Nutrisystem 2003 Annual Report Download - page 21

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ended December 31, 2002 and 2003, the Company recorded a loss of $143 and $157, respectively, under the caption
Equity in losses of affiliate, representing the Companys investment in an affiliate.
Interest Income. Interest income net of interest expense increased $16 from $41 in 2002 to $57 in 2003
primarily due to interest earned on higher cash balances.
Income taxes. In 2003, the Company recorded a $3,397 income tax benefit related to the recognition of
deferred tax assets (see Note 8 of the Financial Statements).
Net Income. From 2002 to 2003, net income decreased by $1,599 from net income of $2,411 to net income of
$812. The decrease in net income in 2003 is primarily due to lower revenues, increased marketing expense and costs
associated with the development of a new program. These high costs were fully offset by an income tax benefit recorded
in 2003.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues. Revenues increased from $23,798 for the year ended December 31, 2001 to $27,569 for the year
ended December 31, 2002. The revenue increase of $3,771, or 15.9%, resulted from increased sales to QVC ($4,694)
which began distributing the Companys products in the second quarter of 2001. Offsetting these increases was a decline
in sales of $451, $250 and $222 through the Direct, Case Distributor and Field Sales channels, respectively. In 2002,
Direct accounted for 59% of total revenues, while QVC, Field Sales and Case Distributor revenues accounted for 26%,
8% and 7% of total revenues, respectively. In 2001, the comparable percents were 70%, 11%, 10% and 9% of total
revenues, respectively.
Costs and Expenses. Cost of revenues increased $2,539 from $13,114 to $15,653 for the years ended
December 31, 2001 and 2002, respectively. Gross margin as a percent of revenues decreased from 44.9% in 2001 to
43.2% in 2002. The decrease in gross margin is due to lower margin QVC sales accounting for a higher percent of
overall sales. In 2002 and 2001, gross margin for Direct remained approximately the same. Marketing expenses
decreased $2,173 from $3,565 to $1,392 from 2001 to 2002. All marketing promoted the Direct channel, and, as
discussed above, the decline in marketing expense is attributable to the decrease in television advertising. General and
administrative expenses ($6,440 and $7,775 in 2001 and 2002, respectively) increased $1,335 from 27.1% of sales to
28.2% of sales. The Company incurred higher expenses in a variety of areas including compensation, professional
services, and packaging expenses. Included in general and administrative costs in 2002 are $481 in severance relating to
the Company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 3).
Other expense in 2002 of $100 represents the cost of settling an employment-related complaint filed by certain
employees of the Companys Reno facility. In 2001, the Company had other income of $77 representing passive
investment income.
Interest Income. Interest income net of interest expense decreased $57 from $98 in 2001 to $41 in 2002
primarily due to lower interest rates.
Net Income. From 2001 to 2002, the Company improved its net results from net income of $1,249 to net
income of $2,411. In 2001 and 2002, the Companys net income included income from discontinued operations of $813
and $200, respectively. The Company generated operating income from continuing operations of $261 in 2001 and
$2,413 in 2002. This sharp increase in operating income of $2,152 is primarily related to the decrease in advertising
spending.