Nutrisystem 2003 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ...: We launched the first new weight loss program for NutriSystem in more than a dozen years. The program, NutriSystem Nourish, is based on foods with low Glycemic Index values (i.e., good carbs). We also introduced more than 80 new foods to support the program. Marketing and Growth: We tested various...

  • Page 3
    ...the voting stock held by non-affiliates of the Registrant as of June 30, 2003, was $10,817,679. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the NASDAQ OTC Bulletin Board on June 30, 2003. Number of shares outstanding of the Registrant...

  • Page 4
    ... Compensation...23 Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...23 Certain Relationships and Related Transactions ...23 Principal Accountant Fees and Services ...23 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form...

  • Page 5
    ...linked to obesity. The weight loss industry consists of a wide variety of diet foods and meal replacement bars and shakes, appetite suppressants, nutritional supplements, pharmaceutical products and weight loss programs. The domestic market for weight loss programs, diet foods and diet related books...

  • Page 6
    ... stable at room temperature, making it relatively inexpensive to ship and store. On the web site, members can order food 24 hours a day, seven days a week. The Company's telephone and online support addresses many of the most common limitations of traditional weight loss programs, including high...

  • Page 7
    ...and meal replacement bars and shakes, appetite suppressants and nutritional supplements. The weight loss market is served by a diverse array of competitors. Potential customers seeking to manage their weight can turn to traditional center-based competitors, medically supervised programs, online diet...

  • Page 8
    ... reports on Form10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the Â"1934 Act ReportsÂ"), are available free of charge through the CompanyÂ's investor relations page at www.nutrisystem.com...

  • Page 9
    ...obtained key person life insurance on any key employees. If any key employees left NutriSystem or were seriously injured and became unable to work, the business could be harmed. The Company may be subject to health-related claims from members or customers. The CompanyÂ's weight loss program does not...

  • Page 10
    ... perceptions, adverse publicity associated with illness or other undesirable effects resulting from the consumption of the CompanyÂ's products or competitorsÂ' similar products, whether or not accurate, could also damage customer confidence in the NutriSystem weight loss program and result in...

  • Page 11
    ... of weight loss food products, vitamins, nutritional supplements and minerals, including the Predecessor Businesses, have been named as defendants in product liability lawsuits from time to time. The successful assertion or settlement of an uninsured claim, a significant number of insured claims or...

  • Page 12
    ... franchise agreements and now operate as Case Distributors. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS IN THE FOURTH QUARTER OF FISCAL 2003 None submitted. PART II ITEM 5. MARKET FOR REGISTRANTÂ'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The CompanyÂ's common stock traded...

  • Page 13
    ... exemption from registration set forth in Section 4(2) of the Securities Act of 1933. On October 23, 2003, we issued 10,000 and 1,000 shares of common stock to Zora Andrich and Ray Manzella, respectively, in consideration for marketing services. In granting the shares, we relied upon the exemption...

  • Page 14
    ... Data: Revenues: Total revenues...Costs and expenses: Cost of revenues...Marketing...General and administrative ...New program developmentÂ..... Depreciation and amortization ...Operating income (loss) from continuing operations...Other income (loss) Equity in losses of affiliate Interest income, net...

  • Page 15
    ... profit of $813, respectively. Also in 2000, the Company recorded a loss on disposal of $7,873 consisting of a write off of intangibles of $7,650 and $223 of other shutdown related costs. In 2002, the Company recorded a gain of $200 upon the sale of the intellectual property associated with Sweet...

  • Page 16
    ... after the transaction. Sweet Success is a diet meal replacement product line distributed in traditional retail outlets such as drug and grocery stores and price clubs. In the transaction, the Company acquired certain assets directly related to the Sweet Success product line, including inventory...

  • Page 17
    ... for Returns. Management reviews the reserves for customer returns at each reporting period and adjusts them to reflect data available at that time. To estimate a return for reserves, management considers return rates in preceding periods and changes in product offerings or marketing methods that...

  • Page 18
    ... shipping costs, charge card discounts and packing material. Cost of products sold includes products provided at no charge as part of promotions. Cost of sales includes the fees paid to independent distributors. Marketing Expense. Marketing expense includes advertising, marketing and promotional...

  • Page 19
    ...$467 and $484 per program new customer in 2003 and 2002, respectively. The Company had 16,729 and 19,569 program new customers in 2003 and 2002, respectively. Timing also affected sales per new customer. In 2003, 45.5% of new customers were acquired in the second half of the year, while in 2002 only...

  • Page 20
    ...site. Retail prices (including shipping and handling) offered on QVC to consumers are similar to prices offered on the web site. The Company generates a lower gross margin (as a percent of sales) on sales to QVC relative to direct sales, but QVC sales require no incremental advertising and marketing...

  • Page 21
    ... $481 in severance relating to the CompanyÂ's former Chief Executive Officer and $175 in charges relating to discontinued packaging and products. Also in general and administrative costs in 2002 is $239 in legal defense costs associated with the franchise lawsuit that was settled in 2003 (see Item...

  • Page 22
    ... to increase web site capacity, fulfillment operations, leasehold improvements related to the relocation of home office and an investment ($93) made in a start up company formed to provide diet and fitness programs in center locations and capital . In the year ended December 31, 2003, net cash...

  • Page 23
    ...the effect of the method used on reported results. Management has elected to continue to apply the intrinsic-value based method of accounting under Accounting Principals Board (APB) Opinion No. 25, Â"Accounting for Stock Issued to Employees,Â" and related interpretations. The disclosure requirements...

  • Page 24
    ... procedures as of the end of the period covered by this Report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized...

  • Page 25
    ... in our definitive proxy statement related to the 2004 annual meeting of stockholders. Biographical information relating to the CompanyÂ's executive officers is set forth in Item 1 of Part I of this Report. Executive Officers The information concerning our executive officers required by this...

  • Page 26
    ... incorporated by reference as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K. The Company furnished a Report on Form 8-K, dated October 29, 2003, that included information reported under Items 7 and 12 relating to the CompanyÂ's earnings for the nine month period ended September 30...

  • Page 27
    NUTRISYSTEM, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent AuditorsÂ' Report ...26 Report of Independent Public Accountants ...27 Consolidated Balance Sheets...28 Consolidated Statements of Operations...29 Consolidated Statements of StockholdersÂ' Equity ...30 ...

  • Page 28
    ... AUDITORSÂ' REPORT The Board of Directors and Stockholders NutriSystem, Inc.: We have audited the 2003 and 2002 consolidated financial statements of NutriSystem, Inc. and subsidiaries as listed in the accompanying index. These financial statements are the responsibility of the CompanyÂ's management...

  • Page 29
    ...sheets of Nutri/System, Inc. (formerly nutrisystem.com inc.)(a Delaware corporation) and subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of operations, stockholdersÂ' equity and cash flows for each of the three years in the period ended December 31, 2001. These...

  • Page 30
    NUTRISYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31 2003 2002 ASSETS CURRENT ASSETS: Cash and cash equivalents Restricted cash Trade receivables Inventories Deferred tax asset Other current assets Total current assets FIXED ASSETS, net ...

  • Page 31
    ...2001 2003 REVENUES $ 22,575 $ 27,569 $ 23,798 COSTS AND EXPENSES: Cost of revenues Marketing General and administrative New program development Depreciation and amortization Total costs and expenses Operating income (loss) from continuing operations OTHER INCOME (LOSS) EQUITY IN LOSSES OF AFFILIATE...

  • Page 32
    ...BALANCE, December 31, 2002 Net income Stock-based costs Exercise of stock options Exercise of warrants Sale of common stock Purchase of treasury stock Retirement of treasury stock Recognition of previously reserved deferred tax asset BALANCE, December 31, 2003 28,735,794 Â- Â- (1,670,400) 27,065,394...

  • Page 33
    ... Repayment of non-current liabilities Sale of common stock Treasury stock purchases, at cost Net cash provided by (used in) financing activities NET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of year CASH AND CASH EQUIVALENTS, end of year $ $ 812 $ 2,411 $ 1,249...

  • Page 34
    ... network. The CompanyÂ's pre-packaged foods are now sold to weight loss program participants directly through the Internet, telephone, QVC, independent commissioned representatives and Case Distributor weight loss centers. Since the inception of the NutriSystem business in 1972, the Company and its...

  • Page 35
    ... or to franchise or Case Distributors. Revenues for products distributed by QVC are recognized when QVC ships the products from their distribution center to the end-consumer. Product inventory held by QVC is carried in the CompanyÂ's inventories and payments received from QVC in advance of shipments...

  • Page 36
    ...only if the current market price of the underlying stock exceeded the exercise price. SFAS 123 established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS 123, as amended in SFAS 148, the Company has...

  • Page 37
    ... value of the options at the date of grant, as prescribed under SFAS 123, as amended by SFAS 148, the CompanyÂ's net income and net income per share would have been changed to the following pro forma amounts: Year Ended December 31 2003 Net income: As reported Add stock-based employee compensation...

  • Page 38
    ...shares outstanding after the transaction. The acquisition was recorded using the purchase method of accounting. In the transaction, the Company acquired certain assets directly related to the Sweet Success product line, including inventory, books and records, contracts and intellectual property such...

  • Page 39
    ... payments related to the costs associated with the development of new packaging as well as any remaining packaging that has been discontinued due to the introduction of the new product line. The severance accrual represents the current portion of future payments to a former executive of the Company...

  • Page 40
    ... estimated defense costs at the time a matter becomes known. The Company has provided indemnifications to certain affiliates of Imagine Weight Loss Center amounting to $52 at December 31, 2003 . 6. COMMITMENTS AND CONTINGENCIES The Company leases its warehouse, corporate headquarters and certain...

  • Page 41
    ... affect the voting power of the common stock. The issuance of preferred stock may have the effect of delaying, averting or preventing a change in control of the Company. 8. INCOME TAXES Income taxes consist of the following: Year Ended December 31 2002 2001 $ Â- $ Â- 966 501 (966) $ (501) $ 2003...

  • Page 42
    ...operating results, tax planning strategies, and the expiration date of net operating loss carryforwards. In the second quarter of 2003, management determined based on an analysis of the cumulative level of pretax profits over the past three years, projected levels of profits, schedule of reversal of...

  • Page 43
    ... At December 31, 2003, 2002 and 2001, options to purchase 2,186,742, 1,445,889, and 643,667 shares were exercisable with a weighted-average exercise price of $1.65, $2.20 and $2.97 per share, respectively. Average Remaining Life (Years) 7.7 8.4 5.0 6.3 6.2 6.5 Average Exercise Price $ 0.37 0.61 1.49...

  • Page 44
    ... by a former member of the Board of Directors. 11. EMPLOYEE BENEFIT PLAN The Company maintains a qualified tax deferred defined contribution retirement plan (the Â"PlanÂ"). Under the provisions of the Plan, substantially all employees meeting minimum age and service requirements are entitled to...

  • Page 45
    ... CONSOLIDATED FINANCIAL DATA Quarter First (In thousands, except per share amounts) 2003: Revenues Income (loss) before income taxes Net income (loss) Income (loss) per basic and diluted share Second Third Fourth Year $ $ $ 7,196 651 651 $ $ $ 6,315 211 2,098 $ $ $ 4,866 (376) (225) $ 4,198...

  • Page 46
    ... GENERAL INFORMATION Corporate Headquarters 200 Welsh Road Horsham, PA 19044 (215) 706-5300 Annual Meeting The Annual Meeting of Stockholders will be held on May 6, 2004 at 10:00 a.m. at the CompanyÂ's headquarters. Independent Public Accountants KPMG LLP. Philadelphia, PA General Counsel...

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