Nutrisystem 2005 Annual Report Download - page 47

Beginning in the fourth quarter of 2005 the Company included inbound freight expenses as part of
capitalized inventory costs. The impact of not previously capitalizing is not material to the 2004 and 2003
consolidated financial statements.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets, which are generally three to seven years. Leasehold improvements are
amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the related lease term.
Capital leases are amortized on a straight-line basis over the respective lease terms. Expenditures for repairs and
maintenance are charged to expense as incurred, while major renewals and improvements are capitalized.
Identifiable Intangible Assets and Goodwill
Identifiable intangible assets and goodwill arose from the acquisition of Slim and Tone in December 2004
(see Note 3). Identifiable intangible assets represent trade names and trademarks, customer relationships,
procedural manuals and covenants not to compete acquired in the transaction. Goodwill represents the excess of
the purchase price over the net tangible and identifiable intangible assets acquired of Slim and Tone. The
Company does not amortize trade names, trademarks and goodwill due to their indefinite life, but management
reviews these assets at least annually for impairment. The other intangible assets are presented at cost, net of
accumulated amortization, and are amortized over their estimated useful lives (see Note 6).
Valuation of Long-Lived Assets
The Company continually evaluates whether events or circumstances have occurred that indicate that the
remaining useful lives of its long-lived assets, primarily fixed assets and purchased identifiable intangibles
subject to amortization, should be revised or that the remaining balance of such assets may not be recoverable
using objective methodologies. Such methodologies include evaluations based on the undiscounted cash flows
generated by the underlying assets or other determinants of fair value. As of December 31, 2005 and
December 31, 2004, respectively, management believes that no reductions to the remaining useful lives or write-
downs of long-lived assets are required.
Investment Carried Under the Equity Method
The Company invested $93 in 2003 and $155 in 2002 for a 25% interest in Imagine Weight Loss Center,
LLC (“Imagine”), a start up company formed to provide diet and fitness programs in center locations. There were
no additional investments made in 2004 or 2005. In addition to the cash investments, the Company provided
indemnifications to certain affiliates of Imagine amounting to $52 at December 31, 2003 and 2004. For the year
ended December 31, 2003, the Company recorded a loss of $157 in the consolidated statement of operations
under the caption “Equity in losses of affiliate”, representing the Company’s portion of the losses incurred by
Imagine. As of December 31, 2005, the Company had no commitment to make further investments in Imagine. A
liability of $52 at December 31, 2004, is included in “Other current liabilities” in the accompanying consolidated
balance sheets. This liability was satisfied with a cash payment in 2005.
Revenue Recognition
Revenue from product sales is recognized when the earnings process is complete, which is upon transfer of
title to the product. This transfer occurs upon shipment from the Company’s and third-party warehouses to the
end-customer in the case of Company sales or sales through QVC, independent commissioned representatives
and Slim and Tone franchisee, and to the case distributor for sales through case distributors. Recognition of
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