Nutrisystem 2007 Annual Report Download - page 52

Dependence on Suppliers
In 2007, approximately 24%, 14% and 11%, respectively, of inventory purchases were from three suppliers. The
Company has supply arrangements with these vendors that require the Company to make minimum purchases. In
2006, these vendors supplied 32%, 11% and 12% of total purchases and in 2005 these vendors supplied 35%,
1%, and 11% of total purchases (see Note 7).
In 2007, 2006 and 2005, the Company outsourced approximately 90%, 87% and 75%, respectively, of its
fulfillment operations to a third-party provider.
Vendor Rebates
One of the Company’s suppliers provides for rebates based on purchasing levels. The Company accounts for this
rebate on an accrual basis as purchases are made at a rebate percent 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. A receivable of $3,703 and $3,169 at December 31,
2007 and 2006, respectively, has been recorded in receivables in the accompanying consolidated balance sheet.
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.
Marketing Expense
Marketing expense includes media, advertising production, marketing and promotional expenses and payroll-
related expenses for personnel engaged in these activities. Media expense was $162,691, $111,290 and $43,904
in 2007, 2006 and 2005, respectively. Direct-mail advertising costs are capitalized if the primary purpose was to
elicit sales to customers who could be shown to have responded specifically to the direct mailing and results in
probable future economic benefits. The capitalized costs are amortized to expense over the period during which
the future benefits are expected to be received. Typically, this period falls within 40 days of the initial direct
mailing. All other advertising costs are charged to expense as incurred or the first time the advertising takes
place. At December 31, 2007 and 2006, $15 and $46, respectively, of capitalized direct-mail advertising costs are
included in other current assets and $4,760 and $1,532, respectively, of costs have been prepaid for upcoming
advertisements and promotions. The increase is primarily due to the timing of when commercials air and new
advertising in Canada.
Accounting for Lease Related Expenses
Certain of the Company’s lease contracts contain rent holidays, various escalation clauses, or landlord/tenant
incentives. The Company records rental costs, including costs related to fixed rent escalation clauses and rent
holidays, on a straight-line basis over the lease term. Landlord/tenant incentives are recorded as leasehold
improvement assets and amortized over the shorter of the economic useful life of the asset or the lease term.
Tenant allowances received are recorded as deferred rent and amortized as reductions to rent expense over the
lease term.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the
consolidated statement of operations in the period that includes the enactment date.
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