Nutrisystem 2014 Annual Report Download - page 23

Our success is also dependent on our food innovation including maintaining a robust array of food items and
improving the quality of existing items. If we do not continually expand our food items or provide customers
with items that are desirable in taste and quality, our business could be harmed.
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 in use at that time 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phen as an appetite suppressant, which the FDA ordered withdrawn from the market in September 1997.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 is 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. Certain federal and state agencies,
such as the Federal Trade Commission (the “FTC”), regulate and enforce such laws relating to advertising,
disclosures to consumers, privacy, consumer pricing and billing arrangements and other consumer protection
matters. A determination by a federal or state agency, or a court, that any of our practices do not meet existing or
new laws or regulations could result in liability, adverse publicity, and restrictions of our business operations.
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. In October 2009, the FTC published its revised Guides concerning the Use of Endorsements and
Testimonials in Advertising which now requires us to use a statement as to what the typical weight loss a
customer can expect to achieve on our program when using a customer’s weight loss testimonial in advertising.
Federal and state regulation of advertising practices generally, and in the weight loss industry in particular, may
increase in scope or severity in the future, which could have a material adverse impact on our business.
Other aspects of our industry are also subject to government regulation. For example, the labeling and
distribution of food products, including dietary supplements, are subject to strict USDA and FDA requirements
and food manufacturers are subject to rigorous inspection and other requirements of the USDA and FDA, and
companies operating in foreign markets must comply with those countries’ requirements for proper labeling,
controls on hygiene, food preparation and other matters. If federal, state, local or foreign regulation of our
industry increases for any reason, then we may be required to incur significant expenses, as well as modify our
operations to comply with new regulatory requirements, which could harm our operating results. Additionally,
remedies available in any potential administrative or regulatory actions may include product recalls and requiring
us to refund amounts paid by all affected customers or pay other damages, which could be substantial.
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