Nutrisystem 2006 Annual Report Download

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Table of contents

  • Page 1
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  • Page 2
    BUILDING ON OUR CORNERSTONES A foundation is built. A business grows. Strong futures thrive on the wisdom of the past. With each cornerstone valued, each building block seen. From insight and vision, success. CONVENIENCE SIMPLICITY VALUE PRIVACY

  • Page 3
    " NutriSystem worked for us!" MIKE GOLIC LOST CARA LOST 30lbs. SCOTT CONOVER LOST JULIE LOST 22lbs. NACHOLE LOST KELLI LOST 55lbs. 51lbs. 100lbs. 70lbs.

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    ... for senior men and women, and are seeing solid growth in the number of older Americans starting on the NutriSystem program; Becoming even more adept at speaking to and reactivating ex-customers, a large opportunity over the next several years; Investing in and launching new markets and new channels...

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    ...was $2,044,570,247. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the NASDAQ National Market on June 30, 2006 (the last business day of the Registrant's most recently completed fiscal second quarter). Number of shares outstanding of the...

  • Page 8
    ..., Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions, and Director Independence ...Principal Accounting Fees and Services ...PART...

  • Page 9
    ...food packages or customize their monthly food orders for their specific tastes. There are no center visits, no measuring foods or counting calories. Value. Our Auto-delivery program is currently priced at about $10 per day for a full day's supply of three entree meals and one snack. We do not charge...

  • Page 10
    ... a month of food, including breakfast, lunch, dinner and desserts, which removes the confusion of reading nutrition labels, measuring portions or counting calories, carbohydrates or points. At a cost of about $10 a day for three meals and a snack, we believe our weight management program offers our...

  • Page 11
    ... 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-based competitors such as Weight Watchers, Jenny...

  • Page 12
    ... to weigh or measure foods or count calories, carbohydrates or points. Marketing Our primary marketing objective is to cost-effectively promote our established brand and to build sales of our weight management program through our direct channel. We use a combination of online and traditional offline...

  • Page 13
    ... shipping and handling on Auto-delivery food orders. Product Development All of our foods and supplements are currently outsourced from more than 30 manufacturers or vendors. Our product development department primarily creates ideas and concepts based on customer feedback, market trends, nutrition...

  • Page 14
    ... 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 15
    ...of the Board of Directors Executive Vice President, Administration, Chief Financial Officer, Secretary & Treasurer Executive Vice President, Program Development and Chief Marketing Officer Senior Vice President, Operations and Chief Information Officer Michael J. Hagan has served as the Chairman of...

  • Page 16
    ... has served as our Chief Marketing Officer since November 2004 and our Executive Vice President, Program Development since July 2006. Prior to joining us, Mr. Connerty was the Vice President of Marketing at the Nautilus Group, a retailer of commercial and home use fitness equipment, including the...

  • Page 17
    ... 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 18
    .... 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 19
    ...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 20
    ... If these spokespersons suffer adverse publicity, our revenue could be adversely affected. Our marketing strategy depends in part on celebrity spokespersons, such as Dan Marino, Don Shula, Zora Andrich and Kat Carney, as well as customer spokespersons to promote our weight management program. Any of...

  • Page 21
    ... could harm us, even if the adverse publicity is not directly related to us. In the early 1990s, our predecessor businesses were subject to extremely damaging adverse publicity relating to a large number of lawsuits alleging that the NutriSystem weight loss program led to gall bladder disease. This...

  • Page 22
    ... the FTC relating to weight loss claims and other advertising practices. We continue to be subject to these consent decrees, which restrict how we advertise the successes our customers have achieved in losing weight through the program and require us to include the phrase "results not typical" in...

  • Page 23
    ... 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 24
    ...and low sale prices for the Company's common stock as reported on the American Stock Exchange and NASDAQ National Market. High Low 2006 First Quarter ...2006 Second Quarter ...2006 Third Quarter ...2006 Fourth Quarter ...2005 First Quarter ...2005 Second Quarter ...2005 Third Quarter ...2005 Fourth...

  • Page 25
    STOCK PRICE PERFORMANCE GRAPH The following graph shows a comparison of cumulative total return since December 31, 2001 for our common stock, the Russell 2000 Index and the Dow Jones Consumer Services Index (a published industry index), each of which assumes an initial value of $100 and reinvestment...

  • Page 26
    ...Annual Report on Form 10-K. Selected Consolidated Financial Data (in thousands, except per share data) 2006 Year Ended December 31, 2005 2004 2003 2002 Statement of Operations Data: Revenue ...Costs and expenses: Cost of revenue ...Marketing ...General and administrative ...New program development...

  • Page 27
    ...4,445 8,277 255 5,249 (a) In the second quarter of 2003, management determined that recognition of the benefits related to deferred tax assets was more likely than not based on an analysis of the cumulative level of pretax profits over the prior three years, projected levels of profits, schedule of...

  • Page 28
    ... products and services. Our 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 independent center-based distributors, the...

  • Page 29
    ...of obsolete packaging 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...

  • Page 30
    ... terms of total revenue, new customers and revenue per customer. A new customer is defined as a first time purchaser through the direct channel. We define a customer with an initial purchase of $100 or more to be a "program" new customer. These customers tend to stay on a weight loss program longer...

  • Page 31
    ...price increase. Direct gross margin increased to 51.6% in 2005 from 48.2% in 2004, primarily driven by pricing net of the effect of program enhancements and partially offset by increased promotional costs primarily arising from our "Week Free" promotion on initial orders. Marketing cost per customer...

  • Page 32
    ... the benefits of the NutriSystem diet programs. Under the terms of our agreement, QVC viewers purchase NutriSystem products directly from QVC and are not directed to the NutriSystem web site. Retail prices (including shipping and handling) offered on QVC to consumers are similar to prices offered on...

  • Page 33
    ... from increased direct sales ($337.4 million) and QVC sales ($15.7 million). In the year ended December 31, 2006, direct revenue accounted for 93% of total revenue compared to 5% for QVC and 2% for the other channels. In 2005, the comparable percentages were 89%, 7% and 4%, respectively. Costs and...

  • Page 34
    ... in our case distributor channel ($360,000). In the year ended December 31, 2005, direct revenue accounted for 89% of total revenue, while QVC, field sales, case distributor and Slim and Tone revenue accounted for 7%, 2%, 1% and 1% of revenue, respectively. In 2004, the comparable percentages were...

  • Page 35
    ... 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 packaging...

  • Page 36
    ... of net purchases of marketable securities ($26.1 million) and capital expenditures ($5.9 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...

  • Page 37
    ... to favorable conditions in the market for certain media. We believe the overall impact of seasonality on revenue is difficult to predict at this time. Recently Issued Accounting Pronouncements In September 2006, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB...

  • Page 38
    ... 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 and reported within the time periods specified in the SEC's rules and forms. Management's Report...

  • Page 39
    ... an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require...

  • Page 40
    ... "Statement of Corporate Ethics and Code of Business Conduct" in our definitive proxy statement, to be filed within 120 days after the end of the fiscal year covered by this annual report on Form 10-K, and is incorporated herein by reference. The required information as to executive officers is set...

  • Page 41
    ... IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements See Index to the Consolidated Financial Statements 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 Consolidated...

  • Page 42
    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 43
    ... Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2007 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP Philadelphia, Pennsylvania February 27, 2007 37

  • Page 44
    ... payroll and related benefits ...Other current liabilities ...Total current liabilities ...NON-CURRENT LIABILITIES ...Total liabilities ...COMMITMENTS AND CONTINGENCIES (Note 8) STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value (5,000,000 shares authorized, no shares issued and outstanding...

  • Page 45
    NUTRISYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Year Ended December 31, 2006 2005 2004 REVENUE ...COSTS AND EXPENSES: Cost of revenue ...Marketing ...General and administrative ...Depreciation and amortization ...Total costs and ...

  • Page 46
    ... Warrants Retained Earnings (Deficit) Total BALANCE, January 1, 2004 ...Net income ...Share-based expense ...Exercise of stock options ...Exercise of warrants ...Tax benefit from stock option exercises ...BALANCE, December 31, 2004 ...Net income ...Share-based expense ...Exercise of stock options...

  • Page 47
    ...offering costs ...Exercise of stock options and warrants ...Payment on note payable ...Tax benefit from stock option exercises ...Stock purchases, at cost ...Net cash (used in) provided by financing activities ...NET CHANGE IN CASH AND CASH EQUIVALENTS ...CASH AND CASH EQUIVALENTS, beginning of year...

  • Page 48
    ... 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-based distributors...

  • Page 49
    ... presented net of returns, free food products provided to consumers and billed sales tax. Revenue from shipping and handling charges was $2,567, $1,125 and $401 in 2006, 2005 and 2004, respectively. Shipping-related costs are included in cost of revenue. Revenue for Slim and Tone consists primarily...

  • Page 50
    ... value. Segment Information The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer. Revenue consists primarily of food sales. The operations and assets for Slim and Tone are not material in relation...

  • Page 51
    ... the Company recorded a pre-tax compensation charge of $541 for restricted stock grants in 2006. The related income tax benefit for all share-based compensation was $1,359. The fair-value of share-based awards is determined using the Black-Scholes valuation model, which is the same model the Company...

  • Page 52
    ...: Year Ended December 31, 2005 2004 Net income: As reported ...Add: stock-based employee compensation expense included in reported net income, net of tax ...Impact of total stock-based compensation expense determined under fair-value based method for all rewards, net of tax ...Pro forma ...Basic...

  • Page 53
    ... data for 2004 is not included for Slim and Tone as the operations are not material in relation to the consolidated financial statements. 4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES The following summarizes cash, cash equivalents and marketable securities: Cost Accrued Interest Fair Value...

  • Page 54
    ... in the first two years of service). In 2006, the Company recognized additional expense of $398 for the reduction in the carrying value of the customer relationships and trade name/trademark as the Slim and Tone franchises have suffered a decline in projected future revenues compared to original...

  • Page 55
    ...quarter of 2005, the Company entered into a capital lease agreement for telephone systems. The lease 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 based on an annual interest rate of 6%. The lease requires...

  • Page 56
    ... - $ 680 $13,135 A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows: Year Ended December 31, 2006 2005 2004 Statutory federal income tax rate ...State income taxes, net of federal benefit ...Tax exempt income ...Other ...Change in deferred...

  • Page 57
    ... years from the grant date and all of the awards issued under the Director Plan expire between three months and 10 years from the grant date. The Board also determines the vesting provisions and the exercise price per share, which is the fair market value at date of grant. Awards issued to employees...

  • Page 58
    ... following table summarizes the options granted, exercised and cancelled in 2004, 2005 and 2006: WeightedAverage Exercise Price WeightedAverage Remaining Contractual Life (years) Aggregate Intrinsic Value Number of Shares Outstanding, January 1, 2004 ...Granted ...Exercised ...Forfeited ...Expired...

  • Page 59
    ... of operations. The fair 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 Dividend yield ...Expected volatility ...Risk-free interest rate ...Contract life (in years) ... None...

  • Page 60
    ... exercised. All remaining warrants expired on September 30, 2004. 12. EMPLOYEE BENEFIT PLAN The Company maintains a qualified tax deferred defined contribution retirement plan (the "Plan"). Under the provisions of the Plan, substantially all employees meeting minimum age and service requirements...

  • Page 61
    14. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) First Quarter Second Third Fourth Year (In thousands, except per share amounts) 2006: Revenue ...Gross margin ...Income before income taxes ...Net income ...Basic income per common share ...Diluted income per common share ...2005: Revenue ......

  • Page 62
    ... 10-K filed on March 14, 2006. Employment agreement dated October 4, 2004 between NutriSystem, Inc. and Thomas Connerty, the Company's Executive Vice President and Chief Marketing Officer incorporated by reference to the designated exhibit of the Company's Report on Form 8-K filed on April 18, 2005...

  • Page 63
    ... Description 10.11 Agreement dated September 16, 2005 between NutriSystem, Inc. and Oregon Freeze Dry, Inc. incorporated by reference to the designated exhibit of the Company's Report on Form 8-K filed on September 19, 2005. Compensation Policy For Non-Employee Directors incorporated by reference...

  • Page 64
    ... duly authorized. NutriSystem, Inc. By: /s/ MICHAEL J. HAGAN Michael J. Hagan, Chairman of the Board, President and Chief Executive Officer Dated: February 27, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on...

  • Page 65
    ... 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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the...

  • Page 66
    ... D. Brown, certify that: 1. 2. I have reviewed this annual report on Form 10-K of NutriSystem, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under...

  • Page 67
    ... undersigned, Michael J. Hagan, the Chief Executive 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, 2006 (the "Report") fully complies with the requirements of Section...

  • Page 68
    ...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: February 27, 2007 By: /S/ JAMES D. BROWN Executive Vice President, Chief Financial Officer, Secretary...

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  • Page 72
    ... Publisher Philadelphia Inquirer and Daily News Stephen T. Zarrilli Managing Partner Penn Valley Management Group, LLC EXECUTIVE OFFICERS Michael J. Hagan Chairman, President and Chief Executive Officer Thomas F. Connerty Executive Vice President, Program Development and Chief Marketing Officer...

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    ZORA LOST DAN MARINO LOST PAT LOST COACH DON SHULA LOST MARY ANNE SHULA LOST 20lbs. 22lbs. 1 12lbs. 32lbs. 23lbs.

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    MIKE ERUZIONE LOST AMY LOST GEOFF LOST NANCY LOST 32lbs. 33lbs. 1 30lbs. 70lbs.

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