Nutrisystem 2005 Annual Report Download

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Table of contents

  • Page 1

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  • Page 3
    ... our target markets and marketing reach. 2005 Recap Our new customer growth in the NutriSystem Direct channel was nothing short of fantastic. From 52,000 new customer starts in 2004 to 347,000 in 2005 - now that's growth! For 2005, we generated total net revenues of $213 million, an increase of...

  • Page 4

  • Page 5
    ... 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2005 ' TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to Commission File Number 0-28551 NutriSystem, Inc. (Exact name of Registrant...

  • Page 6
    ... Item 14. Directors and Executive Officers of the Registrant ...Executive Compensation ...Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions ...Principal Accountant Fees and Services ...PART IV 34 34 34...

  • Page 7
    ...consumer sales and distribution approach using the internet and telephone (89% of 2005 revenue), the QVC Shopping Network (7% of 2005 revenue) and other channels that accounted for 3% of 2005 revenue. On our website, www.nutrisystem.com, our customers can order 24 hours a day, seven days a week. Our...

  • Page 8
    ... management program that is convenient, private and cost-effective. Our customers place their order through the internet or over the phone and have their food delivered directly to their home. This affords our customers the convenience and anonymity that other diets which rely on weight-loss centers...

  • Page 9
    ...weight loss programs, as well as a wide variety of diet foods 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...

  • Page 10
    .... NutriSystem Nourish also features new, easy-to-use exercise and behavior modification programs. Dieters also receive our checkbook-sized meal planner, dining out guide and food catalog. Typically, our customers purchase monthly food packages containing 28 breakfasts, lunches, dinners and desserts...

  • Page 11
    ... calls and email from customers that have questions or problems with an order after the sale transaction is completed. Typical customer inquiries relate to arrival date of their order shipment, report of missing or damaged items, credits and exchanges and requests to end Autoship deliveries. For...

  • Page 12
    ... diet programs. Most of our customers say they would recommend the program to others and value the following NutriSystem program attributes effective weight loss; direct delivery to their door; easy to follow; food can be easily prepared in minutes; wide variety of food; and they do not feel hungry...

  • Page 13
    ... quarterly 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 "1934 Act Reports"), are available free of charge through the Company's investor relations page at www.nutrisystem.com...

  • Page 14
    ... and home use fitness equipment, including the Bowflex Home Gym, from 1999 to 2004. Bruce Blair has served as our Senior Vice President, Operations and Chief Information Officer since April 2005. Prior to joining us, Mr. Blair was the Chief Information Officer and Executive Vice President of...

  • Page 15
    ... of the following delays in order intake time both on our website as well as through call centers; delays in order processing, packaging and shipping; failures to provide our customers with their specific food selections; inadequate numbers of telephone counselors, customer service representatives...

  • Page 16
    ... add to our costs. Any replacement fulfillment provider would also require startup time, which could cause us to lose sales and market share. Internet, Networking and Call Centers. Our business also depends on a number of third parties for internet access, networking and call center services, and we...

  • Page 17
    .... Any increased competition from new entrants into our industry or any increased success by existing competition could result in reductions in our sales or prices, or both, which could have an adverse effect on our business and results of operations. New weight loss products or services may put...

  • Page 18
    ...to inquiries; delivery time associated with online or telephone orders, compared to the immediate receipt of products at a store or weight loss center; shipping charges, which do not apply to shopping at stores or traditional weight loss centers; the ability to return or exchange orders; the absence...

  • Page 19
    ... be adversely affected. Our marketing strategy depends in part on celebrity spokespersons, such as Zora Andrich and Kat Carney, 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...

  • Page 20
    ... by competitors, whether or not accurate, 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...

  • Page 21
    ... of weight loss food products, vitamins, nutritional supplements and minerals, including our 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 22
    ... office and warehouse space at a combined annual rent of $1,141,789. One lease in Horsham expires in 2009, while the other expires in 2010. We also lease 1,400 square feet at an annual rent of $23,669 in Yardley, Pennsylvania, where our Slim and Tone business was formerly located. In late 2005, Slim...

  • Page 23
    ... The following table sets forth, for the periods indicated, the high and low sale prices for the Company's common stock as reported on the NASDAQ OTC Bulletin Board, American Stock Exchange and NASDAQ National Market. High Low 2005 First Quarter ...2005 Second Quarter ...2005 Third Quarter ...2005...

  • Page 24
    ... except per share data) 2005 Year Ended December 31, 2004 2003 2002 2001 Statement of Operations Data: Revenue: Total revenue ...Costs and expenses: Cost of revenue ...Marketing ...General and administrative ...New program development ...Depreciation and amortization ...Operating income (loss) from...

  • Page 25
    2005 2004 December 31, 2003 2002 2001 Balance Sheet Data: Cash, cash equivalents and marketable securities ...Working capital ...Total assets ...Non-current liabilities ...Stockholders' equity ... $ 45,968 65,470 107,246 254 78,966 $ 4,201 5,100 17,825 272 12,175 $ 2,684 5,664 13,...

  • Page 26
    ... and by telephone, or our direct channel. In 2001, we began selling foods through QVC, a television shopping network. Our prepackaged foods are sold to weight loss program participants through the direct channel, QVC, the field sales channel and the case distributor channel. Substantially all...

  • Page 27
    ... and product. Cost of products sold includes products provided at no charge as part of promotions and the non-food materials provided with customer orders. Cost of revenue also includes the fees paid to independent distributors and sales commissions. Cost of revenue for Slim and Tone consists...

  • Page 28
    ...to be a "program" new customer. These customers tend to stay on a weight loss program longer and spend substantially more than customers that make an initial purchase of less than $100. Profit margins are measured in terms of gross margin (revenue less cost of revenue) and total marketing expense as...

  • Page 29
    ...margin increased to 51.6% in 2005 from 48.2% in 2004, primarily driven by pricing net of the effect of program enhancements (5.0 percentage points) partially offset by increased promotional costs primarily arising from our "Week Free" promotion on initial orders (1.9 percentage points). In 2005, new...

  • Page 30
    ... to prices offered on the web site. We generate a lower gross margin (as a percent of revenue) on sales to QVC relative to the direct channel, but QVC sales require no incremental advertising and marketing expense and, management believes, exposure on QVC raises consumer awareness of the NutriSystem...

  • Page 31
    ... and temporary staffing services ($3.1 million); telephone and internet expenses ($944,000); office related expenses including rent and supplies ($901,000); sales, use and miscellaneous taxes ($540,000); travel and conference expenses ($427,000); new product and program development and associated...

  • Page 32
    ... in 2004 from 34.1% in 2003. The increase in gross margin is primarily due to a mix shift toward the higher margin direct channel, to higher pricing for the new NutriSystem Nourish program and to a $529,000 write-off of old program inventory and packaging recorded in cost of sales in 2003. Marketing...

  • Page 33
    ... quarter of 2003, we incurred $599,000 in expenses associated with new program development in order to create the NutriSystem Nourish program. New program expenses include the new package design costs and development of program specifications. For the year ended December 31, 2003, we recorded a loss...

  • Page 34
    ... of marketable securities ($41.8 million) and capital expenditures ($5.4 million) incurred to increase web site capacity and fulfillment operations, as well as computer equipment and leasehold improvements related to staff additions and office expansion. In the year ended December 31, 2005, net...

  • Page 35
    ... method prescribed by APB Opinion No. 25, and related interpretation, that the Company currently uses. The Company will adopt SFAS No. 123R effective January 1, 2006 using the modified prospective method. The Company's net income for the years ended December 31, 2005, 2004 and 2003 would have been...

  • Page 36
    ... 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, 2005. The Company's independent registered public accounting...

  • Page 37
    ...in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that NutriSystem, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on...

  • Page 38
    ...information concerning directors and compliance with Section 16(a) of the Securities Exchange Act of 1934 and our Statement of Corporate Ethics and Code of Business Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer or controller called...

  • Page 39
    ... IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements See Index to the Consolidated Financial Statements which begins on page 36 of this Annual Report 2. Financial Statement Schedules None, as all information required in these schedules is included in the Notes to the...

  • Page 40
    NUTRISYSTEM, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Operations ...Consolidated Statements of Stockholders' Equity ...Consolidated Statements of Cash Flows ...

  • Page 41
    ... of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP Philadelphia, Pennsylvania March 13, 2006 37

  • Page 42
    ...2005 2004 ASSETS CURRENT ASSETS Cash and cash equivalents ...Marketable securities ...Trade receivables ...Inventories ...Deferred income taxes ...Other current assets ...Total......Accounts payable ...Accrued payroll and related benefits ...Deferred revenue ...Other current liabilities ...Total ...

  • Page 43
    ...amounts) Year Ended December 31 2005 2004 2003 REVENUE ...$212,506 COSTS AND EXPENSES: Cost of revenue ...Marketing ...General and administrative ...New program development ...Depreciation and amortization ...Total costs and expenses ...Operating income (loss) ...OTHER INCOME ...EQUITY IN LOSSES OF...

  • Page 44
    ... deferred tax asset ...- - BALANCE, December 31, 2003 ...28,511,021 Net income ...- Stock-based costs ...108,500 Exercise of stock options ...982,159 Exercise of warrants ...531,180 Tax benefit from stock option exercises ...- BALANCE, December 31, 2004 ...30,132,860 Net income ...- Stock-based...

  • Page 45
    ...) Year Ended December 31 2005 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ...Adjustments to reconcile net income to net cash provided by (used in) operating activities- Equity in losses of affiliate ...Depreciation and amortization ...Deferred tax (benefit) expense ...Loss on...

  • Page 46
    ... and fitness products and services. The Company's pre-packaged foods are sold to weight loss program participants directly via the internet and telephone, referred to as the direct channel, and through independent commissioned representatives, the field sales channel, through 13 independent center...

  • Page 47
    ... the Equity Method The Company invested $93 in 2003 and $155 in 2002 for a 25% interest in Imagine Weight Loss Center, LLC ("Imagine"), a start up company formed to provide diet and fitness programs in center locations. There were no additional investments made in 2004 or 2005. In addition to the...

  • Page 48
    ... credit. Estimated returns are accrued at the time the sale is recognized and actual returns are tracked monthly and the estimated returns reserve is adjusted quarterly. In 2003, QVC distributed the Company's products to QVC customers. In other periods, the Company shipped products sold through QVC...

  • Page 49
    ... capitalized direct-mail advertising costs are included in other current assets and $1,027 and $253 of costs have been prepaid for upcoming advertisements and promotions. Media expense was $44,084, $5,274 and $2,099 in 2005, 2004 and 2003, respectively. Accounting for Lease Related Expenses Certain...

  • Page 50
    ... as stock options and warrants. The following table sets forth the computation of basic and diluted earnings per share: Year Ended December 31, 2005 2004 2003 (in thousands, except per share amounts) Net income: ...Weighted average shares outstanding: Basic ...Effect of dilutive stock options and...

  • Page 51
    ... each stock option is estimated on the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions: 2005 2004 2003 Dividend yield ...Expected volatility ...Risk-free interest rate ...Expected life (in years) ... None None None 117.1% 122.2% 103.9% 4.04...

  • Page 52
    ... from marketing to cost of revenue. Prior year and interim quarter amounts have been reclassified to conform to the current period presentation. 3. ACQUISITION On December 2, 2004, the Company acquired Slim and Tone to unite diet and exercise for successful weight loss. The purchase price consists...

  • Page 53
    4. MARKETABLE SECURITIES The following summarizes cash, cash equivalents and marketable securities: Cost Accrued Interest Fair Value Cash and cash equivalents Demand deposits ...Money market accounts ...December 31, 2005 ...Marketable securities Auction-rate securities ...December 31, 2005 ...Cash...

  • Page 54
    ... and 2003, respectively. 6. IDENTIFIABLE INTANGIBLE ASSETS $ 1,197 The Company recorded the following identifiable intangible assets in connection with the acquisition of Slim and Tone. Weighted Average Amortization Period December 31, 2005 December 31, 2004 Amortizable intangible assets Customer...

  • Page 55
    ...Total rent expense for 2005, 2004 and 2003 was $912, $663 and $485, respectively. The Company is involved in certain various claims and routine litigation matters. In the opinion of management, after consultation with legal counsel, the outcome of such matters will not have a material adverse effect...

  • Page 56
    ... accounted for using the cost method. In 2003, the Company purchased and subsequently retired 220,100 shares of common stock for an aggregate cost of $123 (an average price of $0.56 per share). No shares were purchased in 2004 or 2005, and in 2005, the Company terminated its stock repurchase program...

  • Page 57
    ... 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 deferred taxes, and tax strategies that recognition of the benefits related...

  • Page 58
    ...from the issue date. The Board also determines the option exercise price per share and vesting provisions. Options issued to employees generally vest over a three year period. The following table summarizes the options granted, exercised and cancelled in 2003, 2004 and 2005: Number of Shares Average...

  • Page 59
    ... value of the stock options issued to non-employees was determined using the Black-Scholes option pricing model and the following weighted average assumptions: 2005 2004 2003 Dividend yield ...Expected volatility ...Risk-free interest rate ...Contract life (in years) ... None None None 116.0% 70...

  • Page 60
    ... increased in 2005 and 2004 due to the higher level of new customers. 14. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA First Second Quarter Third Fourth Year (In thousands, except per share amounts) 2005: Revenue ...Gross margin ...Income before income taxes ...Net income ...Income per basic...

  • Page 61
    ... Company's Report on Form 8-K filed on December 22, 2004. Agreement dated April 26, 2005 between NutriSystem, Inc. and QVC, Inc. Employment agreement dated October 4, 2004 between NutriSystem, Inc. and Thomas Connerty, the Company's Executive Vice President and Chief Marketing Officer incorporated...

  • Page 62
    ...September 19, 2005. Compensation Policy For Non-Employee Directors incorporated by reference to the designated exhibit of the Company's Report on Form 8-K filed on December 23, 2005. Subsidiaries of NutriSystem Inc. Consent of KPMG LLP. Certifying Statement of the Chief Executive Officer pursuant to...

  • Page 63
    ... thereunto duly authorized. NutriSystem, Inc. By: /s/ MICHAEL J. HAGAN Michael J. Hagan, Chairman of the Board and Chief Executive Officer Dated: March 13, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf...

  • Page 64
    ... of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Michael J. Hagan, certify that: 1. 2. I have reviewed this annual report on Form 10-K of NutriSystem, Inc.; Based on my knowledge, this annual report does not contain any untrue statement of a material fact or...

  • Page 65
    ... of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, James D. Brown, certify that: 1. 2. I have reviewed this annual report on Form 10-K of NutriSystem, Inc.; Based on my knowledge, this annual report does not contain any untrue statement of a material fact or...

  • Page 66
    ... of Section 13(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 13, 2006 /s/ MICHAEL J. HAGAN Chief Executive Officer

  • Page 67
    ...Financial Officer of NutriSystem, Inc. (the "Company"), hereby certifies that based on the undersigned's knowledge: 1) The Company's Form 10-K Annual Report for the period ended December 31, 2005 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange...

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  • Page 70
    ... and Treasurer Thomas F. Connerty Executive Vice President and Chief Marketing Officer Bruce Blair Senior Vice President, Operations and Chief Information Officer GENERAL INFORMATION Corporate Headquarters 300 Welsh Road Building 1, Suite 100 Horsham, PA 19044 (215) 706-5300 Annual Meeting...

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