Nutrisystem 2008 Annual Report Download - page 34

Marketing expenses decreased to $175.0 million in 2008 from $178.7 million in 2007. Marketing expense as a
percent of revenue increased to 25.4% in 2008 from 23.0% in 2007. Substantially all of the marketing spending
promoted the direct business, and the decrease in marketing is attributable to decreased spending for advertising
media ($9.1 million) and professional fees and talent ($629,000) which offset increased spending in production
of television 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 economy. These
tests, while impacting the 2008 marketing expense, will provide valuable insight into 2009.
General and administrative expenses increased to $75.7 million in 2008 from $65.5 million in 2007 and as a
percent of revenue increased to 11.0% in 2008 from 8.4% in 2007. The increase in spending is primarily
attributable to higher compensation and benefits costs ($953,000) due to the hiring of new executive officers in
late 2007 and 2008; increased professional, outside services and computer services ($7.6 million) in part for
maintenance and support of our ecommerce website; and costs associated with certain cost savings initiatives
($1.4 million). We successfully launched our new ecommerce platform during 2008 which increased the
computer services expense after the development work on this website was completed. While we will continue to
incur maintenance and support for our website, we believe the additional support needed for the initial launch
will decline in 2009.
Depreciation and Amortization. Depreciation and amortization expense increased to $8.5 million in 2008
from $5.8 million in 2007 due to increased capital expenditures on our website and the amortization expense
associated with the NuKitchen acquisition in July 2008.
Other Expense. Other expense primarily represents the realized gains and losses from currency.
Equity and Impairment Loss. An equity loss of $3.0 million was recorded during 2008 for our share of Zero
Water’s loss and for the amortization expense for the difference between the cost and the underlying equity in the
net assets of Zero Water at the investment date. Additionally, we recorded an impairment charge of $6.5 million
to reduce the carrying value of the equity investment to its estimated fair value during the fourth quarter of 2008.
The impairment charge primarily resulted from lower-than-expected operating results and projections of future
performance coupled with the current non-strategic business direction of Zero Water and the overall general
economic decline which indicated that the full carrying value of the equity investment was not recoverable.
Interest Income, Net. Interest income, net decreased to $757,000 in 2008 from $3.8 million in 2007
primarily due to lower cash and marketable securities balances and lower interest rates. Any excess cash in 2008
was invested in treasury and money market accounts as compared to marketable securities in 2007.
Income Taxes. In 2008, we recorded income tax expense of $33.6 million, which reflects an effective tax
rate of 42.0%. In 2007, we recorded $60.9 million of income tax expense for the reporting period. The effective
tax rate in 2007 was 36.7%. The increase in the effective tax rate for 2008 was primarily due to a capital loss
carryforward of Zero Water for which a valuation allowance was recorded as we do not have sufficient history in
generating capital gains.
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