Nutrisystem 2005 Annual Report Download - page 33

compensation ($973,000) and rent ($177,000). In general and administrative expenses in 2003, we recorded
litigation expense related to the franchise lawsuit of $238,000, and $198,000 expense related to the Reno
warehouse closing costs. Primarily in the fourth 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 of $157,000, respectively, under the caption “Equity in losses of
affiliate,” representing our investment in an affiliate. In 2004, we made no additional investments in the affiliate.
Interest Income, Net. Interest income, net decreased $21,000 to $36,000 from $57,000 in 2003 primarily
due to lower interest rates on invested funds.
Income Taxes. In 2004, we recorded $680,000 of income taxes due to the income for the reporting period.
The effective tax rate in 2004 is 40.0%. In 2003, we recorded a $3.4 million income tax benefit related to the
recognition of deferred tax assets (see Note 10 of the consolidated financial statements).
Net Income. In 2004, net income increased by $207,000 to $1.0 million from net income of $812,000 in
2003. The increase in net income in 2004 is primarily due to higher gross profit in 2004 versus 2003 resulting
from increased revenue offset by income tax expense of $680,000 recorded in 2004 compared to a $3.4 million
income tax benefit recorded in 2003.
Contractual Obligations and Commercial Commitments
As of December 31, 2005, our principal commitments consisted of an obligation under a supply agreement
with a food vendor, a capital lease, operating leases, employment contracts and a note payable related to the Slim
and Tone acquisition. Although we have no material commitments for capital expenditures, we anticipate
continuing requirements for capital expenditures consistent with anticipated growth in operations, infrastructure
and personnel.
Following is a summary of our contractual obligations. We have no other commercial commitments.
Payments Due by Period
Contractual obligations Total
Less Than
1 Year 1-3 Years 4-5 Years
More Than
5 Years
Food vendor agreement ............................. $ 9.5 $0.0 $ 9.5 $— $—
Operating and capital leases .......................... 5.3 1.3 3.9 0.1 —
Note payable ...................................... 0.3 0.2 0.1 — —
$15.1 $1.5 $13.5 $ 0.1 $—
In 2004, we entered into two employment agreements. The agreements have terms ranging from one to two
years, with automatic one-year renewal terms. These agreements provide for base compensation of $225,000 for
each employee per year and other fringe benefits and payments upon termination.
During the second quarter of 2005, we entered into a capital lease agreement for our telephone systems. This
is a five year lease that expires in the end of 2009 and contains a bargain purchase option. The present value of
the lease payments is $183,000 based on an annual interest rate of 6%. The lease requires payments of $4,000 per
month.
Also during the second quarter of 2005, we entered into an agreement with a food vendor. The agreement is
for a term of three years expiring June 1, 2008. The agreement requires us to make minimum cumulative
purchases of $20.0 million through 2006 and $33.0 million through 2007.Through December 31, 2005, we have
made aggregate purchases under this agreement of $23.5 million. We will incur penalties of 15% of the shortfall
if we do not reach the required minimum purchases. We anticipate we can meet the remaining $9.5 million
cumulative requirement through 2007. The agreement also provides for annual pricing updates and rebates if
certain volume thresholds are exceeded.
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