Nutrisystem 2006 Annual Report Download - page 50

I
n 2006, 200
5
and 2004, the Company outsourced approximately 87%, 7
5
% and 7
5
%, respectively, of its
f
u
lfill
ment operat
i
ons to a t
hi
r
d
-party prov
id
er
.
V
en
d
or
R
e
b
ates
O
ne of the Compan
y
’s suppliers provides for rebates based on purchasin
g
levels. The Compan
y
accounts for
this rebate on an accrual basis as
p
urchases are made at a rebate
p
ercent determined based u
p
on the estimate
d
tota
l
purc
h
ases
f
rom t
h
e ven
d
or. T
h
e est
i
mate
d
re
b
ate
i
s recor
d
e
d
as a re
d
uct
i
on
i
nt
h
e carry
i
ng va
l
ue o
f
purchased inventor
y
and is reflected in the consolidated statement of operations when the associated inventor
y
i
s
sold. A receivable is recorded for the estimate of the rebate earned. A receivable of
$
3
,
169 and
$
2
,
402 at
December 31, 2006 and 2005, respectively, has been recorded in receivables in the accompanying consolidated
balance sheet. The actual rebate received from the vendors has closel
y
matched the estimated rebate recorded and
a
n adjustment is made to the estimate upon determination of the final rebate
.
Market
i
n
g
Expens
e
Mar
k
et
i
ng expense
i
nc
l
u
d
es me
di
a, a
d
vert
i
s
i
ng pro
d
uct
i
on, mar
k
et
i
ng an
d
promot
i
ona
l
expenses an
d
pa
y
roll-related expenses for personnel en
g
a
g
ed in these activities. Direct-mail advertisin
g
costs are capitalized if
the primary purpose was to elicit sales to customers who could be shown to have responded specifically to th
e
di
rect ma
ili
ng an
d
resu
l
ts
i
n pro
b
a
bl
e
f
uture econom
i
c
b
ene
fi
ts. T
h
e cap
i
ta
li
ze
d
costs are amort
i
ze
d
to expense
o
ver the period durin
g
which the future benefits are expected to be received. T
y
picall
y
, this period falls within 40
d
ays of the initial direct mailing. All other advertising costs are charged to expense as incurred or the first tim
e
the advertising takes place. At December 31, 2006 and 2005,
$
46 and
$
137, respectively, of capitalized direct-
mail advertisin
g
costs are included in other current assets and $1,533 and $1,027, respectivel
y
, of costs have been
prepaid for upcoming advertisements and promotions. Media expense was
$
111,343,
$
44,084 and
$
5,274 i
n
2006, 2005 and 2004, respectively.
A
ccounting for Lease Related Expenses
Certain of the Compan
y
’s lease contracts contain rent holida
y
s, various escalation clauses, or landlord/
tenant incentives. The Company records rental costs, including costs related to fixed rent escalation clauses and
rent
h
o
lid
ays, on a stra
i
g
h
t-
li
ne
b
as
i
s over t
h
e
l
ease term. Lan
dl
or
d
/tenant
i
ncent
i
ves are recor
d
e
d
as
l
ease
h
o
ld
im
p
rovement assets and amortized over the shorter of the economic useful life of the asset or the lease term
.
T
enant allowances received are recorded as deferred rent and amortized as reductions to rent ex
p
ense over th
e
l
ease term.
I
n
co
m
eTa
x
es
D
eferred tax assets and liabilities are reco
g
nized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and the respective tax base
s
a
n
d
operat
i
ng
l
oss an
d
tax cre
di
t carry
f
orwar
d
s. De
f
erre
d
tax assets an
dli
a
bili
t
i
es are measure
d
us
i
ng enacte
d
tax
rates expected to appl
y
to taxable income in the
y
ears in which those temporar
y
differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the
conso
lid
ate
d
statement o
f
operat
i
ons
i
nt
h
e per
i
o
d
t
h
at
i
nc
l
u
d
es t
h
e enactment
d
ate
.
Fair Value of Financial Instrument
s
T
he carr
y
in
g
values of the Compan
y
’s financial instruments, includin
g
cash, cash equivalents, marketable
securities, trade receivables and accounts payable, approximate the fair values due to the short-term nature of
t
h
ese
i
nstruments. T
h
e carry
i
ng amount o
f
t
h
e note paya
bl
e approx
i
mates t
h
e
f
a
i
rva
l
ue
.
S
egment Information
T
he Compan
y
is mana
g
ed and operated as one business. The entire business is mana
g
ed b
y
a sin
g
le
management team that reports to the chief executive officer. Revenue consists primarily of food sales. Th
e
o
perat
i
ons an
d
assets
f
or S
li
man
d
Tone are not mater
i
a
li
nre
l
at
i
on to t
h
e conso
lid
ate
dfi
nanc
i
a
l
statements
.
44