Nutrisystem 2007 Annual Report Download - page 50

NUTRISYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. BACKGROUND
Nature of the Business
NutriSystem, Inc. (the “Company” or “NutriSystem”) provides weight management and fitness products and
services. The Company’s pre-packaged foods are sold to weight loss program participants directly via the
Internet and telephone, referred to as the direct channel, and through independent commissioned representatives,
the field sales channel, through independent center-based distributors, the case distributor channel, and through
QVC, a television shopping network. In 2007, substantially all of the Company’s revenue was generated
domestically. In January 2008, the Company expanded operations into Canada.
In the fourth quarter of 2007, the Company committed to a plan to sell its subsidiary Slim and Tone LLC (“Slim
and Tone”), a franchisor of women’s express fitness centers. In accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
this subsidiary has been treated as a discontinued operation. Accordingly, the operating results of this
discontinued operation have been presented separately from continuing operations and are included in loss on
discontinued operation, net of income tax in the accompanying consolidated statement of operations for all
periods presented. The assets and liabilities of this discontinued operation have also been presented separately in
the accompanying consolidated balance sheets (see Note 10).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Presentation of Financial Statements
The Company’s consolidated financial statements include 100% of the assets and liabilities of NutriSystem, Inc.
and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The Company holds approximately 27% interest in Zero Technologies, LLC (“Zero Water”), a manufacturer of
patented water filters, and has the ability to significantly influence the operations of Zero Water (see Note 5). The
investment in Zero Water is accounted for using the equity method of accounting and is classified as equity
investment in the accompanying consolidated balance sheet. The Company’s share of Zero Water’s loss
subsequent to the purchase is included in equity loss in the accompanying consolidated statement of operations.
Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents include only securities having a maturity of three months or less at the time of
purchase. At December 31, 2007 and December 31, 2006, demand accounts and money market accounts
comprised all of the Company’s cash and cash equivalents.
Marketable securities consist of corporate auction rate securities with original maturities of greater than three
months. As of December 31, 2007 and 2006, all the auction rate securities held had original maturities in excess
of 10 years. The Company’s investment policy permits investments in auction rate securities that have interest
reset dates of three months or less at the time of purchase. The reset date is the date on which the underlying
interest rate is revised based on a Dutch auction. Typically interest reset dates are every 35 days for these types
of securities. The marketable securities may be readily sold at any time as there is a ready market for such
securities. The Company does not intend to hold these marketable securities to maturity as evidenced by the sale
of these investments during its normal operating cycle. Additionally, the Company intends to utilize these
securities to fund operations in the ordinary course of business. Accordingly, the Company classifies these
available-for-sale securities as a current asset in the accompanying consolidated balance sheet.
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