Nutrisystem 2005 Annual Report Download - page 16

We rely on third parties to provide us with adequate food supply and certain fulfillment, internet,
networking and call center services, the loss of any of which could cause our revenue, earnings or
reputation to suffer.
Food Manufacturers. We rely solely on third-party manufacturers to supply all of the food and other
products we sell, the top three of which supplied approximately 60% of our food in 2005. We currently have a
written contract with only two of these manufacturers and therefore are not assured of an adequate supply or
pricing on a long-term basis. If we are unable to obtain sufficient quantity, quality and variety of food and other
products in a timely and low cost manner from our manufacturers, we will be unable to fulfill our customers’
orders in a timely manner, which may cause us to lose revenue and market share or incur higher costs, as well as
damage the value of the NutriSystem brand.
Fulfillment. Approximately 90% of our order fulfillment is handled by a third party, Ozburn-Hessey
Logistics, or OHL. Should 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 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 Centers. 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
centers become 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;
• 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 are dependent on the QVC Shopping Network for a significant percentage of revenue.
In 2005, sales of our products through our relationship with the QVC Shopping Network accounted for 7%
of our revenue. For 2006, we have a one year contractual agreement with QVC with an automatic extension
unless either party decides not to extend the agreement and a minimum level of sales has not been achieved for
the year. Under the QVC agreement, QVC controls when and how often our products and services are offered
on-air, and we are not guaranteed any minimum level of sales or transactions. QVC has the exclusive right to
promote our products using direct response television programs other than our own infomercials during the
contract term and on a non-exclusive basis for two years thereafter. If QVC elects not to renew the agreement or
reduces airtime for promoting our products, our operating profits will suffer and we will be prohibited from
selling our products through competitors of QVC for six months after the termination of the agreement.
We may be subject to claims that our personnel are unqualified to provide proper weight loss advice.
Most 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
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