Nutrisystem 2010 Annual Report Download - page 18

Freight and Fulfillment. In 2010, more than 95% of our orders were shipped by one third party, United
Parcel Service, or UPS, and 100% of our order fulfillment was handled by another third party, Ozburn-Hessey
Logistics, or OHL. Should UPS or OHL be unable to service our needs for even a short duration, our revenue and
business could be harmed. Additionally, the cost and time associated with replacing UPS or OHL on short notice
would add to our costs. Any replacement fulfillment provider would also require startup time, which could cause
us to lose sales and market share.
Internet, Networking and Call Center. Our business also depends on a number of third parties for Internet
access, networking and call center services, and we have limited control over these third parties. Should our
network connections go down, our ability to fulfill orders would be delayed. Further, if our website or call center
becomes unavailable for a noticeable period of time due to Internet or communication failures, our business
could be adversely affected, including harm to our brand and loss of sales.
Therefore, we are dependent on maintaining good relationships with these third parties. The services we
require from these parties may be disrupted by a number of factors associated with their businesses, including the
following:
• labor disruptions;
• delivery problems;
• financial condition of operations;
• internal inefficiencies;
• equipment failure;
• natural or man-made disasters; and
• with respect to our food suppliers, shortages of ingredients or United States Department of Agriculture
(“USDA”) and United States Food and Drug Administration (“FDA”) compliance issues.
We may be subject to claims that our personnel are unqualified to provide proper weight loss advice.
Some of our counselors for our weight management program do not have extensive training or certification
in nutrition, diet or health fields and have only undergone the training they receive from us. We may be subject to
claims from our customers alleging that our personnel lack the qualifications necessary to provide proper advice
regarding weight loss and related topics. We may also be subject to claims that our personnel have provided
inappropriate advice or have inappropriately referred or failed to refer customers to health care providers for
matters other than weight loss. Such claims could result in damage to our reputation and divert management’s
attention from our business, which would adversely affect our business.
We may be subject to health-related claims from our customers.
Our weight loss program does not include medical treatment or medical advice, and we do not engage
physicians or nurses to monitor the progress of our customers. Many people who are overweight suffer from
other physical conditions, and our target consumers could be considered a high-risk population. A customer who
experiences health problems could allege or bring a lawsuit against us on the basis that those problems were
caused or worsened by participating in our weight management program. For example, our predecessor
businesses suffered substantial losses due to health-related claims and related publicity. Currently, we are neither
subject to any such allegations nor have we been named in any such litigation. However, if we were, we would
defend ourselves against such claims. Defending ourselves against such claims, regardless of their merit and
ultimate outcome, would likely be lengthy and costly, and adversely affect our results of operations. Further, our
general liability insurance may not cover claims of these types.
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