-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C6GirnXonfRt9kbEJyM1GFKQBLDdEEK4sLPGm1YZToymes9D7zlg8KqEk1/YKqSY A2fRunY8TqHdn3iOCSHRFQ== 0000950115-99-001643.txt : 19991220 0000950115-99-001643.hdr.sgml : 19991220 ACCESSION NUMBER: 0000950115-99-001643 CONFORMED SUBMISSION TYPE: 10-12G PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19991217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NUTRISYSTEM COM INC CENTRAL INDEX KEY: 0001096376 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 233012204 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12G SEC ACT: SEC FILE NUMBER: 000-28551 FILM NUMBER: 99776885 BUSINESS ADDRESS: STREET 1: 202 WELSH RD CITY: HORSHAM STATE: PA ZIP: 19044 MAIL ADDRESS: STREET 1: 202 WELSH RD CITY: HORSHAM STATE: PA ZIP: 19044 10-12G 1 INITIAL STATEMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 nutrisystem.com inc. ------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 23-3012204 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 202 Welsh Road, Horsham, PA 19044 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 215-706-5300 Securities to be registered pursuant to Section 12(b) of the Act Title of each class Name of each exchange on which to be so registered each class is to be registered ------------------- ------------------------------ None None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value ----------------------------- (Title of Class) INDEX Page ---- Item 1. Business...................................................... 1 Item 2. Financial Information......................................... 19 Item 3. Properties.................................................... 28 Item 4. Security Ownership of Certain Beneficial Owners and Management.............................................. 28 Item 5. Directors and Executive Officers.............................. 30 Item 6. Executive Compensation........................................ 32 Item 7. Certain Relationships and Related Transactions................ 34 Item 8. Legal Proceedings............................................. 37 Item 9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters............... 38 Item 10. Recent Sales of Unregistered Securities....................... 39 Item 11. Description of Registrant's Securities to be Registered....... 40 Item 12. Indemnification of Directors and Officers..................... 41 Item 13. Financial Statements and Supplementary Data................... 42 Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... 42 Item 15. Financial Statements and Exhibits............................. 43 (i) Item 1. Business. (a) General Development of Business On September 27, 1999, Ansama Corp. ("Ansama"), a Nevada corporation formed in March 1988 with no active business operations, stockholders' equity of approximately $72,235 at December 31, 1998 and approximately 200 stockholders of record, merged (the "Merger") with and into nutrisystem.com inc. (the "Company") for the purpose of reincorporating as a Delaware corporation under the name "nutrisystem.com inc." Ansama formed the Company as a Delaware corporation for this purpose in August 1999. As part of the Merger, each of the 2,039,337 outstanding shares of Common Stock of Ansama was converted into the right to receive one share of the Company's Common Stock. As a further consequence of the Merger, the Company succeeded to the rights of Ansama under: (i) an August 16, 1999 Asset Purchase Agreement (the "Asset Agreement") with Nutri/System L.P., a Delaware limited partnership (the "Partnership"), whereby Ansama agreed to purchase specified assets of the Partnership, including the right to the name "NutriSystem," and assume specified liabilities of the Partnership, for $3,000,000 in cash and (ii) an August 16, 1999 Stock Exchange and Purchase Agreement (the "Stock Agreement") with HPF Holdings, Inc., Brian D. Haveson, Joseph H. Boileau, Kathleen E. Simone, Deborah A. Gallen and Frederick C. Tecce, whereby Ansama agreed to acquire all of the beneficial interests of NutriSystem Direct, L.L.C. ("NSDirect"), a Pennsylvania limited liability company, for $400,000 in cash and the issuance of 17,500,000 shares of Common Stock. See Item 7 hereof. On September 30, 1999, the Company completed the sale of 4,363,985 shares of its Common Stock at a price of $1.00 per share in a partial closing under a private placement (the "Private Placement") for which Pennsylvania Merchant Group acted as placement agent and, immediately thereafter, the Company and the other parties to the Asset Agreement and the Stock Agreement consummated the transactions contemplated by such agreements. The Company used a portion of the proceeds of the Private Placement to satisfy its obligations under the Asset Agreement and issued 17,500,000 shares of Common Stock pursuant to the Stock Agreement; the remainder of such proceeds were used to pay the Company's expenses incurred in connection with the Private Placement and for working capital. On October 13, 1999, the Company completed the closing of the Private Placement by the sale for $1.00 per share of an additional 3,273,415 shares of its Common Stock, all of the proceeds which are being used for working capital. As a result of the foregoing transactions, as of the date hereof the Company has 27,176,737 outstanding shares of Common Stock. As used herein, unless the context otherwise requires, the term the "Company" refers to nutrisystem.com inc. and its subsidiaries and their respective predecessors. "NutriSystem(R)" and "Nutrihance(R)" are the registered trademarks of the Company. -1- (b) Financial Information About Industry Segments The Company operates as a single industry segment within the meaning of Statement of Financial Accounting Standards No. 131. (c) Narrative Description of Business Overview By offering an interactive, Internet based solution to the $33 billion weight loss industry, the Company has transferred its business model from weight loss centers to homes via its Internet Web site, "www.nutrisystem.com" (the "Web site"), providing dieters with a friendly and timesaving program. The Company leverages the advantages of online commerce with specific focus on all aspects of weight loss. The increasing percentage of Internet users who shop for healthcare products online puts the Company in an optimal position for rapid and profitable growth. Traditional weight loss programs offered at physical retail centers are inherently expensive, requiring up-front program fees that range from $60 to $600. Participants attend mandatory weekly on-site meetings and are required to purchase products and supplements. This traditional form of weight loss has lost its luster and now represents an archaic business model. The Internet allows the Company to be the low-cost provider in the weight loss industry, offering free participation and products at value pricing. Without the constraints and overhead costs of the bricks and mortar weight loss program, the Company is able to expand its client base, offering a time-conscious and private experience, while promoting quality and value to the consumer. The Company's online program offers dieters a comprehensive and anonymous approach to dieting without sacrificing any program benefits. By providing individualized calorie plans, portion-controlled food, one-on-one counseling, behavior modification, exercise education and maintenance plans at the participant's convenience, the online program meets the client's every need. Comprehensive weight related information is offered in a participatory manner, allowing clients to customize their weight loss programs and personalize their meal and exercise plans. The primary tool in promoting weight loss in the nutrisystem.com program is pre-packaged, portion-controlled food. The food is specially formulated and prepared using a state-of-the-art heating process. It requires no refrigeration, making storage and shipping costs negligible. With over 100 shelf-stable food selections, the products offered by the Company are particularly suited for e-commerce. Because orders can be placed 24 hours a day, seven days a week through the Web site, customers find themselves having the convenience of timely product selection and service fulfillment. Once the Company achieves sufficient sales volume to realize economies of scale, the Company believes that its high inventory turnover, lack of investment in expensive retail centers and substantially lower warehousing expenses should give it significant advantages relative to traditional weight loss centers. -2- Industry Background Traditional Weight Loss Retailing. The traditional weight loss industry is characterized by classroom style diet firms that charge initiation fees and have mandatory weekly meetings. The two major classroom style diet firms are Jenny Craig Inc., with approximately 800 owned and franchised centers in North America, Australia and New Zealand, and Weight Watchers International, which was recently sold to a private European investment firm by H.J. Heinz Company. On average, a client spends 10 weeks in a program and loses 1 to 2 1/2 pounds per week. Overweight individuals typically join a weight loss program for health and cosmetic reasons and often stop and then re-enroll in a program several times. The weight loss industry is characterized by a broad array of products, services and supplements as well as rapid changes in trends and the broad availability of diet literature and philosophies. The Company believes that the business model of the traditional weight loss industry results in high overhead costs that are passed on to clients through program fees ranging from $60 to $600. Recent studies reported in the Journal of the American Medical Association indicate that approximately 100 million Americans are overweight and spend in excess of $33 billion per year on weight control products and services. A recent report released by Tufts University found that 63% of men and 55% of women over the age of 25 are obese or overweight, the highest rate ever recorded. As result, more Americans are now at risk for diabetes, cancer and heart disease among other conditions. These statistics contribute to the rising health care costs to treat obesity, which are now estimated at $70 billion per year. The Company believes its Web site provides an attractive commercial medium to reach the weight loss industry. e-Commerce. The Internet has become an important alternative to traditional media, enabling millions of consumers to seek information, communicate with one another and execute commercial transactions electronically. According to an industry research firm, the number of World Wide Web users is expected to grow from approximately 100 million in 1998 to approximately 320 million by 2002. The Internet is distinct from traditional media in that it offers real-time access to dynamic and interactive content and instantaneous communication among users. These characteristics, combined with the fast growth of Internet users and usage, have created a powerful, rapidly expanding direct marketing and sales channel. Advertisers can target specific demographic groups, measure the effectiveness of advertising campaigns and revise them in response to real-time feedback. Similarly, the Internet offers online merchants the ability to reach a large audience and operate with lower costs and greater economies of scale, while offering consumers greater selection, lower prices and increased convenience compared to conventional retailing. Cyber Dialogue, Inc. estimates that the number of adults in the United States searching for on-line health and medical information will grow to approximately 30 million in the year 2000, and they will spend approximately $150 billion for all types of health-related products and services off-line. Accordingly, the Company believes that companies that establish a clear brand identity as a trusted source of online consumer healthcare information and services will -3- have a significant opportunity to capitalize on multiple revenue sources, including direct-to-consumer advertising and e-commerce. Strategy The Company's online marketing strategy is to attract clients through informative up-to-date content, online counseling sessions, chat rooms and personalized exercise programs, coupled with its NutriSystem food offerings. The Company believes its Web site, which became operational on October 15, 1999, attracts users who are health conscious and have the disposable income to participate in weight loss activities but who are faced with time restrictions from busy work and home schedules. The Web site is attractive to those who would rather participate privately in an online weight loss program due to the sensitivity of the subject matter or those who have a dislike for the mandatory group session approach used by other weight loss firms. The Company plans to capitalize on the $33 billion weight loss industry by combining the well-established NutriSystem name and proven weight loss program with the Internet as the medium of communications with its customers and potential customers. The Company intends to facilitate this goal using the following strategies: Leverage Strong Brand Name Recognition through Strategic Alliances. The more than 30 years of experience of the Company's predecessors in the weight loss industry under the NutriSystem name conveys strong brand recognition and should substantially facilitate the Company's ability to garner valuable advertising space and form strategic relationships. To exploit the Company's brand name recognition and generate traffic to its online store, the Company has focused its strategic alliances into three categories: (i) Internet Portals: AOL.com, Lycos.com, Snap.com, About.com, AltaVista.com, Excite.com and WebCrawler.com, (ii) Health Content Sites: drkoop.com., HeathCentral.com and OnHealth.com and (iii) Wedding Content Sites: TheKnot.com, ModernBride.com and WeddingChannel.com. Encourage Frequent Visits, Providing a Truly Interactive, Informative Experience. The Company's Web site provides a highly participatory and enjoyable experience. Unlike other sites which offer read only content, the Company's Web site provides a virtual environment in which the user calculates his/her health status, communicates in "real time" with a personal counselor in the state-of-the-art counseling room and even evaluates his/her progress using the Daily Diary. The Web site also features weight loss product information and other health related content provided by nutritionists and health experts, as well as live discussions and lectures that encourage the user to talk to the experts. Secure Customer Loyalty by Delivering a Compelling Value Proposition. The Company offers value through the use of innovative technology, broad product selection, high quality content, a high level of customer service, competitive pricing and personalized services. Dieters are offered an interactive and anonymous approach to dieting without sacrificing the specifics of a successful program. Each customer is provided with an individualized weight loss program as well as one-on-one behavior modification counseling and exercise -4- program development. The Company offers over 100 food items that require no refrigeration, with a cost to the consumer of less than $8.00 per day before shipping and handling for breakfast, lunch, dinner and snacks. New food items are added on a quarterly basis to ensure variety. Orders can be placed 24 hours a day and will be shipped within the next 24 hours. Customers make person to person inquiries by talking live to the Company's Online Help Consultant or by calling the Customer Support toll-free number. Generate Incremental Revenue. In addition to the products and services offered as part of its weight loss program, the Company plans to derive revenue from the sale of nutritional supplements and exercise equipment. The Company currently markets a line of vitamins and supplements under the name "Nutrihance," and plans to expand this line in the first quarter of 2000 to include brand name vitamins and supplements. The Company also intends to offer exercise equipment as well as other diet and health-related products and accessories beginning in the third quarter of 2000. Broaden Potential Client Base. The Internet provides the Company with an excellent distribution channel to attract overweight men. With over 48% of overweight men trying to lose weight at any given time, the general program design is intended to capitalize on the male population that is traditionally reluctant to attend formal weight loss programs. Because of the anonymous nature and personalized approach of the program, the Company believes it can increase the percentage of male clients who currently participate in structured weight loss programs from 5% to 30%. Continue to Service Dieters Without Internet Access. Through the Company's NutriSystem Direct Program, independent representatives offer the Company's products and services directly to clients or potential customers who do not have Internet access. This approach offers these clients a convenient and cost effective approach to the NutriSystem weight loss program. The nutrisystem.com Web site The Company's nutrisystem.com Web site is designed to be informative, helpful and encouraging, allowing customers to learn easily about, discover and purchase weight loss products and other complementary products such as exercise and nutritional aids. Management believes the Company's program is intuitive and convenient to use and facilitates completion of the ordering process with a minimum of customer effort. Customers entering the Web site can, in addition to ordering weight loss products, read a weekly newsletter on dietary trends and other featured products, sign up for one-on-one counseling sessions, create individual calorie and exercise plans, search a "before and after" photo library and check order status. In contrast to the "classroom style" approach used by traditional diet centers, the consumer can accomplish the weight loss experience in the comfort and convenience of his or her own home or office. -5- PERSONAL MEAL PLAN - The Company takes all the thinking, calculating and measuring out of dieting. The Company's plan offers a wide variety of convenient and appealing portion-controlled meals specifically designed to provide the client with the important vitamins, minerals and other nutrients the body needs without the excess fat and calories. Each week, the client may choose from a variety of meals that can be delivered directly to the client's home or office. INNOVATIVE COUNSELING - The counseling room allows a client to meet and chat with a personal counselor over the Internet in real time. The one-on-one counseling is a private session, where the client can discuss his or her progress and receive support. A client is assigned a counselor who stays with the client throughout the program, allowing the client to work with someone the client can learn to trust. If a client has a question between sessions, or prefers to take a more independent approach, the client can communicate with a counselor by e-mail and receive personalized responses to questions and concerns. FREE PERSONAL PROFILE - The Personal Profile takes information provided by the client and identifies his or her overall weight status. The profile charts the client's present weight and body mass index. The profile also provides the client with a recommended calorie level and meal plan based on the NutriSystem plan and gives an estimate in chart form of how long it will take to lose the desired weight. WEEKLY NEWSLETTER - The Weekly Newsletter is a free distribution that is e-mailed to clients once a week and provides the latest information on diet aids, fads and the current exercise craze. Experts on topics such as childhood obesity and the role of diet in preventing disease are featured. Other topics include fashion tips and a Dear NutriSystem column. DISCUSSION AND LECTURE ROOM - Free lectures and discussions provide the client with information from experts in topics ranging from weight loss to women's and men's health as well as other articles describing beauty and fashion issues and trends. A client is able to listen to and participate in these monthly sessions that are hosted by book authors, doctors and well-known personalities. A client is able to ask the experts questions and receive immediate answers. Clients can also read how others are dealing with the same issues. PERSONALIZED EXERCISE PROGRAMS - A counselor designs an exercise program that complements the client's specific physical condition, hobbies and lifestyle. During the weekly counseling sessions, a client receives information on how to walk effectively, which exercise equipment works best and how to use everyday activities to help increase endurance. Counselors help individuals design their own exercise programs, set realistic goals and measure their progress. -6- TESTIMONIALS - "BEFORE AND AFTER" LIBRARY - Real photos of actual clients are displayed on the Web site with brief testimonials as to their success using the Company's weight loss program. TRULY INTERACTIVE SITE - The Company's Web site is participatory in nature. For example, if clients choose to take full advantage of the Web site, they can log in their daily food intake and physical activity and the Web site calculates the caloric intake and the calories burned and recommends ways to improve the clients' progress. The Web site is user friendly and provides motivational tools to keep a client focused and on track with his or her program. Strategic Relationships The Company believes it can enhance its new customer acquisition efforts, increase purchases by current customers and expand brand recognition through strategic alliances with major online and traditional content and service providers. Alliances with major Internet portal sites will build brand recognition, increase market share and attract customers. In furtherance of this strategy, the Company has successfully negotiated strategic alliances with providers of leading Internet sites including AOL.com, Snap.com, Lycos.com, Excite.com, WebCrawler.com and Netscape.com. The Company has teamed up with TheKnot.com, one of the world's busiest content-based Web sites for wedding planning, to be the exclusive weight loss brand advertised on its weight management center and has an agreement with drkoop.com to be the premier sponsor of and the exclusive weight loss program advertised on drkoop.com's Weight Management Center. The Internet-based alliances generally provide that the Company will be the premier online weight loss program on the provider's Web site, with the exclusive right to place banner advertisements and integrated links to the nutrisystem.com Web site. These pages feature the nutrisystem.com branded link that allows users to click through to the Company's Web site. As part of these arrangements, the Company typically purchases the right to display its banners and hyperlinks, often in conjunction with specified search keywords such as "diet" and "weight loss." To direct traffic to its Web site, the Company created a number of inbound links that connect directly to "www.nutrisystem.com" from other sites on the Web. The Company carefully evaluates each potential alliance in order to ensure that the associated fees are cost effective in terms of customer acquisition, potential revenue to be generated, level of exclusivity and brand exposure. Advertising and Marketing The Company believes that the use of multiple marketing channels reduces reliance on any one source of customers, lowers customer acquisition costs and maximizes brand awareness. The marketing strategy is to promote, advertise and increase its brand visibility and acquire new customers through multiple channels and through various advertising and marketing media, including: (1) Internet Advertising, (2) Affiliate Network Programs, (3) Traditional Advertising Media and (4) Direct Marketing. -7- Internet Advertising The following table lists the Company's Internet advertising agreements and the number of impressions provided for under each agreement. In most instances, the number of impressions is "guaranteed" during a specific contract term, and the term of the agreement is generally extended until that number of impressions is provided. Number of Portal/Web site Impressions --------------- ----------- AOL.com including Netscape.com 132,000,000 AltaVista.com 1,259,000 ModernBride.com 11,900,000 drkoop.com 15,952,000 HealthCentral.com 3,700,000 TheKnot.com 15,000,000 Excite.com 22,248,000 OnHealth.com 11,842,000 About.com 944,000 Lycos.com 24,885,000 WeddingChannel.com 2,400,000 Snap.com 2,200,000 Affiliate Network Programs Affiliate programs provide the Company with an efficient way to market products and services online. Under these agreements, partners agree to display the Company's advertising for a percentage of the sales that originate on the affiliate's site or pay-for-click. The Company currently has an affiliate relationship with Microsoft's Link Exchange and is in negotiations with other affiliate networks. Traditional Advertising Media The Company will use a combination of television, radio and print advertising to complement the Internet campaign. The television commercials will feature a "Before and After" campaign, a strategy that has been proven effective throughout the weight loss industry. With the input of a leading advertising agency, a campaign is being developed to capitalize on the highly recognized brand name while introducing the "New" nutrisystem.com online weight loss program. The national radio campaign will use testimonials featuring prominent radio personalities who will participate in the NutriSystem program, lose weight and then report via live spots regarding their success. Direct Marketing A direct mail campaign is being developed as a companion to the media advertising and will include mailings to the existing database of over 1,000,000 historical customers of the Company's predecessors. -8- Customer Service The Customer Service area of the Company's Web site contains extensive information regarding shopping, ordering and returning products. Shipping charges, payment options and other policies are explained to the customer. Help buttons on every page of the site take customers to the specific customer service topic they desire. Customers can track the current status of their orders and can obtain shipper-tracking numbers. Because the concept of Internet retail is new to many people, the Company offers live, interactive help using NetAgent software and offers telephone assistance by customer service agents to answer questions about products and the shopping process. Detailed product information is available, including descriptions and photographs. To purchase products, customers simply click on a button to add products to their virtual shopping baskets. Customers can add and subtract products from their shopping baskets as they browse, prior to making a final purchase decision, just as in a physical store. To execute orders, customers click on the "check out" button and are prompted to supply shipping and credit card details online. For convenience, the Company enables customers to store information on the Company's secure server, thereby avoiding the need to re-enter this information when making future purchases. The Company automatically confirms each order by e-mail within minutes after the order is placed. The Company offers a money back return policy. Behind The Scenes Warehousing and Fulfillment. Products are shipped from the Company's 27,000 square foot warehouse located in Horsham, Pennsylvania. Orders placed by 6:00 p.m. Eastern Time are processed and shipped via UPS or RPS the same day. Infrastructure, Operations and Technology. The Company's technology infrastructure provides for continuous availability of its online service. All of the critical components of the system are redundant with locations in Horsham, Pennsylvania and Allentown, Pennsylvania, allowing the Company to withstand unexpected component failure and to undergo maintenance or upgrades. The Company's operation is dependent on the ability to maintain its computer and telecommunications systems in effective working order and to protect its systems against damage from fire, natural disaster, power loss, telecommunications failure or similar events. Systems administrators and network managers of a third party under contract to the Company also monitor the Company's servers and execute backups. The servers have access to auxiliary power during outages. Systems are copied to backup tapes daily, which in turn are sent to the Company for offsite storage. Database and Web servers are redundant and operate using clustering technology for effective load balancing and fault tolerance. Regular capacity planning allows for the quick upgrade of existing hardware and integration of new hardware to react quickly to a rapidly expanding member base and increased traffic to the Company's Web site. Key content management and e-commerce components are designed, developed and deployed by the Company's in-house technology group. -9- Several layers of security are employed to protect data transmission and prevent unauthorized access. All production servers are behind firewalls and do not allow for outside access at the operating systems level. Strict password management and physical security measures are followed. E-commerce transactions and browser-based administration screens employ secure sockets layer encryption to secure data transmitted between clients and servers. Credit card information captured during e-commerce transactions is never shared with outside parties. Information Gathering. Internet software technology allows the Company to gather detailed information about the purchase and the customer. For example, the Company can track the source of each sale in order to identify those Web sites on which the Company advertises that are generating the most business. This information, combined with customer profile information gathered throughout the ordering process, creates a powerful direct marketing database which is utilized to generate repeat business. Competition The market for Internet services and products is relatively new, intensely competitive and rapidly changing. The number of Web sites on the Internet competing for consumers' attention has proliferated and the Company expects that competition will continue to intensify. The Company competes, directly and indirectly, for advertisements, viewers, members and content providers with the following categories of companies: o Traditional weight loss franchise centers including Jenny Craig and Weight Watchers. o Self-administered weight loss regimens and physician-monitored programs. o Online services or Web sites targeted to weight conscious persons and health enthusiasts, such as eDiets.com and Cyberdiet.com. The Company believes its products, services and Web site content compare favorably with those of its competitors, due to the fact many of them have committed to relatively expensive multi-site retail operations that make it difficult for them to leverage their overhead. Intellectual Property The Company pursues the registration of its trademarks and service marks in the United States. The Company also has rights to several Internet domain names, including "nutrisystem.com." Employees The Company believes its success depends to a significant extent on its ability to attract, motivate and retain highly skilled vision-oriented management and employees. To this end, -10- the Company focuses on incentive programs for its employees and fosters a corporate culture which is challenging, rewarding and fun. As of November 30, 1999, the Company had 46 full-time employees and one part-time employee and considers its employee relations satisfactory. Other Expenditures for research and development activities are not material to the Company's business, nor has compliance with federal, state or local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, had any material effect upon the capital expenditures, earnings or competitive position of the Company. Financial Information About Foreign and Domestic Operations and Export Sales The Company does not have material foreign operations, and has no export sales. Risk Factors No Operating History; Anticipated Losses. The Company was incorporated in August 1999, acquired the Partnership and NSDirect in September 1999 and launched its Web site on October 15, 1999. Accordingly, the Company has no operating history upon which an evaluation of the Company and its prospects can be based. The Company anticipates that it will incur significant additional costs to fund increased marketing initiatives, additional strategic alliances, enhancements to the Company's Web site and technological and hardware improvements. As a result of these costs, the Company anticipates significant operating losses for the foreseeable future. To the extent that such costs do not result in appropriate revenue increases, the Company's business, financial condition, results of operations or prospects may be materially adversely affected. Need for Additional Financing. The capital resources required to implement the Company's business plan are significant. The Company anticipates that it will continue to need additional financing to accomplish its business plan. There can be no assurance that any such financing will be available on terms acceptable to the Company or at all. Competition. Both the e-commerce market and the weight loss business are highly competitive. Since the introduction of e-commerce to the Internet, the number of e-commerce Web sites competing for customer attention has increased rapidly. The Company expects future competition to intensify given the relative ease with which new Web sites can be developed. The Company believes that the primary competitive factors in e-commerce are brand recognition, site content, ease of use, price, fulfillment speed, customer support and reliability. The Company believes that its success will depend heavily upon its ability to provide a compelling and satisfying weight loss experience for its customers. The Company believes that other factors that will affect the Company's success include the Company's ability to attract experienced marketing, technology, operations and management talent. The nature of the Internet as an electronic marketplace which may, among other things, facilitate competitive entry and comparison shopping, may render it inherently more price competitive -11- than traditional weight loss formats. The increase of competitiveness among online weight loss businesses may result in reduced operating margins, loss of market share and a diminished brand franchise. Management of Growth. Future growth is expected to place a significant strain on the Company's managerial, operational and technical resources. The Company expects its operating expenses and staffing levels to increase substantially in the future. To manage its anticipated growth, the Company must expand its operational and technical capabilities and manage its employee base while effectively administering multiple relationships with various third parties. There can be no assurance that the Company will be able to manage the expansion of its operations effectively. Any failure of the Company to implement cohesive management and operating systems, add resources on a cost effective basis or manage the Company's expansion could have a material adverse effect on the Company's business, financial condition, results of operations or prospects. Potential Fluctuations in Quarterly Results. The Company expects that it will experience significant fluctuations in its future quarterly operating results due to a variety of factors, many of which are outside of the Company's control. The Company believes that factors that may adversely affect the Company's quarterly operating results include: (i) the Company's ability to retain existing customers, attract new customers at a steady rate and maintain customer satisfaction; (ii) the Company's ability to acquire product and to manage fulfillment operations; (iii) the Company's ability to maintain gross margins in its existing business and in future product lines and markets; (iv) the development, announcement or introduction of new Web sites, services and products by the Company and its competitors; (v) price competition and (vi) the Company's ability to upgrade and develop its systems and infrastructure. Consequently, the Company believes that period-to-period comparisons of the Company's operating results will not necessarily be meaningful and should not be relied upon as an indication of future performance. The Company's future quarterly operating results from time to time may not meet the expectations of securities analysts or investors, which may have a material adverse effect on the market price of the Common Stock. Control by Principal Stockholders. The Company's directors and their affiliates own beneficially approximately 63.0% the Company's outstanding Common Stock. As a result, the Company's directors and their affiliates will, collectively, be able to exercise control over all matters requiring stockholder approval, including the election of all directors and the approval of significant corporate transactions. This ownership may have the effect of delaying or preventing a change in control of the Company. Dependence upon Strategic Alliances. The Company relies on strategic alliances with third-party Web sites and content providers to attract users to its Web site. The Company has entered into various agreements with companies to attract users from numerous other Web sites or online service providers which are described in more detail in "Strategic Relationships." The Company believes that such alliances will result in increased traffic to the Company's Web site. The Company's ability to generate revenues from e-commerce may depend on the increased traffic, purchases, advertising and sponsorships that the Company expects to generate through such strategic alliances. There can be no assurance that these agreements will be maintained beyond their initial terms or that additional third-party -12- agreements will be available to the Company on acceptable commercial terms or at all. In addition, significant strategic alliance agreements have traditionally been exclusive arrangements. The inability to enter into new, and to maintain any one or more of its existing strategic alliances could have a material adverse effect on the Company's business, financial condition, results of operations or prospects. Risks of the Internet as a Medium for Commerce. Consumer use of the Internet as a medium for commerce is a recent phenomenon and is subject to a high level of uncertainty. The Internet may not prove to be a viable commercial marketplace because of inadequate development of the necessary infrastructure, such as reliable network backbones, or complementary services, such as high speed modems and security procedures for financial transactions. The viability of the Internet or its viability for commerce may prove uncertain due to delays in the development and adoption of new standards and protocols (for example, the next generation Internet Protocol) to handle increased levels of Internet activity or due to increased government regulation or taxation. While the number of Internet users has been rising, the Internet infrastructure may not expand fast enough to meet the increased levels of demand. The increased use of the Internet as a medium for commerce raises concerns regarding Internet security, reliability, pricing, accessibility and quality of service. If use of the Internet does not continue to grow, or if the necessary Internet infrastructure or complementary services are not developed to support effectively growth that may occur, the Company's business, financial condition, results of operations or prospects could be materially adversely affected. In addition, the nature of the Internet as an electronic marketplace, which may, among other things, facilitate competitive entry, comparison shopping and advertising revenue supported business models, may render it inherently more competitive than conventional retailing formats. Rapid Technological Change. To remain competitive, the Company must continue to enhance and improve the responsiveness, functionality and features of its Web site. The Internet and the e-commerce industry are characterized by rapid technological change, changes in user and customer requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices that could render the Company's Web site and proprietary technology and systems obsolete. The Company's success will depend, in part, on its ability to license leading technologies useful in its business, enhance its existing services, develop new services and technology that address the increasingly sophisticated and varied needs of its existing and prospective customers and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of a Web site and other proprietary technology entails significant technical, financial and business risks. Further, the adoption of new Internet, networking or telecommunications technologies may require the Company to devote substantial resources to modify and adapt its services. There can be no assurance that the Company will successfully implement new technologies or adapt its Web site, proprietary technology and transaction-processing systems to customer requirements or emerging industry standards. If the Company is unable, for technical, legal, financial or other reasons, to adapt in a timely manner in response to changing market conditions or customer requirements, such failure -13- could have a material adverse effect on the Company's business, financial condition, results of operations or prospects. Security Risks. Public concern over Internet security has been, and may continue to be, a hindrance to mass market commercial use of the Internet. Despite the implementation of network security measures by the Company, its infrastructure is potentially vulnerable to computer break-ins and similar disruptive problems caused by its customers or others. Computer viruses, break-ins or other security problems could lead to misappropriation of proprietary information and interruptions, delays or cessation in service to the Company's customers. Any computer break-in could affect consumer confidence in the security of the Company and could seriously damage its business. Moreover, until more comprehensive security technologies are developed, the security and privacy concerns of existing and potential customers may hinder the growth of the Internet as a mass market medium for commerce. Risk of System Failure or Inadequacy. The Company's operations will be dependent on its ability to maintain its computer and telecommunications equipment in effective working order and to protect its systems against damage from fire, natural disaster, power loss, telecommunications failure or similar events. In addition, the growth of the Company's customer base may strain or exceed the capacity of its computer and telecommunications systems and lead to degradations in performance or systems failure. From time to time, the Company may experience capacity constraints and failure of its information systems which could result in decreased levels of service delivery or interruptions in service to its customers. While the Company will continually review and seek to upgrade its technical infrastructure and provide for system redundancies and backup power to limit the likelihood of systems overload or failure, any damage, failure or delay that causes interruptions in the Company's operations could have a material adverse effect on the Company's business, financial condition, results of operations or prospects. Risks Associated with Domain Names. The Company currently holds various Internet domain names, including "www.nutrisystem.com." Currently, the acquisition and maintenance of domain names is regulated by governmental agencies and their designees. For example, in the United States, the National Science Foundation has appointed Network Solutions, Inc. as the current registrar for the ".com," ".net" and ".org" generic top-level domains. The regulation of domain names in the United States and in foreign countries will change in the near future. Such changes in the United States will include a transition from the current system to a system which is controlled by a non-profit corporation and the possible creation of additional top-level domains. Requirements for holding domain names will also be affected. As a result, there can be no assurance that the Company will be able to acquire or maintain relevant domain names in all countries in which it conducts business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. The Company, therefore, may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of the Company's trademarks and other proprietary rights. Any such inability could have a material adverse effect on the Company's business, financial condition, results of operations or prospects. -14- Government Regulation and Legal Uncertainties. E-commerce is new and rapidly changing, and federal and state regulation relating to the Internet and e-commerce is evolving. Currently, there are few laws or regulations directly applicable to the access to the Internet or to e-commerce on the Internet. Due to the increasing popularity of the Internet, it is possible that laws and regulations may be enacted with respect to the Internet, covering issues such as user privacy, pricing, taxation, content, copyrights, distribution, antitrust and quality of products and services. In addition, the rapid growth of e-commerce may trigger the development of more stringent consumer protection laws. The adoption of such laws or regulations could reduce the rate of growth of the Internet, which could potentially decrease the usage of the Company's Web site or could otherwise have a material adverse effect on the Company's business. In addition, applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy is uncertain. The vast majority of such laws were adopted prior to the event of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. It should also be noted that several telecommunications carriers have requested that the Federal Communications Commission ("FCC") regulate telecommunications over the Internet. Due to the increasing use of the Internet and the requirements it has placed on the current telecommunications infrastructure, telephone carriers have requested that the FCC regulate Internet service providers and online service providers and impose access fees on those providers. If the FCC imposes access fees, the costs of using the Internet could increase dramatically and result in the reduced use of the Internet as a medium for commerce. A reduction in the use or availability of the Internet could have a material adverse effect on the Company's business, financial condition, results of operations or prospects. Sales and Other Taxes. The Company, in accordance with current industry practice, does not collect sales or other taxes in respect of shipments of goods into states other than Pennsylvania. However, one or more states or foreign countries may seek to impose sales or other tax collection obligations on out-of-jurisdiction companies such as the Company which engage in e-commerce. A successful assertion by one or more states or foreign countries that the Company should collect sales or other taxes on the sale of merchandise could have a material adverse effect on the Company's business, financial condition, results of operations or prospects. Recent federal legislation limits the imposition of state and local taxes on Internet-related sales. In 1998, Congress passed the Internet Tax Freedom Act which places a three-year moratorium on state and local taxes on (i) Internet access, unless such tax was already imposed prior to October 1, 1998 and (ii) discriminatory taxes on electronic commerce. There can be no assurance that Congress will renew this legislation in 2001. If Congress does not renew this legislation, state and local governments would be free to impose taxes on electronically purchased goods which could have a material adverse effect on the Company's business, financial condition, results of operations or prospects. Risks of Possible Extreme Volatility of Market Price of Common Stock; Limited Trading Market. The market price of the Common Stock may be extremely volatile for many reasons, including: (i) actual or anticipated variations in the Company's revenues and operating results; -15- (ii) announcements of the development of improved technology; (iii) the use of new sales formats by the Company or its competitors; (iv) changes in the financial forecasts by securities analysts; (v) new conditions or trends in the Internet and e-commerce and (vi) general market conditions. Recently, market prices for Internet-based companies have experienced extreme price and volume fluctuations, particularly after initial public offerings. These fluctuations are often unrelated or disproportionate to the operating performance of those companies and may not be sustainable. Further, market prices of the Common Stock in the future may bear no traditional relationship to the Company's financial condition or performance. An active trading market does not exist for the Common Stock, and there can be no assurance that such a market will develop or how liquid that market might become. Anti-takeover Effects of Certificate of Incorporation, By-laws and Delaware Law Provisions; Possible Issuance of Preferred Stock. The ownership by the Company's directors and their affiliates of approximately 63.0% of the Company's outstanding Common Stock gives them voting control of the Company and has the effect of preventing a change in control of the Company without their consent. In addition, the Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock without any further vote or action by the stockholders, and to determine the price, rights, preferences, privileges and restrictions, including voting rights, if any, of such shares. Since the Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to those of the Common Stock, the rights of the holders of the Common Stock are subject to, and may be adversely affected by, the rights of the holders of any such Preferred Stock. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. Further, the provisions of the Company's Certificate of Incorporation, including provisions of Delaware law, could have the effect of delaying or preventing a change in control of the Company. Year 2000 Preparation. Software failures due to calculations using Year 2000 dates are a known risk. The Company is currently evaluating and managing the financial and operating risks associated with this problem. Problems with Year 2000 software could result in system failures or miscalculations causing disruptions of operations, including, among others, a temporary inability to process transactions, send invoices or engage in similar normal business activities. To date, the Company has experienced very few problems related to Year 2000 testing and those requiring immediate modification have been fixed. The Company does not believe that there is material exposure to the Year 2000 issue with respect to its electronic commerce transaction processing and online activity since these systems correctly define the Year 2000. The Company is currently conducting an analysis to determine the extent to which others have Year 2000 issues. These include the Company's major suppliers' systems, including the systems of credit card processors, telecommunications providers, product distributors and companies with whom the Company does business. The Company is currently unable to predict the extent to which the Year 2000 issue will affect suppliers, or the extent to which the Company would be vulnerable to its suppliers' failure to remediate any -16- Year 2000 issues on a timely basis. The failure of a major supplier subject to the Year 2000 issue to convert its systems on a timely basis or a conversion that is incompatible with the Company's systems could have a material adverse effect on the Company. In addition, most of the purchases from the Company's online sales are made with credit cards. As such, operations may be materially adversely affected to the extent customers are unable to use their credit cards due to Year 2000 issues that are not rectified by their credit card providers. Cost of Food and Services. Because a large percentage of the Company's revenues will be derived from sales of the Company's food products, increases in the cost of food and food services could have a material adverse impact on the Company. Seasonality. The Company's revenues will be affected by a number of factors, including the volume and timing of customer leads, success of marketing and advertising programs, success of introductions of new services and products, activities of competitors and the ability of the Company to penetrate new markets. The Company's business is seasonal with revenues generally decreasing in the quarter ending December 31 and during the summer months. The Company may also choose to reduce prices or to increase spending in response to competition or to pursue new market opportunities, all or any of which may materially adversely affect the Company's results of operations. Reliance on Certain Suppliers. The Company carries inventory and is improving its warehouse to enhance its inventory, but the Company relies to a large extent on rapid fulfillment from vendors. The Company has no long-term contracts with any of its vendors that guarantee the availability of merchandise, the continuation of particular payment terms or the extension of credit limits. There can be no assurance that the Company's current vendors will continue to sell merchandise to the Company on current terms or that the Company will be able to establish new or extend current vendor relationships to ensure acquisition of merchandise in a timely and efficient manner and on acceptable commercial terms. If the Company were unable to develop and maintain relationships with vendors that would allow it to obtain sufficient quantities of merchandise on acceptable commercial terms, its business, prospects, financial condition and results of operations would be materially adversely affected. Risks Associated with Entry into New Business Areas. The Company may choose to expand its operations by developing new Web sites, promoting new or complementary products or sales formats, expanding the breadth and depth of products and services offered or expanding its market presence through relationships with third parties. There can be no assurance that the Company would be able to expand its efforts and operations in a cost-effective or timely manner or that any such efforts would increase overall market acceptance. Furthermore, any new business or Web site launched by the Company that is not favorably received by consumers could damage the Company's reputation. Expansion of the Company's operations in this manner would also require significant additional expenses and development, operations and editorial resources, and would strain the Company's management, financial and operational resources. The lack of market acceptance of such efforts or the Company's inability to generate satisfactory revenues from such expanded services or products to offset their cost could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. -17- Dependence on Trademarks and Proprietary Rights. The Company regards its copyrights, service marks, trademarks, trade secrets and similar intellectual property as critical to its success, and relies on trademark and copyright law and trade secret protection to protect its proprietary rights. The Company pursues the registration of its trademarks and service marks in the United States. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which the Company's products and services are made available online. There can be no assurance that third parties will not take actions that might materially adversely affect the value of the Company's proprietary rights or reputation, which could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate or that third parties will not infringe or misappropriate the Company's copyrights, trademarks, trade secrets and similar proprietary rights. In addition, there can be no assurance that other parties will not assert infringement claims against the Company. -18- Item 2. Financial Information. The following historical selected financial data are derived from the Company's audited and unaudited Consolidated Financial Statements and those of its predecessors, Nutri/System L.P. and NutriSystem Direct, L.L.C. (the "Predecessor Businesses"). The historical selected financial data as of September 30, 1999 and for the nine months ended September 30, 1999 and 1998 have been derived from the unaudited Consolidated Financial Statements of the Company. In the opinion of management, the Company's unaudited financial statements include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company's results of operations and financial condition for the periods presented. The Company's results of operations for the nine months ended September 30, 1999 and 1998 are not necessarily indicative of the results of operations to be expected for the full fiscal year or for future periods. The operating data and the balance sheet data set forth below should be read in conjunction with the Company's Consolidated Financial Statements and related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this document. Summary Consolidated Financial Data (in thousands, except per share data)
Year Ended Nine Months Ended December 31 September 30 -------------------------------------------------------------- ---------------------- 1994 1995 1996 1997 1998 1998 1999 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Statement of Operations Data Revenues (a): Food Sales $ 43,531 $ 44,972 $ 39,000 $ 23,698 $ 8,415 $ 6,606 $ 6,346 Other Revenues 11,829 9,948 8,030 22,173 908 745 579 Total Revenues 55,360 54,920 47,030 45,871 9,323 7,351 6,925 Cost of revenues 57,379 49,217 45,823 47,686 7,101 5,571 5,014 Other Items 1,125 8,781(e) 367(b) (1,828)(c) --- --- 8,260(d) Other operating expenses 2,694 2,995 2,318 2,873 2,332 2,133 2,242 Operating loss (5,838) (6,073) (1,478) (2,860) (110) (353) (8,591) Net loss $ (5,875) $ (6,095) $ (163) $ (1,598) $ (42) $ (141) $ (8,390) Net loss per share: Basic $ (0.36) $ (0.37) $ (0.01) $ (0.08) $ (0.00) $ (0.01) $ (0.43) Diluted $ (0.36) $ (0.37) $ (0.01) $ (0.08) $ (0.00) $ (0.01) $ (0.43) Weighted Average Shares Outstanding: Basic 16,282,781 16,282,781 16,282,781 19,539,337 19,539,337 19,539,337 19,539,337 Diluted 16,282,781 16,282,781 16,282,781 19,539,337 19,539,337 19,539,337 19,539,337
-19-
Year Ended Nine Months Ended December 31 September 30 -------------------------------------------------------------- ---------------------- 1994 1995 1996 1997 1998 1998 1999 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Total Assets $ 14,900 $ 10,146 $ 11,056 $ 4,826 $ 2,924 $ 3,687 $ 6,822 Long-term liabilities 314 1,045 1,678 76 53 55 44 Minority interest 8,144 2,704 2,350 878 807 661 --- Equity 981 326 2,163 565 523 426 2,482
- ------------------- (a) In 1997, the Company sold its owned weight loss centers to Complete Wellness Weight Management, Inc. As a result, beginning in 1998, the Company experienced a significant decrease in revenues associated with food sales and weight loss programs. Revenues generated from Company-owned weight loss centers in 1997 were $33,484. (b) In 1996, the Company sold some weight loss centers at a loss of $367. (c) In 1997, the Company sold its weight loss centers (see note (a)) at a loss of $5,347. In addition, in 1997, the Company received proceeds from its insurance carrier associated with products liability litigation which generated a net gain of $7,175. (d) A compensation charge of $8,260 was recorded in the nine months ended September 30, 1999. (e) In 1995, the Company disposed of its exercise weight loss centers at a loss of $8,292. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except share data) BACKGROUND nutrisystem.com inc., a Delaware corporation, was formed to operate the leading authoritative World Wide Web site for weight loss and related health issues by providing a well-known diet program that incorporates pre-packaged meals and a complete diet philosophy, in the convenience of one's own home. The Company's predecessors, including Nutri/System L.P. and NutriSystem Direct, L.L.C. (collectively, the "Predecessor Businesses") have historically operated through company-owned and franchised weight loss centers. Independent franchise weight loss center owners operate using the Company's trade name, trademarks and programs for which a royalty is paid to the Company. The Company's pre-packaged foods are sold to program participants through the Internet, independent distribution and the franchised weight loss centers. -20- The Company plans to capitalize on the $33 billion weight loss industry by combining the well-established NutriSystem name and proven weight loss program with the Internet as the medium of communication using the following strategies: o Leverage the strong brand name recognition through an aggressive marketing campaign using traditional and Internet marketing channels. On the Internet, the Company has focused its strategic alliances into three categories: (1) Internet portals; (2) health content sites; and (3) wedding content sites. o Encourage frequent visits by providing a truly interactive, informative experience. o Offer a compelling value to the customer, including broad product selection, excellent counseling and customer service and competitive pricing. o Broaden the potential customer base by attracting male clients who traditionally are reluctant to attend formal weight loss programs. o Generate incremental revenue through the sale of nutritional supplements and exercise equipment. o Servicing dieters without Internet access through the Company's NutriSystem Direct program. See additional discussion in Item 1 to this Form 10. The Company has incurred significant losses and, as of September 30, 1999, had an accumulated deficit of $11,497. For the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1999, the Company generated net losses of $1,598, $42 and $8,390, respectively. The Company intends to invest heavily in marketing and promotion, strategic alliances, Web site development and technology, and development of its administrative organization. In addition, as discussed in Note 1 to the Consolidated Financial Statements, the Company acquired the Predecessor Businesses for cash of $3,400 plus 17,500,000 shares of Common Stock. In order to fund the planned investment and the Company's purchase of the Predecessor Businesses, the Company initiated a private placement of Common Stock which raised proceeds of approximately $7,637 of which $964 and $3,400, respectively, were recorded in cash and receivables as of September 30, 1999. The balance of the proceeds from the private placement was received on October 13, 1999. Future investment is expected to be funded through the sale of additional equity securities in private and/or public offerings in 2000. Achieving profitability depends upon the Company's ability to: (1) raise the necessary funds to finance the planned marketing program and technology investment and (2) generate and sustain substantially increased revenue levels. There can be no assurance that the Company will be able to raise the necessary capital or generate sufficient revenues to achieve or sustain profitability in the future. -21- RESULTS OF OPERATIONS The following table illustrates for the periods indicated the historical selected financial data, derived from the Company's audited and unaudited Consolidated Financial Statements and those of the Predecessors Businesses, for the periods indicated. The results of operations for the nine months ended September 30, 1999 and 1998 are not necessarily indicative of the results of operations to be expected for the full fiscal year or for future periods.
Year Ended Nine Months Ended December 31 September 30 ------------------------------------ ----------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (Unaudited) REVENUES: Food sales $ 39,000 $ 23,698 $ 8,415 $ 6,606 $ 6,346 Franchise royalty fees 2,421 1,766 633 514 346 Weight-loss programs 4,676 17,058 -- -- -- Other 933 3,349 275 231 233 --------- --------- --------- --------- --------- 47,030 45,871 9,323 7,351 6,925 --------- --------- --------- --------- --------- COSTS AND EXPENSES: Cost of revenues 45,823 47,686 7,101 5,571 5,067 General and administrative 1,392 1,056 2,220 2,069 2,003 Depreciation and amortization 787 1,235 79 57 54 Other 139 582 33 7 185 Disposal of weight-loss centers 367 5,347 -- -- -- Compensation expense -- -- -- -- 8,260 Net gain on insurance settlement -- (7,175) -- -- -- --------- --------- --------- --------- --------- 48,508 48,731 9,433 7,704 15,516 --------- --------- --------- --------- --------- Operating loss (1,478) (2,860) (110) (353) (8,591) INTEREST EXPENSE (39) (104) (7) (5) (7) --------- --------- --------- --------- --------- Loss before minority interest (1,517) (2,964) (117) (358) (8,598) MINORITY INTEREST 1,354 1,366 75 217 208 --------- --------- --------- --------- --------- Net loss $ (163) $ (1,598) $ (42) $ (141) $ (8,390) ========= ========= ========= ========= ========= BASIC LOSS PER SHARE $(0.01) $(0.08) $(0.00) $(0.01) $(0.43) ====== ====== ======= ====== ====== DILUTED LOSS PER SHARE $(0.01) $(0.08) $(0.00) $(0.01) $(0.43) ====== ====== ======= ====== ======
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Net Sales. The Company's net sales decreased $426, or approximately 5.8%, from $7,351 for the nine months ended September 30, 1998 to $6,925 in the interim period ended September 30, 1999. The decrease was attributable primarily to a decline in food sales ($260) and franchise royalty fees ($168). Costs and Expenses. Cost of sales decreased $504 for the nine months ended September 30, 1999 versus the comparable period in the prior year. As a percentage of revenues, cost of sales decreased from 76% to 72% primarily due to a shift in mix toward higher margin NutriSystem Direct sales and away from franchise food sales. General and administrative expenses decreased $66, or approximately 3%, to $2,003 for the nine months ended September 30, 1999. During the nine months ended September 30, 1999, the Company recorded a -22- non-cash compensation expense of $8,260 associated with equity interests granted to an executive pursuant to the merger transaction (see discussion in Note 1 to the Consolidated Financial Statements). Pro Forma Income Tax Expense. The Predecessor Businesses were flow-through entities that were not subject to federal or state income taxes and, consequently, none have been reflected in the Company's financial statements for the historical periods prior to September 30, 1999. For purposes of pro forma presentation, due to the recurring losses incurred by the Company and management's assessment of realization of the related tax deduction, no pro forma tax benefit would be recorded during the years ended December 31, 1996, 1997 or 1998 or the nine months ended September 30, 1998 or 1999. Effective with the merger on September 30, 1999, the Company became subject to corporate level income taxes. No income tax benefit on the excess of the tax basis of Company's assets over the financial reporting carrying amount has been recorded based on management's assessment that the net deferred tax asset was not realizable through future taxable earnings. Net Loss. The Company's net loss increased to $8,390 in the interim period ended September 30, 1999 versus $141 in the nine months ended September 30, 1998, primarily due to the compensation expense charge of $8,260 discussed above that was recorded in 1999. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Net Sales. The Company's net sales decreased $36,548 from $45,871 during the year ended December 31, 1997 to $9,323 for the year ended December 31, 1998. The decrease resulted from reduction in food sales and revenues from weight loss programs primarily attributable to the sale or disposal of all of the Company-owned weight loss centers. Management elected to dispose of the assets of this business because of a sharp revenue decline. The revenue decline was triggered by adverse publicity associated with a drug combination formerly incorporated in the weight loss program that was shown to cause health problems. In addition, franchise royalty fees declined from $1,766 in 1997 to $633 in 1998 due to a reduction in the percentage royalty fee and a decline in the number of franchise locations. Weight loss program fees, which amounted to $17,058 in revenue in 1997, were eliminated before 1998 as the Company-owned centers were disposed of. Other revenues declined from $3,349 in 1997 to $275 in 1998 as a result of discontinued sales of the drug combination mentioned above. Costs and Expenses. Consistent with the decline in revenues, cost of sales decreased $40,585 from $47,686 during the year ended December 31, 1997 to $7,101 for the year ended December 31, 1998. As a percentage of revenues, cost of sales was 76% during the year ended December 31, 1998 versus 104% in 1997. The 1997 cost of sales includes additional costs associated with opening and upgrading various Company-owned centers. General administrative expenses increased $1,164, or approximately 110%, from $1,056 during the year ended December 31, 1997 to $2,220 during the year ended December 31, 1998. The increase is primarily due to a shift in the focus of corporate support activity in 1998 away from the Company-owned centers (record in cost of revenue) to general and administrative activity as the Company-owned centers were closed. Depreciation and amortization expense was $1,235 in 1997. Depreciation and amortization expense decreased to $79 in 1998 as the Company had -23- written off substantially all of its property and equipment in 1997 in connection with the sale of the weight loss centers. Other Items. The results for the year ended December 31, 1997 include a loss of $5,347 on the sale of the Company's weight loss centers. In addition, in 1997, the Company recorded a gain, net of legal costs of $2,325, of $7,175 on a settlement with an insurance company for coverage associated with product liability litigation relating to the drug combination discussed above. See additional discussion of these items in the Notes to the Consolidated Financial Statements. Interest Expense. Net interest expense decreased $97 from $104 in the year ended December 31, 1997 to $7 in the year ended December 31, 1998. This decrease resulted from a lower average borrowings outstanding under the credit facility compared to 1998. Net Loss. The Company's net loss decreased from $1,598 in the year ended December 31, 1997 to $42 in the year ended December 31, 1998. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net Sales. The Company's net sales decreased $1,159, or approximately 2.5%, from $47,030 during the year ended December 31, 1996 to $45,871 for the year ended December 31, 1997. The decrease in revenues resulted from a reduction in food sales of $15,302 to $23,698 due to a decline in the number of franchise centers and the disposal during 1998 of the Company-owned centers. The decline in food sales was offset in part by an increase in revenues from weight loss programs from $4,676 in 1996 to $17,058 in 1997 due to sharply higher enrollment fees charged to customers entering the weight loss programs. Other revenues increased from $933 in 1996 to $3,349 in 1997 as a result of charges for the drug combination subsequently discontinued. Costs and Expenses. Cost of sales increased $1,863, or approximately 4.1%, from $45,823 during the year ended December 31, 1996 to $47,686 during the year ended December 31, 1997. As a percentage of revenues, cost of sales was 104% during the year ended December 31, 1997 versus 97% in 1996. The increase is due to additional costs associated with opening and upgrading various Company-owned centers in 1997. General and administrative expenses decreased $336, or approximately 24%, from $1,392 during the year ended December 31, 1996 to $1,056 during the year ended December 31, 1997. The decrease was primarily due to reduced head count. Depreciation and amortization expense increased from $787 in 1996 to $1,235 in 1997 due to capital additions associated with the establishment of the Company's weight loss centers. Other expense increased from $139 in 1996 to $582 in 1997 primarily due to higher non-food sales. Other Items. The results for the years ended December 31, 1997 and 1996 include losses of $5,347 and $367, respectively, on the sale of the Company's weight loss centers. In addition, the Company recorded a gain, net of legal costs of 2,325, of $7,175 on a settlement with an insurance company for coverage associated with product liability litigation. See additional discussion of these items in the Notes to the Consolidated Financial Statements. -24- Interest Expense. Net interest expense increased from $39 in the year ended December 31, 1996 to $104 in the year ended December 31, 1997 due primarily to an increase in average borrowings outstanding under the credit facility to fund capital additions in late 1996 and 1997. Net Loss. The Company's net loss increased from $163 in the year ended December 31, 1996 to $1,598 in the year ended December 31, 1997. The increase resulted in part due to the Company purchasing a portion of the minority shareholders' interest, which resulted in a decrease in the allocation of the losses to the minority interest in the accompanying statement of operations. Also, see discussion of the other specific factors contributing to the increase in the net loss discussed above. LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA On September 30, 1999, the Company initiated a private placement of 7,637,400 shares of Common Stock at $1 per share. The offering raised net proceeds of approximately $7,637, of which $964 and $3,400, respectively, were recorded in cash and receivables as of September 30, 1999. The balance of the proceeds from the private placement was received on October 13, 1999. At September 30, 1999, the Company had net working capital of $1,772. Cash and cash equivalents were $1,047. Also included in working capital is a payable for the Company's purchase of the Predecessor Businesses. The Company's principal source of liquidity is the cash obtained from the private placement transaction. The Company currently has no available credit facilities to fund operating cash flow or investment opportunities. During 1998 and the nine months ended September 30, 1999, the Company has generated small cash flow deficits from operations which were funded from existing cash balances. Cash requirements in 1997 and 1996 were funded from existing credit facilities and capital contributions. Net cash used in operating activities was $278 and $302 for the nine month period ended September 30, 1999 and the year ended December 31, 1998, respectively, and was primarily attributable to the net losses generated in those periods, as well as changes in working capital balances. The net cash provided by operations in 1997 was attributable primarily to net changes in working capital balances. Net cash used by investing activities was $0, $180 and $2,849 for the nine month period ended September 30, 1999 and the years ended December 31, 1998 and 1997, respectively, and consisted of capital expenditures. The 1997 additions of $2,849 were incurred primarily in connection with the establishment of the weight loss centers. Net cash provided by financing activities was $964 for the nine month period ended September 30, 1999, and consisted entirely of net proceeds from a private placement of equity securities. Under marketing agreements, the Company is required to pay aggregate minimum fixed fees of $637, $4,285 and $319 during the quarter ending December 31, 1999, and the years ending December 31, 2000 and 2001, respectively. The Company expects to fund its -25- 1999 payment obligations under its marketing agreements, as well as other advertising and web site development costs, from the proceeds of the completed private placement. Future cash obligations are expected to be funded from financing activities which may include additional private or public offerings of equity securities. As of September 30, 1999, the Company's principal commitments consisted of obligations under its marketing agreements and operating leases. Although nutrisystem.com has no material commitments for capital expenditures, it anticipates substantial increases in its capital expenditures consistent with anticipated growth in operations, infrastructure and personnel. FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS The Company expects to experience significant fluctuations in its future quarterly operating results due to a variety of factors, many of which are outside the Company's control. These issues are discussed more fully in the Risk Factors section in Item 1 of this Form 10. FINANCING AND CAPITAL STRUCTURE Since inception in 1972, the Nutri/System businesses have operated in various organizational and legal structures. In August 1999 Ansama, a non-operating public shell corporation and the sole stockholder of the Company, entered into: (1) an Asset Purchase Agreement to acquire the operating assets and certain liabilities of Nutri/System L.P. for $3,000 and (2) a Stock Exchange and Purchase Agreement to acquire the beneficial interest in NutriSystem Direct, L.L.C. for $400 and 17,500,000 shares of Ansama Common Stock. Ansama was subsequently merged into the Company. In order to fund the Company's resulting cash obligations of $3,400 under the Asset Purchase and Stock Exchange and Purchase Agreements and the planned marketing program and technology investment, the Company completed a private placement of 7,637,400 shares of Common Stock in September and October 1999, which raised $7,637. Future operating needs and investment are expected to be funded through the sale of additional equity securities in private and/or public offerings. There can be no assurance that the Company will be able to raise the necessary capital or generate sufficient revenues to achieve or sustain profitability in the future. The Company has no credit facilities available to fund working capital or investment needs. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has no material interest-bearing assets or liabilities, nor does the Company have any current exposure for changes in foreign currency exchange rates. The Company does not use derivatives or other financial instruments. The Company's financial instruments consist of cash and receivables. The market values of these financial instruments approximate book value. INFLATION The financial statements are presented on a historical cost basis and do not fully reflect the impact of prior years' inflation. While the U.S. inflation rate has been modest for several years, inflation issues may impact the Company's business in the future. The ability to pass -26- on inflation costs is an uncertainty due to general economic conditions and competitive situations. YEAR 2000 PREPARATION Software failures due to calculations using Year 2000 dates are a known risk. The Company is currently evaluating and managing the financial and operating risks associated with this problem. Problems with Year 2000 software could result in system failures or miscalculations causing disruptions of operations, including, among others, a temporary inability to process transactions, send invoices or engage in similar normal business activities. To date, the Company has experienced very few problems related to Year 2000 testing and those requiring immediate modification have been fixed. The Company does not believe that there is material exposure to the Year 2000 issue with respect to its electronic commerce transaction processing and online activity since these systems correctly define the Year 2000. The Company is currently conducting an analysis to determine the extent to which others have Year 2000 issues. These include the Company's major suppliers' systems, including the systems of credit card processors, telecommunications providers, product distributors and companies with whom the Company does business. The Company is currently unable to predict the extent to which the Year 2000 issue will affect suppliers, or the extent to which the Company would be vulnerable to its suppliers' failure to remediate any Year 2000 issues on a timely basis. The failure of a major supplier subject to the Year 2000 issue to convert its systems on a timely basis or a conversion that is incompatible with the Company's systems could have a material adverse effect on the Company. In addition, most of the purchases from the Company's online sales are made with credit cards. As such, operations may be materially adversely affected to the extent customers are unable to use their credit cards due to Year 2000 issues that are not rectified by their credit card providers. The Company has incurred less than $25 of expense related to Year 2000 compliance to date and expects to expend less than $10 in the future to support Year 2000 compliance initiatives. The Company intends to actively work with its suppliers and encourage them to minimize the risks of business disruptions resulting from Year 2000 issues and develop contingency plans where necessary. Such plans may include, but are not limited to, using alternative suppliers and establishing contingent supply arrangements. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS See Note 2 to the Consolidated Financial Statements of the Company for a discussion of recently issued accounting pronouncements. -27- Item 3. Properties. The Company leases approximately 30,000 square feet of office and warehouse space in Horsham, Pennsylvania pursuant to a lease expiring in 2004 at an annual rate of $360,000. Item 4. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth, as of November 30, 1999, the number of shares and percentage of the Company's Common Stock beneficially owned by (i) each person who is known by the Company to own beneficially 5% or more of the Company's outstanding Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company and (iv) all executive officers and directors of the Company as a group.
Percent of Name of Individual Shares of Common Stock Outstanding or Identity of Group Beneficially Owned (1)(2) Common Stock (3) - -------------------- ------------------------- ---------------- 5% Holders: HPF Holdings, Inc. (4)........................ 8,200,000 30.2% Brian D. Haveson (5).......................... 8,095,000 29.8 Directors (6): Irwin Schneidmill (7)......................... 200,000 * Frederick C. Tecce (8)........................ 450,000 1.7 Michael E. Heisley (4)........................ 8,200,000 30.2 Executive Officers (9): Deborah A. Gallen (10)........................ 165,000 * James A. Brown (11)........................... --- * Brendon Perero (12)........................... --- * All executive officers and directors as a group (7 persons) (13)................. 17,110,000 63.0
- -------------------- * less than 1%. (1) Information furnished by the named persons. (2) Under the rules of the Securities and Exchange Commission (the "SEC"), a person is deemed to be the beneficial owner of securities if he has, or shares, "voting power" which includes the power to vote, or to direct the voting of, such securities or -28- "investment power" which includes the power to dispose, or to direct the disposition, of such securities. Under these rules, more than one person may be deemed to be the beneficial owner of the same securities. Securities beneficially owned also include securities owned jointly, in whole or in part, or individually by the person's spouse, minor children or other relatives who share the same home. The information set forth in the above table includes all shares of Common Stock over which the named individuals individually or together share voting power or investment power, adjusted, however, to eliminate the reporting of shares more than once in order not to overstate the aggregate beneficial ownership of such persons and to reflect shares as to which the named individuals disclaim beneficial ownership. (3) Less than 1% unless otherwise indicated. (4) Michael E. Heisley is the principal equity owner of HPF Holdings, Inc. (5) Excludes a total of 103,000 shares held by members of the immediate family of Mr. Haveson as to which shares Mr. Haveson disclaims beneficial ownership. (6) Excludes directors listed under "5% Owners." (7) Excludes a total of 80,000 shares held by members of the immediate family of Mr. Schneidmill, as to which shares Mr. Schneidmill disclaims beneficial ownership. (8) Excludes a total of 60,000 shares held by members of the immediate family of Mr. Tecce, as to which shares Mr. Tecce disclaims beneficial ownership. (9) Excludes executive officers listed under "Directors." (10) Excludes a total of 20,000 shares held by members of the immediate family of Ms. Gallen, as to which shares Ms. Gallen disclaims beneficial ownership. (11) Excludes an option granted to Mr. Brown in November 1999 to purchase 200,000 shares of Common Stock at a price of $1.75 per share. The option becomes exercisable in cumulative equal annual installments on the first, second and third anniversaries of the date of grant. (12) Excludes an option granted to Mr. Perero in October 1999 to purchase 200,000 shares of Common Stock at a price of $1.00 per share. This option becomes exercisable in cumulative equal annual installments on the first, second and third anniversaries of the date of grant. (13) Excludes a total of 263,000 shares held by members of the immediate families of such persons, as to which shares such persons disclaim beneficial ownership. -29- Item 5. Directors and Executive Officers. Certain information as to the directors and executive officers of the Company is as follows:
Principal Occupation Name Age Positions with the Company for Past Five Years ---- --- -------------------------- -------------------- Brian D. Haveson 35 President, Chief Executive Officer President of the Part- and a director of the Company nership from 1997 to since August 1999 1999; Chief Financial Officer of the Partner- ship from 1993 to 1997; Arthur Andersen LLP for five years prior thereto Deborah A. Gallen 41 Vice President of E-Commerce Vice President of Oper- of the Company since ations for NSDirect September 1999 from 1995 to 1999; Di- rector of Health Care Services for the Partner- ship from 1994 to 1995; Director of Outpatient Programs for the Mercy Health Care System in Philadelphia, Pennsylva- nia for ten years prior thereto James D. Brown 42 Chief Financial Officer of the Chief Financial Officer Company since December 1999 of ImageMax, Inc., a document management company located in Conshohocken, Pennsyl- vania, from 1997 to 1999; from 1996 to 1997, Chief Financial Officer of LMR Holdings in Brooklyn, New York; President, Main Line Management in Wynnewood, Pennsylvania during 1995; from 1990 to 1994, Chief Financial Officer of Lib- erty Broadcasting Group and Controller of Lancer Industries, Inc.
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Principal Occupation Name Age Positions with the Company for Past Five Years ---- --- -------------------------- -------------------- Brendon Perero 23 Chief Information Officer of Vice President and the Company since August 1999 Senior Programmer/De- veloper of INetU, Inc. from 1997 to 1999; from 1997 to 1998, Mr. Perero was a member of the Design Council for IBM Net.Commerce and col- laborated with IBM for third party development of e-commerce software; student at Allentown College of Saint Francis DeSales from 1994 to 1998 (B.S.) and at pres- ent (Masters candidate) Michael E. Heisley 62 Director of the Company President and Chief since August 1999 Executive Officer, Heico Acquisitions; Chairman and Chief Executive Officer, The Heico Companies, LLC; Chairman of the Board, Pettibone LLC; Chairman of the Board, Davis Wire Cor- poration; Chairman of the Board, Tom's Foods, Inc.; Vice Chairman, Robertson-Ceco Corpo- ration
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Principal Occupation Name Age Positions with the Company for Past Five Years ---- --- -------------------------- -------------------- Irwin Schneidmill 46 Director of the Company President and Chief since August 1999 Executive Officer, America's Shopping Mall, Inc. since June 1998; Presi- dent and Chief Executive Officer, Creadis Promo- tions, Inc. since December 1998; President and Chief Executive Officer, Re- markable Office Products, Inc. since October 1994; sole stockholder, Irwin Schneidmill, P.C. from July 1993 to October 1994 Frederick C. Tecce 64 Director of the Company Private investor; Of since August 1999 Counsel, Klett Leiber Rooney & Schorling since April 1997; Of Counsel, Pepper Hamilton LLP from 1993 to 1997
The Company's Board of Directors has an Audit Committee, consisting of Messrs. Heisley, Schneidmill and Tecce. The Audit Committee has responsibility for recommending to the Board of Directors the selection of independent auditors, reviewing the scope and results of the audit and reviewing the adequacy of the Company's accounting, financial, internal and operating controls. All directors hold office until their respective successors are elected, or until death, resignation or removal. Officers serve at the discretion of the Board of Directors. There are no family relationships between any directors or executive officers of the Company. Item 6. Executive Compensation. Brian D. Haveson, President and Chief Executive Officer of the Company, is being paid a salary at an annual rate of $250,000 and is the only executive officer of the Company who will receive total compensation in excess of $100,000 for the Company's fiscal year ending December 31, 1999. -32- Equity Incentive Plan On August 20, 1999, the Company's Board of Directors adopted and the Company's then stockholders approved the Company's 1999 Equity Incentive Plan (the "Incentive Plan"). The purposes of the Incentive Plan are to attract and retain key employees and certain other persons who are in a position to make significant contributions to the success of the Company, to reward those employees and other persons for their contributions, to provide additional incentive to those employees and other persons to continue making similar contributions and to align further the interests of those employees and other persons with those of the Company's stockholders. To achieve these purposes, the Incentive Plan permits grants of incentive stock options ("ISOs") and options not intended to qualify as incentive stock options ("Non-ISOs"). ISOs and Non-ISOs are collectively referred to herein as "Awards." The Incentive Plan permits Awards to be granted for a total of 1,000,000 shares of Common Stock. Shares issuable pursuant to Awards that terminate or expire unexercised will be available for future Awards under the Incentive Plan. As of November 30, 1999, the Company has granted options to purchase an aggregate of 294,500 shares of Common Stock at a price of $1.00 per share, of which options to purchase 200,000 shares were granted to Brendon Perero, the Company's Chief Information Officer, and 200,000 shares of Common Stock at a price of $1.75 per share, all of which were granted to James D. Brown, the Company's Chief Financial Officer. All current and future employees of the Company, and other persons who, in the opinion of the Board of Directors, are in a position to make significant contributions to the success of the Company, such as consultants and non-employee directors, are eligible to receive Awards under the Incentive Plan. The Incentive Plan is administered by the Board of Directors, which determines, among other things and subject to certain conditions, the persons eligible to receive Awards, the persons who actually receive Awards, the type of each Award, the number of shares of Common Stock subject to each Award, the date of grant, exercise schedule, vesting schedule and other terms and conditions of each Award, whether to accelerate the exercise or vesting schedule or waive any other terms or conditions of each Award, whether to amend or cancel an Award and the form of any document used under the Incentive Plan. The Board of Directors has the right to adopt rules for the administration of the Incentive Plan, settle all controversies regarding the Incentive Plan or any Award and construe and correct defects and omissions in the Incentive Plan or any Award. The Incentive Plan may be amended, suspended or terminated by the Board of Directors, subject to certain conditions, provided that stockholder approval will be required whenever necessary for the Incentive Plan to continue to satisfy the requirements of certain securities and tax laws, rules and regulations. Recipients of stock options under the Incentive Plan will have the right to purchase shares of Common Stock at an exercise price, during a period of time and on such other terms and conditions as are determined by the Board of Directors. For ISOs, the recipient must be an employee, the exercise price must be at least 100% (110% if issued to a 10% or greater stockholder of the Company) of the fair market value of the Common Stock on the date of grant and the term cannot exceed ten years (five years if issued to a 10% or greater -33- stockholder of the Company) from the date of grant. If permitted by the Board of Directors and subject to certain conditions, an option exercise price may be paid by delivery of shares of Common Stock that have been outstanding, a promissory note, a broker's undertaking to deliver promptly the necessary funds or by a combination of these methods. If permitted by the Board of Directors, options may be settled by the Company paying to the recipient, in cash or in shares of Common Stock valued at the then fair market value of the Common Stock, an amount equal to such fair market value minus the exercise price of the option shares. Generally, upon termination of a recipient's employment or other relationship with the Company, stock options remain exercisable for a period of three months (one year if termination is due to death or disability) to the extent the stock options were exercisable at the date of expiration, except as otherwise agreed between the employee and the Company. Item 7. Certain Relationships and Related Transactions. Following the Merger and the consummation of the transactions contemplated by the Asset Agreement and the Stock Agreement in September 1999, Michael E. Heisley, the principal owner of HPF Holdings, Inc., Brian D. Haveson, Irwin Schneidmill and Frederick C. Tecce, became directors of the Company; Brian D. Haveson, Deborah A. Gallen, Joseph H. Boileau, Kathleen E. Simone and George Weatherstone were executive officers of the Company at such time and HPF Holdings, Inc. and Brian D. Haveson became owners of more than 5% of the Company's outstanding Common Stock. On August 16, 1999, Ansama entered into the Stock Agreement with HPF Holdings, Inc., a Delaware corporation, Brian D. Haveson, Deborah A. Gallen, Joseph H. Boileau, Kathleen E. Simone and Frederick C. Tecce (collectively, the "Assignors") whereby the Assignors agreed to transfer to Ansama 100% of the outstanding ownership interests in NSDirect in exchange for $400,000 in cash and 17,500,000 shares of Ansama's Common Stock. On the basis of unaudited financial statements of NSDirect as of May 31, 1999, NSDirect had current assets of $531,960, fixed assets of $105,855, current liabilities of $356,357 and members equity of $282,058. For the five months ended May 31, 1999, NSDirect had revenues of $1,833,282 and net income of $282,057. The Assignors acquired their interests in NSDirect in January 1998 for an aggregate capital contribution of $100,000. On August 16, 1999, Ansama entered into the Asset Agreement with the Partnership whereby Ansama agreed to purchase certain assets and assume certain liabilities of the Partnership, as specified in the Asset Agreement, in consideration for the payment to the Partnership of $3,000,000 in cash. The principal assets purchased were (i) all equipment, fixtures, leasehold improvements, furniture, computers and software of the Partnership, (ii) all of the Partnership's rights and obligations to the lease (the "Lease") for the Partnership's premises in Horsham, Pennsylvania, (iii) the Partnership's telephone numbers and telephone equipment, (iv) all rental and utility deposits of the Partnership relating to the Lease and deposits securing letters of credit to food vendors, (v) all patents, trademarks, logos, copyrights, trade names, trade secrets, testimonials, agreements of sale, assignments and all other intellectual property related to the Partnership's business and goodwill relating thereto, (vi) all financial and sales records, client and customer lists, including all files and records -34- relating thereto and all other proprietary information used in connection with the Partner ship's business, (vii) all franchise agreements, (viii) all saleable and marketable foods, vitamins and other perishable goods and inventory relating to the Partnership's business located at its Horsham, Pennsylvania warehouse at the close of business on the day preceding the consummation of the asset purchase and (ix) all cash and accounts receivable of the Partnership on the date of consummation of the asset purchase. The assets purchased excluded all rights, claims, causes of action, judgments, awards, settlements and other benefits related to or arising from the purchase, sale, prescription or other dealings with fenfluramine, phentermine or Redux or any combination thereof, including, without limitation, (i) those against American Home Products Company and any insurance company, (ii) rising from loss of or injury to business, bad faith and failure to indemnify, and (iii) any and all deposits for legal fees and services, prepayment for legal fees and services and retainers for legal fees and services. The Asset Agreement provided that Ansama was to assume all liabilities and obligations of the Partnership and its business operations, of any type or nature, known or unknown, absolute, contingent or otherwise, whether arising before or after the consummation of the asset purchase, including without limitation all liabilities and obligations of the Partnership (i) to employees, franchisees, customers, suppliers and others having relationships with the Partnership, (ii) arising under contracts, leases, agreements, benefit plans and other obligations, (iii) for personal injury from products of the Partnership except as hereinafter specifically not assumed, (iv) arising from any failure to comply with any law, rule or regulation, (v) for any infringement of any third party's intellectual property and arising from any suit, claim or proceeding, except that the Partnership agreed to remain solely responsible for any debt or liability of the Partnership or its business arising out of or related to any claims for personal injury, fraud, breach of contract, false advertising or any related advertising claim arising out of or related to the sale or prescription by the Partnership or US Medical Weight Loss Company, Inc., their agents or employees of fenfluramine, phentermine or Redux, including any claims arising from specific lawsuits listed in a schedule to the Asset Agreement and (vi) for sales taxes, franchise taxes, employment taxes, property taxes, utilities and other amounts. Pursuant to the Asset Agreement, the Partnership also agreed for three years to refrain from engaging in the business in which the Partnership engaged with the assets being sold. On the basis of unaudited financial statements of the Partnership as of May 31, 1999, the Partnership had current assets of $1,686,464, total fixed and other assets of $313,756, total liabilities of $914,605 and total shareholders' equity of $1,085,810. For the five months ended May 31, 1999, the Partnership had total revenues of $2,851,105 and a net loss of $178,017. A brief discussion of the history of the Partnership's business follows: Nutri/System, Inc., a Pennsylvania business corporation, was incorporated in September 1976 under the name Shape-Up Weight Control Centers of America, Inc. The original name was changed to Weight Loss Medical Centers of America, Inc. in June 1977, then to Nutri-System Weight Loss Medical Centers of America, Inc. in May 1979, and to Nutri/System, Inc. in October 1980. Nutri/System, Inc. opened its first center in 1971 under the name Shape-Up, Inc., its predecessor. The first franchise was also sold by Nutri/System, Inc.'s predecessor, Shape-Up, Inc. in 1972. Nutri/System, Inc. sold its first franchise in 1976. Nutri/System, Inc. was -35- the franchisor of Nutri/System weight loss centers from 1976 until 1993. Nutri/System, Inc. also did business under the trade name Nutri/System Weight Loss Centers. The stock of Nutri/System, Inc. was publicly traded from 1980 through August 1986 when a senior management group including A. Donald McCulloch, Jr., Reef C. Ivey, II, Albert J. DiMarco and John E. Sylvester acquired Nutri/System, Inc. through a leveraged buy-out and merger. In August 1986, the shareholders of Nutri/System, Inc. approved the merger among Nutri/System, Inc., Diversified Services Group, Inc. ("DSG") and Management Acquisition Group, Inc. ("MAG"). At the time, DSG, a Pennsylvania business corporation incorporated on January 15, 1986, became the parent of Nutri/System, Inc. DSG and MAG were formed solely for the purpose of effecting the buy-out, and neither was previously involved in any type of franchising business. In July 1988, Nutri/System, Inc. refinanced the debt incurred in the leveraged buy-out and merger through a repurchase of warrants and notes (the "Refinancing"). DSG repurchased more than 95% of the 4,500,000 warrants to acquire Nutri/System, Inc.'s common stock, and Nutri/System, Inc. repurchased 98% of its outstanding Subordinated Debentures and 12% Senior Notes. An aggregate of approximately $127,000,000 was required to complete the Refinancing. Nutri/System, Inc. provided DSG approximately $67,000,000 to finance the warrant purchase. Nutri/System, Inc. obtained $100,000,000 in loans from lenders to accomplish the Refinancing. In June 1989, John E. Sylvester retired from Nutri/System, Inc. for medical reasons, and his shares in Nutri/System, Inc. were purchased by DSG. In September 1989, Albert J. DiMarco resigned from Nutri/System, Inc. for personal reasons, and his shares in Nutri/System, Inc. were purchased by the two remaining shareholders, A. Donald McCulloch, Jr. and Reef C. Ivey, II. Effective as of July 28, 1989, Nutri/System, Inc. was merged with the following corporate subsidiaries: Nutri/System Delaware, Inc., Nutri-System Investment Co., Inc., Nutri/System of Florida, Inc., Nutri/System of Georgia, Inc., Nutri/System of Michigan, Inc., Nutri/System of Nevada, Inc. and Old York Rydal Corp., and its parent company, DSG. Nutri/System, Inc. was the surviving corporation. The mergers were effected to comply with the restructuring of Nutri/System, Inc. to qualify as a Subchapter S corporation as defined by the Internal Revenue Code of 1986, as amended. In August 1989, Nutri/System, Inc. opted to localize its financial and banking arrangements and changed from Citibank, N.A., New York, New York to a group of six banks led by Fidelity Bank, National Association, Philadelphia, Pennsylvania. Nutri/System, Inc., through Fidelity Bank, National Association, paid off its loan to Citibank, N.A. and maintained a revolving line of credit of up to $125,000,000 with the six banks led by Fidelity Bank, National Association (collectively, the "Banks"). On April 27, 1993, the Banks swept all of Nutri/System, Inc.'s bank accounts forcing Nutri/System, Inc. to close all 283 of its company centers as well as cease all operations for a two-week period. In addition, there was a two-week interruption of the flow of food to franchise owners. The Banks had perfected security interests in, or liens and/or encumbrances on substantially all of the assets of Nutri/System, Inc. and the capital stock of Nutri/System, Inc. pursuant to the terms of a U.S. $125,000,000 Credit Agreement dated as of August 17, 1989, as amended, and an Amended and Restated Credit Agreement dated October 30, 1991, as amended. -36- Nutri/System, Inc. was served with a Summons to Debtor and Petition for Relief under Chapter 7 of the United States Bankruptcy Code (in the United States Bankruptcy Court for the Eastern District of Pennsylvania on May 4, 1993, Case Number 93-12725S). The Case was converted to a Chapter 11 proceeding effective June 4, 1993. Nutri/System, Inc. operated as a debtor in possession through December 1993. Nutri/System, Inc. re-opened 75 of its 283 company owned and operated weight loss centers in this period, and continued to provide services, including food products, to its franchisees. In addition, in July 1993, Nutri/System of Florida Associates, a Florida general partnership ("NSF") and Nutri/System of Georgia Associates, a Florida general partnership ("NSG") involuntarily filed for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court, Eastern District of Pennsylvania, Case Number 93-14121 and Case Number 93-14120, respectively. All of the assets of NSF and NSG were also secured by the Banks, sold to NSI Debt, Inc. and subsequently assigned to the Partnership. NSF and NSG together operated 60 Nutri/System weight loss centers at the date of sale. NSI Debt, Inc., a Nevada corporation, was formed on November 8, 1993 to acquire the assets of Nutri/System, Inc. On December 1, 1993, NSI Debt, Inc. purchased from the Banks all of the Banks' rights, claims and interests in and to the Notes and Security Agreements and other documents perfecting the Banks' interest in Nutri/System, Inc.'s assets, pursuant to the terms of an Assignment of Nutri/System Interests (hereinafter referred to as the "Assignment Agreement"). On December 29, 1993, NSI Debt, Inc., pursuant to a public auction which took place in Philadelphia, Pennsylvania, bid part of its secured debt in return for the assets of Nutri/System, Inc., and subsequently assigned all of its rights and obligations under the Assignment Agreement to the Partnership. Pursuant to the Assignment Agreement, the Partnership then became the owner of the assets, properties and rights of Nutri/System, Inc., including but not limited to, the trademarks, trade names and franchise agreements of Nutri/System, Inc. In December 1993, the United States Bankruptcy Court for the Eastern District of Pennsylvania dismissed the bankruptcy action of NSG. On July 8, 1994, the United States Bankruptcy Court for the Eastern District of Pennsylvania dismissed the bankruptcy actions for Nutri/System, Inc. and NSF. The dismissal was appealed by several landlords of Nutri/System, Inc. and NSF. The appeal was denied and no further appeals were taken. From time to time, the Company purchases food from a vendor that is an affiliate of certain partners of a Predecessor Business. Such transactions are effected on terms no less favorable to the Company than those made available to independent third parties. Item 8. Legal Proceedings. The Company is not a party to any material pending legal proceedings. -37- Item 9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters. No established trading market exists for the Common Stock, although, following the Merger, there has been some trading in the over-the-counter market of the Common Stock issued to the former stockholders of Ansama. On or about the date of the filing of this Form 10 registration statement, the Company will file an application to have its Common Stock listed on the Nasdaq National Market under the symbol "THIN". The Company has not paid any dividends since its formation in August 1999 and does not intend to pay cash dividends on its Common Stock in the foreseeable future. The Company currently intends to reinvest its earnings, if any, in the development and expansion of the Company's business. Any future declaration of cash dividends will be at the discretion of the Company's Board of Directors and will depend upon all then relevant factors, including the earnings, capital requirements and financial position of the Company as well as general economic conditions. As of November 30, 1999, there were approximately 341 holders of record of the Common Stock. Of the 27,176,337 shares of the Company's Common Stock outstanding as of November 30, 1999, approximately 2,039,337 shares are freely transferable without restriction or further registration under the Securities Act of 1933, as amended (the "Act") unless purchased by affiliates of the Company as that term is defined in Rule 144 under the Act. The remaining outstanding shares of Common Stock (the "Restricted Shares") are eligible to be sold publicly pursuant to an effective registration statement under the Act or in accordance with an applicable exemption from the registration requirements under the Act, including, after October 1, 2000, Rule 144, assuming that the Common Stock has become registered under the Securities Exchange Act of 1934, as amended, not later than April 1, 2000. The Company is unable to estimate the amount of Restricted Shares that may be sold under Rule 144 since this amount will depend in part on the price for the Common Stock, the personal circumstances of the sellers and other factors. Sales of a substantial number of Restricted Shares in the public market, or the availability of such shares, could adversely affect the price of the Common Stock. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated for purposes of Rule 144) who has beneficially owned Restricted Shares for at least one year is entitled to sell within any three-month period a number of shares that does not exceed the greater of (i) one percent of the number of shares of Common Stock then outstanding or (ii) the average weekly trading volume of the Common Stock in the over-the-counter market during the four calendar weeks preceding the date on which notice of sale is filed with the SEC. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. However, a person (or persons whose shares are aggregated for purposes of Rule 144) who is deemed not to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the Restricted Shares for at least two years -38- at the time of sale, would be entitled to sell such shares under Rule 144(k) without regard to the aforesaid limitations. Item 10. Recent Sales of Unregistered Securities. On August 17, 1999, in connection with the incorporation of the Company, the Company issued 100 shares of Common Stock, $.001 par value (the "Common Stock") to Ansama in exchange for $100 in cash. This issuance of Common Stock is exempt from registration under Section 4(2) of the Act. The 100 shares of Common Stock so issued were cancelled on September 27, 1999 when Ansama merged with and into the Company in order to change the state of incorporation of Ansama from Nevada to Delaware. On September 27, 1999, Ansama merged with and into the Company pursuant to an Agreement and Plan of Merger dated as of August 19, 1999 between Ansama and the Company. The purpose of the Merger was to change the state of incorporation of Ansama from Nevada to Delaware. Upon consummation of the Merger, each outstanding share of common stock of Ansama was converted in the right to receive one share of common stock of the Company, resulting in the issuance to the former stockholders of Ansama of an aggregate of 2,039,337 shares of Common Stock of the Company in exchange for 2,039,337 shares of common stock of Ansama. No underwriters were involved in the Merger. The issuance of the 2,039,337 shares of Common Stock in the Merger was exempt from registration pursuant to Rule 145(a)(2) of the SEC which provides that an exchange of securities pursuant to a statutory merger the sole purpose of which is to change an issuer's domicile solely within the United States does not constitute the offer or sale of a security within the meaning of Section 2(3) of the Act. On September 30, 1999, the Company completed the sale of 4,363,985 shares of Common Stock at a price of $1.00 per share in cash in a partial closing of a private placement effected by the Company for which Pennsylvania Merchant Group acted as agent. On October 13, 1999, the Company sold an additional 3,273,415 shares of Common Stock at a price of $1.00 per share in the completion of this private placement. The Company received an aggregate of $7,637,400 in cash from this private placement and in consideration of the services of Pennsylvania Merchant Group as placement agent, the Company issued a warrant to Pennsylvania Merchant Group entitling it to purchase 763,740 shares of Common Stock at an exercise price of $1.00 per share for five years from the date of issuance. In addition, the Company reimbursed Pennsylvania Merchant Group for its out-of-pocket expenses. The 7,637,400 shares issued in the private placement were sold to a total of 111 individuals and institutions, each of whom was an accredited investor. The issuance of the 7,637,400 shares of Common Stock in the private placement was exempt from registration under Section 4(2) of the Act and Regulation D thereunder. The Company filed a Form D with the SEC on or about September 30, 1999 with respect to this private placement and an amended Form D on or about October 27, 1999. On September 30, 1999, the Company consummated the acquisition of all of the beneficial interests in NutriSystem Direct, L.L.C., a Pennsylvania limited liability company, pursuant to the August 16, 1999 Stock Exchange and Purchase Agreement among HPF -39- Holdings, Inc., Brian D. Haveson, Joseph H. Boileau, Kathleen E. Simone, Deborah A. Gallen, Frederick C. Tecce and Ansama, to which the Company had succeeded pursuant to the September 27, 1999 Merger of Ansama with and into the Company. As consideration for the acquisition of all of the beneficial interests in NutriSystem Direct, L.L.C., the Company paid $400,000 in cash to HPF Holdings, Inc. and issued an aggregate of 17,500,000 shares of Common Stock to HPF Holdings, Inc. (the principal owner of which is Michael E. Heisley), Brian D. Haveson, Joseph H. Boileau, Kathleen E. Simone, Deborah A. Gallen and Frederick C. Tecce, each of which individuals was a director or an executive officer of the Company. The issuance of the 17,500,000 shares of Common Stock to such six persons is exempt from registration under Section 4(2) of the Act. No underwriters were utilized in connection with this acquisition. Reference is also made to Item 7 hereof. Item 11. Description of Registrant's Securities to be Registered. The authorized Common Stock of the Company consists of 55,000,000 shares, par value $.001 per share, of which 27,176,337 shares were outstanding as of November 30, 1999. Each share of Common Stock is entitled to one vote on all matters submitted to the stockholders of the Company. The shares of Common Stock do not have cumulative voting rights and, therefore, the holders of more than 50% of the voting power of the Company are able to elect all directors entitled to be elected by the stockholders. The absence of cumulative voting, together with the ownership of more than a majority of the Common Stock by Brian D. Haveson and HPF Holdings, Inc. could be expected to have the effect of delaying, averting or preventing a change in control of the Company unless Mr. Haveson and HPF Holdings, Inc. were in favor of such a change. Holders of Common Stock have equal rights, share for share, to receive dividends when, as and if declared by the Board of Directors. The current policy of the Company's Board of Directors is to retain all future earnings of the Company, if any, and not to pay cash dividends which, under the Delaware General Corporation Law (the "DGCL"), can only be paid from earnings. The payment of future dividends, if any will be at the discretion of the Board of Directors and will depend upon many factors, including the Company's earnings, financial position, capital requirements and other factors. Therefore, there can be no assurance as to future dividends. In the event of any liquidation, dissolution or winding-up of the Company, holders of Common Stock will be entitled to share ratably in the assets of the Company available for distribution to stockholders, subject to the rights of any Preferred Stock which may be outstanding at the time. No holder of Common Stock has any preemptive rights. The Company also has authorized 5,000,000 shares of Preferred Stock issuable in series upon resolution of the Board of Directors. The Board of Directors is authorized to establish the relative terms, rights and other provisions of any series of Preferred Stock. No Preferred Stock is outstanding, and the Board of Directors has no current intention of issuing any Preferred Stock. However, unless otherwise required by law in a particular circumstance, the Board of Directors can, without stockholder approval, issue Preferred Stock in the future -40- with voting and conversion rights which could adversely affect the voting power of the Common Stock. The issuance of Preferred Stock could be expected to, and may have the effect of, delaying, averting or preventing a change in control of the Company. As permitted by the DGCL, the Company's Certificate of Incorporation provides that directors of the Company will not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL relating to prohibited dividends, distributions and repurchases or redemptions of stock or (iv) for any transaction from which the director derives an improper personal benefit. However, such limitation on liability would not generally apply to violations of the federal securities laws, nor does it limit the availability of non-monetary relief in any action or proceeding. The Company intends to send to its stockholders annual reports containing audited financial statements for each fiscal year and quarterly reports containing unaudited financial statements for the first three quarters of each fiscal year. The transfer agent for the Company's Common Stock is StockTrans, Inc., Ardmore, Pennsylvania. Item 12. Indemnification of Directors and Officers. Section 145(a) of the DGCL provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no cause to believe his conduct was unlawful. Section 145(b) of the DGCL provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted under similar standards, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine that, despite such -41- adjudication of liability, such person is fairly and reasonably entitled to be indemnified for such expenses which the court shall deem proper. Section 145 of the DGCL further provides that to the extent a director or officer of a Delaware corporation has been successful in the defense of any action, suit or proceeding referred to in subsections (a) or (b) of Section 145 or in the defense of any claim, issue or matter therein, he shall be indemnified against any expenses actually and reasonably incurred by him in connection therewith; that the indemnification provided for by Section 145 shall not be deemed exclusive of any rights to which the indemnified party may be entitled and the corporation may purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him or incurred by him in any such capacity or arising out of his status as such whether or not the corporation would have the power to indemnify him against such liabilities under Section 145. As noted in Item 11, Section 102(b)(7) of the DGCL permits a Delaware corporation to include a provision in its Certificate of Incorporation, and the Company's Certificate of Incorporation contains such a provision, to the effect that, subject to certain exceptions, a director of a Delaware corporation is not personally liable to the corporation or its stockholders for monetary damages for breach of his fiduciary duty as a director. The Company's By-laws also provide that the Company shall indemnify its directors and officers and, to the extent permitted by the Board of Directors, the Company's employees and agents, to the full extent permitted by and in the manner permissible under the laws of the State of Delaware. In addition, the Company's By-laws permit the Board of Directors to authorize the Company to purchase and maintain insurance against any liability asserted against any of the Company's directors, officers, employees or agents arising out of their capacity as such. Item 13. Financial Statements and Supplementary Data. The financial statements and supplementary data required by this Item 13 are listed in Item 15(a) hereof and are included elsewhere in this Form 10. Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. -42- Item 15. Financial Statements and Exhibits: (a) Financial Statements: Report of Independent Public Accountants Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1997 and 1998 Consolidated Statements of Operations for the Nine Months Ended September 30, 1998 and 1999 (unaudited) and the Years Ended December 31, 1996, 1997 and 1998 Consolidated Statements of Changes in Shareholders' Equity for the Nine Months Ended September 30, 1999 (unaudited) and the Years Ended December 31, 1996, 1997 and 1998 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1999 (unaudited) and the Years Ended December 31, 1996, 1997 and 1998 Notes to Consolidated Financial Statements Schedule II - Valuation and Qualifying Accounts (b) Exhibits: 2.1 Agreement and Plan of Merger dated August 19, 1999 between nutrisystem.com inc. and Ansama Corp. 2.2 Asset Purchase Agreement dated August 16, 1999 between Ansama Corp. and Nutri/System L.P. 2.3 Stock Exchange and Purchase Agreement dated August 16, 1999 among Ansama Corp., HPF Holdings, Inc., Brian D. Haveson and NutriSystem Direct, L.L.C. management (comprised of Joseph Boileau, Kathleen Simone, Deborah Gallen and Frederick C. Tecce) 2.4 Assignments of NutriSystem Direct, L.L.C. Membership Interests dated September 30, 1999 to nutrisystem.com inc. by each of HPF Holdings, Inc., Brian D. Haveson, Joseph Boileau, Kathleen Simone, Deborah Gallen and Frederick C. Tecce 2.5 Operating Agreement of NutriSystem Direct, L.L.C. dated September 30, 1999 2.6 Intellectual Property Assignment from Nutri/System L.P. to nutrisystem.com inc. dated September 30, 1999 -43- 2.7 Assignment of Franchise Agreements from Nutri/System L.P. to nutrisystem.com inc. dated September 30, 1999 3.1 Certificate of Incorporation of nutrisystem.com inc. 3.2 By-laws of nutrisystem.com inc. 4.1 Form of Common Stock certificate of nutrisystem.com inc. 4.2 Form of warrant to purchase Common Stock of nutrisystem.com inc. 10.1 Joint Defense and Indemnification Agreement dated September 27, 1999 between Wyeth Ayerst Laboratories Division of American Home Products Corporation and Nutri/System L.P. 10.2 Lease, dated December 11, 1997, between Teachers Insurance and Annuity Association and nutrisystem.com inc. as amended by First Amendment to Lease dated October 28, 1999 10.3 Form of Nutri/System L.P. Franchise Agreement 10.4 Form of NutriSystem Direct, L.L.C. Distributor Agreement 10.5 1999 Equity Incentive Plan of nutrisystem.com inc. 21.1 Subsidiaries of nutrisystem.com inc. 23.1 Consent of Arthur Andersen LLP 27.1 Financial data schedule -44- NUTRISYSTEM.COM INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2 FINANCIAL STATEMENTS: Consolidated Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999 (unaudited) F-3 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 and the Nine Months Ended September 30, 1998 and 1999 (unaudited) F-4 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1996, 1997 and 1998 and the Nine Months Ended September 30, 1999 (unaudited) F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 and the Nine Months Ended September 30, 1998 and 1999 (unaudited) F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 SCHEDULE: Schedule II - Valuation and Qualifying Accounts S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To nutrisystem.com inc.: We have audited the accompanying consolidated balance sheets of nutrisystem.com inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of nutrisystem.com inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to the financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules, and are not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Philadelphia, PA November 24, 1999 F-2 NUTRISYSTEM.COM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data)
December 31 ----------------------- September 30, 1997 1998 1999 -------- -------- ------------- ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 843 $ 361 $ 1,047 Restricted cash 280 401 358 Trade receivables, less allowance of $440 in 1997, $341 in 1998 and $220 in 1999 1,742 527 341 Receivable from investors -- -- 3,400 Inventories 1,031 819 700 Prepaid expenses and other current assets 646 380 222 -------- -------- -------- Total current assets 4,542 2,488 6,068 FIXED ASSETS, net 197 299 128 GOODWILL, net -- -- 527 OTHER ASSETS 87 137 99 -------- -------- -------- $ 4,826 $ 2,924 $ 6,822 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 892 $ 762 $ 277 Payable to Nutri/System L.P. -- -- 3,400 Accrued payroll and related benefits 332 46 89 Other current liabilities 2,083 733 530 -------- -------- -------- Total current liabilities 3,307 1,541 4,296 NON-CURRENT LIABILITIES 76 53 44 -------- -------- -------- Total liabilities 3,383 1,594 4,340 -------- -------- -------- COMMITMENTS AND CONTINGENCIES (Note 7) MINORITY INTEREST 878 807 -- -------- -------- -------- SHAREHOLDERS' EQUITY: Preferred stock (5,000,000 shares authorized, no shares outstanding) -- -- -- Common stock, $.001 par value (55,000,000 shares authorized; shares issued - 19,539,337 at December 31, 1997 and 1998 and 23,903,322 at September 30, 1999) 20 20 24 Additional paid-in capital 3,610 3,610 13,611 Warrants exercisable at $1 per share -- -- 344 Accumulated deficit (3,065) (3,107) (11,497) -------- -------- -------- Total shareholders' equity 565 523 2,482 -------- -------- -------- $ 4,826 $ 2,924 $ 6,822 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-3 NUTRISYSTEM.COM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except share amounts)
Year Ended Nine Months Ended December 31 September 30 ------------------------------------------------- ------------------------------- 1996 1997 1998 1998 1999 ------------ ------------ ------------ ------------ ------------ (Unaudited) REVENUES: Food sales $ 39,000 $ 23,698 $ 8,415 $ 6,606 $ 6,346 Franchise royalty fees 2,421 1,766 633 514 346 Weight-loss programs 4,676 17,058 -- -- -- Other 933 3,349 275 231 233 ------------ ------------ ------------ ------------ ------------ 47,030 45,871 9,323 7,351 6,925 ------------ ------------ ------------ ------------ ------------ COSTS AND EXPENSES: Cost of revenues 45,823 47,686 7,101 5,571 5,014 General and administrative 1,392 1,056 2,220 2,069 2,003 Depreciation and amortization 787 1,235 79 57 54 Other 139 582 33 7 185 Disposal of weight-loss centers 367 5,347 -- -- -- Compensation expense -- -- -- -- 8,260 Net gain on insurance settlement -- (7,175) -- -- -- ------------ ------------ ------------ ------------ ------------ 48,508 48,731 9,433 7,704 15,516 ------------ ------------ ------------ ------------ ------------ Operating loss (1,478) (2,860) (110) (353) (8,591) INTEREST EXPENSE (39) (104) (7) (5) (7) ------------ ------------ ------------ ------------ ------------ Loss before minority interest (1,517) (2,964) (117) (358) (8,598) MINORITY INTEREST 1,354 1,366 75 217 208 ------------ ------------ ------------ ------------ ------------ Net loss $ (163) $ (1,598) $ (42) $ (141) $ (8,390) ============ ============ ============ ============ ============ BASIC LOSS PER SHARE $ (0.01) $ (0.08) $ (0.00) $ (0.01) $ (0.43) ============ ============ ============ ============ ============ DILUTED LOSS PER SHARE $ (0.01) $ (0.08) $ (0.00) $ (0.01) $ (0.43) ============ ============ ============ ============ ============ BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 16,282,781 19,539,337 19,539,337 19,539,337 19,539,337 DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 16,282,781 19,539,337 19,539,337 19,539,337 19,539,337
The accompanying notes are an integral part of these financial statements. F-4 NUTRISYSTEM.COM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (dollars in thousands, except share amounts)
Additional Common Paid-in Accumulated Shares Stock Capital Warrants Deficit Total ---------- ---------- ---------- ---------- ----------- ----------- BALANCE, JANUARY 1, 1996 16,282,781 $ 17 $ 1,613 $ -- $ (1,304) $ 326 Capital contributions 3,256,556 3 1,997 -- -- 2,000 Net loss -- -- -- -- (163) (163) ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 1996 19,539,337 20 3,610 -- (1,467) 2,163 Net loss -- -- -- -- (1,598) (1,598) ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 1997 19,539,337 20 3,610 -- (3,065) 565 Net loss -- -- -- -- (42) (42) ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 1998 19,539,337 20 3,610 -- (3,107) 523 Net loss (unaudited) -- -- -- -- (8,390) (8,390) Payment to shareholder in excess of book value (Note 1) (unaudited) -- -- (2,275) -- -- (2,275) Capital contribution of shares issued to executive (Note 1) (unaudited) -- -- 8,260 -- -- 8,260 Issuance of warrants (unaudited) -- -- (344) 344 -- -- Issuance of common stock (Note 1) (unaudited) 4,363,985 4 4,360 -- -- 4,364 ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, SEPTEMBER 30, 1999 (unaudited) 23,903,322 $ 24 $ 13,611 $ 344 $ (11,497) $ 2,482 ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-5 NUTRISYSTEM.COM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Nine Months Year Ended December 31 Ended September 30 --------------------------------------- ----------------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- CASH FLOWS FROM OPERATING (unaudited) ACTIVITIES: Net loss $ (163) $(1,598) $ (42) $ (141) $(8,390) Adjustments to reconcile net loss to net cash provided by (used in) operating activities- Compensation expense -- -- -- -- 8,260 Minority interest (1,354) (1,366) (75) (217) (208) Depreciation and amortization 787 1,235 79 57 54 Loss on disposals 465 5,347 -- -- 115 Provisions for bad debts and inventory obsolescence 134 403 -- 2 -- Changes in operating assets and liabilities- Restricted cash -- (280) (121) (251) 43 Receivables (53) 1,100 1,214 1,269 186 Inventories 429 1,073 212 (366) 120 Prepaids and other assets -- 454 217 119 196 Accounts payable (2,794) (608) (130) 1,410 (486) Accrued payroll and related expenses 56 (137) (286) (267) 43 Other accrued expenses 723 (2,277) (1,370) (1,926) (211) ------- ------- ------- ------- ------- Net cash provided by (used in) operating activities (1,770) 3,346 (302) (311) (278) ------- ------- ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital additions (1,775) (2,849) (180) (97) -- ------- ------- ------- ------- ------- Net cash used in investing activities (1,775) (2,849) (180) (97) -- ------- ------- ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank borrowing 1,000 -- -- -- -- Payment of bank borrowing -- (1,000) -- -- -- Contributions from partners 1,000 -- -- -- -- Issuance of common shares -- -- -- -- 964 Other (16) -- -- -- -- ------- ------- ------- ------- ------- Net cash provided by (used in) financing activities 1,984 (1,000) -- -- 964 ------- ------- ------- ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (1,561) (503) (482) (408) 686 CASH AND CASH EQUIVALENTS, beginning of period 2,907 1,346 843 843 361 ------- ------- ------- ------- ------- CASH AND CASH EQUIVALENTS, end of period $ 1,346 $ 843 $ 361 $ 435 $ 1,047 ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-6 NUTRISYSTEM.COM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share amounts) (Information as of September 30, 1999, and for the nine months ended September 30, 1999 and 1998 is unaudited) 1. BACKGROUND: Nature of the Business nutrisystem.com inc. (a Delaware corporation) together with its subsidiaries (the "Company"), is a national provider of weight loss programs and distributor of prepackaged foods. As discussed below, the Company was formed to offer interactive, Internet-based weight loss solutions to the beauty, health, wellness and personal care markets by providing well-known diet programs that incorporate pre-packaged meals and a complete diet philosophy. nutrisystem.com inc. and its predecessor businesses, including Nutri/System L.P. and NutriSystem Direct, L.L.C. (collectively, the "Predecessor Businesses"), have historically operated through company-owned and franchised weight-loss centers. Independent franchise weight loss center owners operate using the Company's trade name, trademarks and programs for which a royalty is paid to the Company. The Company's pre-packaged foods are sold to program participants through the Internet, independent distribution and through franchised weight loss centers. Since the inception of the Nutri/System business in 1972, the Company has operated in various organizational and legal structures. In early 1993, the Company was party to a bankruptcy proceeding. This case was converted to a Chapter 11 proceeding effective June 4, 1993. The Company operated as a debtor in possession through December 1993. Since 1993, the Company has incurred significant losses and, as of September 30, 1999, has an accumulated deficit of $11,497. The Company intends to invest heavily in marketing and promotion, strategic alliances, Web site development and technology and development of its administrative organization. As a result, the Company believes that it will incur further operating losses for the foreseeable future. In addition, the Company acquired the Predecessor Businesses for cash of $3.4 million plus 17,500,000 shares of common stock. In order to fund the planned investment and the Company's purchase of the Predecessor Businesses, the Company initiated a private placement which raised proceeds of approximately $7,637 of which $964 and $3,400, respectively, were recorded in cash and receivables as of September 30, 1999. The balance of the proceeds from the private placement was received on October 13, 1999. Based on current cash flow projections, management believes that existing cash and cash equivalents are sufficient to fund operating and other needs through the second quarter of 2000. Additional funding is expected through the sale of additional equity securities in a future private placement F-7 and/or a public offering. Achieving profitability depends upon the Company's ability to: (1) raise the necessary capital to fund operating needs and finance the planned marketing programs and technology investment and (2) generate and sustain substantially increased revenue levels. There can be no assurance that the Company will be able to obtain the necessary capital to fund operating and investment needs or to generate sufficient revenues to achieve or sustain profitability in the future. Merger Transaction In August 1999, Ansama Corp. ("Ansama"), a non-operating public shell company with minimal assets and liabilities and the sole shareholder of nutrisystem.com inc., entered into: (1) an Asset Purchase Agreement to acquire the operating assets and certain liabilities of Nutri/System L.P. for $3,000 and (2) a Stock Exchange and Purchase Agreement to acquire the stock of Nutrisystem Direct, L.L.C. for $400 and 17,500,000 shares of Ansama common stock. The Asset Purchase Agreement and Stock Exchange and Purchase Agreement are collectively referred to as the Merger Agreements. The amount paid to the principal shareholder in excess of the book value was treated as a return of capital. The consideration paid for the acquisition of the minority interest was allocated to the Company's assets and liabilities in accordance with APB 16. On September 27, 1999, Ansama was merged into the Company, and the Company completed the transactions contemplated in the Merger Agreements with proceeds generated from the private placement. As a result of the transaction, the owners of the Predecessor Businesses obtained controlling interest in the common stock of the Company. In addition, the management team of the Predecessor Businesses became the officers and management of the Company. The transaction was treated as a recapitalization with the assets and liabilities of the Predecessor Businesses recorded at historical cost in the accompanying financial statements. In connection with the merger transaction, the president of the Company was issued 8,260,000 incremental shares of common stock of the Company. This issuance was treated as compensation expense for accounting purposes. The compensation expense recorded was based on a fair market value of $1 per share. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Presentation of Financial Statements As of September 30, 1999, the Company's consolidated financial statements include the accounts of nutrisystem.com inc. and its wholly owned subsidiaries. The accompanying historical financial statements prior to September 30, 1999 include the combined accounts of the Predecessor Businesses. The historical shareholders' equity presented in the accompanying financial statements has been retroactively restated to give effect to the shares and consideration issued in the merger (see Note 1). All significant intercompany accounts and transactions have been eliminated. F-8 Interim Financial Statements The financial statements as of September 30, 1999, and for the nine months ended September 30, 1998 and 1999 are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of results for those interim periods. The results of operations for the nine months ended September 30, 1998 and 1999 are not necessarily indicative of the results to be expected for the entire year or any other period. Cash Flow Information For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less as cash equivalents. The Company made no payments for income taxes during the years ended December 31, 1996, 1997 or 1998, or the nine months ended September 30, 1998 and 1999. Payments for interest were $39, $104, and $7 for the years ended December 31, 1996, 1997 and 1998, respectively, and $5, and $7 for the nine months ended September 30, 1998 and 1999, respectively. Restricted Cash Restricted cash represents minimum cash deposited in banks required under certain vendor arrangements. Inventories Inventories consist principally of packaged food at the Company's central warehouse. Inventories are priced using the lower of cost or market for which cost is determined using the first-in, first-out (FIFO) method. Goodwill Goodwill represents the excess of the consideration paid over the fair value of net assets and was generated from the acquisition of the minority interest by the Company. Goodwill is amortized over five years. Advertising Costs The Company follows the American Institute of Certified Public Accountants Statement of Position ("SOP"), 93-7 "Reporting for Advertising Costs" to account for its Internet site linking agreements. Under SOP 93-7, the Company amortizes the costs associated with its linking agreements over the contract terms, with the amortization method primarily based on the rate of delivery of a guaranteed number of impressions to be received during the contract term. To the extent additional payments are required to be made based on factors such as click-throughs and new customers generated, such payments will be charged to expense as incurred. At December 31, 1997 and 1998, and September 30, 1999, $0, $41 and $82 of prepaid advertising was included in prepaid expenses. Advertising expense F-9 was $3,174, $5,655 and $65 during 1996, 1997 and 1998, respectively, and was $43 and $72 for the nine month periods ended September 30, 1998 and 1999, respectively. Internet Site Development Costs Internet site development costs are expensed as incurred. Expenses related to Internet site development began in 1999 and totaled $132 for the nine months ended September 30, 1999. Fixed Assets Fixed assets are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, which are generally three to seven years. Leasehold improvements are amortized on a straight-line basis over the related lease terms. Other Assets Other assets represent security deposits on leased facilities and equipment. Revenue Recognition Revenues from food sales are recognized when the related products are shipped. Other revenues represent primarily the sale of vitamins and other supplements to consumers, and the sales of print materials to franchises. Until December 1997, franchise royalty fees were calculated at percentages ranging from 3.4% to 7.0% of the franchisees' monthly net sales. The percentage applied to the franchisees' revenue is contractual and based on factors such as territory population size and annual revenue amounts. Beginning in December 1997, royalty income was fixed at 4% of franchisees' total net sales for all franchises. Minority Interest Minority interest represents the minority shareholders' share of the equity and results of operations of the Company based on their proportionate share of capital contributions. Income Taxes The Predecessor Businesses were flow-through entities which were not subject to federal or state income taxes and, consequently, none have been reflected in the accompanying consolidated financial statements. The owners of the Predecessor Business were required to include their respective share of the profits or losses in their tax returns (see Note 3). nutrisystem.com inc. is a "C" corporation which is subject to corporate level income taxes. As a result of the merger transaction discussed in Note 1, the Company will be subject to corporate income taxes and will provide for income taxes in the accompanying financial statements beginning on September 30, 1999 in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the recognition of deferred tax liabilities and assets for the expected future tax F-10 consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. As a result of the transaction discussed in Note 1, the tax basis of the assets acquired from the Predecessor Businesses exceeded the financial statement carrying amount by $1,975, resulting in a net deferred tax asset of $790 as of September 30, 1999. A valuation allowance of $790 was recorded based on management's current assessment that the net deferred tax asset will not be realized through future taxable income. To the extent that the existing deferred tax asset is realized in the future, the related tax benefit will be credited to equity. Stock Options The Company accounts for stock option plans under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (See Note 11). Fair Value of Financial Instruments The carrying values of the Company's financial instruments approximate their fair values. Net Loss Per Common Share The Company has presented net loss per common share pursuant to SFAS No. 128, "Earnings per Share," and the Securities and Exchange Commission Staff Accounting Bulletin No. 98. Basic loss per common share was computed by dividing net loss applicable to common shareholders by the weighted average number of shares of Common Stock outstanding. The impact of common stock equivalents has not been included in the weighted average shares for diluted loss per share purposes since its effect would be anti-dilutive. Recently Issued Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and disclosure of comprehensive income. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement outlines standards for determining and disclosing information with regards to operating segments. These pronouncements, which were required to be adopted in 1998, had no impact as the Company has no other comprehensive income items to report and is operated as a single segment. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Company is required to adopt this statement beginning in 2001. Currently management believes that SFAS 133 will have no impact on the Company's consolidated financial statements. F-11 In March 1998, the American Institute of Certified Public Accountants issued SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. Adoption of SOP 98-1 will have no effect on the Company's consolidated financial statements. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and operating expenses during the reporting period. Actual results could differ from these estimates. 3. PRO FORMA INFORMATION (UNAUDITED): As discussed in Note 2, on September 27, 1999, the Company became subject to federal and state income taxes. SEC disclosure rules require companies, for informational purposes, to display a pro forma adjustment for the income taxes which would have been recorded if the Company had not been a flow-through entity during the periods presented in the accompanying statements of operations. Due to the recurring losses incurred by the Company, and management's assessment of realization of the related tax deduction, no pro forma tax benefit would be recorded during the years ended December 31, 1996, 1997 or 1998 or the nine months ended September 30, 1998 or 1999. Also on September 27, 1999, the Company's principal shareholder group purchased the remaining interest of the minority shareholder, which resulted in goodwill of $527. The effect of goodwill amortization on results of operations would have been to increase expenses by $105 for each of the years presented, and by $79 for each of the nine-month periods presented had the transaction taken place as of the beginning of the periods. 4. DISPOSITION OF COMPANY-OWNED WEIGHT LOSS CENTERS: During 1997, the Company disposed of its 155 Company-owned centers. The assets and certain liabilities of 53 of its centers were sold, and the remaining centers were closed. Proceeds from the sale were $150. A loss on the disposition reflected in the statement of operations of $5,347 has been recorded for closing the centers, which includes primarily losses on fixed asset disposals of $3,064 and reserves for lease obligations, inventory obsolescence and other liabilities of $2,283. Also in 1996, the Company recorded a charge of $367 in connection with the disposal of certain exercise weight loss centers. F-12 5. FIXED ASSETS: Fixed assets consist of the following: December 31 ------------------- September 30, 1997 1998 1999 ----- ----- ------------- (unaudited) Furniture and fixtures $ 158 $ 150 $ 160 Equipment 331 360 167 ----- ----- ----- 489 510 327 Accumulated depreciation (292) (211) (199) ----- ----- ----- $ 197 $ 299 $ 128 ===== ===== ===== 6. RELATED-PARTY TRANSACTIONS: During 1996, 1997 and 1998, the Company purchased $657, $424 and $172, respectively, of food from a vendor that is an affiliate of the partners of one of the Predecessor Businesses. Food purchases from that vendor totaled $135 and $102 for the nine months ended September 30, 1998 and 1999. For the years ended December 31, 1996, 1997 and 1998, the Company paid retainers and professional fees of $282, $618, and $0, respectively, to a law firm whose partner serves as a member of the Board of Directors of the Predecessor Businesses. No amounts were paid to this firm during the nine months ended September 30, 1998 and 1999. For the years ended December 31, 1996, 1997, and 1998, and the nine months ended September 30, 1998 and 1999, the Company purchased vitamins and supplements of $0, $355, $51, $49, and $14, respectively, from a vendor that is owned by a shareholder. At September 30, 1999, the Company had payables of $47 to related parties. F-13 7. COMMITMENTS AND CONTINGENCIES: The Company leases its warehouse, corporate headquarters and certain equipment. These leases generally have initial terms of three to five years. Certain of the leases also contain escalation clauses based upon increases in costs related to the properties. Lease obligations, with initial or remaining terms of one year or more, consist of the following at December 31, 1998: 1999 $ 180 2000 307 2001 335 2002 350 2003 365 -------- $ 1,537 ======== Total rent expense for the years ended December 31, 1996, 1997 and 1998 was $5,820, $4,762 and $200, respectively, and was $149 in each of the nine month periods ended September 30, 1998 and 1999. The Company has committed to banner advertising and integrated Internet site linking agreements with various Internet companies. These arrangements extend through October 2001 with a total commitment of $6,335 payable in installments over the related contract periods. In September 1997, Nutri/System L.P., one of the Predecessor Businesses, removed a drug combination from its weight loss program after it was shown to cause health problems. Numerous suits were subsequently filed against the Nutri/System L.P. Also, in 1997, the Company obtained a settlement from its insurance carrier for coverage associated with this matter. Consequently, the Company recorded a gain of $7,175, net of related legal costs of $2,325, in the accompanying 1997 statement of operations associated with this settlement. In September 1999, the supplier of the drug combination agreed to indemnify Nutri/System LP with respect to any further liability with respect to this matter. In the opinion of management, the Company has no liability with respect to this matter. The Company is also involved with certain other claims and litigation matters. In the opinion of management, after consultation with legal counsel, the outcome of such matters will not have a material adverse effect on the Company's financial position or results of operations. 8. EMPLOYEE BENEFIT PLAN: During 1996, the Company adopted a qualified defined contribution retirement plan (the "Plan"). Under the provisions of the Plan, substantially all employees meeting minimum age and service requirements are entitled to defer a certain percentage of their compensation. The Company matches 100% of an employee contribution, up to a maximum F-14 Company match of 3% of the employee annual salary. Employees vest immediately in their contributions and vest in the Company contribution over a three-year period of service. The Company's expense for the years ended December 31, 1996, 1997 and 1998 was $44, $60 and $13, respectively, and for the nine months ended September 30, 1998 and 1999 was $8 and $17, respectively. 9. CAPITAL STOCK: Common Stock The Company's certificate of incorporation includes authorization to issue up to 55 million shares of common stock with a $.001 par value per share. As of September 30, 1999, 23,903,322 shares were issued and outstanding. Preferred Stock The Company has also authorized 5,000,000 shares of preferred stock issuable in series upon resolution of the Board of Directors. Unless otherwise required by law, the Board of Directors can, without shareholder approval, issue preferred stock in the future with voting and conversion rights that could adversely affect the voting power of the common stock. The issuance of preferred stock could be expected to, and may have the effect of, delaying, averting, or preventing a change in control of the Company. 10. INCOME TAXES: On September 30, 1999, the Company became subject to federal and state income taxes. At this time, the Company recorded deferred income taxes which represent the tax effect of the cumulative differences between the financial reporting and income tax bases of assets and liabilities. The significant items comprising the Company's deferred income tax assets and liabilities as of September 30, 1999 are as follows: Deferred tax asset- Inventory allowance $ 16 Goodwill 778 Valuation Allowance (790) ----------- 4 Deferred tax liability- Property and equipment (4) ----------- $ -- =========== F-15 The valuation allowance was established based on management's current assessment that the net deferred tax asset will not be realized through future taxable income. 11. STOCK OPTIONS AND WARRANTS: Stock Option Plan In August 1999, the Company adopted the 1999 Equity Incentive Plan (the "Plan"), under which options to purchase shares of the Company's common stock could be granted to key employees. A maximum of 1,000,000 shares of common stock may be issued pursuant to the Plan. These options could be either incentive stock options or nonqualified stock options. The Board of Directors determines the term of each option, but no option can be exercisable more than ten years from the date the option was granted. The Board also determines the option exercise price per share and vesting provisions. On October 7, 1999, the Board granted options to buy 294,500 shares at $1 that vest over a three-year period and expire ten years from the grant date. As permitted under SFAS No. 123, the Company has elected to continue to account for compensation cost using the intrinsic value-based method of accounting as prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123 does require the Company to disclose pro forma net income and pro forma earnings per share amounts as if compensation expense were recognized for options granted. For disclosure purposes, the fair value of stock options granted is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: no dividend yield; expected volatility of 0.1%; risk-free interest rate of 6.04%; and expected life of 10 years. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of subjective assumptions, including the expected stock price volatility. The fair value of the options granted was $133; however, no pro forma compensation expense would have been recognized had the Company adopted the provisions of SFAS No. 123 for financial reporting purposes since the options were not issued during the periods presented. Common Stock Warrants In return for services in connection with the private placement, the placement agent received warrants to purchase 763,740 common shares at $1.00 per share. The fair value of the warrants of $344 was recorded as a reduction of the proceeds from the offering. Fair value was computed using the Black-Scholes option-pricing model as described above. F-16 SCHEDULE II NUTRISYSTEM.COM INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (amounts in thousands)
Balance at Additions Balance At Beginning of Charged to End of Period Write-offs Income Deductions Period ------------ ---------- ----------- ---------- ---------- Year ended December 31, 1998: Allowance for doubtful accounts $ 440 $ (99) $ -- $ -- $ 341 Year ended December 31, 1997: Allowance for doubtful accounts 209 (116) 347 -- 440 Year ended December 31, 1996: Allowance for doubtful accounts 190 (33) 52 -- 209
S-1 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. nutrisystem.com inc. By: /s/ Brian D. Haveson ----------------------------- Brian D. Haveson, President and Chief Executive Officer Date: December 17, 1999 -45- EXHIBIT INDEX (Pursuant to Item 601 of Regulation S-K) Exhibit Number Description of Exhibit - ---------- --------------------------------------------------------- 2.1 Agreement and Plan of Merger dated August 19, 1999 between nutrisystem.com inc. and Ansama Corp. 2.2 Asset Purchase Agreement dated August 16, 1999 between Ansama Corp. and Nutri/System L.P. 2.3 Stock Exchange and Purchase Agreement dated August 16, 1999 among Ansama Corp., HPF Holdings, Inc., Brian D. Haveson and NutriSystem Direct, L.L.C. management (comprised of Joseph Boileau, Kathleen Simone, Deborah Gallen and Frederick C. Tecce) 2.4 Assignments of NutriSystem Direct, L.L.C. Membership Interests dated September 30, 1999 to nutrisystem.com, inc. by each of HPF Holdings, Inc., Brian D. Haveson, Joseph Boileau, Kathleen Simone, Deborah Gallen and Frederick C. Tecce 2.5 Operating Agreement of NutriSystem Direct, L.L.C. dated September 30, 1999 2.6 Intellectual Property Assignment from Nutri/System L.P. to nutrisystem.com inc. dated September 30, 1999 2.7 Assignment of Franchise Agreements from Nutri/System L.P. to nutrisystem.com inc. dated September 30, 1999 3.1 Certificate of Incorporation of nutrisystem.com inc. 3.2 By-laws of nutrisystem.com inc. 4.1 Form of Common Stock certificate of nutrisystem.com inc. 4.2 Form of warrant to purchase Common Stock of nutrisystem.com inc. -46- 10.1 Joint Defense and Indemnification Agreement dated September 27, 1999 between Wyeth Ayerst Laboratories Division of American Home Products Corporation and Nutri/System, L.P. 10.2 Lease, dated December 11, 1997, between Teachers Insurance and Annuity Association and nutrisystem.com inc. as amended by First Amendment to Lease dated October 28, 1999 10.3 Form of Nutri/System L.P. Franchise Agreement 10.4 Form of NutriSystem Direct, L.L.C. Distributor Agreement 10.5 1999 Equity Incentive Plan of nutrisystem.com inc. 21.1 Subsidiaries of nutrisystem.com inc. 23.1 Consent of Arthur Andersen LLP 27.1 Financial data schedule -47- EX-2.1 2 AGREEMENT AND PLAN OF MERGER Exhibit 2.1 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of August 19, 1999, is by and between ANSAMA CORP., a Nevada corporation with a business address at 382 Route 59, Suite 310, Monsey, New York 10952 ("Ansama"), and NUTRISYSTEM.COM INC., a Delaware corporation and wholly-owned subsidiary of Ansama, with a business address at 202 Welsh Road, Horsham, Pennsylvania 19044 ("Nutri"). BACKGROUND Ansama owns 100 shares of the Common Stock of Nutri, constituting 100% of the issued and outstanding shares of Nutri's capital stock. The respective Boards of Directors and stockholders of Ansama and Nutri deem it desirable and in the best interest of Ansama and Nutri that Ansama be merged with and into Nutri upon the terms and conditions hereinafter set forth, all in accordance with the applicable provisions of the laws of the State of Nevada and the General Corporation Law of Delaware (the "DEGCL"). The respective Boards of Directors and stockholders of each of Ansama and Nutri have approved the merger of Ansama with and into Nutri upon the terms and conditions hereinafter set forth, in accordance with the requirements of Nev. Rev. Stat. Ann. sec. 92A.120 and the DEGCL. NOW THEREFORE, in consideration of the foregoing, and in further consideration of the promises and mutual covenants and agreements herein set forth, the parties, intending to be legally bound, covenant and agree as follows: 1. The Merger. (a) On the terms and subject to the conditions set forth in this Plan, at the Effective Time (as hereinafter defined), Ansama shall be merged with and into Nutri (the "Merger"), and Nutri shall survive the Merger. (b) At the Effective Time, the separate corporate existence of Ansama shall cease and all of the property, real, personal and mixed, and all of the rights, privileges, immunities, powers and franchises of Ansama, and all of debts, liabilities and obligations of Ansama shall be deemed to be transferred to and vested in Nutri without further action. (c) Promptly following the Effective Time, Ansama and Nutri shall cause (i) a Certificate of Merger to be filed with the Secretary of State of Delaware as required by Section 252 of the DEGCL, and (ii) Articles of Merger to be filed with the Secretary of State of Nevada as required by Nev. Rev. Stat. Ann. '92A.200. 2. Effective Time. The Merger shall be effective as of the date a Certificate of Merger and Articles of Merger with respect to the Merger are filed in the offices of the Secretary of State of the States of Delaware and Nevada, respectively (the "Effective Time"). 3. Consideration; Cancellation of Nutri Common Stock. At the Effective Time, (i) each outstanding share of Common Stock of Ansama shall automatically be cancelled and converted into the right to receive one share of Nutri Common Stock and (ii) each share of Nutri Common Stock that is outstanding immediately prior to the Effective Time shall be canceled and no payment shall be made with respect thereto. 4. Certificate of Incorporation and By-laws; Officers and Directors. The Certificate of Incorporation and By-laws of Nutri as in effect immediately prior to the Effective Time shall continue in full force and effect after the Effective Time, and the officers and directors of Nutri immediately prior to the Effective Time shall be the officers and directors of Nutri after the Effective Time, in each case as the same may subsequently be changed in accordance with the Certificate of Incorporation and By-laws of Nutri and the DEGCL. 5. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which, taken together, shall constitute one and the same instrument. -2- IN WITNESS WHEREOF, the parties, pursuant to the approval and authority duly given by resolutions adopted by their respective Boards of Directors and stockholders, have caused this Agreement to be executed by their respective duly authorized officers as of the day and year first above written. Attest: ANSAMA CORP. By: /s/ Dennis McNany By: /s/ Irwin Schneidmill -------------------------- ----------------------------- Dennis McNany Irwin Schneidmill Secretary President Attest: NUTRISYSTEM.COM INC. By: /s/ Frederick W. Dreher By: /s/ Brian D. Haveson -------------------------- ----------------------------- Frederick W. Dreher Brian D. Haveson Secretary President -3- EX-2.2 3 ASSET PURCHASE AGREEMENT Exhibit 2.2 ASSET PURCHASE AGREEMENT This Agreement is made as of this 16th day of August, 1999, by and between ANSAMA Corp., a Nevada corporation, located at 382 Route 59, Section 310, Moncey, New York 10952 (hereinafter referred to as the "Buyer") and Nutri/System L.P., a Delaware limited partnership with its principal place of business located at 202 Welsh Road, Horsham, Pennsylvania 19044 (hereinafter referred to as "Seller"). W I T N E S S E T H: WHEREAS, Seller is the franchisor of Nutri/System(R) Weight Loss Centers and sells Nutri/System franchises and prepackaged low calorie food and related products (hereinafter referred to as the "Business"); and WHEREAS, Buyer is a publicly owned company being advised by Brian Haveson, the President of Seller and the person most familiar with the Business and its operation; WHEREAS, Seller desires to sell to Buyer and Buyer wishes to purchase substantially all of the assets of the business including, without limiting the foregoing, Seller's inventory of food products, Seller's patents, trademarks and other intellectual property rights, leasehold interests, franchise agreements, and all additional assets set forth below, except those assets specifically excluded below, and assumes all liabilities and obligations of the Business, except those liabilities specifically excluded below. NOW THEREFORE, in consideration of the premises set forth hereinabove and the mutual promises and covenants herein contained, the parties, intending to be legally bound, agree as follows: 1. Assets to be Conveyed. On the Closing Date (as hereinafter defined), Seller will assign, convey, transfer and deliver to Buyer, by instruments of conveyance in form and substance reasonably acceptable to both parties, the following assets owned by Seller (hereinafter sometimes referred to as the "Assets"): (a) All equipment, fixtures, leasehold improvements, furniture, computers, and software located at or used in the Business located at Seller's headquarters or elsewhere, to include, as a minimum, all of the furniture, fixtures and equipment described in Exhibit "A" attached hereto and incorporated herein; (b) All of Seller's rights and obligations under the lease agreement for Seller's headquarters, as amended (the "Lease Agreement"), and attached hereto as Exhibit "B"; (c) Seller's telephone numbers and telephone equipment for the Business, to the extent assignable; (d) All rental and utility deposits under the Lease Agreement, or on deposit with any supplier or utility company or other company, or deposits securing letters of credit to food vendors; (e) All patents, trademarks, logos, copyrights, trade names, trade secrets, testimonials, agreements of sale, assignments, and leases and licenses thereof and all other intellectual property related to the Business and all goodwill related thereto; (f) All financial and sales records, client and customer lists, including all files and records relating thereto, and all other proprietary information used in connection with the operation of the Business; (g) All franchise agreements; (h) The saleable and marketable inventory, including food, vitamins and other perishable goods and inventory pertaining to the Business operations located at Seller's warehouse at the close of business on the day prior to the Closing Date; and (i) All cash and accounts receivable on Seller's books as of the Closing Date; provided, however, Seller and Buyer hereby agree that no statement or warranty is made concerning the value of the accounts receivable or to what extent they are or are not collectible. 1.1 Assets Excluded from Sale. Notwithstanding anything herein to the contrary the Assets do not include, and Buyer shall not receive and Seller retains all right title and interest in, to and arising directly or indirectly from any and all rights, claims, causes of action, judgments, awards, settlements and other benefits related to or arising from the purchase, sale, prescription or other dealings with fenfluramine, phentermine or Redux or any combination thereof, including without limitation (i) those against any insurance company (including Chubb Insurance Company, and its affiliates) and American Home Products and (ii) arising from loss of or injury to business, bad faith and failure to indemnify. 2. Closing. The closing shall take place on or before , 1999, (the "Closing Date") and shall take place at such place and time as the parties may agree. 3. Assumption of Liabilities. It is expressly agreed and understood that upon closing Buyer will be assuming all liabilities and obligations of Seller, the Business and its operations of any type or nature, known or unknown, absolute, contingent or otherwise, whether arising before or after Closing, including without limitation any and all liabilities and obligations (i) to employees, franchisees, customers, suppliers and others having relations with Seller or the Business, (ii) arising under contracts, leases, agreements, benefit plans and other obligations, (iii) for sales taxes, franchise taxes, employment taxes, property taxes, utilities and other amounts, (iv) for personal injury from products of the Business, except those excluded below, (v) arising from any failure to comply with any law, rule or regulation, (vi) for any infringement of any third party's intellectual property, and arising from any suit, claim or proceeding, except that Seller shall be solely responsible for, and there shall be no assumption of liability by Buyer of, any debt or liability of Seller or the Business, arising out of or related to any claims for personal injury, fraud, breach of contract, false advertising or any related advertising claim, arising out of or related to the sale or prescription by Seller or US Medical Weight Loss Company, Inc., their agents or employees of fenfluramine and/or phentermine and/or Redux, including, without limitation, any claims raised or which could be raised in the list of lawsuits attached hereto as Exhibit C (the "Phen-Fen litigation") in which Seller is a party and for which Seller will continue to be liable, and further there shall be no assumption of any and all legal fees due to Sperling, Slater & Spitz or arising out of the Chubb Custom Insurance Company v. Nutri/System L.P. or Federal Insurance Company v. Nutri/System L.P. litigation (the "Excluded Liabilities"). 4. Consideration for Sale and Transfer. 4.1 Purchase Price. The purchase price to be paid by Buyer to Seller shall be Three Million Dollars ($3,000,000.00). 4.2 Method of Payment. Buyer shall pay the purchase price to Seller at Closing by wire transfer to Seller's bank account in the amount of Three Million Dollars ($3,000,000.00). 4.3 Allocation of Purchase Price. The parties hereto agree that the purchase price for the assets of Seller sold pursuant to this Agreement shall be allocated pursuant to a separate written agreement of the parties. Each party agrees to report this transaction for state and federal income taxes in a manner consistent with this written allocation. 5. Operation Pending Closing. Subject to Article 3, operation of the Business, and income and expenses attributable thereto, prior to the Closing Date shall be maintained in the ordinary course and be for the account of Seller and, on and after the Closing Date for the account of Buyer. Expenses which have been paid in advance for any period extending beyond the Closing Date, including, but not limited to, such items as electricity, water and other utility charges, rent, real and personal property taxes, shall be for the benefit of Buyer as of the Closing Date. Seller shall notify the companies providing the telephone, water, electric and other utility services of the transfer of such services to Buyer and shall advise such companies to effect the transfer of the services and billing therefor on the Closing Date. 6. Seller's Representations and Warranties. Seller represents and warrants to Buyer as follows: 6.1 Seller is a limited partnership, duly organized and validly existing and in good standing under the laws of the State of Delaware and has full power and authority to enter into this transaction, to carry on its business, and to transfer the Assets and other interests specified in this Agreement free and clear of all liens and encumbrances. 6.2 Seller has full partnership power and authority to perform its obligations hereunder. The execution and delivery of this Agreement and performance by Seller of its obligations hereunder have been duly authorized by all necessary partnership action in order to constitute this Agreement as a binding and enforceable obligation of Seller. The execution and delivery of this Agreement and the performance by Seller of its obligations hereunder do not and will not violate any provision of Seller's Partnership Agreement or any other agreement to which it is a party or any judgment, order, decree, law or regulation. This Agreement is a legal, valid and binding agreement, enforceable against the Seller in accordance with its terms. There are no consents required to enable Seller to execute and deliver this Agreement that have not been obtained. 6.3 The Assets are being purchased in an "as is" condition. SELLER MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND WITH RESPECT TO THE ASSETS OR IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY OTHER THAN THOSE SET FORTH IN THIS SECTION 6 AND OTHER DOCUMENTS DELIVERED OR TO BE DELIVERED HEREWITH AND ALL OTHER WARRANTIES EXPRESS OR IMPLIED ARE HEREBY DISCLAIMED, INCLUDING ALL WARRANTIES OF MERCHANTIBILITY, SUITABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 6.4 To the best of Seller's knowledge, after due inquiry, the performance by Seller of, and its compliance with the terms, provisions and conditions of this Agreement does not violate any applicable statute, regulation, order or judgment applicable to it and does not constitute a default under, and is not in any respect in conflict with, the provisions of any bylaw, indenture, or other agreement or any judgment to which Seller is a party or by which it may be bound or affected, including but not limited to any obligation of Seller to its creditors. 7. Covenants of Seller. From and after the date of this Agreement and up to the Closing Date, except as otherwise specifically agreed to in writing by Buyer, Seller agrees not to sell, assign, lease or otherwise transfer or dispose of any of the Assets of the Business except in the ordinary course of business. 8. Conditions to Obligations of Buyer. The obligations of Buyer under this Agreement are additionally subject to the satisfaction of or written waiver by Buyer of each of the following conditions on or before the Closing Date, any of which may be waived by Buyer in writing and each of which shall be considered properly performed if no notice to the contrary has been provided to Seller in writing by the close of any contingency time set forth in this section: (a) that the representations and warranties of Seller contained herein shall be true on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date; (b) that Seller shall have performed all of its obligations and agreements and complied with all covenants and undertakings required by this Agreement between the date hereof and the Closing Date; (c) that Buyer has received funding from Buyer's investors in an amount sufficient to complete this transaction. If Buyer has not received a firm commitment from its investors at least ten (10) days prior to the scheduled Closing Date, then Buyer must give written notice to Seller whether Buyer elects to cancel this Agreement or proceed to Closing without the financing. However, if no written notice is received then this Agreement is terminated and neither party has any continuing obligation to the other; and (d) Prior to the Closing Date, Buyer shall be entitled, through its employees and representatives, to satisfactorily complete such investigations of the property and such examination of the books, records and financial condition of Seller and the Business as Buyer may reasonably request. In order that Buyer may have the full opportunity to do so, Seller shall furnish Buyer and its representatives during such period with all such information concerning the affairs of Seller and the Business as Buyer or such representatives may reasonably request and cause Seller's officers, employees, consultants, agents, accountants and attorneys to cooperate fully with Buyer or such representatives in connection with such review and examination and to make full disclosure of all information and documents requested by Buyer and/or such representatives. Any such investigations and examinations shall be conducted at reasonable times and under reasonable circumstances. 9. Conditions to Obligations of Seller. Obligations of Seller under this Agreement are additionally subject to the satisfaction of or written waiver by Seller of the following conditions on or before the Closing Date, any one of which may be waived by Seller in writing and each of which shall be considered properly performed if no notice to the contrary has been provided to Buyer in writing by the close of any contingency time set forth: (a) that Buyer shall have performed or complied with all of the terms and conditions of this Agreement on its part to be performed or complied with; (b) that all actions, proceedings, instruments and documents required to be delivered by Buyer hereunder or incident to the performance hereof, and all other related matters shall have been delivered by Buyer to Seller; (c) that Buyer has made payment of the purchase price as set forth in Section 4 hereof; (d) delivery of a secretary's certificate certifying Buyer's corporate resolution authorizing Buyer to enter into and consummate this transaction. 10. Seller's Performance at Closing. On the Closing Date, Seller shall execute and deliver or cause to be delivered to Buyer: 10.1 One or more Bills of Sale in the form attached hereto as Exhibit D conveying to the Buyer all of the Assets to be acquired by the Buyer hereunder. 10.2 Assignment and consent of landlord of the Lease Agreement in the form attached hereto as Exhibit E. 10.3 Secretary's Certificate certifying the resolutions of the General Partner of Seller approving this transaction. 10.4 Assignment of any and all trademarks, patents and copyrights for the name "Nutri/System" and all related names and marks all of which are more fully set forth on Exhibit F attached hereto. Copies of the assignments shall be in the form attached hereto as Exhibit G. 10.5 As of the Closing Date Seller shall cease to use the name "Nutri/System" and will change its name to some other name of its choosing that is in no way similar to "Nutri/System". 11. Covenants of Buyer. From and after the date of this Agreement and up to the Closing Date, except as otherwise specifically agreed to in writing by Seller, Buyer agrees to: 11.1 Take any and all actions necessary for the approval and performance of this Agreement and the consummation of the transactions contemplated hereby. 11.2 Cooperate fully with Seller and its counsel in preparation and prosecution of the assignment of the Lease Agreement. 12. Buyer's Representations and Warranties. 12.1 Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. Buyer has all requisite corporate power and authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. 12.2 Buyer has full power and authority to assume and perform its obligations hereunder. The execution and delivery of this Agreement and performance by Buyer of its obligations hereunder have been duly authorized by all necessary corporate action in order to constitute this Agreement as a binding and enforceable obligation of Buyer. 12.3 To the best of Buyer's knowledge, after due inquiry, the performance by Buyer of, and its compliance with the terms, provisions and conditions of this Agreement does not violate any applicable statute, regulation, order or judgment applicable to it and does not constitute a default under, and is not in any respect in conflict with, the provisions of any bylaw, indenture, or other agreement or any judgment to which Buyer is a party or by which it may be bound or affected, including but not limited to any obligation of Buyer to its creditors. 12.4 There are no actions, suits or proceedings pending or threatened against Buyer with respect to this Agreement which might prevent the performance of the transactions contemplated hereby. 13. Buyer's Performance at Closing. On the Closing Date Buyer shall pay to Seller, by wire transfer of funds, the monies payable on the Closing Date as set forth in Section 4 hereof and execute the Assignment of Lease. 14. Leasehold Premises. Seller will assign to Buyer all of its rights, title and interests, including any security deposit, in the Lease Agreement for the Business, without representation or warranty of any kind. Buyer shall, at its sole expense, after Closing use its best efforts to obtain the consent of landlord to the assignment of the Lease Agreement. Buyer shall indemnify, defend and hold harmless Seller against any liability arising from the failure to obtain such consent. 15. Restrictive Covenant. Seller will not, for a period of three (3) years from the date of execution of this Agreement, in the United States of America, engage in the Business the operating assets of which are being purchased by Buyer hereby, or have an interest, as a proprietor, partner, employee, agent, or consultant in any enterprise which shall be so engaged. 15.1 The terms and conditions of this Restrictive Covenant have been established by the mutual agreement of the parties, and in reliance on the validity of this Agreement, Seller will cease engaging in the Business as of the Closing Date. Further, if any court shall determine that the duration, geographical limits or any other provisions of the restrictions contained in this Agreement are unenforceable, Seller agrees that this Agreement shall be deemed amended so as to render such Agreement valid and enforceable, with all other provisions of the Agreement to remain in full force and effect. 16. Cross Indemnification. (a) Indemnification by Seller. Seller shall defend, indemnify and hold harmless Buyer from and against all claims, demands, causes of action, suits, judgments, debts, liabilities and expenses, including attorneys fees, known or unknown (i) resulting from any misrepresentations or nonfulfillment of any condition or obligation on the part of Seller under this Agreement or (ii) which result from the Excluded Liabilities. Seller hereby agrees to defend, indemnify and hold harmless the Buyer from the lawsuits identified on Exhibit C hereto. (b) Indemnification by Buyer. Buyer shall defend, indemnify and hold harmless Seller from and against all claims, demands, causes of action, suits, judgments, debts, liabilities and expenses, known or unknown (i) resulting from any misrepresentations or non-fulfillment of any condition or obligation on the part of Buyer under this Agreement; or (ii) which result from the operation of the Business by Buyer on or after the Closing Date; or (iii) which result from the operation of the Business by Seller prior to Closing, only so long as such Closing occurs, except claims, demands, causes of action, suits, judgments, debts, liabilities and expenses related to the Excluded Liabilities. 17. Assignment. This Agreement and any and all rights or benefits hereunder shall not be assignable by either party without the prior written consent of all other parties. (a) This Agreement shall be binding upon and shall inure to the exclusive benefit of the respective heirs, administrators, legal representatives, successors or permitted assigns of the parties. This Agreement is not intended to, nor shall it create any rights for the benefit of any other party. (b) Any provision of this Agreement found to be unenforceable or prohibited in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such unenforceability or prohibition without invalidating the remaining provisions hereof. 18. Counterparts. This Agreement may be executed in two or more counterparts, which shall each be considered one and the same Agreement. 19. Further Assurance. From time to time after the Closing Date and without further consideration, the parties will execute and deliver, or arrange for the execution and delivery of, such other instruments of conveyance and transfer and take such action or arrange for such other actions as may reasonably be requested to more effectively complete any of the transactions provided for in this Agreement or any document annexed hereto. 20. Termination or Abandonment. Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and abandoned at any time prior to the Closing Date: (a) by the mutual written consent of Buyer and Seller; (b) by Buyer or Seller if any court of competent jurisdiction or governmental body, authority or agency having jurisdiction shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; (c) by Buyer if one or more of the conditions to the obligations of Buyer as set forth in Article 8 hereof has not been fulfilled by the Closing Date; (d) by Seller if one or more of the conditions to the obligations of Seller as set forth in Article 9 hereof has not been fulfilled by the Closing Date; or (e) by Seller if Closing hereunder has not taken place within 45 calendar days after the date of execution hereof. Neither Buyer nor Seller shall be liable to the other for any termination of this Agreement pursuant to this Article 20. 21. Survival. Each party shall be entitled to rely on the representations and warranties of the other set forth herein and on any Exhibit or other document delivered pursuant to this Agreement to the extent the party does not have or receive actual notice that the representation or warranty is untrue or has been breached by the party making the representation or warranty. The representations, warranties, covenants and obligations of the parties made herein shall survive the Closing. 22. Governing Law. This Agreement shall be construed under and in accordance with the laws of the Commonwealth of Pennsylvania. 23. Notices. Any notices or other communications required or permitted hereunder shall be properly delivered if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed as follows: To Seller: Mr. Michael Heisley, Chairman C/o Heico Acquisitions, Inc. 70 West Madison, Suite 5600 Chicago, IL 60602 With a copy to: Stanley Meadows, Esq. McDermott, Will & Emery 227 West Monroe, Suite 3100 Chicago, IL 60606-5096 To Buyer: Mr. Irwin Schniedmill, President ANSAMA Corp. 382 Route 59 Section 310 Moncey, NY 10952 With a copy to: Christopher Lange, Esq. Emmet, Marvin & Martin 120 Broadway New York, NY 10271 or such other address as may be furnished in writing by any party hereto. 24. Merger. This Agreement represents the entire agreement of the parties and may not be modified or changed except in a writing signed by both parties. No party hereto has relied on any representation, oral or written other than those contained herein in connection with the execution and delivery of this Agreement. IN WITNESS WHEREOF, the corporate parties hereto have caused this Asset Purchase Agreement to be executed by their duly authorized officers and their respective corporate seals to be affixed hereto and the individual parties hereto have hereunto set their hands and seal, the day and year first above written. BUYER: SELLER: ANSAMA CORP. NUTRI/SYSTEM L.P. By: /s/ Irwin Schneidmill By: /s/ Stanley H. Meadows ------------------------------- ---------------------------------- Title: President & CEO Title: Assistant Secretary --------------------------- ------------------------------ [EXHIBITS OMITTED] EX-2.3 4 STOCK EXCHANGE AND PURCHASE AGEEMENT Exhibit 2.3 STOCK EXCHANGE AND PURCHASE AGREEMENT This Stock Exchange and Purchase Agreement (the "Agreement") is dated as of this 16th day of August, 1999, by and between HPF Holdings, Inc., a Delaware corporation, with a principal place of business located at 2075 Foxfield Road, St. Charles, IL 60174 ("HPF"), Brian Haveson, an individual, residing at 1704 Scott Drive, Newtown, PA 18940 ("Haveson"); ANSAMA Corp., a Nevada corporation, with a principal place of business located at 382 Route 59, Section 310, Moncey, NY 10952 (the "Company"); Nutri/System Direct, L.L.C. management (comprised of Joe Boileau, Kathleen Simone, and Deborah Gallen and hereinafter collectively referred to as "Management"); and Fred Tecce, an individual residing at 1025 Sentry Lane, Gladwynne, PA 19035 ("Tecce"). WHEREAS, the Company is interested in acquiring all outstanding ownership interests of the direct marketing company, Nutri/System Direct, L.L.C. ("NSDirect"); and WHEREAS, the Interest Holders of NSDirect are willing to sell and/or exchange all of their ownership interests in NSDirect for cash and/or shares of the Company. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I SALE AND EXCHANGE 1.1 On the Closing Date (as hereinafter defined) HPF shall assign, transfer and convey to Company its ownership interest of NSDirect representing eighty-one and one half percent (81.5%) of all outstanding ownership interests in NSDirect. In exchange for its interest in NSDirect, HPF shall receive a payment of Four Hundred Thousand Dollars ($400,000.00). The Company shall make payment to HPF at Closing by wire transfer to HPF's bank account in the amount of Four Hundred Thousand Dollars ($400,000.00). 1.2 On the Closing Date (as hereinafter defined) HPF shall assign, transfer and convey to Company the remainder of its ownership interest in NSDirect representing seven and one half percent (7.5%) of all outstanding ownership interests in NSDirect. In exchange for its ownership interest in NSDirect, HPF shall receive 8,200,000 shares of the Company's common stock, representing 40.9% of all outstanding shares of the Company on a fully diluted basis as of the Closing Date. 1.3 On the Closing Date, Haveson shall assign, transfer and convey to Company his ownership interest in NSDirect representing seven and one half percent (7.5%) of all outstanding ownership interests in NSDirect. In exchange for its ownership interest of NSDirect, Haveson shall receive 8,200,000 shares of the Company's common stock, representing 40.9% of all outstanding shares of the Company on a fully diluted basis as of the Closing Date. 1.4 On the Closing Date, Management shall assign, transfer and convey to Company their ownership interests in NSDirect representing three percent (3%) of all outstanding ownership interests in NSDirect. In exchange for its ownership interest in NSDirect, Management shall receive 600,000 shares of the Company's common stock, representing 2.99% of all outstanding shares of the Company on a fully diluted basis as of the Closing Date. 1.5 On the Closing Date, Tecce shall assign, transfer and convey to Company his ownership interest in NSDirect representing one half of one percent (2.5%) of all outstanding ownership interests in NSDirect. In exchange for his ownership interest in NSDirect, Tecce shall receive 500,000 shares of the Company's common stock, representing 2.5% of all outstanding shares of the Company on a fully diluted basis as of the Closing Date. 1.6 As a result of the transactions contemplated herein, the existing shareholders of record of the Company who hold shares at the date and time of the Closing of this transaction (the "Existing Shareholders") shall retain 2,039,337 shares of the Company's common stock, representing 10.2% of all outstanding shares of the Company on a fully diluted basis as of the Closing Date. 1.7 500,000 shares of the Company's common stock will be set aside as option shares for new and existing employees, representing 2.5% of all outstanding shares of the Company on a fully diluted basis as of the Closing Date. ARTICLE II REPRESENTATIONS AND WARRANTIES 2.1 Representations and Warranties of the Company. Company hereby represents and warrants to HPF, Haveson and Management (the "NSDirect Interest Holders") and Tecce as follows: (a) Incorporation. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. The Company has all requisite corporate power and authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. (b) Capitalization. The authorized capital stock of the Company consists of 55,000,000 shares of common stock, $.01 par value per share, of which 2,039,337 shares are issued and outstanding to Existing Shareholders. All of the Company's issued and outstanding shares of capital stock have been duly authorized and validly issued, are fully paid and non-assessable and are owned by Existing Shareholders. Accurate and complete copies of the Company's charter and bylaws are attached hereto. As of the Closing, the Company shall not have outstanding any stock or securities convertible or exchangeable for any shares of its capital stock containing any profit participation features, nor shall it have outstanding any rights or options to subscribe for or to purchase its capital stock or any stock or securities convertible into or exchangeable for its capital stock or any stock appreciation rights or phantom stock plans. As of the Closing, the Company shall not be subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any warrants, options or other rights to acquire its 2 capital stock, except pursuant to the Certificate of Incorporation. All outstanding securities of the Company were issued in compliance with state and federal securities laws. (c) Execution, Delivery, Binding Effect. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Board of Directors of the Company. The Board of Directors of the Company is not required to submit this Agreement for approval by its stockholders and the stockholders are not required to approve this Agreement. This Agreement is a valid and binding obligation of the Company enforceable against it in accordance with its terms, except as may be limited by applicable bankruptcy and similar laws and general principals of equity. (d) Transfer Free and Clear. The shares of the Company are being transferred to the parties hereto free and clear of all liens, pledges, security interests, restrictions, claims, charges and other encumbrances, and at the time of issuance, will be duly authorized, validly issued, fully paid and non-assessable. (e) Reports with the Securities and Exchange Commission. The Company is a non-reporting Company. The Company last filed a Form 10Q with the Securities and Exchange Commission for the quarter ending September 30, 1992. Subsequent to this date, the Company filed Form 15 with the Securities and Exchange Commission and became a non-reporting Company. The Company's Form 15 filing is attached hereto as Exhibit "A". (f) Conduct of Business; Liabilities. The Company does not currently conduct any business, has no material debts, obligations or liabilities (whether accrued, absolute, contingent, unliquidated or otherwise, whether or not known to the Company and whether due or to become due) and has not entered into any contracts or agreements. Prior to Closing, the Company has not violated and will not violate any laws or governmental rules or regulations. (g) Financial Statements. Attached hereto as Exhibit "B" are the following financial statements: (i) the audited balance sheets of the Company as of December 31, 1998 and December 31, 1997, and the related statements of income and cash flows (or the equivalent) for the respective twelve-month periods then ended; and (ii) the unaudited balance sheet of the Company as of June 30, 1999, and the related statements of income and cash flows (or the equivalent) for the six month period then ended. Each of the foregoing financial statements (including in all cases the notes thereto, if any) is accurate and complete in all material respects, is consistent with the books and records of the Company (which, in turn, are accurate and complete in all material respects) and has been prepared in accordance with generally accepted accounting principals, consistently applied, subject in the case of the unaudited financial statements to the lack 3 of footnote disclosure and changes resulting from normal year-end adjustments (none of which would, alone or in the aggregate, be materially adverse to the financial condition, operating results, assets, operations, or business prospects of the Company taken as a whole). All of the books, records and accounts of the Company are in all material respects accurate and complete and have been prepared in accordance with good business practice and all laws, regulations and rules applicable to the Company and accurately present and reflect in all material respects all of the transactions described therein. 2.2 Representations and Warranties of and the NSDirect Interest Holders. Except as otherwise provided, each NSDirect Interest Holder, singularly and not on behalf of any other NSDirect Interest Holder, hereby represents and warrants to the Company as follows: (a) Interest Ownership. The NSDirect Interest Holder is the beneficial and record owner of its ownership interest of NSDirect and there are no outstanding agreements or rights to subscribe for or purchase its ownership interest. Additionally Haveson and Management, but not HPF represent and warrant that there are no outstanding agreements or rights to subscribe for or purchase any additional ownership interests in NSDirect. (b) Enforceability. This Agreement is a valid and binding obligation of the NSDirect Interest Holder in accordance with its terms, except as may be limited by applicable bankruptcy and similar laws and general principals of equity. (c) NSDirect Ownership Interests. The NSDirect ownership interests are, and at the time of Closing will be, free and clear of all liens, pledges, security interests, restrictions, claims, charges and other encumbrances. (d) The NSDirect ownership interests are being purchased in an "as is" condition. THE NSDIRECT INTEREST HOLDERS MAKE NO REPRESENTATION OR WARRANTY OF ANY KIND WITH RESPECT TO THE OWNERSHIP INTERESTS OR IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY OTHER THAN THOSE SET FORTH IN THIS SECTION 2.2 AND OTHER DOCUMENTS DELIVERED OR TO BE DELIVERED HEREWITH. (e) Organization. NSDirect is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware. NSDirect has all requisite limited liability company power and authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. (f) Financial Statements. Attached hereto as Exhibit "C" are the following financial statements: (i) the unaudited balance sheets of NSDirect as of December 31, 1998 and December 31, 1997, and the related statements of income and cash flows (or the equivalent) for the respective twelve-month periods then ended; and 4 (ii) the unaudited balance sheet of NSDirect as of June 30, 1999, and the related statements of income and cash flows (or the equivalent) for the six-month period then ended. With respect to the attached financial statements Haveson and Management, but not HPF or NSDirect, represent and warrant that each of the foregoing financial statements (including in all cases the notes thereto, if any) is accurate and complete in all material respects, is consistent with the books and records of NSDirect (which, in turn, are accurate and complete in all material respects) and has been prepared in accordance with generally accepted accounting principals, consistently applied, subject in the case of the unaudited financial statements to the lack of footnote disclosure and changes resulting from normal year-end adjustments (none of which would, alone or in the aggregate, be materially adverse to the financial condition, operating results, assets, operations, or business prospects of NSDirect taken as a whole). All of the books, records and accounts of NSDirect are in all material respects accurate and complete and have been prepared in accordance with good business practice and all laws, regulations and rules applicable to NSDirect and accurately present and reflect in all material respects all of the transactions described therein. (g) Execution, Delivery, Binding Effect. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by NSDirect. No consents are required for the execution of this Agreement and it does not violate or conflict with any applicable statute, regulation, order or judgment applicable to NSDirect and does not constitute a default under, and does not conflict with, the provisions of any operating agreement or other agreement or any judgment to which NSDirect is a party or by which it may be bound or affected including but not limited to any obligation of NSDirect to its creditors. ARTICLE III CLOSING; OTHER MATTERS 3.1 Closing. The Closing shall take place on or before _____________, 1999, (the "Closing Date") and shall take place at such place and time as the parties may agree. At the Closing of the transactions contemplated herein, the NSDirect Interest Holders shall deliver to the Company documents representing all of their ownership interests in NSDirect, duly endorsed for transfer. Concurrently therewith the Company shall deliver to the NSDirect Interest Holders and Tecce certificates of the Company's stock in the amounts set forth above for each NSDirect Interest Holder and Tecce, properly registered and issued in the respective names of the NSDirect Interest Holders and Tecce. 3.2 Additional Investment. It is anticipated that on or about the Closing Date the Company will raise an additional five million dollars ($5,000,000.00) at not less than one dollar ($1.00) per share in a private placement of equity based on this Agreement and related agreements. The Company will issue an additional five million (5,000,000) shares of common stock as part of this contemplated transaction. The parties hereto acknowledge that the Company will be making this additional offering and agree to cooperate with the Company in the furtherance of this offering. The parties hereto 5 further acknowledge that their percentage of ownership in the Company will be diluted, as set forth in Exhibit "D" attached hereto, by the proposed offering. 3.3 Conditions to Obligations of the Company. The obligations of the Company under this Agreement are additionally subject to the satisfaction of or written waiver by the Company of each of the following conditions on or before the Closing Date, any of which may be waived by the Company in writing and each of which shall be considered properly performed if no notice to the contrary has been provided to the NSDirect Interest Holders and Tecce in writing by the close of any contingency time set forth in this section: (a) the Company shall have received funding from the Company's investors in an amount sufficient to complete this transaction. If the Company has not received a firm commitment from its investors at least ten (10) days prior to the scheduled Closing Date, then the Company must give written notice to the NSDirect Interest Holders and Tecce whether the Company elects to cancel this Agreement or proceed to Closing without the financing. However, if no written notice is received then this Agreement is terminated and none of the parties hereto has any continuing obligation to any other party hereto; (b) there shall have been no material change in the Business of NSDirect between the date hereof and the Closing Date; (c) prior to the Closing of this transaction, Nutri/System L.P. shall have executed and delivered an Asset Purchase Agreement to Company, a copy of which is attached hereto as Exhibit "E" (the "Asset Purchase Agreement"), and there shall be no remaining conditions to Company's obligation to Close under the Asset Purchase Agreement; (d) prior to the Closing Date, the Company shall be entitled, through its employees and representatives, to satisfactorily complete such investigations of the property and such examination of the books, records and financial condition of NSDirect as the Company may reasonably request. In order that the Company may have the full opportunity to do so, NSDirect and the NSDirect Interest Holders shall furnish the Company and its representatives during such period with all such information concerning the affairs of NSDirect as the Company or such representatives may reasonably request and cause NSDirect's officers, employees, consultants, agents, accountants and attorneys to cooperate fully with the Company or such representatives in connection with such review and examination and to make full disclosure of all information and documents requested by the Company and/or such representatives. Any such investigations and examinations shall be conducted at reasonable times and under reasonable circumstances. (e) All covenants, agreements and conditions contained in this Agreement to be performed or complied with by NSDirect and NSDirect Interest Holders at or prior to the Closing shall have been performed or complied with in all material respects. 6 3.4 Conditions to Obligations of NSDirect Interest Holders and Tecce. The obligations of the NSDirect Interest Holders and Tecce under this Agreement are additionally subject to the satisfaction of each of the following conditions on or before the Closing Date, unless waived by each NSDirect Interest Holder and Tecce in writing: (a) The representations and warranties made by the Company in Section 2.1 shall be true and correct when made, and shall be true and correct as of Closing as if made at Closing; (b) All covenants, agreements and conditions contained in this Agreement to be performed or complied with by the Company at or prior to the Closing shall have been performed or complied with in all material respects; and (c) At or prior to Closing, the Company shall have entered into the Asset Purchase Agreement and that concurrently with the Closing hereunder, the Company and Nutri/System L.P. shall have closed pursuant to the terms of the Asset Purchase Agreement. ARTICLE IV INDEMNIFICATION 4.1 Indemnification by the Company. The Company will indemnify the NSDirect Interest Holders and Tecce for any loss, liability, claims, damages and expenses, including reasonable attorneys fees, suffered by the NSDirect Interest Holders and/or Tecce, or any of them, as a result of any breach by the Company of its representations and warranties or covenants hereunder. 4.2 Indemnification by NSDirect Interest Holders and Tecce. Each NSDirect Interest Holder and Tecce, singularly, and not on behalf of any other NSDirect Interest Holder or Tecce, as the case may be, will indemnify the Company for any loss, liability, claims, damages and expenses, including reasonable attorneys fees, suffered by the Company, as a result of any breach by the NSDirect Interest Holders and/or Tecce of its representations and warranties or covenants hereunder. 4.3 Indemnification Procedures. Any party claiming indemnification hereunder shall give written notice thereof to the party or parties against whom indemnification is sought. If the claim involves a third party claim, notice shall be given timely in order to allow the indemnifying party the opportunity to participate in the defense of the claim, to the extent the party wishes; provided, however, that no failure of an indemnified party to give notice timely shall relieve the indemnifying party of any obligation hereunder except to the extent, if any, that the failure materially prejudices the ability of the indemnifying party to defend the third-party claim. ARTICLE V MISCELLANEOUS MATTERS 5.1 Notices. All notices, requests, demands, payments and other communications under this Agreement shall be in writing and shall be duly given if delivered personally to the person to whom it is authorized to be given, or it is sent by mail, telegraph, overnight 7 courier service, or transmission by telecopy or similar service at the person's address set forth below, or at such other address as the person may from time to time specify by written notice pursuant to this section 5.1. Any notice shall be deemed to be given as of the date so delivered, if delivered personally, or upon confirmation of the telecopy, or as of the date the same was deposited in the United States Mail, or delivered to an overnight courier service, in each case with all applicable charges prepaid, addressed as set forth below: If to Company: Irwin Schniedmill 382 Route 59 Section 310 Moncey, NY 10952 If to HPF: 2075 Foxfield Road St. Charles, IL 60174 Att'n: Michael Heisley If to Haveson: 1704 Scott Drive Newtown, PA 18940 If to Tecce: 1025 Sentry Lane Gladwynne, PA 19035 If to Boileau: 87 Wooden Bridge Road Holland, PA 18966 If to Simone: 3439 Manor Road Huntingdon Valley, PA 19006 If to Gallen: 14 Glenwood Circle Aldan, PA 19018 5.2 Binding Agreement. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their successors, assigns, heirs and personal representatives. 5.3 Entire Agreement. This Agreement and the agreements contemplated herein constitute the entire agreement between the parties with respect to the subject matter hereof; there are no other terms other than those contained herein and therein and this Agreement may not be modified or amended except in a writing signed by the parties hereto. 5.4 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to principles of conflicts of law thereof. 8 5.5 Counterparts. This Agreement may be executed in counterparts and by each party hereto on separate counterparts, each of which shall be deemed an original, but which together shall constitute one and the same agreement. 5.6 Termination or Abandonment. Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and abandoned at any time prior to the Closing Date: (a) by the mutual written consent of the parties hereto; (b) by Company or the NSDirect Interest Holders holding a majority of the NSDirect interests if any court of competent jurisdiction or governmental body, authority or agency having jurisdiction shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; (c) by Company if one or more of the conditions to the obligations of Company as set forth in Section 3.3 hereof has not been fulfilled by the Closing Date; (d) by the NSDirect Interest Holders holding a majority of the NSDirect interests if one or more of the conditions to the obligations of the NSDirect Interest Holders as set forth in Section 3.4 hereof has not been fulfilled by the Closing Date; or (e) by NSDirect Interest Holders holding a majority of the NSDirect interests if Closing hereunder has not taken place within 45 calendar days after the date of execution hereof. Neither Buyer nor Seller shall be liable to the other for any termination of this Agreement pursuant to this Section 5.6. 5.7 Each party shall be entitled to rely on the representations and warranties of the other set forth herein and on any Exhibit or other document delivered pursuant to this Agreement to the extent the party does not have or receive actual notice that the representation or warranty is untrue or has been breached by the party making the representation or warranty. The representations, warranties, covenants and obligations of the parties made herein shall survive the Closing. 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first set forth above. HPF HOLDINGS, INC. ANSAMA CORP. BY: /s/ Stanley H. Meadows BY: /s/ Irwin Schniedmill ------------------------- --------------------------- Assistant Secretary President and CEO /s/ Brian Haveson /s/ Fred Tecce - ----------------------------- ------------------------------ BRIAN HAVESON FRED TECCE /s/ Joe Boileau /s/ Kathleen Simone - ----------------------------- ------------------------------ JOE BOILEAU KATHLEEN SIMONE /s/ Deborah Gallen - ----------------------------- DEBORAH GALLEN 10 EX-2.4 5 ASSIGNMENTS OF MEMBERSHIP INTEREST Exhibit 2.4 ASSIGNMENT OF MEMBERSHIP INTEREST HPF Holdings, Inc. ("Assignor"), a Delaware corporation, for good and valuable consideration, receipt of which is hereby acknowledged, intending to be legally bound, hereby assigns, transfers and delivers to nutrisystem.com inc. ("Assignee"), a Delaware corporation, all of Assignor's right, title, claim and interest in and to its eighty-nine percent (89%) membership interest in NutriSystem Direct, L.L.C., a Pennsylvania limited liability company, in accordance with the provisions of the Stock Exchange and Purchase Agreement dated as of August 16, 1999, among Assignee, HPF Holdings, Inc., Brian Haveson, Joseph Boileau, Kathleen Simone, Deborah Gallen and Frederick C. Tecce. IN WITNESS WHEREOF, the undersigned does hereby execute this Assignment of Membership Interest as of the 30th day of September, 1999. HPF HOLDINGS, INC. By: /s/ Stanley H. Meadows -------------------------- Stanley H. Meadows Assistant Secretary ASSIGNMENT OF MEMBERSHIP INTEREST Brian D. Haveson ("Assignor"), an individual, for good and valuable consideration, receipt of which is hereby acknowledged, intending to be legally bound, hereby assigns, transfers and delivers to nutrisystem.com inc. ("Assignee"), a Delaware corporation, all of Assignor's right, title, claim and interest in and to his seven and one-half percent (7.5%) membership interest in NutriSystem Direct, L.L.C., a Pennsylvania limited liability company, in accordance with the provisions of the Stock Exchange and Purchase Agreement dated as of August 16, 1999, among Assignee, HPF Holdings, Inc., Brian Haveson, Joseph Boileau, Kathleen Simone, Deborah Gallen and Frederick C. Tecce. IN WITNESS WHEREOF, the undersigned does hereby execute this Assignment of Membership Interest as of the 30th day of September, 1999. /s/ Brian D. Haveson --------------------------- Brian D. Haveson ASSIGNMENT OF MEMBERSHIP INTEREST Joseph Boileau ("Assignor"), an individual, for good and valuable consideration, receipt of which is hereby acknowledged, intending to be legally bound, hereby assigns, transfers and delivers to nutrisystem.com inc. ("Assignee"), a Delaware corporation, all of Assignor's right, title, claim and interest in and to his one percent (1.0%) membership interest in NutriSystem Direct, L.L.C., a Pennsylvania limited liability company, in accordance with the provisions of the Stock Exchange and Purchase Agreement dated as of August 16, 1999, among Assignee, HPF Holdings, Inc., Brian Haveson, Joseph Boileau, Kathleen Simone, Deborah Gallen and Frederick C. Tecce. IN WITNESS WHEREOF, the undersigned does hereby execute this Assignment of Membership Interest as of the 30th day of September, 1999. /s/ Joseph Boileau ------------------------- Joseph Boileau ASSIGNMENT OF MEMBERSHIP INTEREST Kathleen Simone ("Assignor"), an individual, for good and valuable consideration, receipt of which is hereby acknowledged, intending to be legally bound, hereby assigns, transfers and delivers to nutrisystem.com inc. ("Assignee"), a Delaware corporation, all of Assignor's right, title, claim and interest in and to her one percent (1.0%) membership interest in NutriSystem Direct, L.L.C., a Pennsylvania limited liability company, in accordance with the provisions of the Stock Exchange and Purchase Agreement dated as of August 16, 1999, among Assignee, HPF Holdings, Inc., Brian Haveson, Joseph Boileau, Kathleen Simone, Deborah Gallen and Frederick C. Tecce. IN WITNESS WHEREOF, the undersigned does hereby execute this Assignment of Membership Interest as of the 30th day of September, 1999. /s/ Kathleen Simone ------------------------- Kathleen Simone ASSIGNMENT OF MEMBERSHIP INTEREST Deborah Gallen ("Assignor"), an individual, for good and valuable consideration, receipt of which is hereby acknowledged, intending to be legally bound, hereby assigns, transfers and delivers to nutrisystem.com inc. ("Assignee"), a Delaware corporation, all of Assignor's right, title, claim and interest in and to her one percent (1.0%) membership interest in NutriSystem Direct, L.L.C., a Pennsylvania limited liability company, in accordance with the provisions of the Stock Exchange and Purchase Agreement dated as of August 16, 1999, among Assignee, HPF Holdings, Inc., Brian Haveson, Joseph Boileau, Kathleen Simone, Deborah Gallen and Frederick C. Tecce. IN WITNESS WHEREOF, the undersigned does hereby execute this Assignment of Membership Interest as of the 30th day of September, 1999. /s/ Deborah Gallen ------------------------ Deborah Gallen ASSIGNMENT OF MEMBERSHIP INTEREST Frederick C. Tecce ("Assignor"), an individual, for good and valuable consideration, receipt of which is hereby acknowledged, intending to be legally bound, hereby assigns, transfers and delivers to nutrisystem.com inc. ("Assignee"), a Delaware corporation, all of Assignor's right, title, claim and interest in and to his two and one-half percent (2.5%) membership interest in NutriSystem Direct, L.L.C., a Pennsylvania limited liability company, in accordance with the provisions of the Stock Exchange and Purchase Agreement dated as of August 16, 1999, among Assignee, HPF Holdings, Inc., Brian Haveson, Joseph Boileau, Kathleen Simone, Deborah Gallen and Frederick C. Tecce. IN WITNESS WHEREOF, the undersigned does hereby execute this Assignment of Membership Interest as of the 30th day of September, 1999. /s/ Frederick C. Tecce --------------------------- Frederick C. Tecce EX-2.5 6 OPERATING AGREEMENT Exhibit 2.5 NUTRISYSTEM DIRECT, L.L.C. OPERATING AGREEMENT This Operating Agreement (this "Agreement") is made as of September 30, 1999, by nutrisystem.com inc., a Delaware corporation with its principal place of business at 202 Welsh Road, Horsham, Pennsylvania 19044 (the "Member"). RECITALS: WHEREAS, NutriSystem Direct, L.L.C. (the "Company") was formed as a limited liability company on February 6, 1998 under the Pennsylvania Limited Liability Company Law of 1994; and WHEREAS, the initial members of the Company (the "Former Members") consisted of HPF Holdings, Inc., Brian D. Haveson, Joseph Boileau, Kathleen Simone, Deborah Gallen and Frederick C. Tecce; and WHEREAS, pursuant to a Stock Exchange and Purchase Agreement dated August 16, 1999 among the Former Members and the Member (as successor to Ansama Corp., a Nevada corporation), the Former Members have assigned to the Member 100% of the Interests in the Company; and WHEREAS, the Member is now the sole member of the Company; and WHEREAS, the Member wishes, by this Agreement, to provide for the administration of the business and affairs of the Company and the rights and obligations of the Member with respect thereto; NOW, THEREFORE, in consideration of the premises and covenants herein contained and intending to be legally bound hereby, the Member hereby agrees as follows: 1. Definitions. For purposes of this Agreement, the following terms shall have the following definitions: "Act" means the Pennsylvania Limited Liability Company Law of 1994, 15 P.S. '8901, et seq. "Capital" means the sum of all of the money and other property contributed to the Company by the Member and the Former Members as Capital Contributions from time to time. "Capital Contribution" means each initial and subsequent contribution to the Capital of the Company. "Certificate" means the Certificate of Organization of the Company filed with the Department of State of the Commonwealth of Pennsylvania, as amended from time to time. "Distributable Cash" means, for any fiscal year, the total cash gross receipts of the Company from all sources during such year less (i) any reserves established by action of the Member, (ii) payments of interest and principal on any liabilities of the Company and (iii) the expenditures incurred by the Company during such year other than those paid out of reserves previously established pursuant to clause (i) hereof. "Interest in the Company" means the Member's percentage ownership interest in the Company. "Transfer" means any and all types of transfers including, but not limited to, any sale, conveyance, assignment, disposition, distribution, encumbrance, pledge, mortgage, hypothecation or gift. 2. Name. The name of the Company shall be "NutriSystem Direct, L.L.C." and all business of the Company shall be conducted under that name or such fictitious names as may be designated by the Member from time to time. 3. Registered Office. The registered office and the principal place of business of the Company shall be maintained at 202 Welsh Road, Horsham, Pennsylvania 19044. The Company may from time to time change such registered office and principal place of business with the consent of the Member. The Member agrees to execute and deliver all necessary documents in connection with the registration of the Company in all jurisdictions requiring such registration. 4. Purposes. The purposes of the Company are to engage in the provision of weight loss services and products and all other lawful activities incidental or related thereto. 5. Term; Fiscal Year. The Company shall continue until terminated in accordance with this Agreement. The fiscal year of the Company shall end on December 31. 6. Member and its Interest. -2- (a) Member. The Member is the sole member of the Company and owns a 100% Interest in the Company. (b) Capital Contribution. Based upon Capital Contributions made to the Company by the Former Members, which have been assigned to the Member, the aggregate Capital Contribution of the Member as of the date of this Agreement is $100,000. The Member shall not be entitled to receive any interest on any Capital Contribution. The Member shall not be obligated to make any additional Capital Contribution to the Company; provided, however, that this Agreement shall be amended from time to time to reflect any additional Capital Contributions made by the Member to the Company. 7. Allocation of Profits and Losses and Cash Distributions. (a) Profits and Losses. All income, expenses, deductions, profits and losses of the Company for both book and tax purposes shall be allocated to the Member. (b) Cash Distributions. Distributable Cash shall be distributed to the Member annually based upon actual amounts available, unless waived by the Member in whole or in part. 8. Management of the Company. (a) General Management. Management and control of the operations of the Company and all decisions with respect to the Company's affairs shall rest exclusively with the Member. (b) Conduct of Company Affairs by the Member. The Member shall have the right to act for and on behalf of the Company. Without limiting the generality of any of the foregoing provisions of this Section 8(b), the Member shall have the authority to perform the following acts: (i) monitor, supervise, manage and control the business activities of the Company and its employees; (ii) open, maintain and close bank accounts and draw checks, drafts or orders for the payment of money; (iii) receive, dispose of and deal in all checks, money and other personal property of the Company; -3- (iv) employ or retain employees, engineers, consultants, attorneys, accountants and agents and terminate such employment; (v) maintain one or more offices and, in connection therewith, rent or acquire office space and do such other acts as may be necessary or appropriate in connection with the maintenance of such offices; (vi) expend the capital and revenues of the Company in furtherance of the Company's business; (vii) enter into agreements and contracts with third parties, terminate such agreements, and institute, defend and settle litigation arising therefrom, and give receipts, releases and discharges with respect to all of the foregoing and any matters incident or related thereto; (viii) borrow money and issue guaranties and evidences of indebtedness; (ix) purchase, lease or otherwise acquire all or substantially all of the properties, assets, stock or other equity interests of another entity; (x) maintain at the expense of the Company such insurance coverage as the Member shall determine for workers' compensation, comprehensive general liability, product liability, property liability and professional liability, if available, and any and all other insurance necessary or appropriate to the business of the Company; (xi) acquire by purchase, lease or otherwise any real or personal property that may be necessary, convenient or incidental to the accomplishment of the purposes of the Company; (xii) determine the accounting methods and conventions to be used in the preparation of the Company's financial statements and tax returns and make any and all elections under the tax laws of the United States, the several states and other relevant jurisdictions as to the treatment of the Company's income, expenses, deductions, profits and losses and any other method or procedure relating to the preparation of the Company's financial statements and tax returns; and (xiii) engage in any kind of activity and perform and carry out contracts of any kind necessary to, or in connection with, or incidental to the accomplishment of the purposes of the Company. -4- (c) Indemnification of the Member. The Company shall indemnify and hold harmless the Member from all liabilities, losses, costs, expenses and damages including, without limitation, reasonable attorneys' fees, and for judgments and amounts paid in settlement of any action, suit or proceeding or arising from any threatened, pending, settled or completed action, suit or proceeding in which the Member is or was a party or threatened to be made a party arising from or relating to the Company; provided that the Member's act or omission was not the result of willful misconduct or recklessness on the part of the Member. The foregoing right of indemnification shall be in addition to any other rights to which the Member may otherwise be entitled and shall inure to the benefit of the successors and assigns of the Member. (d) Dealings with the Member and its Affiliates. The Company may employ, appoint, contract or otherwise deal with the Member and any person or entity affiliated with or related to the Member without restriction and without any effect on the validity of such dealings. 9. Liabilities and Rights of Member. Notwithstanding anything to the contrary contained herein, the liability of the Member for the debts, obligations and expenses of the Company shall in no event exceed the aggregate amount of its Capital Contributions to the Company, except as otherwise required by law. 10. Banking; Books and Records. (a) Banking. All funds of the Company shall be deposited and kept in its name in such Company bank account or accounts as shall be designated by the Member. All withdrawals therefrom shall be made upon checks or drafts signed by the Member or employees of the Company duly authorized by the Member pursuant to Section 8(b) hereof. (b) Books and Records. The Member shall be responsible for overseeing the maintenance of the Company's books and records. The Company's books and records shall at all times be maintained in the principal office or such other office as the Member shall designate for such purpose, and shall be open to the inspection and examination at reasonable times by the Member or its duly authorized representatives. 11. Transfer of Interests. (a) Transfers by the Member. The Member may transfer all, or any portion of, its Interest in the Company or rights in its Interest in the Company to one or more successors. -5- (b) Admission of Members. Additional Members may be admitted to the Company upon the approval of the Member. No prospective Member may be admitted to the Company until such prospective Member shall execute a joinder to this Agreement in form and substance satisfactory to the Company, whereby the additional Member agrees to be bound by all of the terms and conditions of this Agreement then in effect. Upon the admission of each additional Member, the Interest in the Company of such additional Member shall be as specified at the time such new Member shall be admitted, the Interests in the Company of all other Members of the Company shall be proportionately reduced and this Agreement shall be amended to reflect the Capital Contributions and respective Interests in the Company of the Members as so changed. 12. Termination and Liquidation. (a) Termination. The existence of the Company shall terminate upon the occurrence of any of the following: (i) the written consent of the Member to dissolve the Company and the filing of a certificate of dissolution pursuant to the Act; (ii) the sale of all or substantially all of the assets owned by the Company and the collection of all of the net proceeds therefrom or (iii) the entry of a decree of judicial dissolution pursuant to the Act. (b) Liquidation. In the event of the termination of the Company, the Member shall within a reasonable period of time prepare, or cause to be prepared, a full and accurate statement of the Company's assets and liabilities and results of operations since the last previous statement, convert the Company's assets to cash, collect all amounts due the Company, including amounts owed by the Member, discharge the debts of the Company and then cause all remaining funds to be distributed to the Member. 13. Miscellaneous. (a) Amendments. Amendments to this Agreement shall become effective only upon the execution of a written instrument describing such amendments signed by the Member. (b) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. (c) Headings. The headings herein have been included for convenience of reference only and shall not be considered in interpreting this Agreement. -6- (d) Integration. This Agreement constitutes the entire agreement of the Member with respect to the subject matter hereof and shall supersede all oral agreements and prior writings with respect to the subject matter hereof. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the Member and its successors and assigns. -7- IN WITNESS WHEREOF, the Member has executed this Agreement as of the day and year first above written. NUTRISYSTEM.COM INC. By: /s/ Brian D. Haveson ------------------------- Brian D. Haveson President -8- EX-2.6 7 QUITCLAIM ASSIGNMENT Exhibit 2.6 QUITCLAIM ASSIGNMENT For good and valuable consideration, receipt of which is hereby acknowledged, Nutri/System L.P. ("Assignor"), a Delaware limited partnership with its principal place of business located at 202 Welsh Road, Horsham, Pennsylvania 19044, hereby sells, assigns, transfers and conveys to nutrisystem.com inc. ("Assignee"), a Delaware corporation and successor by merger to Ansama Corp., a Nevada corporation, with its principal place of business located at 202 Welsh Road, Horsham, Pennsylvania 19044, whatever rights, title and interest Assignor may now have or has ever had in the trademarks and service marks (hereinafter collectively referred to as "the Trademarks") identified and listed in the attached Exhibit A, and any goodwill of Assignor's business symbolized by the Trademarks together with all claims for damages by reason of infringement of the Trademarks, with the right to sue for and collect the same for its own use and enjoyment, and for the use and enjoyment of its successors, assigns or other legal representatives. ASSIGNOR MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER TO ASSIGNEE AS TO THE RIGHTS, TITLE AND INTEREST HELD BY ASSIGNOR IN THE TRADEMARKS NOR ANY REPRESENTATION OR WARRANTY OF ANY KIND IN CONNECTION WITH THE TRANSACTION CONTEMPLATED HEREIN. ADDITIONALLY, ALL WARRANTIES EXPRESS OR IMPLIED ARE HEREBY DISCLAIMED, INCLUDING ALL WARRANTIES OF MERCHANTABILITY, SUITABILITY AND FITNESS FOR A PARTICULAR PURPOSE. ASSIGNOR: NUTRI/SYSTEM L.P. Dated: September 30, 1999 By: /s/ Brian D. Haveson -------------------------- Brian D. Haveson President COMMONWEALTH OF PENNSYLVANIA CITY OF PHILADELPHIA On this 30th day of September, 1999, before me appeared Brian D. Haveson, the person who signed this instrument, and who acknowledged that he has the authority to sign said instrument on behalf of Nutri/System L.P., a Delaware limited partnership. /s/ Ann Marie Bruski -------------------------- Notary Public My Commission Expires Nov. 13, 2000 ------------- [EXHIBITS OMITTED] EX-2.7 8 ASSIGNMENT OF FRANCHISE AGREEMENTS Exhibit 2.7 ASSIGNMENT OF FRANCHISE AGREEMENTS ASSIGNMENT made as of this 30th day of September, 1999 between Nutri/System L.P., a Delaware limited partnership (hereinafter referred to as "Assignor"), and nutrisystem.com inc., a Delaware corporation and successor by merger to Ansama Corp., a Nevada corporation (hereinafter referred to as "Assignee"). WHEREAS, Assignor is the Franchisor pursuant to Exclusive Franchise Agreements with its franchisees, a representative copy of which is attached hereto as Exhibit A and a list of all existing franchise agreements is attached hereto and incorporated herein as Exhibit B (the "Franchise Agreements"); and WHEREAS, pursuant to an Asset Purchase Agreement between Assignor and Assignee dated as of August 16, 1999 ("Purchase Agreement"), Assignor is required to assign its interest in the aforesaid Franchise Agreements to Assignee and Assignee is required to assume the obligations thereunder. NOW, THEREFORE, in consideration of the Purchase Agreement and of the mutual covenants therein and herein set forth, it is hereby agreed as follows: 1. Assignor does hereby sell, assign, and transfer to Assignee any and all of Assignor's right, title and interest in and to the aforesaid Franchise Agreements and any and all rights, duties and obligations thereunder. 2. Assignee hereby accepts the foregoing assignment and promises and agrees to assume and faithfully perform all covenants, stipulations, agreements and obligations under the Franchise Agreements accruing on or after the Closing Date, or otherwise attributable to the period commencing on the Closing Date and continuing thereafter. 3. Assignee shall indemnify and save Assignor harmless from any and all claims, demands, actions, causes of action, suits, proceedings, damages, liabilities and costs and expenses of every nature, whatsoever and relating to the Franchise Agreements accruing on or after the Closing Date. 4. This Assignment shall be binding upon the successors and assigns of the parties. The parties shall execute and deliver such future additional agreements and documents as may be necessary to carry out the provisions of this Assignment. 5. Anything to the contrary contained herein notwithstanding, if the Purchase Agreement shall fail of performance or become null and void, this Assignment shall become null and void and of no effect whatsoever. 6. All capitalized terms used herein but not otherwise defined herein shall have the same meaning as in the Purchase Agreement. IN WITNESS WHEREOF, the parties have hereunto set their hands effective as of the day and year first above written. ASSIGNEE: NUTRISYSTEM.COM INC. (successor by merger to Ansama Corp.) By: /s/ Brian D. Haveson ------------------------- Brian D. Haveson President ASSIGNOR: NUTRI/SYSTEM L.P. By: /s/ Brian D. Haveson ------------------------- Brian D. Haveson President -2- [EXHIBITS OMITTED] EX-3.1 9 CERTIFICATE OF INCORPORATION Exhibit 3.1 CERTIFICATE OF INCORPORATION OF NUTRISYSTEM.COM INC. FIRST. The name of the corporation is nutrisystem.com inc. (the "Corporation"). SECOND. The registered office of the Corporation in the State of Delaware is to be located at 314 South State Street, Dover, Delaware 19901, in the County of Kent. The registered agent at such address is be Capitol Corporate Services, Inc. THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware (the "DGCL"). FOURTH. The aggregate number of shares of stock which the Corporation shall have the authority to issue is 60,000,000 shares, consisting of (i) 55,000,000 shares of Common Stock (the "Common Stock"), par value $.001 per share, and (ii) 5,000,000 shares of Series Preferred Stock (the "Preferred Stock"), par value $.001 per share. (a) Each holder of Common Stock shall be entitled to one vote for each share of Common Stock held. Each share of Common Stock shall have identical powers, preferences, qualifications, limitations, restrictions and other rights. (b) The Preferred Stock may be issued from time to time by the Board of Directors of the Corporation as herein provided in one or more series. The designations, relative rights (including voting rights), preferences, limitations and restrictions of the Preferred Stock, and particularly of the shares of each series thereof, may, to the extent permitted by law, be similar or may differ from those of any other series. The Board of Directors of the Corporation is hereby expressly granted authority, subject to the provisions of this Article Fourth, to issue from time to time Preferred Stock in one or more series and to fix from time to time before issuance thereof, by filing a certificate of designations pursuant to the DGCL, the number of shares in each such series and all designations, relative rights (including the right, to the extent permitted by law, to convert into shares of any class or into shares of any series of any class), preferences, limitations and restrictions of the shares in each such series. Notwithstanding anything to the contrary set forth hereinabove, the powers, preferences and rights, and the qualifications, limitations and restrictions, of the Preferred Stock shall be subject to the following: (i) The number of authorized shares of the Preferred Stock may be increased or decreased, but not below the number of shares then outstanding, by the affirmative vote of the holders of a majority of the voting powers of the stock of the Corporation entitled to vote irrespective of any other voting requirements set forth in Section 242(b)(2) of the DGCL, but subject in all events to compliance with the requirements of this Article FOURTH. (ii) All shares of Preferred Stock of the same series shall be identical in all respects, except that shares of one series issued at different times may differ as to the dates, if any, from which dividends thereon, if any, may accumulate. All shares of Preferred Stock of all series shall be of equal rank and shall be identical in all respects, except that, to the extent not otherwise limited in this Article FOURTH, any series may differ from any other series with respect to any one or more of the designations, relative rights, preferences, limitations and restrictions set forth in a certificate of designations filed under the DGCL with respect to any series. (iii) Except as otherwise specifically provided in the certificate of designations filed pursuant to the DGCL with respect to any series of Preferred Stock or as otherwise provided by law, the Preferred Stock shall not have any right to vote for the election of directors or for any other purpose and the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes. In all instances in which voting rights are granted to the Preferred Stock or any series thereof, such Preferred Stock or series thereof shall vote with the Common Stock as a single class, except as otherwise provided in the certificate of designations filed pursuant to the DGCL with respect to any series of Preferred Stock or as otherwise provided by law. (c) In the event of any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, each series of Preferred Stock shall have preference and priority over the Common Stock for payment of the amount to which each outstanding -2- series of Preferred Stock shall be entitled in accordance with the provisions thereof and each holder of Preferred Stock shall be entitled to be paid in full such amount, or have a sum sufficient for the payment in full set aside, before any payments shall be made to the holders of the Common Stock. After the holders of the Preferred Stock of each series shall have been paid in full the amounts to which they respectively shall be entitled, or a sum sufficient for the payment in full set aside, the remaining net assets of the Corporation shall be distributed pro rata to the holders of the Common Stock in accordance with their respective rights and interests, to the exclusion of the holders of Preferred Stock. A consolidation or merger of the Corporation with or into another corporation or corporations, or a sale, whether for cash, shares of stock, securities or properties, of all or substantially all of the assets of the Corporation, shall not be deemed or construed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Article FOURTH. FIFTH. The name and mailing address of the incorporator is Donna Juhrden, c/o Duane, Morris & Heckscher LLP, 314 S. State Street, Dover, Delaware 18901. The powers of the incorporator shall terminate upon the election of directors. SIXTH. A director of the Corporation shall not be personally liable to the Corporation or to its stockholders for monetary damages for breach of fiduciary duty as a director except for liability to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the DGCL of the State of Delaware; or (iv) for any transaction from which the director derived an improper personal benefit. In discharging the duties of their respective positions, the Board of Directors, committees of the Board of Directors, individual directors and individual officers may, in considering the best interests of the Corporation, consider the effects of any action upon employees, suppliers and customers of the Corporation, communities in which offices or other establishments of the Corporation are located and all other pertinent factors. SEVENTH. The directors of the Corporation shall have the power to make and to alter or amend the By-laws of the Corporation; to fix the amount to be reserved as working capital and to authorize and cause to be executed, mortgages and liens, without limit as to the amount, upon the property and franchises of the Corporation. The By-laws -3- of the Corporation shall determine whether and to what extent the accounts and books of the Corporation, or any of them, shall be open to the inspection of the stockholders. No stockholder of the Corporation shall have any right of inspecting any account, book or document of the Corporation, except as conferred by law, the By-laws of the Corporation or by resolution of the stockholders. EIGHTH. The Corporation shall, to the maximum extent permitted from time to time under the law of the State of Delaware, indemnify and upon request shall advance expenses to any person who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or claim, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was or has agreed to be a director of the Corporation or while a director is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of any corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, against expenses (including attorneys' fees and expenses), judgments, fines, penalties and amounts paid in settlement incurred in connection with the investigation, preparation to defend or defense of such action, suit, proceeding or claim; provided, however, that the foregoing shall not require the Corporation to indemnify or advance expenses to any person in connection with any action, suit, proceeding, claim or counterclaim initiated by or on behalf of such person. Such indemnification shall not be exclusive of other indemnification rights arising under any By-law, agreement, vote of directors or stockholders or otherwise and shall inure to the benefit of the heirs and legal representatives of such person. Any person seeking indemnification under this Article Ninth shall be deemed to have met the standard of conduct required for such indemnification unless the contrary shall be established. Any repeal or modification of the foregoing provisions of this Article Ninth shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such repeal or modification. NINTH. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, the number of members of which shall be set forth in the By-laws of the Corporation. The election of directors need not be by ballot unless the By-laws shall so require. -4- TENTH. The stockholders and directors shall have the power to hold meetings and keep the books, documents and papers of the Corporation outside the State of Delaware, at such places as may be from time to time designated by the By-laws of the Corporation or by resolution of the directors, except as otherwise required by the laws of the State of Delaware. ELEVENTH. The Corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation in the manner now or hereinafter prescribed by the laws of the State of Delaware. All rights herein conferred are granted subject to this reservation. THE UNDERSIGNED, being the incorporator, for the purpose of forming a corporation under the laws of the State of Delaware, does make, file and record this Certificate of Incorporation, and does certify that the facts herein stated are true and, accordingly, does set forth her hand. Dated: August 17, 1999 /s/ Donna Juhrden (SEAL) --------------------------- Donna Juhrden -5- EX-3.2 10 BY-LAWS Exhibit 3.2 BY-LAWS OF NUTRISYSTEM.COM INC. ARTICLE 1 OFFICES Section 1.1 The Corporation shall have and maintain in the State of Delaware a registered office which may, but need not be, the same as its place of business. Section 1.2 The Corporation may also have offices at such other places as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE 2 STOCKHOLDERS Section 2.1 All meetings of the stockholders shall be held at such place, either within or without the State of Delaware, and at such date and time, as may be designated by the Board of Directors and as shall be specified in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2.2 An annual meeting of the stockholders, for the election of directors and for the transaction of such other business as may properly be brought before the meeting, shall be held at such place, date and time as the Board of Directors may designate and as shall be specified in the notice of the meeting or in a duly executed waiver of notice thereof. In the absence of such a designation by the Board of Directors, the Annual Meeting of Stockholders shall be held during the month of May each year on a date to be determined from year to year by the Board of Directors. Section 2.3 Special meetings of the stockholders, for any purpose or purposes, may be called by the Board of Directors or the President and shall be called by the President or the Secretary at the request in writing of a majority of the members of the Board of Directors then in office. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at all special meetings shall be confined to the objects stated in the notice thereof. Section 2.4 Written notice of any annual or special meeting of stockholders shall be mailed to each stockholder entitled to vote thereat at his address as it appears on the records of the Corporation, not fewer than ten nor more than sixty days before the date of such meeting. Such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to each stockholder at his address as it last appears on the records of the Corporation. Such notice shall state the place, date and hour of the meeting, and, in the case of a special meeting, shall state the purpose or purposes for which the meeting is called. Section 2.5 At any meeting of the stockholders, the holders of a majority of all of the issued and outstanding shares of stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, except to the extent that the presence of a larger number of stockholders may be required by law, by the Certificate of Incorporation of the Corporation or by these By-laws. If a quorum shall fail to be present or represented at any meeting, the chairman of the meeting or the holders of a majority of the shares of the stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date or time. When a meeting is so adjourned, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted that might have been transacted at the original meeting. Section 2.6 At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing or any complete and reliable copy, facsimile telecommunication or other reproduction of the writing executed by such stockholder or by an authorized officer, director, employee or agent of such stockholder, to the extent permitted by law, and submitted to the Secretary at or before such meeting, but no proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Each stockholder shall have one vote for each share of stock entitled to vote that is registered in his name on the record date for the meeting, except as otherwise provided herein or required by law. All elections of directors by the stockholders shall be by written ballot and shall be determined by a plurality of the votes cast. All other voting need not be by written ballot, except upon demand therefor by the Board of Directors or the officer of the Corporation presiding at the meeting of stockholders where the vote is to be taken. When a quorum exists at any meeting, the vote of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one for which, by express provision of law or of the Certificate of Incorporation of the Corporation or of these By-laws, a different vote is required. Section 2.7 At least ten days before every meeting of the stockholders, the officer who has charge of the stock ledger of the Corporation shall prepare a complete list of the stockholders entitled to vote at such meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which -2- place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder of the Corporation who is present. The stock ledger of the Corporation shall be the only evidence as to the identities of the stockholders entitled to examine the list of stockholders required by this Section 2.7 or to vote in person or by proxy at any meeting of stockholders. Section 2.8 The Board of Directors shall appoint either one or three inspectors of election, in advance of any meeting of stockholders, to act at such meeting of the stockholders or any adjournment thereof. Inspectors of election need not be stockholders, and no person who is a candidate for corporate office shall act as an inspector of election. If three inspectors of election are appointed, such inspectors of election shall act by majority vote. Each inspector of election shall sign an oath faithfully to execute the duties of inspector with strict impartiality and to the best of the inspector's ability and shall do all acts as are necessary and proper to conduct the election or vote and all such other acts as may be prescribed by law with fairness to all stockholders. Such inspectors of election shall make a written report of any matter determined by them and shall execute a certificate as to any fact found by them. Section 2.9 The chairman of any meeting of the stockholders shall determine the order of business and the procedure to be followed at such meeting, including such regulation of the manner of voting and the conduct of discussion as he shall deem to be fair and equitable. Section 2.10 The stockholders may participate in any meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear one another, and such participation shall constitute presence in person at such meeting. Section 2.11 Unless otherwise required by the Certificate of Incorporation of the Corporation, any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a written consent setting forth the action so taken shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of any corporate action without a meeting by less than unanimous written consent shall be given in conformity herewith to those stockholders who have not consented thereto in writing. ARTICLE 3 BOARD OF DIRECTORS Section 3.1 The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors. In addition to the powers expressly conferred -3- upon the Board of Directors by these By-laws, the Board of Directors may exercise all powers of the Corporation and perform all lawful acts as are not required to be exercised or performed by the stockholders pursuant to law, the Certificate of Incorporation of the Corporation or these By-laws. Section 3.2 Directors shall be natural persons who need not be stockholders of the Corporation. The specific number of directors shall be designated from time to time exclusively by the Board of Directors. In the absence of any such designation, the Board of Directors shall be composed of five directors. Each director shall be elected for a term of one year and until his successor is duly elected, subject, however, to such director's prior death, resignation, retirement, disqualification or removal from office. Whenever the authorized number of directors is increased between annual meetings of the stockholders, a majority of the directors then in office shall have the power to elect such new directors who shall serve until the next annual meeting of stockholders and until their successors are duly elected and qualified. Any decrease in the authorized number of directors shall not become effective until the expiration of the term of the directors then in office unless, at the time of such decrease, there shall be vacancies on the Board of Directors that are being eliminated by such decrease. Section 3.3 Any vacancy on the Board of Directors occurring by reason of death, resignation, retirement, disqualification, removal or other cause may be filled by a majority of the directors then in office, although less than a quorum, and each director elected to fill a vacancy shall serve for the unexpired term of his predecessor and until his successor is duly elected. Section 3.4 The organizational meeting of each newly elected Board of Directors may be held immediately following the stockholders' meeting at which such directors were duly elected without the necessity of notice to such directors or at such time and place as may be fixed by notice or a duly executed waiver of notice thereof. Section 3.5 Regular meetings of the Board of Directors shall be held without call or notice at such time and place as shall from time to time be fixed by the Board of Directors. Section 3.6 Special meetings of the Board of Directors may be called by the Chairman of the Board, by the President or by the Secretary upon his own initiative or upon the written request of a majority of directors then in office. Notice of the place, time and date of each such special meeting shall be given to each director by whom it is not waived by mailing written notice to each director not less than two days before the meeting or by giving notice in person or by telephone, telegram or facsimile transmission not less than twenty-four hours before the meeting. Notice of special meetings of the Board of Directors need not state the purpose thereof, except as otherwise expressly provided by law, by the Certificate of Incorporation of the Corporation, or by these By-laws. Any and all business may be transacted at a special meeting, unless otherwise indicated in the notice thereof or provided by law, by the Certificate of Incorporation of the Corporation or by these By-laws. -4- Section 3.7 Members of the Board of Directors or any committee thereof may participate in any meeting of the Board of Directors or such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear one another, and such participation shall constitute presence in person at such meeting. Section 3.8 At any meeting of the Board of Directors, the presence of a majority of the total number of directors shall constitute a quorum for the transaction of business, and the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless otherwise provided by law, by the Certificate of Incorporation of the Corporation or by these By-laws. If a quorum shall not be present at any meeting of the Board of Directors, a majority of the directors present may adjourn the meeting to any place, date or time, without notice other than announcement at the meeting, until a quorum shall be present. Section 3.9 Unless otherwise provided by law, by the Certificate of Incorporation of the Corporation or these By-laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing and such consent is filed with the minutes of proceedings of the Board of Directors or committee thereof. Section 3.10 Directors, in addition to expenses of attendance, shall be allowed such compensation for their services as directors, including, without limitation, their services as members of committees of the Board of Directors, as may be fixed from time to time by the Board of Directors; provided, that nothing contained in these By-laws shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 3.11 A member of the Board of Directors or of any committee thereof shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or reports made to the Corporation by any of its officers, or by an independent certified public accountant, or by an appraiser selected with reasonable care by the Board of Directors or by any committee thereof, or in relying in good faith upon other records of the Corporation. ARTICLE 4 COMMITTEES Section 4.1 The Board of Directors, by a vote of a majority of the whole Board of Directors, may from time to time designate committees of the Board of Directors, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board of Directors and shall, for those committees and any others provided for herein, elect a director or directors to serve as a member or members and designate, if it desires, -5- one or more directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend or to authorize the issuance of stock if the resolution that designates the committee or a supplemental resolution of the Board of Directors shall so provide. In the absence or disqualification of any member of any committee and any alternate member in his place, the member or members of the committee present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The Board of Directors may, from time to time, suspend, alter, continue or terminate any committee or the powers and functions thereof. Section 4.2 The Board of Directors may appoint committees consisting of officers or other persons, with chairmanships, vice chairmanships and secretaryships and such duties and powers as the Board of Directors may from time to time designate and prescribe. The Board of Directors may from time to time suspend, alter, continue or terminate any of such committees or the powers and functions thereof. Section 4.3 One-third of the members of any committee shall constitute a quorum unless the committee shall consist of one or two members, in which case one member shall constitute a quorum. All matters properly brought before any committee shall be determined by a majority vote of the members present. Section 4.4 Any action that may be taken by a committee at a meeting may be taken without a meeting if all members thereof consent thereto in writing and such writing is filed with the minutes of the proceedings of such committee. Section 4.5 Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided by law, by the Certificate of Incorporation of the Corporation or by these By-laws. Adequate provision shall be made for notice to all members of any committee of all meetings of that committee. ARTICLE 5 OFFICERS Section 5.1 The officers of the Corporation shall consist of a Chairman of the Board, a President, one or more Vice Presidents, a Secretary and a Treasurer. Officers shall be appointed from time to time by the Board of Directors. No officer except the Chairman of the Board need be a member of the Board of Directors. Any number of offices may be held by the same person. Section 5.2 The Board of Directors may appoint such other officers, including assistant officers, and agents as it shall deem necessary, who shall hold their offices for such -6- terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. Section 5.3 Each officer shall hold office until his successor is duly elected or until his earlier death, resignation, retirement or removal. Any officer appointed by the Board of Directors may be removed at any time by the Board of Directors without prejudice to his contract rights. If the office of any officer becomes vacant for any reason, such vacancy shall be filled by the Board of Directors. Any officer appointed to fill such a vacancy shall hold office until his successor is duly elected or until his earlier death, resignation, retirement or removal. Section 5.4 The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision of these By-laws. Section 5.5 The Chairman of the Board shall be a director of the Corporation. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors and shall perform such duties and have such powers as may from time to time be assigned to him by the Board of Directors. Section 5.6 The President shall be the chief executive officer of the Corporation and, subject to the provisions of these By-laws and to the direction of the Board of Directors, shall have responsibility for the general management and control of the business and affairs of the Corporation. Unless otherwise directed by the Board of Directors from time to time, the President shall have the power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders or members of or with respect to any action of stockholders or members of any other corporation or limited liability company in which the Corporation may hold securities or membership interests and otherwise to exercise any and all rights and powers which the Corporation may possess by reason of its ownership of securities or membership interests in such other corporation or limited liability company. The President shall perform the duties and exercise the powers of the Chairman of the Board in the absence or disability of the Chairman. Section 5.7 Each Vice President shall have such powers and perform such duties as may be delegated to him by the Board of Directors or by the President. In the absence or disability of the Chairman of the Board and the President, any Vice President who is also a director of the Corporation may preside at meetings of the stockholders and the Board of Directors to the extent and in the manner authorized by a resolution of the Board of Directors. Section 5.8 The Secretary shall attend all meetings of the Board of Directors and of the stockholders and shall record all votes and the minutes of all proceedings at such meetings in a book to be kept for that purpose and shall perform such other duties as the Board of Directors may from time to time prescribe. The Secretary shall perform the -7- preceding duties for any committee of the Board of Directors upon the request of the Board of Directors or such committee. The Secretary shall give or cause to be given notice of all meetings of the stockholders and the Board of Directors. The Secretary shall have charge of the seal of the Corporation and, where required, shall have the authority to affix such seal to any instrument. In the absence or disability of the Secretary, any Assistant Secretary shall perform the duties and exercise the powers of the Secretary. Section 5.9 The Treasurer shall have the custody of the Corporation's funds and securities and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation, in such depositories as may be designated by the Board of Directors. The Treasurer shall make such disbursements of the Corporation's funds as are authorized by the Board of Directors or by the President, taking proper vouchers for such disbursements, and shall render to the Board of Directors an account of all such transactions and of the financial condition of the Corporation, at such times as the Board of Directors may require. The Treasurer shall also perform such other duties as the Board of Directors may from time to time prescribe. In the absence or disability of the Treasurer, any Assistant Treasurer shall perform the duties and exercise the powers of the Treasurer. ARTICLE 6 INDEMNIFICATION Section 6.1 Subject to Section 6.3 hereof, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer or employee of the Corporation, or is or was serving at the request of the Corporation as a director, officer, manager or employee of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner that he reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 6.2 Subject to Section 6.3 hereof, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer or employee of the Corporation, or is or was serving at the request of the Corporation as a director, officer, manager -8- or employee of another corporation, partnership, limited liability company, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 6.3 Any indemnification under this Article 6 (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer or employee is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 6.1 or Section 6.2 of this Article 6, as the case may be. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who are not parties to such action, suit or proceeding, (ii) if such a quorum is not attainable, or, even if attainable, if a majority vote of a quorum of disinterested directors so directs, by independent legal counsel in a written opinion or (iii) by the stockholders. To the extent, however, that a director, officer or employee of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith, without the necessity of authorization in the specific case. Notwithstanding anything to the contrary set forth in this Article 6, the Corporation shall not be obligated to indemnify or advance expenses to any person in connection with any action, suit, proceeding, claim or counterclaim initiated by or on behalf of such person. Section 6.4 For purposes of any determination under Section 6.3 of this Article 6, a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action is based on the records or books of account of the Corporation or another enterprise (provided that such records or books of account have in each case been prepared by persons whom the person relying thereon reasonably believes to be professionally or expertly competent to prepare such records or books of account), or on information supplied to him by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term "another enterprise" as used in this Section 6.4 shall mean any other corporation or any partnership, limited -9- liability company, joint venture, trust or other entity of which such person is or was serving at the request of the Corporation as a director, officer, manager or employee. The provisions of this Section 6.4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Section 6.1 or Section 6.2 of this Article 6, as the case may be. Section 6.5 Notwithstanding any contrary determination in the specific case under Section 6.3 of this Article 6, and notwithstanding the absence of any determination thereunder, any director, officer or employee may apply to any court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Section 6.1 and Section 6.2 of this Article 6. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director, officer or employee is proper in the circumstances because he has met the applicable standards of conduct set forth in Section 6.1 or Section 6.2 of this Article 6, as the case may be. Notice of any application for indemnification pursuant to this Section 6.5 shall be given to the Corporation promptly upon the filing of such application. Section 6.6 Expenses incurred in defending or investigating a threatened or pending action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors upon receipt of an undertaking by or on behalf of the director, officer or employee to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article 6. Section 6.7 The indemnification and advancement of expenses provided by, or granted pursuant to, the other sections of this Article 6 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, contract, vote of stockholders or disinterested directors or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of, and advancement of expenses to, the persons specified in Section 6.1 and Section 6.2 of this Article 6 shall be made to the fullest extent permitted by law. To this end, the provisions of this Article 6 shall be deemed to have been amended for the benefit of such persons effective immediately upon any modification of the General Corporation Law of the State of Delaware which expands or enlarges the power or obligation of corporations organized under such law to indemnify, or advance expenses to, such persons. The provisions of this Article 6 shall not be deemed to preclude the indemnification of, or advancement of expenses to, any person who is not specified in Section 6.1 or Section 6.2 of this Article 6 but whom the Corporation has the power or obligation to indemnify, or to advance expenses for, under the provisions of the General Corporation Law of the State of Delaware or otherwise. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article 6 shall, unless otherwise provided when authorized or -10- ratified, continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of the heirs, executors and administrators of such person. Section 6.8 The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer or employee of the Corporation, or is or was serving at the request of the Corporation as a director, officer, manager or employee of another corporation, partnership, limited liability company, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power or the obligation to indemnify him against such liability under the provisions of this Article 6. Section 6.9 For purposes of this Article 6, references to the "Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had the power and authority to indemnify its directors, officers and employees, so that any person who is or was a director, officer or employee of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, manager or employee of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article 6 with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. ARTICLE 7 STOCK Section 7.1 The certificates representing shares of stock of the Corporation shall be numbered and shall be entered in the books of the Corporation as they are issued. Each stockholder shall be entitled to a certificate exhibiting such stockholder's name and the number of shares held by such stockholder, which certificate shall be signed by the Chairman of the Board or the President or any Vice President, and by the Treasurer or the Secretary or any Assistant Secretary. Any or all of the signatures on such certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 7.2 Transfers of stock shall be made only upon the transfer books of the Corporation maintained in an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation, and only by the person named in the certificate or by his attorney, lawfully constituted in writing, and upon surrender of the certificate therefor. -11- Section 7.3 In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 7.4 The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of the State of Delaware. Section 7.5 The Board of Directors may authorize the issuance of a new certificate representing shares of stock in place of any certificate previously issued by the Corporation and alleged to have been lost, stolen or destroyed, pursuant to such regulations as the Board of Directors may establish concerning proof or advertisement of such alleged loss, theft or destruction and concerning the giving of a satisfactory bond or bonds sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate. Section 7.6 The issue, transfer, conversion and registration of certificates of stock of the Corporation shall be governed by such other regulations as the Board of Directors may from time to time establish. ARTICLE 8 NOTICES Section 8.1 Whenever notice is required to be given to any director, committee member, officer, stockholder, employee or agent, whether pursuant to law, the Certificate of Incorporation of the Corporation or these By-laws, it shall not be construed to mean personal notice, but such notice may be given, in the case of stockholders, in writing, by depositing the same in the mail, postage prepaid, or by overnight carrier addressed to such stockholder at his last known address as the same appears on the books of the Corporation, and, in the case of directors, committee members, officers, employees and agents, by telephone, or by mail, postage prepaid, or by prepaid telegram at his last known address as the same appears on the books of the Corporation. All notices shall be deemed to be given when mailed, telegraphed or telephoned. -12- Section 8.2 Whenever notice is required to be given to any stockholder, director, committee member, officer, employee or agent, whether pursuant to law, the Certificate of Incorporation of the Corporation or these By-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except as otherwise provided by law. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice unless so required by the Certificate of Incorporation of the Corporation or by these By-laws. ARTICLE 9 MISCELLANEOUS Section 9.1 Any officer of the Corporation shall, if required by the Board of Directors, give the Corporation a bond for the faithful performance of the duties of his office, and for the restoration to the Corporation of all corporate books, papers, vouchers, money and property of whatever kind in his possession or under his control. Such bond shall be for a sum and with such surety or sureties as the Board of Directors may require. Section 9.2 The corporate seal shall be in the charge of the Secretary and shall have inscribed thereon the name of the Corporation and the words "Incorporated 1999 Delaware." If and when so directed by the Board of Directors or a committee thereof, the Secretary may have duplicates of such seal made and deposited for use with other officers of the Corporation. It shall not be necessary to the validity of any instrument executed by any authorized officer or officers of the Corporation that the execution of such instrument be evidenced by the corporate seal. Section 9.3 The fiscal year of the Corporation shall be as determined by the Board of Directors. Section 9.4 All checks or demands for money and notes of the Corporation shall be signed by such officer or officers as the Board of Directors may from time to time designate. Section 9.5 The Board of Directors shall determine from time to time whether, when and under what conditions and regulations, the books and records of the Corporation (except such as may by statute be specifically open to inspection) shall be open to the inspection of the stockholders, and the stockholders' rights in this respect are and shall be restricted and limited accordingly. Section 9.6 Facsimile signatures of any officer of the Corporation may be used at such time and in such manner as authorized by the Board of Directors or a committee thereof. -13- ARTICLE 10 AMENDMENT Section 10.1 These By-laws may be amended, suspended or repealed and new By-laws may be adopted in a manner consistent with law: (a) if authorized by the Certificate of Incorporation of the Corporation, by the affirmative vote of a majority of the Directors then in office, at any meeting of the Board of Directors, or (b) by the affirmative vote of the stockholders at any stockholders' meeting called and maintained in accordance with Article 2 of these By-laws; provided, however, that a brief description of such proposed amendment, suspension or repeal and/or adoption of new By-laws is contained in the notice of such meeting of the Board of Directors or of such annual or special stockholders' meeting. Adopted as of August 17, 1999. -14- EX-4.1 11 CERTIFICATE Exhibit 4.1 SPECIMEN NOT NEGOTIABLE NUMBER SHARES NS nutrisystem.com(R) NUTRISYSTEM.COM INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS COMMON STOCK CUSIP 670617 10 9 THIS CERTIFIES THAT: is owner of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF $.001 PAR VALUE EACH OF ============================= NUTRISYSTEM.COM INC. ============================= transferable on the books of the Corporation in person or by attorney upon surrender of this certificate duly endorsed or assigned. This certificate and the shares represented hereby are subject to the laws of the State of Delaware, and to the Certificate of Incorporation and By-laws of the Corporation, as now or hereafter amended. This certificate is not valid until countersigned by the Transfer Agent. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. COUNTERSIGNED DATED: STOCKTRANS, INC. 7 EAST LANCASTER AVE., ARDMORE, PA 19003 TRANSFER AGENT BY: AUTHORIZED SIGNATURE NUTRISYSTEM.COM INC. CORPORATE SEAL 1999 DELAWARE /s/ Frederick W. Dreher /s/ Brian D. Haveson ------------------------ ----------------------- SECRETARY PRESIDENT The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian TEN ENT - as tenants by the entireties ---------------- JT TEN - as joint tenants with right of (Cust) (Minor) survivorship and not as tenants under Uniform in common Gifts to Minors Act ----------- (State) Additional abbreviations may also be used though not in the above list. For Value Received, ___________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- | | | | - -------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------- Shares of the stock represented by the within Certificate, and do hereby irrevocably constitute and appoint - ----------------------------------------------------------------------- Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ---------------------------- --------------------------------------------------------------------------- NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER, UPON REQUEST AND WITHOUT CHARGE, A FULL STATEMENT OF THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF THE SHARES OF EACH CLASS AND SERIES AUTHORIZED TO BE ISSUED, SO FAR AS THE SAME HAVE BEEN DETERMINED, AND OF THE AUTHORITY, IF ANY, OF THE BOARD TO DIVIDE THE SHARES INTO CLASSES OR SERIES AND TO DETERMINE AND CHANGE THE RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF ANY CLASS OR SERIES. SUCH REQUEST MAY BE MADE TO THE SECRETARY OF THE CORPORATION OR TO THE TRANSFER AGENT NAMED ON THIS CERTIFICATE. - -------------------------------------------------------------------------------- THE SIGNATURE TO THE ASSIGNMENT MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF A NATIONAL OR REGIONAL OR OTHER RECOGNIZED STOCK EXCHANGE IN CONFORMANCE WITH A SIGNATURE GUARANTEE MEDALLION PROGRAM. - -------------------------------------------------------------------------------- STOCK MARKET INFORMATION www.pbssexchange.com COLUMBIA FINANCIAL PRINTING CO., P.O. BOX 219, BETHPAGE, NY 11714 EX-4.2 12 WARRANT Exhibit 4.2 THE SECURITIES ISSUABLE UPON EXERCISE HEREOF (THE "SECURITIES") WILL BE ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY OTHER SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR HYPOTHECATED UNTIL SUCH SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND OTHER APPLICABLE SECURITIES LAWS, OR IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH OR EXEMPT THEREFROM. WARRANT For the Purchase of _________ Shares of Common Stock, $.001 Par Value, of nutrisystem.com inc. 1. Issuance and Exercise of Warrant. (a) Issuance of Warrant. For value received, __________________________ (the "Holder") is entitled to purchase from nutrisystem.com inc., a Delaware corporation (the "Company"), _______ shares (the "Shares") of Common Stock, par value $.001 per share (the "Common Stock"), of the Company upon surrender of this Warrant to the Company and upon payment of the Exercise Price (as hereinafter defined), subject to the terms and conditions set forth herein. (b) Exercise of Warrant; Expiration. (i) Exercisability. This Warrant is exercisable in whole or in part commencing on and after its date of issuance and shall expire at 5:00 p.m., Philadelphia Time, on September 30, 2004 (the "Expiration Date"). (ii) Exercise Price. The price for which the Shares may be purchased upon the exercise of this Warrant shall be $1.00 per share (the "Exercise Price"), subject to adjustment as hereafter provided. (c) No Registration of the Shares or this Warrant. The Holder understands that: (i) this Warrant and the Shares issuable pursuant hereto are being issued under certain exemptions from the registration provisions of the Securities Act of 1933 (the "Securities Act"); (ii) the Holder is acquiring this Warrant and the Shares issuable pursuant hereto without being furnished any offering literature or prospectus other than publicly disseminated information regarding the Company and (iii) the issuance of this Warrant and the Shares issuable pursuant thereto has not been examined by the Securities and Exchange Commission (the "SEC") or by any agency charged with the administration of the securities laws of any state or other jurisdiction. The Holder represents and warrants that it has such knowledge and experience in financial and business matters that it is -2- capable of evaluating the merits and risks of an investment in this Warrant and the Shares issuable pursuant hereto and of making an informed investment decision with respect thereto. The Holder further represents that it is familiar with the Company's business and operations. The Holder understands that the Company is relying on the truth and accuracy of the representations, declarations and warranties made herein by the Holder in issuing this Warrant and the Shares issuable pursuant hereto without having first registered this Warrant or such Shares under the Securities Act or under the securities laws of any state or other jurisdiction. (d) Investment Intent. The Holder confirms that: (i) it understands that there are substantial restrictions on the transferability of this Warrant and the Shares issuable pursuant hereto and, accordingly, it may not be possible for the Holder to liquidate its investment in this Warrant and the Shares issuable pursuant hereto in case of emergency and (ii) the Holder is able to bear the economic risk of its investment in this Warrant and the Shares issuable pursuant hereto, to hold this Warrant and the Shares issuable pursuant hereto for an indefinite period of time and currently to afford a complete loss of its investment. This Warrant and the Shares issuable pursuant hereto are being acquired in good faith solely for the Holder's own personal account, for investment purposes only and are not being purchased with a view to or for the resale, distribution, subdivision or fractionalization thereof. The Holder has no contract, undertaking, understanding, agreement or arrangement, formal or informal, with any person to sell, transfer or pledge to any person this Warrant and the Shares issuable pursuant hereto, or any part thereof, nor any current plan to enter into any such contract, undertaking, agreement or arrangement. The Holder understands that the legal consequences of the foregoing representations and warranties are that the Holder must bear the economic risk of this Warrant and the Shares issuable pursuant hereto for an indefinite period of time because this Warrant and the Shares issuable pursuant hereto have not been registered under the Securities Act. (e) Permitted Transfers. The Holder understands and agrees that this Warrant and the Shares issuable pursuant hereto may be transferred by it only pursuant to (i) a public offering thereof registered under the Securities Act, (ii) Rule 144 of the SEC or any similar rule in force at the time of such transfer if such rule is available and (iii) any other legally available means of transfer. (f) Restrictive Legend. This Warrant and the Shares issuable pursuant hereto, and any shares of capital stock received in respect thereof, whether by reason of a stock split or share reclassification thereof, a stock dividend thereon or otherwise, shall be stamped or otherwise imprinted with a legend in substantially the following form: -3- THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS. 2. Adjustments; Anti-Dilution Provisions. If the Company, at any time while this Warrant is outstanding, shall split, subdivide or combine its Common Stock (by reclassification, by payment of a dividend in shares of Common Stock or otherwise), an appropriate and equitable adjustment shall be made as of the effective date of such action in the number of Shares as to which this Warrant, or portion thereof then unexercised, shall be exercisable and in the Exercise Price of such Shares in order to reflect such stock split, subdivision, combination or reclassification. The Company shall promptly furnish or cause to be furnished to the Holder a certificate setting forth each such adjustment. 3. No Fractional Shares. No fractional Shares shall be issued in connection with any exercise hereof, and if the total number of Shares that remain unexercised would result in a fraction, such number of Shares shall be rounded to the nearest whole Share. 4. No Stockholder Rights. This Warrant shall not entitle the Holder to any of the rights of a stockholder of the Company. 5. Reservation of Shares. The Company covenants that the Shares issuable upon the exercise of this Warrant have been duly authorized and reserved and, when issued and paid for, will be validly issued, fully paid and non-assessable. The issuance of this Warrant shall constitute full authority to those officers of the Company who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for Shares upon the exercise of this Warrant. 6. Exercise of Warrant. (a) This Warrant may be exercised in whole or in part at any time, or from time to time, on or after the date hereof, but not later than the Expiration Date, or if the Expiration Date is a day on which banking institutions are authorized by law to close, then on the next succeeding day which shall not be such a day, by presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, with the -4- Notice of Exercise attached hereto as Annex A duly executed and accompanied by payment of the Exercise Price for the number of shares specified in such form, together with all federal and state taxes applicable upon such exercise. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the right of the Holder to purchase the balance of the shares purchasable hereunder. Upon receipt by the Company of this Warrant at the office or agency of the Company, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to the Holder. (b) Notwithstanding the provisions set forth in Section 6(a) hereof, the Holder may, at its election, exercise this Warrant on or after the date hereof, but not later than the Expiration Date, or if the Expiration Date is a day on which banking institutions are authorized by law to close, then on the next succeeding day which shall not be such a day, by presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, with the Notice of Exercise attached hereto as Annex A duly executed, indicating thereon its election to receive Shares equal to the value (as determined below) of this Warrant, in which event the Company shall issue to the Holder a number of Shares computed using the following formula: X = Y(A-B) -------- A Where: X = the number of Shares to be issued to the Holder Y = the total number of Shares purchasable under this Warrant A = the current fair market value of one Share B = the Exercise Price per Share If the Common Stock shall be publicly traded at the time of calculation of fair market value, current fair market value shall mean the average of the closing prices of shares of such class sold on all securities exchanges on which such class may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such class is not so listed, the average of the representative bid and asked prices quoted in the Nasdaq System as of 4:00 p.m., Philadelphia Time, or, if on any day such class is not quoted in the Nasdaq System, the average of the highest bid and lowest asked price on such day on the Nasdaq Bulletin Board or in the domestic over-the-counter -5- market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which the current fair market value of such class is being determined and the 20 consecutive business days prior to such day. If at any time such class is not listed on any securities exchange or quoted in the Nasdaq System or the over-the-counter market, the current fair market value of a share of such class shall be the highest price per share that the Company could obtain from a willing buyer (not a current employee, officer or director of the Company) for shares of such class sold by the Company, for authorized but unissued shares, as determined in good faith by the Board of Directors of the Company, unless the Holder shall purchase such shares in conjunction with an underwritten public offering of such class pursuant to a registration statement filed under the Securities Act, in which case the fair market value shall be the price per share at which the shares of such class are sold to the public in such offering. 7. Registration Rights. The Holder of this Warrant is entitled to demand and piggyback registration rights as follows: (a) Piggyback Registration. (i) As used in this Section 7, the following terms shall have the following respective meanings: (A) "Registration Stock" shall mean: (1) any shares of Common Stock and the shares of Common Stock purchasable upon exercise of this Warrant or other securities issued or issuable upon exercise or conversion in whole or in part of the Shares or this Warrant and (2) any shares of Common Stock or other securities issued in respect of any such securities upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event; provided, however, that Registration Stock shall not include any such shares disposed of pursuant to one or more registration statements under the Securities Act or pursuant to Rule 144 under the Securities Act. For purposes of this Section 7(a)(i)(A), any record holder of securities convertible into or exercisable for the purchase of Registration Stock or exercisable for securities which are convertible into Registration Stock shall be deemed to be the holder of the Registration Stock issuable upon such exercise or conversion. (B) "Additional Registration Stock" shall mean any shares of Common Stock of the Company which have been issued or shall be issued in the future and which have rights given in writing to be included in Company registrations under the Securities Act. (ii) If the Company shall seek to register under the Securities Act or qualify any of the securities holdings of the Company or any of its stockholders except -6- in connection with any stock option plan, stock purchase plan, savings or similar plan or an acquisition, merger or exchange of stock and if the form of registration statement proposed to be used may be used for the registration of the Registration Stock, then, on each such occasion, the Company shall furnish the Holder with at least 30 days prior written notice thereof. At the written request of the Holder, given within 20 days after the receipt of such notice, the Company will cause all of the Registration Stock for which registration shall have been requested by such Holder to be included in such registration statement. In the event that the Company offers any of its securities in an offering exempt from registration under the Securities Act pursuant to Regulation A thereunder, the Company will provide to the Holder rights comparable to those provided herein. If any registration pursuant to this Section 7(a)(ii) shall be, in whole or in part, an underwritten public offering of Common Stock, then the number of shares of Registration Stock to be included in such an underwriting may be reduced by the Company and the managing underwriter thereof if and to the extent that the Company and such underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein. (b) Demand Registration. (i) If at any time after the Company shall have a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, the Company shall be requested in writing by the holders of not less than 50% of the Registration Stock to effect the registration under the Securities Act of any of the Registration Stock, the Company shall promptly give written notice of such proposed registration to all record holders of Registration Stock. Such holders shall have the right, by giving written notice to the Company within 30 days from receipt of the Company's notice, to elect to have included in such registration such of their Registration Stock as such holders may request in such notice of election. Thereupon, the Company shall, as expeditiously as possible, use its best efforts to effect the registration, on a form of general use under the Securities Act, of all shares of Registration Stock which the Company has been requested to register. The Company shall only be obligated to cause to become effective one registration statement pursuant to which Registration Stock is sold under this Section 7(b). The holders of not less than 50% of the Registration Stock may also require the Company to effect one other registration under the Securities Act of the Registration Stock as described above, in which the participants therein shall pay the costs of such offering pro rata. (ii) In addition to and not in limitation of the rights set forth in Sections 7(a)(ii) and 7(b) hereof, at such time as the Company shall have qualified for the use of Form S-2 or Form S-3 in an offering solely for the accounts of persons other than the Company (or any similar form or forms promulgated by the SEC), the holders of Registration Stock shall have the right to request an unlimited number of registrations on Form S-2 -7- or Form S-3 or other similar forms. Such holders shall have the right, by giving written notice to the Company within 20 days from receipt of the Company's notice, to elect to have included in such registration such of their Registration Stock as such holders may request in such notice of election. Thereupon, the Company shall, as expeditiously as possible, use its best efforts to effect the registration on Form S-2 or Form S-3 of all shares of Registration Stock which the Company has been requested to register. Registrations effected on Form S-2 or Form S-3 shall not be considered to be demand registrations pursuant to Section 7(b)(i) hereof. (iii) The Company may include in a registration requested under this Section 7(b) any additional authorized shares of the Common Stock of the Company, whether or not issued, for sale by the Company or for sale by others; provided, however, that such shares shall not be included to the extent that the holders of a majority of the shares of Registration Stock included therein determine in good faith that the inclusion of such shares will interfere with the successful marketing of the shares of Registration Stock to be included therein; and, provided, further, that, if the number of shares to be so included exceeds the number of shares of Registration Stock included therein by the holders of Registration Stock, such registration shall be deemed to be a registration pursuant to Section 7(a)(ii) hereof. (iv) The underwriter for any registration pursuant to this Section 7(b) shall be mutually acceptable to the Company and the holders of not less than 50% of the Registration Stock included therein. (c) Further Obligations of the Company. Whenever the Company is required to register any of the Registration Stock pursuant to any of the provisions of this Section 7, the Company shall also be obligated to do the following: (i) Prepare for filing with the SEC such amendments and supplements to said registration statement and the prospectus used in connection therewith as may be necessary to keep said registration statement effective and to comply with the provisions of the Securities Act with respect to the sale of securities covered by said registration statement for the period necessary, but in no event more than nine months, to complete the proposed public offering; (ii) Furnish to each selling holder such copies of preliminary and final prospectuses and such other documents as said holder may reasonably request to facilitate the public offering of such holder's Registration Stock; (iii) Use its best efforts to register or qualify the Registration Stock covered by said registration statement under the securities or Blue Sky laws of such -8- jurisdictions as not less than 50% of the holders of Registration Stock may reasonably request; (iv) Furnish to the selling holders, and any underwriters or broker-dealers through whom the Registration Stock may be sold, an opinion or opinions of counsel for the Company and a letter or letters of the independent certified public accountants for the Company, in form and substance customary for similar offerings; (v) Permit each selling holder or his counsel or other representatives, at the selling holder's expense, to inspect and copy such corporate documents and records as may reasonably be requested by them; and (vi) Furnish to each selling holder a copy of all documents filed and all correspondence to or from the SEC in connection with any such offering. (d) Expenses, etc. All expenses in connection with the preparation and filing of any registration statement under this Section 7, any registration or qualification under the securities or Blue Sky laws of states in which the offering will be made under such registration statement and any filing fee of the National Association of Securities Dealers, Inc. relating to such offering, shall be borne in full by the Company, except for any underwriters' or brokers' commissions, fees required to be paid by a selling stockholder rather than the Company in order to comply with applicable Blue Sky or state securities laws, fees or expenses expressly applicable to securities being sold by the holders of securities and fees or expenses of their counsel. (e) Indemnification. The Company shall indemnify the selling holders of Registration Stock, and, to the extent required in any agreement with any underwriter or broker-dealer through whom the Registration Stock may be sold, any such underwriter or broker-dealer and each person, if any, who controls any such underwriter or broker-dealer (within the meaning of the Securities Act) against all losses, claims, damages, liabilities, expenses or actions in respect thereof (under the Securities Act or common law or otherwise) caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement under which such Registration Stock was registered under the Securities Act, any preliminary or final prospectus contained therein, or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse the selling holders of Registration Stock for any legal or other out-of-pocket expenses reasonably incurred by such selling holders in connection with investigating or defending against such loss, claim, damage, liability or action; except insofar as such losses, claims, damages, liabilities, expenses or actions are caused by any untrue statement or omission contained in information furnished in writing to the Company by such selling holders expressly for use therein. In connection with any -9- such registration statement, the selling holders of Registration Stock will furnish the Company in writing such information as may reasonably be requested by the Company for use in any such registration statement or prospectus and will indemnify the Company, its directors and officers, and, to the extent required in any agreement with any underwriter or broker-dealer, each such underwriter or broker-dealer and each person, if any, who controls the Company or any underwriter or broker-dealer (within the meaning of the Securities Act) against any losses, claims, damages, liabilities, expenses and actions in respect thereof (under the Securities Act or common law or otherwise) resulting from any untrue statement or alleged untrue statement of a material fact required to be stated in such registration statement or prospectus or resulting from any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading and necessary to make the statements therein not misleading; and will reimburse the Company for any legal or other out-of-pocket expenses reasonably incurred by it in connection with investigating or defending against such loss, claim, damage, liability or action; but only to the extent that such untrue statement or omission was contained in information so furnished in writing by the selling holders of Registration Stock expressly for use therein, and only to the extent of proceeds received by the selling holders of Registration Stock in the offering. The Company further agrees that, in connection with any underwritten public offering, it also will enter into customary contribution arrangements with the selling holders of Registration Stock and the underwriters or broker-dealers through whom the Registration Stock may be sold, with respect to situations in which indemnification is potentially unavailable. (f) Withdrawal. If a public offering is not completed within nine months after the effective date of any registration statement filed pursuant to Section 7(a)(ii) hereof, the Company reserves the right, at its option, to withdraw from registration any securities offered by the Company which have not been sold during such period, provided that no securities offered by any holder of Registration Stock shall be withdrawn without the consent of the holders of not less than 50% of the Registration Stock. 8. Exchange, Assignment or Loss of Warrant. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other Warrants of different denominations entitling the Holder hereof to purchase in the aggregate the same number of shares of Common Stock purchasable hereunder. This Warrant may be sold, transferred, assigned or hypothecated by the Holder at any time subject to compliance with the Securities Act and applicable state securities law. Any such assignment shall be made by surrender of this Warrant to the Company or at the office of its stock transfer agent, if any, with the Assignment Form attached hereto as Annex B duly executed and funds sufficient to pay any transfer tax; whereupon the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be canceled. This Warrant may be divided -10- or combined with other Warrants which carry the same rights upon presentation hereof at the office of the Company or at the office of its stock transfer agent, if any, together with a written notice specifying the names and denominations in which new Warrants are to be issued and signed by the Holder hereof. The term "Warrant" as used herein includes any Warrants issued in substitution for or replacement of this Warrant, or into which this Warrant may be divided or exchanged. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and, in the case of loss, theft or destruction, of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this Warrant so lost, stolen, destroyed or mutilated shall be at any time enforceable by anyone. 9. Miscellaneous. This Warrant shall be governed by the internal laws, but not the law of conflicts, of the State of Delaware. The headings in this Warrant are for purposes of convenience and reference only and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated except by an instrument in writing signed by the Company and the registered Holder. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 10. Notice Generally. Any notice, demand or delivery pursuant to the provisions hereof shall be sufficiently given or made if sent by registered or certified mail, postage prepaid, or overnight delivery service, addressed to the Holder at such Holder's last known address appearing on the books of the Company, or, except as herein otherwise expressly provided, to the Company at nutrisystem.com inc., 202 Welsh Road, Horsham, PA 19044, Attention: Brian D. Haveson, President, or such other address as shall have been furnished to the party giving or making such notice, demand or delivery. ISSUED THIS 30th day of September, 1999. Attest: NUTRISYSTEM.COM INC. By: By: ---------------------------------- ------------------------------ Frederick W. Dreher, Secretary Brian D. Haveson, President -11- ANNEX A NOTICE OF EXERCISE (To be Executed by the Registered Holder in Order to Exercise the Warrant) The undersigned hereby irrevocably elects to exercise the right to purchase from nutrisystem.com inc. (the "Company") Shares covered by the Warrant dated September 30, 1999 and issued to ____________________________ according to the conditions thereof, as follows: Check one: ____ Exercise by payment of exercise price in cash. The undersigned hereby irrevocably elects to exercise the within Warrant to the extent of purchasing ____________________ Shares and hereby makes payment of $_______________ in payment of the actual exercise price thereof. ____ Cashless exercise by surrender of the Warrant. The undersigned hereby irrevocably elects to receive Shares equal to the value of the Warrant determined in accordance with the provisions of Section 6(b) of the Warrant. The undersigned understands that the Shares being issued hereunder have not been registered under the Securities Act of 1933 (the "Securities Act") or any state securities laws and that such Shares may not be sold, transferred, or assigned except: (i) pursuant to an effective registration thereof under the Securities Act; or (ii) if in the opinion of counsel for the registered owner thereof, which opinion is reasonably satisfactory to the Company, the proposed sale, transfer or assignment may be effected without such registration under the Securities Act and will not be in violation of applicable state securities laws. Printed Name of Registered Dated: Holder: -------------- ----------------------------------- Signature: ----------------------------------- Address: ----------------------------------- ----------------------------------- ----------------------------------- -12- ANNEX B ASSIGNMENT FORM FOR VALUE RECEIVED, ----------------------------------------- hereby sells, assigns and transfers unto Name ------------------------------------------------ (Please typewrite or print in block letters) Address --------------------------------------------- the right to purchase Common Stock of nutrisystem.com inc. represented by this Warrant to the extent of _______________ shares as to which such right is exercisable and does hereby irrevocably constitute and appoint ______________________________ attorney, to transfer the same on the books of nutrisystem.com inc. with full power of substitution in the premises. Signature ------------------------------- Dated: ------------------ -13- EX-10.1 13 JOINT DEFENSE AND INDEMNIFICATION AGREEMENT Exhibit 10.1 JOINT DEFENSE, AND INDEMNIFICATION AGREEMENT THIS AGREEMENT is entered into between Wyeth Ayerst Laboratories Division of American Home Products Corporation ("AHP") and NutriSystem L.P. ("NutriSystem"). WHEREAS NutriSystem has been sued in numerous lawsuits alleging injury arising from the promotion, advertising, sale, prescription, use, recommended use or ingestion of Pondimin and/or Redux ("the Products"), either alone or in combination with phentermine; and WHEREAS AHP manufactured the Products and has a longstanding policy to defend and indemnify retailers that are sued as a result of dispensing AHP products; and WHEREAS NutriSystem has requested defense and indemnification for itself and the NutriSystem parties (i.e., NutriSystem's present and former affiliates, subsidiaries, officers, directors, general partners, limited partners, attorneys, agents, servants, employees, successors and assigns), pursuant to AHP's policy and state law; and WHEREAS AHP and NutriSystem desires to enter into this Agreement for their joint defense and the indemnification of NutriSystem and the NutriSystem parties against claims arising from the use or ingestion of the Products; NOW THEREFORE, it is agreed as follows: 1. This Agreement is entered into between AHP and NutriSystem as a joint defense and indemnification agreement. 2. This Agreement shall apply to all claims arising from ingestion of the Products (including claims arising from the ingestion of phentermines in combination with the Products) ("Claims") that have been or may he asserted against NutriSystem and the NutriSystem parties as a result of the promotion, advertising, sale, use, recommended use or ingestion of the Products. 3. AHP agrees to defend, indemnify and hold harmless NutriSystem and the NutriSystem parties from or against all Claims; except that if a court/jury apportions fault and determines that a pharmaceutical product other than the Products was a proximate/producing cause of the injuries giving rise to liability, then AHP shall indemnify only that portion of the judgment against NutriSystem equal to that portion of liability assigned to the Products as compared to the total liability assigned to the Products and to the other pharmaceutical product (such that, for example, if a court/jury determines that the Products are responsible for 50 percent of the harm, that a phentermine product is responsible for 40 percent of the harm, and that NutriSystem is responsible for 10 percent of the harm, then ATOP shall be obligated to indemnify NutriSystem to the extent of 50/90 of its liability). As to Claims where both AHP and phentermine manufacturer(s) are defendants and where the court/jury will not apportion liability between the claims subject to this paragraph and covered Claims, AHP and NutriSystem shall confer in good faith to determine an appropriate apportionment of liability based on the evidence in the case. If AHP and NutriSystem are unable is reach agreement on an appropriate apportionment, the dispute shall be submitted to arbitration pursuant to the arbitration agreement attached as Exhibit D. 4. NutriSystem shall promptly communicate to AHP all demands for settlement or settlement proposals. 5. If NutriSystem receives a separate demand or proposal for settlement from plaintiff, NutriSystem and AHP shall consult in good faith to determine whether AHP will negotiate and/or settle on behalf of NutriSystern only. In the event AHP determines not to settle on behalf of NutriSystem only, NutriSystem shall have the right to negotiate and settle on its own behalf. In the event that NutriSystem settles a claim under this paragraph after AHP has determined not to do so: (a) NutriSystem shall pay the first $5,000.00 of such settlement; (b) AHP and NutriSystern will immediately negotiate in good faith to attempt to agree upon the percentage of said settlement above the amount of $5,000.00 that will be paid by AHP; (c) If the parties cannot agree on an appropriate apportionment of the settlement amount, then AHP and NutriSystem shall each pay 50 percent of the settlement amount above $5,000; provided that AHP shall not be required to pay more than $25,000 pursuant to this paragraph. 6. AHP may settle any Claims against NutriSystem by paying the amount of such settlement to the plaintiff/claimant; provided that; (a) Such settlement be conditioned on dismissal with prejudice of all Claims by the plaintiff/claimant against NutriSystem, including any claims arising from the dispensing of phentermines in combination with the Products; (b) AHP gives notice of the proposed settlement and obtains the approval of NutriSystem with respect to any admissions or acknowledgment of liability on the part of NutriSystem. 7. If AHP settles any claim against itself in any case in which there are also Claims against NutriSystem, AHP shall make all reasonable efforts also to settle such Claims, subject to paragraph 5, above. 8. Counsel for NutriSystem ("Counsel") shall be selected by AHP after consultation with NutriSystem, provided that: (a) Counsel shall not also represent Wyeth and/or AHP in any case involving the Products, but may represent pharmacies who have been sued as a result of dispensing the Products; (b) Counsel shall agree, as a condition of their retention, that their sole recourse regarding any dispute over the payment of fees shall be against AHP. (c) The reasonable legal fees and expenses of Counsel shall be payable directly by AHP; (d) Counsel shall have an attorney-client relationship with NutriSystem, but not AHP. Counsel shall not share the attorney-client confidences or confidential information of NutriSystem with pharmacy defendants or AHP without written consent, and such confidences and information shall be shared only to the extent explicitly authorized. (e) Nothing in this Agreement shall be construed to prohibit NutriSystem from retaining counsel in addition to Counsel ("additional counsel") at their expense, which additional counsel shall be subject to the obligations of paragraph 10 below; except that AHP shall reimburse NutriSystem for such work of additional counsel as may be agreed upon in a particular case (possibly including, for example, preparation of NutriSystem officers and employees for deposition and trial testimony; production of company documents; preparation of responses to generic interrogatories; preparation of responses to generic requests for admissions; selection of experts; consultation on generic legal issues). 9. Nothing in this Agreement shall be construed to limit the duty of loyalty owed to NutriSystem by Counsel. Consistent with that duty, it is the expectation of the parties that Counsel will take all reasonable steps to limit attorneys' fees and costs. As a general rule, absent prior consultation and agreement with AHP, which agreement will not be unreasonably withheld, Counsel will not (i) attend depositions other than those of the plaintiff, the prescribing physician, NutriSystem employees, and experts designated to render opinions about NutriSystem's conduct, (ii) prepare and file memoranda in response to motions other than those directed against NutriSystem, or (iii) retain more than one expert in each state. Nothing herein shall he construed to limit the ability of Counsel to follow instructions from, and to defend effectively, NutriSystem. 10. AHP and NutriSystem shall claim, urge, assert and defend the joint defense privilege and all other privileges for confidential communication among the parties or for the joint development of information relevant to defense of the Claims. 11. AHP, NutriSystem and Counsel shall cooperate fully in the investigation and defense of the Claims. Such cooperation will include, but not be limited to: (a) making available to AHP NutriSystem's records as to any plaintiff/claimant and providing NutriSystem witnesses for interview or to present testimony at trial or any proceeding upon request; (b) making available to Counsel a summary of all materials reasonably necessary to defend NutriSystem in a particular case, including but not limited to deposition transcripts and medical records and other summaries. AHP shall have the right to control the joint defense, including settlement, of the Claims. 12. NutriSystem shall file in each case in which a phentermine manufacturer(s) is a defendant(s) a cross-claim against the phentermine manufacturer(s) and/or its insurer(s), seeking recovery of amounts due and owing NutriSystem in connection with the Claims. It is further agreed that: (a) the cross-claims against the phentermine manufacturers and/or their insurers shall be coordinated by and between AHP and NutriSystem; (b) with respect to their claims for indemnification of legal fees and expenses incurred in the underlying litigation, NutriSystem shall pay any recovery to AHP as reimbursement for legal fees and expenses paid pursuant to this Agreement; (c) with respect to their claims for indemnification of liability judgments, where the court/jury has apportioned fault, NutriSystem shall be entitled to retain that portion of the recovery; (d) with respect to their claims for indemnification of liability judgments, where the court/jury has not apportioned fault, NutriSystem shall pay any recovery to AHP as reimbursement for the indemnification paid pursuant to paragraph 3; (e) this Paragraph 12 shall not apply to any Claim where AHP withdraws its defense and indemnity of NutriSystem under Paragraph 13 of this Agreement; (f) NutriSystem may only settle the cross-claims against the phentermine manufacturers after consultation with AHP. 13. Notwithstanding the provisions of paragraphs 8 and 8(b), AHP will not indemnify NutriSystem for Claims that it dispensed or recommended the use of the Products despite clear indication in its records that use by the plaintiff/claimant was contraindicated per the contraindications section of the Prescribing Information for the Products (as reproduced at Exhibit B); formulated and dispensed a compounded product; provided warranties not authorized by AHP; or provided warnings other than those attached as Exhibit C. AHP shall notify NutriSystem of any claim to which this paragraph applies and for which it declines to provide indemnification under this Agreement; provided that: (a) Such notice shall be provided not less than 30 days before the close of discovery, or 120 days after provision to AHP of NutriSystem's records per paragraph 11(a), whichever date is first; (b) AHP shall support a request by NutriSystem for severance and/or an extension of the discovery cut-off or deadline for amending pleadings. 14. Should NutriSystem receive a demand for, or be subject to a cross-claim or third-party claim for, indemnification by a physician retained as an independent contractor by NutriSystem in connection with Claims, AHP will promptly evaluate the physician pursuant to AHP's program of indemnification for physicians. 15. AHP and NutriSystem shall not during the term of this Agreement sue or assert any cross-claim, third party claim or other claim against the other or against any parent, subsidiary or affiliate of the other with respect to any Claim. If such claims have been filed already, the parties shall withdraw them forthwith. NutriSystem shall execute an unconditional release of all claims that it may have against AHP for alleged injury to its business as a result of prescribing and/or dispensing the Products, 16. A party may terminate this Agreement only for material breach. AHP may not terminate this Agreement by reason of the bankruptcy of NutriSystem. In the event of such termination; (a) The parties waive any right they may have to disqualify Counsel or counsel for AHP by reason of participation in the joint defense. (b) The parties will have all rights to contribution or indemnification, and any claim which it had against the other, which it may have had prior to this Agreement, with respect to Claims that have not at the time of termination been the subject of judgment, other final court action or settlement; (c) The Agreement shall govern Claims that have been the subject of judgment, other final court action or settlement. 17. Without waiving any pre-existing rights with regard to NutriSystem's or the NutriSystem parties' insurers, including Federal Insurance Company ("Federal") and Chubb Custom Insurance Company ("Chubb"), Federal and Chubb shall be deemed to be NutriSystem parties with respect to any Claim premised upon the conduct of NutriSystem or a NutriSystem party for which Federal or Chubb are sued directly, and for no other purpose. 1n addition, AHP shall not seek reimbursement from NutriSystem's or the NutriSystem parties' insurers of any monies paid pursuant to this Agreement. 18. This Agreement constitutes the entire agreement of AHP and NutriSystem with respect to the subject matter thereof. No modification of this Agreement shall be effective unless contained in a writing executed by each of the parties. 19. Notices with respect to this Agreement shall be provided by facsimile with confirming copy by mail or courier, addressed as follows: For NutriSystem, L.P. For American Home Products Brian Haveson, President Corporation NutriSystem, L.P. Louis L. Hoynes, Jr., Esq. 202 Welsh Road Senior Vice-President and Horsham, PA 19044 General Counsel Five Giralda Farms Madison, NJ 07940 (973) 660-6040 The parties may change address and/or facsimile number by giving 15 days prior written notice of such change. 20. The signatures below constitute the representation by each representative that s/he is duly authorized to enter into the Agreement on behalf of AHP and NutriSystem, respectively. 21. This Agreement shall be governed by the laws of the State of New Jersey, provided that if application of federal law would result in upholding a claim of attorney-client privilege, work production protection, trade secret privilege or other applicable privilege or protective doctrine that would not be recognized under New Jersey law, then federal law shall govern this Agreement insofar as such privilege or protection is concerned. 22. This Agreement may be executed in one or more counterparts each of which shall be deemed an original. AGREED AS TO SUBSTANCE AND FORM: BY: /s/ Brian Haveson ------------------------------ Brian Haveson Date: Sept. 27, 1999 President, Nutri/System, L.P. -------------- BY: [Signature appears here] ------------------------------ AHP's authorized representative Date: Sept. 27, 1999 -------------- Exhibit D ARBITRATION AGREEMENT THIS AGREEMENT is entered into between Wyeth Ayerst Laboratories Division of American Home Products Corporation ("AHP") and NutriSystem L.P. ("NutriSystem"). WHEREAS the parties have agreed to confer in good faith to determine an appropriate apportionment of liability between AHP and NutriSystem as to Claims where both AHP and NutriSystem. are defendants and where the court/jury will not apportion liability between the claims subject to paragraph 3 of the Joint Defense and Indemnification Agreement and covered Claims; and WHEREAS the parties have further agreed, if they are unable to reach agreement on an appropriate apportionment, to submit the dispute to arbitration; NOW, THEREFORE, it is agreed as follows: according to the following guidelines, which guidelines may be amended or supplemented by further agreement of the parties: 1. The parties will submit the question of how liability should be apportioned to a former federal judge, who shall be selected by mutual agreement of the parties. 2. The proceedings shall be governed by the Federal Rules of Civil Procedure and Federal Rules of Evidence as far as practicable. 3. Fact discovery shall be permitted, but the number of witnesses and the number of hours of deposition discovery per side shall be limited. If the parties cannot agree on these issues, the arbitrator will establish the limits. 4. Expert disclosures shall be made in accordance with Rule 26 of the Federal Rules of Civil Procedure; each side shall be limited to the same number of experts pursuant to the direction of the arbitrator; and the deposition of each expert shall not exceed one day. 5. There shall not be a separate Daubert hearing, but Daubert challenges, if any, shall be heard and considered as part of a single hearing to adjudicate an appropriate apportionment of liability. 6. At the close of discovery, the parties shall confer to determine an appropriate limit on the number of hours each side shall have to present its case at the hearing. If parties cannot reach agreement, the issue shall be submitted to the judge, who shall establish an equal limit for each side. 7. Evidence presented for the first time at the hearing shall be given no greater or lesser weight than evidence presented by the parties at trial and offered at the hearing. 8. The judge shall render a decision within 30 days of the completion of the hearing. 9. The judge shall determine an apportionment of liability between AHP (for fenfluramine or dexfenfluramine) and NutriSystem (for phentermine). EX-10.2 14 FIRST AMENDMENT TO LEASE Exhibit 10.2 FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE (the "Amendment") is entered into this 28th day of October, 1999, between TEACHERS INSURANCE AND ANNUITY ASSOCIATION ("Landlord"), and NUTRI/SYSTEM LP ("Tenant"). Background Landlord and Tenant are parties to a Lease dated December 11, 1997 (the "Lease"), between Landlord's predecessor-in-interest, Teachers Pennsylvania Realty, Inc. ("TPR"), and Tenant, pursuant to which Landlord agreed to lease to Tenant and Tenant agreed to lease from Landlord premises described in the Lease (the "Existing Space") located in that certain building known as 202 Welsh Road, Horsham, Pennsylvania (the "Building"), as more particularly described in the Lease, upon the terms and conditions set forth in the Lease. Landlord has succeeded to the interests of TPR as landlord under the Lease. Landlord and Tenant desire to extend the term of the Lease and for Tenant to lease from Landlord additional space located in the Building in accordance with the terms and conditions of the Lease and this Amendment. Agreement In consideration of the foregoing and of the mutual promises contained in this Amendment, and for other good and valuable consideration the receipt and sufficiency of which is acknowledged by Landlord and Tenant, and intending to be legally bound hereby, Landlord and Tenant agree as follows: l. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, in addition to the Existing Space currently leased by Tenant under the Lease, the portion of the Building shown by cross-hatching on the Building floor plan attached to this Amendment as Exhibit A (the "Expansion Space"), in accordance with the terms and conditions of this Amendment. The Expansion Space shall be deemed to consist of 15,855 square feet of rentable floor area. 2. Tenant is fully familiar with the Expansion Space, and shall accept possession of the Expansion Space under this Amendment as of the date of execution of this Amendment by Landlord and Tenant in their then-current "as is" condition. Notwithstanding the foregoing, promptly after the execution of this Amendment by Landlord and Tenant, Landlord shall, at Landlord's sole cost and expense, perform all work necessary to cause the electricity (including but not limited to the electricity used to power the heating, ventilation and air conditioning equipment ("HVAC") serving the Expansion Space) and gas consumed in the Expansion Space separately metered. In performing such work, Landlord shall make reasonable efforts not to cause undue interference with Tenant's business operations in the Expansion Space. Except for the work described in this Section 2, Landlord shall not be required to make any improvements in the Expansion Space. 3. The term of the Lease (currently scheduled to expire under the Lease on December 31, 2000), is hereby extended so as to run through the last day of the month in which the fifth (5th) anniversary of the date of execution of this Amendment by Landlord and Tenant occurs. All references in the Lease to the "Original Term" shall be deemed to be references to the term of the Lease as extended pursuant to the immediately preceding sentence. 4. As of the date of execution of this Amendment by Landlord and Tenant (the "Expansion Commencement Date"), the Expansion Space shall be deemed to be a part of the Demised Premises under the Lease, and all provisions of the Lease relating to the Demised Premises generally (but not any provisions of the Lease applicable specifically to the Existing Space or any portion thereof), except as modified by this Amendment (and except with respect to Landlord's obligation to perform or pay for any alterations or improvements in the Demised Premises, other than as provided under this Amendment), shall thereafter be applicable to the Existing Space and the Expansion Space. As of the Expansion Commencement Date, the Demised Premises (i.e., the Existing Space and the Expansion Space) shall be deemed to consist of 48,555 square feet of rentable floor area. 5. Effective as of the Expansion Commencement Date, Tenant shall pay to Landlord during the remainder of the term of the Lease (as amended by this Amendment) Annual Base Rent (as defined in the Lease) for the Demised Premises (i.e., the Existing Space and, as of the Expansion Commencement Date, the Expansion Space) in the following amounts for the following Lease Years (as defined in the Lease): (i) for the period from the Expansion Commencement Date through the day immediately preceding the first (1st) anniversary of the Expansion Commencement Date, Annual Base Rent shall equal $305,947.56 per annum payable in monthly installments of $25,495.63; -2- (ii) for the period from the first (1st) anniversary of the Expansion Commencement Date through December 31, 2000, Annual Base Rent shall equal $313,875.00 per annum payable in monthly installments of $26,156.25; (iii) for the period from January 1, 2001, through the day immediately preceding the second (2nd) anniversary of the Expansion Commencement Date, Annual Base Rent shall equal $333,495.00 per annum payable in monthly installments of $27,791.25; (iv) for the period from second (2nd) anniversary of the Expansion Commencement Date through December 31, 2001, Annual Base Rent shall equal $341,422.56 per annum payable in monthly installments of $28,451.88; (v) for the period from January 1, 2002, through the day immediately preceding the third (3rd) anniversary of the Expansion Commencement Date, Annual Base Rent shall equal $348,289.56 per annum payable in monthly installments of $29,024.13; (vi) for the period from the third (3rd) anniversary of the Expansion Commencement Date through December 31, 2002, Annual Base Rent shall equal $356,217.00 per annum payable in monthly installments of $29,684.75; (vii) for the period from January 1, 2003, through the day immediately preceding the fourth (4th) anniversary of the Expansion Commencement Date, Annual Base Rent shall equal $364,065.00 per annum payable in monthly installments of $30,338.75; and (viii) for the period from the fourth (4th) anniversary of the Expansion Commencement Date through the last day of the term, as extended by this Amendment, Annual Base Rent shall equal $371,992.56 per annum payable in monthly installments of $30,999.38. 6. Effective as of the Expansion Commencement Date, Lessee's Pro Rata Share, as referred to in the Lease, for all periods from and after the Expansion Commencement Date, shall equal 31.5292%. 7. The Security Deposit (as defined in the Lease) is hereby increased to $50,991.26. Upon the execution of this Amendment, Tenant shall deliver to Landlord funds in the amount of $25,103.76 to increase the Security Deposit to such amount. 8. Section 1 of Article XXV of the Lease is deleted in its entirety. -3- 9. Tenant represents and warrants to Landlord that Tenant has not dealt with any party to whom a commission might be owing in connection with this Amendment, except for The Flynn Company ("Broker"), and shall indemnify, defend and hold harmless Landlord from and against the claim of any party other than Broker claiming a commission owing due to its dealings with Tenant in connection with this Amendment. Landlord shall pay any commission payable to Broker in connection with this Amendment under a separate agreement or agreements. 10. If there is any conflict between the terms and provisions of the Lease and the terms and provisions of this Amendment, the terms and provisions of this Amendment shall prevail. Landlord and Tenant ratify and affirm the Lease as modified by this Amendment. Except as modified by this Amendment, the Lease shall remain unmodified, in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment on the day and year first above written. WITNESS/ATTEST: TEACHERS INSURANCE AND ANNUITY ASSOCIATION /s/ Ronette A. Blissett BY: /s/ Arend W. Taal - --------------------------------- --------------------------------- RONETTE A. BLISSETT AREND W. TAAL ITS: ASSOCIATE DIRECTOR --------------------------------- NUTRI/SYSTEM LP /s/ Barbara D. Hart BY: /s/ Brian D. Haveson - ---------------------------------- --------------------------------- ITS: PRESIDENT --------------------------------- -4- EXHIBIT A [GRAPHIC] In the printed version of the document a floor plan appears. LEASE SUMMARY This summary shall not be construed as a part of the subject Lease, but rather is intended as a guide to essential terms of the subject Lease for the convenience and reference of Lessor and Lessee. 1. BUILDING AND LOCATION: 202 Welsh Road Horsham, PA 2. LESSOR: Teachers Pennsylvania Realty, Inc. 730 Third Avenue New York, New York 10017 3. LESSEE: Nutri/System LP 4. USE OF PREMISES: QUIET ENJOYMENT: The premises may only be used for offices, and for the warehousing, distribution and storage of non-hazardous and nonflammable materials. Lessee shall procure any government licenses and permits from time to time required for such permitted uses, and Lessor, at no expense to itself, shall cooperate in procuring such licenses or permits. Without limiting the generality of the foregoing, it is agreed that Lessee, and not Lessor, shall be responsible for ascertaining whether Lessee's proposed use of the Premises complies with the local zoning ordinance. The Premises may not be used for any use that would cause the Demised Premises to be deemed a "place of public accommodation" under the Americans with Disabilities Act (ADA) of 1990. 5. LEASED AREA: 32,700 s.f. 6. LEASE TERM: 3 years 7. OPTIONS: One, 2 year option at a renewal rate of $5.35 s.f. triple net or annual rent of $174,945.00 Year 1 of option period and a rental rate of $5.56 s.f. triple net or an annual rent of $181,812.00 year 2 of option period. 8. NO. OF. DAYS' NOTICE REQUIRED TO EXERCISE OPTION(S): 180 days 9. ANTICIPATED LEASE COMMENCEMENT DATE: January 1, 1998 10. ANTICIPATED LEASE EXPIRATION DATE: December 31, 2000 11. ANTICIPATED RENT COMMENCEMENT DATE: January 1, 1998 12. RENT STRUCTURE: Rate/S.F. Annual Monthly Period Per Year Base Rent Base Rent -------- --------- ----------- ---------- Year 1-3 $4.75 NNN $155,325.00 $12,943.75 13. FREE RENT: None 14. LESSEE'S PRO RATA SHARE OF BUILDING AREA: 22% - 32,700 s.f. premises in a 150,000 s.f. building. 15. LESSEE'S INITIAL MONTHLY ESTIMATED PAYMENT TOWARDS REAL ESTATE TAXES, OPERATING EXPENSES, AND INSURANCE ("ADDITIONAL RENT"): Real Estate Taxes: $1,771.25 Operating Expenses: $1,607.75 Insurance: $ 218.00 Total: $3,597.00 16. LESSEE'S CONTRIBUTION TO COST OF IMPROVEMENTS: Lessee is taking space "as is". Any improvements to the space are at Lessee's sole cost and responsibility including the certificate of occupancy. 17. LESSEE'S RIGHT OF TERMINATION: None. 18. RIGHT OF FIRST REFUSAL: None. 19. SECURITY DEPOSIT: $25,887.50 (Two months rent). 20. ADDITIONAL PROVISIONS: None. 21. SEWERAGE (MUNICIPAL SEWER, SEPTIC, MDC INDUSTRIAL USER PERMIT): Building is on public water and sewer. 22. AUTHORIZED BROKER(S): The Flynn Company and Lotz Realty. 23. LESSEE'S REPRESENTATIVE TO BE CONTACTED IN AN EMERGENCY (NAME, ADDRESS, TELEPHONE NUMBER): Joseph Boileau (215) 752-9111 STANDARD FORM INDUSTRIAL LEASE Lease made this day of December, 1997 by and between Teachers Pennsylvania Realty, Inc., 730 Third Avenue, New York, New York 10017 (hereinafter with their successors and assigns called the "Lessor") and Nutri/System LP (hereinafter with its successors and permitted assigns called the "Lessee"). WITNESSETH: Article I Basic Lease Provisions Section 1. The following sets forth basic data for this Lease. Each reference in this Lease to any of the following subjects shall be construed to incorporate the data stated for that subject in this Section: Lessor: Teachers Pennsylvania Realty, Inc. 730 Third Avenue New York, NY 10017 Lessee: Nutri/System LP, 202 Welsh Road, Horsham, PA Lessee's Address: Demised Premises: Approximately 32,700 square feet of floor area on the first floor of the building (the "Building") thereon erected and situated at 202 Welsh Road in the Town of Horsham, Pennsylvania on the parcel of land (the "Land") described in Exhibit A attached hereto. Original Term: Three (3) years from the "Commencement Date" of this Lease, as defined in Article II, Section 5 hereof; provided, however, if the Commencement Date is other than the first day of a calendar month then the Original Term shall expire three (3) years after the last day of the calendar month in which the term hereof commences. Original Annual Base Rent: YIELDING AND PAYING an Annual Base Rent during the Original Term hereof in the amount of: $155,325.00 payable in advance in equal monthly installments of $12,943.75. All rates are triple net. Anticipated Lease Commencement Date: January 1, 1998 Anticipated Rent Commencement Date: January 1, 1998 Anticipated Lease Expiration Date: December 31, 2000 Use of Premises: Quiet Enjoyment: The Premises will be used for general offices. Lessor shall procure any government licenses and permits from time to time required for such permitted uses, and Lessor, at no expense to itself, shall cooperate in procuring such licenses or permits. Without limiting the generality of the foregoing, it is agreed that Lessee, and not Lessor, shall be responsible for ascertaining whether Lessee's proposed use of the Premises complies with the local zoning ordinance. The Premises may not be used for any use that would cause the Demised Premises to be deemed a "place of public accommodation" under the Americans with Disabilities Act (ADA) of 1990. Lessee's Pro Rata Share: 22%, based on 32,700 square feet of floor area in the Demised Premises and 150,000 square feet of total leasable area in the building. Authorized Broker: The Flynn Company and Lotz Realty Security Deposit: $25,887.50 (two months rent) Section 2. The Exhibits listed below are incorporated this Lease by reference and are to be construed as part of this Lease: Exhibit A - Description of the Land B - Intentionally omitted C - Floor Plan of the Demised Premises D - Lessor's Initial Estimate of Lessee's Monthly Pro Rata Share of Real Estate Taxes, Operating Expenses and Insurance E - HVAC Maintenance Schedule F - Signage Standards G - Subordination Agreement H - Approved Hazardous Substances Article II Demised Premises; Term and Commencement 2 Section 1. In consideration of the rents and covenants herein contained on the part of the Lessee to be paid, performed and observed, the Lessor hereby leases to the Lessee and the Lessee hereby leases from the Lessor, subject to the terms and provisions hereinafter set forth, the Demised Premises; together with the nonexclusive right to use, in common with others lawfully entitled thereto, the common areas of the Building, the parking areas on the Land as same may exist from time to time, for parking purposes only, and the driveways and walkways on the Land, as same may exist from time to time, for roadway and walkway purposes only. The Demised Premises shall be constructed substantially in accordance with the outline specification attached hereto as Exhibit B and the floor plan attached hereto as Exhibit C. Section 2. The Demised Premises are leased subject to the reservation to the Lessor of the roof and exterior walls of the Demised Premises and of the Building, and subject to the Lessor's reservation of the right (without thereby assuming the obligation) to install, maintain, use, repair and replace (in such manner as to reduce to a minimum to the extent reasonably practicable the interference with Lessee's use of the Demised Premises) all pipes, ducts, wires, meters, utility lines and the like which are in the judgment of the Lessor, required to be in the Demised Premises. The Lessor reserves the right to alter, reduce, increase and relocate such parking areas, driveways and walkways from time to time and any common facilities within the Building. The Lessor reserves the right to make additions to the Building, to erect additional buildings and structures on the Land, and to continue to do construction work on the Building and the Land following delivery of the Demised Premises to Lessee. Section 3. TO HAVE AND TO HOLD the Demised Premises for the original term unless sooner terminated as herein provided. Section 4. Lessor shall engage an architect or engineer to prepare a detailed plan of improvements (the "Engineered Plan", which term shall also be deemed to include the improvements specified in Exhibits B and C to this Lease) to be made to prepare the Demised Premises for Lessee's occupancy. Lessor shall submit the Engineered Plan for Lessee's approval and Lessee shall respond within five (5) business days. Upon Lessee's written approval of the Engineered Plan, Lessor shall promptly commence and shall use diligent efforts to complete all work ("Lessor's Work") specified in the Engineered Plan by the Lessor's Work 3 Completion Date provided in Article I, Section 1 of this Lease. Section 5. The term "Commencement Date" as used in this Lease shall be deemed to refer to the earlier to occur of (i) the date on which Lessor has completed Lessor's work (except for punch-list items), or (ii) the date on which the demised premises or any portion thereof are first used for the conduct of Lessee's business. Lessor shall complete all punch-list items as soon as conditions permit and Lessee shall afford Lessor reasonable access to the Demised Premises for such purposes. "Punch-list" items shall mean minor items of work (and, if applicable, adjustment of equipment and fixtures) which can be completed after Lessee has taken occupancy of the Demised Premises without causing undue interference with Lessee's use of the Demised Premises. At any time after the Commencement Date is determined as aforesaid, Lessee agrees upon demand of Lessor to execute, acknowledge and deliver a written statement in recordable form satisfactory to Lessor stating the Commencement Date hereunder. Section 6. Lessor shall have no obligation to change the Engineered Plan of the Demised Premises as approved by Lessee, but shall use good faith efforts to accommodate any requests by Lessee for modifications thereof ("Changes"), provided (i) each such Change shall be described in a written Change Order signed by Lessor and Lessee and any additional cost shall be payable by Lessee in full upon the execution of such Change Order, and (ii) there shall be no delay or extension of the Commencement Date on account of Lessor's failure to complete any work described in a Change Order, although Lessor shall use diligent efforts to complete such work as soon as practicable. Article III Rent Section 1. YIELDING AND PAYING an annual base rent during the Original Term hereof in the amount of the Original Annual Base Rent. All such rent shall be payable in advance on the first day of each calendar month during the term hereof commencing on the Rent Commencement Date. If the Rent Commencement Date is other than the first day of a calendar month, base rent for the first incomplete month, prorated at the rate set forth above, shall be paid on the Rent Commencement Date. Section 2. The Original Annual Base Rent shall, during the Original Term, be 4 Section 3. The Lessee shall pay, as additional rent hereunder, during the Original Term hereof and any extension hereof, Lessee's Pro Rata Share of any and all real estate taxes and betterments and other assessments (ordinary and extraordinary), water rents, sewer and other charges which shall be imposed, assessed or levied upon the Building and the Land. In addition, the Lessee shall pay 100% of real estate taxes, betterments and other assessments due to any alterations or improvements made by the Lessee to the Demised Premises. If any betterment assessment is payable in installments, Lessee shall only be obligated to pay its Pro Rata Share of the installments (including interest) which are allocable to the term of this Lease or any extension of the term hereof. If this Lease shall commence on a date other than the first day of a tax year, or terminate on a date other than the last day of a tax year, the Lessee for that tax year shall pay to the Lessor only such portion of such additional rent for the whole tax year as shall be proportionate to the portion of the tax year contained within the term of this Lease. Section 4. The term "real estate taxes" shall mean all taxes and special assessments of every kind and nature assessed by a governmental authority on the Land or the Building which the Lessor shall become obligated to pay because of or in connection with the ownership, leasing and operation of the Land or Building. The foregoing provisions are predicated upon the present system of taxation in the Commonwealth of Pennsylvania. If taxes upon rentals or otherwise pertaining to the Demised Premises shall be substituted, in whole or in part, for the present ad valorem real estate taxes or assessed in addition thereto, then Lessee's obligation to pay such taxes shall be based upon such substituted taxes, to the extent to which the same shall be a substitute for present ad valorem real estate taxes, together with such additional taxes, and such substitute or additional taxes shall be deemed to be included within the term "real estate taxes." Except as hereinabove provided, nothing herein contained shall otherwise require or be construed to require Lessee to reimburse Lessor for any inheritance, estate, succession, transfer, gift, franchise, income or earnings, profit, excess profit tax, capital stock, capital levy or corporate or other similar tax which is or may be imposed upon Lessor or upon Lessor's business. Section 5. During the Original Term and any extensions or renewals thereof, Lessee shall pay to Lessor, as additional rent, Lessee's Pro Rata Share of the costs paid or incurred 5 by Lessor in managing, operating, maintaining and repairing the Building, and any additions to the Building (except only for structural repairs set forth in Article VI, Section 2) and in maintaining and repairing the Land, including, without limitation, parking areas, driveways, walkways, and landscaping thereon. Such costs shall include, without limitation: (1) all costs of providing utilities, (including, without limitation, where applicable, heat, cooling, and light), for maintaining and repairing the common areas of the Building, the parking areas, driveways and walkways on the Land (including, without limitation, resurfacing, striping and sweeping) and removing snow and ice from the parking areas, driveways and walkways on the Land and from the roof of the Building; (2) all costs of maintaining and repairing all drainage, sewage and/or septic systems and utility facilities and equipment on the Land whether above or underground; (3) all costs of operating, maintaining and repairing the Building and any additions thereto (structural repairs set forth in Article VI, Section 2 excepted), including without limitation, security and traffic control, maintenance and repair of all fixtures and equipment and utility facilities, including sewer and/or septic systems not serving exclusively the Demised Premises nor serving exclusively any other tenant; (4) reasonable management, legal, accounting and other professional fees (including management fees) incurred in connection with the operation, maintenance and management of the Building and the Land. The Tenant's cost of legal, accounting, or professional fees shall not exceed five cents ($.05) per square foot in any given year. Section 6. During the Original Term and any extensions or renewals thereof, Lessee shall pay Lessor, as additional rent hereunder, Lessee's Pro Rata Share of Lessor's cost of the following insurance on the Building and the Land: fire, extended coverage, flood, earthquake, boiler and machinery, and such other insurance covering all hazards included within customary "all risks" coverage, including without limitation insurance covering fire, lightning, vandalism, malicious mischief, and sprinkler leakage, said insurance to be on a full value, repair, or replacement basis as determined by Lessor; loss of rents insurance; and such other insurance as may be requested by Lessor's mortgagee. In addition, notwithstanding the foregoing, Lessee shall pay as additional rent, 100% of Lessor's cost of any insurance with respect to the Building or the Land which is attributable solely to Lessee's particular use of the Demised Premises. 6 Section 7. During the original term and any extensions or renewals thereof, Lessee shall pay Lessor, as additional rent hereunder, Lessee's Pro Rata Share of Lessor's cost for comprehensive liability insurance indemnifying the Lessor against all claims and demands for any injury to persons or property which may be claimed to have occurred in or upon the Building or the Land in such amounts as Lessor shall from time to time determine. Section 8. Lessee's Pro Rata Share of Lessor's costs relating to real estate taxes, operating expenses and insurance, referred to in Sections 3 through 7 of this Article III, shall be paid in advance in 12 equal monthly estimated installments (based on an amount estimated by Lessor) due and payable on the same dates as the monthly installments of annual base rent payable hereunder. Lessee's obligation to pay its Pro Rata Share of Lessor's costs relating to real estate taxes, operating expenses, and insurance (and ail other charges in the nature of additional rent provided in this Lease) shall begin as of the Commencement Date of this Lease and shall not be affected by any "free rent" or other concessions relating to Lessee's obligation to pay the Original Annual Base Rent provided in Section 1 of this Article III. As of the end of each fiscal year of Lessor (meaning the twelve-month period used by the Lessor preparing its annual financial statements), Lessor shall furnish to Lessee a statement in reasonable detail setting forth the computation of such costs; thereupon Lessee shall pay any deficiency, and any overpayment shall be refunded to Lessee. If the Lease shall commence on a date other than the first day of Lessor's fiscal year, or terminate on a date other than the last day of Lessor's fiscal year, the Lessee for that respective fiscal year shall pay to the Lessor only a proportionate share of Lessor's costs for the whole fiscal year as shall be proportionate to the portion of the fiscal year contained within the term (as extended or renewed) of this Lease. Lessor's initial estimate of the monthly installments payable by Lessee hereunder is attached hereto as Exhibit D. Section 9. This is, and is intended to be, a NET LEASE, and accordingly, except as expressly otherwise provided for herein, all charges, assessments and impositions made upon the Land and the Building and all costs, expenses and other obligations paid or incurred by Lessor of any kind or nature whatsoever in insuring, maintaining and/or repairing the Demised Premises or the Building or the Land or any additions to the Building, (other than costs of maintaining or repairing the interior of space leased to others or available for lease to others and other than structural 7 repairs set forth in Article VI, Section 2 hereof) shall be included in determining Lessor's costs of which Lessee is obligated to pay a pro rata share or the entirety, as the case may be, as provided hereinabove. Section 10. All payments of base rent and additional rent hereunder shall be mailed or delivered to the Lessor, when due as set forth herein without offset or deduction and without previous demand therefore and if other than cash be made payable to the order of Teachers Pennsylvania Realty, Inc. (Lessor), c/o The Flynn Company (Rental Agent for Lessor) at 1621 Wood Street, Philadelphia, PA 19103, or otherwise as Lessor may notify Lessee from time to time. Article IV Covenants Lessee covenants and agrees as follows: (a) To pay when due the said base rent and additional rent at the times and in the manner set forth herein. (b) To procure any and all licenses and permits required for any use to be made of the Demised Premises by Lessee, to keep the Demised Premises equipped with all safety appliances required by law or ordinance because of any use of the Demised Premises by Lessee and to make any alterations or changes which may be necessary to meet the obligations and standards promulgated under the Occupational Safety and Health Act of 1970 which are related to Lessee's use and occupation of the Demised Premises. (c) To pay promptly when due the entire cost of any work to the Demised Premises undertaken by Lessee so that said premises shall at all times be free of liens for labor and materials; to procure all necessary permits before undertaking such work; to do all of such work in a good and workmanlike manner, employing new materials of good quality and complying with all governmental and insurance requirements; and to save Lessor harmless and indemnified from all injury, loss, claims or damage to any person or property occasioned by or growing out of such work including, without limitation, reasonable attorneys' fees. If so requested by Lessor, Lessee shall take over Lessor's defense in any action related to work undertaken by Lessee on the Demised Premises. (d) To permit Lessor and anyone claiming under Lessor at reasonable times to enter into and examine the Demised 8 Premises and to show the Demised Premises to prospective purchasers or tenants, provided that Lessor shall not thereby unreasonably interfere with the conduct of Lessee's business; to permit Lessor to enter said premises to make such repairs, improvements, alterations or additions thereto as may be required in order to comply with the requirements of any public authority having jurisdiction of the Demised Premises, or as may be required of Lessor under the terms of this Lease, provided that such entry shall not unreasonably interfere with the conduct of Lessee's business; and to permit the affixing to any suitable part of the Demised Premises reasonable notice for letting or selling the Demised Premises or the Building; to permit Lessor to enter the Demised Premises at any time to make emergency repairs. (e) To pay when due any and all State, Federal or local taxes based upon Lessee's personal property or resulting from any permitted alteration, additions or improvements made by Lessee to the Demised Premises. (f) To conform to and comply with all laws, orders and regulations of any governmental authorities and any public body or officer having jurisdiction over the Demised Premises. (g) To comply with any rules, regulations or recommendations of the National Board of Fire Underwriters, any rating bureau, or any similar association performing such function, and any insurance company insuring the Demised Premises with respect to the Demised Premises and/or Lessee's use and occupation thereof, so long as Lessee shall not be required to make structural changes unless required by Lessee's particular use of the premises. (h) To keep the Demised Premises adequately heated for the protection of the plumbing herein. (i) To permit no waste with respect to the Demised Premises. (j) To permit no storage of materials outside of the Demised Premises except for such temporary storage as may be required for reasonable periods of time due to unforeseen circumstances or emergencies. (k) To comply with such reasonable rules and regulations now or hereafter made by Lessor for and with respect to 9 the care and use of the Building, the Land and their facilities and approaches, it being understood that Lessor shall not be liable to Lessee for the failure of any other tenants of the Building to conform to such rules and regulations. (1) Not to do, or suffer to be done, or to keep, or suffer to be kept, or omit to do anything in, upon or about the Demised Premises which may prevent the obtaining of any insurance on the Building or the Demised Premises or which may make void or voidable any insurance on the Building or the Demised Premises. Article V Use of Demised Premises Section 1. The Lessee shall have the right to use the Demised Premises only for Permitted Uses and for no other purpose whatsoever, but in no event shall Lessee conduct at the Demised Premises any use or do anything which is offensive, constitutes a nuisance or violates any provisions of any zoning, building or other applicable laws, ordinances or regulations. Section 2. Lessee further agrees to conform to the following provisions during the entire term of this Lease or any extension thereof; (a) Lessee shall always conduct its operations in the Demised Premises under its present trade name or any future trade name which is not offensive or in violation of law, unless Lessor shall otherwise consent in writing, which consent shall not be unreasonably withheld; (b) Lessee shall not permit any auction, fire, going-out-of-business, or bankruptcy sales or any retail sales whatsoever to be conducted within the Demised Premises, without the prior written consent of the Lessor; (c) Lessee shall not use the sidewalks, parking areas or other outside areas for advertising or business purposes or otherwise obstruct the same; (d) Lessee shall, at its own cost and expense, be responsible for the prompt regular removal of all trash, refuse, and the like, from the Demised Premises and shall insure that same be kept in covered containers at all times; 10 (e) All curtains and other window treatments visible from the exterior of the Demised Premises shall be white in color; (f) Lessee shall take whatever measures are necessary to insure that floor load limitations are not exceeded in the Demised Premises; and (g) Lessee shall not cause any offensive odors or loud noise (including, but without limitation, the use of loudspeakers), nor take nor permit any action which constitutes a nuisance or menace to any other occupant of other premises in the Building, and in no event shall any loud noises or offensive odors be emitted from the Demised Premises. Article VI Repairs and Alterations Section l. The Lessee shall keep the Demised Premises in a neat, clean, sanitary condition and in good order and repair and in good working condition, including all electrical, plumbing, gas, sprinkler, and equipment within or serving the Demised Premises (including without limitation the maintenance, repair and/or replacement of the HVAC system serving the Demised Premises), and all fixtures and interior walls, floors, ceilings, signs (including exterior signs where permitted) and all interior building appliances and similar equipment and the exterior and the interior portions of all windows, window frames, doors, door frames, and all other glass or plateglass thereon. In connection therewith, and without limiting Lessee's obligations hereunder, Lessee shall perform the maintenance as set forth on the HVAC maintenance schedule attached hereto as Exhibit E and made a part hereof. Lessor shall use reasonable efforts to assign to Lessee or to enforce on Lessee's behalf any written warranties from contractors or manufacturers applicable to repairs and replacements to be performed by Lessee. Section 2. The Lessor shall, at its own expense, promptly after receipt of written notice from the Lessee, make any necessary repairs to the roof, foundations, beams, girders, mullions and exterior walls of the Demised Premises only (exclusive of glass, window frames, windows, doors, door frames, and signs, which repairs shall be made by the Lessee) except where such repairs are required by reason of any act or negligence of the Lessee, its employees, agents, licensees, suppliers, contractors, or guests ("structural repairs"). The Lessor shall commence repairs to be made by it as promptly as practicable after the receipt of such 11 notice; provided, however, that the Lessor (without limiting Section 15 of Article XXII hereof) shall not be liable for a delay in commencement of the making of such repairs or for a delay or failure to complete such repairs where such delay or failure is attributable to strikes or other labor conditions, inability or difficulty in obtaining materials or services, wars, delays due to the weather, or other cause beyond the reasonable control of the Lessor. Section 3. Lessor shall be responsible for the maintenance of the grass and shrubs located on the Land and shall be responsible for maintaining, repairing and lighting of common areas of the Building and maintaining, repairing, lighting and removing snow from the parking areas, driveways and walkways on the Land, except where the necessity thereof is due to the willful or negligent acts of Lessee or its agents, employees, licensees, suppliers, contractors or guests. Section 4. All costs paid or incurred by Lessor in performing any of its obligations under this Article VI (except for structural repairs set forth in Section 2 hereof) shall be included in Lessor's costs of maintaining and repairing as set forth in Article III, Section 5. Section 5. The Lessee shall at the expiration or earlier termination of this Lease remove its goods and effects and peaceably yield up the Demised Premises, clean and in the same order, repair and condition as at the Commencement Date of the term hereof, or as the same may be put in during the term hereof, reasonable wear and tear excepted (provided good maintenance practices are employed), except for repairs which the Lessor agrees to make as herein provided, and except for damage by fire or insured casualty, and Lessee shall promptly repair any injury done to the Demised Premises, the Building or the Land by the installation or removal of the Lessee's fixtures or other property. Section 6. The Lessee shall have the right at its expense to make alterations, improvements or additions to the interior of the Demised Premises, provided that; (a) No such alteration, addition or improvement shall lessen the fair market value of the Demised Premises or the Building, and any such alteration, addition or improvement shall be done in accordance with all applicable laws, in a good and workmanlike manner with good quality material, and shall not impair the safety of the structure of the Building. 12 (b) Any such alteration, addition, or improvement shall be made in accordance with previously prepared plans and specifications, and such plans and specifications must have the written approval of the Lessor before any work thereon shall be commenced, such approval with respect to non-structural alterations, not to be unreasonably withheld. With respect to structural alterations, improvements or additions, Lessor shall have absolute discretion to withhold or grant its consent. (c) Prior to the commencement of work on any such alteration, addition, or improvement, the plans and specifications covering the same shall have been submitted to and approved by: 1. All municipal or other governmental departments or agencies having jurisdiction over the subject matter thereof, and 2. Any mortgagee having an interest in or lien upon the Building or the Land, if required by the terms of the mortgage, it being understood that the Lessor will join in any application to any such mortgagee to obtain such approval with respect to any alteration, addition, or improvement which the Lessor shall have approved under subparagraph b above. (d) The Lessee shall pay the increased premium, if any, for the insurance coverage of the Demised Premises or the Building resulting from any additional risk during the course of construction or installation of any such alteration, addition, or improvement or resulting from such alteration, addition or improvement. All additions, improvements and fixtures (other than the usual trade fixtures, furniture and equipment installed by the Lessee which may be removed from the Demised Premises without injury thereto) which may be made or installed by either the Lessor or the Lessee and which are attached to a floor, wall or ceiling, including any linoleum or other floor covering of similar character, shall remain upon the Demised Premises, and at the expiration or earlier termination of this Lease shall be surrendered with the Demised Premises as a part thereof. However, the Lessor upon termination of this Lease may require the Lessee at Lessee's expense to restore the Demised Premises to their condition at the commencement of this Lease in whole or in part. 13 Any trade fixtures, furniture and equipment owned by the Lessee which may be removed from the Demised Premises without injury thereto shall remain the property of the Lessee and shall be removed by the Lessee from the Demised Premises without injury thereto prior to the expiration or earlier termination of this Lease. In the event Lessee fails to remove said fixtures, furniture and/or equipment prior to the expiration or earlier termination of this Lease they shall be deemed abandoned and may be disposed of by Lessor in any way it sees fit, and Lessor shall not be liable to Lessee for any such disposal. Section 7. Without limiting Lessee's obligations in this Lease or elsewhere, Lessee shall promptly, after notice from the Lessor, repair at its own expense any damage to the exterior of the Demised Premises, the Building or to the utilities serving the Demised Premises (including the HVAC system), or to the Land (including without limitation the parking areas, driveways, walkways, and grass and shrubs located on the Land) caused by any act or negligence of the Lessee, its agents, employees, licensees, suppliers, contractors, or guests. Section 8. It is understood that Lessor's obligations under this Article VI are subject to the provisions and limitations set forth in Article XV and XVI. Article VII Utilities The Lessee shall pay when due all charges for utility services provided to the Demised Premises including, without limitation, electricity, gas, water, telephone, and the cost of fuel to heat or air condition the Demised Premises. If water consumed by the Demised Premises is not metered separately from water consumed by the remainder of the Building, Lessee shall pay to Lessor, in accordance with the provisions of Section 8 of Article III, Lessee's Pro Rata Share of the aforesaid. The aforementioned share is based on the assumption that water in the Demised Premises will be used only for ordinary drinking and lavatory purposes. If water is consumed in the Demised Premises for other purposes or in excessive quantities or if Lessee's heating and/or cooling requirements are materially greater than that of other tenants or prospective tenants, then Lessee shall pay to Lessor, on demand from time to time, charges for said additional water as reasonably estimated by Lessor. Lessor reserves the right to install a water meter to measure water consumption in the Demised Premises if not installed at the 14 Commencement Date. The Lessor shall not be liable for any interruption of electricity, gas water, telephone, sewage and/or septic system or other utility service supplied to the Demised Premises, when in Lessor's judgment it is deemed necessary by reason of accident, emergency, repair work, or otherwise. No such interruption or stoppage of utility service shall be deemed to be an eviction of the Lessee or relieve Lessee from any of the Lessee's obligations under this Lease. Article VIII Indemnity and Public Liability Insurance Section 1. The Lessee shall assume exclusive control of the Demised Premises, and all tort liabilities with respect to the control or occupancy thereof and shall save the Lessor harmless and indemnified from all injury, loss, claims or damage of whatever nature to any person or property in or about the Demised Premises, the Building and/or the Land, arising from any act, omission or negligence of the Lessee or Lessee's subtenants or concessionaires or the employees, agents, contractors, suppliers, licensees, invites, or customers of any of the foregoing or otherwise resulting from Lessee's use, maintenance and occupancy of the Demised Premises or any thing or facility kept or used thereon. Upon request of Lessor, the Lessee shall take over the Lessor's defense in any action related to such matter for which Lessee has agreed to indemnify Lessor. Section 2. Lessee agrees to maintain in full force during the term hereof, and any extensions thereof, a policy of public liability and property damage insurance under which the Lessor (and such other persons as are in privity of estate with Lessor as may be set out in notice from the Lessor from time to time) and Lessee are named as insureds, and under which the insurer agrees to indemnify and hold Lessor and those in privity of estate with Lessor harmless from and against all cost, expense and/or liability arising out of or based upon any and all claims, accidents, injuries, and damages mentioned in Section 1 of This Article VIII. Each such policy shall be non-cancellable with respect to the Lessor and Lessor's said designees without ten (10) days' prior written notice to Lessor, and a duplicate original or certificate thereof shall be delivered to Lessor upon execution of this Lease. The minimum limits of liability of such insurance shall be One Million Dollars ($1,000,000) for injury (or death) to any one person, and Two Million Dollars ($2,000,000) for injury (or death) to 15 more than one person, and Five Hundred Thousand Dollars ($500,000) with respect to damage to property. Section 3. Neither the Lessor nor any agent or employee of the Lessor shall be liable for any loss or damage to the person or property of the Lessee, or of any subtenant, or concessionaire, or of any employee, customer, licensee, invitee, contractor or supplier, or guest of any of the foregoing, except where such damage is attributable solely to the negligence of the Lessor its agents or employees. Without in any way limiting the generality of the foregoing, Lessor, its agents or employees shall not be liable, in any event, for any such damage resulting; (a) from the interruption to business resulting from theft, fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow or leaks from any part of said Demised Premises, or from the pipes, appliances or plumbing or from dampness or any other cause; (b) from any hidden defect in, under or upon the Demised Premises, the Building or the Land; and/or (c) from acts or omissions or persons occupying adjacent premises or otherwise entitled to use the Building and/or Land. Section 4. Lessor shall not be liable to Lessee for any compensation or reduction of rent by reason of inconvenience or annoyance or for loss of business arising from power losses or shortages or from the necessity of Lessor's entering the Demised Premises for any of the purposes in this Lease authorized, or for repairing the Demised Premises or any portions of the Building or Land in accordance herewith, nor shall any such entry, interruption or similar event give rise to a claim in Lessee's favor that such event constitutes actual or constructive, total or partial, eviction from the Demised Premises. Article IX Fire and Extended Coverage Insurance Section 1. The Lessor shall obtain the insurance for which Lessee makes required payments to Lessor under Article III, Section 6. Section 2. The Lessee shall not acquire, by being named, at the election of Lessor, as insured under any fire or extended coverage insurance on the Demised Premises or the Building, any right to participate in the adjustment of loss or to receive insurance proceeds and agrees upon request 16 promptly to endorse any checks or other instruments in payment of loss in which the Lessee is named as payee. Section 3. The Lessee shall, at its own expense, maintain fire and comprehensive casualty insurance of adequate amounts with respect to its own fixtures, merchandise, equipment and other property contained in the Demised Premises, it being understood that all merchandise, furniture, fixtures, effects and property of every kind of the Lessee which may be in the Demised Premises, or the Building or on the Land shall be at the sole risk and hazard of the Lessee. Article X Signs The Lessee shall submit to the Lessor, for Lessor's prior approval, the design and specifications for any signs to be installed by Lessee. All Lessee's signs shall conform to Lessor's signage standards attached hereto as Exhibit F and to any applicable municipal or other law, rules, ordinance or code. If a building permit is required to install Lessee's sign, Lessee shall furnish Lessor with a copy of such permit prior to installation. Lessee shall maintain and keep in good repair any signs erected by it. Lessee shall be responsible for any repairs to the Demised Premises or the Building related to the erection of said signs. Lessee shall remove all of its signs upon expiration of the term or earlier termination of this Lease and shall promptly repair any damage related to the erection or removal of said signs. Article XI Assignment or Subletting A. Lessee shall not have the right to assign or pledge this Lease or to sublet the whole or any part of the Premises, whether voluntarily or by operation of law, or permit the use or occupancy of the Premises by anyone other than Lessee, or assign this Lease for security purposes, without the prior written consent of Lessor, and such restrictions shall be binding upon any assignee or sublessee to which Lessor has consented. In the event Lessee desires to sublet the Premises, or any portion thereof, or assign this Lease, Lessee shall give written notice thereof to Lessor at least 90 days but no more than 180 days prior to the proposed commencement date of such subletting or assignment, which notice shall set forth the name of the proposed sublessee or assignee, the relevant terms 17 of any sublease, and copies of financial reports and other financial information of the proposed sublessee or assignee. Notwithstanding any permitted assignment or subletting, Lessee shall at all times remain directly and primarily responsible and liable for the payment of the rent herein specified and for compliance with all of its other obligations under this Lease. Upon the occurrence of an "event of default" (as hereinafter defined), if the Premises or any part thereof are then sublet, Lessor, in addition to any other remedies provided herein or by law, may collect directly from such sublessee all rents due and becoming due to Lessee under such sublease and apply such rent against any sums due to Lessor from Lessee hereunder. No such collection directly from an assignee or sublessee shall be construed to constitute a novation or a release of Lessee from the further performance or Lessee's obligations hereunder. B. In addition to Lessor's right to approve any sublessee or assignee, Lessor shall have the option, in its sole discretion, in the event of any proposed subletting or assignment, to terminate this Lease, or in the case of a proposed subletting of less than the entire Premises, to recapture the portion of the Premises to be sublet, as of the date the subletting or assignment is to be effective. The option shall be exercised by Lessor's giving Lessee written notice thereof within sixty (60) days following Lessor's receipt of Lessee's written notice as required above. If this Lease shall be terminated with respect to the entire Premises the Term shall end on the date stated in Lessee's notice as the effective date of the sublease or assignment as if that date had been originally fixed in this Lease for the expiration of the Term. If Lessor recaptures only a portion of the Premises, the rent during the unexpired Term shall abate, proportionately, based on the rent as of the date immediately prior to such recapture. Lessee shall, at Lessee's own cost and expense, discharge in full any outstanding commission obligation or the part of Lessor with respect to this Lease, and any commissions which may be due and owing as a result of any proposed assignment or subletting, whether or not the Premises are captured pursuant hereto and rented by Lessor to the proposed lessee or any other lessee. C. Consent by Lessor to any assignment or subletting shall not include consent to the assignment or 18 transferring of any lease renewal option rights or space option rights of the Premises, special privileges or extra services granted to Lessee by this Lease, or addendum or amendment thereto of letter or agreement (and such options, rights, privileges or services shall terminate upon such assignment), unless Lessor specifically grants in writing such options, rights, privileges or services to assignee or sublessee. Any sale, assignment, mortgage, transfer of this Lease or subletting which does not comply with the provisions or this Article shall be void. D. In the event that Lessee sells, sublets, assigns or transfers this Lease and at any time receives periodic rent and/or other consideration which exceeds that which Lessee would at that time be obligated to pay to Lessor, Lessee shall pay to Lessor 100% of the gross increase in such rent as such rent is received by Lessee and 100% of any other consideration received by Lessee from such sublessee in connection with such sublease, or in the case of an assignment of this Lease by Lessee, Lessor shall receive 100% of any consideration paid to Lessee by such assignee in connection with such assignment. E. Should Lessor agree to authorize and execute an assignment or sublease agreement, Lessee will pay to Lessor on demand a sum equal to all of Lessor's costs, including attorneys' fees, incurred in connection with such assignment or transfer. F. The nature of the occupancy, the use and the manner of use of the Premises by the proposed subtenant or assignee shall not impose on Lessor any requirements of the Americans with Disabilities Act (ADA) of 1990 in excess of those requirements imposed on Lessor in the absence of such proposed subtenant or assignee or such occupancy, use or manner of use, unless such proposed subtenant or assignee shall have agreed to comply with each of such excess requirements and, at Lessor's option, shall have furnished Lessor with such security as Lessor may require to assure that such subtenant or assignee shall so comply. Article XII Subordination 19 Section 1. The Lessee shall from time to time, within ten (10) days after written demand of Lessor, either (as demanded by Lessor) subordinate this Lease or make this Lease superior to any existing and/or future Mortgage heretofore or hereafter placed upon the Land and to any renewal, modification, replacement or extension of such Mortgage, and to any and all advances made to or to be made thereunder, provided that said Mortgagee enter into an agreement with Lessee by the terms of which the Mortgagee under said Mortgage will agree that in the event of foreclosure thereof, said Mortgagee will not disturb the possession of the Lessee under the Lease so long as the Lessee is not in default hereunder and the Lessee will agree to recognize the holder of such Mortgage as the Lessor in such event, which agreement shall be made expressly binding upon the successors and assigns of the Lessee, and the Mortgagee and upon anyone purchasing said Demised Premises or Building at any foreclosure sale. Notwithstanding the foregoing if requested by Lessor or a Mortgagee of the Demised Premises, Lessee agrees to promptly execute a Subordination and Attornment Agreement substantially in the form attached hereto as Exhibit G, or in the mortgagee's standard form containing its usual terms and conditions, and failure to execute such an agreement promptly upon request shall be a default under this Lease. The Lessee and the Lessor agree to execute and deliver any instruments necessary to carry out the agreements contained in this Section. Any such Mortgage to which this Lease shall be subordinated or be made superior may contain such other terms, provisions and conditions as the Mortgagee deems usual or customary. The Lessee hereby irrevocably appoints the Lessor and any successor or assigns its attorney-in-fact (which appointment is coupled with an interest) to execute and deliver any such instrument of subordination for and on behalf of the Lessee and its successors and assigns. Section 2. If any Mortgagee elects by written notice given to the Lessee, to have this Lease and the interest of the Lessee hereunder superior to any such Mortgage then this Lease and the interest of the Lessee hereunder shall be deemed superior to any such Mortgage, whether this Lease was executed before or after such Mortgage. Section 3. Lessee will, upon request by Lessor or any Mortgagee, from time to time, execute and deliver to such party (a) an "estoppel Letter", so called, in form satisfactory to such party and/or (b) a copy of every notice of default delivered by Lessee to Lessor at the same time 20 and in the same manner as to Lessor and/or (c) an agreement consenting to an assignment of this Lease to such party and acknowledging such assignment. Section 4. For purposes hereof, the term "Mortgage" shall mean any real estate mortgages, ground leases, deeds of trust, security agreements or indentures affecting the Land or the Building; the term "Mortgagee" shall include the holder of any such real estate mortgage, any ground lessor or any trustees or holders of any such security agreements or indentures. Article XIII Self-Help If the Lessee shall default in the performance or observance of any agreement or condition in this Lease contained on its part to be performed or observed, and shall not cure such default within thirty (30) days after notice from Lessor specifying the default (or, if said default cannot reasonably be expected to be cured within such thirty-day period, shall not within said period commence to cure such default and thereafter prosecute the curing of such default to completion with due diligence) Lessor may, at its option, without waiving any claim for breach of agreement, at any time thereafter cure such default for the account of Lessee, and make all necessary payments in connection therewith, including but not limiting the same to reasonable counsel fees, costs or charges of or in connection with any legal action which may have been brought, and any amount paid by Lessor in so doing shall be deemed paid for the account of Lessee and Lessee agrees to reimburse Lessor therefore with interest thereon at 18% per annum, such sums payable by Lessee to Lessor to be deemed additional rent; provided that Lessor may cure any such default as aforesaid prior to the expiration of any waiting or cure period but after Lessor has exerted best efforts to give actual notice (by telephone or otherwise), if the curing of such default prior to the expiration of said waiting or cure period is reasonably necessary to protect the real estate or Lessor's interest therein, or to prevent injury or damage to persons or property. Article XIV Waiver of Subrogation 21 Lessor and Lessee each hereby releases the other from any and all liability or responsibility to the other (or anyone claiming through or under them by way of subrogation or otherwise) for any loss or damage to the Demised Premises or property thereon against which the waiving party is protected by insurance, even if such loss or damage shall have been caused by the fault or negligence of the other party, or anyone for whom such party may be responsible; provided, however, that this release shall be applicable and in force and effect only with respect to loss or damage occurring during such time as the releasors policies shall contain a clause or endorsement to the effect that any such release shall not adverselv affect or impair said policies or prejudice the right of the releasor to recover thereunder. Lessor and Lessee each hereby agree that it shall cause such clause or endorsement to be included in its insurance policies with respect to the Demised Premises, if available, and, if necessary, pay any additional premium, that may be charged therefore. Article XV Damage by Fire, Etc. Section 1. If the Demised Premises or the Building shall be damaged or destroyed by fire, windstorm or any other insured casualty, the Lessee shall immediately give notice thereof to the Lessor and unless this Lease is terminated as hereinafter provided, the Lessor at his own expense shall repair or rebuild the same so as to restore the Demised Premises (but not any leasable improvements, alterations, additions or improvements made by or for Lessee) to substantially the same condition they were in immediately prior to such damage or destruction, subject, however, to zoning and building laws then in existence, provided that the Lessor shall not be responsible for any delay in such repair or reconstruction which may result from any cause beyond its reasonable control, and provided further that Lessor shall not be required to expend more than the net amount of insurance proceeds, if any, received by Lessor for such purposes, it being understood that the application of insurance proceeds is subject to the right of any first mortgagee of the Demised Premises. Section 2. If either the Demised Premises or the Building shall be damaged or destroyed to the extent of twenty-five percent (25%) or more on a square footage basis by any cause (whether insured against by the Lessor or not), the Lessor may elect by written notice to the Lessee either to 22 terminate this Lease or to repair or rebuild on the conditions set forth in Section 1. Section 3. If the Demised Premises or the Building shall, within the last year of the Original term of this Lease or the last year of any extended term hereof, be damaged or destroyed by any cause to such extent that the same cannot be reasonably expected to be restored to substantially the same condition as prior to such damage or destruction within ninety (90) days from the time that such repair or restoration work would be commenced, then the Lessor shall have the right to terminate this Lease by notice to the Lessee given within sixty (60) days after the occurrence of such damage or destruction. Section 4. In the event that the Demised Premises or the Building are damaged or destroyed by any cause, then, unless this Lease is terminated as above provided, the Lessee, at its own expense and proceeding with all reasonable dispatch, shall repair or replace suitably all trade fixtures, equipment, signs or other property installed by or belonging to the Lessee which shall be damaged or destroyed. Section 5. If this Lease is not terminated as above provided, then from and after such damage which is material and until the Demised Premises are restored as above provided, the rent reserved herein shall abate, either wholly or proportionately, according to the nature and extent of the injury. Article XVI Eminent Domain Section 1. If as a result of any taking by eminent domain which shall be deemed to include a voluntary conveyance in lieu of a taking, the total floor area remaining in the Demised Premises shall be reduced to less than fifty (50%) percent of the total floor area in the Demised Premises at the commencement of the term hereof, then at the election of the Lessor, exercisable by written notice given to the Lessee within ninety (90) days after the date of the filing of the notice of such taking, this Lease may be terminated as of the date when the Lessee is required to vacate the Demised Premises or the portion thereof so taken, notwithstanding that the entire interest of the Lessor may have been divested by such taking, and if following any such taking the Lessor does not terminate this Lease, then the Lessor at the Lessor's expense, but only to the extent of the award actually received by the Lessor for any such taking, (subject to the rights of any first mortgagee of the 23 Demised Premises) and proceeding with all reasonable dispatch shall do such work as may be required to put what may remain of the Demised Premises in proper condition for the conduct of the Lessee's business, and the Lessee, at the Lessee's expense and proceeding with all reasonable dispatch, shall make such alterations, repairs and replacements of the trade fixtures, equipment, signs or other property installed by or belonging to the Lessee as may be necessary to put the remainder of the Demised Premises in proper condition for the Lessee's business. From and after the date on which the Lessee is required to vacate the portion of the Demised Premises so taken, a just proportion of the rent reserved herein according to the nature and extent of the taking of the Demised Premises, shall be abated until the Demised Premises are restored to such condition that the Lessee can commence business therein, and from and after the date on which the Lessor shall restore the Demised Premises in the manner above provided the rent shall be reduced in the proportion that the floor area of the portion of the Demised Premises so taken bears to the floor area of the Demised Premises at commencement of the term hereof. Section 2. In the event of a taking, as defined herein, of 25% or more of the Land or the Building and even though such taking leaves at least fifty (50%) percent or more of the floor area of the Demised Premises remaining, the Lessor shall nonetheless have the right to terminate this Lease by notifying the Lessee of the Lessor's election to terminate within ninety (90) days after the final determination of the amount of the award, or to restore any part of the Demised Premises so remaining and in the case of such restoration, the rent shall be abated to the extent provided above. Section 3. The Lessor reserves and excepts all rights to damages to the Land, the Building, the Demised Premises and the leasehold hereby created, or awards with respect thereto, then or thereafter accruing, by reason of any taking by eminent domain or by reason of anything lawfully done or required by any public authority, and the Lessee grants to the Lessor all the Lessee's rights, if any, to such damages except with respect to the value of its personal property and its relocation expenses, which may be compensable by a separate award and shall execute and deliver to the Lessor such further instruments of assignment thereof as the Lessor may from time to time request. Article XVII 24 Default Section 1. This Lease is made on the condition that if the Lessee shall fail to perform any obligation hereunder in payment of base rent, additional rent, or in payment of any other sums due under this Lease, and such failure shall continue for ten (10) days after receipt of written notice from Lessor, or for thirty (30) days after receipt of written notice of default in the case of any other obligation (or, if said default cannot reasonably be expected to be cured within such thirty-day period, Lessee shall not within such thirty-day period promptly commence to cure such default and thereafter prosecute the curing of such default to completion with due diligence), or if the estate hereby created shall be taken on execution or other process of law, or if the Lessee shall be declared bankrupt or insolvent according to law, or if the Lessee shall make or offer to make, in or out of bankruptcy, a composition with the Lessee's creditors, or if the Lessee shall make an assignment for the benefit of its creditors, or if the Lessee shall commit any act of bankruptcy, or if a receiver, trustee or other officer shall be appointed to take charge of all or any substantial part of the Lessee's property by a court, or if a petition shall be filed by or against the Lessee for the reorganization of the Lessee or for an "arrangement" under the Bankruptcy Code or under any other provisions of the Bankruptcy Code or any successor or similar State or Federal statute or regulation now or hereafter in effect, and the same, if filed against but not by Lessee, shall not be dismissed within thirty (30) days after the date on which it is filed, then and in any of the said cases, notwithstanding any prior waivers or consent the Lessor lawfully may, in addition to and not in derogation of any remedies for any preceding breach of covenant, immediately or at any time thereafter and without prior demand or prior notice (1) terminate this Lease by notice in writing forthwith, or on a date stated in said notice, (2) with or without process of law (forcibly, if necessary) enter into and upon the Demised Premises or any part thereof in the name of the whole and repossess the same as of the Lessor's former estate, and (3) expel the Lessee and those claiming through or under the Lessee and remove its and their effects (forcibly, if necessary without being deemed guilty of any manner of trespass and without prejudice to any remedies which might otherwise be used for arrears of rent or preceding breach of covenant, and upon entry as aforesaid this Lease shall terminate, the Lessee hereby waiving all statutory rights; and in case of such termination, or termination by reason of default on the part 25 of the Lessee, the Lessee shall at the election of the Lessor, which election may be changed at any time: (a) pay to the Lessor in equal monthly installments, in advance, sums equal to the aggregate rent herein provided for or, if the Demised Premises have been relet, sums equal to the excess of the aggregate rent herein provided for over the sums actually received by the Lessor from such reletting, as well as any reasonable expenses incurred by the Lessor as a consequence of such default or in such reletting, including but not 1imited to, attorneys' fees, brokers' fees and expenses of repairing and putting the Demised Premises in good order and condition, and repairing the same for re-rental, such sums being payable, as liquidated damages for the unexpired term hereof; or (b) pay to the Lessor as damages a sum which, at the time of such termination or at the time to which installments of liquidated damages shall have been paid represents the amount by which the then rental value of the Demised Premises is less than the aggregate rent herein provided for the residue of the term and pay from time to time to the Lessor upon demand such additional sums as are equal to the excess, if any, of the aforesaid rental value of the Demised Premises over the rent actually received by Lessor for the Demised Premises for the period from such termination, or from the time to which installments of liquidated damages shall have been paid, or from the time to which these additional sums may have been paid by Lessee under this paragraph, whichever the case may be, to the time for which the Lessor may specify in its demand hereunder (but in no event to the time later than the expiration of the term hereof), plus, in any case, reasonable expenses of the Lessor by way of attorneys' fees, or otherwise, in connection with such default; or (c) indemnify the Lessor against loss of the aggregate rent herein provided for from the time of such termination or from the time to which installments of liquidated damages shall have been paid to the expiration of the term hereof as above set forth, plus, in any case, reasonable expenses of the Lessor by way of attorneys' fees, or otherwise, in connection with such default. For the purposes of this Article, the phrase "aggregate rent" as used herein, shall include the annual base rent as adjusted from time to time, and all additional rent payable hereunder. 26 In the event of a default by the Lessee as above provided, if the Lessor shall elect not to terminate this Lease, it may relet the Demised Premises or any part or parts thereof in the name of either the Lessor or the Lessee, for a term or terms which may, at the Lessor's option, extend beyond the balance of the term of this Lease and may remove and store the Lessee's effects at the Lessee's expense, and the Lessee agrees that in the event of such reletting the Lessee shall pay Lessor any deficiency between the aggregate rent to be paid hereunder and the net amount of the rents collected during such reletting, as well as any expenses reasonably incurred by the Lessor as a consequence of such default or in such reletting, including but not limited to, attorneys' fees, brokers' fees and expenses of repairing and putting the Demised Premises in good order and preparing the same for re-rental. Such deficiency shall be paid in monthly installments upon statements rendered by the Lessor to the Lessee. Section 2. All rights and remedies which the Lessor may have under this Lease shall be cumulative and shall not be deemed inconsistent with each other, and any two or more of such rights and remedies may be exercised at the same time insofar as permitted by law. Section 3. The Lessor shall not be deemed to be in default hereunder unless its default shall continue for thirty (30) days or such additional time as is reasonably required to correct its default, after written notice thereof has been given by the Lessee to the Lessor specifying the nature of the alleged default. In no event shall Lessor be liable for consequential or incidental damages, nor shall damages exceed the reasonable costs of performing the obligations of Lessor hereunder. Article XVIII Notices Any notice, request, demand or other communication required or permitted by this Lease shall, until either party notifies the other in writing of a different address in accordance herewith, be deemed to be duly given if in writing and sent by registered or certified first class mail, postage prepaid, return receipt requested, addressed as follows: If to Lessor: addressed to the Lessor c/o The Flynn Company, 1621 Wood Street, Philadelphia, PA 19103. If to the Lessee, at Lessee's Address, as stated in Article I, Section 1 of this Lease. 27 Article XIX Brokerage Lessor and Lessee each warrants and represents to the other that it has not dealt with any broker in connection with this Lease or the Demised Premises, except the Authorized Broker named in Article I, Section 1 hereof, and each agrees to defend, indemnify and hold the other harmless from and against any and all claims for brokerage fees and commissions (except with respect to the Authorized Broker) by any broker claiming to have dealt with it in connection with this Lease. Article XX Term "Lessee's Pro Rata Share" As used in this Lease the term "Lessee's Pro Rata Share" shall mean the percentage stated in Article I, Section 1 of this Lease, so long as there are no additions to the Building. If any additions are made to the Building, then such term shall mean a fraction of the respective item, the numerator of which fraction shall be the then total leasable square footage of the Demised Premises and the denominator or which shall be the then total leasable square footage of floor area of the Building. Article XXI Security Deposit At the time of the execution hereof, Lessee shall pay to Lessor a Security Deposit in the amount provided in Article I, Section 1 of this Lease, to be held by Lessor without interest during the term hereof, and any extensions, and for so long thereafter as Lessee is in possession of the Demised Premises or has unsatisfied obligations hereunder to Lessor, which deposit the Lessor may apply from time to time against outstanding obligations of Lessee hereunder. Each time that the monthly installment of annual base rent shall increase Lessee shall promptly pay Lessor as additional Security Deposit the amount of any increase in the same monthly installment of annual base rent, said additional sums to be added to the Security Deposit held hereunder. Lessee shall have no right to require the Lessor to so apply said Security Deposit, nor shall Lessee be entitled to credit the same against rents or other sums payable hereunder. If and to the extent that Lessor makes such use of the Security Deposit, or any part thereof, the sum so applied by Lessor shall be restored to the Security Deposit by Lessee upon notice from Lessor, and failure to pay to Lessor the amount to be so restored (within the grace period applicable to 28 rents hereunder) shall be a default hereunder giving rise to all of the Lessor's rights and remedies applicable to a default in the payment of rent. Any portion of said Security Deposit which has not been applied as aforesaid by Lessor shall be repaid by Lessor to Lessee at the end of the term and any extensions hereof, or as soon thereafter as all obligations of Lessee hereunder have been performed in full. Upon any conveyance by Lessor of its interest under this Lease the Security Deposit may be turned over by the Lessor to Lessor's grantee or transferee, and upon any such delivery of the deposit, Lessee hereby releases Lessor herein named of any and all liability with respect to the Security Deposit, its application and return, and Lessee agrees to look solely to such grantee or transferee, and it is further understood that this provision shall also apply to subsequent grantees and transferees. Article XXII Miscellaneous Provisions Section 1. No consent or waiver, express or implied, by the Lessor to or of any breach in the performance by the Lessee of its agreements hereunder shall be construed as a consent or waiver to or of any other breach in the performance by the Lessee of the same or any other covenant or agreement. No acceptance by the Lessor of any rent or other payment hereunder, even with the knowledge of any such breach, shall be deemed a waiver thereof nor shall any acceptance of rent or other such payment in a lesser amount than is herein required to be paid by the Lessee, regardless of any endorsement or any check or any statement in any letter accompanying the payment of the same, be construed as an accord and satisfaction or in any manner other than as a payment on account by the Lessee. No reference in this Lease to any sublessee, licensee or concessionaire, or acceptance by the Lessor from other than the Lessee of any payment due hereunder shall be construed a consent by the Lessor to any assignment or subletting by the Lessee, or give the Lessee any right to permit another to occupy any portion of the Demised Premises except as herein expressly provided. No waiver by the Lessor in respect of any one tenant shall constitute a waiver with respect to any other tenant. Failure on the part of the Lessor to complain of any action or non-action on the part of the Lessee or to declare the Lessee in default, no matter how long such failure may continue shall not be deemed to be a waiver by the Lessor of any of its rights hereunder. 29 Section 2. In no case shall mention of specific instances under a more general provision be construed to limit the generality of said provisions. Section 3. The delivery of keys to Lessor or any employees of Lessor or the Lessor's agent or any employee thereof shall not operate as a termination of this Lease or surrender of the Demised Premises. Section 4. If any installment of rent, base or additional, is paid more than 10 days after the due date thereof, at Lessor's election, it shall bear interest at 18% per annum from such due date of payment, which interest shall be immediately due and payable as additional rent. Section 5. If the Lessee continues to occupy the Demised Premises after the termination hereof, it shall have no more rights than a tenant by sufferance, but shall be liable for 150% of the aggregate rental as above determined during such occupancy, and shall be liable for any loss or expense due to such holding over. Nothing in this section shall be construed to permit such holding over. Suction 6. If any provision of this Lease or the application thereof to any person of circumstances shall be to any extent invalid or unenforceable the remainder of this Lease and the application to persons or circumstances other than those as to which it is invalid or unenforceable shall not be affected thereby and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. Section 7. Lessor agrees that upon Lessee's paying rent and performing and observing the agreements, conditions and other provisions on its part to be performed and observed, Lessee shall and may peaceably and quietly have, hold and enjoy the Demised Premises during the term of this Lease and any extension thereof without any manner of hindrance or molestation from Lessor or anyone claiming under Lessor, subject, however, to rights of holders of present and future Mortgages and to the terms and provisions of this Lease. Section 8. The conditions and agreements in this Lease contained to be kept and performed by the parties hereto shall be binding upon and inure to the benefit of said respective parties, their legal representatives, successors and assigns, and the same shall be construed as covenants running with the land. Wherever in this Lease reference is made to either of the parties, it shall be held to include 30 and apply to the successors and assigns of such party as if in each case so expressed, unless the context requires otherwise and regardless of the number or gender of such party; provided, however, that the term "Lessor" as used in this Lease means only the owner for the time being of the Land, so that in the event of any sale or sales of the Land and Demised premises or of this Lease the Lessor shall be and hereby is entirely released of all covenants and obligations of the Lessor hereunder. Section 9. This Lease shall constitute the only agreement between the parties relative to the Demised Premises and no oral statements and no prior written matter not specifically incorporated herein shall be of any force or effect. In entering into this Lease, the Lessee relies solely upon the representations and agreements contained herein. This agreement shall not be modified except by writing executed by both parties. Section 10. The section and article headings throughout this instrument are for convenience and reference only and shall in no way be held to limit, define or describe the scope or intent of this Lease or in any way affect this Lease. Section 11. If the Lessor shall at any time be an individual, joint venture, tenancy in common, joint regency, firm or partnership (general or limited), or a trust or trustee of a trust, it is specifically understood and agreed that there shall be no personal liability of any individual or any joint endure, tenant, partner (general or limited), trustee, shareholder, beneficiary or holder of a beneficial interest under any of the provisions hereof or arising out of the use or occupation of the Demised Premises by Lessee. The obligations of Lessor shall in all events be binding upon Lessor's equity in the Building and Land only, all in accordance herewith. It is further understood and agreed that the liability of any party who is a Lessor (whether the original Lessor or any successor Lessor) shall be limited to defaults occurring or arising during the period for which such party shall have been a Lessor, and such party shall not be liable for defaults occurring or arising at any time before such party obtained its interest as Lessor or after such party disposed of its interest as Lessor. Section 12. In the event that prior to the Commencement Date any actual or proposed holder of a first mortgage on the Building or Land shall demand that this Lease be modified or amended in any respect (other than those 31 provisions relating to rental, term, size, or location of the Demised Premises) and if Lessee shall fail to so modify or amend this Lease within fifteen (15) days after such demand, Lessee shall be deemed in default under this Lease. Lessee agrees to give within ten (10) days of written request such reasonable statements and certificates as may be requested by Lessor in connection with a mortgage closing or the sale of the Building or Land, or any portion thereof. Section 13. This Lease shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. Section 14. In any case where either party hereto is required to do any act, delays caused by or resulting from Acts of God, war, civil commotion, fire, flood or other casualty, labor difficulties, shortages of labor, materials or equipment, government regulations, unusually severe weather, or other causes beyond such party's reasonable control shall not be counted in determining the time during which work shall be completed, whether such time be designated by a fixed date, a fixed time, "promptly" or "a reasonable time", and such time shall be deemed to be extended by the period of such delay. For the purpose hereof, inability to pay normal charges incurred in connection with performance of an obligation hereunder (including, without limitation, payment of base rent or additional rent hereunder) does not constitute a cause beyond such party's reasonable control. Section 15. Lessee shall provide Lessor with annual certified financial statements within ninety (90) days after the close of Lessee's fiscal year. Section 16. Lessee shall not record this Lease, but upon request of either party, both parties shall execute and deliver a notice of lease, in form satisfactory to Lessor and appropriate for recording; the costs of such notice shall be borne by the requesting party. Section 17. Lessee shall not do, and shall not permit Persons Within Lessee's Control to do, any act or thing in or upon the Premises or the Building which will invalidate or be in conflict with the Certificate of Occupancy for the Premises or the Building or violate any Requirements. Lessee shall, at Lessee's sole cost and expense, take all action, including any required Alterations necessary to comply with all Requirements (including, but not limited to, applicable terms of Local Laws No. 5 of 1973, No. 16 of 1984, No. 76 of 1985, No. 58 of 1987, and the Americans with 32 Disabilities Act of 1990 (the "ADA"), each as modified and supplemented from time to time) which shall with respect to the Premises or with respect to any abatement of nuisance, impose any violation, order or duty upon Lessor or Lessee arising from, or in connection with, the Premises, Lessee's occupancy, use or manner of use of the Premises (including, without limitation, any occupancy, use or manner of use that constitutes a "place of public accommodation" under the ADA, or any installations in the Premises, or required by reason of a breach of any of Lessee's covenants or agreements under this Lease, whether or not such Requirements shall now be in effect or hereafter enacted or issued, and whether or not any work required shall be ordinary or extraordinary or foreseen or unforeseen at the date hereof. Notwithstanding the preceding sentence, Lessee shall not be obligated to perform any Alterations necessary to comply with any Requirements, unless compliance shall be required by reason of (i) any cause or condition arising out of any Alterations or installations in the Premises (whether made by Lessee or by Lessor on behalf of Lessee), (ii) Lessee's particular use, manner of use or occupancy of the Premises (as opposed to mere use as executive, general and administrative offices, (iii) any breach of any of Lessee's covenants or agreements under this Lease, or (iv) any wrongful act or omission by Lessee or Persons Within Lessee's Control, or (v) Lessee's use or manner of use or occupancy of the Premises as a "place of public accommodation" within the meaning of the ADA. Article XXIII Prohibition of Lessee Abandonment Lessee shall not vacate the Demised Premises or abandon part or all of the Demised Premises during the Original Term, and any extension thereof. At all times during the Original Term, and any extension thereof, Lessee agrees (i) to keep the Demised Premises adequately heated to the extent necessary to prevent the pipes from freezing and to prevent deterioration of the Demised Premises, (ii) to keep the Demised Premises adequately secure so as to prevent the entry of unauthorized persons, and (iii) to fully and completely occupy the Demised Premises. Article XXIV Hazardous Waste; Hazardous Material; Oil Section 1. As used herein, the terms "Hazardous Material" shall mean material or waste, in whatever form, which because of its quantity, concentration, physical, chemical, 33 corrosive, flammable, reactive, toxic, infectious or radioactive characteristics, either separately or in combination with any substance or substances, constitutes a present or potential threat to human health, safety, welfare, or to the environment or any other substance that is defined or listed as hazardous, toxic, or dangerous under any present or future environmental law or regulation or which is otherwise regulated, prohibited, or subject to investigation under any present or future environmental law or regulation including, without limitation, those substances which are included under 42 USC Section 9601 (14), and insoluable or partially soluable oils of any kind or origin or in any form (including, without limitation, crude or fuel oils, lube oil or sludge, asphalt, insoluable or partially insoluable derivatives of mineral, animal or vegetable oils). Section 2. Except as provided in Section 5 hereof, Lessee shall not use, maintain, generate or bring on the Demised Premises, the Building or the Land or transport or dispose of or from the Demised Premises, the Building or the Land (whether through the sewer or septic system or into the ground or by removal off-site or otherwise) any Hazardous Material and shall not voilate the provisions of any environmental law or regulation; and Lessee shall prevent any agent, servant, employee, contractor, supplier, guest, visitor, customer or invitee of Lessee, and of such parties, and any other party claiming under Lessee, from using, maintaining, generating or bringing on the Demised Premises, the Building or the Land or transporting or disposing of on or from the Demised Premises, the Building or the Land (whether through the sewer or septic system or into the ground or by removal off-site or otherwise) any Hazardous Material or from violating the provisions of any environmental law or regulation. Section 3. Lessee shall deliver to Lessor, within ten (10) days after Lessee receives same, copies of all letters, inquiries, summons, subpoenas, complaints, restraining orders and any other written communication received by Lessee, and written notice of any oral communication received by Lessee, which written or oral communication relates to Lessee's compliance or noncompliance, the compliance or noncompliance of any activities being conducted on or from the Demised Premises, with any laws, orders, regulations and the like of any governmental authorities or any public body relating to Hazardous Materials or which writen or oral communication otherwise relates to the use, maintenance, generation, storage, 34 treatment, transport or disposal of Hazardous Material on, from, or to the Demised Premises, the Building or the Land. Section 4. Lessee shall be solely responsible for becoming informed of any new environmental laws and regulations and of any amendments made from time to time to existing environmental laws and regulations; the Lessor shall not be obligated to notify Lessee of any said amendments. In addition, Lessee shall execute affidavits, representations and the like from time to time at Lessor's request concerning Lessee's best knowledge and belief regarding the presence of Hazardous Materials on the property. Section 5. In accordance with Exhibit H of the Lease, Lessee may engage in the activities described in Section 2 hereof provided (a) such activities are performed in a manner consistent with the highest standards of the industry, (b) such activities are performed in strict compliance with applicable statues, ordinances and regulations, including without limitation any applicable statutes, ordinances and regulations of the State where the building is located dealing with Hazardous Materials and (c) and except for those items listed on Exhibit H which Lessor has pre-approved as a condition of this Lease, Lessor gives its prior written consent to any such activities. Any request for Lessor's consent shall be in writing and shall include a list of particular Hazardous Materials to be used and a description of their purpose and intended applications and any other information that Lessor requests. Lessor shall not unreasonably withhold its consent provided that Lessee demonstrates strict compliance with requirements (a) and (b) above and provided further that in Lessor's reasonable judgment, Lessee's proposed use wi11 not pose a present or potential hazard to the health, safety or welfare of the occupants of the Demised Premises, the Building or Land or any other persons or a substantial present or potential risk or damage to the Demised Premises, the Building or the Land or any other property or pose a risk of potential liability on Lessor. As a condition of its consent, Lessor may require such alterations to the Demised Premises, the Building or the Land as may be reasonably necessary or appropriate to mitigate hazards associated with Lessee's proposed use. Any such alterations shall be at Lessee's sole expense upon Lessor's prior approval of the plans for such alterations. In consideration of Lessee's use of the Premises and Lessee's use of the pre-approved Hazardous Materials and substances as outlined in Exhibit H, Lessor agrees that no such alterations are required of Lessee as of the Lease Commencement Date. 35 Section 6. a. (a) Lessee shall, at Lessee's sole expense, indemnify, defend and hold Lessor and Lessor's officers, trustees, employees, and agents harmless from any and all claims, judgments, damages, penalties, fines, costs, 1iabilities, obligations, defenses, 1iens or losses (including without limitation, diminution in value of the Property, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Property, damages arising from any adverse impact on marketing of space in the Building, and sums paid in settlement of claims, actual attorneys' fees, consultation fees and expert fees) which arise during or after the Lease Term as a result of any of the activities by Lessee its employees, agents, contractors, or licensees or sublessees described in Section 2 hereof or as a result of any violation of the provisions of this Article HM by Lessee its employees, agents, contractors, or licensees or sublessees. This indemnification of Lessor by Lessee includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or restoration work, damages for personal injury and property damage, and claims for damages or rent offset by other tenants. The indemnity and hold harmless obligations of Lessee under this Article shall survive any termination of this Lease. Without limiting the foregoing, if the presence of any Hazardous Material on the Property caused or permitted by Lessee results in any contamination of the Property, Lessee shall promptly take all actions at its sole expense as are necessary to return the Property to the condition existing prior to the introduction of any such Hazardous Material to the Property; provided that Lessor's approval of such actions shall first be obtained, which approval shall not be unreasonably withheld so long as such actions, in Lessor's sole and absolute discretion, would not potentially have any material adverse long-term or short-term effect on the Property. If Lessee fails to take such actions, Lessor may take such actions, and Lessee shall reimburse Lessor, for Lessor's expense in taking such actions no later than ten (10) days after each request for such reimbursement. 36 b. It shall not be unreasonable for Lessor to withhold its consent to any proposed Assignment or Sublease if (i) the proposed Assignee's or Sublessee's anticipated use of the Premises involves the generation, storage, use, treatment, maintenance or disposal of Hazardous Material or any other activities described in Section 2 hereof; (ii) the proposed Assignee or Sublessee has been required by any prior landlord, lender or governmental authority to take remedial action in connection with Hazardous Material contaminating a property if the contamination resulted from such Assignee's or Sublessee's actions or use of the property in question; or (iii) the proposed Assignee is subject to an enforcement order issued by any governmental authority in connection with the use, disposal or storage of a Hazardous Material. c. Any increase in the premiums for necessary insurance on the Property which arises from Lessee's use and/or storage of Hazardous Materials shall be solely at Lessee's expense. Lessee shall procure and maintain at its sole expense such additional insurance as may be necessary to comply with any requirement of any Federal, State or local governmental agency with jurisdiction. Section 7. In all events, Lessee shall indemnify Lessor in the manner provided elsewhere from any release of hazardous materials on the Premises occurring while Lessee is in possession, or elsewhere if caused by Lessee or persons acting under Lessee. The within covenants of this Article XXIV shall survive the expiration or earlier termination of the lease term. Section 8. Any breach of the provisions of this Article XXIV shall be deemed to be a breach and default of a material obligation of Lessee under this Lease; and Lessor shall have with respect thereto all remedies provided in this Lease for defaults of Lessee. Article XXV Additional Provisions Section 1. The Lessee shall have the option to extend the term of this Lease for an additional period of two (2) years (the "Extended Term") provided that Lessee is not in default and 37 has given Lessor written notice of its election to extend the term no later than one hundred eighty (180) days prior to the expiration of the Original Term of this Lease. In the event that Lessee shall extend the term as aforesaid, such extension shall be upon the same terms and conditions as set forth herein, except that no further right to extend shall be deemed to be included, and except for the rental which shal1 be $5.35 s.f. triple net or an annual rent of $174,945.00 in year one of the option period and $5.56 s.f. triple net or an annual rent of $181,812.00 in year two of the option period. Section 2. LESSOR'S MANAGEMENT AND INCOME TAX PROVISIONS A. Any services which Lessor is required to furnish pursuant to the provisions of this Lease may at Lessor's option be furnished from time to time, in whole or in part, by employees of Lessor or by the Managing Agent of the Building and Land or by one or more third persons, and Lessor further reserves the right to require Lessee to enter into reasonable agreements with such persons in form and content approved by Lessor for the furnishing of such services. B. Lessor shall have the right, at any time and from time to time, to unilaterally amend the provisions of the Lease if Lessor is advised by its Counsel that all or any portion or the monies paid by Lessee to Lessor hereunder are, or may be deemed to be, unrelated business income within the meaning of the United States Internal Revenue Code, regulation issues thereunder, and Lessee agrees that it will execute all documents or instruments necessary to effect such amendment or amendments, provided that no such amendment shall result in Lessee having to pay in the aggregate more money on account of its occupancy of the Demised Premises under the terms of this Lease as so amended, and provided further that no such amendment or amendments shall result in Lessee having less rights than it has prior to any such amendments or receiving under the provisions of this Lease less services than it is entitled to receive, nor services of a lesser quality, and provided further that Lessee's taxes do not increase as a result of such amendment or amendments. 38 EXECUTED under seal on the date first above written. LESSEE: Nutri/System LP By: /s/ Brian D. Haveson ------------------------- Title: President ---------------------- Dated: 12/11/97 ---------------------- Lessee's Signature Witnessed By: [SIGNATURE APPEARS HERE] --------------------------- LESSOR: Teachers Pennsylvania Realty, Inc. 730 Third Avenue New York, New York 10017 By: [SIGNATURE APPEARS HERE] ----------------------------------------- Nicholas E. Stolatis Assistant Secretary Title: Dated: ------------------------------------------------------ Lessor's Signature Witnessed By: [SIGNATURE APPEARS HERE] ---------------------------- 39 Exhibit A [GRAPHIC] In the printed version of the document a floor plan appears. Exhibit D Lessor's Initial Estimate of Lessee's Monthly Pro-Rata Share of Real Estate Taxes, Operating Expenses and Insurance. Real Estate Taxes: $1,771.25 Operating Expenses: $1,607.75 Insurance: $ 218.00 --------- Total: $3,597.00 ========= Exhibit E HVAC Maintenance Schedule PERIODIC MAINTENANCE: Perform the following inspections and service routine at the beginning of each cooling season: 1. Clean the condenser coil by hosing with cold water. Do not use hot water which can cause excessive pressure within the coil. 2. Remove any accumulation of dust and dirt from the casing of the unit. 3. Clean or replace the air filters. 4. Inspect the condensate drain pan and piping to make sure they are clear and will carry away all water. At the beginning of the heating season, perform the following inspection and service routine: 1. Add a few drops of SAE. No. 10 non-detergent oil to the combustion blower motor. WARNING: The use of a heavier grade oil may cause operating difficulties during cold weather. 2. Clean or replace the air filters. 3. Inspect the control panel wiring and the heating controls to make sure connections are tight and wiring insulation is intact. 4. Check the operation of the gas ignition system and the spark electrode, and the setting of the limit control; make sure the evaporator-furnace fan is cycled at the correct cut-in and cut-out points. MONTHLY INSPECTIONS: It is recommended that, once a month, the following inspections be performed: 1. Clean or replace air filters. 2. Inspect and clean, if necessary, the condensate drain piping during the cooling season. 3. Inspect the control panel wiring and the heating controls to make sure connections are tight and wiring insulation is intact. 4. Check the operation of the gas ignition system and the spark electrode, and the setting of the limit control; make sure the evaporator-furnace fan is cycled at the correct cut-in and cut-out points. Exhibit F Signage Standards Tenant's proposed signage must first be submitted to Landlord for approval. Such approval shall not be unreasonably withheld. Any proposed signs must conform with those that presently exist at the building. Exhibit G Subordination and Attornment Agreement THIS AGREEMENT made as of the ______ day of _______, 19___, by and between Teachers Pennsylvania Realty, Inc. with a principal place of business c/o The Flynn Company, 1521 Wood Street, Philadelphia, PA 19103 (hereinafter "Lessor"), and _____________ with a place of business at _____________ (hereinafter "Lessee"), and ___________________, with a place of business at ____________________________ (hereinafter "Mortgagee"). W I T N E S S E T H: WHEREAS, Mortgagee is committed to lend certain sums to Lessor which sums shall be secured by a Mortgage Deed (hereinafter referred to as the "Mortgage) on certain property (hereinafter referred to as the "Property") in _______________ more particularly described therein and which shall be recorded in the County Registry of Deeds, ________________ concurrently with the recording of his agreement; and WHEREAS, Lessee has entered into a Lease (hereinafter referred to as "said Lease" which term shall mean and include all amendments and modifications thereto through the date hereof or which have been approved by Mortgagee with Lessor dated the _______ day of _______, 19___, covering a part of the premises subject to said Mortgage as therein more particularly described; and WHEREAS, in order to induce the Mortgagee to make the loan as evidenced by the Mortgage, Lessor and Lessee have offered to enter into this Agreement in order to, inter alia, establish the prior right, claim and lien of the Mortgagee with respect to all matters concerning condemnation and casualty as set forth in said Lease. NOW, THEREFORE, for and in consideration of One Dollar ($1.00) and other good and valuable consideration, the receipt whereof the parties hereto hereby acknowledge, and to induce the Mortgagee to make the loan evidenced by said Mortgage, the parties hereto covenant and agree as follows: 1. The said Mortgage and the lien thereof, shall be, and the same is hereby made, SUBJECT AND SUBORDINATE to the said Lease with the same force and effect if said Lease had been executed, delivered and recorded prior to execution, delivery and recording of the said Mortgage, EXCEPT HOWEVER that the Lease and the rights of Lessor and Lessee thereunder shall be expressly subject and subordinate in all respects to: (a) The right, claim and lien of said Mortgage in, to and upon any award or other compensation heretofore or hereafter to be made for any taking by eminent domain of any part of the said Property, and to the right of disposition thereof in accordance with the provisions of said Mortgage, (b) The right, claim and lien of said Mortgage in, to and upon any proceeds payable under all policies of fire, casualty and rent insurance upon the said Property and as to the right of disposition thereof in accordance with the terms of said Mortgage, (c) Any lien, right, power or interest, if any, which may have arisen or intervened between the date of execution of said Lease, the date of recording of the Mortgage, or any lien or judgment which may arise at any time, under the terms of such Lease, it being expressly further understood and agreed that with respect to the matters referred to in subsections 1(a) through and including 1(c), the Mortgage and the lien thereof shall be, and the same is hereby made, prior in right to the said Lease and the rights of Lessor and Lessee thereunder with the same force and effects as if said Mortgage had been executed, delivered and recorded prior to the execution, delivery and recording of the Lease. 2. Lessee agrees that it shall not alter, modify, amend, change, surrender or cancel the Lease, nor pay the rent due thereunder in advance for more than thirty (30) days except as may be required by said Lease, without the prior written consent of the mortgagee, and will not seek to be made an adverse or defendant party in any action or proceeding brought to enforce or foreclose the Mortgage. Lessee further agrees that it shall not subordinate its interest in the Lease to the lien of any mortgage, security agreement or lease affecting the Premises demised under the Lease. 3. In the event of a default by Lessor under the terms of the Lease which is of such a nature as to give Lessee the right to terminate the Lease or reduce the rent payable thereunder by credit, offset or otherwise, then, and in any such event, Lessee agrees that concurrently with giving notice of default to Lessor, Lessee shall deliver a copy thereof to Mortgagee. Lessee further agrees that if Lessor does not cure the default specified in such notice of default within thirty (30) calendar days after notice thereof, then Lessee shall give further notice of that fact to Mortgagee and Mortgagee shall thereupon, if it shall so elect, have the right, but not the obligation, to cure the default of Lessor within twenty (20) calendar days after the giving of such further notice by Lessee, and in case of a default which cannot, with due diligence, be cured within said twenty (20) days, then the twenty (20) days shall be extended for such period as my be necessary to complete the curing of the same with all due diligence and continuity. 2 4. In the event of entry to foreclose the Mortgage and/or foreclosure thereof, or a conveyance in lieu of, or subsequent to, foreclosure and if the Lease shall not have been terminated under the provisions hereof or of the Lease: A. The Mortgagee will not interfere with or disturb Lessee's possession of the Premises demised under the Lease, so long as Lessee pays the rent stipulated in the Lease and performs all other terms and conditions thereof; B. The Lease will remain in full force and effect, as modified hereby, and the Lessee will attorn to and be bound after the Lease to the Mortgagee and its successors and assigns including any purchaser of the Property in foreclosure or any grantee under a conveyance in lieu of or subsequent to foreclosure, and Lessee will perform and observe all of its obligations thereunder to the same effect as through the Lease had been executed prior to the execution and delivery of the Mortgage, and Lessee agrees to execute and deliver, upon the request of the mortgagee or other owner of the Demised Premises, any instrument which may be necessary or appropriate to evidence such attornment. PROVIDED, HOWEVER, that the Mortgagee shall not be: (i) Liable for any act or omission of the Lessor; or (ii) subject to any off-sets or defenses which the Lessee might have against Lessor; or (iii) bound by any rent or additional rent which Lessee might have paid for more than the current rental period of the Lease; or (iv) bound by an amendment or modification of the Lease made without its written consent. 5. All notices, demands or other communications which any party hereto is required or may desire to give to another party hereto may be delivered in person or shall be mailed by certified or registered mail, postage prepaid, return receipt requested, addressed to the other party at the address first set forth hereinabove or at such other addresses as any party hereto may hereafter specify by notice in writing to the others. Any such notice or demand shall be deemed given and received seventy-two (72) hours after deposit in the United States mail as aforesaid. 6. Lessor hereby authorizes Lessee to rely on any written notice of demand received from Mortgagee to make rent and other payments, to which Lessor may be entitled, to Mortgagee instead of Lessor whenever so demanded by Mortgagee, whether or not the Mortgage shall have been foreclosed. 3 7. Lessee agrees that in the event Mortgage shall succeed to the rights of Lessor as Lessor under the Lease, then Lessee shall look solely to Mortgagee's interest in the Property in the enforcement of any claims against Mortgagee. The provisions hereof shall expressly inure to the benefit of any successors and assigns of Mortgagee. 8. The provisions of this Agreement shall be deemed to be covenants running with the land, shall be binding upon and shall inure to the benefit of the parties hereto, their respective successors and assigns, and shall specifically be binding upon any purchaser of said Property at a sale foreclosing the said Mortgage. 9. This Agreement may be executed in three or more counterparts by one or more of the parties hereto and each such counterpart shall be deemed to be an original and shall have the same force and effect as an original, and all such counterparts in the aggregate shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals, as of the day and year first above written.___________________________________ as Trustee of ____________________ REALTY TRUST UNDER Declaration of Trust dated __________________ and recorded in the ____________________ County, __________ Registry of deeds in Book _________________ at Page ____. - ---------------------------- as Trustee, for self and not individually 4 EX-10.3 15 AMENDMENT TO FRANCHISE AGREEMENT Exhibit 10.3 AMENDMENT TO FRANCHISE AGREEMENT This Amendment is made as of the 29th day of April, 1996, between NUTRI/SYSTEM L.P. ("Franchisor" or "we"), a Delaware limited partnership, with its principal place of business located at 410 Horsham Road, Horsham, PA 19044-2014, and __________ ("Franchisee" or "you"), a ___________________ __________, whose principal address is ________________________________________. 1. NutriRx Program. Franchisor has developed a new comprehensive, multidiscipline weight loss program involving appetite suppressant medication, nutritionally balanced menu plans, wellness and exercise information and other products and services (hereinafter the "NutriRx Program" or the "Program"). The Program contemplates that a duly licensed physician be present at the premises of Nutri/System Centers, prescribing and monitoring the use of prescription medications. We may improve or otherwise change the Program from time to time. 2. Your Acknowledgements. You have read this Amendment. You understand the terms of this Amendment and accept them as being reasonably necessary to maintain the uniformity of our high quality standards at all Nutri/System Centers in order to protect the goodwill of the Marks and the integrity of the System. You have conducted an independent investigation of the NutriRx Program and recognize that the NutriRx Program may involve customer liability risks and includes experimental weight loss therapy. You recognize that the NutriRx Program involves business risks, that the success of the venture is largely dependent on your own business abilities, efforts and financial resources and that the nature of the Program may change over time. You have not received or relied on any guaranty or assurance, express or implied, as to the revenues, profits or success of the NutriRx Program. As we further develop the NutriRx Program, we will provide you with information and guidance regarding any changes and improvements. This Amendment modifies the Franchise Agreement to grant you a limited right to offer the NutriRx Program at your Center(s) and to amend certain other provisions of the Franchise Agreement. 3. Definitions. (a) "Operations Manual" - Our confidential operations manual, as amended from time to time, which may consist of one or more manuals, containing our mandatory and suggested standards, specifications and operating procedures relating to the development and operation of Nutri/System Centers and other information relating to your obligations under this agreement. The term "Operations Manual" also includes alternative or supplemental means of communicating such information to you, including bulletins, e-mails, videotapes, audio tapes, compact discs and computer diskettes. All such alternative or supplemental communications will be clearly identified as additions to the Operations Manual. (b) "Owner" - Each person or entity that has a 10% or more direct or indirect legal or beneficial ownership interest in you, if you are a business corporation, partnership, limited liability company or other legal entity. (c) "Competitive Business" - Any weight loss, wellness or fitness business or any other business that is the same as or similar to the Nutri/System Center concept, as it evolves or changes over time. Restrictions in this Agreement on competitive activities do not apply to: (a) the ownership or operation of other Nutri/System Centers that are licensed or franchised by us; or (b) the ownership of shares of a class of securities that are listed on a stock exchange or traded on the over-the-counter market and that represent less than five percent (5%) of that class of securities. (d) "Confidential Information" - Our proprietary and confidential information relating to the development and operation of Nutri/System Centers, including: (1) technical information and expertise relating to the treatment of obesity, including preparation of dietary food and beverage products; (2) site selection criteria for Nutri/System Centers and plans and specifications for the development of Nutri/System Centers, (3) knowledge of operating results and financial performance of Nutri/System Centers, other than your Center and other Nutri/System Centers you own; (4) methods of food product handling, training and management relating to Nutri/System Centers; and (5) computer systems and software programs. Confidential Information includes information that is a trade secret owned by Company, or confidential and proprietary information owned by Company, but does not include: (i) information that is generally known in the industry, (ii) information that becomes public through means other than the violation of this Amendment by Franchisee, or (iii) information that Franchisee can demonstrate that Franchisee acquired from third parties who did not obtain the information in violation of the rights of Company. (e) "The Franchise Agreement" - The Agreement dated November 16, 1987, by and between you and the Franchisor, for the territory described as Angelina County, Texas. This Amendment shall be part of the Franchise Agreement (and reference to the Franchise Agreement shall include this Amendment). 4. Grant of Rights. We grant you the right, and you assume the obligation, to offer and sell the NutriRx Program at your Center(s) during the term of the Franchise Agreement strictly in accordance with its terms and conditions. All fees and other revenues you receive in connection with the NutriRx Program are part of your net receipts and subject to the royalty fee and advertising provisions of the Franchise Agreement. 5. Development of the Premises. You are responsible for developing and/or converting your Center and for all expenses associated with it. We will furnish you prototype plans for a Nutri/System Center that offers the NutriRx Program. You may modify the prototype plans only to the extent that the plans and specifications pursuant to which you develop the Center comply with all applicable ordinances, building codes and permit requirements and any lease requirements and restrictions. You must submit such plans and specifications to us for our approval, not to be unreasonably withheld, before starting to develop the Premises. At our request, you must submit all revised or "as built" plans and specifications. All development must be in accordance with the plans and specifications we have approved and must comply with all applicable laws, ordinances and local rules and regulations. We will furnish such guidance to you in developing the Premises as we deem appropriate. We may periodically inspect the Premises during its development. We do not, by approving your plans and specifications or by inspecting the Premises, assume any liability or responsibility to you or to any third parties with respect to the soundness of construction of the Premises or otherwise. All copies of prototype plans and plans and specifications provided by us for your Center are our sole and exclusive property, and you 2 may claim no interest therein. Within 30 days after you have signed this Amendment you must start renovation of your Center or lease, sublease or acquire new Premises. You must complete renovation of your Center within 90 days after the date hereof. Any extension of time is subject to our approval, which we may withhold at our discretion, except in cases of delays occasioned by causes beyond the reasonable control of the Franchisee, but in no event shall renovations be completed later than 180 days after the date hereof. The requirement to complete renovations of your Center includes obtaining all required construction and occupancy licenses and permits, installing all required fixtures, furnishings, equipment and signs, and doing all other things as may be required pursuant to this agreement or by practical necessity. Your Center may not begin to offer the NutriRx Program until we have notified you that your Center meets these requirements. 6. Equipment, Furniture and Fixtures. You agree to purchase or lease all required medical and other equipment, furnishings and fixtures for your Center. You agree to purchase or lease only such types, brands and models of fixtures, furniture, medical and other equipment which we approve for your Centers and the NutriRx Program as meeting our standards and specifications. You may purchase or lease approved types, brands or models of fixtures, furniture and equipment only from suppliers (including us and any of our Affiliates) we approve, approval not to be unreasonably withheld. We may modify the list of approved types, brands, models and/or suppliers, and you may not, after receipt of notice of such modification, reorder any type, brand or model, or from any supplier, which is no longer approved. If you propose to purchase or lease any fixtures, furniture or equipment of a type, brand or model, or from a supplier, that we have not previously approved, you must notify us and submit to us such information as we may request. We may impose reasonable inspection and supervision fees on suppliers not previously approved. Franchisor will not arbitrarily discriminate against any proposed supplier. 7. Introduction of Program. You agree to conduct an introductory advertising and promotion program for the NutriRx Program within 30 days after you begin offering the Program. You are required to spend at least 20% of your average monthly net receipts (for the trailing twelve (12) months) or the equivalent of 100 target rating points on the program and to use any combination of one or more of the following types of advertising media: television, radio, newspaper, magazine, yellow pages, direct mail, flyers, billboards and telemarketing (only actual out-of-pocket telemarketing expenses will qualify, and salaries or benefits for employees who are not solely dedicated to telemarketing do not qualify). The program must last four weeks and is subject to our approval, not to be unreasonably withheld. 8. Operations Manual/Physician's Manual. We will loan to each of your Center(s) and to each signatory to the Franchise Agreement 1 copy each of the Operations Manual, Physician's Manual and other Operating Manuals. You agree to comply with all mandatory standards, specifications and operating procedures and other obligations contained in the Manuals. We may modify the Operations Manual and other Manuals to reflect changes in standards, specifications and operating procedures, provided no addition 3 or modification may alter your fundamental status and rights under this Amendment or the Franchise Agreement. Mandatory specifications, standards and operating procedures and other obligations we prescribe from time to time in the Operations Manual, or otherwise communicate to you in writing, constitute provisions of this Franchise Agreement as if fully set forth therein. All references to the Franchise Agreement include all such mandatory specifications, standards and operating procedures and other obligations. You must keep your copy of the Operations Manual current. If a dispute develops relating to the contents of the Operations Manual, our master copy will be controlling. The Operations Manual contains Confidential Information, and you agree not to copy any part of the Operations Manual. 9. NutriRx Program. You agree to offer and sell our multi-disciplinary weight loss program strictly in accordance with our standards, specifications and requirements, as we may establish and modify them from time to time. If and to the extent permitted by applicable law, you must engage (or retain as an independent contractor) at least one duly licensed physician to examine clients at your Center to prescribe and monitor the use of appetite suppressant medications as he or she deems appropriate in his or her independent professional judgment. If you are not permitted by applicable law to so employ or retain one or more licensed physicians, you agree to establish an appropriate lawful relationship with one or more physicians to provide the medical treatment elements of the NutriRx program. You must require such physicians, at all times that they perform such services, to maintain such medical malpractice insurance coverage as we may reasonably specify from time to time. Nothing contained herein nor in any of our specifications, standards or requirements shall be deemed to directly or indirectly interfere with or control the independent professional judgment of any such physician. Furthermore, no payment required under the Franchise Agreement will permit us directly or indirectly to interfere with or control the independent professional judgment of a licensed physician. The right to receive any payment shall not permit us to have access to any confidential information relating to any clients. No payment under the Franchise Agreement will be made, directly or indirectly, as an inducement for the referral of clients and we shall not solicit or refer patients to the Center's physician. We reserve the right to review the qualifications of any physician you engage or enter into a relationship with. 10. Compliance With Laws. You must maintain in force in your name all required licenses, permits and certificates relating to the operation of your Center. You must operate your Center in full compliance with all applicable laws, ordinances and regulations. You must notify us in writing within 5 days after: (a) the commencement of any legal or administrative action, or the issuance of any order of any court, agency or other governmental instrumentality, which may adversely affect the development, occupancy or operation of your Center of your financial condition; or (b) the delivery of any notice of violation or alleged violation of any law, ordinance or regulation, including those relating to health or sanitation at your Center. In all dealings with us, as well as your customers, suppliers, lessors and the public, you must adhere to the highest standards of honest, integrity, fair dealing and ethical conduct. 11. Insurance. Paragraph 9 of the Franchise Agreement is hereby deleted in its entirety and the following inserted in its place: You must maintain in force: (a) comprehensive, general, professional, product, and automobile liability insurance; (b) 4 general casualty insurance, including fire and extended coverage, vandalism and malicious mischief insurance, for the replacement value of your Center and its contents; (c) medical malpractice insurance; and (d) such other insurance policies, such as business interruption and unemployment insurance, as we may determine from time to time. All insurance policies must be issued by carriers approved by us, must contain such types and reasonable minimum amounts of coverage, exclusions and maximum deductibles as we prescribe from time to time, must name us and our Affiliates as additional insureds, must provide for 30 days' prior written notice to us of any material modification, cancellation or expiration of such policy and must include such other provisions as we may require. At our request, you must furnish us with such evidence of insurance coverage and payment of premiums as we require. If you fail or refuse to maintain any required insurance coverage, or to furnish satisfactory evidence thereof, we, at our option and in addition to our other rights and remedies hereunder, may obtain such insurance coverage on your behalf and you must pay us any costs and premiums we incur. 12. Training and Guidance. You or your designated representative must attend and successfully complete an initial program on the operation of the NutriRx Program at such time(s) and place(s) as we designate. We may require you or your Center Manager(s) to attend and successfully complete periodic or additional training programs. We will not charge any fees for attendance at any such training program. You will be responsible for all compensation and expenses (including travel, meals and lodging) incurred by you and your personnel in attending any training programs. 13. Inspection. We may periodically inspect your Center(s) to determine whether the NutriRx Program is being properly implemented. We have the right at any time during business hours to (1) inspect your Center; (2) observe, photograph, audiotape and/or video tape your Center's operation; (3) remove samples of any dietary food and beverage products, materials or supplies for testing and analysis and (4) interview personnel and/or customers of your Center. You agree to cooperate fully with such activities. We will respect client privacy and the confidentiality of client medical records during any inspection. 14. Termination of NutriRx Program. If at any time during the first twelve months after the date of this Amendment, Franchisee fails to implement and/or operate the NutriRx Program in accordance with the Company's standards established in the Operations Manual or other manuals or written communications or if we in good faith determine to terminate, limit or otherwise restrict the NutriRx Program, then we may terminate your right to offer the NutriRx Program or any other or related weight loss program that uses prescription medication effective upon notice to you. You agree to take all action we request to discontinue offering, selling and using the Program. If we determine to restrict, limit or terminate the NutriRx Program, we agree not to act arbitrarily in any distinctions we make between you and other franchisees and if we determine to continue the NutriRx Program only in corporate centers, we agree to make such decision in good faith, for example, we may decide that it is more difficult or costly to ensure proper implementation of the NutriRx Program in franchised centers, but we may not do so for the sole purpose of providing a competitive edge for corporate centers that compete directly with you. 5 You acknowledge and agree that a termination of your rights to the NutriRx Program does not constitute a termination (or constructive termination) of your franchise under this Agreement or applicable law. 15. Effect of Failure to Voluntarily Discontinue the NutriRx Program. Any franchisee who fails to comply with paragraph 14 above and does not voluntarily discontinue the sale and servicing of the NutriRx Program (or any other medical weight loss program approved by the Company) after notice from the Company, may have its franchise immediately terminated and shall thereafter: (a) Within 30 days after the effective date of termination or expiration (without renewal) of this Agreement, you must pay us and our Affiliates all royalties, Advertising Fund contributions, amounts owed for purchases from us or our Affiliates, interest due on any of the foregoing and all other amounts owed to us or our Affiliates which are then unpaid. (b) not directly or indirectly at any time or in any manner use any Mark, any colorable imitation of any Mark or any other indicia of a Nutri/System Center. (c) take such action as may be required to cancel all fictitious or assumed name registrations relating to your use of any Mark; (d) notify the telephone company and all telephone directory publishers of the termination or expiration of any rights you may have to use any telephone number and any regular, classified or other telephone directory listings associated with any Mark and to authorize transfer of the number to us or at our direction. You must immediately execute such instruments and take such steps as we deem necessary or appropriate to transfer and assign each such telephone number. You irrevocably appoint the then president of Franchisor or its successor as your duly authorized agent and attorney-in-fact to execute all instruments and take all steps to transfer and assign each such telephone number; (e) promptly remove from the Premises, and discontinue using for any purpose, all signs, fixtures, furniture, decor items, advertising materials, forms and other materials and supplies which display any of the Marks or any distinctive features, images, or design associated with Nutri/System Centers and, at your expense, make such alterations as may be necessary to distinguish the Premises so clearly from its former appearance as a Nutri/System Center and from other Nutri/System Centers as to prevent any possibility of confusion by the public; (f) if we ask you to sell us all unadulterated and saleable dietary food and beverage products located at the Center and purchased in accordance with this Agreement, you must promptly do so and discard any remaining dietary food and beverage products not so purchased. If we choose to purchase such dietary food and beverage products, we will do so at your cost, less 10% for shipping and handling; 6 (g) immediately cease to use all Confidential Information and return to us all copies of the Operations Manual and any other confidential materials which have been loaned to you; and (h) within 30 days after the effective date of termination or expiration, furnish us evidence satisfactory to us of your compliance with the foregoing obligations. 16. Covenants Not To Compete. Paragraph 2 of the Franchise Agreement is hereby deleted in its entirety and replaced with the following: During the term of the Franchise Agreement, neither you nor any of your Owners may, without our prior written consent, directly or indirectly own any legal or beneficial interest in, or render services or give advice to any Competitive Business located anywhere or any business enterprise located anywhere which grants franchises or licenses to operate any Competitive Business. In addition, for a additional period of 2 years, starting on the effective date of termination or expiration (without renewal) of this agreement, neither you nor any of your Owners may directly or indirectly (such as through your or their Immediate Families) own a legal or beneficial interest in, or render services or give advice to: (a) any Competitive Business operating in a radius of 10 miles of your Center; (b) any Competitive Business operating within a radius of 10 miles of any Nutri/System Center in operation or under construction on the effective date of termination or expiration; or (c) any entity which grants franchises, licenses or other interests to others to operate any Competitive Business. You and each of your Owners expressly acknowledge the possession of skills and abilities of a general nature and the opportunity for exploiting such skills in other ways, so that enforcement of the covenants made in this Section will not deprive any of you of your personal goodwill or ability to earn a living. If you or any of your Owners fail or refuse to abide by any of the foregoing covenants, and we obtain judicial enforcement thereof, the obligations under the breached covenant will continue in effect for a period of time ending 2 years after the date such person commences compliance with the order enforcing the covenant. 17. Continuing Obligations. All obligations under this Agreement which expressly or by their nature survive the expiration or termination of this Agreement shall continue in full force and effect until they are satisfied in full or by their nature expire. 18. Exclusive Jurisdiction. You and each of your Owners agree that the U.S. District Court for the Eastern District of Pennsylvania, or if such court lacks jurisdiction, the Court of Common Pleas (or its successor) for Montgomery County, Pennsylvania shall be the venue and exclusive forum in which to adjudicate any case or controversy arising from or relating to this Amendment. You and each of your Owners irrevocably submit to the jurisdiction of such courts and waive any objections to either the jurisdiction of or venue in such courts. 19. Conflict of Provisions. If there is any conflict between the provisions of this Amendment and the Franchise Agreement the provisions of this Amendment prevail. All 7 of the remaining terms, conditions, covenants and obligations of the Franchise Agreement shall remain unchanged and in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the date first written above. NUTRI/SYSTEM L.P. FRANCHISEE: by: NSI Management, Inc., its managing general partner by: By: By: -------------------------------- ------------------------------- Philip Voluck, President , President 8 1995 SETTLEMENT AND RELEASE AGREEMENT This Agreement is entered into as of April __, 1995, by and between Nutri/System L.P. ("Franchisor") and ______________________ ("Franchisee"). WHEREAS, Franchisee is a party to one or more Franchise Agreements, as previously amended, with Franchisor which are listed and described more fully on Exhibit 1 hereto (the "Franchise Agreements"); WHEREAS, Franchisee entered into a "1994 Settlement and Release Agreement" with an effective date of January 1, 1994, with Franchisor and Michael E. Heisley (the "1994 Agreement"); WHEREAS, Franchisee has alleged directly, or through a party purporting to act as a representative of a class of all franchisees, that it has or may have claims against Franchisor and Michael E. Heisley arising out of the Franchise Agreements and/or 1994 Agreement; WHEREAS, Franchisor and Michael E. Heisley deny that Franchisee has any claim against either of them; and WHEREAS, Franchisor and Franchisee now wish to settle and resolve all of their differences and amend the 1994 Agreement. NOW, THEREFORE, in consideration of the premises and promises set forth herein and intending to be legally bound hereby, the parties agree to the following: 1. For the period from March 1, 1995 through February 28, 1997, Franchisor hereby agrees to reduce Franchisee's royalty due and owing under the Franchise Agreements by 42.9% (i.e., from 7% to 4% or from 6% to 3.4%, depending on the royalty currently due thereunder). 2. Paragraph 2 of the 1994 Agreement is deleted in its entirety and Franchisor agrees to waive payment of all accounts receivable (but not the balance due on promissory notes) attributable to Franchisee which arose on or before the date of the filing of bankruptcy of Nutri/System, Inc., May 4, 1993. However, same shall only be applicable as long as Franchisee's centers do not compete with existing Franchisor centers for a period of two years, provided this non-competition requirement does not apply to existing Franchisee centers in Franchisor markets. 3. Franchisee acknowledges that Franchisor has complied with the advertising requirements for 1994 set forth in paragraph 3 of the 1994 Agreement. Furthermore, Franchisee hereby waives and releases Franchisor from any obligation to do franchisee dedicated advertising in 1995 or 1996 as set forth in paragraph 3 of the 1994 Agreement. 4. Franchisor hereby waives Franchisee's obligations to comply with the provisions of paragraphs 3, 4 and 5 of that certain Amendment to Franchise Agreement, dated effective December 31, 1991 ("PCA Amendment"), for the calendar years 1994 and 1995. Beginning January 1, 1996, and thereafter, Franchisee must comply with all provisions of the PCA Amendment in order to receive the benefits of a free renewal period, except that Franchisee's obligation in paragraph 4 thereof to advertise at ten percent (10%) of its net receipts is reduced to six percent (6%). 5. Franchisee hereby irrevocably and unconditionally releases the Franchisor and Michael E. Heisley from any and all claims of every kind and nature which Franchisee has or may have up to the date of this Release (i) arising out of or in connection with: (a) the Franchise Agreements or (b) the 1994 Agreement, including, without limitation, their respective terms and conditions and Franchisor's performance thereunder; and (ii) any claims that were raised or could have been raised by the parties regarding subparagraph (a) and/or (b) above or, had the action been certified as a class action, by the class representative in Cross Road Professionals, Inc. and Park Avenue Professionals, Inc. v. Nutri/System L.P. and Michael Heisley, Case No. 94-CV-5266, in the United States District Court for the Eastern District of Pennsylvania (the "Civil Action"). Franchisee hereby also agrees that should Franchisee file any action against Franchisor subsequent to the date of this Agreement that alleges a cause or causes of action to which this Release is deemed a bar, then Franchisee shall be liable to Franchisor for its attorneys fees and costs in defending any such cause of action, provided Franchisor prevails. 6. This Agreement shall be null and void and of no effect unless all Nutri/System franchisees who signed the 1994 Agreement execute agreements identical in substance to this Agreement on or before April 15, 1995. 7. Counsel for the franchisee plaintiffs in the Civil Action will take those steps necessary to dismiss with prejudice the Civil Action on or before April 15, 1995. Franchisee hereby consents to the entry of the aforesaid dismissal order, subject to the provisions of this Agreement. 8. Any terms, covenants or conditions in Franchisee's Franchise Agreements or any amendments thereto or in the 1994 Agreement that are inconsistent with any of the provisions of this Agreement are superseded by the terms of this Agreement. 9. This Agreement shall be binding upon the parties, their heirs, legal representatives, successors and assigns. 10. This Agreement shall be governed by the laws of the Commonwealth of Pennsylvania. The parties hereto agree that the United States District Court for the Eastern District of Pennsylvania or the Court of Common Pleas for Montgomery County, PENNSYLVANIA SHALL have jurisdiction over any dispute arising out of the terms of this Agreement. 11. If any provision of this Agreement or the application of it shall be determined to be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions shall not be affected and shall be enforced to the greatest extent permitted by law. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first above written. (FRANCHISEE) NUTRI/SYSTEM L.P. By: NSI MANAGEMENT, INC., its General Partner By: By: -------------------------- --------------------------- Philip Voluck [EXHIBITS OMITTED] 1994 AMENDMENT TO FRANCHISE AGREEMENT This Amendment is entered into as of January 1, 1994, by and between NSI Acquisition Limited Partnership ("Company") and ________________________ ("Franchisee"). WHEREAS, an exclusive Franchise Agreement, issued under date of November 16, 1987 as amended ("Franchise Agreement"), was entered into by and between Nutri/System, Inc. ("NSI") and Franchisee whereby Franchisee agreed to own and operate Nutri/System Weight Loss Centers in the territory designated therein ______________________ ("Territory"); and WHEREAS, the Company, a partnership having two general partners, one of which is a corporation controlled by Michael E. Heisley and responsible for the management of the Company has acquired the Franchise Agreement; and WHEREAS, Franchisee and the Company wish to reaffirm the commitment of Franchisee and Company to the Nutri/System Weight Loss Program and amend the terms of the Franchise Agreement. NOW, THEREFORE, in consideration of the premises and promises set forth herein and intending to be legally bound hereby, the parties agree to modify the Franchise Agreement as follows: 1. Paragraph 7 of the Franchise Agreement shall be deleted in its entirety and be replaced for purposes of this Amendment with the following language: "In addition to the franchise fee previously paid for the Territory, the Franchisee will pay to the Company a monthly royalty on a per center basis beginning with March 15, 1994, in accordance with the following schedule: With respect to net receipts from the sale of the Company's products and services ("Net Receipts") during each month during the following period: - -------------------------------------------------------------------------------- February 1, 1994 through December 31, 1994 (the "Period") A royalty in an amount equal to a percentage of the Net Receipts, as set forth below, payable on or before the fifteenth (15th) day of the following month: - -------------------------------------------------------------------------------- 5% of Net Receipts on a per center basis, until such time as aggregate Net Receipts for a center during the Period equal $100,000 then 7% on all other Net Receipts for such center during the Period January 1, 1995 through December 31, 7% of Net Receipts 1995 and each calendar year thereafter 2. Paragraph 1(B) of Exhibit C to the Franchise Agreement (the 1984 Release Agreement) shall be deleted in its entirety and replaced for purposes of this Amendment with the following language: 'Thirty-three percent (33%) of the net cost amount from subparagraph (A) above, which includes all cost of distribution except as set forth in paragraph 4 below, until such time that year-to-date system wide retail revenue (i.e., total Company and franchisee retail revenue from the sale of all services and products, less sales tax and refunds) equals three hundred and fifty million dollars ($350,000,000). Above $350,000,000 of year-to-date system wide retail revenue the 33% markup declines one hundred (100) basis points for each incremental fifty million dollars ($50,000,000) of system wide retail revenue to a floor of twenty-three percent (23%) as outlined below: Year-to-Date System Wide Retail Revenue Food Mark-Up -------------------------- ------------ zero to $350 million 33% $350 million to $400 million 32% $400 million to $450 million 31% $450 million to $500 million 30% $500 million to $550 million 29% $550 million to $600 million 28% $600 million to $650 million 27% $650 million to $700 million 26% $700 million to $750 million 25% $750 million to $800 million 24% $800 million and above 23% plus," 3. Paragraph 13(1) of Exhibit C to the Franchise Agreement (1984 Release Agreement) is amended to delete the words "make suggestions for" and substitute therefore the word "approve". 4. Paragraph 7(C)(2) of Exhibit C to the Franchise Agreement (1984 Release Agreement) shall be deleted in its entirety. 5. All the remaining terms, conditions, covenants and obligations of the Franchise Agreement shall remain unchanged and in full force and effect. To the extent that Franchisee owes a renewal fee, any renewal fee schedule attached to the Franchise Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment, effective as of the date first written above. NSI ACQUISITION, LIMITED PARTNERSHIP FRANCHISEE By NSI Management, Inc., Its General Partner By: By: ---------------------------- ---------------------------- 1994 SETTLEMENT AND RELEASE AGREEMENT This Agreement is entered into as of January 1, 1994, by and between NSI Acquisition Limited Partnership ("Franchisor"), Michael E. Heisley ("Heisley") and ___________________ ("Franchisee") WHEREAS, Franchisee is a party to one or more franchise agreements, as previously amended, with Nutri/System, Inc. ("NSI") which are listed and described more fully on Exhibit 1 hereto ("the Franchise Agreements"); and WHEREAS, on May 4, 1993 an involuntary petition was filed against NSI ("Petition") under Chapter 7 of Title 11 of the United States Code, 11 U.S.C. ss.101 et seq. (the "Bankruptcy Code"). On June 3, 1993, the Petition was amended to seek relief under Chapter 11 of the Bankruptcy Code and NSI consented to an order for relief, which was entered by the Court on June 4, 1993, In re Nutri/System. Inc., E.D. Pa., Cpt. 11, No. 93-12725S ("NSI Bankruptcy"); and WHEREAS, Franchisee has alleged that it has or may have claims against NSI arising out of actions taken by NSI; and WHEREAS, NSI has alleged that it holds food and print related receivables for obligations incurred by Franchisee prior to the filing of the Petition ("Prepetition Accounts Receivable"); and WHEREAS, on December 29, 1993, Franchisor, a partnership having two general partners, one of which is a corporation controlled by Heisley and responsible for the management of Franchisor, acquired the Franchise Agreements, the "Nutri/System" trade name and trademarks, the Franchise pre-Petition trade accounts receivable, including Franchisee food and print related receivables, non-food receivables and renewal fees receivables, and a significant portion of other assets of NSI which were used in the operation of NSI's franchise system as of that date ("NSI Franchise Assets"), from NSI Debt, Inc. which had acquired the NSI Franchise Assets through foreclosure and public sale pursuant to state law; and WHEREAS, Franchisor and Franchisee now wish to settle and resolve all of their differences and reaffirm the franchise relationship and Franchise Agreements; NOW, THEREFORE, in consideration of the premises and promises set forth herein and intending to be legally bound hereby, the parties agree to the following: 1. Franchisor hereby waives all royalties due and owing under the Franchise Agreements from April 1, 1993 through and including January 31, 1994. 2. Franchisee agrees to pay to Franchisor Prepetition Accounts Receivables in six equal monthly payments commencing October 1, 1994. Payments received on such Prepetition Accounts Receivables will be placed into a trust account, under the exclusive control of the advertising committee, to be used to pay: (i) for advertising supplemental to that required by paragraph 3 below and (ii) $161,000 from pre-Petition food and print related accounts receivables to be collected from all franchisees system wide to be paid directly to NSF Corp. ("NSF") for its general expenses on March 15, 1995. Commencing on March 15,1994, provided Franchisee has made and continues to make all payments required hereunder and under the terms of the Franchise Agreements, as amended per Exhibit 2, the Franchisor will reestablish fourteen (14) day credit terms, including normal delivery time, in accordance with paragraph 7 of the June 1984 Release Agreement, attached as Exhibit C to the Franchise Agreements. 3. Franchisor will begin to create and distribute advertising materials for/to the franchisees immediately. This obligation, the creation and distribution of advertising materials, is an ongoing obligation of Franchisor. Franchisor has indicated that in 1994, it will spend at least three million dollars ($3,000,000) on the creation of advertising materials. Franchisor will begin national advertising on January 1, 1994. In addition to this obligation, Franchisor is obligated to spend, on an annual basis in 1994, 1995 and 1996, and subject to Advertising Committee approval the lesser of nine million dollars ($9,000,000) increased annually by four percent (4%) for inflation or seventy-one point four percent (71.4%) of the royalty (i.e., five percent (5%) of franchisee revenue) collected by the Franchisor on franchisee dedicated advertising (including national advertising which would benefit Company centers indirectly). Advertising programs for years after 1996 will be developed in the future. Franchisor has indicated that in 1994, it will spend a total of eighteen million dollars ($18,000,000) on advertising; nine million dollars ($9,000,000) on franchisee dedicated advertising (including national advertising which would benefit Company centers indirectly), six million dollars ($6,000,000) on local advertising in the Company markets, and three million dollars ($3,000,000) on the creation of advertising materials. 4. Franchisor will reimburse NSF for $500,000 of its NSI Bankruptcy related expenses following receipt of appropriate documentation supporting these expenses. Franchisor will pay this sum by February 12,1994; provided that at least 400 of the franchise centers sign this Agreement and the attached Amendment to Franchise Agreement (Exhibit 2) by January 15, 1994. 5. Franchisor will make reasonable efforts to purchase insurance coverage, including products and professional liability insurance, for Franchisor. In addition, Franchisor will purchase insurance for its Company centers from a financially sound third party insurance company (i.e., the captive insurance subsidiary of NSI will not be used to provide this insurance) and will cooperate with the franchisees in developing an overall insurance program. 6. As of December 29, 1993, Franchisor was capitalized with at least fifteen million dollars ($15,000,000) of equity. 7.(a) Franchisee hereby irrevocably and unconditionally releases Heisley, any company or entity controlled by Heisley, and Franchisor from any and all claims of every kind and nature which Franchisee has or may have arising out of or in connection with: (i) the operation of Franchisee's Nutri/System franchise or the performance of NSI or Franchisor under the Franchise Agreements or any other franchise agreement Franchisee now has or may have had with NSI or Franchisor, (ii) the operations or management of NSI or the NSI Bankruptcy proceedings, (iii) the transfer or disposal of any assets of NSI or the effecting of any payment to the "Banks" (as hereinafter defined). Franchisee acknowledges that as of the effective date hereof, no non-waived defaults or violations by Heisley, any company or entity controlled by Heisley, or Franchisor exist. (b) Franchisee hereby irrevocably and unconditionally releases First Fidelity Bank, National Association, Pennsylvania, PNC Bank, National Association, Mellon Bank, N.A., CIBC, Inc., Maryland National Bank, Continental Bank, N.A. and Credit Du Nord (the "Banks"), and any and all successor holders of the NSI debt owed to the Banks from any claims that Franchisee may have against the Banks that could require repayment by any of the Banks of any amount paid, set-off or applied against obligations of NSI to any of the Banks on or after April 27, 1993 and prior to or as of December 1, 1993 ("NSI Payments"). The parties intend that said release does not preclude Franchisee from bringing, and said release shall not apply to, any and all other claims of every kind and nature Franchisee may have against the Banks which could not require repayment of any portion of the NSI Payments (e.g. tortious interference claims by Franchisee for damages such as lost profits, additional costs and diminution in value regarding its business and punitive damages). (c) Notwithstanding any contrary provision herein, it is the intention of the parties to this Agreement that the foregoing release of the Banks be limited to and effect a release of only those claims that could require Heisley, any company or entity controlled by Heisley, or Franchisor to pay or otherwise reimburse, to any of the Banks all or any portion of NSI Payments repaid by the Banks as described in (b) above. 8. Heisley, any company or entity controlled by Heisley, and Franchisor hereby irrevocably and unconditionally release Franchisee from any and all claims of every kind and nature which Heisley, any company or entity controlled by Heisley, or Franchisor may have arising out of or in connection with the operation of Franchisee's Nutri/System franchise or Franchisee's performance under the Franchise Agreements or any other franchise agreement Franchisee now has or may have had with NSI or Franchisor other than with respect to Prepetition Accounts Receivable, any non-food receivables (excluding royalties to the extent required by paragraph 1 above) and any renewal fees, if any, now due under the Franchise Agreements. Heisley, any company or entity controlled by Heisley, and Franchisor acknowledge that as of the effective date hereof, no non-waived defaults or violations by Franchisee exist, other than with respect to Prepetition Accounts Receivable, any non-food receivables (excluding royalties to the extent required by paragraph 1 above) and renewal fees, if any, now due. Heisley, any company or entity controlled by Heisley, and Franchisor further acknowledge that Franchisee reserves any and all claims of every kind and nature and the right and ability to assert such claims, not released in paragraph 7 above. 9. Franchisor hereby waives Franchisee's obligation to comply with the provisions of paragraphs 3, 4, and 5 of that certain Amendment to Franchise Agreement, dated effective December 31,1991 ("December 31,1991 Amendment"), for the calendar year 1993. Beginning January 1, 1994, and thereafter, Franchisee must comply with all provisions of the December 31, 1991 Amendment in order to receive the benefits of a free renewal period. 10. Franchisee and Franchisor hereby reaffirm the terms of the Franchise Agreements, acknowledge that the Franchise Agreements are valid and binding contracts, and agree to execute an Amendment to Franchise Agreement, in the form attached hereto as Exhibit 2, for each Franchise Agreement listed on Exhibit 1. 11. Franchisee hereby consents to an assignment of the Franchise Agreements to Franchisor and agrees to execute any additional agreement which is necessary to effectuate the assignment and which is consistent with this Agreement and the Franchise Agreements. 12. Any terms, covenants or conditions in Franchisee's Franchise Agreements that are inconsistent with any of the provisions of this Agreement are superseded by the terms of this Agreement. 13. This Agreement shall be binding upon the parties, their heirs, legal representatives, successors and assigns. 14. This Agreement shall be governed by the laws of the Commonwealth of Pennsylvania. If any provision of this Agreement or the application of it shall be determined to be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions shall not be affected and the remainder shall be enforced to the greatest extent permitted by law. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first above written. (FRANCHISEE) NSI ACQUISITION LIMITED PARTNERSHIP BY NSI MANAGEMENT, INC., ITS GENERAL PARTNER By: By: --------------------------- -------------------------------- MICHAEL E. HEISLEY, individually and on behalf of any company or entity controlled by him By: -------------------------------- [EXHIBIT OMITTED] AMENDMENT TO FRANCHISE AGREEMENT Amendment made effective this 31st day of December, 1991 by and between Nutri/System, Inc. ("Company") and __________________ ("Franchisee"). WHEREAS, an exclusive Franchise Agreement, issued under date of November 16, 1987 ("Franchise Agreement") was entered into by and between the Company and Franchisee whereby franchisee agreed to own and operate Nutri/System Weight Loss Centers in the territory designated as __________________ ("Territory"). WHEREAS, both the Company and Franchisee recognize the importance of marketing the Franchisee's business throughout the territory. WHEREAS, pursuant to Exhibit B to the Franchise Agreement and the Letter of Intent to Participate, dated August 1987, referred to therein, Franchisee received a deferral and opportunity to reduce the franchise renewal fee ("PCC Payment") payable during a period, commencing January 1, 1988 and ending January 1, 1993, for an extended term of the Franchise Agreement ("PCC Term"). WHEREAS, Franchisee and the Company wish to reaffirm Franchisee's commitment to marketing the Nutri/System name and weight loss program in the Territory through media advertising and amend the terms of the Franchise Agreement. NOW, THEREFORE, In consideration of the premises set forth herein and intending to be legally bound hereby, the parties agree to modify the Franchise Agreement as follows: 1. The second sentence of paragraph three of the Franchise Agreement is deleted in its entirety. percent (10%) of net receipts or a $.50 PCA on local advertising does not affect Franchisee's obligations to participate in a cooperative advertising program, in accordance with the terms and conditions set forth above." 4. For the purposes of this Amendment, the determination of whether Franchisee is in compliance with the above provision, i.e., whether Franchisee's advertising expenditures are equal to either 10% of its net receipts or $.50 PCA, Franchisee's compliance will be measured annually on a calendar year basis using the net receipts or population of the Territory or, if Franchisee has two or more Franchise Agreements describing territories within the same ADI, Franchisee may choose to have its compliance measured by the Territory combined with all other territories owned by Franchisee within the same ADI. The population data source for the Territory will be the Company's "center based tracking system", with the population determined by the most current federal census report, as updated. Under no circumstances will the Company update or change the population figure for the Territory more than once every two years. 5. The Franchisee will complete and file with the Home Office a monthly form reporting Franchisee's monthly advertising expenditures. The Company will be entitled to audit on a semi-annual basis, at Company expense and after reasonable written note to Franchisee, Franchisee's advertising expenditure receipts and Franchisee is obligated to maintain current records and past records for the most recent two full calendar years. 6. If Franchisee now has or at any time in the future adds a satellite not included in the existing Territory (for which an annual renewal fee is paid), said satellite(s) are excluded from this renewal program; that is, neither the advertising expenditures for such satellite nor the net receipts attributable thereto shall be used to determine Franchisee's compliance with either the 10% of net receipts or $.50 PCA obligations. 7. Should Franchisee fail to comply with its obligation to spend at least 10% of net receipts or $.50 PCA in advertising dollars during any calendar year, Franchisee shall be allowed to cure any deficiency during the first quarter of the following calendar year. Any additional advertising expenditures designated by Franchisee to cure the prior year's deficiency in advertising expenditures will be credited to the prior year so designated and will not be counted towards Franchisee's advertising obligations for the current year. 8. The Company will use its best efforts, at Franchisee's request, to assist Franchisee in developing and managing plans for the efficient and productive expenditures of its marketing funds. 9. The Company hereby agrees to waive any additional PCC Payments due as of January 1, 1992 and going forward thereafter under the terms of Franchise Agreement. All payments, if any, made prior to January 1, 1992 by Franchisee shall be retained by the Company except that if Franchisee met its PCC goal established by Exhibit B to the Franchise Agreement for the annual adjusted base year beginning May 1, 1990 and ending April 30, 1991, Franchisee will be entitled to a refund of all PCC payments made prior to January 1, 1992. Franchisee and the Company agree that the refund due under this paragraph will be made to Franchisee through food credits available beginning April 1, 1992. Provided Franchisee is in compliance with this Amendment agreement, Franchisee will have no further obligation for PCC Payments pursuant to the Franchise Agreement. 10. Should Franchisee default under its obligations to incur local advertising expenditures equal to 10% of net receipts or $.50 PCA in any calendar year during the term set forth in paragraph three of the Franchise Agreement, and Franchisee fails to cure said default within the time frame set forth in paragraph 7 above, then Franchisee forfeits the waiver of the PCC Payments set forth in paragraph 9 above, forfeits the additional renewal term at no renewal fee set forth in paragraph 2 above, and Franchisee's obligations revert back to those set forth in the Franchise Agreement and Exhibit B thereto, as if this Amendment never existed and this Amendment shall be null and void and Franchisee shall be obligated to pay any PCC Payments or renewal payments due and owing pursuant to the Franchise Agreement. 11. All the remaining terms, conditions, covenants and obligations of the Franchise Agreement shall remain unchanged and in full force and effect. IN WITNESS WHEREOF, the parties hereto have set their hands and seals this 31st day of March, 1992. Attest: NUTRI/SYSTEM, INC. By: By: ----------------------------------------- -------------------------------------- _____________, Asst. Corporate Secretary Ricardo D. Arevalo, Vice President- Franchise Operations (Seal)
By: ----------------------------------------- Authorized Signer NUTRI/SYSTEM, INC. Exclusive Franchise Agreement Issued under date of Nutri/System, Inc., a corporation organized under the laws of the State of Pennsylvania with general offices in Willow Grove, PA (herein called the "Company"), hereby grants to Name Address (herein called the "Franchisee"), an exclusive Franchise to own and operate a weight control or weight loss center(s) (herein called the "Center"), under the Nutri/System, Inc. copyrights, patents, and trademarks for designs, trade names, signs, insignias, symbols, or slogans (herein collectively called the "Trademarks"), in the following described territory (herein referred to as the "Territory"), and shown more fully on the attached map called "Exhibit A", and nowhere else, bounded as follows: This Franchise Agreement being upon the following terms and conditions: 1) That the Franchisee will operate a thoroughly clean, appropriately laid out, and decorated center at: or other locations as agreed upon in writing. 2) That the Franchisee will not operate or sell, directly or indirectly, any other competing weight control or weight loss business, or any other business which could be confused with the Center either during the term of this Agreement or for two (2) years thereafter in a ten (10) mile radius of any center. 3) That the term of this Agreement shall commence (Issue Date) and expire . Provided Franchisee is in substantial compliance with this Agreement, this Agreement shall be renewable for an additional ten (10) years at the option of the Franchisee, on economic terms and conditions presenting the Franchisee a reasonable opportunity to earn renewal fee reductions and/or a "zero" renewal fee. 4) That the Franchisee will use reasonable efforts to have sufficient penetration of Centers in the Territory approved by the Company to enable the Franchisee to meet fully his obligations under this Agreement. It is recognized that under the foregoing it may be necessary from time to time for the Franchisee to increase the penetration of Centers in the Territory. The Franchisee will comply with any and all local, city, county, State and Federal laws and regulations now in effect or which may hereafter be enacted pertaining to the operation of weight loss or reduction Centers. The Center will be maintained at all times in good condition and appearance, subject to the Company's operational manual (herein referred to as "Operations Manual"), which manual shall neither be inconsistent with any of the terms or conditions of this Agreement, nor contain minimum business requirements not set forth in this Agreement. The Franchisee will not operate or permit the Center to be operated in any way not in compliance with the Company's reasonable requirements or standards. 5) That the Franchisee will make no representation as to the program, diet, food, or Center not previously authorized by the Company in writing, such authorization not to be unreasonably withheld. Failure of the Company to act within fourteen (14) days of request for authorization shall be deemed authorization. The business shall be operated under the Company's Trademarks and on its own merits, and not compared with any other weight loss or reduction business without the Company's consent. 6) That the Franchisee will market the business throughout the entire Territory. Without in any way limiting the Franchisee's obligation under this Paragraph 6, the Franchisee must use reasonable efforts to meet and increase the demand for the business throughout the Territory and to secure penetration for the population in the Territory; and must reasonably cooperate in and support the Company's marketing, advertising, and sales promotion programs and campaigns for the Territory. If other franchisees or Company centers share an Area of Dominant Influence ("ADI") with Franchisee, then if Company directs and two-thirds (2/3) of the franchise centers of the affected franchisees agree, Franchisee shall participate with the other franchisees and Company in a cooperative advertising program. In the event no payment sharing agreement is reached, Franchisee shall pay a proportionate share of the expenses of such cooperative advertising program based upon penetration of the advertising medium within the Territory provided however, Franchisee's proportionate share shall not exceed three and one-half percent (3 1/2%) of Franchisee's monthly gross receipts from centers located in that part of the Territory penetrated by such advertising medium. In addition, the Franchisee will advertise in all reasonable media and engage in reasonable sales promotion of the business throughout the Territory at his own cost and expense. All advertising, marketing, promotional, and media copy shall be subject to the Company's approval, such approval not to be unreasonably withheld. Failure of the Company to act within fourteen (14) days of request for approval shall be deemed approval. 7) That in addition to paying a fee of for the Territory, the Franchisee will pay to the Company by the fifteenth (15) day of the following month a royalty fee of seven percent (7%) on all net receipts from the previous month's sale of the Company's products and services. 8) That the Franchisee will at all times cooperate and comply with quality control programs reasonably required by the Company, including Center layout and design specifications, and procedures set forth in the Operations Manual. The Franchisee will at all times cooperate with the company's field, territorial, and other representatives. The Franchisee will permit the Company's agents to conduct checks in the Center and Territory and to enter the Franchisee's Center upon reasonable notice during working hours and inspect the facilities, equipment and materials used. Without notice during working hours, Company shall have that access to Center which is available to the general public. The Company or its agents will be allowed to check methods of operations. The Franchisee will furnish information reasonably requested by the Company concerning his Center and business and will furnish same in the form so requested. Franchisees without prior written approval may not alter any program, or diet, or sell products by mail, or relinquish control over the management of the exclusive franchise to an independent third party, or publish written materials copyrighted by Company. 9) That the Franchisee will carry all insurance and renewals on his operation in such amounts as reasonably required by the Company. 10) That upon the happening of any one or more of the following events, in addition to all other rights and remedies, including the Company's right to damages sustained, if any, the Company shall have the right to cancel or terminate this Agreement by written notice to the Franchisee: a) The failure of the Franchisee to substantially perform or comply with any one or more of the material terms or conditions of this Agreement, and correction of such failure is not made within sixty (60) days after receipt by Franchisee of written notice from Company that such failure exists, provided however, if such failure constitutes an imminent danger of public health, then such cure period may be shortened as reasonably necessary to protect the public health; or the failure of the Franchisee to obtain prior written approval from the Company for any deviations from this agreement, such approval not to be unreasonably withheld. Failure of the Company to act within thirty (30) days of request for approval shall be deemed approval. b) Any sale, transfer or other disposition, without the prior written consent of the Company (such consent not to be unreasonably withheld. Failure of the Company to act within thirty (30) days of request for consent shall be deemed consent) including any such transfer by operation of law: i) Of all or part of the business effecting the Franchise; or ii) Of more than ten percent (10%) of the stock of the Franchisee, if the Franchisee be a corporation, or of any of its stock if sold in a public offering; or iii) Of any interest in a partnership or the withdrawal of a partner if the Franchisee be a partnership; or iv) The merger or consolidation of the Franchisee with any other company, or the dissolution of the Franchisee. c) The discontinuance by the Franchisee, for any reason, of the business for a period of thirty (30) days, except as provided in Paragraph 17 hereof; or d) The insolvency of the Franchisee as that term is defined in either the bankruptcy or equity sense, or an assignment by the Franchisee for the benefit of creditors, or the filing of a voluntary petition under any Chapter of the Bankruptcy Act, as now enacted or as may hereafter be amended, or the failure of the Franchisee to vacate an involuntary bankruptcy or reorganization petition filed against him within sixty (60) days from the date of such filing, or the failure of the Franchisee to vacate the appointment of a receiver or a trustee for the Franchisee, or any part or interest of his business effecting the franchise, within sixty (60) days from the date of such appointment. e) If Franchisee defaults in the reporting or the payment of royalties, franchise fee, cooperative advertising costs, or any other indebtedness to Company, where such payments are not made 1) after receipt by the Franchisee of written notice that such payments are overdue and 2) within fourteen (14) days after Franchisee receipt of such written notice which period shall occur prior to cancellation or termination. Upon the happening of any one or more of the foregoing events the Company shall also have the right to discontinue supplying the Franchisee with Food and/or other materials, for such length of time as the Company may reasonably deem necessary. without thereby cancelling or terminating this Agreement and without thereby prejudicing the Company's other rights and remedies including the right to terminate this Agreement for the same cause or for any one or more other causes. 11) In the event that the Company gives written consent to a sale or transfer as in paragraph 1Ob. above, the Franchisee will pay the Company its reasonable expenses of such transfer, at a rate schedule published by Company, which shall not exceed thirty-five hundred dollars ($3500.00) prior to any transfer being completed. 12) That, in addition to and not in limitation of the foregoing, if, in the reasonable opinion of the Company, the Franchisee should fail to promote the business or fail to secure reasonable penetration thereof in the Territory so defined geographically, the Company may call the Franchisee's attention to such failure by written notice to the Franchisee, specifying the segment of the Territory involved, and suggest remedial steps therefore. If Franchisee fails to use reasonable effort to substantially correct the failures identified in Company's written notice within three (3) months after the giving of such written notice, the Company shall thereupon have the right, upon written notice to the Franchisee to that effect, to remove such segment from the Territory covered by this Agreement and deal with it as the Company sees fit, without thereby cancelling or terminating this Agreement and without thereby prejudicing the Company's other rights and remedies hereunder. If the Company exercises such right to remove such segment from the Territory, the Company shall refund to Franchisee that portion of the franchise fee paid and attributable to such Territory segment. 13) That the Franchisee will pay and discharge, at his own expense, any and all expenses, charges, fees and taxes arising out of, or incidental to, the carrying on of his business, including, without limiting, the generality of the foregoing, all workers' compensation, unemployment insurance, and social security taxes levied or assessed with respect to the employees of the Franchisee, and the Franchisee will indemnify and hold harmless the Company, against any and all claims for such expenses, charges, fees and taxes. 14) That the Company or one of its subsidiaries is the owner of the various Trademarks used in the business, and will defend and protect same and indemnify and hold harmless the Franchisee in the authorized use of same. Nothing herein contained shall be construed as conferring upon the Franchisee any right or interest in said Trademarks or copyrights, and patents, used in connection with the business. 15) Company shall use best efforts to provide Franchisee with training programs for Franchisee and staff, operations and management guidance, marketing programs and advertising for the purpose of marketing the business throughout the entire Territory and securing penetration for the population in the Territory. 16) That the Franchisee shall not have the right to use the Trademarks as part of a trade name or the name of a partnership or corporation. 17) That immediately upon the cancellation or termination of this Agreement, however caused, the Franchisee will eliminate the Trademarks from his business, if they are in use, and will cease using, in any manner whatsoever, the Trademarks or copyrights, and patents used in connection with the business. 18) That neither party to the Agreement shall be held liable for failure to comply with any of the terms and conditions of this Agreement when such failure has been caused solely by fire, labor dispute, strike, war, insurrection, government restrictions, force majeure or act of God beyond the control and without fault on the part of the party involved, provided such party uses due diligence to remedy such default. 19) That this Agreement is personal. It cannot be transferred, assigned, pledged, mortgaged, or otherwise disposed of by the Franchisee in whole or in part without the Company's prior written consent, such consent not to be unreasonably withheld. Failure of the Company to act within thirty (30) days of request for consent shall be deemed consent. 20) That this Agreement expresses fully the understanding, and that all prior understandings are hereby cancelled, and no future changes in the terms of this Agreement shall be valid, except when and if reduced in writing and signed by both the Franchisee and the Company, by legally authorized officials. 21) That this Agreement is subject to and controlled by all the terms and conditions of the Settlement/Release Agreement between the Company and the Nutri/System franchisees arising out of Civil Action No. 83-C-0601 (E.D. Wis.) and attached hereto and made a part hereof as Exhibit C. In the event of any inconsistencies between the terms and conditions of this Agreement and the terms and conditions of said Settlement/Release Agreement, the Settlement/Release Agreement shall control. 22) That the failure by the Company or the Franchisee to enforce at any time or for any period of time any one or more of the terms and conditions of the Agreement, shall not be a waiver of such terms or conditions or of such party's right thereafter to enforce each and every term and condition of this Agreement. 23) That this Agreement and all its terms and conditions shall be governed by and interpreted under the laws of the State of Pennsylvania. NUTRI/SYSTEM, INC. By Title This Agreement accepted and agreed to: EX-10.4 16 APPLICATION AGREEMENT Exhibit 10.4 Independent Distributor [LOGO] Application and Agreement ================================================================================ 202 Welsh Road, Horsham, PA 19044 Fax: (215) 706-5367, Customer Order Number: 1-800-892-0276 - ----------------------------------------- ------------------------------------- Applicant Information Sponsor Information - ----------------------------------------- ------------------------------------- Name: Name: - ----------------------------------------- ------------------------------------- Social Security or Federal Tax ID: ID Number: - ----------------------------------------- ------------------------------------- Address: Address: - ----------------------------------------- ------------------------------------- City, State, and Zip Code: City, State, and Zip Code: - ----------------------------------------- ------------------------------------- Phone (Daytime) Phone: Fax: - ----------------------------------------- ------------------------------------- Phone (Evening): Sponsor's Signature: - ----------------------------------------- ------------------------------------- Fax: - ----------------------------------------- ------------------------------------- TERMS AND CONDITIONS Executive Right Away Program I want to become an Independent Distributor and become an Executive Initials right away. I authorize NutriSystem Direct to charge my credit card listed below, my checking account, or I have enclosed a check for ------- $299 for the Distibutor Kit, the Executive Development Kit and | | an assortment of Nutri-System(R) products. I authorize NutriSystem | | Direct to enroll me in the optional $100 AutoShip program. I | | have attached an AutoShip form with my order. ------- Independent Distributor I want to become an Independent NutriSystem Direct(TM) Initials Distributor. I authorize NutriSystem Direct to charge my credit card listed below, my checking account or I have enclosed a check -------- in the amount of $49 for the Distributor Kit. I understand this is | | the only requirement to become a NutriSystem Direct(TM) | | Distributor. | | -------- [ ] LOGO [ ] LOGO [ ] LOGO [ ] LOGO - ------------------------ -------------------------- ---------------------- Name on Card Card Number Expiration Date [ ] Yes, I have read the terms and conditions listed on the reverse side of this form and the NutriSystem Direct(TM) Compensation Plan. I understand all of my options and I agree to comply by the company's policies and procedures stated in this agreement and in the NutriSystem Direct(TM) Policy and Procedures Manual. - -------------------------------------------- --------------------- Signature Date Call in Application: 800-892-0276 Fax: 215-706-5367 - -------------------------------------------------------------------------------- 775400 7/99 NutriSystem(R) (C)1999 Printed in U.S.A. NUTRISYSTEM DIRECT DISTRIBUTOR AGREEMENT TERMS OF ENROLLMENT As a NutriSystem Direct Independent Distributor, I acknowledge that I am an independent contractor and not an agent or employee of NutriSystem Direct. I understand that I will not be treated as an employee for federal or state tax purposes. As a NutriSystem Direct Independent Distributor, I will make no statements, disclosures, or representations to sell NutriSystem Direct products or services, or in recuiting other prospective Distributors other than those contained in approved NutriSystem Direct Literature. I understand that no purchase other than a Distributor Kit is necessary to become a NutriSystem Direct Distributor. I understand that I may terminate my Distributorship at any time. I further understand that I am under no obligation to make any financial investment to become a NutriSystem Direct Independent Distributor. I also understand that any successful retail business will incur business expenses beyond the purchase of product. When I choose to become an Executive by accumulation, I must generate a monthly personal sales volume of at least $100 SV to maintain may Executive status and stay in the 4x7 Executive Organization. If I fail to meet this minimum two months in a row, I will simply return to my sponsor's Personal Group. If I choose to become an Executive right away, I must generate a monthly personal Sales Volume of at least $100 SV and be enrolled in the autoship program. If I fail to meet the Sales Volume minimum for two months in a row, I will simply return to my sponsor's Personal Group. I understand that if no personal sales volume is generated for 12 consecutive months, this Agreement shall automatically terminate and any Distributorship will be cancelled and any future Bonuses will be forfeited. I understand that I may re-enroll after 12 months of not generating any sales volume by submitting a new Distributor Agreement and purchasing a new Distributor Kit. I understand that in order to maintain a viable marketing system and to comply with changes in applicable law, NutriSystem Direct reserves the right to change prices, company policies, company literature and/or the compensation plan, without prior notice. I understand that should I wish to terminate my distributorship. I must notify NutriSystem Direct. Any that time any salable products may be returned for a refund equal to 90% of the original purchase price less any commissions or bonuses paid. In any state in which specific buy back requirements has been enacted which may vary from the foregoing, NutriSystem Direct shall repurchase products in accordance with the applicable statute. NutriSystem Direct Check By Phone/Fax Terms and Conditions You may use Check-By-Phone for product purchases or monthly services available from NutriSystem Direct. To activite the Check-By-Phone option, please attach a voided check to this Agreement. (No deposit slips or temporary checks will be accepted.) I hereby authorize NutriSystem Direct, its authorized agent in accordance with this Agreement to initiate debit/credit entries to may checking account. I agree that NutriSystem Direct shall be fully protected in honoring such a draft, and if any funds are dishonored, whether intentionally or inadverently, NutriSystem Direct shall be under no liability whatsoever even though such dishonor results in the forfeiture of product, bonuses, or privileges I may have been entitled to as an active distribuor. Additional Terms and Conditions I understand that in order to be successful in this program I must purchase and sell NutriSystem Direct Products and retail them myself. I understand that I can sponsor other distributors to do the same; and in order for them to be successful they must purchase and sell products at retail and recruit other people to do the same. I understand that in order to qualify for commissions, I must retail or use in business building, 70% of the product I purchase before I purchase more products. EX-10.5 17 1999 EQUITY INCENTIVE PLAN Exhibit 10.5 NUTRISYSTEM.COM INC. 1999 EQUITY INCENTIVE PLAN 1. Purpose. The purpose of the nutrisystem.com inc. 1999 Equity Incentive Plan (the "Plan") is to further the growth, development and financial success of nutrisystem.com inc. (the "Company") by providing additional incentives to those officers and key employees who are responsible for the management of the Company's business, which incentives will enable them to participate directly in the growth of the value of the capital stock of the Company. To accomplish these purposes, the Plan provides a means whereby key employees and officers may receive stock options ("Options") to purchase the Company's Common Stock, $.001 par value (the "Common Stock"). 2. Administration. (a) Composition of the Committee. The Plan shall be administered by a committee (the "Committee") which shall be appointed by and serve at the pleasure of the Company's Board of Directors (the "Board") or by the Board in the absence of the appointment of the Committee. The Committee shall be comprised of two or more members of the Board, each of whom shall be (i) a "non-employee director" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and (ii) an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Subject to the foregoing, from time to time the Board may increase or decrease the size of the Committee, appoint additional members thereof, remove members with or without cause, appoint new members in substitution therefor, fill vacancies or remove all members of the Committee and thereafter directly administer the Plan. (b) Authority of the Committee. The Committee shall have full and final authority, in its sole discretion, to interpret the provisions of the Plan and to decide all questions of fact arising in its application; to determine the officers and other key employees to whom awards shall be made and the type, amount, size and terms of each such award; to determine the time when awards shall be granted and to make all other determinations necessary or advisable for the administration of the Plan. The Committee shall have the authority to adopt, amend and rescind such rules, regulations and procedures as, in its opinion, may be advisable in the administration of the Plan, including, without limitation, rules, regulations and procedures that: (i) deal with satisfaction of an optionee's tax withholding obligations pursuant to Section 13 hereof, (ii) include arrangements to facilitate an optionee's ability to borrow funds for the payment of the exercise price of an Option, if applicable, from securities brokers and dealers and (iii) include arrangements that provide for the payment of some or all of an Option's exercise price by delivery of previously owned shares of Common Stock or other property and/or by withholding some of the shares of Common Stock being acquired upon exercise of an Option. All decisions, determinations and interpretations of the Committee shall be final and binding on all optionees and all other holders of Options granted under the Plan. (c) Authority of the Board. Notwithstanding anything to the contrary set forth in the Plan, all authority granted hereunder to the Committee may be exercised at any time and from time to time by the Board. All decisions, determinations and interpretations of the Board shall be final and binding on all optionees and all other holders of Options granted under the Plan. 3. Stock Subject to the Plan. Subject to Section 16 hereof, the shares that may be issued under the Plan shall not exceed in the aggregate 1,000,000 shares of Common Stock. Such shares may be authorized and unissued shares or shares issued and subsequently reacquired by the Company. Except as otherwise provided herein, any shares subject to an Option that for any reason expires or is terminated unexercised as to such shares shall again be available under the Plan. 4. Eligibility To Receive Options. Persons eligible to receive Options under the Plan shall be limited to those officers and other key employees of the Company and any subsidiary (as defined in Section 424 of the Code or any amendment or substitute thereto) who are in positions in which their decisions, actions and counsel significantly impact upon the profitability and success of the Company or a subsidiary of the Company; provided, however, that directors of the Company who are not also officers or employees of the Company shall not be eligible to participate in the Plan. 5. Types of Options. Grants may be made at any time and from time to time by the Committee in the form of stock options to purchase shares of Common Stock. Options granted hereunder may be Options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Code or any amendment or substitute thereto ("Incentive Stock Options") or Options that are not intended to so qualify ("Nonqualified Stock Options"). 6. Option Agreements. Each Option for the purchase of Common Stock shall be evidenced by a written option agreement in such form not inconsistent with the Plan as the Committee or the Board shall approve from time to time. The Options granted hereunder may be evidenced by a single agreement or by multiple agreements, as determined by the Committee in its sole discretion. Each option agreement shall contain in substance the following terms and conditions: -2- (a) Type of Option. Each option agreement shall identify the Options represented thereby either as Incentive Stock Options or Nonqualified Stock Options, as the case may be. (b) Option Price. Each option agreement shall set forth the purchase price of the Common Stock purchasable upon the exercise of the Option evidenced thereby. Subject to the limitation set forth in Section 6(d)(ii) hereof, the purchase price of the Common Stock subject to an Incentive Stock Option shall be not less than 100% of the fair market value of such stock on the date the Option is granted, as determined by the Committee or the Board, but in no event less than the par value of such stock. The purchase price of the Common Stock subject to a Nonqualified Stock Option shall be not less than 85% of the fair market value of such stock on the date the Option is granted, as determined by the Committee or the Board. For this purpose, fair market value on any date shall mean the closing price of the Common Stock, as reported in The Wall Street Journal, or if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation System ("Nasdaq"), or if the Common Stock is not reported by Nasdaq, the fair market value shall be as determined by the Committee or the Board pursuant to Section 422 of the Code. (c) Exercise Term. Each option agreement shall state the period or periods of time within which the Option may be exercised, in whole or in part, as determined by the Committee or the Board, provided that no Option shall be exercisable after ten years from the date of grant thereof. The Committee shall have the power to permit an acceleration of previously established exercise terms, subject to the requirements set forth herein, upon such circumstances and subject to such terms and conditions as the Committee deems appropriate. (d) Incentive Stock Options. In the case of an Incentive Stock Option, each option agreement shall contain such other terms, conditions and provisions as the Committee determines necessary or desirable in order to qualify the Option granted thereunder as a tax-favored Option (within the meaning of Section 422 of the Code or any amendment or substitute thereto or regulation thereunder) including without limitation, each of the following, except that any of these provisions may be omitted or modified if it is no longer required in order to have an Option qualify as a tax-favored Option within the meaning of Section 422 of the Code or any amendment or substitute therefor: (i) The aggregate fair market value, determined as of the date the Option is granted, of the Common Stock with respect to which Incentive Stock Options are first exercisable by any employee during any calendar year under all plans of the Company shall not exceed $100,000. -3- (ii) No Incentive Stock Options shall be granted to any employee if at the time the Option is granted such employee owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or its subsidiaries unless at the time such Option is granted the Option price is at least 110% of the fair market value of the stock subject to the Option and, by its terms, the Option is not exercisable after the expiration of five years from the date of grant. (iii) No Incentive Stock Options shall be exercisable more than three months, or one year in the case of an employee who dies or becomes disabled within the meaning of Section 72(m)(7) of the Code or any substitute therefor, after termination of employment with the Company. (e) Substitution of Options. Options may be granted under the Plan from time to time in substitution for stock options held by employees of other corporations who are about to become, and who do concurrently with the grant of such options become, employees of the Company or a subsidiary of the Company as a result of a merger or consolidation of the employing corporation with the Company or a subsidiary of the Company, or the acquisition by the Company or a subsidiary of the Company of the assets of the employing corporation or the acquisition by the Company or a subsidiary of the Company of stock of the employing corporation. The terms and conditions of the substitute Options so granted may vary from the terms and conditions set forth in this Section 6 to such extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the stock options in substitution for which they are granted. 7. Date of Grant. The date on which an Option shall be deemed to have been granted under the Plan shall be the date of the Committee's authorization of the Option or such later date as may be determined by the Committee at the time the Option is authorized. Notice of the determination shall be given to each individual to whom an Option is so granted within a reasonable time after the date of such grant. 8. Exercise and Payment for Shares. Options may be exercised in whole or in part, from time to time, by giving written notice of exercise to the President of the Company, specifying the number of shares to be purchased. The purchase price of the shares with respect to which an Option is exercised shall be payable in full with the notice of exercise in cash, Common Stock at fair market value or a combination thereof, as the Committee may determine from time to time and subject to such terms and conditions as may be prescribed by the Committee for such purpose. The Committee may also, in its discretion and subject to prior notification to the Company by an optionee, permit an optionee to enter into an agreement with the Company's transfer agent or a brokerage firm of national standing whereby the optionee will -4- simultaneously exercise the Option and sell the shares acquired thereby through the Company's transfer agent or such a brokerage firm and either the Company's transfer agent or the brokerage firm executing the sale will remit to the Company from the proceeds of sale the exercise price of the shares as to which the Option has been exercised. 9. Rights upon Termination of Service. In the event that an optionee ceases to be an employee of the Company or any subsidiary of the Company for any reason other than death, retirement (as hereinafter defined) or disability (within the meaning of Section 72(m)(7) of the Code or any substitute therefor), the optionee shall have the right to exercise the Option during its term within a period of three months after such termination to the extent that the Option was exercisable at the time of termination or within such other period and subject to such terms and conditions as may be specified by the Committee. In the event that an optionee dies, retires or becomes disabled prior to the expiration of his Option and without having fully exercised his Option, the optionee or his successor shall have the right to exercise the Option during its term within a period of one year after termination of employment due to death, retirement or disability to the extent that the Option was exercisable at the time of termination or within such other period and subject to such terms and conditions, as may be specified by the Committee. As used in this Section 9, "retirement" means a termination of employment by reason of an optionee's retirement at or after his earliest permissible retirement date pursuant to and in accordance with his employer's regular retirement plan or personnel practices. Notwithstanding the provisions of Section 6(d)(iii) hereof, if the term of an Incentive Stock Option continues for more than three months after termination of employment due to retirement or more than one year after termination of employment due to death or disability, such Option shall thereupon lose its status as an Incentive Stock Option and shall be treated as a Nonqualified Stock Option. 10. General Restrictions. Each Option granted under the Plan shall be subject to the requirement that if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or federal law, (ii) the consent or approval of any government regulatory body, (iii) the satisfaction of any tax payment or withholding obligation or (iv) an agreement by the recipient of an Option with respect to the disposition of shares of Common Stock is necessary or desirable as a condition of or in connection with the granting of such Option or the issuance or purchase of shares of Common Stock thereunder, such Option shall not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee or the Board. -5- 11. Rights of a Stockholder. The recipient of any Option under the Plan, unless otherwise provided by the Plan, shall have no rights as a stockholder unless and until a certificate for shares of Common Stock is issued and delivered to him. 12. Right to Terminate Employment. Nothing contained in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any optionee the right to continue in the employment of the Company or any subsidiary of the Company or affect any right that the Company or any subsidiary of the Company may have to terminate the employment of such optionee. 13. Withholding. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. If and to the extent authorized by the Committee, in its sole discretion, an optionee may make an election, by means of a form of election to be prescribed by the Committee, to have shares of Common Stock that are acquired upon exercise of an Option withheld by the Company or to tender other shares of Common Stock or other securities of the Company owned by the optionee to the Company at the time of exercise of an Option to pay the amount of tax that would otherwise be required by law to be withheld by the Company as a result of any exercise of an Option. Any such election shall be irrevocable and shall be subject to termination by the Committee or the Board at any time. Any securities so withheld or tendered will be valued by the Committee or the Board as of the date of exercise. 14. Non-Assignability. No Option under the Plan shall be assignable or transferable by the recipient thereof except by will or by the laws of descent and distribution or by such other means as the Committee or the Board may approve. During the life of the recipient, such Option shall be exercisable only by such person or by such person's guardian or legal representative. 15. Non-Uniform Determinations. The Committee's determinations under the Plan, including, without limitation, determinations of the persons to receive Options, the form, amount and timing of such grants, the terms and provisions of Options and the agreements evidencing same, need not be uniform and may be made selectively among persons who receive, or are eligible to receive, grants of Options under the Plan whether or not such persons are similarly situated. 16. Adjustments. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each -6- outstanding Option and the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Committee or the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee or the Board. The Committee or the Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Committee or the Board and give each Option holder the right to exercise his Option as to all or any part of the shares of Common Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable. (c) Sale or Merger. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Committee or the Board, in the exercise of its sole discretion, may take such action as it deems desirable, including, but not limited to: (i) causing an Option to be assumed or an equivalent option to be substituted by such successor corporation or a parent or subsidiary of such successor corporation, (ii) providing that an Option holder shall have the right to exercise his Option as to all of the shares of Common Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable or (iii) declaring that an Option shall terminate at a date fixed by the Committee or the Board provided that the Option holder is given notice and opportunity prior to such date to exercise that portion of his Option that is currently exercisable. 17. Amendment. The Committee or the Board may terminate or amend the Plan at any time with respect to shares as to which Options have not been granted, subject to any required stockholder approval or any stockholder approval that the -7- Committee or the Board may deem to be advisable for any reason, such as for the purpose of obtaining or retaining any statutory or regulatory benefits under tax, securities or other laws or satisfying any applicable stock exchange listing requirements. Neither the Board nor the Committee may, without the consent of the holder of an Option, alter or impair any Option previously granted under the Plan, except as specifically authorized herein. 18. Conditions upon Issuance of Shares. (a) Compliance with Securities Laws. Shares of Common Stock shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder and the requirements of any stock exchange upon which the Common Stock may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the shares of Common Stock are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such representation is required by any of the aforementioned relevant provisions of law. 19. Reservation of Shares. The Company, during the term of the Plan, will at all times reserve and keep available such number of shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. 20. Effect on Other Plans. Participation in the Plan shall not affect an employee's eligibility to participate in any other benefit or incentive plan of the Company or any subsidiary of the Company. Any Options granted pursuant to the Plan shall not be used in determining the benefits provided under any other plan of the Company or any subsidiary of the Company unless specifically provided. 21. Duration of the Plan. The Plan shall remain in effect until all Options granted under the Plan have been satisfied by the issuance of shares, but no Option -8- shall be granted more than ten years after the earlier of the date the Plan is adopted by the Board or is approved by the Company's stockholders. 22. Forfeiture for Dishonesty. Notwithstanding anything to the contrary in the Plan, if the Committee or the Board finds, by a majority vote, after full consideration of the facts presented on behalf of both the Company and any optionee, that the optionee has been engaged in fraud, embezzlement, theft, commission of a felony or dishonest conduct in the course of his employment or retention by the Company or any subsidiary of the Company that damaged the Company or any subsidiary of the Company or that the optionee has disclosed trade secrets of the Company or any subsidiary of the Company, the optionee shall forfeit all unexercised Options and all exercised Options with respect to which the Company has not yet delivered the certificates. The decision of the Committee or the Board in interpreting and applying the provisions of this Section 22 shall be final. No decision of the Committee or the Board shall affect the finality of the discharge or termination of such optionee by the Company or any subsidiary of the Company in any manner. 23. No Prohibition on Corporate Action. No provision of the Plan shall be construed to prevent the Company or any officer or director thereof from taking any corporate action deemed by the Company or such officer or director to be appropriate or in the Company's best interest, whether or not such action could have an adverse effect on the Plan or any Options granted hereunder, and no optionee or optionee's estate, personal representative or beneficiary shall have any claim against the Company or any officer or director thereof as a result of the taking of such action. 24. Indemnification. With respect to the administration of the Plan, the Company shall indemnify each present and future member of the Committee and the Board against, and each member of the Committee and the Board shall be entitled without further action on his part to indemnity from the Company for, all expenses (including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of, any action, suit or proceeding in which he may be involved by reason of his being or having been a member of the Committee or the Board, whether or not he continues to be such member at the time of incurring such expenses; provided, however, that such indemnity shall not include any expenses incurred by any such member of the Committee or the Board (i) in respect of matters as to which he shall be finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the performance of his duty as such member of the Committee or the Board or (ii) in respect of any matter in which any settlement is effected for an amount in excess of the amount approved by the Company on the advice of its legal counsel; and provided further that no right of indemnification under the provisions set forth -9- herein shall be available to or enforceable by any such member of the Committee or the Board unless, within 60 days after institution of any such action, suit or proceeding, he shall have offered the Company in writing the opportunity to handle and defend such action at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors and administrators of each such member of the Committee and the Board and shall be in addition to all other rights to which such member may be entitled as a matter of law, contract or otherwise. 25. Miscellaneous Provisions. (a) Compliance with Plan Provisions. No optionee or other person shall have any right with respect to the Plan, the Common Stock reserved for issuance under the Plan or any Option until a written option agreement shall have been executed by the Company and the optionee and all the terms, conditions and provisions of the Plan and the Option applicable to such optionee and each person claiming under or through him have been met. (b) Approval of Counsel. In the discretion of the Committee and the Board, no shares of Common Stock, other securities or property of the Company or other forms of payment shall be issued hereunder with respect to any Option unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state, local and foreign legal, securities exchange and other applicable requirements. (c) Compliance with Rule 16b-3. To the extent that Rule 16b-3 under the Exchange Act applies to Options granted under the Plan, it is the intention of the Company that the Plan comply in all respects with the requirements of Rule 16b-3, that any ambiguities or inconsistencies in construction of the Plan be interpreted to give effect to such intention and that, if the Plan shall not so comply, whether on the date of adoption or by reason of any later amendment to or interpretation of Rule 16b-3, the provisions of the Plan shall be deemed to be automatically amended so as to bring them into full compliance with such rule. (d) Unfunded Plan. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets under the Plan. (e) Effects of Acceptance of Option. By accepting any Option or other benefit under the Plan, each optionee and each person claiming under or through him shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board or the Committee or its delegates. -10- (f) Construction. The masculine pronoun shall include the feminine and neuter, and the singular shall include the plural, where the context so indicates. 26. Stockholder Approval. The Company shall submit the Plan to the stockholders entitled to vote hereon for approval within twelve months after the date of adoption by the Board in order to meet the requirements of Section 422 of the Code and the regulations thereunder. The exercise of any Option granted under the Plan shall be subject to the approval of the Plan by the affirmative vote of the holders of a majority of the outstanding shares of the Common Stock present, or represented, and entitled to vote at a duly convened meeting of stockholders. Date of adoption by the Board of Directors: August 20, 1999 Date of approval by the stockholders: August 20, 1999 -11- EX-21.1 18 SUBSIDIARIES OF THE COMPANY Exhibit 21.1 SUBSIDIARIES OF THE COMPANY State of Incorporation Name of Subsidiary or Organization ------------------ ---------------------- NutriSystem Franchise, Inc. Delaware NutriSystem Direct, L.L.C. Pennsylvania EX-23.1 19 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To nutrisystem.com inc.: As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Philadelphia, Pennsylvania December 17, 1999 EX-27 20 FDS --
5 12-MOS 12-MOS 12-MOS 9-MOS 9-MOS DEC-31-1996 DEC-31-1997 DEC-31-1998 DEC-31-1998 DEC-31-1999 DEC-31-1996 DEC-31-1997 DEC-31-1998 SEP-30-1998 SEP-30-1999 0 1,123 762 0 1,405 0 0 0 0 0 0 2,182 868 0 3,961 0 440 341 0 220 0 1,031 819 0 700 0 4,542 2,488 0 6,068 0 489 510 0 327 0 (292) (211) 0 (199) 0 4,826 2,924 0 6,822 0 3,307 1,541 0 4,296 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 20 20 0 24 0 545 503 0 2,458 0 4,826 2,924 0 6,822 47,030 45,871 9,323 7,351 6,925 47,030 45,871 9,323 7,351 6,925 45,823 47,686 7,101 5,571 5,014 45,823 47,686 7,101 5,571 5,014 2,318 2,873 2,332 2,133 2,242 0 0 0 0 0 39 104 7 5 7 (1,517) (2,964) (117) (358) (8,598) 0 0 0 0 0 (163) (1,598) (42) (141) (8,390) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (163) (1,598) (42) (141) (8,390) (0.01) (0.08) (0.00) (0.01) (0.43) (0.01) (0.08) (0.00) (0.01) (0.43)
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