Nutrisystem 2006 Annual Report Download - page 21

Development of our Slim and Tone business may have a ne
g
ative impact on our core business.
D
eve
l
opment o
f
our S
li
man
d
Tone
b
us
i
ness may requ
i
re us to
di
vert some o
f
our cap
i
ta
l
resources an
d
mana
g
ement’s time awa
y
from our wei
g
ht mana
g
ement business. Since our Slim and Tone franchisees ar
e
independent third parties with their own financial ob
j
ectives, actions taken b
y
them, includin
g
breaches of thei
r
contractua
l
o
bli
gat
i
ons, may
h
ave negat
i
ve
i
mpact on
b
ot
h
our S
li
man
d
Tone an
d
Nutr
i
System
b
ran
d
s. Furt
h
er,
if we have to deal with disputes with our Slim and Tone franchisees re
g
ardin
g
operations and other contractual
issues, our mana
g
ement’s attention could be diverted which could have an adverse affect on our core business.
O
ur
S
lim and Tone subsidiary is subject to franchise law and regulations that govern its status as a
franchisor and re
g
ulate aspects of its franchise relationships. Slim and Tone’s ability to develop facilities
and to en
f
orce contractual r
ig
hts a
g
a
i
nst
i
ts
f
ranch
i
sees may be adversely a
ff
ected by these laws an
d
r
egulations, which could cause its franchise revenue to decline and adversely affect our growth strategy
.
Sli
man
d
Tone
i
ssu
bj
ect to
f
e
d
era
l
an
d
state
l
aws an
d
regu
l
at
i
ons,
i
nc
l
u
di
ng t
h
e regu
l
at
i
ons o
f
t
h
eFe
d
era
l
T
ra
d
e Comm
i
ss
i
on (t
h
e “FTC”), as we
ll
as s
i
m
il
ar aut
h
or
i
t
i
es
i
n
i
n
di
v
id
ua
l
states an
d
ot
h
er
j
ur
i
s
di
ct
i
ons,
i
n
connection with the offer, sale and termination of Slim and Tone franchises and the re
g
ulation of the franchisor-
f
ranc
hi
see re
l
at
i
ons
hi
p. Fa
il
ure to comp
l
yw
i
t
h
t
h
ese
l
aws cou
ld
su
bj
ect
b
ot
h
S
li
man
d
Tone an
d
us to
li
a
bili
ty to
f
ranc
hi
sees an
d
to
fi
nes or ot
h
er pena
l
t
i
es
i
mpose
dbyg
overnmenta
l
aut
h
or
i
t
i
es. In a
ddi
t
i
on, we ma
yb
ecom
e
sub
j
ect to liti
g
ation with, or other claims filed with state or federal authorities b
y
, Slim and Tone franchisee
s
b
ase
d
on a
ll
ege
d
un
f
a
i
r tra
d
e pract
i
ces,
i
mp
li
e
d
covenants o
f
goo
df
a
i
t
h
an
df
a
i
r
d
ea
li
ng, payment o
f
roya
l
t
i
es,
l
ocation of stores, advertisin
g
expenditures, franchise renewal criteria or express violations of franchise
ag
reements. Our Slim and Tone business ma
y
encounter compliance problems from time to time and material
di
sputes may ar
i
se w
i
t
h
one or more S
li
man
d
Tone
f
ranc
hi
sees. Accor
di
ng
l
y, S
li
man
d
Tone’s
f
a
il
ure to comp
l
y
with applicable franchise laws and re
g
ulations, or disputes with Slim and Tone franchisees, could have a material
a
dverse effect on our results of operations, financial condition and
g
rowth strate
gy.
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 chan
g
e of control would be beneficial to our stockholders
.
P
rovisions of our certificate of incorporation (as amended) ma
y
have the effect of deterrin
g
unsolicite
d
takeovers or dela
y
in
g
or preventin
g
a third part
y
from acquirin
g
control of us, even if our stockholders mi
g
h
t
o
t
h
erw
i
se rece
i
ve a prem
i
um
f
or t
h
e
i
rs
h
ares over t
h
en current mar
k
et pr
i
ces. In a
ddi
t
i
on, t
h
ese prov
i
s
i
ons ma
y
l
imit the abilit
y
of stockholders to approve transactions that the
y
ma
y
deem to be in their best interests
.
O
ur cert
ifi
cate o
fi
ncorporat
i
on (as amen
d
e
d
) perm
i
ts our Boar
d
o
f
D
i
rectors to
i
ssue pre
f
erre
d
stoc
k
without stockholder approval upon such terms as the Board of Directors ma
y
determine. The ri
g
hts of the holders
o
f our common stock will be
j
unior to, and ma
y
be adversel
y
affected b
y
, the ri
g
hts of the holders of an
y
pre
f
erre
d
stoc
k
t
h
at may
b
e
i
ssue
di
nt
h
e
f
uture. T
h
e
i
ssuance o
f
pre
f
erre
d
stoc
k
cou
ld h
ave t
h
ee
ff
ect o
f
ma
ki
ng
it more difficult for a third part
y
to acquire, or of discoura
g
in
g
a third part
y
from acquirin
g
,ama
j
orit
y
of our
o
utstandin
g
common stock. The issuance of a substantial number of preferred shares could adversel
y
affect the
pr
i
ce o
f
our common stoc
k
.
R
isks Related to Our Industr
y
The weight loss industry is subject to adverse publicity, which could harm our business.
T
he wei
g
ht loss industr
y
receives adverse publicit
y
from time to time, and the occurrence of such publicit
y
could
h
arm us, even if the adverse publicity is not directly related to us. In the early 1990s, our predecessor businesses wer
e
su
bj
ect to extreme
l
y
d
amag
i
ng a
d
verse pu
bli
c
i
ty re
l
at
i
ng to a
l
arge num
b
er o
fl
awsu
i
ts a
ll
eg
i
ng t
h
at t
h
e Nutr
i
Syste
m
wei
g
ht loss pro
g
ram led to
g
all bladder disease. This publicit
y
was a factor that contributed to the bankruptc
y
of ou
r
predecessor businesses in 1993. More recently, our predecessor businesses were severely impacted by significan
t
li
t
i
gat
i
on an
dd
amag
i
ng pu
bli
c
i
ty re
l
ate
d
to t
h
e
i
r customers’ use o
ff
en-p
h
en as an appet
i
te suppressant, w
hi
c
h
t
h
eFD
A
o
rdered withdrawn from the market in September 1997. The si
g
nificant decline in business resultin
g
from the fen-phen
problems caused our predecessor businesses to close all of their company-owned weight loss centers.
15