Nutrisystem 2003 Annual Report Download - page 42

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At December 31, 2002, the Company had net operating loss carryforwards of approximately $5 million for federal and
state tax purposes. As a result of a change of control transaction which occurred in December 2002, approximately $2
million of the net operating loss carryforwards are subject to usage limitations pursuant to the rules of Internal Revenue
Code section 382. Net operating losses will begin to expire in 2014. In addition, deferred income taxes were recorded for
other differences in bases of assets and liabilities for financial reporting and income tax purposes. Through March 2003, a
valuation allowance had been maintained for the deferred tax asset based on managements assessment that the deferred
tax asset would not be realized given the historical taxable levels of income (loss), the uncertainty of future operating
results, tax planning strategies, and the expiration date of net operating loss carryforwards. In the second quarter of 2003,
management determined based on an analysis of the cumulative level of pretax profits over the past three years, projected
levels of profits, schedule of reversal of deferred taxes, and tax strategies that recognition of the benefits related to
deferred tax assets was more likely than not. As a result, the valuation allowance was eliminated, a deferred tax asset was
recorded on the consolidated balance sheet and an income tax benefit was recorded. A portion of the deferred tax asset
recognized arose prior to a 1999 merger transaction; in order to reflect the recognition of the deferred tax asset on the
previously recorded merger transaction, the Company eliminated $290 of goodwill and credited equity by $790.
Starting in 2001, the Company offset taxable income for federal tax purposes with net operating loss carryforwards. For
state tax purposes, there is a limitation on the amount of net operating loss carryforwards that can be utilized in a given
year to offset state taxable income. However, the state taxable income in 2002 and 2001 is below the annual limitation.
9. STOCK OPTIONS AND WARRANTS
Stock Option Plan
The Company has two stock option plans (the 1999 Equity Incentive Plan and 2000 Equity Incentive Plan) under which
options to purchase shares of the Companys common stock can be granted to key employees. Currently, 1,000,000 and
4,100,000 shares of common stock may be issued pursuant to the 1999 Equity Incentive Plan and the 2000 Equity
Incentive Plan, respectively. At December 31, 2003, options to purchase 900,833 shares were available for grant under
these plans. These options could be either incentive stock options or nonqualified stock options.
In June 2000, the Company also adopted the 2000 Equity Incentive Plan for Outside Directors and Consultants (the
Director Plan) under which nonqualified stock options to purchase shares of the Companys common stock could be
granted to non-employee directors and consultants to the Company. A maximum of 1,000,000 shares of common stock
may be issued pursuant to the Director Plan. At December 31, 2003, options to purchase 209,334 shares were available
for grant under this plan.
Under each of the plans, the Board of Directors determines the term of each option, but no option can be exercisable more
than ten years from the date the option was granted. To date, all of the options issued under the Equity Incentive Plans
expire ten years from the issue date and all of the options issued under the Director Plan expire between three months and
ten years from the issue date. The Board also determines the option exercise price per share and vesting provisions.
Options issued to employees generally vest over a three year period. All of the options issued are incentive stock options.