Nutrisystem 2005 Annual Report Download - page 20

location of stores, advertising expenditures, franchise renewal criteria or express violations of franchise
agreements. Our Slim and Tone business may encounter compliance problems from time to time and material
disputes may arise with one or more Slim and Tone franchisees. Accordingly, Slim and Tone’s failure to comply
with applicable franchise laws and regulations, or disputes with Slim and Tone franchisees, could have a material
adverse effect on our results of operations, financial condition and growth strategy.
Provisions in our certificate of incorporation may deter or delay an acquisition of us or prevent a change
in control, even if an acquisition or a change of control would be beneficial to our stockholders.
Provisions of our certificate of incorporation (as amended) may have the effect of deterring unsolicited
takeovers or delaying or preventing a third party from acquiring control of us, even if our stockholders might
otherwise receive a premium for their shares over then current market prices. In addition, these provisions may
limit the ability of stockholders to approve transactions that they may deem to be in their best interests.
Our certificate of incorporation (as amended) permits our Board of Directors to issue preferred stock
without stockholder approval upon such terms as the Board of Directors may determine. The rights of the holders
of our common stock will be junior to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our
outstanding common stock. The issuance of a substantial number of preferred shares could adversely affect the
price of our common stock.
Risks Related to Our Industry
The weight loss industry is subject to adverse publicity, which could harm our business.
The weight loss industry receives adverse publicity from time to time, and the occurrence of such publicity
could harm us, even if the adverse publicity is not directly related to us. In the early 1990s, our predecessor
businesses were subject to extremely damaging adverse publicity relating to a large number of lawsuits alleging
that the NutriSystem weight loss program led to gall bladder disease. This publicity was a factor that contributed
to the bankruptcy of our predecessor businesses in 1993. More recently, our predecessor businesses were
severely impacted by significant litigation and damaging publicity related to their customers’ use of fen-phen as
an appetite suppressant, which the FDA ordered withdrawn from the market in September 1997. The significant
decline in business resulting from the fen-phen problems caused our predecessor businesses to close all of their
company-owned weight loss centers.
Congressional hearings about practices in the weight loss industry have also resulted in adverse publicity
and a consequent decline in the revenue of weight loss businesses. Future research reports or publicity that are
perceived as unfavorable or that question certain weight loss programs, products or methods could result in a
decline in our revenue. Because of our dependence on consumer perceptions, adverse publicity associated with
illness or other undesirable effects resulting from the consumption of our products or similar products by
competitors, whether or not accurate, could also damage customer confidence in our weight loss program and
result in a decline in revenue. Adverse publicity could arise even if the unfavorable effects associated with
weight loss products or services resulted from the user’s failure to use such products or services appropriately.
Our industry is subject to governmental regulation that could increase in severity and hurt results of
operations.
Our industry is subject to federal, state and other governmental regulation. For example, some advertising
practices in the weight loss industry have led to investigations from time to time by the FTC and other
governmental agencies. Many companies in the weight loss industry, including our predecessor businesses, have
entered into consent decrees with the FTC relating to weight loss claims and other advertising practices. We
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