Nutrisystem 2006 Annual Report Download - page 29

estimates to be the most critical in preparing our consolidated financial statements. These critical accounting
est
i
mates
h
a
v
e
b
een
di
scusse
dwi
t
h
our au
di
t comm
i
ttee.
Reserves
f
or Return
s
.
We rev
i
ew t
h
e reserves
f
or customer returns at eac
h
report
i
n
g
per
i
o
d
an
d
a
dj
ust
them to reflect data available at that time. To estimate reserves for returns, we consider actual return rates i
n
prece
di
ng per
i
o
d
san
d
c
h
anges
i
n pro
d
uct o
ff
er
i
ngs or mar
k
et
i
ng met
h
o
d
st
h
at m
i
g
h
t
i
mpact returns go
i
ng
f
orwar
d
.Tot
h
e extent t
h
e est
i
mate o
f
returns
i
s
i
naccurate, we w
ill
a
dj
ust t
h
e reserve, w
hi
c
h
w
ill i
mpact t
h
e
a
mount of product sales revenue reco
g
nized in the period of the ad
j
ustment. The provision for estimated returns
f
or the years ended December 31, 2006, 2005 and 2004 were
$
39.6 million,
$
15.7 million and
$
2.2 million,
respectivel
y
. The reserve for returns incurred but not received and processed was $2.6 million and $1.5 million a
t
December 31, 2006 and 200
5
, respectivel
y
.
I
mpairment o
f
Fixe
d
Assets an
d
Intangi
bl
e
s
.
We cont
i
nua
ll
y assess t
h
e
i
mpa
i
rment o
fl
ong-
li
ve
d
asset
s
w
h
enever events or c
h
an
g
es
i
nc
i
rcumstances
i
n
di
cate t
h
at t
h
e carr
yi
n
g
va
l
ue o
f
t
h
e assets ma
y
not
b
e
recoverable. Jud
g
ments re
g
ardin
g
the existence of impairment indicators are based on le
g
al factors, marke
t
con
di
t
i
ons an
d
our operat
i
ng per
f
ormance. Future events cou
ld
cause us to conc
l
u
d
et
h
at
i
mpa
i
rment
i
n
di
cator
s
ex
i
st an
d
t
h
e carr
yi
n
g
va
l
ues o
ffi
xe
d
an
di
ntan
gibl
e assets ma
yb
e
i
mpa
i
re
d
.An
y
resu
l
t
i
n
gi
mpa
i
rment
l
oss
would be limited to the value of net fixed and intan
g
ible assets
.
I
ncome
T
axes. Currently, we are recording income taxes at a rate equal to the combined federal and state
statutory rates. For the year ended December 31, 2006, we recorded income tax expense of
$
50.6 million, whic
h
reflected an estimated annual effective tax rate of 37.3%. For the
y
ear ended December 31, 200
5
, we recorde
d
$
13.1 million of income taxes
,
which was recorded at an estimated annual effective tax rate of 38.5%. We
est
i
mate t
h
e annua
l
e
ff
ect
i
ve tax rate at t
h
e
b
eg
i
nn
i
ng o
f
eac
h
year an
d
rev
i
se t
h
e est
i
mate at eac
h
report
i
n
g
period based on a number of factors includin
g
operatin
g
results, level of tax exempt interest income and sales b
y
state, among other items.
R
esults of Operations
R
evenue an
d
expenses cons
i
st o
f
t
h
e
f
o
ll
ow
i
n
g
components:
Revenue. Revenue cons
i
sts pr
i
mar
il
yo
ff
oo
d
sa
l
es. Foo
d
sa
l
es
i
nc
l
u
d
esa
l
es o
ff
oo
d
, supp
l
ements,
shippin
g
and handlin
g
char
g
es billed to customers and sales credits and ad
j
ustments, includin
g
product returns.
No revenue
i
s recor
d
e
df
or
f
oo
d
pro
d
ucts prov
id
e
d
at no c
h
arge as part o
f
promot
i
ons. Revenue
f
or S
li
man
d
T
one cons
i
sts pr
i
mar
il
yo
ff
ranc
hi
se
f
ees an
d
roya
l
t
i
es. Revenue
f
or
f
ranc
hi
se
f
ees
i
s recogn
i
ze
d
w
h
en a
f
ranc
hi
se
center opens for business. Ro
y
alties are paid monthl
y
and reco
g
nized in the month the ro
y
alt
y
is earned
.
Cost o
f
Revenue. Cost of revenue consists primarily of the cost of the products sold, includin
g
compensat
i
on re
l
ate
d
to
f
u
lfill
ment, t
h
e costs o
f
outs
id
e
f
u
lfill
ment,
i
ncom
i
ng an
d
outgo
i
ng s
hi
pp
i
ng costs,
char
g
e card fees, packin
g
material and the write-off of obsolete packa
g
in
g
and product. Cost of products sold
includes products provided at no charge as part of promotions and the non-food materials provided with custome
r
o
r
d
ers. Cost o
f
revenue a
l
so
i
nc
l
u
d
es t
h
e
f
ees pa
id
to
i
n
d
epen
d
ent
di
str
ib
utors an
d
sa
l
es comm
i
ss
i
ons. Cost o
f
revenue for Slim and Tone consists of the costs incurred associated with the openin
g
of a franchise center
.
M
arketin
g
Expens
e
.
Marketin
g
expense includes advertisin
g
, marketin
g
and promotional expenses and
payro
ll
re
l
ate
d
expenses
f
or personne
l
engage
di
nt
h
ese act
i
v
i
t
i
es. We
f
o
ll
ow t
h
e Amer
i
can Inst
i
tute o
f
Cert
ifi
e
d
Public Accountants Statement of Position 93-7, “Reportin
g
on Advertisin
g
Costs.” Internet advertisin
g
expense i
s
recorded based on either the rate of deliver
y
of a
g
uaranteed number of impressions over the advertisin
g
contract
term or on a cost per customer acqu
i
re
d
,
d
epen
di
ng upon t
h
e terms. D
i
rect-ma
il
a
d
vert
i
s
i
ng costs are cap
i
ta
li
ze
d
if the primar
y
purpose was to elicit sales to customers who could be shown to have responded specificall
y
to th
e
a
dvertisin
g
and results in probable future economic benefits. The capitalized costs are amortized to expense over
t
h
e per
i
o
dd
ur
i
ng w
hi
c
h
t
h
e
f
uture
b
ene
fi
ts are expecte
d
to
b
e rece
i
ve
d
.A
ll
ot
h
er a
d
vert
i
s
i
ng costs are c
h
arge
d
t
o
expense as incurred.
23