Nutrisystem 2007 Annual Report Download - page 38

Interest Income, Net. Interest income, net increased to $3.6 million in 2006 from $846,000 in 2005 primarily
due to higher cash balances and investments in marketable securities.
Income Taxes. In 2006, we recorded income tax expense of $51.0 million, which reflects an estimated
annual effective tax rate of 37.3%. In 2005, we recorded $13.6 million of income tax expense for the reporting
period. The effective tax rate in 2005 was 38.5%. The decrease in the effective tax rate was primarily due to
lower state income taxes due to the apportionment of income to states with lower tax rates.
Net Income. For the year ended December 31, 2006, net income increased to $85.1 million from net income
of $21.0 million in 2005. The increase in net income in 2006 is primarily due to higher gross profit in 2006
versus 2005 resulting from increased revenue offset by higher advertising and marketing spending, general and
administrative expenses and income taxes.
Contractual Obligations and Commercial Commitments
As of December 31, 2007, our principal commitments consisted of obligations under supply agreements
with food vendors, an agreement with our outside fulfillment provider, a capital lease, operating leases and
employment contracts. We have excluded one supply agreement from the table below because the contract did
not specify fixed purchase commitments. Although we have no material commitments for capital expenditures,
we anticipate continuing requirements for capital expenditures consistent with anticipated growth in operations,
infrastructure and personnel.
Following is a summary of our contractual obligations. We have no other commercial commitments.
Payments Due by Period (in millions)
Contractual obligations Total
Less Than
1 Year
1-3
Years
4-5
Years
More Than
5 Years
Fulfillment and food purchase commitments ................ $256.9 $28.2 $55.8 $88.9 $84.0
Operating and capital leases ............................. 13.0 3.0 5.4 1.5 3.1
$269.9 $31.2 $61.2 $90.4 $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 also provides rebates if certain volume
thresholds are exceeded. Additionally, the Company has entered into an agreement with our outside fulfillment
provider which contains minimum space requirements. The Company anticipates it will meet all annual
purchases commitments.
The Company executed a credit agreement with a group of lenders that provides for a $200 million
unsecured revolving credit facility. No amounts were outstanding at December 31, 2007 but the Company is
subject to 0.15% per annum unused fee payable quarterly.
In addition, we have no off-balance sheet financing arrangements.
Liquidity, Capital Resources and Other Financial Data
At December 31, 2007, we had net working capital of $103.3 million, a decrease of $30.7 million from the
$134.0 million net working capital balance at December 31, 2006. Cash and cash equivalents at December 31,
2007 were $40.7 million, an increase of $27.2 million from the balance of $13.5 million at December 31, 2006.
In addition, we had $1.8 million and $66.8 million invested in marketable securities at December 31, 2007 and
2006, respectively. Our principal sources of liquidity during this period were cash flow from operations. We have
a $200.0 million unsecured revolving credit facility with a group of lenders which is committed until October 2,
2012 with an expansion feature, subject to certain conditions, to increase the facility to $300.0 million. As of
December 31, 2007, we have not drawn down any funds against this facility. We currently have no off-balance
sheet financing arrangements.
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