Nutrisystem 2008 Annual Report Download - page 49

Included in fixed assets is the capitalized cost of internal-use software and website development incurred during
the application development stage. Capitalized costs are amortized using the straight-line method over the
estimated useful life of the asset, which is generally two to five years. Costs incurred related to planning or
maintenance of internal-use software and website development are charged to expense as incurred. The net book
value of capitalized software was $10,397 and $5,499 at December 31, 2008 and 2007, respectively.
Equity Investment
The Company holds an approximately 27% fully diluted interest in Zero Technologies, LLC (“Zero Water”), a
manufacturer of patented water filters, and has the ability to participate in the operations of Zero Water. The
investment in Zero Water is accounted for using the equity method of accounting and is classified as equity
investment in the accompanying consolidated balance sheets. The Company’s investment was initially recorded
at cost and subsequently adjusted by the Company’s share of Zero Water’s loss subsequent to the purchase and
any additional contributions made or distributions received.
The Company periodically reviews the carrying value of its investment in Zero Water to determine if
circumstances exist indicating impairment to the carrying value of the investment. The Company’s estimate of
fair value takes into consideration factors such as expected future operating income, trends and prospects, as well
as the effects of demand, competition and other factors. This determination requires significant estimates by
management, including the expected course of action at the balance sheet date that would lead to such cash
flows. Subsequent changes in estimates could impact the determination of whether an impairment exists. To the
extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the property
over the fair value of the property. During 2008, the Company recorded an impairment of $6,483 on the
investment in Zero Water (see Note 7).
Identifiable Intangible Assets and Goodwill
Identifiable intangible assets and goodwill arose from the acquisition of Power Chow, LLC (d/b/a NuKitchen)
(“NuKitchen”) in July 2008 (see Note 3). Identifiable intangible assets represent trademarks, customer lists and
technology acquired in the transaction. Goodwill represents the excess of the purchase price over the net tangible
and identifiable intangible assets acquired of NuKitchen. The Company does not amortize goodwill due to its
indefinite life, but management reviews this at least annually for impairment. The other intangible assets are
presented at cost, net of accumulated amortization, and are amortized on a straight-line basis over their estimated
useful lives (see Note 6).
Valuation of Long-Lived and Intangible Assets
The Company continually evaluates whether events or circumstances have occurred that indicate that the
remaining useful lives of its long-lived and intangible assets are properly valued. These assets consist of fixed
assets and purchased identifiable intangibles. The Company uses methodologies including evaluations based on
the discounted cash flows generated by the underlying assets or other determinants of fair value. As of
December 31, 2008 and 2007, respectively, management believes that no reductions to the remaining useful lives
or write-downs of long-lived assets are required.
Foreign Currency Translation
The functional currency of the Company’s Canadian subsidiary is the Canadian dollar. Assets and liabilities are
translated into U.S. dollars at exchange rates as of the financial statement date and revenues and expenses are
translated at average exchange rates prevailing during the respective periods. Translation adjustments are
included as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity in
the accompanying consolidated balance sheets. Gains and losses from foreign currency transactions are
recognized as other expense in the accompanying consolidated statements of operations and totaled $1,155 of
expense in 2008 and $39 of expense in 2007.
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