Nutrisystem 2005 Annual Report Download - page 34

In the fourth quarter of 2005, we entered into an employment agreement. The agreement has a term of two
years, with automatic one-year renewal terms. This agreement provides for base compensation of $200,000 per
year, a restricted stock grant of 25,570 shares vesting in equal annual installments over three years and other
fringe benefits and payments upon termination.
Other than the lease, the agreement with the food vendor and the employment agreement, there were no
items that significantly impacted our commitments and contingencies as disclosed in the notes to the
consolidated financial statements for the year ended December 31, 2005. In addition, we have no off-balance
sheet financing arrangements.
Liquidity, Capital Resources and Other Financial Data
At December 31, 2005, we had net working capital of $65.5 million, an increase of $60.4 million from the
$5.1 million net working capital balance at December 31, 2004. Cash and cash equivalents at December 31, 2005
were $3.9 million, a decrease of $300,000 from the balance of $4.2 million at December 31, 2004; however, we
had $42.1 million invested in marketable securities at December 31, 2005. Our principal sources of liquidity
during this period were net proceeds from an underwritten secondary stock offering and cash flow from
operations. At December 31, 2005, we had no bank debt or term or revolving credit facilities to fund operations
or investment opportunities. In connection with the acquisition of Slim and Tone, we have a seller note
obligation of $300,000 at the end of 2005. We currently have no off-balance sheet financing arrangements.
In the year ended December 31, 2005, we generated a cash flow of $17.6 million from operations, an
increase of $14.8 from cash flow from operations of $2.8 million in 2004. The increase in cash flow from
operations is attributable to higher operating income. Net changes in operating assets and liabilities decreased
cash flow from operations by $17.5 million in 2005, with changes in components generally due to the larger scale
of the business. Increases in inventories ($30.5 million), trade receivables ($6.5 million) and other assets ($3.1
million) were offset by increases in accounts payable ($21.5 million). In the fourth quarter of 2005, we had
negative cash flow from operations of $7.7 million, primarily attributable to a $22.5 million increase in inventory
in the quarter. We increased inventory in the fourth quarter in order to meet anticipated demand in the first
quarter of 2006. Based on preliminary results for the first quarter of 2006, we believe the increase in inventory
levels was appropriate.
In the year ended December 31, 2005, net cash used in investing activities was $47.2 million, which
primarily consisted of purchase 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 cash provided by financing activities was $29.4 million, which
primarily represents proceeds from an underwritten secondary stock offering ($25.4 million) and the exercise of
stock options and warrants ($4.1 million).
Under a series of Board of Directors authorizations to repurchase up to 5,000,000 shares of our common
stock, we repurchased a total of 2,760,291 shares from March 2001 through June 2003, at an average purchase
price of $0.56 per share. On May 2, 2005, our Board terminated our share repurchase program.
There are no current plans or discussions in process relating to any material acquisition that is probable in
the foreseeable future.
We have not declared or paid any dividends since inception. The Board of Directors has considered the
declaration of a dividend and expects to give it further consideration in the future. The declaration and payment
of dividends in the future will be determined by our Board of Directors in light of conditions then existing,
including our earnings, financial condition, capital requirements and other factors.
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