Nutrisystem 2008 Annual Report Download

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9,187,775
Annual Report 2008
8

Table of contents

  • Page 1
    8 9,187,775 Annual Report 2008

  • Page 2
    ... how many pounds NutriSystem customers lost in 2008. And they lost them one at a time, day-in and day-out, week after week. Inspired, and with the same tenacity, we approach our business-perfecting our systems, customizing our offerings, and increasing our value-all in an effort to make the lives of...

  • Page 3
    ...fresh and frozen menu items with our acquisition of Power Chow, LLC (d/b/a/ Nu-Kitchen) and a new strategic alliance with Schwan's Home Service. We introduced NutriSystem Flex, our lower priced program that targets a less restrictive dieter and provides the freedom for the customer to take "Weekends...

  • Page 4

  • Page 5
    ... closing price of the common stock as reported on the NASDAQ Global Select Market on June 30, 2008 (the last business day of the registrant's most recently completed fiscal second quarter). Number of shares outstanding of the registrant's common stock, $0.001 par value, as of February 27, 2009: 30...

  • Page 6
    ..., Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions, and Director Independence ...Principal Accounting Fees and Services ...PART...

  • Page 7
    ... or customize their monthly food orders for their specific tastes. There are no center visits, no measuring foods or counting calories. Value. Our basic Auto-Delivery program is currently priced at about $10 to $12 per day for a full 28 days of NutriSystem food. We do not charge membership fees...

  • Page 8
    ...our customers with a month of food, including breakfast, lunch, dinner and dessert, each day, which removes the confusion of reading nutrition labels, measuring portions or counting calories, carbohydrates or points. At a cost as little as $3 per meal, we believe our weight management program offers...

  • Page 9
    ... food program and counseling. Trained counselors are available 24 hours per day, seven days per week, to answer questions and make recommendations to help each customer achieve his or her weight loss goal. Customers support, encourage and share information with each other through hosted chat rooms...

  • Page 10
    ...-quality prepared meals delivered daily to customers and will expand our product offerings, menu selection and price points. Even though this offering is currently only available in New York City, it provided us the opportunity to enter the fresh delivery market and we believe the business has the...

  • Page 11
    ... new online opportunities as the market evolves, but focus the majority of our efforts on search optimization (paid and natural), affiliate management, portal relationships, large ad networks, strategic partnerships, targeted display media and internal/external email campaigns. Public Relations...

  • Page 12
    ... business days using standard ground transportation. Direct customers are not charged for their orders until the ordered product is shipped. We do not charge customers for shipping and handling on Auto-Delivery food orders provided customers take receipt of their second order. If a customer cancels...

  • Page 13
    ... these vendors supplied 32% and 12% of total purchases. Our product development department primarily creates ideas and concepts based on customer feedback, market trends, nutrition and food technology breakthroughs and retail grocery trends. This starts at the laboratory level to determine if the...

  • Page 14
    ... 2008, we had approximately 598 administrative, sales, counseling and customer service personnel, 82 employees dedicated to fulfillment and 44 employees in marketing. None of our employees is represented by a labor union, and we consider relations with our employees to be good. Seasonality Typically...

  • Page 15
    ...Executive Vice President, Customer Management and Product Development since May 2008. Prior to joining us, Mr. Falconer held a number of positions at AOL, Inc., a global web services company, including Executive Vice President, AOL Mobile and Executive Vice President, Chief Operating Officer, Member...

  • Page 16
    ...and promotional expenditures; effectively manage marketing costs (including creative and media) in order to maintain acceptable customer acquisition costs; select the right market, media and specific media vehicle in which to advertise; and convert consumer inquiries into actual orders. Our planned...

  • Page 17
    ... ("FDA") compliance issues. We are dependent on the QVC Shopping Network for a percentage of revenue. In 2008, sales of our products through our relationship with the QVC Shopping Network accounted for 6% of our revenue. For 2009, we have a one-year contractual agreement with QVC with an automatic...

  • Page 18
    ... our weight management program. For example, if a major supplier of pre-packaged foods decided to enter this market and made a substantial investment of resources in advertising and training diet counselors, our business could be significantly affected. Any increased competition from new entrants...

  • Page 19
    ... existing customers; the risk that new efforts may have a detrimental effect on our brand; the risk that we will face competition from established or larger competitors in the new markets we may enter, which could adversely affect the financial performance of any businesses we might acquire or start...

  • Page 20
    ... costs associated with acquiring new customers and generating revenue will increase, which will, in turn, have an adverse affect on our profitability. We use spokespersons to promote our products. If these spokespersons suffer adverse publicity, our revenue could be adversely affected. Our marketing...

  • 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
    ... uninsured claim, a significant number of insured claims or a claim exceeding the limits of our insurance coverage would harm us by adding costs to the business and by diverting the attention of senior management from the operation of the business. We may also be subject to claims that our products...

  • Page 23
    ...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 of its securities. These actions were consolidated in December 2007 under docket number 07-4215. On January 3, 2008, the...

  • Page 24
    ... is also involved in other various claims and routine litigation matters. In the opinion of management, after consultation with legal counsel, the outcome of such matters is not anticipated to have a material adverse effect on the Company's consolidated financial position, results of operations...

  • Page 25
    ..., the high and low sale prices for the Company's common stock as reported on the NASDAQ Stock Market. High Low 2008 First Quarter ...2008 Second Quarter ...2008 Third Quarter ...2008 Fourth Quarter ...2007 First Quarter ...2007 Second Quarter ...2007 Third Quarter ...2007 Fourth Quarter ...Holders...

  • Page 26
    ...The following table provides information relating to our purchases of our common stock during the quarter ended December 31, 2008: Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs...

  • 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
    ..., in this Annual Report on Form 10-K. Selected Consolidated Financial Data (in thousands, except per share data) 2008 Year Ended December 31, 2007 2006 2005 2004 Statement of Operations Data: Revenue ...Costs and expenses: Cost of revenue ...Marketing ...General and administrative ...Depreciation...

  • Page 29
    ... in 2008 for our share of Zero Technologies, LLC ("Zero Water") loss and the amortization expense for the difference between the cost and the underlying equity in net assets of Zero Water at the investment date. Additionally, we recorded an impairment charge of $6,483 to reduce the carrying value of...

  • Page 30
    ...number of outside distribution centers during 2008. We also expanded our product offerings in 2008 and in early 2009 with our introduction of NutriSystem Select, our first program to incorporate a new, fresh-frozen line of menu items. We also introduced NutriSystem Flex, our newly launched "weekends...

  • Page 31
    ...committee quarterly. Reserves for Returns. We review the reserves for customer returns at each reporting period and adjust them to reflect data available at that time. To estimate reserves for returns, we consider actual return rates in preceding periods and changes in product offerings or marketing...

  • Page 32
    ... 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. Cost...

  • Page 33
    ... 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 34
    ... advertising ($4.9 million) and an increase in marketing compensation and benefit costs ($996,000). In total, media spending was $153.6 million in 2008 and $162.7 million in 2007. During 2008, we tested a number of different promotional offers to see what drove the best response rate in the current...

  • 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
    ...reduced levels from 2008. Following is a summary of our contractual obligations. We have no other commercial commitments. Payments Due by Period (in millions) Less Than 1-3 4-5 More Than Total 1 Year Years Years 5 Years Contractual obligations Fulfillment and food purchase commitments ...Operating...

  • Page 37
    ... in testing and in offering new promotional programs. In the year ended December 31, 2008, net cash used in financing activities was $80.1 million and consisted of the repurchase of 4.9 million shares of common stock for an aggregate purchase price of $67.1 million and the payment of dividends...

  • Page 38
    ... and the price and availability of certain media. This seasonality can be seen in our results for 2008 and 2007, however, in 2006, third quarter revenue was higher than the first quarter due in part to favorable conditions in the market for certain media. Recently Issued Accounting Pronouncements In...

  • Page 39
    ... 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...

  • Page 40
    ... have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of NutriSystem, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders' equity and...

  • Page 41
    ...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 in Part I hereof and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11...

  • Page 42
    NUTRISYSTEM, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets at December 31, 2008 and 2007 ...Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006 ......

  • Page 43
    ... the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), NutriSystem, Inc.'s internal control over financial reporting as...

  • Page 44
    ... CURRENT LIABILITIES: Accounts payable ...Accrued payroll and related benefits ...Deferred revenue ...Income taxes payable ...Other accrued expenses and current liabilities ...Current liabilities of discontinued operation ...Total current liabilities ...NON-CURRENT LIABILITIES ...Total liabilities...

  • Page 45
    NUTRISYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Year Ended December 31, 2008 2007 2006 REVENUE ...COSTS AND EXPENSES: Cost of revenue ...Marketing ...General and administrative ...Depreciation and amortization ...Total costs...35,800 37...

  • Page 46
    ...currency translation adjustment ...- Total comprehensive income ...Share-based expense ...119,707 Exercise of stock options ...659,518 Tax benefit from equity compensation awards ...- Cash dividends ...- Purchase and retirement of common shares ...(4,907,323) BALANCE, December 31, 2008 ...29,384,573...

  • Page 47
    ... Inventories ...31,237 (10,110) (38,213) Other assets ...3,248 (3,878) (7,342) Accounts payable ...(13,970) 779 19,637 Accrued payroll and related benefits ...245 547 442 Deferred revenue ...4,964 - - Income taxes ...(6,664) 5,728 258 Other accrued expenses and liabilities ...(1,231) 1,381 4,725 Net...

  • Page 48
    .... (the "Company" or "NutriSystem") provides weight management products and services. The Company's pre-packaged foods are sold to weight loss program participants directly primarily via the Internet and telephone, referred to as the direct channel and through QVC, a television shopping network. In...

  • Page 49
    ... 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 $10,397 and $5,499 at December 31, 2008 and 2007, respectively. Equity Investment The Company holds an...

  • Page 50
    ... program cards to the wholesaler. Revenue from product sales includes amounts billed for shipping and handling and is presented net of returns and billed sales tax. Revenue from shipping and handling charges was $5,019, $5,060 and $2,564 in 2008, 2007 and 2006, respectively. Shipping-related costs...

  • Page 51
    ... treat any of its financial assets or liabilities under the fair value option. Segment Information The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer. Revenue consists primarily of food sales. 47

  • Page 52
    ...basis from the date of grant. The Company issues new shares upon exercise of stock options or granting of restricted stock. Cash Flow Information The Company made payments for income taxes of $36,784, $48,742 and $32,000 in 2008, 2007, and 2006, respectively. Interest payments in 2008, 2007 and 2006...

  • Page 53
    ... the year ending December 31, 2009 are achieved. Additionally, the Company incurred $217 in transaction costs. NuKitchen provides a full menu of fresh, restaurant-quality prepared meals delivered daily to customers and will expand the Company's product offerings, menu selection and price points. The...

  • Page 54
    ...relation to the consolidated financial statements. 4. CASH, CASH EQUIVALENTS AND 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, 2008...

  • Page 55
    ... and amortization expense for the difference between the cost and the underlying equity in net assets of Zero Water at the investment date. During the fourth quarter of 2008, the Company recorded an impairment charge of $6,483 to reduce the carrying value of the equity investment to its estimated...

  • Page 56
    ...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 of its securities. These actions were consolidated in December 2007 under docket number 07-4215. On January 3, 2008, the...

  • Page 57
    ... a class of current and former sales representatives who were compensated by NutriSystem pursuant to a commission-based compensation plan, rather than on an hourly basis. The plaintiff filed an amended complaint on May 28, 2008, adding a state-law class claim under the Pennsylvania Minimum Wage Act...

  • Page 58
    ... in the number of shares vested for 2008 were 24,422 shares that employees surrendered to the Company for payment of the minimum tax withholding obligations. Also, in 2008, the Company issued 49,264 shares of common stock as compensation to board members, certain consultants and spokespersons...

  • Page 59
    ...A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows: Year Ended December 31, 2008 2007 2006 Statutory federal income tax rate ...State and foreign income taxes, net of federal benefit ...Tax exempt income ...Other ...Valuation allowance ... 35...

  • Page 60
    ... the next 12 months. A reconciliation of the beginning and ending amounts of the total unrecognized tax benefit is as follows: Year Ended December 31, 2008 2007 (in thousands, except per share amounts) Balance at beginning of year ...Increase related to current year tax positions ...Decrease due...

  • Page 61
    ... Equity Incentive Plans expire 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 three to five years. The following table...

  • Page 62
    ...-based compensation costs were recorded in general and administrative expenses in 2008 and 2007 and in marketing expenses in 2006 in the accompanying consolidated statements of operations. The Company has issued restricted stock to employees generally with terms ranging from three to five years. The...

  • Page 63
    ... 31, 2008, no options to non-employee consultants were outstanding. 14. 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...

  • Page 64
    16. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) First Quarter Second Third Fourth (In thousands, except per share amounts) Year 2008: Revenue ...Gross margin ...Income (loss) from continuing operations ...(Loss) income on discontinued operation, net ...Net income (loss) ...Basic income per ...

  • Page 65
    ... 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 66
    ...the designated exhibit of the Company's Report on Form 10-Q filed on November 7, 2008. Employment Agreement dated November 30, 2007, between NutriSystem, Inc. and Thomas F. Connerty, the Company's Executive Vice President, Program Development and Chief Marketing Officer, incorporated by reference to...

  • Page 67
    ....1 23.1 31.1 31.2 32.1 32.2 * ** + Subsidiaries of NutriSystem, Inc. Consent of KPMG LLP. Certifying Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. Certifying Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley...

  • Page 68
    ..., Inc. By: /s/ Joseph M. Redling Joseph M. Redling, Chairman and Chief Executive Officer Dated: March 6, 2009 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capabilities indicated...

  • Page 69
    ... 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. b. Date: March 6, 2009 /S/ JOSEPH M. REDLING Joseph M. Redling Chairman and Chief Executive Officer

  • Page 70
    ...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: March 6, 2009 /S/ DAVID D. CLARK David D. Clark Executive Vice President, Chief Financial Officer, Treasurer and Secretary

  • Page 71
    ..., the undersigned, Joseph M. Redling, 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 period ended December 31, 2008 (the "Report") fully complies with the requirements of...

  • Page 72
    ... 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. 2) Dated: March 6, 2009 /S/ DAVID D. CLARK Executive Vice President, Chief Financial Officer, Treasurer and...

  • Page 73
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  • Page 74
    ... and Product Development Monica L. Woo Executive Vice President, eCommerce and Chief Marketing Officer Bruce Blair Executive Vice President and Chief Information Officer GENERAL INFORMATION Corporate Headquarters 300 Welsh Road Building 1, Suite 100 Horsham, PA 19044 (215) 706-5300 Annual Meeting...

  • Page 75
    ... millions of people we've helped lose weight over the years, the 170 delicious meals and desserts we've created, the 8 different plans we offer to meet our customers' needs, or the more than $600 we help people save in food costs every year, numbers- and the value they bring-are our focus. Because...

  • Page 76
    Lose weight. Save money.â„¢ 215.706.5300 | www.nutrisystem.com | 300 Welsh Road Building 1, Suite 100 | Horsham, PA 19044 2008 Cert no. SCS-COC-00648