Nutrisystem 2007 Annual Report Download - page 58

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issued various materially false and misleading statements relating to the Company’s projected performance that
had the effect of artificially inflating the market price of its securities. These actions were consolidated in
December 2007 under docket number 07-4215. On January 3, 2008, the Court appointed lead plaintiffs and lead
counsel pursuant to the requirements of the Private Securities Litigation Reform Act of 1995, and a consolidated
amended complaint is due to be filed on March 7, 2008. The Company believes the claims are without merit and
intends to defend the litigation vigorously. In addition, federal and state derivative actions raising claims similar
to those alleged in the putative class action have also been filed.
Commencing on October 30, 2007, two shareholder derivative suits have been filed in the United States District
Court for the Eastern District of Pennsylvania. These suits, which are nominally brought on behalf of
NutriSystem, Inc., name certain of its officers and the entire current Board of Directors as defendants. The
federal complaints allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
claims for breach of fiduciary duty, waste, and unjust enrichment against all defendants and insider selling
against certain defendants. The complaints are based on many of the same allegations as the putative class action
described above but add contentions regarding the Company’s buyback program. The two federal actions were
consolidated in December 2007 under docket number 07-4565, and an amended complaint is due to be filed on
March 14, 2008. A shareholder derivative action was also filed in the Common Pleas Court of Montgomery
County, Pennsylvania, in November 2007. Like the federal derivative action, the state court action is nominally
brought on behalf of the Company and names the entire current Board of Directors as defendants. This action has
been stayed. The Company believes that the claims in these matters are without merit and intends to defend the
litigation vigorously.
The Company received in November 2007 correspondence from an attorney purporting to represent a
NutriSystem shareholder. This correspondence requested that the Company’s Board of Directors appoint a
special litigation committee to investigate unspecified breaches of fiduciary duty. The disinterested and
independent board members met to discuss this issue and responded to the attorney’s correspondence. Following
receipt of additional correspondence from the same attorney in February 2008, the Board of Directors is
considering its response.
The Company is also involved in other various claims and routine litigation matters. In the opinion of
management, after consultation with legal counsel, the outcome of such matters is not anticipated to have a
material adverse effect on the Company’s consolidated financial position, results of operations or cash flows in
future years.
The Company has entered into supply agreements with various food vendors. The majority of these agreements
provide for annual pricing, annual purchase commitments, as well as exclusivity in the production of certain
products, with terms of five years or less. One agreement also provides rebates if certain volume thresholds are
exceeded. The Company anticipates it will meet all annual purchase commitments.
8. STOCKHOLDERS’ EQUITY
Common Stock
In 2005, the Company completed a secondary public offering of 2,476,625 shares of common stock and received
net proceeds of $25,399. In addition, the Company issued 2,786,070 shares of common stock in 2005 upon the
exercise of stock options and received proceeds of $4,135. Also in 2005, the Company issued 36,500 shares of
common stock as compensation to board members, certain consultants and spokespersons per their contract.
Costs recognized for these stock grants were $107.
In 2006, the Company issued 1,324,174 shares of common stock upon the exercise of common stock options and
received proceeds of $3,632 and the restrictions on 8,523 shares of common shares issued to employees lapsed.
Also, in 2006, the Company issued 10,804 shares of common stock as compensation to board members, certain
consultants and spokespersons per their contracts. Costs recognized for these stock grants were $537.
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