Nutrisystem 2003 Annual Report Download - page 23

21
balance at December 31, 2003 and managements belief that additional equity financing, if required, can be raised,
management believes that the Company has the ability to continue operations into 2005. However, there can be no
assurance that the Company will be able to sustain profitability or, if necessary, obtain the capital to fund operating and
investment needs in the future. Currently, there is no credit facility in place to fund working capital or investment needs.
There are no current plans or discussions in process relating to any material acquisition that is probable in the
foreseeable future.
Factors Affecting Business and Prospects
The Company expects to experience significant fluctuations in future quarterly operating results due to a variety
of factors, many of which are outside its control.
Inflation
The Companys financial statements are presented on a historical cost basis and do not fully reflect the impact
of prior years' inflation. While the U.S. inflation rate has been modest for several years, inflation issues may impact
business in the future. The ability to pass on inflation costs is an uncertainty due to general economic conditions and
competitive situations.
Recently Issued Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting
for Stock-Based Compensation  an Amendment to FASB Statement No. 123, which amends SFAS 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the method used on reported results.
Management has elected to continue to apply the intrinsic-value based method of accounting under Accounting
Principals Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The
disclosure requirements of SFAS No. 148 are included in Note 2 to the consolidated financial statements.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, (FIN46R) which addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the
entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued
January 2003. The Company will be required to apply FIN 46R to variable interests in variable interest entities (VIEs)
created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be
applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before
January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling
interest of the VIE. The Company is evaluating the impact of applying FIN 46R to existing VIEs in which it has variable
interests and has not yet completed this analysis. At this time, it is anticipated that the adoption of FIN 46R will not have
an impact on the Companys consolidated financial statements.
In November 2002, FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57
and 107 and a rescission of FASB Interpretation No. 34, was issued. This Interpretation enhances the disclosures to be
made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation were
applicable to guarantees issued or modified after December 31, 2002 and the disclosure requirements were effective for
financial statements of interim or annual periods ending after December 15, 2002. The adoption of this recently issued
accounting standard did not have an impact on the Companys consolidated financial statements.