Nutrisystem 2007 Annual Report Download

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NutriSystem—changing lives
& building our business
one success story at a time.
ANNUAL REPORT 2007

Table of contents

  • Page 1
    NutriSystem-changing lives & building our business one success story at a time. ANNUAL REPORT 2007

  • Page 2
    ..., and dedicated to our mission of serving the community in which we live. For more than 35 years, we've been transforming lives, and delivering success in the business of weight loss-and that's just the beginning. With new markets on the horizon, and science and innovation on our side, the future...

  • Page 3
    Coach Don Shula lost 32 lbs. "People say I look 10 years younger. I sure as heck feel that way!" Marie Osmond lost 40 lbs. "NutriSystem is perfect for all us gals with busy lives." From the scientists and chefs who craft our programs, to the dietitians and counselors who help turn dreams into ...

  • Page 4
    NutriSystem- Delivering success... Jillian Barberie lost 41 lbs. "When you feel good and look good, people really do notice." Readus M. lost 60 lbs. "I was so impressed with how this system worked."

  • Page 5
    ...our opportunity to be a leading, global player in the weight management industry, and we take pride in serving our customers and building our business one success story at a time. I thank our employees, management team and stockholders for their support in these efforts. Sincerely, Michael J. Hagan...

  • Page 6

  • Page 7
    ...232,257,848. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the NASDAQ Global Select Market on June 30, 2007 (the last business day of the Registrant's most recently completed fiscal second quarter). Number of shares outstanding of the...

  • Page 8
    ...Statements and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ... Item 9A. Controls and Procedures ...Item 9B. Other Information ...PART III Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate Governance...

  • Page 9
    ... meal program. Typically, our customers purchase monthly food packages containing a 28-day supply of breakfasts, lunches, dinners and desserts, which they supplement with fresh dairy, fruit, salad, vegetables and low-glycemic carbohydrate items. Most of our customers order on an auto-delivery...

  • Page 10
    ... of reading nutrition labels, measuring portions or counting calories, carbohydrates or points. At a cost of about $10 or $11 a day for a full 28 days of NutriSystem food, we believe our weight management program offers our customers significant value and is priced below those of our competitors. In...

  • Page 11
    ... diet foods and meal replacement bars and shakes, appetite suppressants and nutritional supplements. The weight loss market is served by a diverse array of competitors. Potential customers seeking to manage their weight can turn to traditional center-based competitors such as Weight Watchers, Jenny...

  • Page 12
    ... and low-glycemic carbohydrate items. Most customers order on an auto-delivery basis in which we send food to the customers on a monthly basis until notified by the customer to cease shipments. With the Auto-Delivery program, a full day's supply of entrees and desserts is currently priced at...

  • Page 13
    ..., Good Housekeeping, The New York Times, US Weekly, Women's Day, Access Hollywood and The Tonight Show. Moreover, we have promoted our brand and product through celebrity spokespersons who also appear in our advertising, such as Marie Osmond, Tori Spelling, Joey Fatone, ANT, Tony Orlando, Dan Marino...

  • Page 14
    ... shipping and handling on Auto-Delivery food orders. Product Development All of our foods and supplements are currently outsourced from more than 30 manufacturers or vendors. Our product development department primarily creates ideas and concepts based on customer feedback, market trends, nutrition...

  • Page 15
    ...quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the "1934 Act Reports"), are available free of charge through the Company's investor relations page at www.nutrisystem.com...

  • Page 16
    ... Chief Operating Officer Senior Vice President, Chief Financial Officer, Secretary and Treasurer Executive Vice President, Program Development and Chief Marketing Officer Senior Vice President, Operations and Chief Information Officer Michael J. Hagan has served as the Chairman of our Board and as...

  • Page 17
    ... of the following delays in order intake time both on our website as well as through call centers; delays in order processing, packaging and shipping; failures to provide our customers with their specific food selections; inadequate numbers of telephone counselors, customer service representatives...

  • Page 18
    ... network connections go down, our ability to fulfill orders would be delayed. Further, if our website or call centers become unavailable for a noticeable period of time due to Internet or communication failures, our business could be adversely affected, including harm to our brand and loss of sales...

  • Page 19
    ... health problems could allege or bring a lawsuit against us on the basis that those problems were caused or worsened by participating in our weight management program. For example, our predecessor businesses suffered substantial losses due to health-related claims and related publicity. Currently...

  • Page 20
    ... spokespersons to promote our products. If these spokespersons suffer adverse publicity, our revenue could be adversely affected. Our marketing strategy depends in part on celebrity spokespersons, as well as customer spokespersons to promote our weight management program. Any of these spokespersons...

  • Page 21
    ... our program versus various other weight loss, weight management and fitness regimens, such as low carbohydrate diets, appetite suppressants and diets featured in the published media. Changes in consumer tastes and preferences away from our pre-packaged food and support and counseling services, and...

  • Page 22
    ... publicity related to their customers' use of fen-phen as an appetite suppressant, which the FDA ordered withdrawn from the market in September 1997. The significant decline in business resulting from the fen-phen problems caused our predecessor businesses to close all of their company-owned weight...

  • Page 23
    ... of weight loss food products, vitamins, nutritional supplements and minerals, including our predecessor businesses, have been named as defendants in product liability lawsuits from time to time. The successful assertion or settlement of an uninsured claim, a significant number of insured claims or...

  • Page 24
    ... Company's common stock between February 14, 2007 and October 3, 2007 or October 4, 2007. The complaints allege that the defendants issued various materially false and misleading statements relating to the Company's projected performance that had the effect of artificially inflating the market price...

  • Page 25
    ... 2005 under the symbol "NTRI." The following table sets forth, for the periods indicated, the high and low sale prices for the Company's common stock as reported on the NASDAQ Stock Market. High Low 2007 First Quarter ...2007 Second Quarter ...2007 Third Quarter ...2007 Fourth Quarter ...2006 First...

  • Page 26
    ... Purchases of Equity Securities The following table provides information relating to our purchases of our common stock during the quarter ended December 31, 2007: Total Number of Shares Approximate Dollar Purchased as Part of Value of Shares that May Average Price Publicly Announced Yet Be Purchased...

  • Page 27
    ... OTC Bulletin Board under the ticker symbol THIN.OB., the American Stock Exchange under the ticker symbol NSI and now trades on the NASDAQ Global Select Market under the ticker symbol NTRI. Comparison of Cumulative Total Return Among NutriSystem, Inc., THE DOW JONES CONSUMER SERVICES INDEX AND THE...

  • Page 28
    ...the Company's Consolidated Financial Statements included as Items 7 and 8, respectively, in this Annual Report on Form 10-K. Selected Consolidated Financial Data (in thousands, except per share data) 2007 Year Ended December 31, 2006 2005 2004 2003 Statement of Operations Data: Revenue ...Costs and...

  • Page 29
    ... recognition of the benefits related to deferred tax assets was more likely than not based on an analysis of the cumulative level of pretax profits over the prior three years, projected levels of profits, schedule of reversal of temporary differences, and tax planning strategies. As a result, the...

  • Page 30
    ... the online experience with the member section of our website which, we believe, should provide a more valuable, effective and interactive experience and increase the level of weight loss support that we offer with our program to our customers. In December 2007, we launched NutriSystem Advanced...

  • Page 31
    ... develop in 2008, with some consumers reducing spending on discretionary type items, which we believe includes commercial weight loss products. Operating in this environment will require a flexible business model but we believe our core product offering and brand not only remain healthy but continue...

  • Page 32
    ... 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...

  • Page 33
    .... Factors influencing our marketing effectiveness include the quality of the advertisements, promotional activity by our competitors, along with the price and availability of appropriate media. In addition to our marketing efforts, we generate new customers through referrals and publicity, such as...

  • Page 34
    ... us to fully convey the benefits of the NutriSystem diet programs. Under the terms of our agreement, QVC viewers purchase NutriSystem products directly from QVC and are not directed to the NutriSystem website. Retail prices (including shipping and handling) offered on QVC to consumers are similar to...

  • Page 35
    ... all of the marketing spending promoted the direct business, and the increase in marketing is attributable to increased spending for advertising media ($51.4 million), public relations ($2.7 million) and production of television advertising ($1.9 million). In total, media spending was $162.7 million...

  • Page 36
    ...call center relocation. Other Expense. Other expense represents the realized gains and losses from currency. Equity Loss. In October 2007, we purchased an approximate 27% equity interest in Zero Water, a manufacturer of patented water filters. This investment is accounted for under the equity method...

  • Page 37
    ... in 2005. Substantially all of the marketing spending promoted the direct business, and the increase in marketing is attributable to increased spending for advertising media ($67.4 million) and production of television advertising ($1.3 million). In total, media spending was $111.3 million in 2006...

  • Page 38
    ... $90.4 $84.0 3.1 $87.1 The Company has entered into supply agreements with various food vendors. The majority of these agreements provide for annual pricing, annual purchase commitments, as well as exclusivity in the production of certain products, with terms of five years or less. One agreement...

  • Page 39
    ... member section of our website which allows our customers access to community-based tools such as online counseling, bulletin boards, chat rooms, weight loss trackers and recipe clubs. Additionally, staff additions and a call center relocation required additional capital spending. In the year ended...

  • Page 40
    ...Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 is not expected to have a material impact on the Company's consolidated financial...

  • Page 41
    ..., 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 were effective to ensure that information required to be disclosed in the...

  • Page 42
    ...standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of NutriSystem, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the...

  • Page 43
    ... and "Statement of Corporate Ethics and Code of Conduct" in our definitive proxy statement, to be filed within 120 days after the end of the fiscal year covered by this annual report on Form 10-K, and is incorporated herein by reference. The required information as to executive officers is set forth...

  • Page 44
    NUTRISYSTEM, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Operations ...Consolidated Statements of Stockholders' Equity ...Consolidated Statements of Cash Flows ...

  • Page 45
    ... of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the...

  • Page 46
    ...' EQUITY CURRENT LIABILITIES: Accounts payable ...Accrued payroll and related benefits ...Income taxes payable ...Other accrued expenses and current liabilities ...Current liabilities of discontinued operation ...Total current liabilities ...NON-CURRENT LIABILITIES ...NON-CURRENT LIABILITIES OF...

  • Page 47
    NUTRISYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Year Ended December 31, 2007 2006 2005 REVENUE ...COSTS AND EXPENSES: Cost of revenue ...Marketing ...General and administrative ...Depreciation and amortization ...Total costs and ...

  • Page 48
    ... 31, 2006 ...35,878,856 Net income ...- Foreign currency translation adjustment ...- Total comprehensive income ...Share-based expense ...20,770 Exercise of stock options ...412,076 Tax benefit from stock option exercises ...- Purchase and retirement of common shares ...(2,799,031) BALANCE, December...

  • Page 49
    ......Deferred income tax (benefit) expense ...Tax benefit from stock option exercises ...Equity loss ...Changes in operating assets and liabilities Accrued interest income ...Receivables ...Inventories ...Other assets ...Accounts payable ...Accrued payroll and related benefits ...Income taxes ...Other...

  • Page 50
    ...) 1. BACKGROUND Nature of the Business NutriSystem, Inc. (the "Company" or "NutriSystem") provides weight management and fitness products and services. The Company's pre-packaged foods are sold to weight loss program participants directly via the Internet and telephone, referred to as the direct...

  • Page 51
    ..., the selling price is fixed and determinable and collection is reasonably assured. Customers may return unopened product within 30 days of purchase in order to receive a refund or credit. Estimated returns are accrued at the time the sale is recognized and actual returns are tracked monthly and the...

  • Page 52
    ...760 and $1,532, respectively, of costs have been prepaid for upcoming advertisements and promotions. The increase is primarily due to the timing of when commercials air and new advertising in Canada. Accounting for Lease Related Expenses Certain of the Company's lease contracts contain rent holidays...

  • Page 53
    ... the fair values due to the short-term nature of these instruments. Segment Information The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer. Revenue consists primarily of food sales. Earnings Per...

  • Page 54
    ...pro forma compensation, the fair value of each stock option was estimated on the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions: Dividend yield ...Expected volatility ...Risk-free interest rate ...Expected life (in years) ...None 117.1% 4.04...

  • Page 55
    ...Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 is not expected to have a material impact on the Company's consolidated financial...

  • Page 56
    ...MARKETABLE SECURITIES The following summarizes cash, cash equivalents and marketable securities: Cost Accrued Interest Fair Value Cash and cash equivalents Demand deposits ...Money market accounts ...December 31, 2007 ...Marketable... variable interest bonds of housing agencies and as of December 31,...

  • Page 57
    ...acquisition costs of $259. This represents approximately a 27% equity interest in Zero Water. This investment is accounted for under the equity method of accounting and an estimated loss of $800 was recorded for the Company's share of Zero Water's loss subsequent to the initial investment. 6. CREDIT...

  • Page 58
    issued various materially false and misleading statements relating to the Company's projected performance that had the effect of artificially inflating the market price of its securities. These actions were consolidated in December 2007 under docket number 07-4215. On January 3, 2008, the Court ...

  • Page 59
    ... timing and actual number of shares repurchased depends on a variety of factors including price, corporate and regulatory requirements, alternative investment opportunities and other market conditions. In 2007, the Company purchased and retired 2,799,031 shares of common stock for an aggregate cost...

  • Page 60
    ... information. A tax benefit from an uncertain position was previously recognized if it was probable of being sustained. Under FIN 48, the liability for unrecognized tax benefits is classified as noncurrent unless the liability is expected to be settled in cash within 12 months of the reporting date...

  • Page 61
    ... awards issued under the Director Plan expire between three months and 10 years from the grant date. The Board also determines the vesting provisions and the exercise price per share, which is the fair market value at date of grant. Awards issued to employees generally vest over terms ranging from...

  • Page 62
    ... $22,071 The Company adopted SFAS No. 123R, effective January 1, 2006. Prior to January 1, 2006, the Company applied the intrinsic value method of accounting for all stock-based employee compensation in accordance with APB Opinion No. 25, and related interpretations. The Company elected to use the...

  • Page 63
    ... of operations. The fair value of the stock options issued to non-employees was determined using the Black-Scholes option pricing model and the following weighted average assumptions: 2005 Dividend yield ...Expected volatility ...Risk-free interest rate ...Contract life (in years) ... None 116...

  • Page 64
    ... Treasury yield curve in effect at the time of grant. 12. EMPLOYEE BENEFIT PLAN The Company maintains a qualified tax deferred defined contribution retirement plan (the "Plan"). Under the provisions of the Plan, substantially all employees meeting minimum age and service requirements are entitled to...

  • Page 65
    14. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) First Quarter Second Third Fourth (In thousands, except per share amounts) Year 2007: Revenue ...Gross margin ...Income from continuing operations ...Loss on discontinued operation, net ...Net income ...Basic income per common share: Income from...

  • Page 66
    ... of the Company's Report on Form 10-K filed on March 14, 2006. Employment Agreement, Stock Award Agreement and Nondisclosure and Noncompete Agreement dated November 30, 2007 between NutriSystem, Inc. and Thomas Connerty, the Company's Executive Vice President and Chief Marketing Officer incorporated...

  • Page 67
    ... 23, 2005. Five-Year Credit Agreement dated October 2, 2007 incorporated by reference to the designated exhibit of the Company's Report on Form 10-Q filed on November 6, 2007. Employment agreement dated September 4, 2007 between NutriSystem, Inc. and Joseph Redling, the Company's President and Chief...

  • Page 68
    ..., thereunto duly authorized. NutriSystem, Inc. By: /s/ Michael J. Hagan Michael J. Hagan, Chairman and Chief Executive Officer Dated: February 29, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of...

  • Page 69
    ... Executive Officer of NutriSystem, Inc. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Michael J. Hagan, certify that: 1. 2. I have reviewed this annual report on Form 10-K of NutriSystem, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact...

  • Page 70
    ... 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. b. Date: February 29, 2008 /S/ DAVID D. CLARK David D. Clark Senior Vice President, Chief Financial Officer...

  • Page 71
    ... United States Code as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Michael J. Hagan, the Chief Executive Officer of NutriSystem, Inc. (the "Company"), hereby certifies that based on the undersigned's knowledge: 1) The Company's Form 10-K Annual Report for the...

  • Page 72
    ... 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. 2) Dated: February 29, 2008 /S/ DAVID D. CLARK Senior Vice President, Chief Financial Officer, Secretary and Treasurer

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  • Page 76
    ... Senior Vice President, Operations and Chief Information Officer Thomas F. Connerty Executive Vice President, Program Development and Chief Marketing Officer GENERAL INFORMATION Corporate Headquarters 300 Welsh Road Building 1, Suite 100 Horsham, PA 19044 (215) 706-5300 Annual Meeting The Annual...

  • Page 77
    Synetha R. lost 22 lbs. "I've never felt better about myself!" Tony Orlando lost 103 lbs. "I feel like a million bucks! I haven't felt this way in years!" ...in the business of weight loss.

  • Page 78
    300 Welsh Road • Building One • Suite One Hundred Horsham, PA 19044 www.nutrisystem.com