Nutrisystem 2003 Annual Report Download - page 36

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advertising contract term or on a cost per customer acquired, depending upon the payment terms. Direct-response
advertising costs are capitalized if the primary purpose was to elicit sales to customers who could be shown to have
responded specifically to the advertising 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. All other advertising
costs are charged to expense as incurred. At December 31, 2003 and 2002, $90 and $283, respectively, of prepaid
advertising was included in prepaid expenses. Advertising expense was $3,182, $1,270 and $3,443 in 2003, 2002 and
2001, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. 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 statement of operations in the period that includes the enactment date.
At December 31, 2002, deferred tax assets were offset by a full valuation allowance. In the second quarter of 2003,
management determined based on an analysis of the cumulative level of pretax profits over the past three years and
projected level of profits that recognition of deferred tax assets was more likely than not. As a result, the valuation
allowance was eliminated and a deferred tax asset and a deferred tax liability were recorded on the consolidated balance
sheet and an income tax benefit was recorded in the statement of operations (see Note 8).
Fair Value of Financial Instruments
The carrying values of the Companys financial instruments, including cash, cash equivalents, trade receivables and
accounts payable, approximate the fair values due to the short-term nature of these instruments.
Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the weighted average number of shares of
common stock outstanding. For 2003, 2002 and 2001, diluted net income per common share reflects the potential dilution
from the exercise of outstanding options and warrants into common stock. In 2003, 2002 and 2001, common stock
equivalents representing 750,666, 1,270,500 and 2,262,834 shares of common stock, respectively, were excluded from
weighted average shares for diluted net loss per share purposes since the effect of including would be anti-dilutive. In
addition, outstanding warrants to purchase 698,740 shares of common stock in 2002 and 2001, respectively, were also
excluded as the effect of including would be anti-dilutive.
Stock Options
The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, to account for its fixed-plan
stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. SFAS 123 established accounting and disclosure requirements using
a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS 123, as
amended in SFAS 148, the Company has elected to continue to apply the intrinsic-value-based method of accounting has
adopted only the disclosure requirements.