UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
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Nutri/System, Inc.
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[LOGO] nutrisystem(R)
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 19, 2003
To the Stockholders of
Nutri/System, Inc.:
The Special Meeting of Stockholders of Nutri/System, Inc. (the "Company")
will be held at 10:00 a.m., local time, on Wednesday, February 19, 2003, at the
offices of the Company located at 202 Welsh Road, Horsham, Pennsylvania 19044,
for the following purposes:
1. To elect four directors of the Company to hold office until the Company's
2003 Annual Meeting of Stockholders and until their successors are duly
elected; and
2. To transact such other business as may properly come before the Special
Meeting and any adjournment, postponement or continuation thereof.
The Board of Directors has fixed the close of business on January 17, 2003
as the record date for the determination of the stockholders entitled to notice
of and to vote at the Special Meeting.
Whether or not you expect to attend the Special Meeting in person, please
complete, sign, date and return the enclosed form of proxy in the envelope
provided.
By Order of the Board of Directors,
Michael J. Hagan
Chairman and Chief Executive Officer
Horsham, Pennsylvania
January 27, 2003
NUTRI/SYSTEM, INC.
PROXY STATEMENT
This Proxy Statement and the form of proxy enclosed herewith, which are
first being mailed to stockholders on or about January 27, 2003, are furnished
in connection with the solicitation by the Board of Directors of Nutri/System,
Inc. (the "Company") of proxies to be voted at the Special Meeting of
Stockholders (the "Special Meeting") to be held at 10:00 a.m., local time, on
Wednesday, February 19, 2003 and at any adjournment, postponement or
continuation thereof, at the Company's principal executive offices at 202 Welsh
Road, Horsham, Pennsylvania 19044.
BACKGROUND
This Special Meeting is being held to elect four directors to the Company's
board of directors. The nominees are Ian J. Berg, Djordje Jankovic, Warren V.
Musser and Brian P. Tierney. The Company currently has four directors and two
vacancies on the board, one of which exists due to the creation of an
additional seat on the board. Two of the nominees are being elected to replace
directors Brian D. Haveson and Donald R. Caldwell, who desire to resign from
the board, and two of the nominees are being elected to fill the vacancies on
the board. The two directors continuing in office, Michael J. Hagan and Michael
A. DiPiano, were appointed to the board as a result of a change of control of
the Company's stockholders.
HJM Holdings, LLC and NewSpring Ventures, L.P. collectively acquired from
existing stockholders 15,313,500 shares of the Company's common stock (58.4% of
the outstanding shares of common stock) effecting a change in control of the
Company in a transaction that closed on December 20, 2002. The Company was not
a party to the transaction. HJM Holdings, LLC and NewSpring Ventures, L.P.
acquired the shares of the Company's common stock from existing stockholders
holding a controlling interest in the Company to effect a change of control of
the Company and appoint a new executive leadership team. At the closing, HJM
Holdings acquired 10,522,092 shares of common stock for $6,588,100 in cash
raised from its investors, and NewSpring Ventures acquired 4,791,408 shares of
common stock for $3,000,000 in cash from its working capital. The common stock
was acquired from Brian D. Haveson (5,113,500 shares for $3,068,100), HPF
Holdings, Inc. (8,200,000 shares for $4,920,000), Donald R. Caldwell (100,000
shares for $80,000) and CRX Investments I, L.P. (1,900,000 shares for
$1,520,000). Michael E. Heisley is the President and sole stockholder of HPF
Holdings, Inc. Donald R. Caldwell is a limited partner of CRX Investments I,
L.P. Cross Atlantic Partners, Inc. is the general partner of CRX Investments I,
L.P. Mr. Caldwell is the Chief Executive Officer and a principal stockholder of
Cross Atlantic Partners, Inc.
In connection with the transaction, Frederick C. Tecce and Michael E.
Heisley resigned from the board of directors of the Company. To fill the
vacancies on the board of directors created by the resignations of
Messrs. Tecce and Heisley, Michael J. Hagan, the president of HJM Holdings, and
Michael A. DiPiano, the Managing Partner of NewSpring Ventures, were appointed
to the board on December 20, 2002, joining Brian D. Haveson and Donald R.
Caldwell. Also on December 20, 2002, Mr. Haveson resigned as president and
chief executive officer of the Company, and the board appointed Mr. Hagan as
chairman and chief executive officer of the Company, and Djordje Jankovic as
president and chief operating officer of the Company.
HJM Holdings, LLC and NewSpring Ventures, L.P. entered into a Stockholders'
Agreement, dated December 20, 2002 (the "Stockholders' Agreement"), with
respect to the shares of Common Stock of the Company acquired by them on
December 20, 2002. The Company is not a party to the Stockholders' Agreement.
Under the terms of the Stockholders' Agreement, HJM Holdings and NewSpring
Ventures have agreed to vote their shares for the election to the board of
directors of the Company of two designees of HJM Holdings and two designees of
NewSpring Ventures. Mr. Hagan is a designee of HJM Holdings and Mr. DiPiano is
a designee of NewSpring Ventures. HJM Holdings and NewSpring Ventures have also
agreed to vote their shares together on matters submitted to stockholders that
meet the requirements and thresholds described in the Stockholders'
Agreement. The Stockholders' Agreement has a two-year term. Under the
Stockholders' Agreement, as amended, HJM Holdings and NewSpring Ventures have
agreed to use their best efforts to cause the total number of directors to be
no more than seven.
Mr. Haveson and Mr. Caldwell have informed the Company that they desire to
resign from the board of directors as soon as new directors can be elected to
the board by the Company's stockholders to replace them. Under the terms of the
Stockholders' Agreement, HJM Holdings and NewSpring Ventures intend to vote in
favor of one additional designee for each party in the election of directors to
replace Messrs. Haveson and Caldwell. Mr. Musser is the designee of HJM
Holdings, and Mr. Berg is the designee of NewSpring Ventures.
If all the nominees are elected at the Special Meeting, then the board will
consist of the following six members, all of whom will hold office until the
2003 Annual Meeting of Stockholders: Michael J. Hagan (Chairman), Ian J. Berg,
Michael A. DiPiano, Djordje Jankovic, Warren V. Musser and Brian P. Tierney.
ABOUT THE SPECIAL MEETING
Shares represented by proxies in the accompanying form, if properly signed
and returned, will be voted in accordance with the specifications made thereon
by the stockholders. Any proxy not specifying to the contrary will be voted for
the election of the nominees for director named below. A stockholder who signs
and returns a proxy in the accompanying form may revoke it at any time before
it is voted by giving written notice of revocation or a duly executed proxy
bearing a later date to the Secretary of the Company or by attending the
Special Meeting and voting in person.
The cost of solicitation of proxies in the accompanying form will be borne
by the Company, including expenses incurred in connection with preparing and
mailing this Proxy Statement. Such solicitation will be made by mail and may
also be made on behalf of the Company in person or by telephone or telegram by
the Company's regular officers and employees, none of whom will receive special
compensation for such services. The Company, upon request therefore, will also
reimburse brokers, nominees, fiduciaries and custodians and persons holding
shares in their names or in the names of nominees for their reasonable expenses
in sending proxies and proxy material to beneficial owners.
Only holders of Common Stock of record at the close of business on January
17, 2003, will be entitled to notice of and to vote at the Special Meeting. As
of the close of business on January 17, 2003, the Company had outstanding
26,220,504 shares of Common Stock, each of which is entitled to one vote.
Cumulative voting rights do not exist with respect to the election of
directors. The presence at the Special Meeting in person or by proxy of a
majority of the outstanding shares of Common Stock will constitute a quorum.
As of January 17, 2003, HJM Holdings, LLC and NewSpring Ventures, L.P.,
which are included in the table herein under the heading "Beneficial Ownership
of Common Stock," beneficially owned in the aggregate 15,313,500 shares, or
approximately 58.4%, of the Company's outstanding Common Stock. They have
advised the Company that they intend to vote their shares for the election of
the nominees for director. Accordingly, Ian J. Berg, Djordje Jankovic, Warren
V. Musser and Brian P. Tierney will be elected as directors regardless of the
votes cast by the Company's stockholders other than HJM Holdings, LLC and
NewSpring Ventures, L.P.
ELECTION OF DIRECTORS
The Company's by-laws provide that the number of members of the Company's
Board of Directors shall be as fixed by the Board of Directors from time to
time. The number of members of the Board of Directors is currently fixed at six.
2
Four directors are to be elected at the Special Meeting. Unless otherwise
instructed, the proxies solicited by the Board of Directors will be voted for
the election of the nominees named below, none of whom are currently directors
of the Company. If a nominee becomes unavailable for any reason, it is intended
that the proxies will be voted for a substitute nominee designated by the Board
of Directors. The Board of Directors has no reason to believe the nominees
named will be unable to serve if elected. Any vacancy occurring on the Board of
Directors for any reason may be filled by a majority of the directors then in
office and each director elected to fill a vacancy will serve for the unexpired
term of his predecessor and until his successor is duly elected. The four
nominees for director receiving the largest number of the votes cast at the
Special Meeting will be elected as directors. Shares held by brokers or
nominees as to which voting instructions have not been received from the
beneficial owner or person otherwise entitled to vote and as to which the
broker or nominee does not have discretionary voting power, i.e., broker
non-votes, will be treated as not present and not entitled to vote for nominees
for election as directors. Votes withheld and broker non-votes will have no
effect on the election of directors because they will not represent votes cast
at the Special Meeting for the purpose of electing directors.
Nominees
The names of the four nominees for director, together with certain
information regarding them, are set forth below.
Ian J. Berg
Age 61
Mr. Berg is a Managing Director of the Eastern Technology Fund, a venture
fund, which he established in March 2000. Prior to that, Mr. Berg was the
founder, president, chief executive officer and director of Copelco Financial
Services Group from October 1972 to July 1999. Mr. Berg is a director of a
number of private companies, and a number of non-profit organizations.
Djordje (George) Jankovic
Age 35
Mr. Jankovic was appointed as President and Chief Operating Officer of the
Company on December 20, 2002. Prior to joining the Company, Mr. Jankovic was
the founder, chairman and chief executive officer of beMany, Inc., a provider
of residential telecom and energy services, from September 1999 to November
2002. Mr. Jankovic was vice president of product development of Verticalnet,
Inc. from September 1998 to September 1999. Mr. Jankovic was co-founder and
chief executive officer of RF Globalnet, Inc. from March 1996 until it was
acquired by Verticalnet in September 1998.
Warren V. (Pete) Musser
Age 75
Mr. Musser is president of The Musser Group, a financial consulting company.
Mr. Musser served as chairman and chief executive officer of Safeguard
Scientifics, Inc. from 1953 until 2001. Mr. Musser is a director of CompuCom
Systems, Inc. and Internet Capital Group, Inc. Mr. Musser serves on a variety
of civic, educational and charitable boards of directors, and serves as vice
president/development, Cradle of Liberty Council, Boy Scouts of America;
co-chairman of The Eastern Technology Council; and chairman of the Pennsylvania
Partnership of Economic Education.
Brian P. Tierney
Age 44
Mr. Tierney is founder/chairman of Tierney Communications, a division of
Interpublic Group. Mr. Tierney was founder, president and chief executive
officer of Tierney Communications from 1989 to April 2002. Mr. Tierney is a
director of FASTNET Corporation. Mr. Tierney serves on a variety of civic,
educational and charitable boards of directors, including the Regional
Performing Arts Center (The Kimmel Center), Zoological Society of Philadelphia,
Thomas Jefferson University, Greater Philadelphia Chamber of Commerce, Police
Athletic League, World Affairs Council, the Boy Scouts of America and the
University Museum of the University of Pennsylvania.
3
Continuing Directors
The names of the two directors whose terms are continuing until the 2003
Annual Meeting of Stockholders, together with certain information regarding
them, are set forth below.
Michael J. Hagan
Age 40
Mr. Hagan was appointed chairman of the board of directors and chief
executive officer of the Company on December 20, 2002. Prior to joining the
Company, Mr. Hagan was the co-founder of Verticalnet, Inc., a
business-to-business internet and software company, and held a number of
executive positions at Verticalnet since its founding in 1995, including
chairman of the board from February 2002 to the present, president and chief
executive officer from January 2001 to February 2002, executive vice president
and chief operating officer from January 2000 to January 2001 and senior vice
president prior to that time. Prior to founding Verticalnet, Mr. Hagan was a
vice president and senior manager at Merrill Lynch Asset Management from 1990
to 1995, and worked for Bristol Meyers Squibb from 1988 to 1990. Mr. Hagan is a
director of Verticalnet, Inc. Mr. Hagan is also a trustee of Saint Joseph's
University.
Michael A. DiPiano
Age 44
Mr. DiPiano was appointed to the board of directors on December 20, 2002. He
is the Managing Partner of NewSpring Ventures, L.P., where he has been a
partner since September 2002. Prior to that, Mr. DiPiano was chairman and chief
executive officer of Maxwell Systems from 1998 to 2002, and he remains chairman
of the board. From 1996 to 1998, Mr. DiPiano was affiliated with Safeguard
Scientifics Inc. and their related venture funds. Mr. DiPiano is a director of
a number of private companies, including Ecount, Maxwell Systems, Message Link,
HR Division, Ripple Technologies and Vytek Wireless. He is also a director of
the University City Science Center.
Board and Committee Meetings
The Board of Directors met on four occasions in 2002. Each director attended
at least 75% of all Board and applicable committee meetings during 2002, except
Dean Bozzano who did not attend any Board or Audit Committee meetings in 2002
prior to his resignation in September 2002.
The Board of Directors has an Audit Committee that currently consists of Mr.
Caldwell. During 2002, the Audit Committee consisted of Mr. Caldwell, Mr. Tecce
and Mr. Bozzano, until Mr. Bozzano resigned in September 2002, and Mr. Tecce
resigned in December 2002. The Audit Committee is responsible for establishing
and reviewing the Company's internal controls and operating procedures to
ensure compliance by the Company with all applicable laws, regulations,
generally accepted accounting standards and customary operating procedures and
practices. The Audit Committee met four times in 2002.
Although the Company's common stock trades on the OTC Bulletin Board, the
Company is required to disclose whether its Audit Committee members meet the
independence standards of an exchange. All of the members of the Audit
Committee in 2002 met the independence requirements of the Nasdaq Stock Market.
After the Special Meeting, the Company intends to include on the Audit
Committee individuals who meet the independence requirements of the Nasdaq
Stock Market.
The Board of Directors has a Compensation Committee that currently consists
of Mr. Caldwell. During 2002, the Compensation Committee consisted of Messrs.
Caldwell, Tecce and Bozzano, until Mr. Bozzano resigned in September 2002, and
Mr. Tecce resigned in December 2002. In 2002, the Board of Directors performed
the functions of the Compensation Committee. The Compensation Committee did not
meet separately in 2002. After the Special Meeting, the Company intends to
include on the Compensation Committee individuals who meet the independence
requirements of the Nasdaq Stock Market.
4
The Board of Directors has established a Nominating Committee for 2003
comprised of Michael A. DiPiano and Michael J. Hagan. The Nominating Committee
responsibilities will be to recommend to the Board of Directors qualified
candidates for election as directors and the slate of nominees for election as
directors at the Annual Meeting.
Compensation of Directors
The Company does not pay its directors cash compensation other than
reimbursement for expenses they incur in attending meetings. The Company is
reviewing its compensation policy for directors and for members of the
committees of the board, and may adopt a policy for compensation of
non-employee directors and committee members.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table shows as of January 17, 2003, the amount and percentage
of the Company's outstanding Common Stock beneficially owned by each person who
is known by the Company to own beneficially more than 5% of its outstanding
Common Stock.
Shares Percent of
Name and Address Beneficially Outstanding
of 5% Beneficial Owner Owned Common Stock
---------------------- ------------ ------------
HJM Holdings, LLC (1)
202 Welsh Road
Horsham, PA 19044............. 15,313,500 58.4%
NewSpring Ventures, L.P. (1)
100 West Elm Street, Suite 101
Conshohocken, PA 19428........ 15,313,500 58.4
(1) Information based upon Schedule 13D filings, dated December 20, 2002, with
the Securities and Exchange Commission (the "Commission") by each person.
Under the rules of the Commission, a person is deemed to be the beneficial
owner of securities if such person has or shares "voting power," which
includes the power to vote, or to direct the voting of, such securities, or
"investment power," which includes the power to dispose, or to direct the
disposition, of such securities. The shares set forth above consist of
10,522,092 shares (40.1% of outstanding shares) held by HJM Holdings, LLC
and 4,791,408 shares (18.3% of outstanding shares) held by NewSpring
Ventures. HJM Holdings and NewSpring Ventures have entered into the
Stockholders' Agreement that, among other things, governs the voting of the
Company's Common Stock beneficially owned by each of them. NewSpring
Ventures disclaims beneficial ownership of all shares held by HJM Holdings,
and HJM Holdings disclaims beneficial ownership of all shares held by
NewSpring Ventures.
5
The following table shows as of January 17, 2003, the amount and percentage
of the Company's outstanding Common Stock beneficially owned (unless otherwise
indicated) by the Company's (i) each director and nominee for director, (ii)
each executive officer named in the Compensation Table and (iii) all directors,
nominees for director and executive officers of the Company as a group.
Shares Shares Percent of
Beneficially Acquirable Outstanding
Name of Beneficial Owner Owned(1) Within 60 Days(2) Common Stock
------------------------ ------------ ----------------- ------------
Ian J. Berg (3) (4).............................................. 457,670 -- 1.7%
Donald R. Caldwell............................................... -- 10,000 *
Michael A. DiPiano (5)........................................... 4,791,408 -- 18.3
Michael J. Hagan (4)............................................. 2,593,715 -- 9.9
Brian D. Haveson................................................. 735,000(6) -- 2.8
Djordje Jankovic (4)............................................. 762,784 -- 2.9
Warren V. Musser (4)............................................. 472,926(7) -- 1.8
Brian P. Tierney (4)............................................. 114,418 -- *
James D. Brown................................................... 30,000 373,333 1.5
Deborah A. Gallen................................................ 185,000(8) 63,333 *
Brendon Perero................................................... -- 286,667 1.1
All directors, nominees for directors and executive officers as a
group (11 persons)............................................. 10,142,921(9) 733,333 40.4
--------
* less than 1%.
(1) Information supplied by officers, directors and nominees. Under the rules
of the Commission, a person is deemed to be the beneficial owner of
securities if such person has or shares "voting power," which includes the
power to vote, or to direct the voting of, such securities, or "investment
power," which includes the power to dispose, or to direct the disposition,
of such securities. Under these rules, more than one person may be deemed
the beneficial owner of the same securities. The information set forth in
the above table includes all shares of Common Stock of the Company over
which the above-named persons individually or together share voting power
or investment power.
(2) Unless otherwise noted, reflects the number of shares that could be
purchased by exercise of options available at January 17, 2003, or within
60 days thereafter under the Company's stock option plans.
(3) The shares set forth as beneficially owned by Mr. Berg are all held through
HJM Holdings, LLC by Eastern Technology Fund, LP, of which Mr. Berg is a
Managing Director. Mr. Berg is also on the investment committee of
NewSpring Ventures LP, but the shares listed as beneficially owned by Mr.
Berg do not include any of NewSpring Ventures' shares disclosed on the 5%
Beneficial Ownership table and Mr. Berg disclaims any beneficial ownership
of such shares.
(4) The shares set forth as beneficially owned by Messrs. Berg, Hagan,
Jankovic, Musser and Tierney represent their proportionate interest in the
shares held by HJM Holdings, LLC and included in the 5% Beneficial
Ownership table above. See Note (1) above. According to a Schedule 13D
dated December 20, 2002 filed with the Commission by Michael J. Hagan and
HJM Holdings, LLC, Mr. Hagan is the President and a Manager of HJM
Holdings, LLC and Mr. Jankovic is the Treasurer and Manager of HJM
Holdings, LLC. Mr. Hagan and Mr. Jankovic may be deemed to own beneficially
all shares held by HJM Holdings, LLC, in which case he would be deemed to
beneficially own 10,522,092 shares (40.1% of outstanding shares); however,
each of them disclaims beneficial ownership of all shares other than his
proportionate interest in HJM Holdings.
(5) The shares set forth as beneficially owned by Mr. DiPiano are all held by
NewSpring Ventures and included in the 5% Beneficial Ownership table above.
See Note (1) above. According to a Schedule 13D dated December 20, 2002
filed with the Commission by NewSpring Ventures, LLC, Mr. DiPiano is the
Managing
6
Director of NewSpring Ventures and the President of Progress Capital II,
Inc. the general partner of the general partner of NewSpring Ventures, L.P.,
and therefore may be deemed to own such shares beneficially. Mr. DiPiano
disclaims beneficial ownership of these shares.
(6) Includes a total of 62,000 shares held by members of Mr. Haveson's
immediate family, as to which shares Mr. Haveson disclaims beneficial
ownership.
(7) Consists of 305,114 shares owned by the Musser Foundation and 167,812
shares held by Mr. Musser's spouse, as to which shares Mr. Musser disclaims
beneficial ownership.
(8) Includes a total of 20,000 shares held by members of Ms. Gallen's immediate
family, as to which shares Ms. Gallen disclaims beneficial ownership.
(9) Includes a total of 554,926 shares held by members of the immediate
families of and charities controlled by such persons, as to which shares
such persons disclaim beneficial ownership.
EXECUTIVE COMPENSATION
The following table contains information concerning total compensation paid
during the 2000, 2001 and 2002 fiscal years to both of the individuals who
served as the Company's chief executive officer in 2002 and those of its
executive officers which received more than $100,000 in total salary and bonus
during 2002. No other executive officer of the Company received more than
$100,000 in total salary and bonus during 2002.
Summary Compensation Table
Long-Term
Compensation
Annual Awards
Compensation Securities
Name and Fiscal ------------------ Underlying All Other
Principal Position Year Salary($) Bonus($) Options (#) Compensation(2)
------------------ ------ --------- -------- ------------ ---------------
Michael J. Hagan(1)........ 2002 -- -- -- --
Chairman and Chief
Executive Officer
Brian D. Haveson(1)........ 2002 260,096 -- -- 12,857(3)
President and Chief 2001 250,054 -- -- 8,464(3)
Executive Officer 2000 250,000 -- -- --
James D. Brown............. 2002 135,250 10,000 -- 4,058
Chief Financial Officer 2001 130,060 -- 250,000 3,900
2000 130,055 -- 100,000 3,000
Deborah A. Gallen.......... 2002 124,846 12,000 -- --
Vice President E-Commerce 2001 120,060 -- 150,000 --
2000 108,402 -- 20,000 --
Brendon Perero............. 2002 124,846 10,000 -- 3,745
Chief Information Officer 2001 120,036 -- 180,000 3,600
2000 120,027 -- 40,000 2,769
--------
(1) Mr. Hagan replaced Mr. Haveson as chief executive officer on December 20,
2002.
(2) Unless otherwise indicated, the amounts in this column consist of matching
contributions made by the Company under its qualified tax deferred defined
contribution retirement plan.
(3) Mr. Haveson received matching contributions made by the Company under its
qualified tax deferred defined contribution retirement plan ($5,769 and
$7,000) and use of a company car ($2,695 and $5,857) in 2001 and 2002,
respectively.
7
Option Grants
No options to acquire shares of the Company's common stock were granted
during 2002 to any of the named executive officers.
Options Exercised and Year-End Option Values
The following table sets forth information with respect to options held at
December 31, 2002 by the named executive officers of the Company:
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values(1)
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End ($) (2)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Michael J. Hagan. -- -- -- --
Brian D. Haveson. -- -- -- --
James D. Brown... 350,000 200,000 45,500 91,000
Deborah A. Gallen 63,333 106,667 26,500 53,000
Brendon Perero... 286,667 133,333 33,000 66,000
--------
(1) No options were exercised by the named executive officers during 2002.
(2) The value of unexercised in-the-money options equals the difference between
the option exercise price and the closing price of the Company's Common
Stock on December 31, 2002 multiplied by the number of shares underlying
the options. The closing price of the Company's Common Stock on December
31, 2002, as reported on the Nasdaq OTC Bulletin Board, was $0.90 per share.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of Securities Exchange Act of 1934 (the "Exchange Act")
requires that the Company's officers and directors and persons who own more
than 10% of the Company's Common Stock file reports of their ownership with the
Commission. Based solely on the Company's review of the copies of such reports
received by it, or written representations received from reporting persons, the
Company believes that during 2002 all filing requirements applicable to these
persons were met timely, except for late amendments to Form 4s for Brian D.
Haveson and Donald R. Caldwell for April 2001.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee Report
In the section below, we describe our financial and accounting management
policies and practices.
Composition. The Audit Committee of the Board of Directors is composed of
independent directors, as defined by Nasdaq rules, and operates under a written
charter adopted by the Board of Directors. The members of the Audit Committee
in 2002 were Donald R. Caldwell, Frederick C. Tecce and Dean J. Bozzano
(Chairman). Mr. Bozzano resigned in September 2002, and Mr. Tecce resigned in
December 2002.
8
Responsibilities. The responsibilities of the Audit Committee include
recommending to the Board of Directors an accounting firm to be engaged as the
Company's independent accountants. Management is responsible for the Company's
internal controls and financial reporting process. The independent accountants
are responsible for performing an independent audit of the Company's
Consolidated Financial Statements in accordance with generally accounting
standards and for issuing a report thereon. The Audit Committee's
responsibility is to oversee these processes.
Review with Management and Independent Accountants. In this context, the
Audit Committee has met and held discussions with management and the
independent accountants. Management represented to the Audit Committee that the
Company's Consolidated Financial Statements as contained in the quarterly Form
10-Qs filed by the Company in 2002 were prepared in accordance with generally
accepted accounting principles, and the Audit Committee has reviewed and
discussed the Consolidated Financial Statements with management and the
independent accountants. The Audit Committee discussed with the independent
accountants matters required to be discussed by Statement on Auditing Standards
No. 61, "Communication with the Audit Committees."
After completing a substantial review process, the Audit Committee in July
2002 recommended to the Board of Directors that the Company dismiss Arthur
Andersen LLP as the Company's independent public accountants and appoint KPMG
LLP to serve as the Company's independent public accountants for the fiscal
year 2002. The Board of Directors adopted the Audit Committee's recommendation.
Prior to the release of the Company's 2002 annual Consolidated Financial
Statements, the Audit Committee intends to obtain from KPMG LLP, the Company's
independent accountants, assurances of KPMG LLP's independence.
This report is submitted by the Audit Committee on January 14, 2003.
Donald R. Caldwell
Audit and Related Fees
Audit Fees. The aggregate fees billed by KPMG LLP for professional services
for the review of the Consolidated Financial Statements included in the
Company's Forms 10-Q for 2002 were $15,000. The audit of the Company's annual
Consolidated Financial Statements for 2002 has not been completed or billed.
Financial Information Systems Design and Implementation Fees. There were no
fees billed by KPMG LLP to the Company for financial information systems design
and implementation in 2002.
All Other Fees. The aggregate fees billed to the Company for all other
services rendered by KPMG LLP in 2002, which consists of fees for tax advisory
services, were $7,000.
Report of the Board of Directors on Compensation Matters
In the section below, we describe the executive compensation policies and
practices employed by the Company in 2002. We also identify the procedures we
used to determine the compensation of the Company's Chief Executive Officer and
the executive management team in 2002. We anticipate that there will be a
complete turnover in the membership of the Board of Directors after the Special
Meeting as compared to the membership prior to December 20, 2002 and that the
new members of the Board of Directors may alter certain of the positions
reflected in this report going forward.
Compensation Philosophy. In developing the Company's executive compensation
policies, we relied on two principal objectives: (1) attracting and retaining
talented officers and (2) motivating officers to achieve corporate goals that
enhance stockholder value.
9
In 2002, the paramount corporate goal was to create stockholder value by
increasing revenues and profitability and generating positive operating cash
flow. We believe the stock options issued to the executive management team from
1999 to 2001 supported these objectives.
Cash Compensation. The Board of Directors authorized guidelines for base
compensation for executive management after reviewing compensation information
for firms of similar size and growth prospects in the Philadelphia region. The
Company's goal is to provide a reasonably competitive level of base
compensation.
In 2002, the Company did generate a meaningful positive cash flow and as a
result it did award cash bonuses to the executive management team (excluding
Brian Haveson) in 2002.
Stock Options. The Board of Directors strongly believes that stock options
motivate executive management and other employees to identify with stockholder
interests and maximize stockholder value. With the adoption of the 1999 and
2000 Equity Incentive Plans, the Company granted stock options to a large
proportion of the Company's employees. All stock options have a per share
exercise price equal to the fair market value of the Company's Common Stock on
the grant date. To date, options granted to employees vest in three equal
annual installments.
The number of options granted to each officer and the vesting schedule are
determined based on a variety of factors, including (1) the executive's
position at the Company, (2) his or her individual performance and (3) the
number of options the executive already holds. The Board of Directors awarded
stock options to the executive management team in 1999, 2000 and 2001 that
continued to vest over the course of 2002. It did not award any additional
stock options to the named executive officers in 2002.
Compensation of the Chief Executive Officer. Mr. Haveson was the chief
executive office in 2002 until December 20, 2002. During 2002, Mr. Haveson
received a salary of $260,096. The Board of Directors did not award Brian
Haveson a cash bonus in 2002 but did provide him with an increase in base cash
compensation of 4% over that paid in 2001. While Mr. Haveson had been granted
no stock options, the Board of Directors believed his interests are aligned
with stockholders by virtue of his direct stock ownership during the year.
Mr. Hagan became the chairman and chief executive officer on December 20,
2002. The Board of Directors appointed Mr. Hagan at an annual salary of
$175,000. Mr. Hagan does not have an employment agreement.
Tax Deductibility of Executive Compensation. Under Section 162(m) of the
Internal Revenue Code, the Company generally receives a federal income tax
deduction for compensation paid to any of its named executive officers if the
compensation is less than $1,000,000 during any fiscal year or is
"performance-based" under Section 162(m). Under these rules, all compensation
paid to the Company's named executive officers is tax deductible.
This report is submitted on January 14, 2003 by these remaining members of
the Board of Directors who were directors during 2002.
Donald R. Caldwell
Brian D. Haveson
Compensation Committee Interlocks and Insider Participation
In 2002, the Board of Directors performed the functions of the Compensation
Committee. During the year 2002, none of the Company's executive officers
served on the board of directors of any entities whose directors or officers
serve on the Company's Board of Directors. The Company's former Chief Executive
Officer, Brian D. Haveson, served on the Company's Board of Directors during
2002.
10
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Haveson resigned as the President and Chief Executive Officer of the
Company on December 20, 2002. Mr. Haveson and the Company entered into a
Consulting Agreement, dated December 20, 2002, with a two year consulting term.
During the consulting term, Mr. Haveson will provide the Company with advice
concerning the business, operations and industry in which it operates,
including assistance with the transition of management responsibilities. During
the consulting term, the Company will pay Mr. Haveson $20,833.33 per month, and
will either provide health care continuation for Mr. Haveson and his immediate
family or pay him an additional amount to pay for health care coverage.
From time to time, the Company purchases food from Tom's Foods, Inc., a
vendor that is an affiliate of Mr. Heisley, and vitamins and supplements from
HPF, L.L.C., a vendor that is an affiliate of Mr. Heisley and Mr. Haveson.
During the Company's 2002 fiscal year, the aggregate amount of food purchases
was approximately $466,000 and the aggregate amount of vitamin and supplement
purchases was approximately $60,000. Such transactions were effected on terms
no less favorable to the Company than those made available to independent third
parties.
STOCK PERFORMANCE
The following graph shows a comparison of cumulative total return since June
16, 2000 (the date the Company became listed on the Nasdaq National Market) for
the Company's Common Stock, the Russell 2000 Index and the Dow Jones Consumer
Services Index (a published industry index), each of which assumes an initial
value of $100 and reinvestment of dividends. The Company's Common Stock traded
on the Nasdaq National Market until May 24, 2001, and since then has traded on
the OTC Bulletin Board under the ticker symbol THIN.OB.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG NUTRI/SYSTEM, INC., THE DOW JONES
CONSUMER SERVICES INDEX AND THE RUSSELL 2000 INDEX
06/16/00 12/29/00 12/31/01 12/31/02
-------- -------- -------- --------
NutriSystem, Inc................. 100 8 2 6
Dow Jones Consumer Services Index 100 52 82 67
Russell 2000 Index............... 100 94 95 74
11
STOCKHOLDER PROPOSALS
Any stockholder who, in accordance with and subject to the provisions of the
proxy rules of the Commission, desired to submit a proposal for inclusion in
the Company's proxy statement for the 2003 Annual Meeting of Stockholders was
required to deliver such proposal in writing to the Secretary of the Company at
the Company's mailing address in Horsham, Pennsylvania, not later than November
19, 2002.
Pursuant to Rule 14a-4(c) of the Exchange Act, if a stockholder who intends
to present a proposal at the 2003 Annual Meeting of Stockholders does not
notify the Company of such proposal on or before February 1, 2003, then
management proxies will be allowed to use their discretionary voting authority
to vote on the proposal when the proposal is raised at the Annual Meeting, even
though there is no discussion of the proposal in the 2003 proxy statement.
OTHER PROPOSALS
The Board of Directors does not know of any matters to be presented for
consideration at the Special Meeting other than the matters described in the
Notice of Special Meeting, but if any matters are properly presented, it is the
intention of the persons named in the accompanying proxy to vote on such
matters in accordance with their judgment.
By Order of the Board of Directors,
Michael J. Hagan
Chairman and Chief Executive Officer
January 27, 2003
12
Nutri/System, Inc.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 19, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Michael J. Hagan and James
D. Brown, and each or either of them, proxies of the undersigned, with full
power of substitution, to vote all of the shares of Common Stock of
Nutri/System, Inc. (the "Company") which the undersigned may be entitled to
vote at the Special Meeting of Stockholders of the Company to be held at the
offices of the Company located at 202 Welsh Road, Horsham, Pennsylvania 19044,
on Wednesday, February 19, 2003 at 10:00 a.m., local time, and at any
adjournment, postponement or continuation thereof, as follows:
1. ELECTION OF DIRECTORS.
[_] FOR all nominees listed below
[_] WITHHOLD AUTHORITY to vote for the nominees listed below
INSTRUCTION: To withhold authority to vote for any individual nominee, strike a
line through the nominee's name on the following list:
Ian J. Berg, Djordje Jankovic, Warren V. Musser and Brian P. Tierney
2. In their discretion, the proxy holders, on behalf of and at the discretion
of the Board of the Directors of the Company, are authorized to vote with
respect to matters incident to the conduct of the Special Meeting and upon
such other business as may properly come before the Special Meeting,
pursuant to SEC Rules, and any adjournment, postponement or continuation
thereof.
This proxy will be voted as specified. If a choice is not specified, the shares
represented by this proxy will be voted "FOR" each director nominee.
---------------------------------------------------------------
(Please date and sign on reverse side)
(Continued from other side)
This proxy should be dated, signed by the stockholder(s) and returned promptly
to the Company in the enclosed envelope. Persons signing in a fiduciary
capacity should so indicate.
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Signature
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Signature
Date: _________________ , 2003