NUTRI SYSTEM INC /DE/ (Form: 10-Q, Received: 08/06/2013 15:30:03)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission File Number 0-28551

Nutrisystem, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

23-3012204

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Fort Washington Executive Center

600 Office Center Drive

Fort Washington, Pennsylvania

19034

(Address of principal executive offices)

(Zip code)

(215) 706-5300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of July 30, 2013:


Common Stock, $.001 par value		28,721,799 shares

NUTRISYSTEM, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q


	Page

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements (unaudited)

Consolidated Balance Sheets		1

Consolidated Statements of Operations		2

Consolidated Statements of Comprehensive Income (Loss)		3

Consolidated Statement of Stockholders’ Equity		4

Consolidated Statements of Cash Flows		5

Notes to Consolidated Financial Statements		6

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3 – Quantitative and Qualitative Disclosures About Market Risk		23

Item 4 – Controls and Procedures		23

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings		24

Item 1A – Risk Factors		24

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		24

Item 3 – Defaults Upon Senior Securities		25

Item 4 – Mine Safety Disclosures		25

Item 5 – Other Information		25

Item 6 – Exhibits		25

SIGNATURES		26

NUTRISYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share and par value amounts)


	June 30, 2013			December 31, 2012

ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	17,085		$	16,186
Short term investments		17,988			3,205
Receivables		7,620			8,487
Inventories		22,811			23,637
Prepaid income taxes		775			4,531
Deferred income taxes		2,069			2,969
Other current assets		5,000			7,160

Total current assets		73,348			66,175

FIXED ASSETS, net		26,902			28,003

OTHER ASSETS		5,519			4,228


Total assets	$	105,769		$	98,406

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	29,760		$	23,192
Accrued payroll and related benefits		3,353			1,326
Deferred revenue		3,410			3,343
Other accrued expenses and current liabilities		8,093			6,911

Total current liabilities		44,616			34,772

NON-CURRENT LIABILITIES		3,293			3,525


Total liabilities		47,909			38,297


COMMITMENTS AND CONTINGENCIES (Note 6)

STOCKHOLDERS’ EQUITY:

Preferred stock, $.001 par value (5,000,000 shares authorized, no shares issued and outstanding)		0			0
Common stock, $.001 par value (100,000,000 shares authorized; shares issued – 28,848,838 at June 30, 2013 and 28,631,464 at December 31, 2012)		29			29
Additional paid-in capital		20,897			18,466
Treasury stock, at cost, 131,591 shares at June 30, 2013 and 72,561 shares at December 31, 2012		(1,143	)		(636	)
Retained earnings		38,105			42,254
Accumulated other comprehensive loss		(28	)		(4	)


Total stockholders’ equity		57,860			60,109


Total liabilities and stockholders’ equity	$	105,769		$	98,406

The accompanying notes are an integral part of these consolidated financial statements.

NUTRISYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012

REVENUE	$	97,469		$	124,560		$	202,853		$	253,077


COSTS AND EXPENSES:
Cost of revenue		47,716			66,419			100,069			136,948
Marketing		24,250			28,546			60,566			74,213
General and administrative		13,350			19,971			28,601			36,286
Depreciation and amortization		2,342			2,706			4,891			5,542


Total costs and expenses		87,658			117,642			194,127			252,989


Operating income		9,811			6,918			8,726			88

OTHER EXPENSE		0			(78	)		0			(78	)

INTEREST EXPENSE, net		(29	)		(236	)		(82	)		(510	)


Income (loss) before income taxes		9,782			6,604			8,644			(500	)

INCOME TAX EXPENSE (BENEFIT)		3,423			2,489			2,925			(134	)


Net income (loss)	$	6,359		$	4,115		$	5,719		$	(366	)


BASIC INCOME (LOSS) PER COMMON SHARE	$	0.22		$	0.14		$	0.20		$	(0.01	)


DILUTED INCOME (LOSS) PER COMMON SHARE	$	0.22		$	0.14		$	0.20		$	(0.01	)


WEIGHTED AVERAGE SHARES OUTSTANDING:

Basic		27,895			27,441			27,905			27,381

Diluted		28,001			27,622			28,046			27,381

DIVIDENDS DECLARED PER COMMON SHARE	$	0.175		$	0.175		$	0.35		$	0.35

The accompanying notes are an integral part of these consolidated financial statements.

NUTRISYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012

Net income (loss)	$	6,359		$	4,115		$	5,719		$	(366	)


OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment
Short term investments:		0			78			0			78
Unrealized (loss) gain on short term investments, net of income tax (benefit) expense of ($23), ($7), ($15) and $1, respectively		(47	)		(10	)		(28	)		2
Reclassification adjustments, net of income tax (benefit) expense of $0 and $2, respectively, for 2013		(1	)		0			4			0

Short term investments, net		(48	)		(10	)		(24	)		2

Interest rate swaps:
Unrealized loss on interest rate swaps, net of income tax benefit of $14 and $24, respectively for 2012		0			(29	)		0			(45	)


Other comprehensive (loss) income, net of tax		(48	)		39			(24	)		35

Comprehensive income (loss)	$	6,311		$	4,154		$	5,695		$	(331	)

The accompanying notes are an integral part of these consolidated financial statements.

NUTRISYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except share amounts)


	Common Shares		Common Stock		Additional Paid-in Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Total

BALANCE, January 1, 2013		28,631,464	$	29	$	18,466		$	(636	)	$	42,254		$	(4	)	$	60,109

Net income		0		0		0			0			5,719			0			5,719

Share-based compensation expense		216,474		0		2,890			0			0			0			2,890

Exercise of stock options		900		0		0			0			0			0			0

Equity compensation awards, net		0		0		(459	)		0			0			0			(459	)

Cash dividends		0		0		0			0			(9,868	)		0			(9,868	)

Employee tax withholdings related to the vesting of equity awards		0		0		0			(507	)		0			0			(507	)

Other comprehensive loss, net of tax		0		0		0			0			0			(24	)		(24	)


BALANCE, June 30, 2013		28,848,838	$	29	$	_20,897		$	(1,143	)	$	38,105		$	(28	)	$	57,860

The accompanying notes are an integral part of these consolidated financial statements.

NUTRISYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Six Months Ended June 30,
	2013			2012

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	5,719		$	(366	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		4,891			5,542
Loss on disposal of fixed assets		48			6
Share–based compensation expense		2,890			6,574
Deferred income tax benefit		(788	)		(3,162	)
Other non-cash charges		30			57
Changes in operating assets and liabilities:
Receivables		867			1,826
Inventories		826			8,356
Other assets		2,153			3,796
Accounts payable		6,642			726
Accrued payroll and related benefits		2,027			3,056
Deferred revenue		67			(633	)
Income taxes		3,658			2,859
Other accrued expenses and liabilities		1,006			486


Net cash provided by operating activities		30,036			29,123


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short term investments		(18,458	)		(8,527	)
Proceeds from sales of short term investments		3,594			0
Capital additions		(3,984	)		(5,496	)
Proceeds from the sale of fixed assets		28			0


Net cash used in investing activities		(18,820	)		(14,023	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issuance costs		0			(200	)
Exercise of stock options		0			9
Taxes related to equity compensation awards, net		(449	)		(627	)
Payment of dividends		(9,868	)		(9,894	)

Net cash used in financing activities		(10,317	)		(10,712	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		899			4,388
CASH AND CASH EQUIVALENTS, beginning of period		16,186			47,594


CASH AND CASH EQUIVALENTS, end of period	$	17,085		$	51,982

The accompanying notes are an integral part of these consolidated financial statements.

NUTRISYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands except share and per share amounts)

1.	BACKGROUND

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 Company’s 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 a retail program.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of Financial Statements

The Company’s 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.

Interim Financial Statements

The Company’s consolidated financial statements as of and for the three and six months ended June 30, 2013 and 2012 are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company’s financial position and results of operations for these interim periods. Accordingly, readers of these consolidated financial statements should refer to the Company’s audited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and the related notes thereto, for the year ended December 31, 2012, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 as certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report pursuant to the rules of the Securities and Exchange Commission (the “SEC”). The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013.

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 June 30, 2013 and December 31, 2012, demand accounts and money market accounts comprised all of the Company’s cash and cash equivalents.

Short term investments at June 30, 2013, consist of investments in government and agency securities and corporate debt securities. Short term investments at December 31, 2012, consisted of investments in 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 loss, a component of stockholders’ equity, net of related tax effects.

At June 30, 2013, cash, cash equivalents and short term investments consisted of the following:


	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash	$	15,108	$	0	$	0		$	15,108
Money market account		1,977		0		0			1,977
Government and agency securities		12,467		0		(21	)		12,446
Corporate debt securities		5,564		0		(22	)		5,542

	$	35,116	$	0	$	(43	)	$	35,073

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

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 $11,311 and $10,511 at June 30, 2013 and December 31, 2012, respectively

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 Company’s website by the customer and the product is shipped to the customer. Revenue from the retail program is recognized typically when the product is received at the retailer’s location.

Deferred revenue consists primarily of unredeemed prepaid gift cards and unshipped frozen foods. When a customer orders the Nutrisystem® Select® program, two separate shipments are delivered. The first shipment contains Nutrisystem’s standard shelf-stable food. The second shipment contains the frozen foods and is generally delivered within a week of a customer’s order. Both shipments qualify as separate units of accounting and the fair value is based on estimated selling prices of both units.

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.

The Company reviews the reserves for customer returns at each reporting period and adjusts them to reflect data available at that time. To estimate reserves for returns, the Company considers actual return rates in preceding periods and changes in product offerings or marketing methods that might impact returns going forward. To the extent the estimate of returns changes, the Company will adjust the reserve, which will impact the amount of product sales revenue recognized in the period of the adjustment. The provision for estimated returns for the three and six months ended June 30, 2013 was $2,643 and $6,488, respectively, and $3,056 and $6,157 for the three and six months ended June 30, 2012, respectively. The reserve for estimated returns incurred but not received and processed was $1,032 and $652 at June 30, 2013 and December 31, 2012, respectively, and has been included in other accrued expenses and current liabilities in the accompanying consolidated balance sheets.

Revenue from product sales includes amounts billed for shipping and handling and is presented net of returns and billed sales tax. Revenue from the retail program is also net of any trade allowances, reclamation reserves or broker commissions. Revenue from shipping and handling charges were $561 and $1,202 for the three and six months ended June 30, 2013, respectively, and $751 and $1,720 for the three and six months ended June 30, 2012, respectively. Shipping-related costs are included in cost of revenue in the accompanying consolidated statements of operations.

Dependence on Suppliers

Approximately 19% and 11% of inventory purchases for the six months ended June 30, 2013 were from two suppliers. The Company has a supply arrangement with one of these suppliers that requires the Company to make minimum purchases. For the six months ended June 30, 2012, these suppliers supplied approximately 16% and 13% of inventory purchases.

The Company outsources 100% of its fulfillment operations to a third-party provider and more than 90% of its orders are shipped by one third-party provider.

Vendor Rebates

One of the Company’s 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 three and six months ended June 30, 2013, the Company reduced cost of revenue by $334 and $692, respectively, for these rebates. For the comparable periods of 2012, cost of revenue was reduced by $441 and $947, respectively. A receivable of $1,439 and $637 at June 30, 2013 and December 31, 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.

Fair Value of Financial Instruments

A three-tier fair value hierarchy has been established by the Financial Accounting Standards Board (“FASB”) to prioritize the inputs used in measuring fair value. These tiers are as follows:

Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2—Valuations 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 3—Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

The fair values of the Company’s 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 June 30, 2013 and December 31, 2012.

The following table summarizes the Company’s financial assets measured at fair value at June 30, 2013:


	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)
Money market account	$	1,977	$	1,977
Government and agency securities		12,446		12,446
Corporate debt securities		5,542		5,542

Total assets	$	19,965	$	19,965

The following table summarizes the Company’s 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

Earnings Per Share

The Company uses the two-class method to calculate earnings per share (“EPS”) as the unvested restricted stock issued under the Company’s 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:


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012

Net income (loss)	$	6,359		$	4,115		$	5,719		$	(366	)
Net income allocated to unvested restricted stock		(169	)		(144	)		(140	)		0

Net income (loss) allocated to common shares	$	6,190		$	3,971		$	5,579		$	(366	)


Weighted average shares outstanding:
Basic		27,895			27,441			27,905			27,381
Effect of dilutive securities		106			181			141			0

Diluted		28,001			27,622			28,046			27,381


Basic income (loss) per common share	$	0.22		$	0.14		$	0.20		$	(0.01	)

Diluted income (loss) per common share	$	0.22		$	0.14		$	0.20		$	(0.01	)

In the three and six months ended June 30, 2013 common stock equivalents representing 1,252,986 and 1,359,706 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. In the three months ended June 30, 2012, common stock equivalents representing 746,751 shares of common stock were excluded from weighted average shares outstanding for diluted income per common share purposes because the effect would be anti-dilutive. In the six months ended June 30, 2012, diluted loss per common share is identical to basic loss per common share as the Company is in a net loss position and the impact of including common stock equivalents is anti-dilutive.

Cash Flow Information

The Company made no payments for income taxes in both six months ended June 30, 2013 and 2012, respectively. Interest payments in the six months ended June 30, 2013 and 2012 were $65 and $469, respectively. For the six months ended June 30, 2013, the Company had non-cash capital additions of $443 of unpaid invoices in accounts payable and accrued expenses. For the six months ended June 30, 2012, the Company had non-cash capital additions of $1,843 of unpaid invoices in accounts payable and accrued expenses.

Recently Issued Accounting Pronouncements

In February 2013, the FASB issued ASU No. 2013-02 which requires companies to present information about reclassifications out of accumulated other comprehensive income in a single note or on the face of the financial statements. The updated standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012, with early adoption permitted. The adoption of this standard update did not impact the Company’s consolidated financial statements.

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP 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.

Reclassifications

Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

3.	CREDIT FACILITY

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 June 30, 2013.

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 Agent’s 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 applicable margin is subject to adjustment based on the Company’s 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 Company’s consolidated fixed charge coverage ratio and ranges from 0.25-0.375% per year. During the three and six months ended June 30, 2013, the Company incurred no interest expense and $25 and $65 in an unused line fee, respectively. In the comparable periods of 2012, the Company incurred $129 and $323 in interest, respectively, and $53 and $106 in unused line fees, respectively. 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 June 30, 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 June 30, 2013, the Company had $165 of unamortized debt issuance costs associated with the Credit Facility that are being amortized over the remaining term of the Credit Facility.

4.	CAPITAL STOCK

Common Stock

The Company issued 900 and 4,668 shares of common stock upon the exercise of stock options in the six months ended June 30, 2013 and 2012, respectively. During the six months ended June 30, 2013 and 2012, employees surrendered to the Company 59,030 and 66,205 shares of common stock, respectively, valued at $507 and $745, respectively, 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 are now included in treasury stock. Previously, these shares were retired. Also, in the six months ended June 30, 2013 and 2012, the Company issued 50,610 and 42,882 shares of common stock, respectively, as compensation to board members and third-party marketing vendors pursuant to their respective contracts. Costs recognized for these stock grants issued and those previously issued were $650 and $359 for the six months ended June 30, 2013 and 2012, respectively. During each of the three and six months ended June 30, 2013 and 2012, the Company paid a dividend of $0.175 per share to all stockholders of record.

In 2011, the Board of Directors of the Company authorized a stock repurchase program of up to $150,000 of the Company’s outstanding shares of common stock in open-market transactions on the NASDAQ Stock Market or through privately negotiated transactions, including block transactions. This stock repurchase program expired on June 30, 2013. No shares of common stock were repurchased during the six months ended June 30, 2013 or 2012.

Preferred Stock

The Company has authorized 5,000,000 shares of preferred stock issuable in series upon resolution of the Board of Directors. Unless otherwise required by law, the Board of Directors can, without stockholder approval, issue preferred stock in the future with voting and conversion rights that could adversely affect the voting power of the common stock. The issuance of preferred stock may have the effect of delaying, averting or preventing a change in control of the Company.

5.	SHARE-BASED COMPENSATION EXPENSE

The following table summarizes the Company’s stock option activity during the six months ended June 30, 2013:


	Number of Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (years)		Aggregate Intrinsic Value
Outstanding, January 1, 2013		633,801		$	11.92
Granted		524,124			8.61
Exercised		(900	)		0.58
Forfeited/expired		(374,345	)		13.70

Outstanding, June 30, 2013		782,680		$	8.87		6.51	$	2,489

Exercisable, June 30, 2013		25,449		$	17.78		4.52	$	6

Expected to vest at June 30, 2013		760,639		$	8.86		6.51	$	2,428

In May 2013, the Company determined that 40,281 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 Company’s consolidated financial statements but did reduce the number of stock options outstanding as of January 1, 2013. The Company recorded compensation expense of $46 and $192 in the accompanying consolidated statements of operations for the three and six months ended June 30, 2013, respectively, for stock option awards. During the three and six months ended June 30, 2012, the Company recorded compensation expense of $979 and $1,068, respectively. The total intrinsic value of stock options exercised during the three and six months ended June 30, 2013 was $3 and $7, respectively, and $0 and $43, respectively, for the comparable periods of 2012.

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 Company’s 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 the six months ended June 30, 2013:


	Number of Shares			Weighted- Average Grant-Date Fair Value		Aggregate Intrinsic Value
Nonvested, January 1, 2013		830,128		$	13.71
Granted		287,779			8.49
Vested		(210,654	)		12.66
Forfeited		(155,456	)		12.84

Nonvested, June 30, 2013		751,797		$	12.19	$	8,856

Additionally, the Company grants restricted stock units. Prior to 2012 and in 2013, the restricted stock units were performance-based 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 units that ultimately vest to range from 0% to 200% of the original units granted. 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 Company’s 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 Company’s 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.

The following table summarizes the restricted stock unit activity for the six months ended June 30, 2013:


	Number of Restricted Stock Units			Weighted- Average Grant-Date Fair Value		Aggregate Intrinsic Value
Nonvested, January 1, 2013		133,190		$	11.76
Granted		156,698			8.58
Vested		(33,541	)		17.53
Forfeited		(29,013	)		12.01

Nonvested, June 30, 2013		227,334		$	8.69	$	2,678

The Company recorded compensation of $887 and $2,048 in the accompanying consolidated statements of operations for the three and six months ended June 30, 2013, respectively, and $3,615 and $5,147, respectively, for the comparable periods of 2012 in connection with the issuance of the restricted stock and restricted stock units. As of June 30, 2013, 719,562 shares of restricted stock and 220,491 restricted stock units were expected to vest.

As of June 30, 2013, there was $9,585 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 1.4 years. The total unrecognized compensation expense will be fully recognized as expense through the second quarter of 2017.

6.	COMMITMENTS AND CONTINGENCIES

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 Company’s “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 Company’s 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 Company’s 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 plaintiff’s 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 Company’s 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 Company’s motion to dismiss for lack of subject matter jurisdiction. On October 23, 2012, the Company filed its answer and affirmative defenses to plaintiff’s complaint for declaratory relief and counterclaims for trademark infringement in which it (i) denied each of plaintiff’s counts in the complaint, (ii) set forth various affirmative defenses to plaintiff’s claims, and (iii) asserted by way of counterclaim claims for trademark infringement and dilution arising from plaintiff’s intentional use of a confusingly similar mark for the purpose of unlawfully trading upon the Company’s 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 plaintiff’s 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 plaintiff’s request for leave to amend as futile, and after argument held April 3, 2013 on plaintiff’s 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, plaintiff’s 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 Company’s 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 10, 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. The Company believes that plaintiff’s claims against the Company are without merit and intends to defend the litigation vigorously.

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 Company’s consolidated financial position, results of operations or cash flows in future years.

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 anticipates it will meet all annual purchase obligations in 2013.

7.	INCOME TAXES

The Company recorded income taxes at an estimated effective income tax rate applied to income before income taxes of 35.0% and 33.8% in the three and six months ended June 30, 2013, respectively, as compared to 37.7% and 26.8% in the comparable periods of 2012. The Company offsets taxable income for state tax purposes with net operating loss carryforwards. At December 31, 2012, the Company had net operating loss carryforwards of approximately $14,526 for state tax purposes. 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 and management believes that some of the net operating loss carryforwards will be subject to this annual limit in 2013. State net operating loss carryforwards will begin to expire in 2025. The total amount of gross unrecognized tax benefits as of both June 30, 2013 and December 31, 2012 was $1,474. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is approximately $958.

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 net deferred tax assets.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

From time to time, information provided by us, including but not limited to statements in this Quarterly Report, or other statements made by or on our behalf, may contain “forward-looking” information within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “believe,” “estimate,” “will be,” “will,” “would,” “expect,” “anticipate,” “plan,” “project,” “intend,” “could,” “should,” or other similar words or expressions often identify forward-looking statements.

Such statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results, performance, or achievements may vary materially from those anticipated, estimated, or projected. Among the factors that could cause actual results to materially differ include:

•

competition from other weight management industry participants or the development of more effective or more favorably perceived weight management methods;

•

our ability to continue to develop innovative new programs and enhance our existing programs, or the failure of our programs to continue to appeal to the market;

•

the effectiveness of our marketing and advertising programs;

•

loss, or disruption in the business of, any of our food suppliers;

•

loss, or disruption in the business, of our fulfillment provider;

•

disruptions in the shipping of our food products;

•

health or advertising related claims by consumers;

•

failure to attract or negative publicity with respect to any of our spokespersons;

•

our ability to successfully make acquisitions or enter into joint ventures, including our ability to successfully integrate, operate or realize the projected benefits of such businesses;

•

general business and economic conditions, particularly the pace, continuation, and possible reversal of the recovery in the worldwide economy;

•

the seasonal nature of our business;

•

our ability to enforce our intellectual property rights, as well as the impact of our involvement in any claims related to intellectual property rights;

•

uncertainties regarding the satisfactory operation of our information technology or systems;

•

risks associated with unauthorized penetration of our information security;

•

the impact of existing and future laws and regulations;

•

the impact of our debt service obligations and restrictive debt covenants;

•

our inability to recruit and retain key executive officers; and

•

other risks and uncertainties, including those detailed from time to time in our periodic reports filed with the Securities and Exchange Commission.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Our 2012 Annual Report on Form 10-K listed various important factors that could cause actual results to differ materially from projected and historic results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. Readers can find them in Part I, Item 1A, of that filing under the heading “Risk Factors.” We incorporate that section of that Annual Report on Form 10-K in this filing and investors should refer to it. Reference is also made to Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

The following discussion should be read in conjunction with the financial information included elsewhere in this Quarterly Report on Form 10-Q.

Background

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 Company’s 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 a retail program.

Revenue consists primarily of food sales. For the six months ended June 30, 2013, the direct channel accounted for 93% of total revenue compared to 4% for QVC and 3% for retail. For the six months ended June 30, 2012, the direct channel accounted for 95% of total revenue compared to 3% for QVC and 2% for other. We incur significant marketing expenditures to support our brand as we continue to advertise across various media channels. New media channels are tested on a continual basis and we consider our media mix to be diverse. We market our weight management system through television, print, direct mail, Internet, public relations and social media. We review and analyze a number of key operating and financial metrics to manage our business, including the number of new customers, revenue per customer, total revenues, marketing per new customer, operating margins and reactivation revenue.

Our mix of revenue can be divided into three categories. First, new customer revenue is all revenue within a quarter from customers joining within that quarter. New customer revenue is the main driver of revenue growth. Second, on-program revenue is all revenue from customers who joined in previous quarters but who are still within their first nine months on the program. Third, reactivation revenue is all revenue generated from customers who are more than nine months from their initial purchase.

Our eCommerce, direct-to-consumer business model provides flexibility which allows us to manage marketing spend according to customer demand. We believe this flexibility is especially valuable due to the current instability in general economic conditions. Additionally, we initiated a concerted effort to improve lifetime customer economics, length of stay, and overall customer satisfaction and are continuously redesigning our eCommerce platform and website. Our product offerings have expanded to include frozen foods, and we entered into the retail channel and introduced the Nutrisystem® D® program during the last several years. Further, we have taken steps to reduce our overall operating costs.

Over the past several years our financial performance has been adversely impacted by a number of factors, including the economic downturn, declines in consumers’ discretionary spending and increased competitive activity. We believe these factors have primarily driven the decline in the number of new customer starts. We have been hampered by continued bargain-focused consumer behavior and economic concerns and reacted with discounted sales promotions, thus reducing average selling prices and gross margins which have been partially offset by increased marketing efficiency.

As we began 2013, we renewed our focus to the following key areas: 1) a return to direct marketing fundamentals including building and leveraging our database; 2) margin improvement; 3) product and program innovation; and 4) prioritization of growth initiatives. During the six months ended June 30, 2013, we have reduced the

size of the senior management team and reorganized the workforce to align around key priorities resulting in approximately $1.4 million in severance, including $326,000 of non-cash expense related to the acceleration of previously awarded equity-based awards. Gross margins have improved by eliminating free promotional items and process re-engineering and we have worked to reduce our reliance on price discounting. We have improved average selling price through the execution of cross-sell initiatives and reduced discounting as well as improved our reactivation rates. Despite these improvements, we have experienced and expect continued pressure on revenue growth which has hampered marketing efficiency.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Our significant accounting policies are described in Note 2 of the consolidated financial statements included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2012.

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management develops, and changes periodically, these estimates and assumptions based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The accounting estimates we consider critical include reserves for returns, excess and obsolete inventory and income taxes. These critical accounting estimates are discussed with our audit committee quarterly.

During the six months ended June 30, 2013, we did not make any material change to our critical accounting policies.

Results of Operations

Revenue and expenses consist of the following components:

Revenue. Revenue consists primarily of food sales. Food sales include sales of food, supplements, shipping and handling charges billed to customers and sales credits and adjustments, including product returns. No revenue is recorded for food products provided at no charge as part of promotions.

Cost of Revenue . Cost of revenue consists primarily of the cost of the products sold, including compensation related to fulfillment, the costs of outside fulfillment, incoming and outgoing shipping costs, charge card fees and packing material. Cost of products sold includes products provided at no charge as part of promotions and the non-food materials provided with customer orders.

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. Internet advertising expense is recorded based on either the rate of delivery of a guaranteed number of impressions over the advertising contract term or on a cost per customer acquired, depending upon the terms. 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 advertising 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. All other advertising costs are charged to expense as incurred or the first time the advertising takes place.

General and Administrative Expense . General and administrative expense consists of compensation for administrative, information technology, counselors, customer service and sales personnel, share-based payment arrangements for related employees, facility expenses, website development costs, professional service fees and other general corporate expenses.

Interest Expense, net. Interest expense, net consists of interest expense on our outstanding indebtedness net of interest income earned on cash balances and short term investments.

Income Taxes. We are subject to corporate level income taxes and record a provision (benefit) for income taxes based on an estimated effective income tax rate for the year.

Overview of the Direct Channel

In the six months ended June 30, 2013 and 2012, the direct channel represented 93% and 95%, respectively, of our revenue. Revenues through the direct channel were $90.6 million and $187.7 million in the three and six months ended June 30, 2013 compared to $118.8 million and $240.3 million in the comparable periods of 2012. Revenue is primarily generated through customer starts, reactivation of former customers and the customer ordering behavior, including length of time on our program and the diet program selection. The decrease in revenue is primarily attributable to declines in new customers and on-program revenue due to a weak response to our 2013 diet season creative and entering 2013 with fewer on-program customers. Critical to increasing customer starts is our ability to deploy marketing dollars while maintaining marketing effectiveness. Factors influencing our marketing effectiveness include the quality of the advertisements, promotional activity by our competitors, as well as the price and availability of appropriate media.

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012


	Three Months Ended June 30,
	2013			2012			$ Change			% Change
	(in thousands)

REVENUE	$	97,469		$	124,560		$	(27,091	)		(22	)%


COSTS AND EXPENSES:
Cost of revenue		47,716			66,419			(18,703	)		(28	)%
Marketing		24,250			28,546			(4,296	)		(15	)%
General and administrative		13,350			19,971			(6,621	)		(33	)%
Depreciation and amortization		2,342			2,706			(364	)		(13	)%


Total costs and expenses		87,658			117,642			(29,984	)		(25	)%


Operating income		9,811			6,918			2,893			42	%

OTHER EXPENSE		0			(78	)		78			100	%

INTEREST EXPENSE, net		(29	)		(236	)		207			88	%


Income before income taxes		9,782			6,604			3,178			48	%
INCOME TAX EXPENSE		3,423			2,489			934			38	%

Net income	$	6,359		$	4,115		$	2,244			55	%


% of revenue
Gross margin		51.0	%		46.7	%
Marketing		24.9	%		22.9	%
General and administrative		13.7	%		16.0	%
Operating income		10.1	%		5.6	%

Revenue. Revenue decreased to $97.5 million in the second quarter of 2013 from $124.6 million for the second quarter of 2012. The decrease in revenue is primarily attributable to declines in new customers and on-program revenue, slightly offset by increases in average selling price and retail revenue. In the second quarter of 2013, the direct channel accounted for 93% of total revenue compared to 3% for QVC and 4% for retail. In the second quarter of 2012, the direct channel accounted for 95% of total revenue compared to 3% for QVC and 2% for other.

Costs and Expenses. Cost of revenue decreased to $47.7 million in the second quarter of 2013 from $66.4 million in the second quarter of 2012. Gross margin as a percent of revenue increased to 51.0% in the second quarter of 2013 from 46.7% for the second quarter of 2012. The increase in gross margin was primarily attributable to continued pricing discipline, the removal of certain promotional items and free food promotions and process re-engineering.

Marketing expense decreased to $24.3 million in the second quarter of 2013 from $28.5 million in the second quarter of 2012. Marketing expense as a percent of revenue increased to 24.9% in the second quarter of 2013 from 22.9% for the second quarter of 2012. Substantially all marketing spending promoted the direct business. The decrease in marketing expense was primarily attributable to decreased spending for advertising media ($2.6 million), television production ($1.4 million) and public relations ($565,000). These decreases were offset by an increase in marketing consulting ($447,000). In total, media spending was $20.3 million in the second quarter of 2013 and $22.9 million in the second quarter of 2012.

General and administrative expense decreased to $13.4 million in the second quarter of 2013 compared to $20.0 million in the second quarter of 2012. General and administrative expense as a percent of revenue decreased to 13.7% in the second quarter of 2013 from 16.0% for the second quarter of 2012. The decrease in spending was primarily

attributable to lower compensation, benefits and temporary help ($1.4 million), decreased non-cash expense for share-based payment arrangements ($3.3 million) and lower recruiting costs ($529,000) primarily due to severance and related charges of $6.6 million recorded in the second quarter of 2012 related to the cessation of employment of our former President and Chief Executive Officer.

Depreciation and amortization expense decreased to $2.3 million in the second quarter of 2013 compared to $2.7 million in the second quarter of 2012.

Interest Expense, net. Interest expense, net was $29,000 in the second quarter of 2013 compared to $236,000 in the second quarter of 2012 as no amounts were outstanding under the debt facility during the three months ended June 30, 2013. During the three months ended June 30, 2012, we had $30.0 million in borrowings outstanding.

Income Tax Expense. In the second quarter of 2013, we recorded an income tax expense of $3.4 million, which reflects an effective income tax rate of 35.0%. In the second quarter of 2012, we recorded an income tax expense of $2.5 million, which reflects an effective income tax rate of 37.7%. The decrease in the effective income tax rate was due to changes in executive compensation.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012


	Six Months Ended June 30,
	2013			2012			$ Change			% Change
	(in thousands)

REVENUE	$	202,853		$	253,077		$	(50,224	)		(20	)%


COSTS AND EXPENSES:
Cost of revenue		100,069			136,948			(36,879	)		(27	)%
Marketing		60,566			74,213			(13,647	)		(18	)%
General and administrative		28,601			36,286			(7,685	)		(21	)%
Depreciation and amortization		4,891			5,542			(651	)		(12	)%


Total costs and expenses		194,127			252,989			(58,862	)		(23	)%


Operating income		8,726			88			8,638			9816	%

OTHER EXPENSE		0			(78	)		78			100	%

INTEREST EXPENSE, net		(82	)		(510	)		428			84	%


Income (loss) before income taxes		8,644			(500	)		9,144			1829	%
INCOME TAX EXPENSE (BENEFIT)		2,925			(134	)		3,059			2283	%

Net income (loss)	$	5,719		$	(366	)	$	6,085			1663	%


% of revenue
Gross margin		50.7	%		45.9	%
Marketing		29.9	%		29.3	%
General and administrative		14.1	%		14.3	%
Operating income		4.3	%		0.0	%

Revenue. Revenue decreased to $202.9 million in the six months ended June 30, 2013 from $253.1 million in the comparable period of 2012. The revenue decrease occurred primarily due to declines in new customers and on-program revenue, slightly offset by increased reactivation and retail revenue. In the six months ended June 30, 2013, the direct channel accounted for 93% of total revenue compared to 4% for QVC and 3% for retail. In the six months ended June 30, 2012, the direct channel accounted for 95% of total revenue compared to 3% for QVC and 2% for other.

Costs and Expenses. Cost of revenue decreased to $100.1 million in the six months ended June 30, 2013 from $136.9 million in the comparable period of 2012. Gross margin as a percent of revenue increased to 50.7% in the six months ended June 30, 2013 from 45.9% for the comparable period of 2012. The increase in gross margin was primarily attributable to pricing discipline, the removal of certain promotional items and free food promotions and process re-engineering.

Marketing expense decreased to $60.6 million in the six months ended June 30, 2013 from $74.2 million in the comparable period of 2012. Marketing expense as a percent of revenue increased to 29.9% in the six months ended June 30, 2013 from 29.3% for the comparable period of 2012. Substantially all marketing spending promoted the direct business. The decrease in marketing expense was primarily attributable to decreased spending for advertising media ($11.6 million), public relations ($1.8 million) and television production ($1.3 million). These decreases were partially offset by an increase in marketing consulting ($801,000). In total, media spending was $51.6 million in the six months ended June 30, 2013 and $63.2 million in the six months ended June 30, 2012.

General and administrative expense decreased to $28.6 million in the six months ended June 30, 2013 from $36.3 million in the comparable period of 2012. General and administrative expense as a percent of revenue decreased to 14.1% in the six months ended June 30, 2013 from 14.3% in the comparable period of 2012. The decreased spending is due to lower compensation, benefits and temporary help ($2.8 million), lower non-cash expense for share-based payment arrangements ($3.8 million), decreased professional, outside and computer services expenses ($1.2 million) and decreased recruiting costs ($494,000). In the six months ended June 30, 2013, we recorded approximately $1.4 million in severance, including $326,000 of non-cash expense related to the acceleration of previously awarded equity-based awards. In the six months ended June 30, 2012, we recorded $6.9 million of severance and related charges.

Depreciation and amortization expense decreased to $4.9 million in the six months ended June 30, 2013 compared to $5.5 million in the six months ended June 30, 2012 due to the normal retirement of certain assets during 2012.

Interest Expense, net. Interest expense, net was $82,000 in the six months ended June 30, 2013 compared to $510,000 in the comparable period of 2012 as no amounts were outstanding under the debt facility during the six months ended June 30, 2013 versus $30.0 million in outstanding borrowings during the comparable period in 2012.

Income Tax Expense (Benefit). In the six months ended June 30, 2013, we recorded an income tax expense of $2.9 million, which reflects an estimated annual effective income tax rate of 33.8%. In the comparable period of 2012, we recorded an income tax benefit of $134,000, which reflects an estimated annual effective income tax rate of 26.8%. Our estimated annual effective income tax rate increased due to changes in executive compensation and charitable contributions.

Contractual Obligations and Commercial Commitments

As of June 30, 2013, our principal commitments consisted of obligations under supply agreements with food vendors, an agreement with our outside fulfillment provider, operating leases and employment contracts. Although we have no material commitments for capital expenditures, we anticipate continuing requirements for capital expenditures.

During the six months ended June 30, 2013, there were no items that significantly impacted our commitments and contingencies as disclosed in the notes to the consolidated financial statements for the year ended December 31, 2012, as included in our Annual Report on Form 10-K. In addition, we have no off-balance sheet financing arrangements.

Liquidity, Capital Resources and Other Financial Data

At June 30, 2013, we had working capital of $28.7 million, compared to working capital of $31.4 million at December 31, 2012. Cash and cash equivalents at June 30, 2013 were $17.1 million, an increase of $899,000 from the balance of $16.2 million at December 31, 2012. In addition, we had $18.0 million invested in short term investments at June 30, 2013 as compared to $3.2 million at December 31, 2012. Our principal sources of liquidity during this period were cash flow from operations.

On November 8, 2012, we entered into a $40.0 million secured revolving credit facility, as amended, with a lender. The $40.0 million credit facility provides for interest on borrowings at either a base rate or a London Inter-Bank Offered Rate, in each case plus an applicable margin, and is also subject to an unused fee payable quarterly. The $40.0 million 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. The $40.0 million credit facility can be drawn upon through November 8, 2015, at which time all amounts must be repaid. As of June 30, 2013, no amounts were outstanding under the $40.0 million credit facility.

In the six months ended June 30, 2013, we generated cash flow of $30.0 million from operating activities, an increase of $913,000 from 2012. The increase in cash flow from operations was primarily attributable to a net income during the six months ended June 30, 2013 offset by net changes in operating assets and liabilities.

In the six months ended June 30, 2013, net cash used in investing activities was $18.8 million primarily for purchases of short term investments.

In the six months ended June 30, 2013, net cash used in financing activities was $10.3 million primarily for the payment of dividends.

On July 28, 2011, we announced that our Board of Directors had authorized the repurchase of up to $150.0 million of our outstanding shares of common stock in open-market transactions on the NASDAQ Stock Market or through privately negotiated transactions, including block transactions. This stock repurchase program expired on June 30, 2013.

Subsequent to June 30, 2013, our Board of Directors declared a quarterly dividend of $0.175 per share payable on August 19, 2013 to stockholders of record as of August 8, 2013. Although we intend to continue to pay regular quarterly dividends, the declaration and payment of future dividends are discretionary and will be subject to quarterly determination by our Board of Directors following its review of our financial performance.

We believe that our available capital resources are sufficient to fund our working capital requirements, capital expenditures, income tax obligations and dividends for the foreseeable future.

Seasonality

Typically in the weight loss industry, revenue is strongest in the first calendar quarter and lowest in the fourth calendar quarter. We believe our business experiences seasonality, driven by the predisposition of dieters to initiate a diet and the price and availability of certain media.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We believe that we are not subject to any material risks arising from changes in foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk instruments. Our cash and cash equivalents at June 30, 2013 of $17.1 million were maintained in bank and money market accounts. Additionally, we have $18.0 million invested in short term investments, which are classified as available-for-sale securities and are reported at fair value in the accompanying consolidated balance sheets. As such, a change in interest rates of 1 percentage point would not have a material impact on our operating results and cash flows.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. The SEC defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on the evaluation of the effectiveness of our disclosure controls and procedures by our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, as of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures at the end of the period covered by this report are designed at a reasonable assurance level and are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

(b) Changes in Internal Control Over Financial Reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Litigation

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

There were no reportable purchases during the quarter ended June 30, 2013, provided however that 19,225 shares, at an average purchase price of $8.74, were surrendered by employees to the Company during such quarter for the payment of the minimum tax liability withholding obligations upon the vesting of shares of restricted stock.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits



10.1		Form of Performance-Based Restricted Stock Unit Grant Agreement.

10.2		Performance-Based Restricted Stock Unit Grant Agreement for Michael Monahan.

10.3		Performance-Based Restricted Stock Unit Grant Agreement for Keira Krausz.

10.4		Letter Agreement, dated May 21, 2013, between Nutrisystem, Inc. and Dawn Zier, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on May 21, 2013.

31.1		Certifying Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certifying Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifying Statement of the Chief Executive Officer pursuant to Section 1350 of Title 18 of the United States Code.

32.2		Certifying Statement of the Chief Financial Officer pursuant to Section 1350 of Title 18 of the United States Code.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


Nutrisystem, Inc.

BY:	/S/ Dawn M. Zier	August 6, 2013
Dawn M. Zier
President and Chief Executive Officer
(principal executive officer)

BY:	/S/ Michael P. Monahan	August 6, 2013
Michael P. Monahan
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)

Exhibit Index


No.		Description

10.1		Form of Performance-Based Restricted Stock Unit Grant Agreement.

10.2		Performance-Based Restricted Stock Unit Grant Agreement for Michael Monahan.

10.3		Performance-Based Restricted Stock Unit Grant Agreement for Keira Krausz.

10.4		Letter Agreement, dated May 21, 2013, between Nutrisystem, Inc. and Dawn Zier, incorporated by reference to the designated exhibit of the Company’s Report on Form 8-K filed on May 21, 2013.

31.1		Certifying Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certifying Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifying Statement of the Chief Executive Officer pursuant to Section 1350 of Title 18 of the United States Code.

32.2		Certifying Statement of the Chief Financial Officer pursuant to Section 1350 of Title 18 of the United States Code.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

Exhibit 10.1

NUTRISYSTEM, INC.

AMENDED AND RESTATED NUTRISYSTEM, INC.

2008 LONG-TERM INCENTIVE PLAN

PERFORMANCE-BASED RESTRICTED STOCK UNIT GRANT AGREEMENT

(Name)

This PERFORMANCE-BASED RESTRICTED STOCK UNIT GRANT AGREEMENT (the “ Agreement ”), dated as of [ ] [ ], [ ] (the “ Date of Grant ”), is delivered by NutriSystem, Inc. (the “ Company ”) to [ ] (the “ Grantee ”).

RECITALS

A. The Amended and Restated NutriSystem, Inc. 2008 Long-Term Incentive Plan (the “ Plan ”) permits the grant of performance-based restricted stock units.

B. The Compensation Committee of the Board of Directors of the Company has determined that the Grantee is eligible to participate in the Plan and has approved this Grant under the Plan.

C. Except as otherwise defined in this Agreement, capitalized terms used herein shall have the meanings set forth in the Plan.

NOW, THEREFORE, the parties to this Agreement, intending to be legally bound hereby, agree as follows:

1. Grant of Performance-Based Restricted Stock Units . Subject to the terms and conditions set forth in this Agreement and the Plan, the Company hereby grants to the Grantee [ ] performance-based restricted stock units (the “ Performance Units ”). The Performance Units are contingently awarded and will become vested and distributable if and only to the extent that the performance goals and other conditions set forth in this Agreement are met. Each Performance Unit shall be a phantom right and shall be equivalent to one share of Company Stock on the applicable distribution date, as described in Paragraph 3 below. The number of Performance Units set forth above is equal to the number of Performance Units that will vest upon achievement of the target level of performance (the “ Target Award ”).

2. Vesting .

(a) Subject to the other provisions of this Paragraph 2 , the Performance Units shall vest as of December 31, [ ] (the “ Service Date ”) to the extent determined by the Committee based on the attached Exhibit A . Any Performance Units that do not vest due to failure to fully satisfy the applicable performance goal(s) or service condition(s) shall be forfeited and the Grantee shall not have any further rights with respect to those Performance Units.

(b) If the Grantee’s service with the Employer ceases prior to the Service Date due to the Grantee’s death or “total disability” (as defined below), the Grantee shall become vested in a pro-rata portion of the Performance Units. The pro-rata portion shall be determined by multiplying (i) the Target Award by (ii) a fraction, (A) the numerator of which is the number of days of continuous service performed by the Grantee for the Employer during the period beginning January 1, [ ] and ending on the Service Date (the “ Performance Period ”), and (B) the denominator of which is [the number of calendar days in the Performance Period]. Any Performance Units that do not vest in connection with such death or total disability shall be forfeited as of the date the Grantee’s service ceases and the Grantee shall not have any further rights with respect to those Performance Units.

(c) If the Grantee’s service with the Employer ceases prior to the Service Date due to (i) a termination by the Employer without “ cause ” (as defined below), or (ii) a resignation by the Grantee with “ good reason ” (as defined below), then the Grantee shall become vested as of the Service Date in a number of Performance Units determined by multiplying (A) the number of Performance Units that would otherwise have then vested under Paragraph 2(a) above (but for the cessation of the Grantee’s service), by (B) a fraction, (1) the numerator of which is the number of days of continuous service performed by the Grantee for the Employer during the Performance Period, and (2) the denominator of which is [the number of calendar days in the Performance Period], subject to the Grantee’s execution and delivery of a general release of claims against the Company and its affiliates in a form prescribed by the Company and subject further to that release becoming irrevocable within 45 days following the Grantee’s cessation of service. Any Performance Units that cannot vest because of the pro-ration described above will be forfeited as of the date the Grantee’s service ceases and the Grantee shall not have any further rights with respect to those Performance Units. Any Performance Units that do not vest because of the failure to fully satisfy the applicable performance goal(s) shall be forfeited as of the Service Date and the Grantee shall not have any further rights with respect to those Performance Units.

(d) If prior to the Service Date the Grantee’s employment or service with the Employer ceases for any reason other than those described in Paragraphs 2(b) or 2(c) above, or if the Grantee’s service is terminated by the Employer for cause (or due to a resignation by the Grantee in anticipation of a termination for cause) after the Service Date and before the payment date described below in Paragraph 3 , all the Performance Units shall be immediately forfeited and the Grantee shall not have any further rights with respect to this Grant.

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(e) For purposes of this Agreement:

(i) “ cause ” will have the meaning defined in any employment agreement, offer letter or similar agreement between the Employer and the Grantee or, in the absence of such an agreement: (A) the Grantee’s conviction of a felony, or (B) a determination of the Committee that the Grantee has: (1) committed an act of fraud, embezzlement or theft, (2) caused intentional damage to the property of the Employer, (3) materially breached any agreement with the Employer, any duty owed to the Company or its stockholders or any published policy of the Employer, which breach (if curable) is not cured within 30 days after receiving written notice from the Employer identifying the breach, or (4) engaged in gross misconduct or gross negligence in the course of employment or service.

(ii) “ good reason ” will have the meaning defined in any employment agreement, offer letter or similar agreement between the Employer and the Grantee or, in the absence of such an agreement: (A) a material diminution of the Grantee’s title, authority or duties, (B) a material reduction in the Grantee’s base salary, or (C) a relocation by more than 50 miles of the Grantee’s principal worksite; provided that , any such event will constitute “good reason” only if the Grantee notifies the Employer in writing of such event within 90 days following the initial occurrence thereof, the Employer fails to cure such event within 30 days after receipt from the Grantee of that written notice, and the Grantee resigns his or her employment within 30 days following the expiration of that cure period.

(iii) “ total disability ” means a condition entitling the Grantee to benefits under any long-term disability plan or policy maintained or funded by the Employer.

3. Time and Form of Payment with Respect to Performance Units . The Grantee shall receive a distribution with respect to vested Performance Units within two and one-half months following the applicable vesting date ( i.e. , the Service Date, for Performance Units vesting pursuant to Paragraphs 2(a) or 2(c) , or the date of cessation of the Grantee’s service, for Performance Units vesting pursuant to Paragraph 2(b) ). The Performance Units will be distributed in shares of Company Stock, with each vested Performance Unit representing the right to receive one share of Company Stock.

4. Dividend Equivalents . At the same time that the Performance Units are converted to shares of Company Stock and distributed to the Grantee as set forth in Paragraph 3 above, the Company shall pay to the Grantee a lump sum cash payment equal to the sum of the dividends that would have been payable between the Date of Grant and the date of such distribution with respect to a number of shares of Company Stock equal to the number of shares then distributable (equitably adjusted by the Committee to take into account any stock splits, reverse splits, mergers, recapitalizations or similar events occurring during such period). If or to the extent the Performance Units are forfeited, dividend equivalent payments will not be made under this Paragraph.

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5. Dissolution or Liquidation; Sale or Merger . The provisions of the Plan applicable to a dissolution, liquidation, sale or merger of the Company shall apply to this Grant, and in the event of a dissolution, liquidation, sale or merger of the Company or any similar event or transaction, the Committee may shorten the Performance Period and accelerate settlement of this Grant based on performance through the end of such abbreviated performance period or take such other actions as it deems appropriate and consistent with the Plan.

6. Acknowledgment by Grantee . By accepting this Grant, the Grantee acknowledges that with respect to any right to distribution and payment pursuant to this Grant, the Grantee is and shall be an unsecured general creditor of the Company without any preference as against other unsecured general creditors of the Company, and the Grantee hereby covenants for him or herself, and anyone at any time claiming through or under the Grantee, not to claim any such preference, and hereby disclaims and waives any such preference which may at any time be at issue, to the fullest extent permitted by applicable law. The Grantee also hereby agrees to be bound by the terms and conditions of the Plan and this Agreement. The Grantee further agrees to be bound by the determinations and decisions of the Committee with respect to this Grant and the Plan and the Grantee’s rights to benefits under this Grant and the Plan, and agrees that all such determinations and decisions of the Committee shall be binding on the Grantee, his or her beneficiaries and any other person having or claiming an interest under this Grant and the Plan on behalf of the Grantee.

7. Restrictions on Issuance or Transfer of Shares of Company Stock .

(a) The obligation of the Company to deliver shares of Company Stock hereunder shall be subject to the condition that if at any time the Committee shall determine in its discretion that the listing, registration or qualification of the shares of Company Stock upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issuance of shares of Company Stock, the shares of Company Stock may not be issued in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. The issuance of shares of Company Stock and the payment of cash to the Grantee pursuant to this Grant, if any, are subject to any applicable taxes and other laws or regulations of the United States and of any state having jurisdiction thereof.

(b) As a condition to the receipt of any shares of Company Stock upon distribution of the earned and vested Performance Units, the Grantee (i) agrees to be bound by the Company’s policies, including, but not limited to, the Company’s Insider Trading Policy, Clawback Policy, Anti-Hedging Policy and Stock Ownership Guidelines, and (ii) understands that there may be certain times during the year that the Grantee will be prohibited from selling, transferring, donating, assigning, mortgaging, hypothecating or otherwise encumbering the shares.

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8. Grant Subject to Plan Provisions . This Grant is made pursuant to the Plan, the terms of which are incorporated herein by reference, and in all respects shall be interpreted in accordance with the Plan. In the event of any contradiction, distinction or difference between this Grant and the terms of the Plan, the terms of the Plan will control. This Grant is subject to the interpretations, regulations and determinations concerning the Plan established from time to time by the Committee in accordance with the provisions of the Plan, including, but not limited to, provisions pertaining to (a) rights and obligations with respect to withholding taxes, (b) the registration, qualification or listing of the shares of Company Stock, (c) changes in capitalization of the Company, and (d) other requirements of applicable law. The Committee shall have the authority to interpret and construe this Agreement pursuant to the terms of the Plan, its decisions shall be conclusive as to any questions arising hereunder and the Grantee’s acceptance of this Grant is the Grantee’s agreement to be bound by the interpretations and decisions of the Committee with respect to this Agreement and the Plan.

9. No Rights as Stockholder . The Grantee shall not have any rights as a stockholder of the Company, including the right to any cash dividends (except as provided in Paragraph 4 hereof) or the right to vote, with respect to any Performance Units.

10. No Rights to Continued Employment or Service . This Grant shall not confer upon the Grantee any right to be retained in the employment or service of the Employer and shall not interfere in any way with the right of the Employer to terminate the Grantee’s employment or service at any time. The right of the Employer to terminate at will the Grantee’s employment or service at any time for any reason is specifically reserved.

11. Confidential Information, Non-Competition and Non-Solicitation . The Grantee reaffirms and acknowledges his or her obligations under the Nondisclosure and Noncompete Agreement for Management Employees.

12. Assignment and Transfers . No Performance Units or dividend equivalents awarded to the Grantee under this Agreement may be transferred, assigned, pledged, or encumbered by the Grantee and the Performance Units and dividend equivalents shall be distributed during the lifetime of the Grantee only for the benefit of the Grantee. Any attempt to transfer, assign, pledge, or encumber the Performance Units or dividend equivalents under this Grant by the Grantee shall be null, void and without effect. The rights and protections of the Company hereunder shall extend to any successors or assigns of the Company. This Grant may be assigned by the Company without the Grantee’s consent.

13. Withholding . The Grantee shall be required to pay to the Employer, or make other arrangements satisfactory to the Employer to provide for the payment of, any federal, state, local or other taxes that the Employer is required to withhold with respect to the grant, vesting and distribution of the Performance Units and dividend equivalents. Subject to Committee approval, the Grantee may elect to satisfy any tax withholding obligation of the Employer with respect to

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the distribution of shares of Company Stock under this Grant by having shares of Company Stock withheld up to an amount that does not exceed the minimum applicable withholding tax rate for federal (including FICA), state, local and other tax liabilities. Notwithstanding anything to the contrary herein or the Plan, until the Grantee has satisfied the Employer’s withholding obligation with respect to this Grant, the Grantee shall not have any rights to sell or transfer any shares of Company Stock that have been distributed to the Grantee pursuant to Paragraph 3 above.

14. Effect on Other Benefits . The value of this Grant and the shares of Company Stock and dividend equivalents potentially distributable hereunder shall not be considered eligible earnings for purposes of any other plan maintained by the Company or the Employer, and such value shall not be considered part of the Grantee’s compensation for purposes of determining or calculating other benefits that are based on compensation, such as life insurance.

15. Applicable Law . The validity, construction, interpretation and effect of this Grant shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws provisions thereof.

16. Notice . Notices permitted or required under this Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or overnight courier addressed, in the case of the Company, c/o its General Counsel at its principal executive office and, in the case of the Grantee, to his or her most recent address set forth in the personnel records of the Company.

17. Entire Agreement . This Agreement represents the entire agreement between the parties hereto relating to the subject matter hereof, and merges and supersedes all prior and contemporaneous discussions, agreements and understandings of every nature relating to the subject matter hereof.

18. Amendment . This Agreement cannot be changed, modified, extended or terminated except upon written amendment executed by the parties hereto. Any such written amendment must be approved by the Committee or its delegate to be effective against the Company.

19. Consent to Electronic Delivery . The Grantee hereby authorizes the Company to deliver electronically any prospectuses or other documentation related to this Grant, the Plan and any other compensation or benefit plan or arrangement in effect from time to time (including, without limitation, reports, proxy statements or other documents that are required to be delivered to participants in such plans or arrangements pursuant to federal or state laws, rules or regulations). For this purpose, electronic delivery will include, without limitation, delivery by means of e-mail or e-mail notification that such documentation is available on the Company’s intranet site. Upon written request, the Company will provide to the Grantee a paper copy of any document also delivered to the Grantee electronically. The authorization described in this Paragraph may be revoked by the Grantee at any time by written notice to the Company.

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[ Remainder of page intentionally left blank; signature page follows ]

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IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Agreement, and the Grantee has placed his or her signature hereon, on this day of [ ], [ ].


Attest:						NUTRISYSTEM, INC.

By:						By:
Name:						Name:
Title:						Title:

I hereby accept the grant of Performance Units described in this Agreement, and I agree to be bound by the terms of the Plan and this Agreement. I hereby further agree that all of the decisions and determinations of the Committee shall be final and binding.



						Grantee: [NAME]

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Exhibit 10.2

NUTRISYSTEM, INC.

AMENDED AND RESTATED NUTRISYSTEM, INC.

2008 LONG-TERM INCENTIVE PLAN

2013 PERFORMANCE-BASED RESTRICTED STOCK UNIT GRANT AGREEMENT

(Michael Monahan)

This 2013 PERFORMANCE-BASED RESTRICTED STOCK UNIT GRANT AGREEMENT (the “ Agreement ”), dated as of May 22, 2013 (the “ Date of Grant ”), is delivered by NutriSystem, Inc. (the “ Company ”) to Michael Monahan (the “ Grantee ”).

RECITALS

A. The Amended and Restated NutriSystem, Inc. 2008 Long-Term Incentive Plan (the “ Plan ”) permits the grant of performance-based restricted stock units.

B. The Compensation Committee of the Board of Directors of the Company has determined that the Grantee is eligible to participate in the Plan and has approved this Grant under the Plan.

C. Except as otherwise defined in this Agreement; capitalized terms used herein shall have the meanings set forth in the Plan.

NOW, THEREFORE, the parties to this Agreement, intending to be legally bound hereby, agree as follows:

1. Grant of Performance-Based Restricted Stock Units . Subject to the terms and conditions set forth in this Agreement and the Plan, the Company hereby grants to the Grantee 8,446 performance-based restricted stock units (the “ Performance Units ”). The Performance Units are contingently awarded and will become vested and distributable if and only to the extent that the performance goals and other conditions set forth in this Agreement are met. Each Performance Unit shall be a phantom right and shall be equivalent to one share of Company Stock on the applicable distribution date, as described in Paragraph 3 below. The number of Performance Units set forth above is equal to the number of Performance Units that will vest upon achievement of the target level of performance (the “ Target Award ”).

2. Vesting .

(a) Subject to the other provisions of this Paragraph 2 , the Performance Units shall vest as of December 31, 2014 (the “ Service Date ”) to the extent determined by the Committee based on the attached Exhibit A . Any Performance Units that do not vest due to failure to fully satisfy the applicable performance goal(s) or service condition(s) shall be forfeited and the Grantee shall not have any further rights with respect to those Performance Units.

(b) If the Grantee’s service with the Employer ceases prior to the Service Date due to the Grantee’s death or “total disability” (as defined below), the Grantee shall become vested in a pro-rata portion of the Performance Units. The pro-rata portion shall be determined by multiplying (i) the Target Award by (ii) a fraction, (A) the numerator of which is the number of days of continuous service performed by the Grantee for the Employer during the period beginning January 1, 2013 and ending on the Service Date (the “ Performance Period ”), and (B) the denominator of which is 730. Any Performance Units that do not vest in connection with such death or total disability shall be forfeited as of the date the Grantee’s service ceases and the Grantee shall not have any further rights with respect to those Performance Units.

(c) If the Grantee’s service with the Employer ceases prior to the Service Date due to (i) a termination by the Employer without “ cause ” (as defined below), or (ii) a resignation by the Grantee with “ good reason ” (as defined below), then the Grantee shall become vested as of the Service Date in a number of Performance Units determined by multiplying (A) the number of Performance Units that would otherwise have then vested under Paragraph 2(a) above (but for the cessation of the Grantee’s service), by (B) a fraction, (1) the numerator of which is the number of days of continuous service performed by the Grantee for the Employer during the Performance Period, and (2) the denominator of which is 730, subject to the Grantee’s execution and delivery of a general release of claims against the Company and its affiliates in a form prescribed by the Company and subject further to that release becoming irrevocable within 45 days following the Grantee’s cessation of service. Any Performance Units that cannot vest because of the pro-ration described above will be forfeited as of the date the Grantee’s service ceases and the Grantee shall not have any further rights with respect to those Performance Units. Any Performance Units that do not vest because of the failure to fully satisfy the applicable performance goal(s) shall be forfeited as of the Service Date and the Grantee shall not have any further rights with respect to those Performance Units.

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(e) For purposes of this Agreement:

(iii) “ total disability ” means a condition entitling the Grantee to benefits under any long-term disability plan or policy maintained or funded by the Employer.

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7. Restrictions on Issuance or Transfer of Shares of Company Stock .

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[ Remainder of page intentionally left blank; signature page follows ]

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IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Agreement, and the Grantee has placed his or her signature hereon, on this 22 ^nd day of May, 2013 .


Attest:		NUTRISYSTEM, INC.

By:	/s/ Kathleen Simone	By:	/s/ Dawn Zier
Kathleen Simone		Dawn Zier
SVP, Finance & Controller		Chief Executive Officer



						/s/ Michael Monahan
						Grantee: Michael Monahan

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EXHIBIT A

PERFORMANCE GOALS

The performance measure applicable to this Grant is the Company’s cumulative, adjusted earnings per share for the Performance Period (“ EPS ”). For these purposes, EPS will be determined and certified by the Company and will mean the Company’s cumulative earnings per share, as reported in the Company’s periodic reports filed with the SEC for the applicable period, adjusted to exclude the impact of employee severance obligations incurred during that period.

Subject to the other terms of the Agreement, the Performance Units will vest and become payable, if at all, based on the following schedule:


EPS	Percentage of the Target Award Vesting
Less than $0.42		0	%
$0.42		50	%
$0.70		100	%
$0.95 or more		150	%

If EPS is between the inflection points specified above, the percentage of the Target Award vesting will be determined by linear interpolation.

Exhibit 10.3

NUTRISYSTEM, INC.

AMENDED AND RESTATED NUTRISYSTEM, INC.

2008 LONG-TERM INCENTIVE PLAN

2013 PERFORMANCE-BASED RESTRICTED STOCK UNIT GRANT AGREEMENT

(Keira Krausz)

This 2013 PERFORMANCE-BASED RESTRICTED STOCK UNIT GRANT AGREEMENT (the “ Agreement ”), dated as of March 21st, 2013 (the “ Date of Grant ”), is delivered by NutriSystem, Inc. (the “ Company ”) to Keira Krausz (the “ Grantee ”).

RECITALS

A. The Amended and Restated NutriSystem, Inc. 2008 Long-Term Incentive Plan (the “ Plan ”) permits the grant of performance-based restricted stock units.

B. The Compensation Committee of the Board of Directors of the Company has determined that the Grantee is eligible to participate in the Plan and has approved this Grant under the Plan.

C. Except as otherwise defined in this Agreement; capitalized terms used herein shall have the meanings set forth in the Plan.

NOW, THEREFORE, the parties to this Agreement, intending to be legally bound hereby, agree as follows:

1. Grant of Performance-Based Restricted Stock Units . Subject to the terms and conditions set forth in this Agreement and the Plan, the Company hereby grants to the Grantee 14,671 performance-based restricted stock units (the “ Performance Units ”). The Performance Units are contingently awarded and will become vested and distributable if and only to the extent that the performance goals and other conditions set forth in this Agreement are met. Each Performance Unit shall be a phantom right and shall be equivalent to one share of Company Stock on the applicable distribution date, as described in Paragraph 3 below. The number of Performance Units set forth above is equal to the number of Performance Units that will vest upon achievement of the target level of performance (the “ Target Award ”).

2. Vesting .

(b) If the Grantee’s service with the Employer ceases prior to the Service Date due to the Grantee’s death or “total disability” (as defined below), the Grantee shall become vested in a pro-rata portion of the Performance Units. The pro-rata portion shall be determined by multiplying (i) the Target Award by (ii) a fraction, (A) the numerator of which is the number of days of continuous service performed by the Grantee for the Employer during the period beginning January 1, 2013 and ending on the Service Date (the “ Performance Period ”), and (B) the denominator of which is 730. Any Performance Units that do not vest in connection with such death or total disability shall be forfeited as of the date the Grantee’s service ceases and the Grantee shall not have any further rights with respect to those Performance Units.

(c) If the Grantee’s service with the Employer ceases prior to the Service Date due to (i) a termination by the Employer without “ cause ” (as defined below), or (ii) a resignation by the Grantee with “ good reason ” (as defined below), then the Grantee shall become vested as of the Service Date in a number of Performance Units determined by multiplying (A) the number of Performance Units that would otherwise have then vested under Paragraph 2(a) above (but for the cessation of the Grantee’s service), by (B) a fraction, (1) the numerator of which is the number of days of continuous service performed by the Grantee for the Employer during the Performance Period, and (2) the denominator of which is 730, subject to the Grantee’s execution and delivery of a general release of claims against the Company and its affiliates in a form prescribed by the Company and subject further to that release becoming irrevocable within 45 days following the Grantee’s cessation of service. Any Performance Units that cannot vest because of the pro-ration described above will be forfeited as of the date the Grantee’s service ceases and the Grantee shall not have any further rights with respect to those Performance Units. Any Performance Units that do not vest because of the failure to fully satisfy the applicable performance goal(s) shall be forfeited as of the Service Date and the Grantee shall not have any further rights with respect to those Performance Units.

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(e) For purposes of this Agreement:

(iii) “ total disability ” means a condition entitling the Grantee to benefits under any long-term disability plan or policy maintained or funded by the Employer.

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7. Restrictions on Issuance or Transfer of Shares of Company Stock .

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[ Remainder of page intentionally left blank; signature page follows ]

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IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Agreement, and the Grantee has placed his or her signature hereon, on this 21st day of March, 2013 .


Attest:		NUTRISYSTEM, INC.

By:	/s/ Kathleen Simone	By:	/s/ Dawn Zier
Name:	Kathleen Simone	Name:	Dawn Zier
Title:	SVP, Finance & Controller	Title:	Chief Executive Officer



						/s/ Keira Krausz
						Grantee: Keira Krausz

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EXHIBIT A

PERFORMANCE GOALS

Subject to the other terms of the Agreement, the Performance Units will vest and become payable, if at all, based on the following schedule:


EPS	Percentage of the Target Award Vesting
Less than $0.42		0	%
$0.42		50	%
$0.70		100	%
$0.95 or more		150	%

If EPS is between the inflection points specified above, the percentage of the Target Award vesting will be determined by linear interpolation.

Exhibit 31.1

Certification of Chief Executive Officer of Nutrisystem, Inc.

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Dawn M. Zier, certify that:

I have reviewed this quarterly report on Form 10-Q of Nutrisystem, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2013

/S/ Dawn M. Zier

Dawn M. Zier

President and Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

Certification of Chief Financial Officer of Nutrisystem, Inc.

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Michael P. Monahan, certify that:

I have reviewed this quarterly report on Form 10-Q of Nutrisystem, Inc.;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2013

/S/ Michael P. Monahan

Michael P. Monahan

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Exhibit 32.1

Statement of Chief Executive Officer

Pursuant to Section 1350 of Title 18 of the United States Code

Pursuant to Section 1350 of Title 18 of the United States Code as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Dawn M. Zier, the Chief Executive Officer of Nutrisystem, Inc. (the “Company”), hereby certifies that based on the undersigned’s knowledge:

The Company’s Form 10-Q Quarterly Report for the period ended June 30, 2013 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: August 6, 2013		/S/ Dawn M. Zier
		President and Chief Executive Officer
		(Principal Executive Officer)

Exhibit 32.2

Statement of Chief Financial Officer

Pursuant to Section 1350 of Title 18 of the United States Code

Pursuant to Section 1350 of Title 18 of the United States Code as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Michael P. Monahan, the Chief Financial Officer of Nutrisystem, Inc. (the “Company”), hereby certifies that based on the undersigned’s knowledge:

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Dated: August 6, 2013		/S/ Michael P. Monahan
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

Large accelerated filer

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Non-accelerated filer

Smaller reporting company