Nutrisystem 2007 Annual Report Download - page 31

and Tone and determined the net carrying value was impaired by $1.2 million pre-tax, which is included in the
loss on discontinued operation. Slim and Tone had revenues of $723,000, $2.3 million and $2.3 million and
pre-tax losses of $100,000, $874,000 and $1.1 million for the years ended December 31, 2007, 2006 and 2005,
respectively.
We are seeing a challenging environment develop in 2008, with some consumers reducing spending on
discretionary type items, which we believe includes commercial weight loss products. Operating in this
environment will require a flexible business model but we believe our core product offering and brand not only
remain healthy but continue to show strength. In 2008, we will continue to focus on reactivation revenue and will
increase our marketing to support this growing revenue stream. We will also look to develop new programs to
focus on revenue per customer and extending length of stay. A new maintenance program is in development to
extend the paying relationships beyond the initial weight loss phase and we are expecting to expand into a frozen
line of entrees to supplement the basic meal plan and provide more variety and choices. To address the current
economic challenges, we are testing a number of new offers and value enhancements to give our customers a
better reason to try us. Additionally, we are launching new creative as well as featuring new celebrity
spokespersons and will continue to manage our media spend to optimize profitability and to ensure we are
capitalizing on all efficiencies.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting
principles. Our significant accounting policies are described in Note 2 of the consolidated financial statements
included in Item 8.
The preparation of these financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and expenses during the reporting period.
Management develops, and changes periodically, these estimates and assumptions based on historical experience
and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. Management considers the following accounting
estimates to be the most critical in preparing our consolidated financial statements. These critical accounting
estimates are discussed with our audit committee quarterly.
Reserves for Returns. We review the reserves for customer returns at each reporting period and adjust them
to reflect data available at that time. To estimate reserves for returns, we consider actual return rates in preceding
periods and changes in product offerings or marketing methods that might impact returns going forward. To the
extent the estimate of returns is inaccurate, we will adjust the reserve, which will impact the amount of product
sales revenue recognized in the period of the adjustment. The provision for estimated returns for the years ended
December 31, 2007, 2006 and 2005 were $57.2 million, $39.6 million and $15.7 million, respectively. The
reserve for returns incurred but not received and processed was $2.9 million and $2.6 million at December 31,
2007 and 2006, respectively, and has been included in other accrued expenses and current liabilities in the
accompanying consolidated balance sheet.
Vendor Rebates. One of our suppliers provides for rebates based on purchasing levels. We accrue this rebate
as purchases are made at a rebate percentage determined based upon the estimated total purchases from the
vendor. The estimated rebate is recorded as a reduction in the carrying value of purchased inventory and is
reflected in the consolidated statement of operations when the associated inventory is sold. A receivable is
recorded for the estimate of the rebate earned. The actual rebate received from the vendors has closely matched
the estimated rebate recorded and an adjustment is made to the estimate upon determination of the final rebate.
The rebate period is June 1 through May 31 of each year. For the years ended December 31, 2007, 2006 and
2005, we reduced cost of revenue by $5.3 million, $4.4 million and $1.9 million, respectively, for these rebates.
A receivable of $3.7 million and $3.2 million at December 31, 2007 and 2006, respectively, has been recorded in
receivables in the accompanying consolidated balance sheet.
25