$
|
124,560
|
|
|
$
|
81,276
|
|
|
$
|
62,525
|
|
|
$
|
396,878
|
|
Gross margin
|
|
$
|
57,988
|
|
|
$
|
58,141
|
|
|
$
|
37,441
|
|
|
$
|
30,213
|
|
|
$
|
183,783
|
|
Net (loss) income
|
|
$
|
(4,481
|
)
|
|
$
|
4,115
|
|
|
$
|
2,590
|
|
|
$
|
(5,029
|
)
|
|
$
|
(2,805
|
)
|
Basic (loss) income per common share
|
|
$
|
(0.16
|
)
|
|
$
|
0.14
|
|
|
$
|
0.09
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per common share
|
|
$
|
(0.16
|
)
|
|
$
|
0.14
|
|
|
$
|
0.09
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The sum of the quarterly basic and diluted per share amounts may not equal amounts reported for the year. This is due to
the effects of rounding and changes in weighted average shares outstanding for each period.
In the fourth quarter of 2012, the Company
recorded a charge of $2,476 to restructure certain third party marketing vendor contracts, a charge of $1,980 to vacate a facility and a charge of $1,079 to write off unamortized debt issuance costs.
59