Nutrisystem 2005 Annual Report Download - page 46

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NUTRISYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. BACKGROUND
Nature of the Business
NutriSystem, Inc. (the “Company” or “NutriSystem”) provides weight management and fitness products and
services. The Company’s pre-packaged foods are sold to weight loss program participants directly via the internet
and telephone, referred to as the direct channel, and through independent commissioned representatives, the field
sales channel, through 13 independent center-based distributors, the case distributor channel, and through QVC, a
television shopping network. Substantially all of the Company’s revenue is generated domestically.
On December 2, 2004, the Company acquired Slim and Tone LLC (“Slim and Tone”), a franchisor of
women’s express fitness centers (see Note 3). Slim and Tone franchisees now sell NutriSystem’s diet program in
their centers as commissioned representatives. As of December 31, 2005, there are 117 Slim and Tone franchise
centers currently open and operating.
Since NutriSystem’s inception in 1972, the businesses have operated in various organizational and legal
structures, and were subject to a bankruptcy proceeding in 1993, which was discharged in 1994. NutriSystem
became a publicly traded company in October 1999. In September 2000, the Company changed its name from
nutrisystem.com inc. to Nutri/System, Inc. and in 2003, the Company changed its name to NutriSystem, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Presentation of Financial Statements
The Company’s consolidated financial statements include the accounts of NutriSystem, Inc. and its wholly
owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents include only securities having a maturity of three months or less at the time of
purchase. At December 31, 2005 and December 31, 2004, demand accounts and money market accounts
comprised all of the Company’s cash and cash equivalents.
Marketable securities consist of corporate auction-rate securities with original maturities of greater than
three months. As of December 31, 2005, all the auction-rate securities held have maturities in excess of 25 years.
The Company’s investment policy permits investments in auction-rate securities that have interest reset dates of
three months or less at the time of purchase. The reset date is the date in which the underlying interest rate is
revised based on a Dutch auction and the underlying security may be readily sold. Although the securities held
have extended maturities, the Company classifies these securities as a current asset as the investments are
considered to be trading securities.
Restricted Cash
In 2003 and years prior, the Company was required under certain vendor arrangements to maintain cash
deposited in banks restricted for the benefit of the vendors. The restrictions were eliminated in 2004.
Inventories
Inventories consist principally of packaged food held in the Company’s warehouse or in outside fulfillment
locations. Inventories are valued at the lower of cost or market, with cost determined using the first-in, first-out
(FIFO) method.
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