Nutrisystem 2005 Annual Report Download - page 48

revenue upon shipment meets the revenue recognition criteria in that persuasive evidence of an arrangement
exists, delivery has occurred, the selling price is fixed and determinable and collection is reasonably assured.
Customers may return unopened product within 30 days of purchase in order to receive a refund or credit.
Estimated returns are accrued at the time the sale is recognized and actual returns are tracked monthly and the
estimated returns reserve is adjusted quarterly.
In 2003, QVC distributed the Company’s products to QVC customers. In other periods, the Company
shipped products sold through QVC directly to the consumer. Revenue for products distributed through QVC is
recognized when the products are shipped to the end-consumer.
Revenue from product sales include amounts billed for shipping and handling, and are presented net of
returns and free food products provided to consumers. Revenue from shipping and handling charges was $1,125,
$401, and $359 in 2005, 2004 and 2003, respectively.
Revenue for Slim and Tone consists primarily of franchise fees and royalties. Revenue for franchise fees is
recognized when a franchise center opens for business. Slim and Tone franchise fee payments received prior to a
franchise center opening are recorded as deferred revenue. Royalties are paid monthly and recognized in the
month the royalty is earned.
Dependence on Key Customer / Suppliers
Approximately 7%, 11% and 20% of the Company’s revenue for the years ended December 31, 2005, 2004
and 2003, respectively, relates to sales through QVC. Accounts receivable from QVC at December 31, 2005 and
December 31, 2004, were $410 and $50, respectively.
In 2005 approximately 36%, 14% and 10%, respectively, of inventory purchases were from three suppliers.
The Company has a supply arrangement with one of these vendors that requires the Company to make minimum
purchases (see Note 8). In 2004, these vendors supplied 46%, 26% and 6% of total purchases and in 2003 these
vendors supplied 25%, 28% and 7% of total purchases.
In 2005 and 2004, the Company outsourced approximately 75% of its fulfillment operations to a third-party
provider.
Vendor Rebates
Certain of the Company’s suppliers provide for rebates based on purchasing levels. The Company accounts
for these rebates on an accrual basis as purchases are made at a rebate percent determined based upon the
estimated total purchases from the vendor. The estimated rebate is recorded as a reduction in the carrying value
of purchased inventory and is reflected in the consolidated statement of operations when the associated inventory
is sold. A receivable is recorded for the estimate of the rebate earned. A receivable of $2,402 and $32 at
December 31, 2005 and 2004, respectively, has been recorded in trade receivables in the accompanying
consolidated balance sheet. The actual rebate received from the vendors has closely matched the estimated rebate
recorded and an adjustment is made to the estimate upon determination of the final rebate.
Marketing Expense
Marketing expense includes advertising, marketing and promotional expenses and payroll related expenses
for personnel engaged in these activities. Direct-mail advertising costs are capitalized if the primary purpose was
to elicit sales to customers who could be shown to have responded specifically to the direct mailing 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. Typically, this period falls within 40 days of the initial direct
mailing. All other advertising costs are charged to expense as incurred. At December 31, 2005 and 2004, $137
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