Nutrisystem 2003 Annual Report Download - page 5

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PART I
ITEM 1. BUSINESS
Background
NutriSystem, Inc., (a Delaware corporation), together with its subsidiaries (NutriSystem or the Company),
provides weight loss programs and distributes pre-packaged foods. The NutriSystem diet program was originally
developed by the Companys predecessor businesses, including Nutri/System L.P. and Nutri/System Direct, L.L.C.
(collectively, the Predecessor Businesses), that operated through company-owned and franchised weight loss centers.
Currently, there are no Company-operated centers and the Company terminated its last franchise agreements in 2003.
There are 24 independent center-based distributors who operate without franchise agreements (Case Distributors). In
1998, the Company initiated Nutri/System Direct, L.L.C., a marketing program using independent commissioned
representatives. In late 1999, the Company began selling directly to the consumer through the Internet and by telephone.
In 2001, the Company began selling foods through QVC, a television shopping network. The Companys pre-packaged
foods are now sold to weight loss program participants directly via the Internet and telephone (the Direct channel) and
through independent commissioned representatives (the Field Sales channel), Case Distributor weight loss centers (the
Case Distributor channel) and QVC. In September 2000, the Company changed its name from nutrisystem.com inc. to
Nutri/System, Inc. and in 2003, the Company changed its name to NutriSystem, Inc.
Since the NutriSystem businesses began in 1972, the businesses have operated in various organizational and
legal structures, and were subject to a bankruptcy proceeding in 1993, which was discharged in 1994. In August 1999,
Ansama, a non-operating public corporation, entered into an Asset Purchase Agreement to acquire the operating assets
and certain liabilities of Nutri/System L.P. for $3 million and a Stock Exchange and Purchase Agreement to acquire the
beneficial interests in NutriSystem Direct, L.L.C. for $400,000 and 17,500,000 shares of Ansama common stock.
Ansama was subsequently merged into the Company and the Company assumed the Asset Purchase Agreement and the
Stock Exchange and Purchase Agreement. NutriSystem became a publicly traded company in October of 1999.
On August 25, 2000, the Company acquired certain assets of the Sweet Success line of diet meal replacement
products. In December 2000, the Company determined that it would be unable to obtain the funding required to rebuild
the Sweet Success brand, and it discontinued sales of the products in the second quarter of 2001. In December 2002, the
Company sold the intellectual property associated with Sweet Success. Sweet Success is reflected in the Consolidated
Financial Statements as a discontinued operation.
In December 2002, HJM Holdings LLC and NewSpring Ventures, L.P. collectively acquired 58.4% of the
outstanding shares of common stock from existing stockholders effecting a change in control of the Company. The
Company was not a party to the transaction.
Industry
Weight loss is a challenge for a significant portion of the American population. According to a study published
in the October 2002 Journal of the American Medical Association, approximately 127 million Americans are
overweight. Furthermore, according to the National Center for Health Statistics, the incidence of obesity in the United
States, as defined by federal guidelines, increased between 1980 and 2000 from 15% to 31% of the adult population.
Many medical studies have documented a link between obesity and a variety of health concerns. With obesity rates
escalating, Americans are increasingly at risk for diseases such as diabetes, certain cancers and various forms of heart
disease that may be linked to obesity.
The weight loss industry consists of a wide variety of diet foods and meal replacement bars and shakes, appetite
suppressants, nutritional supplements, pharmaceutical products and weight loss programs. The domestic market for
weight loss programs, diet foods and diet related books and other information, excluding vitamins, supplements and
minerals, was estimated by Market Data Enterprises, Inc. to be in excess of $7 billion in the year 2000.
Products and Services
For 30 years, the NutriSystem name has been recognized as a leader in the weight loss industry. By telephone
and through its web site, www.nutrisystem.com, NutriSystem provides a comprehensive weight management program,
consisting of support for dieters and a pre-packaged food program. Online support for dieters includes individualized
diet and exercise plans, online counseling, support groups, bulletin boards, online classes and chat rooms. Trained