Nutrisystem 2011 Annual Report Download

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2006 2007 2008 2009 2010 2011
ANNUAL REPORT
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Table of contents

  • Page 1
    2006 2007 2008 2009 2010 2011 ANNUAL REPORT

  • Page 2

  • Page 3
    ... to reinvest in new products, new sales channels, new celebrity spokespersons, and new advertising and public relations strategies to return us to growth in 2012. Some key initiatives included Developing the new Nutrisystem SUCCESSâ„¢ program which features our Chef's Tableâ„¢ frozen line which we...

  • Page 4

  • Page 5
    ... of incorporation or organization) 23-3012204 (I.R.S. Employer Identification No.) Fort Washington Executive Center 600 Office Center Drive Fort Washington, Pennsylvania (Address of principal executive offices) 19034 (Zip Code) Registrant's telephone number, including area code: (215) 706-5300...

  • Page 6
    ...SERVICE MARKS Nutrisystem®, Nutrisystem® Flex® and Nutrisystem® Select® are registered trademarks of Nutrisystem, Inc. or its subsidiaries. Other service marks, trademarks and trade names of Nutrisystem, Inc. or its subsidiaries may be used in this Annual Report on Form 10-K (the "Annual Report...

  • Page 7
    ..., 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 8
    ... effectiveness of our marketing and advertising programs; loss, or disruption in the business of, any of our food suppliers; loss, or disruption in the business, of any of our fulfillment providers; disruptions in the shipping of our food products; health or advertising related claims by consumers...

  • Page 9
    ... meal program. Typically, our customers purchase monthly food packages containing a 28-day supply of breakfasts, lunches, dinners and desserts, which they supplement with dairy, fruit, salad, vegetables and low-glycemic carbohydrate items. Most of our customers order on an auto-delivery basis ("Auto...

  • Page 10
    ... with a month of food, including daily breakfast, lunch, dinner and dessert, which removes the confusion of reading nutrition labels, measuring portions or counting calories, carbohydrates or points. We believe our weight management program offers our customers significant value and is priced below...

  • Page 11
    ... to help take the weight off and keep it off through frequent, portion-controlled, balanced nutrition and low Glycemic Index eating. The SUCCESS program offers our largest ever assortment of signature fresh-frozen meals including new artisanal Chef's Tableâ„¢ dinner entrees, developed by Nutrisystem...

  • Page 12
    ... contain the fresh-frozen foods and will also be delivered directly to the customer's home. The Nutrisystem® D® Program is a weight loss program specifically designed to produce gradual weight loss in overweight patients diagnosed with type 2 diabetes. Results from a 2009 clinical study conducted...

  • Page 13
    ... public relations and social media participation and engagement through blogs, forums, Facebook and Twitter. Ecommerce As a leading ecommerce company and brand, we constantly strive to employ the latest tools and technology in order to drive increased performance of online customer conversion...

  • Page 14
    ... representatives. Customer service representatives are trained to handle in-bound calls and emails from customers who have questions or problems with an order after the sale transaction is completed. Typical customer inquiries relate to the arrival date of the customer's order shipment, reporting of...

  • Page 15
    ... expired in November 2011 and we have found other frozen food supply options to replace this supplier. Our product development team uses a number of sources - customer feedback, market trends, nutrition science, and breakthroughs in food technology - to create new ideas for our program. New foods...

  • Page 16
    ... quarterly reports on Form10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the "1934 Act Reports"), are available free of charge through the Company's investor relations page at www.nutrisystem.com...

  • Page 17
    ... additional position of Executive Vice President from 2000 through February 2006 and Senior Vice President from 1997 through 2000. Michael R. Amburgey has served as our Executive Vice President and Chief Marketing Officer since October 2011. Prior to joining the Company, Mr. Amburgey had been Head...

  • Page 18
    ... and media mix for advertising, marketing and promotional expenditures; effectively manage marketing costs (including creative and media) in order to maintain acceptable customer acquisition costs; acquire cost-effective national television advertising; select the most effective markets, media and...

  • Page 19
    ... States Food and Drug Administration ("FDA") compliance issues. We may be subject to claims that our personnel are unqualified to provide proper weight loss advice. Some of our counselors for our weight management program do not have extensive training or certification in nutrition, diet or health...

  • Page 20
    ...of program efficacy, price, taste, customer service and brand recognition. Our competitors include companies selling pharmaceutical products and weight loss programs, as well as a wide variety of diet foods and meal replacement bars and shakes, appetite suppressants and nutritional supplements. Some...

  • Page 21
    ..., email addresses and home addresses, could keep them from using our website or purchasing our services or products. We currently face certain legal obligations regarding the manner in which we treat such information and data. Businesses have been criticized by privacy groups and governmental bodies...

  • Page 22
    ... develop alternatives or stop using the service, product, software, technology or content for any infringing aspects of our business, we may be forced to limit our service and product offerings. Any of these results could reduce our revenues and our ability to compete effectively, increase our costs...

  • Page 23
    ... affect the price of our common stock. Risks Related to Our Industry Changes in consumer preferences could negatively impact our operating results. Our program features pre-packaged food selections, which we believe offer convenience and value to our customers. Our continued success depends, to...

  • Page 24
    ... publicity related to their customers' use of fen-phen as an appetite suppressant, which the FDA ordered withdrawn from the market in September 1997. The significant decline in business resulting from the fen-phen problems caused our predecessor businesses to close all of their company-owned weight...

  • Page 25
    ... 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 26
    ... "say-on-pay" shareholder derivative action stemming from the advisory, non-binding vote of the Company's stockholders at its May 12, 2011 annual meeting in which the Company's stockholders did not approve the Company's 2010 executive compensation. The complaint is listed under docket number 2:11...

  • Page 27
    ...from the same failed "say-on-pay" advisory, non-binding vote of the Company's stockholders at its May 12, 2011 annual meeting in which the Company's stockholders did not approve the Company's 2010 executive compensation. The complaint is listed under docket number 2011-24985 and specifically alleges...

  • Page 28
    ...various claims and routine litigation matters. In the opinion of management, after consultation with legal counsel, the outcomes of such matters are not anticipated to have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows in future years...

  • Page 29
    ...and low sale prices for the Company's common stock as reported on the NASDAQ Stock Market. High Low 2012 First Quarter (through March 2, 2012) ...2011 First Quarter ...2011 Second Quarter ...2011 Third Quarter ...2011 Fourth Quarter ...2010 First Quarter ...2010 Second Quarter ...2010 Third Quarter...

  • Page 30
    ...block transactions. The timing and actual number of shares repurchased depend on a variety of factors including price, corporate and regulatory requirements, alternative investment opportunities and other market conditions. The stock repurchase program has an expiration date of June 30, 2013 but may...

  • Page 31
    ... THIN.OB., the American Stock Exchange under the ticker symbol NSI and now trades on the NASDAQ Stock Market under the ticker symbol NTRI. COMPARISON OF CUMULATIVE TOTAL RETURN Among Nutrisystem Inc, the Russell 2000 Index, and the Dow Jones US Specialized Consumer Services Index $140 $120 $100 $80...

  • Page 32
    ...respectively, in this Annual Report. Selected Consolidated Financial Data (In thousands, except per share data) 2011 2010 Year Ended December 31, 2009 2008 2007 Statement of Operations Data: Revenue ...$401,336 $509,515 Costs and expenses: Cost of revenue ...Marketing ...General and administrative...

  • Page 33
    ... Financial Statements. (b) In the first quarter of 2010, we committed to a plan to sell the business operations conducted by our subsidiary, Nutrisystem Fresh, Inc. ("NuKitchen"), as it was no longer aligned with the business direction of the Company. NuKitchen has been treated as a discontinued...

  • Page 34
    ... elsewhere in this Annual Report. Background We provide weight management products and services and offer nutritionally balanced weight loss programs designed for women, men, and seniors, as well as the Nutrisystem® D® program, specifically designed to help people with type 2 diabetes who want to...

  • Page 35
    ... is designed to help take the weight off and keep it off through frequent, portion-controlled, balanced nutrition and low Glycemic Index eating. It offers our largest ever assortment of signature fresh-frozen meals including new artisanal Chef's Tableâ„¢ dinner entrees, developed by Nutrisystem...

  • Page 36
    ... shipping costs, charge card fees and packing material. Cost of products sold includes products provided at no charge as part of promotions and the non-food materials provided with customer orders. Marketing Expense. Marketing expense includes media, advertising production, marketing and promotional...

  • Page 37
    ... lower average selling prices and fewer customer starts and on-program customers as a result of bargain-focused consumer behavior and discounted promotional offerings. In 2011, direct revenue accounted for 95% of total revenue compared to 4% for QVC and 1% for other channels. In 2010, direct revenue...

  • Page 38
    ... quarter of 2011, we experienced significant pressures on response and conversion rates across all sales channels causing a decrease in new customers and directly impacting our marketing efficiency. As a result, we reduced the spending for advertising media but increased our promotional incentives...

  • Page 39
    ... 27.9% in 2009. Substantially all of the marketing spending in 2010 promoted the direct business. The decrease in marketing is attributable to decreased spending in the production of television advertising ($3.2 million). This decrease is partially offset by increased spending in advertising media...

  • Page 40
    ... expenditures on our website. Other (Expense) Income. Other (expense) income represents the impact of changes in the Canadian dollar. Equity and Impairment Loss. In 2009, we abandoned our interest in Zero Water because the business was no longer aligned with our strategic direction. An equity and...

  • Page 41
    ...block transactions. The timing and actual number of shares repurchased depend on a variety of factors including price, corporate and regulatory requirements, alternative investment opportunities and other market conditions. The stock repurchase program has an expiration date of June 30, 2013 but may...

  • Page 42
    ... in the weighted average rate would affect annual interest by approximately $300,000. We believe that we are not subject to any material risks arising from changes in foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk instruments. Our...

  • Page 43
    ... and Exchange Commission's rules and forms. Based on the evaluation of the effectiveness of our disclosure controls and procedures by our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, as of the end of the period covered by this report, our Chief...

  • Page 44
    ... sheets of Nutrisystem, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2011, and our report dated March 12...

  • Page 45
    ... of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Code of Conduct" in our definitive proxy statement for the 2012 annual meeting of stockholders, 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...

  • Page 46
    NUTRISYSTEM, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets at December 31, 2011 and 2010 ...Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009 ......

  • Page 47
    ... the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Nutrisystem, Inc.'s internal control over financial reporting as...

  • Page 48
    ..., except share and per share amounts) December 31, 2011 2010 ASSETS CURRENT ASSETS: Cash and cash equivalents ...Marketable securities ...Receivables ...Inventories, net ...Prepaid income taxes ...Deferred income taxes ...Supplier advances ...Other current assets ...Total current assets ...FIXED...

  • Page 49
    ...Year Ended December 31, 2011 2010 2009 REVENUE ...COSTS AND EXPENSES: Cost of revenue ...Marketing ...General and administrative ...Depreciation and amortization ...Total costs...on discontinued operations, net of income tax benefit of $566 in 2010 and $2,398 in 2009 ...Net income ...BASIC INCOME PER ...

  • Page 50
    ... (Loss) Income Common Shares Common Stock Additional Paid-in Capital Retained Earnings Total BALANCE, January 1, 2009 ...Net income ...Foreign currency translation adjustment ...Unrealized loss on marketable securities, net of tax ...Total comprehensive income ...Share-based expense...

  • Page 51
    ... loss ...Realized loss on sales of marketable securities ...Changes in operating assets and liabilities: Receivables ...Inventories, net ...Supplier advances ...Other assets ...Accounts payable ...Accrued payroll and related benefits ...Deferred revenue ...Income taxes ...Other accrued expenses and...

  • Page 52
    ...the "Company" or "Nutrisystem"), a provider of weight management products and services, offers nutritionally balanced weight loss programs designed for women, men, and seniors, as well as the Nutrisystem® D® program, specifically designed to help people with type 2 diabetes who want to lose weight...

  • Page 53
    ...the asset, which is generally two to five years. Costs incurred related to planning or maintenance of internal-use software and website development are charged to expense as incurred. The net book value of capitalized software was $10,285 and $12,845 at December 31, 2011 and 2010, respectively. Long...

  • Page 54
    ... cards is recognized after the card is redeemed online at the Company's website by the customer and the product is shipped to the customer. Deferred revenue consists primarily of unredeemed prepaid program cards and unshipped frozen foods. When a customer orders the Nutrisystem® Select® program...

  • Page 55
    ... date. The Company records accrued interest and penalties related to unrecognized tax benefits as part of interest expense. 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...

  • Page 56
    ... valuation model on the date of grant. The fair value of restricted stock and restricted stock unit awards is equal to the market price of the Company's common stock on the date of grant. The fair value of share-based awards is recognized on a straight-line basis over the requisite service period...

  • Page 57
    Cash Flow Information The Company made payments for income taxes of $6,049, $16,660 and $11,449 in 2011, 2010, and 2009, respectively. Interest payments in 2011, 2010 and 2009 were $655, $283 and $304, respectively. During 2011, the Company had non-cash capital additions of $1,198 of unpaid invoices...

  • Page 58
    ... models that take into account contract terms and certain observable current market information such as London Inter-Bank Offered Rate ("LIBOR") interest rates. The following table summarizes the Company's financial assets and liabilities measured at fair value at December 31, 2011: Quoted Prices...

  • Page 59
    ... $11,177 in 2011, 2010 and 2009, respectively. 6. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS On July 1, 2008, the Company acquired certain assets of Power Chow, LLC (d/b/a NuKitchen) ("NuKitchen"), a provider of freshly prepared meals designed to promote weight management and healthy living. The...

  • Page 60
    ... Operating Leases The Company leases its corporate headquarters and certain equipment. These leases generally have initial terms of one to 12 years and have renewal options for additional periods. Certain of the leases also contain escalation clauses based upon increases in costs related to the...

  • Page 61
    ... "say-on-pay" shareholder derivative action stemming from the advisory, non-binding vote of the Company's stockholders at its May 12, 2011 annual meeting in which the Company's stockholders did not approve the Company's 2010 executive compensation. The complaint is listed under docket number 2:11...

  • Page 62
    ...from the same failed "say-on-pay" advisory, non-binding vote of the Company's stockholders at its May 12, 2011 annual meeting in which the Company's stockholders did not approve the Company's 2010 executive compensation. The complaint is listed under docket number 2011-24985 and specifically alleges...

  • Page 63
    ...are exceeded. In 2010, a new pricing and food purchase agreement with a frozen food supplier was executed which required advance payments to the supplier. The agreement with this supplier expired in November 2011 and the Company has found other frozen food supply options to replace this supplier. As...

  • Page 64
    ... block transactions. The timing and actual number of shares repurchased depend on a variety of factors including price, corporate and regulatory requirements, alternative investment opportunities and other market conditions. This stock repurchase program has an expiration date of June 30, 2013 but...

  • Page 65
    ... the statutory federal income tax rate to the Company's effective tax rate is as follows: Year Ended December 31, 2011 2010 2009 Statutory federal income tax rate ...State and foreign income taxes, net of federal benefit ...Executive compensation limitation ...Food donations ...Changes in reserves...

  • Page 66
    ... pre-tax losses of $390 for the year ended December 31, 2009. In the first quarter of 2010, the Company committed to a plan to sell the business operations conducted by NuKitchen, as it was no longer aligned with the business direction of the Company. The Company was unsuccessful in locating a buyer...

  • Page 67
    ... the exercise price per share, which is the fair market value at date of grant. Awards issued to employees generally vest over terms ranging from three to five years. The following table summarizes the Company's stock option activity for 2009, 2010 and 2011: WeightedAverage Exercise Price Per Share...

  • Page 68
    ... from three to five years. The fair value is equal to the market price of the Company's common stock on the date of grant. Expense for restricted stock is amortized ratably over the vesting period. The following table summarizes the restricted stock activity for 2009, 2010 and 2011: Number of Shares...

  • Page 69
    ... December 31, 2011, there was $12,086 of total unrecognized compensation expense related to unvested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.4 years. 14. EMPLOYEE BENEFIT PLAN The Company maintains a qualified tax deferred defined...

  • Page 70
    16. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) First Quarter Second Third Fourth (In thousands, except per share amounts) Year 2011: Revenue ...Gross margin ...Net (loss) income ...Basic (loss) income per common share ...Diluted (loss) income per common share ...2010: Revenue ...Gross margin...

  • Page 71
    ...Vice President and Chief Financial Officer, incorporated by reference to the designated exhibit of the Company's Report on Form 10-Q filed on November 7, 2008. Employment Agreement dated May 14, 2008, between Nutrisystem, Inc. and Scott A. Falconer, the Company's Executive Vice President of Customer...

  • Page 72
    ... 10-Q filed on November 4, 2010. Employment Agreement dated October 3, 2011, between Nutrisystem, Inc. and Michael R. Amburgey, 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 October...

  • Page 73
    ... Inc. By: /s/ Joseph M. Redling Joseph M. Redling, Chairman, President and Chief Executive Officer Dated: March 12, 2012 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capabilities...

  • Page 74
    Exhibit 31.1 Certification of Chief Executive Officer of Nutrisystem, Inc. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Joseph M. Redling, 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...

  • Page 75
    ...information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. b. Date: March 12, 2012 /S/ DAVID D. CLARK David D. Clark Executive Vice President and Chief Financial Officer

  • Page 76
    ..., the undersigned, Joseph M. Redling, 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, 2011 (the "Report") fully complies with the requirements of...

  • Page 77
    ...13(a) or 15(d) of the 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. /S/ DAVID D. CLARK Executive Vice President and Chief Financial Officer 2) Dated: March 12...

  • Page 78
    ... and Chief Executive Officer David D. Clark Executive Vice President and Chief Financial Officer Michael Amburgey Executive Vice President and Chief Marketing Officer GENERAL INFORMATION Corporate Headquarters Fort Washington Executive Center 600 Office Center Drive Fort Washington, PA 19034...

  • Page 79

  • Page 80
    600 Office Center Drive | Fort Washington, PA 19034 | www.nutrisystem.com