Nutrisystem 2010 Annual Report Download - page 57

defendants 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, and a consolidated amended complaint was filed
on March 7, 2008 that raised the same claims but alleged a class period of February 14, 2007 through
February 19, 2008. The consolidated amended complaint asked the court to (1) certify a class, (2) award
compensatory damages, reasonable costs and expenses and (3) grant such other and further relief as the court
deemed just and proper. The defendants filed a motion to dismiss on May 6, 2008 that was granted by the Court
on August 31, 2009. On September 29, 2009, plaintiff filed a notice of appeal, and on May 19, 2010, upon
motion by the plaintiff/appellant, the appeal was dismissed with prejudice without costs to either party. The
dismissal is final.
Commencing on October 30, 2007, two shareholder derivative suits were filed in the same Court, which were
nominally brought on behalf of Nutrisystem, Inc., and named certain of its officers and directors (including four
current directors) as defendants. The complaints alleged violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and asserted claims for breach of fiduciary duty, waste, and unjust enrichment against all
defendants and insider selling against certain defendants. The complaints were based on many of the same
allegations as the putative class action suits described above but added contentions regarding the Company’s
stock buyback program. The two federal action suits were consolidated under docket number 07-4565, and an
amended complaint was filed on March 14, 2008 naming four members of the current Board of Directors and
certain current and former officers as defendants. The complaint sought (1) judgment for damages against the
individual defendants, (2) declarations that certain defendants were liable for violations of the Exchange Act,
(3) an order directing the Company and current director defendants to reform and improve corporate governance,
(4) extraordinary equitable and/or injunctive relief, (5) an award of restitution to Nutrisystem from defendants
ordering disgorgement of all profits, benefits and other compensation received, (6) an award to the plaintiff for
the costs and disbursements of the action and (7) such other relief as the court deemed just and proper.
Defendants filed a motion to dismiss, which the Court granted on October 26, 2009. The dismissal is final.
A shareholder derivative action was also filed in the Common Pleas Court of Montgomery County, Pennsylvania,
in November 2007. Like the federal derivative action described above, the state court action was nominally
brought on behalf of the Company and named four members of the current Board of Directors as defendants. The
complaint sought (1) a determination that the case was a proper derivative action and plaintiff was an appropriate
representative, (2) a declaration that each of defendants breached his or her fiduciary duties to Nutrisystem,
(3) an award to Nutrisystem of damages sustained by reason of the violations and exemplary damages, (4) an
award to the plaintiffs for costs and disbursements and (5) such other relief as the court deemed just and proper.
On April 30, 2010, the Court sent the plaintiff a notice to terminate pursuant to Pennsylvania’s Rules of Civil
Procedure for inactive cases. The plaintiff took no action and, on October 1, 2010, the Court closed this case.
On April 27, 2010, counsel for the same shareholder who commenced the Montgomery County, Pennsylvania
litigation described above sent a letter relating to the same events that form the bases of the federal putative class
action and derivative suits described above. Specifically, the shareholder has demanded, pursuant to Delaware
Chancery Court Rule 23.1, that the Board of Directors (1) undertake (or cause to be undertaken) an independent
internal investigation into violations of Delaware law committed by Company management during the time
periods described above and (2) commence a civil action against each member of management to recover for the
benefit of the Company the amount of damages sustained by the Company as a result of their breaches of
fiduciary duties described above. The Board of Directors has appointed a special committee consisting of three
independent directors to investigate this demand. The committee has engaged independent legal counsel to assist
it in this investigation, and after the investigation is completed, the committee will provide its recommendation to
the entire Board of Directors, who will make the final decision with respect to the Company’s response to the
shareholder’s demand.
The Company also received in November 2007 correspondence from an attorney purporting to represent another
Nutrisystem shareholder. This correspondence requested that the Company’s Board of Directors appoint a special
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