Nutrisystem 2008 Annual Report Download - page 57

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 was filed on
March 14, 2008 naming a majority of the current Board of Directors as defendants and certain current and former
officers. Defendants filed a motion to dismiss on May 13, 2008. The plaintiffs’ opposition was filed on July 14,
2008, and defendants’ reply was filed on August 13, 2008. The motion has been fully briefed, and oral argument
was held on November 24, 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 a majority of the current Board of Directors as
defendants. This action has been stayed. The Company believes that the claims 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 was
considering its response when the shareholder represented by this attorney commenced a derivative lawsuit in the
Court of Common Pleas in the name of the Company against the entire Board of Directors at that time and
certain current and former officers. The Board of Directors responded to the attorney’s correspondence. The
parties have reached an agreement to stay this matter pending the disposition of the anticipated motion to dismiss
the federal securities putative class action complaint. The Company believes that the claims are without merit
and intends to defend the litigation vigorously.
On March 28, 2008, a former NutriSystem, Inc. sales representative filed a putative collective action complaint in
the United States District Court for the Eastern District of Pennsylvania, docket no. 08-1508, alleging that
NutriSystem unlawfully failed to pay overtime in violation of the Fair Labor Standards Act. The complaint
purported to bring claims on behalf of a class of current and former sales representatives who were compensated
by NutriSystem pursuant to a commission-based compensation plan, rather than on an hourly basis. The plaintiff
filed an amended complaint on May 28, 2008, adding a state-law class claim under the Pennsylvania Minimum
Wage Act, alleging that NutriSystem’s compensation plan also violated state law. On June 11, 2008, NutriSystem
answered the amended complaint and moved to dismiss the plaintiff’s state-law class claim. On June 11, 2008,
the plaintiff filed a motion to proceed as a collective action and send class members notice under the Fair Labor
Standards Act claim. On July 25, 2008, the Court granted NutriSystem’s motion to dismiss with respect to the
state law claim. On September 26, 2008, the Court granted Plaintiff’s Motion to Proceed as a Collective Action
and Facilitate Notice. On October 8, 2008, the Court entered a Stipulation and Order approving proposed notice
of collective action lawsuit. On October 14, 2008, Plaintiff’s counsel mailed notice to potential class members.
Including Plaintiff, fifty-four former sales representatives and fourteen current sales representatives have opted-
into this litigation. On December 10, 2008, Plaintiffs served document requests and interrogatories upon
NutriSystem to which the Company has responded. The Company believes the claims are without merit and
intends to defend the litigation vigorously.
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.
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