Nutrisystem 2008 Annual Report Download - page 36

Other Expense. Other expense represents the realized gains and losses from currency.
Equity Loss. In October 2007, we purchased an approximate 27% fully diluted equity interest in Zero Water.
This investment is accounted for under the equity method of accounting and an estimated loss of $800,000 was
recorded for our share of Zero Water’s loss subsequent to the initial investment.
Interest Income, Net. Interest income, net increased to $3.8 million in 2007 from $3.6 million in 2006
primarily due to higher cash balances maintained for the majority of the year.
Income Taxes. In 2007, we recorded income tax expense of $60.9 million, which reflects an effective tax
rate of 36.7%. In 2006, we recorded $51.0 million of income tax expense for the reporting period. The effective
tax rate in 2006 was 37.3%. 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 and food donations.
Contractual Obligations and Commercial Commitments
As of December 31, 2008, our principal commitments consisted of obligations under supply agreements
with food vendors, an agreement with our outside fulfillment provider, 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 but at reduced levels from 2008.
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 ................ $225.7 $47.5 $94.2 $84.0 $—
Operating leases ...................................... 10.1 3.4 3.0 1.1 2.6
$235.8 $50.9 $97.2 $85.1 $ 2.6
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 for certain rebates to us 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 purchase commitments.
In October 2007, 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 under this credit facility at
December 31, 2008 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
The capital and credit markets have become more volatile as a result of the recent global economic
conditions. This has caused a general tightening in the credit markets, lower levels of liquidity and increased
financing costs. Despite these factors, we believe that available capital resources are sufficient to fund our
working capital requirements, capital expenditures, income tax obligations, dividends and share repurchases for
the foreseeable future.
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