Nutrisystem 2010 Annual Report Download

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ANNUAL REPORT
2010

Table of contents

  • Page 1
    ANNUAL REPORT 2010

  • Page 2

  • Page 3
    ... to our users. We've increased support of the Nutrisystem D business and launched a dedicated site for health care professionals to continue reaching out to primary care physicians and diabetic educators. In addition, during 2010 we launched a new food forum, web family plan program, and our...

  • Page 4

  • Page 5
    ... of incorporation or organization) 23-3012204 (I.R.S. Employer Identification No.) Fort Washington Executive Center 600 Office Center Drive Fort Washington, Pennsylvania (Address of principal executive offices) 19034 (Zip Code) Registrant's telephone number, including area code: (215) 706-5300...

  • Page 6
    ... trademarks. INDUSTRY AND MARKET DATA The market data and other statistical information used throughout this Annual Report are based on independent industry publications, government publications and other published independent sources. Some data are also based on our good faith estimates, which...

  • 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
    ... food orders for their specific tastes. There are no center visits, no measuring foods and no counting calories. Value. Our Core Auto-Delivery program is regularly priced at about $11 to $12 per day for a full 28 days of Nutrisystem food. We do not charge membership fees. Additionally, we advertise...

  • Page 9
    ..., 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 our customers significant value and is priced below...

  • Page 10
    ... 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 and smart phone weight management tools are available to our customers...

  • Page 11
    ... 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 and frozen food containing 28 breakfasts, lunches, dinners and...

  • Page 12
    ... platforms 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...

  • Page 13
    ... 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 14
    ... that our customers value the following Nutrisystem program attributes effective weight loss; direct delivery to their door; easy to follow and stay on the program; food can be easily prepared in minutes; wide variety of food; and they do not feel hungry while on the program. Information Systems...

  • Page 15
    ... administrative, sales, counseling and customer service personnel, 23 employees dedicated to fulfillment and 51 employees in marketing. None of our employees are represented by a labor union, and we consider relations with our employees to be good. Seasonality Typically in the weight loss industry...

  • Page 16
    ... 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 as well as Executive Vice President and Chief Operating Officer, AOL Member...

  • 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 may be subject to claims that our personnel are unqualified to provide proper weight loss advice. Some of our counselors for our weight management program do not have extensive training or certification in nutrition, diet or health...

  • Page 19
    ... 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 20
    ... could be adversely affected. Our marketing strategy depends in part on celebrity spokespersons, as well as customer spokespersons, to promote our weight management program. Any of these spokespersons may become the subject of adverse news reports, negative publicity or otherwise be alienated from...

  • 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
    ..., could also damage customer confidence in our weight loss program and result in a decline in revenue. Adverse publicity could arise even if the unfavorable effects associated with weight loss products or services resulted from the user's failure to use such products or services appropriately. Our...

  • Page 23
    ... one in Fort Washington, Pennsylvania. These three locations total approximately 258,280 square feet of office space. One lease in Horsham expires in the first quarter of 2011 and the second expires in 2018. The lease for our Fort Washington location expires in 2022. We have additional fulfillment...

  • Page 24
    ...above but added contentions regarding the Company's stock buyback program. The two federal action suits were consolidated under docket number 07-4565, and an amended complaint was filed on March 14, 2008 naming four members of the current Board of Directors and certain current and former officers as...

  • Page 25
    ... a class of current and former sales representatives who had been 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...

  • Page 26
    ...and low sale prices for the Company's common stock as reported on the NASDAQ Stock Market. High Low 2011 First Quarter (through March 2, 2011) ...2010 First Quarter ...2010 Second Quarter ...2010 Third Quarter ...2010 Fourth Quarter ...2009 First Quarter ...2009 Second Quarter ...2009 Third Quarter...

  • Page 27
    ... 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. These programs also may...

  • Page 28
    ... 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 29
    ..., in this Annual Report on Form 10-K. Selected Consolidated Financial Data (In thousands, except per share data) 2010 2009 Year Ended December 31, 2008 2007 2006 Statement of Operations Data: Revenue ...Costs and expenses: Cost of revenue ...Marketing ...General and administrative ...Depreciation...

  • Page 30
    ...quarter of 2010, we committed to a plan to sell the business operations conducted by our subsidiary, Nutrisystem Fresh, Inc. ("NuKitchen"), as it was no longer aligned with the business direction of the Company. NuKitchen has been treated as a discontinued operation. During the third quarter of 2010...

  • Page 31
    ... information included elsewhere in this Annual Report on Form 10-K. Background We provide weight management products and services and offer nutritionally balanced weight loss programs based on over 35 years of nutrition research and on the science of the low Glycemic Index. Our pre-packaged foods...

  • Page 32
    ... and the Nutrisystem D program. Further, we have taken steps to reduce our overall operating costs. In late December 2010, we announced that we were incorporating our fresh-frozen foods into most of our weight loss plans and offering these plans at the lowest price in our history. Additionally, we...

  • 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
    ... the customer ordering behavior, including length of time on our program and the diet program selection. Critical to increasing customer starts is our ability to deploy marketing dollars while maintaining marketing effectiveness. Factors influencing our marketing effectiveness include the quality of...

  • Page 35
    ... and ongoing cost savings initiatives. Marketing expense decreased to $145.9 million in 2010 from $146.4 million in 2009. Marketing expense as a percent of revenue increased to 28.6% in 2010 from 27.9% in 2009. Substantially all of the marketing spending in 2010 promoted the direct business. The...

  • Page 36
    ...the marketing spending in 2009 promoted the direct business with an increased concentration on the launch of Nutrisystem D. The decrease in marketing is attributable to decreased spending for advertising media ($27.5 million), the production of television advertising ($567,000) and professional fees...

  • Page 37
    ... 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...

  • Page 38
    ...We borrowed $30.0 million against this facility during 2010 to utilize our low cost debt capital to retire equity capital. No amounts were borrowed during 2009. In the year ended December 31, 2010, we generated cash flows of $66.9 million from continuing operations, an increase of $10.3 million from...

  • Page 39
    ... to quarterly determination by the Board of Directors following its review of the Company's financial performance. Seasonality Typically in the weight loss industry, revenue is strongest in the first calendar quarter and lowest in the fourth calendar quarter. We believe our business experiences...

  • Page 40
    ...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, 2010. The Company's independent registered public accounting firm, KPMG LLP...

  • Page 41
    ...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, 2010 and 2009, and the related consolidated statements of operations, stockholders' equity and comprehensive income...

  • Page 42
    ... 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 43
    NUTRISYSTEM, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets at December 31, 2010 and 2009 ...Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008 ......

  • Page 44
    ..., 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting...

  • Page 45
    ... 31, 2010 2009 ASSETS CURRENT ASSETS: Cash and cash equivalents ...Marketable securities ...Receivables ...Inventories, net ...Prepaid income taxes ...Deferred income taxes ...Supplier advances ...Other current assets ...Current assets of discontinued operation ...Total current assets ...FIXED...

  • Page 46
    ... except per share amounts) Year Ended December 31, 2010 2009 2008 REVENUE ...COSTS AND EXPENSES: Cost of revenue ...Marketing ...General and administrative ...Depreciation and amortization ...Total costs and expenses ...Operating income from continuing operations ...OTHER (EXPENSE) INCOME ...EQUITY...

  • Page 47
    ... of common shares ...BALANCE, December 31, 2008 ...Net income ...Foreign currency translation adjustment ...Unrealized loss on marketable securities, net of tax ...Total comprehensive income ...Share-based expense, net ...Exercise of stock options ...Equity compensation awards, net ...Cash dividends...

  • Page 48
    NUTRISYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2010 2009 2008 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ...Adjustments to reconcile net income to net cash provided by operating activities: Loss on discontinued operations ......

  • Page 49
    ... "Company" or "Nutrisystem"), a provider of weight management products and services, offers nutritionally balanced weight loss programs based on over 35 years of nutrition research and on the science of the low glycemic index. The Company's pre-packaged foods are sold directly to weight loss program...

  • Page 50
    ... prepaid program cards and unshipped frozen foods. 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...

  • Page 51
    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 $5,763, $5,193 and $5,019 in 2010, 2009 and 2008, respectively. Shipping-related costs are included in cost of revenue in ...

  • Page 52
    ... date. The Company records accrued interest and penalties related to unrecognized tax benefits as part of interest expense. 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...

  • Page 53
    ... compensation expense on a straight-line basis from the date of grant. The Company issues new shares upon exercise of stock options or vesting of restricted stock or restricted stock units. Cash Flow Information The Company made payments for income taxes of $16,660, $11,449 and $36,784 in 2010, 2009...

  • Page 54
    ... using pricing models that take into account contract terms and certain observable current market information such as LIBOR interest rates. The following table summarizes the Company's financial assets and liabilities measured at fair value at December 31, 2010: Quoted Prices in Active Markets for...

  • Page 55
    ... the cost and the underlying equity in net assets of Zero Water at the investment date. In June 2009, the Company abandoned its interest in Zero Water as management determined that the business was no longer aligned with the Company's current strategic direction. An equity and impairment loss of...

  • Page 56
    ... renewal options for additional periods. Certain of the leases also contain escalation clauses based upon increases in costs related to the properties. Lease obligations, with initial or remaining terms of one or more years, consist of the following at December 31, 2010: 2011 ...2012 ...2013 ...2014...

  • Page 57
    ...above but added contentions regarding the Company's stock buyback program. The two federal action suits were consolidated under docket number 07-4565, and an amended complaint was filed on March 14, 2008 naming four members of the current Board of Directors and certain current and former officers as...

  • Page 58
    ... a class of current and former sales representatives who had been 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...

  • Page 59
    ... the minimum tax withholding obligations. Also, in 2009, the Company issued 39,039 shares of common stock as compensation to board members and spokespersons per their contracts. Costs recognized for these stock grants were $538. The fair value of the common stock issued in 2009 to board members and...

  • Page 60
    ... federal income tax rate to the Company's effective tax rate is as follows: Year Ended December 31, 2010 2009 2008 Statutory federal income tax rate ...State and foreign income taxes, net of federal benefit ...Tax exempt income ...Executive compensation limitation ...Food donations ...Other...

  • Page 61
    ... income tax payments resulted in a similar decrease in income tax expense for the year ended December 31, 2009 including a reversal of a $3,749 valuation allowance established in 2008 for deferred tax assets related to prior Zero Water losses and impairment charges. These Zero Water losses and...

  • Page 62
    ... pre-tax losses of $390 and $276 for the years ended December 31, 2009 and 2008, respectively. In the first quarter of 2010, the Company committed to a plan to sell the business operations conducted by NuKitchen, as it was no longer aligned with the business direction of the Company. The Company was...

  • Page 63
    ...-based compensation costs were recorded in marketing and general and administrative expenses in 2010, 2009 and 2008 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 fair value is...

  • Page 64
    ... consultants. These stock options were accounted for as liability awards. The fair value of these awards was estimated using the Black-Scholes option pricing model and was remeasured at each financial statement date until the award settled or expired. During 2008, the Company reduced expense by $109...

  • Page 65
    ... December 31, 2010 2009 2008 Balance at beginning of year ...Provision for estimated returns ...Actual returns ...Balance at end of year ... $ 1,850 24,114 (24,955) $ 1,009 $ 2,074 30,169 (30,393) $ 1,850 $ 2,860 47,452 (48,238) $ 2,074 16. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) First...

  • 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
    ...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 68
    ... to the designated exhibit of the Company's Report on Form 10-K filed on March 6, 2009. Employment Agreement dated May 14, 2008, between Nutrisystem, Inc. and Scott A. Falconer, the Company's Executive Vice President of Customer Management and Product Development, incorporated by reference to the...

  • Page 69
    ... to the designated exhibit of the Company's Report on Form 10-K filed on March 6, 2009. Employment Agreement dated October 20, 2008, between Nutrisystem, Inc. and Monica Woo, the Company's Executive Vice President eCommerce and Chief Marketing Officer, incorporated by reference to the designated...

  • Page 70
    ... thereunto duly authorized. Nutrisystem, Inc. By: /s/ Joseph M. Redling Joseph M. Redling, Chairman, President and Chief Executive Officer Dated: March 7, 2011 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of...

  • Page 71
    ...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 7, 2011 /S/ JOSEPH M. REDLING Joseph M. Redling Chairman, President and Chief Executive Officer

  • Page 72
    ... 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 7, 2011 /S/ DAVID D. CLARK David D. Clark Executive Vice President, Chief Financial Officer...

  • Page 73
    ...(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 7, 2011 /S/ JOSEPH M. REDLING Chairman, President and Chief Executive Officer

  • Page 74
    ... 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 7, 2011 /S/ DAVID D. CLARK Executive Vice President, Chief Financial Officer and Treasurer

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  • Page 78
    ... Executive Vice President, E-Commerce and Chief Marketing Officer GENERAL INFORMATION Corporate Headquarters Fort Washington Executive Center 600 Office Center Drive Fort Washington, PA 19034 (215) 706-5300 Independent Registered Public Accounting Firm KPMG LLP Philadelphia, PA General Counsel...

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    600 Office Center Drive | Fort Washington, PA 19034 | www.nutrisystem.com