Nutrisystem 2009 Annual Report Download

Download and view the complete annual report

Please find the complete 2009 Nutrisystem annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 80

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80

Annual Report
2009

Table of contents

  • Page 1
    Annual Report 2009

  • Page 2
    Strengthening an enduring brand through... Science Innovation Customer Success

  • Page 3
    ... food offerings with the introduction of Nutrisystem® Select®, a premium line of fresh-frozen products that was launched through our innovative partnership with Schwan's Home Service. • 2009 represented the first full year of our partnership with Costco and our entry into the retail channel...

  • Page 4

  • Page 5
    ... closing price of the common stock as reported on the NASDAQ Global Select Market on June 30, 2009 (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 25, 2010: 30...

  • Page 6
    ...SERVICE MARKS Nutrisystem®, Nutrisystem® Flex® and Nutrisystem® Select® are registered trademarks of Nutrisystem, Inc. or its subsidiaries. Other service marks, trademarks and trade names of Nutrisystem, Inc. or its subsidiaries may be used in this Annual Report on From 10-K (the "Annual Report...

  • Page 7
    ..., 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 8
    ...pre-selected favorites food package or customize their monthly food orders for their specific tastes. There are no center visits, no measuring foods and no counting calories. Value. Our basic Auto-Delivery program is currently priced at about $11 to $12 per day for a full 28 days of Nutrisystem food...

  • Page 9
    ... 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 of as little as $11 per day, we believe our weight management program offers...

  • Page 10
    ... other through hosted chat rooms and bulletin boards. These services are complemented with relevant information on diet, nutrition and exercise, which is provided on our community website and emailed to our customers bi-weekly. Additionally, online weight management tools are available and include...

  • Page 11
    .... Nutrisystem Flex includes a Recipe Book (Nutrisystem, My Way) and a Dining Out Guide to help consumers make healthy choices and stay within the program guidelines on their "flex" days. Typically, our customers purchase monthly food packages of shelf-stable food containing 28 breakfasts, lunches...

  • Page 12
    ... of food. Most customers order through our Auto-Delivery feature. Our program is currently priced for as little as $11 per day. The food is shelf-stable at room temperature, making it relatively inexpensive to ship and store. On our website, customers can order food 24 hours a day, seven days a week...

  • Page 13
    ... and tools. Sales and Counseling A majority of our direct business sales occur on our website. The remaining sales are by telephone, and our call center processes virtually all of them. Our weight loss program is also sold through QVC, a television home shopping network, which represented 5% of...

  • Page 14
    ... and a new warehouse management system to target improvements in productivity, cost, quality and service. 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...

  • Page 15
    ... 2009, we had approximately 612 administrative, sales, counseling and customer service personnel, 27 employees dedicated to fulfillment and 41 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 16
    ...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, Executive Vice President, Member Services and Chief Operating Officer, Member Services...

  • Page 17
    ... and variety of food and other products in a timely and low-cost manner from our manufacturers, we will be unable to fulfill our customers' orders in a timely manner, which may cause us to lose revenue and market share or incur higher costs, as well as damage the value of the Nutrisystem brand. 13

  • Page 18
    ... States Food and Drug Administration ("FDA") compliance issues. We are dependent on the QVC Shopping Network for a percentage of revenue. In 2009, sales of our products through our relationship with the QVC Shopping Network accounted for 5% of our revenue. For 2010, we have a one-year contractual...

  • Page 19
    ... likely be lengthy and costly, and adversely affect our results of operations. Further, our general liability insurance may not cover claims of these types. The weight management industry is highly competitive. If any of our competitors or a new entrant into the market with significant resources...

  • Page 20
    ... costs that would adversely affect our operating income and earnings; the risk that our current and planned facilities, information systems, personnel and controls will not be adequate to support our future operations; diversion of management time and capital resources from our existing businesses...

  • Page 21
    ... could adversely affect the price of our common stock. Risks Related to Our Industry Changes in consumer preferences could negatively impact our operating results. Our program features pre-packaged food selections, which we believe offer convenience and value to our customers. Our continued success...

  • Page 22
    ... from time to time by the Federal Trade Commission, or FTC, and other governmental agencies. Many companies in the weight loss industry, including our predecessor businesses, have entered into consent decrees with the FTC relating to weight loss claims and other advertising practices. We...

  • Page 23
    ... that establish manufacturing practices and quality standards for food products. Product liability claims could have a material adverse effect on our business as existing insurance coverage may not be adequate. Distributors of weight loss food products, vitamins, nutritional supplements and minerals...

  • Page 24
    ...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 appointed lead plaintiffs and lead counsel pursuant...

  • Page 25
    ... a class of current and former sales representatives who were compensated by the Company 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 26
    ... the high and low sale prices for the Company's common stock as reported on the NASDAQ Stock Market. High Low 2010 First Quarter (through February 25, 2010) ...2009 First Quarter ...2009 Second Quarter ...2009 Third Quarter ...2009 Fourth Quarter ...2008 First Quarter ...2008 Second Quarter ...2008...

  • Page 27
    ... depend on a variety of factors including price, corporate and regulatory requirements, alternative investment opportunities and other market conditions. The stock repurchase programs from 2007 had an expiration date of March 31, 2009, but were extended by our Board of Directors until March 31, 2011...

  • Page 28
    ... 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 RUSSELL 2000 INDEX 2,500 2,224 2,000 1,500...

  • Page 29
    ..., in this Annual Report on Form 10-K. Selected Consolidated Financial Data (in thousands, except per share data) 2009 Year Ended December 31, 2008 2007 2006 2005 Statement of Operations Data: Revenue ...Costs and expenses: Cost of revenue ...Marketing ...General and administrative ...Depreciation...

  • Page 30
    ... fair value. The impairment charge primarily resulted from lower-thanexpected 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...

  • Page 31
    ...category. This is Nutrisystem's first appearance in Internet Retailer's Annual Top 500 Guide. During 2009, we began marketing our Nutrisystem D program, a low-glycemic program specifically designed for those with type 2 diabetes who need to lose weight. Results from a clinical study conducted at the...

  • Page 32
    ... Japanese market. In December 2009, we launched Nutrisystem Jumpstart, a program for men and women designed to help those who are looking to jumpstart their way to a healthier lifestyle. Nutrisystem Jumpstart showcased our 50 new foods and provided customers with extra tools and support to help them...

  • Page 33
    ... 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. Marketing...

  • Page 34
    ...television home shopping network. In 2009, this channel represented 5% of our revenue as compared to 6% of our revenue in 2008 and 5% in 2007. On the QVC network, we reach a large audience in a 50-minute infomercial format that enables us to fully convey the benefits of the Nutrisystem diet programs...

  • Page 35
    ... 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...

  • Page 36
    ...increased food and freight costs. We are continuing to experience pressure on gross margins but are focusing on these costs and are working on a full supply chain optimization effort. In addition, we increased prices on October 1, 2008, to help mitigate these pressures during 2009. Marketing expense...

  • Page 37
    ... 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 and computer services ($7.6 million) in part for maintenance and support of our ecommerce website; and costs...

  • Page 38
    ... in marketable securities of $30.3 million and spending on capital expenditures of $8.4 million. We are continuing to invest in our ecommerce platform and web initiatives which will allow us to enhance our sales efforts and be more efficient in testing and in offering new promotional programs. 34

  • Page 39
    ... date of March 31, 2009 but were extended by our Board of Directors until March 31, 2011. These programs may be limited or terminated by us at any time without prior notice. The repurchased shares have been retired. As of December 31, 2009, an additional $113.8 million was authorized to be purchased...

  • Page 40
    ... at December 31, 2009 and our cash and cash equivalents at that date of $32.2 million were maintained in bank accounts. Additionally, we invested $30.3 million in marketable securities, which are classified as available-for-sale securities and are reported at fair value in the accompanying...

  • Page 41
    ... issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based upon that evaluation, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2009. The Company's independent registered public accounting...

  • Page 42
    ... of Nutrisystem, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2009, and our report dated March 5, 2010...

  • Page 43
    ... 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 in Part I hereof and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information...

  • Page 44
    ..., INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets at December 31, 2009 and 2008 ...Consolidated Statements of Operations for the fiscal years ended December 31, 2009, 2008 and 2007 ...Consolidated...

  • Page 45
    ... Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 5, 2010 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. /s/ KPMG LLP Philadelphia, Pennsylvania March 5, 2010...

  • Page 46
    ... amounts) December 31, 2009 2008 ASSETS CURRENT ASSETS: Cash and cash equivalents ...Marketable securities ...Receivables ...Inventories, net ...Prepaid income taxes ...Deferred income taxes ...Other current assets ...Current assets of discontinued operation ...Total current assets ...FIXED ASSETS...

  • Page 47
    NUTRISYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Year Ended December 31, 2009 2008 2007 REVENUE ...COSTS AND EXPENSES: Cost of revenue ...Marketing ...General and administrative ...Depreciation and amortization ...Total costs and ...

  • Page 48
    ...Share-based expense ...Exercise of stock options ...Tax benefit from equity compensation awards ...Cash dividends ...Purchase and retirement of common shares ...BALANCE, December 31, 2008 ...Net income ...Foreign currency translation adjustment ...Unrealized loss on marketable securities, net of tax...

  • Page 49
    ... ...Net cash provided by operating activities ...CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities ...Sales of marketable securities ...Cash paid for acquisition of business ...Capital additions ...Proceeds from the sale of fixed assets ...Purchase of equity investment ...Net...

  • Page 50
    ... BACKGROUND Nature of the Business Nutrisystem, Inc. (the "Company" or "Nutrisystem"), a provider of weight management products and services, offers weight-loss programs based on nutritious, portion-controlled, lower Glycemic Index prepared meals. The Company's pre-packaged foods are sold to weight...

  • Page 51
    ... asset, which is generally two 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 $12,454 and $10,397 at December 31, 2009 and 2008, respectively. Equity...

  • Page 52
    ..., unshipped frozen foods and promotional offers. 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. The Company reviews its history of actual...

  • Page 53
    ... direct mailing. All other advertising costs are charged to expense as incurred or the first time the advertising takes place. At December 31, 2009 and 2008, $3,529 and $2,066, respectively, of costs have been prepaid for future advertisements and promotions. Accounting for Lease Related Expenses...

  • Page 54
    ... 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 Share Effective January 1, 2009, the Company adopted an accounting pronouncement...

  • Page 55
    ... at the date of the financial statements and the reported amounts of revenue and operating expenses during the reporting period. Actual results could differ from these estimates. Reclassifications Effective January 1, 2009, the Company revised the classification of sales commissions in the...

  • Page 56
    ..., fresh prepared meals designed to promote weight management and healthy living. The total purchase price of $5,717 was allocated to identifiable intangible assets ($3,000) and goodwill ($2,717). The Company conducted its annual impairment test of goodwill during the fourth quarter of 2009. The test...

  • Page 57
    ...that the full carrying value of the equity investment was not recoverable. The charge was recorded as equity and impairment loss in the accompanying consolidated statements of operations. In June 2009, the Company abandoned its interest in Zero Water as management determined that the business was no...

  • Page 58
    ... Operating Leases The Company leases its warehouse, corporate headquarters and certain equipment. These leases generally have initial terms of one to 12 years and have renewal options for additional periods. Certain of the leases also contain escalation clauses based upon increases in costs related...

  • Page 59
    ... a class of current and former sales representatives who were compensated by the Company 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 60
    ... 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 or cash flows in future years...

  • Page 61
    ... preferred stock may have the effect of delaying, averting or preventing a change in control of the Company. 10. INCOME TAXES The provision for income taxes from continuing operations consists of the following: Year Ended December 31, 2009 2008 2007 Current: Federal ...State ...Foreign ...Deferred...

  • Page 62
    ...749 related to its impairment of its investment in Zero Water since the character of the deduction could be a capital item and there was no history of generating capital gains. In 2009, the Company abandoned its investment in Zero Water (see Note 6) which will provide the Company with a current year...

  • Page 63
    ...is granted. To date, all of the awards issued under the 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...

  • Page 64
    ... services. The value of the shares issued was $125, $250 and $250 in 2009, 2008 and 2007, respectively. The stock-based compensation costs were recorded in marketing and general and administrative expenses in 2009, 2008 and 2007 in the accompanying consolidated statements of operations. The Company...

  • Page 65
    ... expense related to unvested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.4 years. During 2009, the Company granted 5,500 restricted stock units. The fair value is equal to the market price of the Company's common stock on the date of...

  • Page 66
    ... basic and diluted per share amounts may not equal amounts reported for the year. This is due to the effects of rounding and changes in weighted average shares outstanding for each period. During the fourth quarter of 2009, an impairment charge of $4,541 was recorded in connection with the NuKitchen...

  • Page 67
    ... amortization expense for the difference between the cost and the underlying equity in net assets of Zero Water at the investment date. Additionally, an impairment charge of $6,483 was recorded during the fourth quarter of 2008 to reduce the carrying value of the equity investment to its estimated...

  • Page 68
    ... 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 by reference to the designated exhibits of the Company's Report on Form 8-K filed on December...

  • Page 69
    ...reference to 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...

  • Page 70
    ... Chief Marketing Officer, incorporated by reference to the designated exhibit of the Company's Report on Form 10-Q filed on November 7, 2008. Employment Agreement dated September 28, 2009, between Nutrisystem, Inc. and Chris Terrill, the Company's Executive Vice President and Chief Marketing Officer...

  • Page 71
    ...undersigned, thereunto duly authorized. Nutrisystem, Inc. By: /s/ Joseph M. Redling Joseph M. Redling, Chairman, President and Chief Executive Officer Dated: March 5, 2010 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons...

  • Page 72
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 73
    ...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 5, 2010 /S/ JOSEPH M. REDLING Joseph M. Redling Chairman, President and Chief Executive Officer

  • Page 74
    ...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 5, 2010 /S/ DAVID D. CLARK David D. Clark Executive Vice President, Chief Financial Officer, Treasurer and Secretary

  • Page 75
    ...(a) or 15(d) of 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) Date: March 5, 2010 /S/ JOSEPH M. REDLING Chairman, President and Chief Executive Officer

  • Page 76
    ... 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 5, 2010 /S/ DAVID D. CLARK Executive Vice President, Chief Financial Officer, Treasurer and...

  • Page 77
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 78
    ... Chris Terrill Executive Vice President, E-Commerce and Chief Marketing Officer Scott A. Falconer Executive Vice President, Operations GENERAL INFORMATION Corporate Headquarters 300 Welsh Road Building 1, Suite 100 Horsham, PA 19044 (215) 706-5300 Annual Meeting The Annual Meeting of Stockholders...

  • Page 79
    Cert no. SCS-COC-000648

  • Page 80
    300 Welsh Road | Building One, Suite One Hundred | Horsham, PA 19044 | nutrisystem.com