-----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, BytH/4DVWb3iqxxoTJRk8fArdRy+2P6kBmbSapvm1W1IxBe9T2/IX9/KDO6vTN5a APTP8utce/IHjkZhfjeHAQ== 0000893750-00-000158.txt : 20000321 0000893750-00-000158.hdr.sgml : 20000321 ACCESSION NUMBER: 0000893750-00-000158 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000122 FILED AS OF DATE: 20000320 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WEIGHT WATCHERS INTERNATIONAL INC CENTRAL INDEX KEY: 0000105319 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 116040273 STATE OF INCORPORATION: VA FISCAL YEAR END: 0429 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-03389 FILM NUMBER: 574046 BUSINESS ADDRESS: STREET 1: 175 CROSSWAYS PARK WEST CITY: WOODBURY STATE: NY ZIP: 11797 BUSINESS PHONE: 5163901400 MAIL ADDRESS: STREET 1: 175 CROSSWAYS PARK WEST CITY: WOODBURY STATE: NY ZIP: 11797 10-Q 1 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES Unaudited Condensed Consolidated Financial Statements For the Three and Nine Months Ended January 22, 2000 and January 23, 1999 Weight Watchers International, Inc. and Subsidiaries - ---------------------------------------------------- PART I. FINANCIAL INFORMATION Page No. - ------------------------------- -------- Item 1. Financial Statements Unaudited Condensed Consolidated Balance Sheets as of 2 April 24, 1999 and January 22, 2000 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended January 23, 1999 and 3 January 22, 2000 Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended January 23, 1999 5 and January 22, 2000. Notes to Unaudited Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of 20 -23 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures 24 About Market Risk -1- Weight Watchers International, Inc. and Subsidiaries (Condensed Consolidated Balance Sheets (in thousands) - ----------------------------------------------------
April 24, January 22, 1999 2000 Assets --------- ----------- (unaudited) Current assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,515 $ 34,446 Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,403 13,988 Notes receivable, current . . . . . . . . . . . . . . . . . . . . . . . . . 3,266 1,391 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,580 11,444 Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 7,598 7,605 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,609 -- Due from related parties . . . . . . . . . . . . . . . . . . . . . . . . . 133,783 -- -------- --------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 186,754 68,874 Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 8,725 7,168 Notes and other receivables, noncurrent . . . . . . . . . . . . . . . . . . . 19,165 7,163 Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,714 154,383 Trademarks and other intangible assets, net . . . . . . . . . . . . . . . . . 8,113 7,977 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,133 74,712 Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . -- 15,097 Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 830 553 -------- --------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $371,434 $ 335,927 ======== ========= Liabilities, Redeemable Preferred Stock, and Parent Company's Investment/Stockholders' Deficit Current Liabilities Short-term borrowings and current portion of long-term debt . . . . . . . . $ 7,854 $ 10,590 Short-term borrowings due to related party . . . . . . . . . . . . . . . . 16,250 1,019 Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . 49,905 58,848 Foreign currency contract payable . . . . . . . . . . . . . . . . . . . . . 7,169 -- Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,962 5,998 Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,414 2,622 -------- --------- Total current liabilities 95,554 79,077 Long-term debt 15,500 477,260 Deferred income taxes 8,228 3,474 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,204 1,860 -------- --------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,486 561,671 Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . -- 25,000 Parent company's investment/stockholders' deficit . . . . . . . . . . . . . . 248,948 (250,744) -------- --------- Total liabilities, redeemable preferred stock, Parent company's investment $371,434 $ 335,927 and stockholders' deficit . . . . . . . . . . . . . . . . . . . . . . . . ======== =========
The accompanying notes are an integral part of the consolidated financial statements. -2- Weight Watchers International, Inc. and Subsidiaries (Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)(in thousands) - -------------------------------------------------------------------------
Three Months Ended ---------------------------------------------- January 23, January 22, 1999 2000 ---------------------- ---------------------- (unaudited) Total revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89,403 $ 90,507 Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,104 51,870 -------- -------- Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,299 38,637 Marketing expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,863 12,666 Selling, general and administrative expenses . . . . . . . . . . . . . . . . 12,318 11,252 -------- -------- Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,118 14,719 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,327 859 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,607) (15,042) Other income (expenses), net . . . . . . . . . . . . . . . . . . . . . . . . (11,199) 3,869 -------- -------- Income before income taxes and minority interests . . . . . . . . . . . . . 20,639 4,405 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 8,714 3,382 -------- -------- Income before minority interest . . . . . . . . . . . . . . . . . . . . . . 11,925 1,023 Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419 111 -------- -------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,506 912 Other comprehensive loss Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . (13,873) (66) -------- -------- Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . (2,367) (846) ======== ========
The accompanying notes are an integral part of the consolidated financial statements. -3- Weight Watchers International, Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income (in thousands) - ------------------------------------------------------------------------
Three Months Ended ---------------------------------------------- January 23, January 22, 1999 2000 ---------------------- ---------------------- (unaudited) Total revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $253,405 $266,712 Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,779 138,526 -------- -------- Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,626 128,186 Marketing expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,188 32,841 Selling, general and administrative expenses . . . . . . . . . . . . . . . . 35,327 33,470 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 3,345 -------- -------- Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,111 53,530 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,740 5,434 Other income (expenses), net . . . . . . . . . . . . . . . . . . . . . . . . (7,002) (21,516) Income before income taxes and minority interests . . . . . . . . . . . . . (3,726) (492) -------- -------- Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 58,123 36,956 Income before minority interest . . . . . . . . . . . . . . . . . . . . . . 24,588 16,007 Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,535 20,949 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,094 703 -------- -------- Other comprehensive income currency translation adjustments . . . . . . . . . 32,441 20,246 Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . 30,160 12,399 -------- -------- $ 62,601 $ 32,645 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. -4- Weight Watchers International, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in thousands) - --------------------------------------------------------------
Nine Months Ended ---------------------------------------------- January 23, January 22, 1999 2000 ---------------------- ---------------------- (unaudited) Cash provided by operating activities $ 23,209 $ 24,936 -------- -------- Investing activities Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . -- (15,900) Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,465) (177) -------- -------- Cash used for investing activities (1,465) (16,077) -------- -------- Financing activities Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . -- 491,452 Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . -- (324,476) Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . -- (15,696) Parent settlements and capital contributions, net . . . . . . . . . . . . . (14,470) (133,674) Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,772) (9,112) -------- -------- Cash (used for) provided by financing activities (20,242) 8,494 -------- -------- Effect of exchange rate changes on cash and cash equivalents . . . . . . . (34) (2,422) Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . 1,468 14,931 Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . 11,829 19,515 -------- -------- Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . 13,297 34,446 ======== ======== Noncash financing and investing activities: Deferred tax asset, net of valuation allowance, recorded as a reduction of stockholders' deficit, in 1999, in conjunction with the recapitalization of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,100 Redeemable preferred stock, issued to H.J. Heinz . . . . . . . . . . . . . $ 25,000
The accompanying notes are an integral part of the consolidated financial statements. -5- Weight Watchers International, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements - -------------------------------------------------------------- 1. General The accompanying consolidated financial statements include the accounts of Weight Watchers International, Inc. and Subsidiaries (the "Company"). The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include amounts that are based on management's best estimates and judgments. While all available information has been considered, actual amounts could differ from those estimates. The consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation. These statements should be read in conjunction with the combined financial statements and related notes which appear in the Company's Offering Circular, dated September 29, 1999. 2. Recapitalization On September 29, 1999, the Company effected a recapitalization and stock purchase agreement ("Agreement") with its former parent, H.J. Heinz Company ("Heinz"). The Company redeemed shares of common stock from Heinz for $349.5 million. The $349.5 million consisted of $324.5 million of cash and $25.0 million of the Company's redeemable Series A preferred stock. After the redemption, Artal Luxembourg S.A. purchased 94% of the Company's remaining common stock from Heinz for $223.7 million. The recapitalization and stock purchase was financed through borrowings under credit facilities amounting to approximately $237.0 million and by issuing Senior Subordinated Notes amounting to $255.0 million, due 2009. The balance of the borrowings was utilized to refinance debt incurred prior to the Agreement relating to the transfer of ownership and acquisition of the minority interest in the Weight Watchers businesses that operate in Australia and New Zealand. The acquisition of the minority interest resulted in approximately $15.9 million of goodwill. In connection with the recapitalization, the Company incurred approximately $8.3 million in transaction costs and $15.7 million in deferred financing costs. For U.S. Federal and State tax purposes, the recapitalization is being treated as a taxable sale under Section 338(h)(10) of the Internal Revenue Code of 1986 as amended. As a result, for tax purposes, the Company will record a step-up in the tax basis of net assets. For financial statement purposes, a valuation allowance of approximately $72.1 million has been established against the corresponding deferred tax asset as management has concluded it is more likely than not that this amount will not be utilized to reduce future tax payments. 3. Redeemable Preferred Stock The Company issued 1.0 million shares of Series A Preferred Stock in conjunction with the recapitalization transaction. Holders of the Series A Preferred Stock are entitled to receive dividends at an annual rate of 6% payable annually in arrears. The Company has recorded a $500,000 dividend which is included in accrued expenses at January 22, 2000. The liquidation preference of the Series A Preferred Stock is $25 per share. If there is a liquidation, dissolution or winding up, the holders of shares of Series A Preferred Stock are entitled to be paid out of the Company assets available for distribution to shareholders an -6- Weight Watchers International, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements - -------------------------------------------------------------- amount in cash equal to the $25 liquidation preference per share plus all accrued and unpaid dividends prior to the distribution of any assets to holders of shares of common stock. Except as required by law, the holders of the preferred stock have no voting rights with respect to their shares of preferred stock, except that (1) the approval of holders of a majority of the outstanding shares of preferred stock, voting as a class, is required to amend, repeal or change any of the provisions of our certificate of incorporation in any manner that would alter or change the powers, preferences or special rights of the shares of preferred stock in a way that would affect them adversely and (2) the consent of each holder of Series A Preferred Stock is required for any amendment that reduces the dividend payable on or the liquidation value of the Series A Preferred Stock. The Company may redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, at the Company's option at a price per share equal to 100% of its liquidation value plus all accrued and unpaid dividends. In addition, the Series A Preferred Stock is redeemable at the option of its holders upon the occurrence of a change of control or upon a sale of our common stock by Artal in a registered public offering. If that occurs, the redemption price will be equal to 100% of the liquidation value plus accrued and unpaid dividends. 4. Long-Term Debt In connection with the recapitalization, the Company entered into a credit facility ("Credit Facility") with The Bank of Nova Scotia, Credit Suisse First Boston and certain other lenders providing (i) a $75.0 million term loan A facility ("Term Loan A"), (ii) a $75.0 million term loan B facility ("Term Loan B"), (iii) an $87.0 million transferable loan certificate ("TLC") and (iv) a revolving credit facility with borrowings up to $30.0 million ("Revolving Credit Facility"). Borrowings under the Credit Facility are paid quarterly and initially bear interest at a rate equal to LIBOR plus (a) in the case of Term Loan A and the Revolving Credit Facility, 3.25% or, at the Company's option, the alternate base rate, as defined, plus 2.25% or (b) in the case of Term Loan B and the TLC, 4.00% or, at the Company's option, the alternate base rate plus 3.00%. At January 22, 2000, the interest rates were 9.0725% for Term Loan A and 9.8225% for Term Loan B and the TLC. Borrowings under Term Loan A and the Revolving Credit Facility mature in six years and Term Loan B and the TLC mature in seven years. Assets of the Company collateralize the Credit Facility. In addition, the Company issued $150.0 million USD denominated and 100.0 million EUR denominated principal amount of 13% Senior Subordinated Notes due 2009 (the "Notes") to qualified institutional buyers under a private placement offering pursuant to Rule 144A. At January 22, 2000 the 100.0 million EUR notes translated into $100.9 million USD denominated equivalent. The impact of the change in foreign exchange rates related to euro denominated debt are reflected in the income statement. Interest is payable on the Notes semi-annually on April 1 and October 1 of each year, commencing April 1, 2000. The Company uses interest rate swaps and foreign currency forward contracts in association with its debt (see footnote 6). The Notes are uncollateralized senior subordinated obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness of the Company, including the Credit Facility. Each of the -7- Weight Watchers International, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements - -------------------------------------------------------------- aforementioned debt facilities contains restrictive covenants and requires the Company to maintain certain financial ratios, as defined. The aggregate amounts of existing long-term debt maturing in each of the next five years and thereafter are as follows: (in thousands) 2000 $ 10,590 2001 14,120 2002 14,120 2003 14,120 2004 and thereafter 434,900 487,850 --------
5. Employee Benefits Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, if the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense will be recorded. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement 123). Incentive Compensation On December 16, 1999, the Board of Directors adopted the Company's "1999 Stock Purchase and Option Plan" (the "Plan"). The Plan is designed to promote the long-term financial interests and growth of the Company and its subsidiaries by attracting and retaining management with the ability to contribute to the success of the business. The Plan is to be administered by the Board of Directors or a committee thereof. Such grants may take the following forms in the Committee's sole discretion: Incentive Stock Options, Other Stock Options (other than incentive options), Stock Appreciation Rights, Restricted Stock, Purchase Stock, Dividend Equivalent Rights, Performance Units, Performance Shares and Other Stock -Based Grants. The maximum number shares available for grant under this Plan shall be 1,200,000 shares of authorized Common Stock as of the effective date of the Plan. Pursuant to the Plan, the Board of Directors authorized the Company to enter into agreements under which certain members of management may receive Non-Qualified Time and Performance Stock Options providing them the opportunity to purchase shares of the Company's Common Stock at an exercise price of $10 per share. The options are exercisable based on the terms outlined in the agreement. -8- Weight Watchers International, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements - -------------------------------------------------------------- Under the stock purchase component of the plan discussed above, 318,000 shares of common stock were sold to 43 members of the Company's management group at $10 a share. 6. Savings Plans The Company sponsors the Weight Watchers Savings Plan for salaried and hourly employees, a defined contribution plan which provides for employer matching contributions up to 100% of the first 3% of an employee's eligible compensation. The Savings Plan also permits employees to contribute between 1% and 13% of eligible compensation on a pre-tax basis. The Company also sponsors the Weight Watchers Profit Sharing Plan for all full-time salaried employees who are eligible to participate in the Savings Plan (except for certain senior management personnel), which provides for a guaranteed monthly employer contribution on behalf of each participant based on the participant's age and a percentage of the participant's eligible compensation. The Profit Sharing Plan also has a supplemental employer contribution component, based on the Company's achievement of certain annual performance targets, which may be determined annually by the Company's board of directors. The Company also reserves the right to make additional discretionary contributions to the Profit Sharing Plan. For certain senior management personnel the Company sponsors the Weight Watchers Executive Profit Sharing Plan. Under the IRS definition the plan is considered a Nonqualified Deferred Compensation Plan. There is a promise of payment by the organization made on the employees behalf instead of an individual account with a cash balance. The account is valued at the end of each fiscal month, based on an annualized interest rate of prime plus 2%, with an annualized cap of 15%. The Company is currently applying for a determination letter to qualify Weight Watchers Savings Plan under section 401 (a) of the Code. Based on review, it is the Company's opinion, that the Internal Revenue Service will issue a favorable determination letter as to the qualified status of the Plan. 7. Financial Instruments The Company conducts classroom meetings globally, with facilities throughout the world. The Company can be exposed to market risks from fluctuations in interest rates and foreign exchange rates. To reduce this risk, the Company uses derivative financial instruments. The Company does not use derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged instruments. The Company uses interest rate swaps to hedge portions of interest payable on its debt. At January 22, 2000, the Company had a short-term interest rate swap contract with a notional amount of USD237.0 million to effectively convert variable interest based on LIBOR to fixed interest. The Company also had long-term interest rate swap contracts with notional amounts of USD 21.0 million, EUR 24.0 million and GBP 3.0 million. The Company uses foreign currency forward contracts to more properly align the underlying sources of cash flows with debt servicing requirements. At January 22, 2000 the Company had long-term foreign currency forward contracts receivable with notional amounts of USD 44.0 -9- Weight Watchers International, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements - -------------------------------------------------------------- million and EUR 52.0 million offset by foreign currency forward contracts payable with notional amounts of GBP 59.2 million. 8. WeightWatchers.com Note and Warrant Agreement The Company has a 19.8% equity investment in a corporation called WeightWatchers.com and has agreed to loan an aggregate principal amount of $10.0 million at any time or from time to time prior to October 31, 2000. The unpaid principal amount under the note will bear interest at a rate of 11% per year. All principal and interest outstanding under the note will be repayable on December 30, 2000. The note may be prepaid at any time and from time to time, in whole or in part, without premium or penalty. WeightWatchers.com as of January 22, 2000 owes the Company $600,000. Under a warrant agreement entered into with WeightWatchers.com, the Company has received warrants to purchase an additional 20.2% of WeightWatchers.com's common stock in connection with the loans described above. These warrants will expire on November 24, 2009 and may be exercised at a price of $500 per share. The exercise price and the number of shares of WeightWatchers.com's common stock available for purchase upon exercise of the warrants may be adjusted from time to time upon the occurrence of certain events. 9. Income Taxes The effective income tax rate for the three months ended January 22, 2000 was 77% due to valuation allowances required in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109). 10. Guarantor Subsidiaries The Company's payment obligations under the Senior Subordinated Notes are fully and unconditionally guaranteed on a joint and several basis by the following wholly-owned subsidiaries: 58 WW Food Corp.; Waist Watchers, Inc.; Weight Watchers Camps, Inc.; W.W. Camps and Spas, Inc.; Weight Watchers Direct, Inc.; W/W Twentyfirst Corporation; W.W. Weight Reduction Services, Inc.; W.W.I. European Services Ltd.; W.W. Inventory Service Corp.; Weight Watchers North America, Inc.; Weight Watchers UK Holdings Ltd.; Weight Watchers International Holdings Ltd.; Weight Watchers (U.K.) Limited; Weight Watchers (Accessories & Publication) Ltd.; Weight Watchers (Food Products) Limited; Weight Watchers New Zealand Limited; Weight Watchers International Pty Limited; Fortuity Pty Ltd.; and Gutbusters Pty Ltd. (collectively, the "Guarantor Subsidiaries"). The obligations of each Guarantor Subsidiary under its guarantee of the Notes are subordinated to such subsidiary's obligations under its guarantee of the new senior credit facility. The following presentations are condensed consolidating financial information for Weight Watchers International, Inc. ("Parent Company"), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries (primarily companies incorporated in European countries other than the United Kingdom). In the Company's opinion, separate financial statements and other disclosures concerning each of the Guarantor Subsidiaries would not provide additional information that is material to investors. Therefore, the Guarantor Subsidiaries are combined in the presentation below. Investments in subsidiaries are accounted for by the Company on the equity method of accounting. Earnings of subsidiaries are, therefore, -10- Weight Watchers International, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements - -------------------------------------------------------------- reflected in the Company's investments in subsidiaries' accounts. The elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. -11- Weight Watchers International, Inc. and Subsidiaries Supplemental Unaudited Condensed Consolidating Balance Sheet As of January 22, 2000 (in thousands) - ------------------------------------------------------------
Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- -------------- ------------ ------------- Assets Current assets Cash and cash equivalents . . . . . . . . . . . $ 3,880 $ 21,847 $ 8,719 $ -- $ 34,446 Receivables, net . . . . . . . . . . . . . . . 5,833 7,007 1,148 -- 13,988 Notes receivable, current . . . . . . . . . . . 1,391 -- -- -- 1,391 Inventories . . . . . . . . . . . . . . . . . . -- 9,153 2,291 -- 11,444 Prepaid expenses and other current assets . . . 698 5,075 1,832 -- 7,605 Deferred income taxes . . . . . . . . . . . . . 2,846 (2,846) -- -- -- Due from related parties . . . . . . . . . . . -- -- -- -- -- Intercompany receivables/(payables) . . . . . . (93,139) 91,528 1,611 -- --------- --------- -------- --------- --------- Total current assets (78,491) 131,764 15,601 -- 68,874 Investment in subsidiaries . . . . . . . . . . . 152,941 -- -- (152,941) -- Property and equipment, net . . . . . . . . . . . 1,785 4,061 1,322 -- 7,168 Notes and other receivables, noncurrent . . . . . 7,163 -- -- -- 7,163 Goodwill, net . . . . . . . . . . . . . . . . . . 26,188 127,392 803 -- 154,383 Trademarks and other intangible assets, net . . . 2,074 5,894 9 -- 7,977 Deferred income taxes . . . . . . . . . . . . . . 76,999 (2,287) -- -- 74,712 Deferred financing costs . . . . . . . . . . . . 15,097 -- -- 15,097 Other noncurrent assets . . . . . . . . . . . . . 75 285 193 -- 553 --------- -------- -------- --------- --------- Total assets . . . . . . . . . . . . . . . . . $ 203,831 $267,109 $ 17,928 $(152,941) $ 335,927 ========= ======== ======== ========= ========= Liabilities, Redeemable Preferred Stock, and Stockholders' Equity (Deficit) Current liabilities Short-term borrowings and current portion of long-term debt . . . . . . . . . . . . . . . . $ 9,938 $ 652 $ -- $ -- $ 10,590 Short-term borrowings due to related party . . 1,019 -- -- -- 1,019 Accounts payable and accrued expenses 23,093 27,048 8,707 -- 58,848 Income taxes . . . . . . . . . . . . . . . . . 1,589 3,022 1,387 -- 5,998 Deferred revenue . . . . . . . . . . . . . . . -- 1,798 824 -- 2,622 --------- -------- -------- --------- --------- Total current liabilities 35,639 32,520 10,918 -- 79,077 Long--term debt . . . . . . . . . . . . . . . . . 390,913 86,347 -- -- 477,260 Deferred income taxes . . . . . . . . . . . . . . 1,903 227 1,344 -- 3,474 Other . . . . . . . . . . . . . . . . . . . . . . 1,120 346 394 -- 1,860 --------- -------- -------- --------- --------- Total liabilities 429,575 119,440 12,656 -- 561,671 Redeemable preferred stock 25,000 -- -- -- 25,000 Stockholders' equity (deficit) $(250,744) $147,669 $ 5,272 $(152,941) $(250,744) --------- -------- -------- --------- --------- Total liabilities, redeemable preferred stock $ 203,831 $267,109 $ 17,928 $(152,941) $ 335,927 and stockholders' equity (deficit) ========= ======== ======== ========= =========
-12- Weight Watchers International, Inc. and Subsidiaries Supplemental Unaudited Condensed Consolidating Balance Sheet As of April 24, 1999 (in thousands) - ------------------------------------------------------------
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- ------------- ------------- ------------- Assets Current assets Cash and cash equivalents . . . . . . . . . . . $ (74) $ 12,376 $ 7,213 $ -- $ 19,515 Receivables, net . . . . . . . . . . . . . . . 5,134 4,364 1,905 -- 11,403 Notes receivable, current . . . . . . . . . . . 3,266 -- -- -- 3,266 Inventories . . . . . . . . . . . . . . . . . . -- 5,775 1,805 -- 7,580 Prepaid expenses and other current assets . . . 856 4,588 2,154 -- 7,598 Deferred income taxes . . . . . . . . . . . . . 1,758 (1,949) 3,800 -- 3,609 Due from related parties . . . . . . . . . . . 1,034 242 132,507 -- 133,783 Intercompany receivables/(payables) . . . . . . 103,588 (107,373) 3,785 -- -- -------- -------- -------- --------- -------- Total current assets 115,562 (81,977) 153,169 -- 186,754 Investment in subsidiaries . . . . . . . . . . . 117,732 -- -- (117,732) -- Property and equipment, net . . . . . . . . . . . 1,981 5,231 1,513 -- 8,725 Notes and other receivables, noncurrent . . . . . 10,295 -- 8,870 -- 19,165 Goodwill, net . . . . . . . . . . . . . . . . . . 27,254 115,568 892 -- 143,714 Trademarks and other intangible assets, net . . . 2,335 5,745 13 -- 8,113 Deferred income taxes . . . . . . . . . . . . . . (22) 4,155 -- -- 4,133 Other noncurrent assets . . . . . . . . . . . . . 138 510 182 830 -------- -------- -------- --------- -------- Total assets . . . . . . . . . . . . . . . . . $275,295 $ 49,232 $164,639 $(117,732) $371,434 ======== ======== ======== ========= ======== Liabilities, Redeemable Preferred Stock, and Stockholders' Equity (Deficit) Current liabilities Short-term borrowings and current portion of long-term debt . . . . . . . . . . . . . . . . $ 1,164 $ -- $ 6,690 $ -- $ 7,854 Short-term borrowings due to related party . . 16,638 (388) -- -- 16,250 Accounts payable and accrued expenses . . . . . 8,787 30,876 10,242 -- 49,905 Foreign currency contract payable . . . . . . . -- -- 7,169 -- 7,169 Income taxes . . . . . . . . . . . . . . . . . (11,168) 17,118 2,012 -- 7,962 Deferred revenue . . . . . . . . . . . . . . . -- 5,680 734 -- 6,414 -------- -------- -------- --------- -------- Total current liabilities 15,421 53,286 26,847 -- 95,554 Long-term debt . . . . . . . . . . . . . . . . . 15,500 -- -- -- 15,500 Deferred income taxes . . . . . . . . . . . . . . (2,366) 10,338 256 -- 8,228 Other . . . . . . . . . . . . . . . . . . . . . . -- 2,659 545 -- 3,204 Total liabilities 28,555 66,283 27,648 -- 122,486 Redeemable preferred stock . . . . . . . . . . . -- -- -- -- -- Parent company's investment . . . . . . . . . . . 246,740 (17,051) 136,991 (117,732) 248,948 -------- -------- -------- --------- -------- Total liabilities, Redeemable preferred $275,295 $ 49,232 $164,639 $(117,732) $371,434 stock, and stockholders' equity (deficit) . ======== ======== ======== ========= ========
The accompanying notes are an integral part of the consolidated financial statements. -13- Weight Watchers International, Inc. and Subsidiaries Supplemental Unaudited Condensed Consolidating Statement of Operations For the Three Months Ended January 23, 1999 (in thousands) - ----------------------------------------------------------------------
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- ------------- ------------- ------------- Total revenues, net . . . . . . . . . . . . . . . $ 17,061 $55,695 $16,647 $ -- $89,403 Cost of revenues . . . . . . . . . . . . . . . . 1,054 30,593 10,457 -- 42,104 -------- ------- ------- ------- ------- Gross profit . . . . . . . . . . . . . . . . . 16,007 25,102 6,190 -- 47,299 Marketing expenses . . . . . . . . . . . . . . . 4,599 7,713 2,551 -- 14,863 Selling, general and administrative . . . . . . . 5,820 4,606 1,892 -- 12,318 -------- ------- ------- ------- ------- Operating income . . . . . . . . . . . . . . . 5,588 12,783 1,747 -- 20,118 Interest income . . . . . . . . . . . . . . . . . 109 1,225 2,993 -- 4,327 Interest expense . . . . . . . . . . . . . . . . (878) (114) (1,615) -- (2,607) Other expenses, net . . . . . . . . . . . . . . . (600) (594) (5) -- (1,199) Equity in income of consolidated subsidiaries . . 3,753 -- -- (3,753) -- Franchise commission income (loss) . . . . . . . 1,878 (1,319) (559) -- -- -------- ------- ------- ------- ------- Income before income taxes and minority interest. 9,850 11,981 2,561 (3,753) 20,639 Provision for income taxes . . . . . . . . . . . -- 6,632 2,082 -- 8,714 -------- ------- ------- ------- ------- Income before minority interest . . . . . . . . . 9,850 5,349 479 (3,753) 11,925 Minority interest . . . . . . . . . . . . . . . . -- 301 118 -- 419 Net income . . . . . . . . . . . . . . . . . . . 9,850 5,048 361 (3,753) 11,506 ======== ======= ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. -14- Weight Watchers International, Inc. and Subsidiaries Supplemental Unaudited Condensed Consolidating Statement of Operations For the Three Months ended January 22, 2000 (in thousands) - ----------------------------------------------------------------------
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- ------------- ------------- ------------- Total revenues, net $ 7,176 $65,867 $17,464 $ -- $90,507 Total costs 1,672 38,880 11,318 -- 51,870 -------- ------- ------- -------- ------- Gross profit 5,504 26,987 6,146 -- 38,637 Marketing expenses 3,322 6,960 2,384 -- 12,666 Selling, general and administrative 4,605 4,440 2,207 -- 11,252 -------- ------- ------- -------- ------- Operating income (loss) (2,423) 15,587 1,555 -- 14,719 Interest income 460 137 262 -- 859 Interest expense (12,581) (2,454) (7) -- (15,042) Other income (expenses), net 4,700 (814) (17) -- 3,869 Equity in income of consolidated subsidiaries 2,821 -- -- (2,821) -- Franchise commission income (loss) 3,036 (2,497) (539) -- -- -------- ------- ------- -------- ------- Income (loss) before income taxes and minority interest (3,987) 9,959 1,254 (2,821) 4,405 Provisions for (benefit from) income taxes (4,899) 7,400 881 -- 3,382 -------- ------- ------- -------- ------- Income before minority interest 912 2,559 373 (2,821) 1,023 Minority interest -- 111 -- 111 -------- ------- ------- -------- ------- Net Income $ 912 $ 2,559 $ 262 $ (2,821) $ 912 ======== ======= ======= ======== =======
The accompanying notes are an integral part of the consolidated financial statements. -15- Weight Watchers International, Inc. and Subsidiaries Supplemental Unaudited Condensed Consolidating Statement of Operations For the Nine Months ended January 23, 1999 (in thousands) - ----------------------------------------------------------------------
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- ------------- ------------- ------------- Total revenues, net $32,498 $176,981 $43,926 $ -- $253,405 Total costs 2,354 97,097 27,328 -- 126,779 ------- -------- ------- -------- -------- Gross profit 30,144 79,884 16,598 -- 126,626 Marketing expenses 7,626 20,702 5,860 -- 34,188 Selling, general and administrative 16,588 13,559 5,180 -- 35,327 ------- -------- ------- -------- -------- Operating income (loss) 5,930 45,623 5,558 -- 57,111 Interest income 406 2,907 8,427 -- 11,740 Interest expense (2,503) (204) (4,295) -- (7,002) Other income (expenses), net (1,457) (2,292) 23 -- (3,726) Equity in income of consolidated subsidiaries 19,174 -- -- (19,174) -- Franchise commission income (loss) 5,105 (3,744) (1,361) -- -- ------- -------- ------- -------- -------- Income (loss) before income taxes and minority interest 26,655 42,290 8,352 (19,174) 58,123 Provisions for (benefit from) income taxes (270) 20,647 4,211 -- 24,588 ------- -------- ------- -------- -------- Income before minority interest 26,925 21,643 4,141 (19,174) 33,535 Minority interest -- 807 287 -- 1,094 ------- -------- ------- -------- -------- Net Income $26,925 $ 20,836 $ 3,854 (19,174) $ 32,441 ======= ======== ======= ======== ========
The accompanying notes are an integral part of the consolidated financial statements. -16- Weight Watchers International, Inc. and Subsidiaries Supplemental Unaudited Condensed Consolidating Statement of Operations For the Nine Months ended January 22, 2000 (in thousands) - ----------------------------------------------------------------------
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- ------------- ------------- ------------- Total revenues, net $ 23,114 $197,907 $45,691 $ -- $266,712 Cost of revenues 2,801 106,625 29,100 -- 138,526 -------- -------- ------- -------- -------- Gross profit 20,313 91,282 16,591 -- 128,186 Marketing expenses 6,614 20,359 5,868 -- 32,841 Selling, general and administrative 12,540 15,412 5,518 -- 33,470 Transaction costs 8,247 98 -- -- 8,345 -------- -------- ------- -------- -------- Operating income (loss) (7,088) 55,413 5,205 -- 53,530 Interest income 1,371 1,664 2,399 -- 5,434 Interest expense (17,209) (3,070) (1,237) -- (21,516) Other income (expenses), net 516 (924) (84) -- (492) Equity in income of consolidated subsidiaries 34,085 -- -- (34,085) -- Franchise commission income (loss) 6,788 (5,104) (1,684) -- -- -------- -------- ------- -------- -------- Income before income taxes and minority interest 18,463 47,979 4,599 (34,085) 36,956 Provision for (benefit from) income taxes (1,783) 16,180 1,610 -- 16,007 -------- -------- ------- -------- -------- Income before minority interest 20,246 31,799 2,989 (34,085) 20,949 Minority interest -- 446 257 -- 703 -------- -------- ------- -------- -------- Net income $ 20,246 $ 31,353 $ 2,732 $(34,085) $ 20,246 ======== ======== ======= ======== ========
The accompanying notes are an integral part of the consolidated financial statements. -17- Weight Watchers International, Inc. and Subsidiaries Supplemental Unaudited Condensed Consolidating Statement of Cash Flows For the Nine Months ended January 23, 1999 (in thousands) - ----------------------------------------------------------------------
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- ------------- ------------- ------------- Cash provided by (used for) operating activities $ (5,484) $46,806 $1,061 $(19,174) $23,209 -------- ------- ------ -------- ------- Investing activities Acquisitions, net of cash acquired -- -- -- -- -- Other, net (265) (773) (427) -- (1,465) -------- ------- ------ -------- ------- Cash used for investing activities (265) (773) (427) -- (1,465) -------- ------- ------ -------- ------- Financing activities Proceeds from borrowings -- -- -- -- -- Repurchase of common stock -- -- -- -- -- Deferred financing costs -- -- -- -- -- Parent settlements and capital contributions, net 11,383 (41,434) 3,316 12,265 (14,470) Other, net (6,386) (2,829) (3,250) 6,693 (5,772) -------- ------- ------ -------- ------- Cash provided by (used for) financing activities 4,997 44,263 66 18,958 (20,242) -------- ------- ------ -------- ------- Effect of exchange rate changes on cash and cash equivalents 856 (878) (228) 216 (34) Net increase in cash and cash equivalents 104 892 472 -- 1,468 Cash and cash equivalents, beginning of period (104) 5,800 6,133 -- 11,829 -------- ------- ------ -------- ------- Cash and cash equivalents, end of period $ -- $ 6,692 $6,605 $ -- $13,297 ======== ======= ====== ======== =======
The accompanying notes are an integral part of the consolidated financial statements. -18- Weight Watchers International, Inc. and Subsidiaries Supplemental Unaudited Condensed Consolidating Statement of Cash Flows For the Nine Months ended January 22, 2000 (in thousands) - ----------------------------------------------------------------------
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- ------------- ------------- ------------- Cash provided by operating activities $ (37,908) $ 3,066 $ 18,126 $(34,164) $ 24,936 --------- -------- -------- -------- --------- Investing activities Acquisition, net of cash acquired -- (15,900) -- -- (15,900) Other, net (185) 360 (431) 79 (177) --------- -------- -------- -------- --------- Cash used for Investing activities (185) (15,540) (431) 79 (16,077) --------- -------- -------- -------- --------- Financing activities Proceeds from borrowings 404,260 87,129 -- -- 491,452 Repurchase of common stock (324,476) -- -- -- (324,476) Deferred financing costs (15,696) -- -- -- (15,696) Parent settlements and capital contributions, net (96,047) (59,124) (5,485) 26,982 (133,674) Other, net (2,423) (3,121) (11,183) 7,615 (9,112) --------- -------- -------- -------- --------- Cash provided by (used for) financing activities (34,382) 24,947 (16,668) 34,597 8,494 --------- -------- -------- -------- --------- Effect of exchange rate changes on cash and cash equivalents 613 (3,002) 479 (512) (2,422) Net increase in cash and cash equivalents 3,954 9,471 1,506 -- 14,931 Cash and cash equivalents, beginning of period (74) 12,376 7,213 -- 19,515 --------- -------- -------- -------- --------- Cash and cash equivalents, end of period $ 3,880 $ 21,847 $ 8,719 $ -- $ 34,446 ========= ======== ======== ======== =========
The accompanying notes are an integral part of the consolidated financial statements. -19- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ----------------------------------------------------------------------- Overview Weight Watchers International, Inc., headquartered in Woodbury, New York, is the largest provider of weight control programs in the world. It operates in 29 countries through a network of company-owned and franchise operations. On average over 1 million members attend weekly Weight Watchers meetings to receive group support and education about healthful eating patterns, behavior modification and physical activity. On September 29, 1999, the Company effected a recapitalization and stock purchase agreement ("Agreement") with its former parent, H.J. Heinz Company ("Heinz"). The Company redeemed shares of common stock from Heinz for $349.5 million. The $349.5 million consisted of $324.5 million of cash and $25.0 million of the Company's redeemable Series A preferred stock. After the redemption, Artal Luxembourg S.A. purchased 94% of the Company's remaining common stock from Heinz for $223.7 million. The recapitalization and stock purchase was financed through borrowings under credit facilities amounting to approximately $237.0 million and by issuing Senior Subordinated Notes amounting to $150.0 million USD denominated and 100.0 million EUR denominated principal amount, due 2009. A portion of the borrowings was utilized to refinance debt incurred prior to the Agreement relating to the acquisition of the businesses in Australia and New Zealand. The Company's historical condensed consolidated financial statements include the effects of the above transaction as of its closing date, September 29, 1999. Comparison of Three Months Ended January 22, 2000 to Three Months Ended January 23, 1999 Net revenues were $90.5 million for the three months ended January 22, 2000, an increase of 14.3% from $79.2 million (excluding $8.7 million of non-recurring revenue from Warnaco licensing agreement and $1.5 million of discontinued food royalties) for the three months ended January 23, 1999. The increase in net revenues resulted from increased attendance in most of our markets, strong growth in classroom product sales, and an increase in franchise commissions that were partially offset by the lower average meeting fees in the North American company-owned ("NACO") operations resulting from the roll-out of Liberty/Loyalty. Cost of revenues was $51.9 million for the three months ended January 22, 2000, an increase of 23.3% from $42.1 million for the three months ended January 23, 1999. This increase was driven by an increase in product sales and number of meetings held in company-owned areas to accommodate attendance growth. In addition, startup costs relating to both a new registration format and program material associated with the rollout of an innovation in NACO contributed to the increase. An additional factor was the reallocation of approximately $1.0 million of expenses in Australia/New Zealand from selling, general and administrative expenses ("SG&A") to cost of revenues to improve the consistency of accounts across subsidiaries. Marketing expenses were $12.7 million for the three months ended January 22, 2000, a decrease of 14.8% from $14.9 million for the three months ended January 23, 1999. The decrease is primarily due to differences in the scheduling of marketing expenses. -20- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ----------------------------------------------------------------------- Selling, general and administrative expenses declined by 8.1% to $11.3 million for the three months ended January 22, 2000, as compared to the three months ended January 23, 1999. The reallocation of approximately $1.0 million of expenses from SG&A to cost of revenues in Australia/New Zealand to improve consistency of accounts across subsidiaries contributed to the decline. As a result of the above, operating income was $14.7 million for the three months ended January 22, 2000, an increase of 48.5% from $9.9 million (excluding $8.7 million of non-recurring revenue from Warnaco licensing agreement, and $1.5 million of discontinued food royalties), for the three months ended January 23, 1999. Interest Expense increased to $15.0 million for the three months ended January 22, 2000 from $2.6 million for the three months ended January 23, 1999 as a result of borrowings related to the recapitalization and stock purchase agreement. The effective income tax rate for the three months ended January 22, 2000 of 77% increased from 42% for the three months ended January 23, 1999 due to valuation allowances required in accordance with Statement of Financial Accounting Standards No 109, Accounting for Income Taxes (FAS 109). Comparison of Nine Months Ended January 22, 2000 to Nine Months Ended January 23, 1999 Net revenues were $264.9 million for the nine months ended January 22, 2000, (excluding 1.8 million from discontinued food royalties) an increase of 9.9% from $241.0 million (excluding $8.7 million from non-recurring revenue from Warnaco licensing agreement and $3.7 million from discontinued food royalties) for the nine months ended January 23,1999. This increase in net revenues resulted primarily from increased attendance in most of our markets and strong growth in classroom product sales that were partially offset by the lower Liberty/Loyalty average meeting fees in NACO. Cost of revenues was $138.5 million for the nine months ended January 22, 2000, an increase of 9.2% from $126.8 million for the nine months ended January 23,1999. This increase was primarily the result of an increased number of meetings to accommodate attendance growth and growing product sales. Marketing expenses were $32.8 million for the nine months ended January 22, 2000, a decrease of 4.1% from $34.2 million for the nine months ended January 23, 1999. This decrease is primarily due to differences in the scheduling of marketing expenses. Selling, general and administrative expenses declined by 5.1% to $33.5 million (excluding one-time charge of $8.3 million of transaction costs) for the nine months ended January 22, 2000, as compared to the nine months ended January 23,1999. This decrease primarily reflects the reallocation of approximately $1.0 million of expenses from SG&A to cost of revenues in Australia/New Zealand to improve the consistency of accounts across subsidiaries. -21- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ----------------------------------------------------------------------- As a result of the above, operating income was $60.0 million (excluding one-time charge of $8.3 million of transaction costs and $1.8 million in revenue from discontinued food royalties) for the nine months ended January 22, 2000, an increase of 34.2% from $44.7 million (excluding $8.7 million of non-recurring revenue from Warnaco licensing agreement and $3.7 million from discontinued food royalties) for the nine months ended January 23, 1999. Interest Expense increased to $21.5 million for the nine months ended January 22, 2000 from $7.0 million for the nine months ended January 23, 1999 as a result of borrowings related to the recapitalization and stock purchase agreement. Summary Pro Forma Information The unaudited pro forma consolidated statement of operations' information for the three and nine months ended January 23, 1999 and January 22, 2000 give effect to the Recapitalization as if it had occurred at April 26, 1998. It does not purport to be indicative of, or a projection for, the Company's results of operations for any future period or date. The pro forma adjustments are based on available information and upon certain assumptions which the Company believes are reasonable. These pro formas have been prepared consistently with the methodology used in the 144A Offering document.
(in thousands) ------------------------------------------------------------------- Three Months Ended Nine Months Ended -------------------------------- --------------------------------- January 23, January 22, January 23, January 22, 1999 2000 1999 2000 --------------- --------------- --------------- --------------- Total pro forma revenues $87,879 $90,507 $249,748 $264,921 Pro forma net income $3,059 $2,888 $7,872 $12,165 ------- ------- -------- -------- EBITDA $22,756 $22,255 $65,431 $71,354 Adjusted pro forma EBITDA $17,455 $18,250 $62,500 $70,883
-22- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ----------------------------------------------------------------------- EBITDA represents income before income taxes and minority interest plus depreciation, amortization, and net interest expense. Pro forma EBITDA adds back transaction expenses and adjusts revenues and costs for the recapitalization agreement (e.g., elimination of food royalties), the fact that Weight Watchers is now a stand-alone entity, and management's planned restructurings. The exclusion of unrealized foreign currency gains or losses included in Other Expenses and an addback of the minimum Warnaco royalty payment, which had been booked in advance by Heinz but which we received during the period, are the major adjustments made to bridge from the pro forma EBITDA to Adjusted EBITDA. Liquidity and Capital Resources For the nine months ended January 22, 2000, our primary source of funds to meet working capital needs was cash from operations. Cash and cash equivalents increased $14.9 million during the nine months ended January 22, 2000. Cash flows provided by operating activities of $24.9 million and financing activities of $8.5 million were in excess of cash flows used in investing activities of $16.1 million. Cash flows used for investing activities were principally related to the acquisition of the Australian and New Zealand businesses. Cash flows provided by financing activities include proceeds of $491.5 million from borrowings, which is offset by $324.5 million used to repurchase common stock. Capital spending has averaged $2.9 million annually over the last three years and has consisted primarily of leasehold improvements for meeting locations and administrative offices, computer equipment for field staff and call centers and Year 2000 upgrades. Capital expenditures through the nine months ended January 22, 2000 were $1.4 million. We are significantly leveraged. As of January 22, 2000 after reflecting the repurchase of common stock and related borrowings, we have outstanding $487.9 million in aggregate indebtedness, with approximately $30.0 million of additional borrowing capacity available under the revolving credit facility, and total stockholders' deficit of $250.7 million. As a result of the Transactions, the Company's liquidity requirements are significantly increased primarily due to increased debt service obligations. The Company believes that cash flows from operating activities, together with borrowings available under the revolving credit facility, will be sufficient to fund currently anticipated capital investment requirements, debt service requirements and working capital requirements. In addition, we have 1.0 million shares of Series A Preferred Stock issued and outstanding. Holders of our Series A Preferred Stock are entitled to receive dividends at an annual rate of 6% payable annually in arrears. -23- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ----------------------------------------------------------------------- Our ability to fund our capital investment requirements, interest, principal and dividend payment obligations and working capital requirements and to comply with all of the financial covenants under our debt agreements depends on our future operations, performance and cash flow. These are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. Forward-Looking Statements These consolidated financial statements include forward-looking statements including, in particular, the statements about our plans, strategies and prospects under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." We have used the words "may," "will," "expect," "anticipate," "believe," "estimate," "plan," "intend" and similar expressions in these consolidated financial statements to identify forward-looking statements. We have based these forward-looking statements on our current views with respect to future events and financial performance. Actual results could differ materially from those protected in the forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things: - - risks associated with our ability to meet our debt obligations; - - risks associated with the relative success of our marketing and advertising; - - risks associated with the continued attractiveness of our diets; competition, including price competition and competition with self-help weight loss and medical programs; and - - adverse results in litigation and regulatory matters, the adoption of adverse legislation or regulations, more aggressive enforcement of existing legislation or regulations or a change in the interpretation of existing legislation or regulations. -24- Item 3. Quantitative and Qualitative Discussions about Market Risk - ------------------------------------------------------------------ We are exposed to foreign currency fluctuations and interest rate changes. Our exposure to market risk for changes in interest rates relates to the fair value of long-term fixed rate debt and interest expense of variable rate debt. We have historically managed interest rates through the use of, and our long-term debt is currently composed of, a combination of fixed and variable rate borrowings. Generally, the fair market value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. In addition, to reduce this risk, the Company uses derivative financial instruments. The Company does not use derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged instruments. Based on the overall interest rate exposure on our fixed rate borrowings at January 22, 2000, a 10% change in market interest rates would have less than an 8% impact on the fair value of our long-term debt. Based on variable rate debt levels at January 22, 2000, a 10% change in market interest rates would have less than a 3% impact on our interest expense, net. Fluctuations in currency exchange rates may also impact our stockholders' equity. The assets and liabilities of our non-U.S. subsidiaries are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated into U.S. dollars at the weighted average exchange rate for the year. The resulting translation adjustments are recorded in stockholders' equity as accumulated other comprehensive income/(loss). In addition, fluctuations in the value of the euro will cause the U.S. dollar translated amounts to change in comparison to prior periods and may impact interest expense. Furthermore, we will revalue the outstanding euro notes at the end of each period, and the resulting change in value will be reflected in the income statement of the corresponding period. Each of our subsidiaries derives revenues and incurs expenses primarily within a single country, and consequently, does not generally incur currency risks in connection with the conduct of normal business operations. Foreign exchange gains and losses are included in our consolidated statements of income. -25- EX-27 2
5 9-MOS 9-MOS APR-29-2000 APR-25-1999 APR-25-1999 APR-26-1998 JAN-22-2000 JAN-23-1999 34,446 13,295 0 0 14,238 10,819 250 840 11,444 9,739 68,874 191,170 34,447 61,658 27,279 52,498 335,927 378,385 79,077 84,393 0 0 0 0 25,000 0 0 0 (250,744) 269,904 335,927 378,385 266,712 253,405 266,712 253,405 138,526 126,779 213,182 196,294 492 3,726 (757) (133) 21,516 7,002 36,956 58,123 16,007 24,588 20,246 32,441 0 0 0 0 0 0 20,246 32,441 0 0 0 0
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