Nutrisystem 2005 Annual Report Download - page 50

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Net Income Per Common Share
Basic EPS is computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of
securities into common stock, such as stock options and warrants. The following table sets forth the computation
of basic and diluted earnings per share:
Year Ended December 31,
2005 2004 2003
(in thousands, except per
share amounts)
Net income: ................................................... $21,015 $ 1,019 $ 812
Weighted average shares outstanding:
Basic ..................................................... 32,898 29,206 26,733
Effect of dilutive stock options and warrants ...................... 2,720 2,636 331
Diluted ................................................... 35,618 31,842 27,064
Earnings per common share:
Basic ..................................................... $ 0.64 $ 0.03 $ 0.03
Diluted ................................................... $ 0.59 $ 0.03 $ 0.03
In 2005, 2004 and 2003, common stock equivalents from stock options and warrants representing 102,728,
1,290,334 and 750,666 shares of common stock, respectively, were excluded from weighted average shares
outstanding for diluted net income per share purposes because the effect would be anti-dilutive.
Stock Options
Through December 31, 2005, the Company applied 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
was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise
price. Compensation expense, if any, was recognized on a straight line basis over the option vesting period.
SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) established accounting and
disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, as amended in SFAS No. 148, “Accounting for Stock-Based Compensation
—Transition and Disclosure” (“SFAS No. 148”), the Company elected to continue to apply the intrinsic-value-
based method of accounting and adopted only the disclosure requirements. See Recently Issued Accounting
Pronouncements for required changes to accounting for share-based payments effective for the Company on
January 1, 2006.
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