Nutrisystem 2010 Annual Report Download - page 51

Revenue from product sales includes amounts billed for shipping and handling and is presented net of returns and
billed sales tax. Revenue from shipping and handling charges was $5,763, $5,193 and $5,019 in 2010, 2009 and
2008, respectively. Shipping-related costs are included in cost of revenue in the accompanying consolidated
statements of operations.
Dependence on Suppliers
In 2010, approximately 18%, 17% and 10%, respectively, of inventory purchases were from three suppliers. The
Company has supply arrangements with certain of these vendors that require the Company to make minimum
purchases. In 2009, these vendors supplied approximately 18%, 19% and 8%, respectively, of inventory
purchases and in 2008, approximately 15%, 19% and 5%, respectively, of total purchases (see Note 9).
During 2010, the Company outsourced 100% of its fulfillment operations to a third party provider. During 2009
and 2008, more than 85% of its fulfillment operations was handled by this 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 statements of operations when the associated inventory is sold. A
receivable is recorded for the estimate of the rebate earned. A receivable of $541 and $1,478 at December 31,
2010 and 2009, respectively, has been recorded in receivables in the accompanying consolidated balance sheets.
Historically, the actual rebate received from the vendor has closely matched the estimated rebate recorded. 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 $127,597, $126,117 and $153,577
in 2010, 2009 and 2008, 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, 2010 and 2009, $7,152 and $3,529, respectively, of costs have been prepaid for future
advertisements and promotions.
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. Lease allowances utilized for space improvement are
recorded as leasehold improvement assets and amortized over the shorter of the economic useful life of the asset
or the lease term. Tenant lease incentive allowances received are recorded as deferred rent and amortized as
reductions to rent expense over the lease term. Included in the accompanying consolidated balance sheets is
$3,991 of a tenant improvement allowance at December 31, 2010, of which $345 is included in other accrued
expenses and current liabilities and $3,646 in non-current liabilities.
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