Nutrisystem 2007 Annual Report Download - page 53

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Fair Value of Financial Instruments
The carrying values of the Company’s financial instruments, including cash, cash equivalents, marketable
securities, trade receivables and accounts payable, approximate the fair values due to the short-term nature of
these instruments.
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. Revenue consists primarily of food sales.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or
conversion of securities into common stock, such as stock options and unvested restricted stock, using the
treasury stock method. The following table sets forth the computation of basic and diluted EPS:
Year Ended December 31,
2007 2006 2005
(in thousands, except per share amounts)
Income from continuing operations ................................ $104,947 $85,678 $21,706
Loss on discontinued operation ................................... (795) (548) (691)
Net income ................................................... $104,152 $85,130 $21,015
Weighted average shares outstanding:
Basic .................................................... 34,397 35,800 32,898
Effect of dilutive stock options and unvested restricted stock ........ 774 1,322 2,720
Diluted .................................................. 35,171 37,122 35,618
Basic income per common share:
Income from continuing operations ............................ $ 3.05 $ 2.39 $ 0.66
Net loss from discontinued operation .......................... (0.02) (0.01) (0.02)
Net income ............................................... $ 3.03 $ 2.38 $ 0.64
Diluted income per common share:
Income from continuing operations ............................ $ 2.98 $ 2.30 $ 0.61
Net loss from discontinued operation .......................... (0.02) (0.01) (0.02)
Net income ............................................... $ 2.96 $ 2.29 $ 0.59
In 2007, 2006 and 2005, common stock equivalents from stock options and unvested restricted stock representing
89,794, 63,829 and 102,728 shares of common stock, respectively, were excluded from weighted average shares
outstanding for diluted net income per share purposes because the effect would be anti-dilutive.
Share-Based Payment Awards
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R, “Share-Based Payment,”
using the modified prospective approach. The cost of all share-based awards to employees, including grants of
employee stock options and restricted stock, is recognized in the financial statements based on the fair value of
the awards at grant date. In addition, SFAS No. 123R requires unrecognized cost (based on the amounts
previously disclosed in the pro forma footnote disclosure) related to options vesting after the date of initial
adoption to be recognized in the financial statements over the remaining requisite service period (see Note 11). In
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