Nutrisystem 2010 Annual Report Download - page 55

6. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
On July 1, 2008, the Company acquired certain assets of Power Chow, LLC (d/b/a NuKitchen) (“NuKitchen”), a
provider of freshly prepared meals designed to promote weight management and healthy living. The total
purchase price of $5,717 was allocated to identifiable intangible assets ($3,000) and goodwill ($2,717). As
further discussed in Note 12, NuKitchen has been treated as a discontinued operation and the $5,717 purchase
price has been included in net cash used in investing activities of discontinued operations in the accompanying
consolidated statements of cash flows for the year ended December 31, 2008.
During the fourth quarter of 2009, a goodwill impairment charge of $2,717 was recorded as a result of the
Company conducting its annual impairment test of goodwill. Additionally, the Company recorded an impairment
charge of $1,824 for identifiable intangible assets. The Company used a combination of income and market based
approaches to estimate the fair value. The impairment was initially recorded to depreciation and amortization in
the accompanying consolidated statement of operations but has since been classified in discontinued operations
(see Note 12). The impairment charge primarily resulted from management’s determination that the resources
needed to grow a premium product in a down economy were unsustainable after conducting market tests during
the fourth quarter of 2009, particularly with respect to the higher-end consumer segment.
7. EQUITY INVESTMENT
On October 11, 2007, the Company purchased an approximately 27% fully diluted equity interest in Zero
Technologies, LLC (“Zero Water”), at a purchase price of $10.60 per Series A unit for an aggregate purchase
price of $14,258, which included acquisition costs of $259. This investment was accounted for under the equity
method of accounting.
During the fourth quarter of 2008, the Company recorded an impairment charge of $6,483 to reduce the carrying
value of the equity investment to its then estimated fair value of $4,000. The impairment charge primarily
resulted from lower-than-expected operating results and projections of future performance coupled with the
current non-strategic business direction of Zero Water and the overall general economic decline which indicated
that the full carrying value of the equity investment was not recoverable. The charge was recorded as equity and
impairment loss in the accompanying consolidated statements of operations. Also, an equity loss of $2,975 was
recorded in 2008 for the Company’s share of Zero Water’s loss and amortization expense for the difference
between the cost and the underlying equity in net assets of Zero Water at the investment date.
In June 2009, the Company abandoned its interest in Zero Water as management determined that the business
was no longer aligned with the Company’s current strategic direction. An equity and impairment loss of $4,000
was recorded to write-off the remaining investment.
8. CREDIT FACILITY AND INTEREST RATE SWAPS
On October 2, 2007, the Company executed a credit agreement with a group of lenders that provides for a
$200,000 unsecured revolving credit facility with an expansion feature, subject to certain conditions, to increase
the facility to $300,000 (the “Credit Facility”). As of December 31, 2010, the Company had $30,000 in
borrowings outstanding under the Credit Facility at a weighted average interest rate of 1.09%. No amounts were
borrowed during 2009. During 2008, the Company drew down and repaid the Credit Facility in the amount of
$35,000.
The Credit Facility provides for interest at either a floating rate, which will be a base rate, or a Eurocurrency rate
equal to the London Inter-Bank Offered Rate (“LIBOR”) for the relevant term, plus an applicable margin. The
base rate will be the higher of the lender’s base rate or one-half of one percent above the Federal Funds Rate. The
Credit Facility is also subject to 0.15% per annum unused fee payable quarterly. During 2010, 2009 and 2008,
the Company incurred $87, $0 and $49 in interest, respectively, and $294, $304 and $303 in an unused line fee,
respectively. Interest payments and unused line fees are classified as interest income, net in the accompanying
consolidated statements of operations.
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