Nutrisystem 2004 Annual Report Download

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Annual Report
2004
HIRING The KEY EXECUTIVES TO TAKE US INTO
THE FutureAND USING MARKET RESEARCH TO POSITION
OUR BRAND AND LAUNCH A COHESIVE DIRECT RESPONSE PROGRAM
INCLUDING ADVERTISING AND PUBLICITY Of OUR PRODUCT
WHILE BUILDING THE SYSTEMS AND CONTROLS TO QUANTIFY OUR
MARKETING INITIATIVES AND LAUNCH THE NUTRISYSTEM®
NOURISH™Weight Loss PROGRAM BUILT ON
FOODS WITH IMPROVED TASTE AND LOW GLYCEMIC INDEX VALUES

Table of contents

  • Page 1
    ... OUR BRAND AND LAUNCH A COHESIVE DIRECT RESPONSE PROGRAM INCLUDING ADVERTISING AND PUBLICITY Of OUR PRODUCT WHILE BUILDING THE SYSTEMS AND CONTROLS TO QUANTIFY OUR MARKETING INITIATIVES AND LAUNCH THE NUTRISYSTEM® NOURISH™ Weight Loss PROGRAM BUILT ON FOODS WITH IMPROVED TASTE AND LOW...

  • Page 2
    ... 100 food selections in the Nourish program and have also introduced customized NutriSystem programs for women, men, diabetics and vegetarians. Marketing and Growth: We were very successful in increasing the NutriSystem brand awareness by employing a successful strategy targeting the most effective...

  • Page 3
    ...non-affiliates of the Registrant as of June 30, 2004, was $29,686,639. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the American Stock Exchange on June 30, 2004. Number of shares outstanding of the Registrant's Common Stock, $0.001 par...

  • Page 4
    ... 13. Item 14. Directors and Executive Officers of the Registrant Executive Compensation Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions Principal Accountant Fees and Services PART IV Item 15. Exhibits and...

  • Page 5
    ...linked to obesity. The weight loss industry consists of a wide variety of diet foods and meal replacement bars and shakes, appetite suppressants, nutritional supplements, pharmaceutical products and weight loss programs. The domestic market for weight loss programs, diet foods and diet related books...

  • Page 6
    ... inexpensive to ship and store. On the web site, members can order food 24 hours a day, seven days a week. The Company's telephone and online support addresses many of the most common limitations of traditional weight loss programs, including high initiation and recurring membership fees, the...

  • Page 7
    ... shipping and handling on auto delivery food orders. Technology The Company's web site is hosted at a remote third party hosting facility with a backup at the Company's headquarters in Horsham, PA. The hosting facility provides technologically advanced physical and fire security and electric power...

  • Page 8
    ... weight loss market are the ability to attract and retain customers through promotion and personal referral; the availability, convenience and effectiveness of the weight reduction program; brand recognition and trustworthiness; and program pricing. Management believes it can compete effectively...

  • Page 9
    ...appointed Chairman of the Board of Directors and Chief Executive Officer of the Company on December 20, 2002. Prior to joining the Company, Mr. Hagan was the co-founder of Verticalnet, Inc., a business-to-business internet and software company, and held a number of executive positions at Verticalnet...

  • Page 10
    ... not obtained key person life insurance on any key employees. If any key employees left NutriSystem or were seriously injured and became unable to work, the business could be harmed. The Company may be subject to health-related claims from members or customers. The Company's weight loss program does...

  • Page 11
    ... customer confidence in the NutriSystem weight loss program and result in a decline in revenues. Adverse publicity could arise even if the unfavorable effects associated with weight loss products or services resulted from the user's failure to use such products or services appropriately. New weight...

  • Page 12
    ... and quality standards for food products. If the Company does not have adequate insurance or contractual indemnification from its suppliers, product liability claims could have a material adverse effect on the business. Distributors of weight loss food products, vitamins, nutritional supplements and...

  • Page 13
    ... The issuance of a substantial number of preferred shares could adversely affect the price of the Company's common stock. ITEM 2. PROPERTIES The Company currently leases approximately 97,600 square feet of office and warehouse space in Horsham, Pennsylvania pursuant to a lease expiring in 2009 at an...

  • Page 14
    ...-Liquidity and Capital Resources and other Financial Data." Recent Sales of Unregistered Securities On February 12, 2004, the Company issued 10,000 and 1,000 shares of common stock to Zora Andrich and Ray Manzella, respectively, in consideration for marketing services. In granting the shares, the...

  • Page 15
    ...8 in this Annual Report on Form 10-K. Selected Consolidated Financial Data (in thousands, except per share data) Year Ended December 31, 2004 2003 2002 2001 2000 Statement of Operations Data: Revenues: Total revenues ...Costs and expenses: Cost of revenues ...Marketing ...General and administrative...

  • Page 16
    ... Distributor weight loss centers (the "Case Distributor" channel) and QVC. On December 2, 2004, NutriSystem Inc. acquired Slim and Tone LLC, a franchisor of women's express fitness centers. Slim and Tone franchisees now sell the NutriSystem diet program in their centers as independent commissioned...

  • Page 17
    ... for Returns. Management reviews the reserves for customer returns at each reporting period and adjusts them to reflect data available at that time. To estimate a return for reserves, management considers return rates in preceding periods and changes in product offerings or marketing methods that...

  • Page 18
    ...include sales of food, supplements, shipping and handling charges billed to customers and sales credits and adjustments, including product returns. No revenue is recorded for food products provided at no charge as part of promotions. Revenues for Slim and Tone consist primarily of franchise fees and...

  • Page 19
    ...the number of new customers, revenues per customer and total revenues. A new customer is defined as a first time purchaser through the Direct channel. Profit margins are measured in terms of gross margin (revenues less cost of revenues as a percentage of revenues) and total advertising and marketing...

  • Page 20
    ...50 minute, infomercial format that enables the Company to convey fully the benefits of the NutriSystem diet foods. 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...

  • Page 21
    ...higher margin Direct channel, to higher pricing for the new NutriSystem Nourish program and to a $529 write-off of old program inventory and packaging recorded in cost of sales in 2003. Marketing expenses increased $4,009 from $3,539 to $7,548 for 2003 to 2004. Almost all marketing spending promoted...

  • Page 22
    ... former Chief Executive Officer and $175 in charges relating to discontinued packaging and products. Primarily in the fourth quarter of 2003, the Company incurred $599 in expenses associated with new program development in order to create the NutriSystem Nourish program. New program expenses include...

  • Page 23
    ... of Slim and Tone, LLC ($1,562) (see Note 3 of the Consolidated Financial Statements) and net capital expenditures ($688) incurred to increase web site capacity, fulfillment operations, leasehold improvements related to the relocation of home office. In the year ended December 31, 2004, net...

  • Page 24
    .... Statement No. 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. It will require companies to recognize in the statement of earnings the grant-date fair value of stock...

  • Page 25
    ... 31, 2004 have been designed and are functioning 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...

  • Page 26
    ... "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 27
    ... Statements See Index to the Consolidated Financial Statements which begins on page 26 of this Annual Report 2. Financial Statement Schedules None, as all information required in these schedules is included in the Notes to the Consolidated Financial Statements. 3. Exhibits Reference is made to...

  • Page 28
    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 29
    .... We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement...

  • Page 30
    NUTRISYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31 2004 2003 ASSETS CURRENT ASSETS Cash and cash equivalents ...Restricted cash ...Trade receivables ...Inventories ...Deferred income taxes ...Other current assets ...Total current assets ......

  • Page 31
    NUTRISYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) Year Ended December 31 2004 2003 2002 NET REVENUES ...COSTS AND EXPENSES: Cost of revenues ...Marketing ...General and administrative ...New program development ......

  • Page 32
    ... reserved deferred tax asset ...- BALANCE, December 31, 2003 ...28,511,021 Net income ...- Stock-based costs ...108,500 Exercise of stock options ...982,159 Exercise of warrants ...531,180 Tax benefit from stock option exercises ...- BALANCE, December 31, 2004 ...30,132,860 26 - - - - 2 - - - 28...

  • Page 33
    ... acquisition of a business ...Investment in affiliates ...Net cash used in investing activities ...CASH FLOWS FROM FINANCING ACTIVITIES: Sale of common stock ...Exercise of stock options and warrants ...Treasury stock purchases, at cost ...Repayment of non-current liabilities ...Net cash provided by...

  • Page 34
    ..." or "NutriSystem") provides weight management and fitness products and services. The Company's pre-packaged foods are now sold to weight loss program participants directly via the Internet and telephone (the "Direct" channel) and through independent commissioned representatives (the "Field Sales...

  • Page 35
    ... food sales are recognized when the related products are shipped to the end-consumer or to Case Distributors. In 2003, QVC distributed the Company's products to QVC customers. In other periods, the Company shipped products sold through QVC directly to the consumer. Revenues for products distributed...

  • Page 36
    ... center opens for business. Slim and Tone franchise fee payments received prior to a franchise center opening are recorded as deferred revenue in the 2004 consolidated balance sheet. Royalties are paid monthly and recognized in the month the royalty was earned. Revenues from pre-packaged food sales...

  • Page 37
    ... by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying...

  • Page 38
    ... to fulfillment, the costs of outside fulfillment and commissions paid on Direct sales from general and administrative expenses to cost of revenues. At the same time, the Company reclassified the cost of non-food materials provided with customer purchases from marketing to cost of revenues. Prior...

  • Page 39
    NUTRISYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (In thousands, except share and per share amounts) 3. ACQUISITION On December 2, 2004, the Company acquired Slim and Tone to unite diet and exercise for successful weight loss. The purchase price consists of ...

  • Page 40
    ... the acquisition of Slim and Tone (see Note 3). Weighted Average Amortization Period Cost Accumulated Amortization Net Book Value Amortizable intangible assets Customer relationships ...Procedures manuals ...Covenant not to compete ...Non-amortizable intangible assets Trade Name/ Trademark ... 10...

  • Page 41
    ... indemnifications to certain affiliates of Imagine Weight Loss Center amounting to $52 at December 31, 2004 and 2003 (see Note 2). 8. NOTE PAYABLE In connection with the acquisition of Slim and Tone (see Notes 1 and 3), the Company issued a $450 note payable to the seller. The seller note bears no...

  • Page 42
    ... the cost method. During 2002, the Company repurchased 869,791 shares of common stock for an aggregate cost of $695 (an average price of $0.80 per share). In 2003, the Company purchased 220,100 shares of common stock for an aggregate cost of $123 (an average price of $0.56 per share). To date, all...

  • Page 43
    ...operating results, tax planning strategies, and the expiration date of net operating loss carryforwards. In the second quarter of 2003, management determined based on an analysis of the cumulative level of pretax profits over the past three years, projected levels of profits, schedule of reversal of...

  • Page 44
    ... Plan expire between three months and ten years from the issue date. The Board also determines the option exercise price per share and vesting provisions. Options issued to employees generally vest over a three year period. The following table summarizes the options granted, exercised and cancelled...

  • Page 45
    ... $17 in 2004, 2003 and 2002, respectively. Compensation costs for these stock options relate to general and administrative expenses. 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...

  • Page 46
    ... Slim and Tone (see Note 3), the Company issued a note payable of $450 to the seller (see Note 8). The seller is now an employee of the Company. During 2002, the Company purchased $478 of food from a vendor that is an affiliate of a former member of the Board of Directors. 14. EMPLOYEE BENEFIT PLAN...

  • Page 47
    ...01) $22,575 $ (2,585) $ 812 $ 0.03 17. RETURNS RESERVE Following is an analysis for the returns reserve for 2004, 2003 and 2002: Year Ended December 31 2004 2003 2002 Balance at beginning of year ...Provision for estimated returns ...Actual returns ...Balance at end of year ... $ 71 2,164 (2,096...

  • Page 48
    ... Stock Exchange and Purchase Agreement dated August 16, 1999 among Ansama Corp., HPF Holdings, Inc., Brian D. Haveson and NutriSystem Direct, L.L.C. management (comprised of Joseph Boileau, Kathleen Simone, Deborah Gallen and Frederick C. Tecce) Assignments of NutriSystem Direct, L.L.C. Membership...

  • Page 49
    ... and Slim and Tone, LLC. and related agreements. Employment Agreement dated December 22, 2004 between George Jankovic, the Company's President and Chief Operating Officer and NutriSystem Inc. Subsidiaries of nutrisystem.com inc. Consent of KPMG LLP Certifying Statement of the Chief Executive Officer...

  • Page 50
    ... duly authorized. NutriSystem, Inc. By: /s/ MICHAEL J. HAGAN Michael J. Hagan, Chairman of the Board and Chief Executive Officer Dated: March 28, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of...

  • Page 51
    ... of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 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 annual report does not contain any untrue statement of a material fact or...

  • Page 52
    ...of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, James D. Brown, certify that: 1. 2. I have reviewed this annual report on Form 10-K of NutriSystem, Inc.; Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit...

  • Page 53
    ...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, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange...

  • Page 54
    ...Financial 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, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange...

  • Page 55
    ... D. Brown Executive Vice President, Chief Financial Officer, Secretary and Treasurer Brendon Perero Chief Technology Officer GENERAL INFORMATION Corporate Headquarters 200 Welsh Road Horsham, PA 19044 (215) 706-5300 Independent Public Accountants KPMG LLP. Philadelphia, PA General Counsel Morgan...

  • Page 56
    200 WELSH ROAD, HORSHAM, PA 19044 215-706-5300 www.nutrisystem.com