10-Q 1 y54360e10-q.htm WEIGHT WATCHERS INTERNATIONAL INC. WEIGHT WATCHERS INTERNATIONAL INC.
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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

     
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2001

Commission File no      000-03389      

WEIGHT WATCHERS INTERNATIONAL INC.


(Exact name of Registrant as specified in its charter)
     
Virginia   11-6040273

 
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

175 Crossways Park West, Woodbury, New York 11797-2055


(Address of principal executive offices)      (Zip code)
     
Registrant’s telephone number, including area code:   (516) 390-1400

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes         X            No               

The number of common shares outstanding as of October 31, 2001 was 22,401,500.

 

PART I — FINANCIAL INFORMATION

 


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets
Unaudited Consolidated Statements of Operations
Unaudited Consolidated Statements of Operations
Unaudited Consolidated Statements of Changes in Shareholders’
Unaudited Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters To a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES    
INDEX  

         
Part I. FINANCIAL INFORMATION   Page No.

 
Item 1. Financial Statements
       
Unaudited Consolidated Balance Sheets as of September 29, 2001 and as of December 30, 2000
    2  
Unaudited Consolidated Statements of Operations for the three months ended September 29, 2001 and October 28, 2000
    3  
Unaudited Consolidated Statements of Operations for the nine months ended September 29, 2001 and October 28, 2000
    4  
Unaudited Consolidated Statements of Changes in Shareholders’ Deficit, Parent Company Investment and Comprehensive Income for the nine months ended September 29, 2001, for the eight month period ended December 30, 2000, and for the fiscal year ended April 29, 2000
    5  
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 29, 2001 and October 28, 2000
    6  
Notes to Unaudited Consolidated Financial Statements
    7 – 21  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    22 – 25  
Item 3. Quantitative and Qualitative Disclosures About Market Risk
    26  
       
Part II. OTHER INFORMATION
    27 – 28  

   
Item 1. Legal Proceedings
       
Item 2. Changes in Securities
       
Item 3. Defaults Upon Senior Securities
       
Item 4. Submission of Matters To a Vote of Security Holders
       
Item 5. Other Information
       
Item 6. Exhibits and Reports on Form 8-K
       

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   2
CONSOLIDATED BALANCE SHEETS  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

                       
          September 29,   December 30,
          2001   2000
          (Unaudited)    
ASSETS
               
CURRENT ASSETS
               
 
Cash and cash equivalents
  $ 37,904     $ 44,501  
 
Receivables, net
    17,103       14,678  
 
Notes receivable, current
    2       2,106  
 
Inventories
    19,131       15,044  
 
Prepaid expenses, other
    14,004       17,111  
 
   
     
 
   
TOTAL CURRENT ASSETS
    88,144       93,440  
Property and equipment, net
    9,650       8,145  
Notes and other receivables, noncurrent
    325       5,601  
Goodwill, net
    237,102       150,901  
Trademarks and other intangible assets, net
    6,851       6,648  
Deferred income taxes
    67,207       67,207  
Deferred financing costs, other
    14,170       14,275  
 
   
     
 
   
TOTAL ASSETS
  $ 423,449     $ 346,217  
 
   
     
 
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ DEFICIT
               
CURRENT LIABILITIES
               
 
Portion of long-term debt due within one year
  $ 16,157     $ 14,120  
 
Accounts payable
    7,966       11,989  
 
Accrued liabilities
    67,066       47,636  
 
Income taxes
    15,529       3,660  
 
Deferred revenue
    16,645       5,836  
 
   
     
 
   
TOTAL CURRENT LIABILITIES
    123,363       83,241  
Long-term debt
    464,629       456,530  
Deferred income taxes
    3,070       3,107  
Other
    822       121  
 
   
     
 
   
TOTAL LONG-TERM DEBT AND OTHER LIABILITIES
    468,521       459,758  
Redeemable preferred stock
    25,621       25,996  
Shareholders’ deficit
               
 
Common stock, $0 par; 100,000 shares authorized; issued 23,800 shares at September 29, 2001 and December 30, 2000; outstanding 22,402 shares at September 29, 2001 and 23,800 shares at December 30, 2000
           
 
Treasury stock, at cost, 1,398 shares at September 29, 2001
    (26,572 )      
 
Accumulated deficit
    (152,232 )     (216,507 )
 
Accumulated other comprehensive loss
    (15,252 )     (6,271 )
 
   
     
 
     
TOTAL SHAREHOLDERS’ DEFICIT
    (194,056 )     (222,778 )
 
   
     
 
   
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ DEFICIT
  $ 423,449     $ 346,217  
 
   
     
 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   3
CONSOLIDATED STATEMENTS OF OPERATIONS  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

                   
  Three Months Ended
     
    September 29,    October 28,
    2000   2001
  (Unaudited)
                 
Revenues, net
  $ 144,064     $ 107,582  
Cost of revenues
    65,949       56,057  
 
   
     
 
 
Gross profit
    78,115       51,525  
Marketing expenses
    10,914       11,829  
Selling, general and administrative expenses
    16,222       12,048  
 
   
     
 
 
Operating income
    50,979       27,648  
Interest expense, net
    14,643       13,844  
Other expenses (income), net
    10,077       (168 )
 
   
     
 
 
Income before income taxes and minority interest
    26,259       13,972  
Provision for income taxes
    10,133       3,050  
 
   
     
 
 
Income before minority interest
    16,126       10,922  
Minority interest
    8       14  
 
   
     
 
 
Net income
  $ 16,118     $ 10,908  
 
   
     
 
Preferred stock dividends
    375       375  
 
   
     
 
 
Net income available to common shareholders
  $ 15,743     $ 10,533  
 
   
     
 
Net income per share:
               
 
Basic
  $ 0.69     $ 0.44  
 
   
     
 
 
Diluted
  $ 0.68     $ 0.44  
 
   
     
 
Weighted average common shares outstanding:
               
 
Basic
    22,815       23,800  
 
   
     
 
 
Diluted
    23,156       23,834  
 
   
     
 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   4
CONSOLIDATED STATEMENTS OF OPERATIONS  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

                   
      Nine Months Ended
     
      September 29,   October 28,
      2001   2000
      (Unaudited)
 
               
Revenues, net
  $ 478,340     $ 343,517  
Cost of revenues
    215,093       167,215  
 
   
     
 
 
Gross profit
    263,247       176,302  
Marketing expenses
    51,483       37,119  
Selling, general and administrative expenses
    51,703       40,795  
 
   
     
 
 
Operating income
    160,061       98,388  
Interest expense, net
    42,011       42,862  
Other expenses (income), net
    13,948       (6,762 )
 
   
     
 
 
Income before income taxes and minority interest
    104,102       62,288  
Provision for income taxes
    38,590       19,922  
 
   
     
 
 
Income before minority interest
    65,512       42,366  
Minority interest
    78       240  
 
   
     
 
 
Net income
  $ 65,434     $ 42,126  
 
   
     
 
Preferred stock dividends
    1,125       1,125  
 
   
     
 
 
Net income available to common shareholders
  $ 64,309     $ 41,001  
 
   
     
 
Net income per share:
               
 
Basic
  $ 2.76     $ 1.72  
 
   
     
 
 
Diluted
  $ 2.72     $ 1.72  
 
   
     
 
Weighted average common shares outstanding:
               
 
Basic
    23,327       23,800  
 
   
     
 
 
Diluted
    23,678       23,810  
 
   
     
 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT,  
PARENT COMPANY INVESTMENT AND COMPREHENSIVE INCOME
 
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

                                                                           
                                              Accumulated                        
      Common Stock   Treasury Stock   Additional   Other           Parent        
     
 
  Paid In   Comprehensive   Accumulated   Company’s        
      Shares   Amount   Shares   Amount   Capital   Loss   Deficit   Investment   Total
     
 
 
 
 
 
 
 
 
 
                                                                       
 
Balance at April 24, 1999
    58,748                                                     $ 248,948     $ 248,948  
Net Parent settlements
                                                            (252,883 )     (252,883 )
Recapitalization and settlement of Parent Company investment
    (34,948 )                           $ (72,100 )   $ (12,764 )   $ (268,547 )     3,935       (349,476 )
Deferred tax asset
                                    72,100                               72,100  
Comprehensive Income:
                                                                       
 
Net income
                                                    37,759               37,759  
 
Translation adjustment
                                            10,311                       10,311  
 
                                                                   
 
 
Total Comprehensive Income
                                                                    48,070  
 
                                                                   
 
Preferred stock dividend
                                                    (875 )             (875 )
 
 
   
     
     
     
     
     
     
     
     
 
 
Balance at April 29, 2000
    23,800                               (2,453 )     (231,663 )           (234,116 )
Elimination of foreign subsidiaries one month reporting lag effective April 30, 2000
                                                    1,137               1,137  
Comprehensive income:
                                                                       
 
Net Income
                                                    15,019               15,019  
 
Translation adjustment
                                            (3,818 )                     (3,818 )
 
                                                                   
 
 
Total Comprehensive Income
                                                                    11,201  
 
                                                                   
 
Preferred stock dividend
                                                    (1,000 )             (1,000 )
 
 
   
     
     
     
     
     
     
     
     
 
 
Balance at December 30, 2000
    23,800                               (6,271 )     (216,507 )           (222,778 )
Comprehensive Income:
                                                                       
 
Net Income
                                                    65,434               65,434  
 
Translation adjustment
                                            (2,904 )                     (2,904 )
 
Change in fair value of derivatives accounted for as hedges
                                            (6,077 )                     (6,077 )
 
                                                                   
 
 
Total Comprehensive Income
                                                                    56,453  
 
                                                                   
 
Preferred Stock Dividend
                                                    (1,125 )             (1,125 )
Purchase of Treasury Stock
                    1,428     $ (27,132 )                                 (27,132 )
Sale of Treasury Stock
                    (30 )     560                     (34 )             526  
 
 
   
     
     
     
     
     
     
     
     
 
 
Balance at September 29, 2001
    23,800     $       1,398     $ (26,572 )   $     $ (15,252 )   $ (152,232 )   $     $ (194,056 )
 
 
   
     
     
     
     
     
     
     
     
 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   6
CONSOLIDATED STATEMENTS OF CASH FLOWS  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

                     
        Nine Months Ended
       
        September 29,   October 28,
        2001   2000
        (Unaudited)
 
               
   
Cash provided by operating activities
  $ 120,234     $ 50,093  
 
   
     
 
Investing activities:
               
 
Capital expenditures
    (1,865 )     (2,223 )
 
Advances to equity investment
    (9,044 )     (8,500 )
 
Acquisitions
    (97,853 )     (2,400 )
 
Other items, net
    (1,896 )     (2,595 )
 
   
     
 
   
Cash used for investing activities
    (110,658 )     (15,718 )
 
   
     
 
Financing activities:
               
 
Net (decrease) increase in short-term borrowings
    (622 )     4,893  
 
Proceeds from borrowings
    60,000        
 
Payment of dividends
    (1,500 )     (879 )
 
Payments of long-term debt
    (46,774 )     (10,590 )
 
Deferred financing costs
          (165 )
 
Net Parent advances
          2,078  
 
Purchase of treasury stock
    (27,132 )      
 
Proceeds from issuance of treasury stock
    525        
 
   
     
 
   
Cash used for financing activities
    (15,503 )     (4,663 )
 
   
     
 
Effect of exchange rate changes on cash and cash equivalents
    (670 )     (4,703 )
Net (decrease) increase in cash and cash equivalents
    (6,597 )     25,009  
Cash and cash equivalents, beginning of period
    44,501       34,446  
 
   
     
 
Cash and cash equivalents, end of period
  $ 37,904     $ 59,455  
 
   
     
 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

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 of America 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. This report should be read in conjunction with the Company’s Form 10K for the eight months ended December 30, 2000.
 
2.   Change in Fiscal Year
 
    The Company changed its fiscal year end from the last Saturday of April, to the Saturday closest to December 31st effective with the eight months commencing April 30, 2000.
 
    In the prior periods, in order to facilitate timely reporting, certain foreign subsidiaries ended their fiscal period one month prior to the Company’s fiscal period with no material impact on the consolidated financial statements. Effective April 30, 2000, the one month lag has been eliminated.
 
3.   Acquisitions
 
    On September 4, 2001, the Company completed the acquisition of Weight Watchers of Oregon, Inc., for an aggregate purchase price of $13,500. Substantially all of the purchase price in excess of the net assets acquired was recorded as goodwill. The results of operations are included in the financial statements from the date of acquisition. The acquisition has been accounted for based on Statements of Financial Accounting Standards No. 141 and 142, “Business Combinations” (“SFAS 141”) and “Goodwill and Other Intangible Assets” (“SFAS 142”), respectively. SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for by the purchase method of accounting. SFAS 142 supercedes APB Opinion 17, “Intangible Assets”, and requires goodwill and other intangible assets that have an indefinite useful life to no longer be amortized; however, these assets must be reviewed at least annually for impairment. The Company will adopt SFAS 142 on December 30, 2001 for all business combinations completed prior to July 1, 2001. Management has not yet determined the impact of adoption on the financial position and results of operations of the Company.
 
    On January 16, 2001, the Company completed the acquisition of Weight Watchers’ franchised territories and certain business assets of Weighco Enterprises, Inc., Weighco of Northwest, Inc., and Weighco of Southwest, Inc. (“Weighco”), for an aggregate purchase price of $83,800 plus acquisition costs of approximately $600. The acquisition was financed through additional borrowings of $60,000 obtained pursuant to the Company’s Amended and Restated Credit Agreement, dated January 16, 2001, and cash from operations.
 
    The acquisition has been accounted for under the purchase method of accounting and, accordingly, the results of operations are included in the financial statements from the date of the acquisition.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   8
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

    Assets acquired include inventory ($1,158) and property and equipment ($1,801). The excess of investment over the net book value of assets acquired at the date of acquisition resulted in goodwill of $81,394.
 
    The following table presents unaudited pro forma financial information that reflects the consolidated results of operations of the Company and Weighco as if the acquisition had occurred as of the beginning of the respective periods. This pro forma information does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of future results of operations of the consolidated companies.

                   
      Pro Forma
      Three Months Ended   Nine Months Ended
     
 
      October 28,   October 28,
      2000   2000
 
               
Revenue
  $ 120,563     $ 382,059  
Net income
  $ 11,524     $ 44,472  
Per share information:
               
 
Basic and diluted earnings per share
  $ 0.47     $ 1.82  
 
   
     
 

4.   Recapitalization
 
    On September 29, 1999, the Company entered into a recapitalization and stock purchase agreement (the “Transaction”) with its former parent, H.J. Heinz Company (“Heinz”). In connection with the Transaction, the Company effectuated a stock split of 58,747.6 shares for each share outstanding. The Company then redeemed 34,948 shares of common stock from Heinz for $349,500. The number of shares of the Company’s common stock that was authorized and outstanding prior to the Transaction has been adjusted to reflect the stock split. The $349,500 consisted of $324,500 of cash and $25,000 of the Company’s redeemable Series A Preferred Stock. After the redemption, Artal Luxembourgh S.A. purchased 94% of the Company’s remaining common stock from Heinz for $223,700. The recapitalization and stock purchase was financed through borrowings under credit facilities amounting to approximately $237,000 and the issuance of Senior Subordinated Notes amounting to $255,000, due 2009. The balance of the borrowings was utilized to refinance debt incurred prior to the Transaction 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 $15,900 of goodwill. In connection with the Transaction, the Company incurred approximately $8,300 in transaction costs and $15,900 in deferred financing costs. For U.S. Federal and State tax purposes, the Transaction 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 recorded a step-up in the tax basis of net assets. For financial reporting purposes, a valuation allowance of approximately $72,100 was established against the corresponding deferred tax asset of $144,200. Management concluded, more

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   9
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

    likely than not, that the valuation allowance would not be utilized to reduce future tax payments. The Company will continue to monitor the need to maintain the valuation allowance in future periods.
 
5.   Earnings Per Share
 
    Basic earnings per share (“EPS”) computations are calculated utilizing the weighted average number of common shares outstanding during the periods presented. Diluted EPS includes the weighted average number of common shares outstanding and the effect of common stock equivalents. The following table sets forth the computation of basic and diluted EPS.

                                       
          Three Months Ended   Nine Months Ended
         
 
          September 29,   October 28,   September 29,   October 28,
          2001   2000   2001   2000
Numerator:
                               
 
Net income
  $ 16,118     $ 10,908     $ 65,434     $ 42,126  
 
Preferred stock dividends
    375       375       1,125       1,125  
 
   
     
     
     
 
   
Numerator for basic EPS-income available to common shareholders
  $ 15,743     $ 10,533     $ 64,309     $ 41,001  
 
   
     
     
     
 
   
Numerator for diluted EPS-income available to common shareholders
  $ 15,743     $ 10,533     $ 64,309     $ 41,001  
 
   
     
     
     
 
Denominator:
                               
   
Denominator for basic EPS-weighted-average shares
    22,815       23,800       23,327       23,800  
   
Effect of dilutive securities:
                               
     
Stock options
    341       34       351       10  
 
   
     
     
     
 
   
Denominator for diluted EPS-adjusted weighted-average shares
    23,156       23,834       23,678       23,810  
 
   
     
     
     
 
EPS:
                               
   
Basic EPS
  $ 0.69     $ 0.44     $ 2.76     $ 1.72  
 
   
     
     
     
 
   
Diluted EPS
  $ 0.68     $ 0.44     $ 2.72     $ 1.72  
 
   
     
     
     
 

6.   Treasury Stock
 
    On April 18, 2001, the Company entered into a Put/Call Agreement with Heinz, pursuant to which Heinz acquired the right and option to sell during the period ending on or before May 15, 2002, and the Company acquired the right and option to purchase after that date and on or before August 15, 2002, 1,428 shares of the common stock of the Company owned by Heinz. During the nine months ended September 29, 2001, Heinz has sold all of its shares to the Company at fair value for an aggregate purchase price of $27,132, which was funded with cash from operations.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   10
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

7.   Comprehensive Income
 
    Comprehensive income for the Company includes net income, the effects of foreign currency translation and changes in fair value of derivative instruments.
 
    Comprehensive income is as follows:

                                   
      Three Months Ended   Nine Months Ended
     
 
      September 29,   October 28,   September 29,   October 28,
      2001   2000   2001   2000
Net income
  $ 16,118     $ 10,908     $ 65,434     $ 42,126  
Foreign currency translation adjustment
    950       (5,060 )     (2,904 )     (8,035 )
Change in fair value of derivatives
                               
 
Cumulative effect of the adoption of SFAS 133
                (5,086 )      
 
Current period changes in fair value of derivatives
    (511 )           (991 )      
 
   
     
     
     
 
Comprehensive income
  $ 16,557     $ 5,848     $ 56,453     $ 34,091  
 
   
     
     
     
 

8.   Long-Term Debt
 
    In connection with the Transaction, 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 $75,000 term loan A facility (“Term Loan A”), (ii) a $75,000 term loan B facility (“Term Loan B”), (iii) an $87,000 transferable loan certificate (“TLC”) and (iv) a revolving credit facility with borrowings up to $30,000 (“Revolving Credit Facility”). The Credit Facility was amended and restated on January 16, 2001 to provide for an additional $50,000 in borrowings in connection with the acquisition of Weighco (see Note 3) as follows: (i) Term Loan A was increased by $15,000, (ii) the Revolving Credit Facility was increased by $15,000 to $45,000 and (iii) a new $20,000 term loan D facility (“Term Loan D”). 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%, (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% and (c) in the case of Term Loan D, 3.25% or, at the Company’s option, the alternate base rate plus 2.25%. At September 29, 2001, the interest rates were 5.46% for Term Loan A, 7.58% for Term Loan B, 7.58% for the TLC and 6.98% for Term Loan D. All assets of the Company collateralize the Credit Facility.
 
    In addition, as part of the Transaction, the Company issued $150,000 USD denominated and 100,000 EUR denominated principal amount of 13% Senior Subordinated Notes due 2009 (the “Notes”) to qualified institutional buyers. At September 29, 2001, the 100,000 EUR notes translated into $91,150 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. The Notes are uncollateralized senior subordinated obligations of the Company, subordinated

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   11
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

    in right of payment to all existing and future senior indebtedness of the Company, including the Credit Facility. The notes are guaranteed by certain subsidiaries of the Company.
 
    The Credit Facility contains a number of covenants that, among other things, restrict the Company’s ability to dispose of assets, incur additional indebtedness, or engage in certain transactions with affiliates and otherwise restrict the Company’s corporate activities. In addition, under the Credit Facility, the Company is required to comply with specified financial ratios and tests, including minimum fixed charge coverage and interest coverage ratios and maximum leverage ratios.
 
9.   Derivative Instruments and Hedging Activities
 
    Effective December 31, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related amendment, Statement of Financial Accounting Standards No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” (“SFAS 133”). These standards require that all derivative financial instruments be recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Changes in the fair value of derivatives will be recorded each period in earnings or accumulated other comprehensive loss, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive loss will be included in earnings in the periods in which earnings are affected by the hedged item. As of December 31, 2000, the adoption of these new standards resulted in an adjustment of $5,086 to accumulated other comprehensive loss.
 
    The Company enters into forward and swap contracts to hedge certain transactions denominated in foreign currencies in order to reduce the currency risk associated with fluctuating exchange rates. Such contracts are used primarily to hedge certain intercompany cash flows and for payments arising from certain foreign denominated obligations. In addition, the Company enters into interest rate swaps to hedge a substantial portion of its variable rate debt which are accounted for as cash flow hedges.
 
    As of September 29, 2001, losses of $991 for qualifying hedges, were reported as a component of accumulated other comprehensive loss. For the nine months ended September 29, 2001, the ineffective portion of changes in fair values of cash flow hedges was not material. In addition, fair value adjustments for non-qualifying hedges resulted in a reduction of net income of $1,200 for the nine months ended September 29, 2001. The Company does not anticipate any reclassification to earnings from accumulated other comprehensive loss within the next twelve months.
 
10.   WeightWatchers.com Note and Warrant Agreements
 
    On October 1, 2000, the Company amended its loan agreement with WeightWatchers.com, increasing the aggregate principal amount from $10,000 to $23,500. On that date, the unpaid principal and accumulated interest was rolled over into the new loan. The Company further amended the agreement on May 3, 2001 and on September 10, 2001, increasing the aggregate amount to $28,500 and $34,500, respectively. The principal amount may be advanced at any time or from time to time prior to July 31, 2003. The note bears interest at 13% per year, beginning on January 1, 2002, which interest shall be paid semi-annually starting on March 31, 2002. All principal outstanding under this note will be payable in six semi-annual installments, starting on March 31, 2004. The note may be prepaid at any time in whole or in part, without penalty. During the three month and nine month

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   12
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

    period ended September 29, 2001, the Company advanced WeightWatchers.com $1,200 and $9,044, respectively, pursuant to the note, which were classified in other expenses, net. As of September 29, 2001, $26,200 of principal was outstanding under this note.
 
    Under warrant agreements dated November 24, 1999, October 1, 2000, May 3, 2001, and September 10, 2001, the Company has received warrants to purchase an additional 6,395 shares of WeightWatchers.com’s common stock in connection with the loans that the Company has made to WeightWatchers.com under the note described above. These warrants will expire from November 24, 2009 to September 10, 2011 and may be exercised at a price of $7.14 per share of WeightWatchers.com’s common stock until their expiration. 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.
 
11.   Legal
 
    The Company is not a party to any material pending legal proceedings. The Company has had and continues to have disputes with the Company’s franchisees regarding, among other things, operations and revenue sharing, including the interpretation of franchise territories as they relate to the internet and mail-order products. In addition, due to the nature of its activities, the Company is, at times, subject to pending and threatened legal actions that arise out of the normal course of business. In the opinion of management, based in part upon advice of legal counsel, the disposition of all such matters will not have a material effect on the consolidated results of operations, cash flows or financial position of the Company.
 
12.   Income Taxes
 
    As a result of the Transaction, the Company has provided for a valuation allowance for its deferred tax assets. The determination of the net deferred tax assets deemed realizable was based on available historical evidence, and estimates of future taxable income. This amount may be subject to adjustment based on changes to those factors in future periods.
 
    The primary differences between the U.S. federal statutory tax rate and the Company’s effective tax rate are the valuation allowance and state income taxes. The effective tax rate for the three month and nine month period ended September 29, 2001 were 38.6% and 37.1%, respectively.
 
13.   Subsequent Events
 
    On October 29, 2001, the Company’s Board of Directors declared a 4.70536-for-one stock split to be effective concurrent with the effective date of the registration statement filed by the Company in connection with its initial public offering. In addition, the Company’s Articles of Incorporation will be amended to authorize the issuance of up to one billion shares of common stock, no par value, upon filing of the registration statement.
 
    Accordingly, earnings per share amounts, after giving retroactive effect to the stock split, are presented below for all of the per share amounts disclosed in the financial statements and the notes to the financial statements:

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   13
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

                                     
        Three Months Ended   Nine Months Ended
       
 
        September 29,   October 28,   September 29,   October 28,
        2001   2000   2001   2000
Net income per common share (unaudited):
                               
 
Proforma:
                               
   
Basic
  $ 0.15     $ 0.09     $ 0.59     $ 0.37  
   
Diluted
  $ 0.14     $ 0.09     $ 0.58     $ 0.37  
 
Proforma (giving effect to the Weighco acquisition):
                               
   
Basic
  $ 0.15     $ 0.10     $ 0.59     $ 0.39  
   
Diluted
  $ 0.14     $ 0.10     $ 0.58     $ 0.39  

14.   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 (Exercise) Ltd.; 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.
 
    Presented below is 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 Parent Company on the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Parent Company’s investments in subsidiaries’ accounts. The elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   14
SUPPLEMENTAL UNAUDITED CONSOLIDATING BALANCE SHEET  
AS OF SEPTEMBER 29, 2001  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

                                             
                        Non-                
        Parent   Guarantor   Guarantor                
        Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
       
 
 
 
 
ASSETS
                                       
CURRENT ASSETS
                                       
 
Cash and cash equivalents
  $ 15,457     $ 11,522     $ 10,925     $     $ 37,904  
 
Receivables, net
    5,108       9,456       2,539             17,103  
 
Notes receivable, current
                2             2  
 
Inventories
          15,179       3,952             19,131  
 
Prepaid expenses, other
    553       11,902       1,549             14,004  
 
Intercompany (payables) receivables
    (1,272 )     (8,088 )     9,360              
 
   
     
     
     
     
 
   
TOTAL CURRENT ASSETS
    19,846       39,971       28,327             88,144  
Investment in consolidated subsidiaries
    230,672                   (230,672 )      
Property and equipment, net
    1,116       7,408       1,126             9,650  
Notes and other receivables, noncurrent
    325                         325  
Goodwill, net
    27,168       209,256       678             237,102  
Trademarks and other intangible assets, net
    909       5,929       13             6,851  
Deferred income taxes
    (44,713 )     111,920                   67,207  
Deferred financing costs, other
    13,348       (560 )     1,382             14,170  
 
   
     
     
     
     
 
   
TOTAL ASSETS
  $ 248,671     $ 373,924     $ 31,526     $ (230,672 )   $ 423,449  
 
   
     
     
     
     
 
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ (DEFICIT) EQUITY
                                       
CURRENT LIABILITIES
                                       
 
Portion of long-term debt due within one year
  $ 15,321     $ 836     $     $     $ 16,157  
 
Accounts payable
    214       5,014       2,738             7,966  
 
Accrued liabilities
    30,973       28,708       7,385             67,066  
 
Income taxes
    (15,031 )     27,874       2,686             15,529  
 
Deferred revenue
          15,660       985             16,645  
 
   
     
     
     
     
 
   
TOTAL CURRENT LIABILITIES
    31,477       78,092       13,794             123,363  
 
Long-term debt
    383,148       81,481                   464,629  
 
Deferred income taxes
    2,481             589             3,070  
 
Other
          700       122             822  
 
   
     
     
     
     
 
   
TOTAL LONG-TERM DEBT AND OTHER LIABILITIES
    385,629       82,181       711             468,521  
 
Redeemable preferred stock
    25,621                         25,621  
 
Shareholders’ (deficit) equity
    (194,056 )     213,651       17,021       (230,672 )     (194,056 )
 
   
     
     
     
     
 
   
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ (DEFICIT) EQUITY
  $ 248,671     $ 373,924     $ 31,526     $ (230,672 )   $ 423,449  
 
   
     
     
     
     
 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   15
SUPPLEMENTAL UNAUDITED CONSOLIDATING BALANCE SHEET  
AS OF DECEMBER 30, 2000  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

                                             
                        Non-                
        Parent   Guarantor   Guarantor                
        Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
       
 
 
 
 
ASSETS
                                       
CURRENT ASSETS
                                       
 
Cash and cash equivalents
  $ 26,699     $ 11,191     $ 6,611     $     $ 44,501  
 
Receivables, net
    7,390       5,941       1,347             14,678  
 
Notes receivable, current
    2,104             2             2,106  
 
Inventories
          11,867       3,177             15,044  
 
Prepaid expenses, other
    9,171       5,611       2,329             17,111  
 
Intercompany (payables) receivables
    (10,921 )     3,147       7,774              
 
   
     
     
     
     
 
   
TOTAL CURRENT ASSETS
    34,443       37,757       21,240             93,440  
Investment in consolidated subsidiaries
    175,876                   (175,876 )      
Property and equipment, net
    1,272       5,679       1,194             8,145  
Notes and other receivables, noncurrent
    5,601                         5,601  
Goodwill, net
    28,367       121,814       720             150,901  
Trademarks and other intangible assets, net
    1,876       4,761       11             6,648  
Deferred income taxes
    (44,713 )     111,920                   67,207  
Deferred financing costs, other
    13,676       271       328             14,275  
 
   
     
     
     
     
 
   
TOTAL ASSETS
  $ 216,398     $ 282,202     $ 23,493     $ (175,876 )   $ 346,217  
 
   
     
     
     
     
 
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ (DEFICIT) EQUITY
                                       
CURRENT LIABILITIES
                                       
 
Portion of long-term debt due within one year
  $ 13,250     $ 870     $     $     $ 14,120  
 
Accounts payable
    932       8,379       2,678             11,989  
 
Accrued liabilities
    23,787       17,151       6,698             47,636  
 
Income taxes
    1,677       (414 )     2,397             3,660  
 
Deferred revenue
          4,843       993             5,836  
 
   
     
     
     
     
 
   
TOTAL CURRENT LIABILITIES
    39,646       30,829       12,766             83,241  
 
Long-term debt
    371,053       85,477                   456,530  
 
Deferred income taxes
    2,481             626             3,107  
 
Other
                121             121  
 
   
     
     
     
     
 
   
TOTAL LONG-TERM DEBT AND OTHER LIABILITIES
    373,534       85,477       747             459,758  
 
Redeemable preferred stock
    25,996                         25,996  
 
Shareholders’ (deficit) equity
    (222,778 )     165,896       9,980       (175,876 )     (222,778 )
 
   
     
     
     
     
 
   
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ (DEFICIT) EQUITY
  $ 216,398     $ 282,202     $ 23,493     $ (175,876 )     346,217  
 
   
     
     
     
     
 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   16
SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS  
FOR THE THREE MONTHS ENDED SEPTEMBER 29, 2001  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

                                           
                      Non-                
      Parent   Guarantor   Guarantor                
      Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
     
 
 
 
 
 
                                       
Revenues, net
  $ 675     $ 123,072     $ 20,317     $     $ 144,064  
Cost of revenues
    112       54,446       11,391             65,949  
 
   
     
     
     
     
 
 
Gross profit
    563       68,626       8,926             78,115  
Marketing expenses
          9,064       1,850             10,914  
Selling, general and administrative expenses
    4,838       8,949       2,435             16,222  
 
   
     
     
     
     
 
 
Operating (loss) income
    (4,275 )     50,613       4,641             50,979  
Interest expense (income), net
    10,925       3,911       (193 )           14,643  
Other expenses, net
    8,575       1,497       5             10,077  
Equity in income of consolidated subsidiaries
    26,212                   (26,212 )      
Franchise commission income (loss)
    11,492       (10,395 )     (1,097 )            
 
   
     
     
     
     
 
 
Income before income taxes and minority interest
    13,929       34,810       3,732       (26,212 )     26,259  
(Benefit from) provision for income taxes
    (2,189 )     11,792       530             10,133  
 
   
     
     
     
     
 
 
Income before minority interest
    16,118       23,018       3,202       (26,212 )     16,126  
Minority interest
                8             8  
 
   
     
     
     
     
 
 
Net income
  $ 16,118     $ 23,018     $ 3,194     $ (26,212 )   $ 16,118  
 
   
     
     
     
     
 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   17
SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS  
FOR THE THREE MONTHS ENDED OCTOBER 28, 2000  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

                                           
                      Non-                
      Parent   Guarantor   Guarantor                
      Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
     
 
 
 
 
Revenues, net
  $ 8,187     $ 77,682     $ 21,713     $     $ 107,582  
Cost of revenues
    4,174       39,492       12,391             56,057  
 
   
     
     
     
     
 
 
Gross profit
    4,013       38,190       9,322             51,525  
Marketing expenses
    1,328       7,669       2,832             11,829  
Selling, general and administrative expenses
    5,074       4,855       2,119             12,048  
 
   
     
     
     
     
 
 
Operating (loss) income
    (2,389 )     25,666       4,371             27,648  
Interest expense (income), net
    9,137       4,745       (38 )           13,844  
Other (income) expenses, net
    (628 )     451       9             (168 )
Equity in income of consolidated subsidiaries
    20,145                   (20,145 )      
Franchise commission income (loss)
    3,101       (2,285 )     (816 )            
 
   
     
     
     
     
 
 
Income before income taxes and minority interest
    12,348       18,185       3,584       (20,145 )     13,972  
Provision for income taxes
    1,440       87       1,523             3,050  
 
   
     
     
     
     
 
 
Income before minority interest
    10,908       18,098       2,061       (20,145 )     10,922  
Minority interest
                14             14  
 
   
     
     
     
     
 
 
Net income
  $ 10,908     $ 18,098     $ 2,047     $ (20,145 )   $ 10,908  
 
   
     
     
     
     
 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   18
SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS  
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

                                           
                      Non-                
      Parent   Guarantor   Guarantor                
      Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
     
 
 
 
 
 
                                       
Revenues, net
  $ 3,505     $ 400,426     $ 74,409     $     $ 478,340  
Cost of revenues
    675       174,329       40,089             215,093  
 
   
     
     
     
     
 
 
Gross profit
    2,830       226,097       34,320             263,247  
Marketing expenses
          42,833       8,650             51,483  
Selling, general and administrative expenses
    14,507       29,878       7,318             51,703  
 
   
     
     
     
     
 
 
Operating (loss) income
    (11,677 )     153,386       18,352             160,061  
Interest expense (income), net
    29,844       12,720       (553 )           42,011  
Other expenses, net
    9,753       4,174       21             13,948  
Equity in income of consolidated subsidiaries
    79,405                   (79,405 )      
Franchise commission income (loss)
    37,828       (33,352 )     (4,476 )            
 
   
     
     
     
     
 
 
Income before income taxes and minority interest
    65,959       103,140       14,408       (79,405 )     104,102  
Provision for income taxes
    525       33,643       4,422             38,590  
 
   
     
     
     
     
 
 
Income before minority interest
    65,434       69,497       9,986       (79,405 )     65,512  
Minority interest
                78             78  
 
   
     
     
     
     
 
 
Net income
  $ 65,434     $ 69,497     $ 9,908     $ (79,405 )   $ 65,434  
 
   
     
     
     
     
 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   19
SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS  
FOR THE NINE MONTHS ENDED OCTOBER 28, 2000  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

                                           
                      Non-                
      Parent   Guarantor   Guarantor                
      Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
     
 
 
 
 
 
                                       
Revenues, net
  $ 25,836     $ 261,398     $ 56,283     $     $ 343,517  
Cost of revenues
    6,549       127,449       33,217             167,215  
 
   
     
     
     
     
 
 
Gross profit
    19,287       133,949       23,066             176,302  
Marketing expenses
    3,231       27,700       6,188             37,119  
Selling, general and administrative expenses
    20,097       14,907       5,791             40,795  
 
   
     
     
     
     
 
 
Operating (loss) income
    (4,041 )     91,342       11,087             98,388  
Interest expense (income), net
    30,328       12,659       (125 )           42,862  
Other (income) expenses, net
    (6,757 )     (33 )     28             (6,762 )
Equity in income of consolidated subsidiaries
    47,535                   (47,535 )      
Franchise commission income (loss)
    20,201       (17,411 )     (2,790 )            
 
   
     
     
     
     
 
 
Income before income taxes and minority interest
    40,124       61,305       8,394       (47,535 )     62,288  
(Benefit from) provision for income taxes
    (2,002 )     18,468       3,456             19,922  
 
   
     
     
     
     
 
 
Income before minority interest
    42,126       42,837       4,938       (47,535 )     42,366  
Minority interest
                240             240  
 
   
     
     
     
     
 
 
Net income
  $ 42,126     $ 42,837     $ 4,698     $ (47,535 )   $ 42,126  
 
   
     
     
     
     
 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   20
SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF CASH FLOWS  
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

                                           
                      Non-                
      Parent   Guarantor   Guarantor                
      Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
     
 
 
 
 
 
                                       
 
Cash provided by operating activities
  $ 67,521     $ 124,702     $ 7,416     $ (79,405 )   $ 120,234  
 
   
     
     
     
     
 
Investing activities:
                                       
 
Capital expenditures
    (80 )     (1,359 )     (426 )           (1,865 )
 
Advances to equity investment
    (9,044 )                       (9,044 )
 
Acquisition
          (97,853 )                 (97,853 )
 
Other items, net
    (576 )     (1,240 )     (80 )           (1,896 )
 
   
     
     
     
     
 
 
Cash used for investing activities
    (9,700 )     (100,452 )     (506 )           (110,658 )
 
   
     
     
     
     
 
Financing activities:
                                       
 
Net decrease in short-term borrowings
    (566 )     (56 )                 (622 )
 
Parent company investment in subsidiaries
    (54,796 )                 54,796        
 
Proceeds from borrowings
    60,000                         60,000  
 
Payment of dividends
    (1,500 )     (19,396 )     (3,258 )     22,654       (1,500 )
 
Payments on long-term debt
    (42,744 )     (4,030 )                 (46,774 )
 
Net parent advances
                986       (986 )      
 
Purchase of treasury stock
    (27,132 )                       (27,132 )
 
Proceeds from issuance of treasury stock
    525                         525  
 
   
     
     
     
     
 
 
Cash used for financing activities
    (66,213 )     (23,482 )     (2,272 )     76,464       (15,503 )
 
   
     
     
     
     
 
Effect of exchange rate changes on cash and cash equivalents
    (2,850 )     (437 )     (324 )     2,941       (670 )
Net (decrease) increase in cash and cash equivalents
    (11,242 )     331       4,314             (6,597 )
Cash and cash equivalents, beginning of period
    26,699       11,191       6,611             44,501  
 
   
     
     
     
     
 
Cash and cash equivalents, end of period
  $ 15,457     $ 11,522     $ 10,925     $     $ 37,904  
 
   
     
     
     
     
 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   21
SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF CASH FLOWS  
FOR THE NINE MONTHS ENDED OCTOBER 28, 2000  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  

                                             
                        Non-                
        Parent   Guarantor   Guarantor                
        Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
       
 
 
 
 
 
                                       
   
Cash provided by operating activities
  $ 77,713     $ 12,478     $ 8,574     $ (48,672 )   $ 50,093  
 
   
     
     
     
     
 
Investing activities:
                                       
 
Capital expenditures
    (430 )     (1,259 )     (534 )           (2,223 )
 
Advances to equity investment
    (8,500 )                       (8,500 )
 
Acquisition of minority interest
    (2,400 )                       (2,400 )
 
Other items, net
    (2,003 )     (681 )     89             (2,595 )
 
   
     
     
     
     
 
   
Cash used for investing activities
    (13,333 )     (1,940 )     (445 )           (15,718 )
 
   
     
     
     
     
 
Financing activities:
                                       
 
Net increase in short-term borrowings
    394       4,499                   4,893  
 
Parent company investment in subsidiaries
    (36,099 )                 36,099        
 
Payment of dividends
    (879 )     (4,355 )     (1,603 )     5,958       (879 )
 
Payments on long-term debt
    (9,937 )     (653 )                 (10,590 )
 
Deferred financing costs
    (165 )                       (165 )
 
Net Parent advances
    2,084             1,378       (1,384 )     2,078  
 
   
     
     
     
     
 
   
Cash used for financing activities
    (44,602 )     (509 )     (225 )     40,673       (4,663 )
 
   
     
     
     
     
 
Effect of exchange rate changes on cash and cash equivalents
    (7,962 )     (3,267 )     (1,473 )     7,999       (4,703 )
Net increase in cash and cash equivalents
    11,816       6,762       6,431             25,009  
Cash and cash equivalents, beginning of year
    3,880       21,847       8,719             34,446  
 
   
     
     
     
     
 
Cash and cash equivalents, end of year
  $ 15,696     $ 28,609     $ 15,150     $     $ 59,455  
 
   
     
     
     
     
 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  
CONDITION AND RESULTS OF OPERATIONS  

Comparison of the three months ended September 29, 2001 to the three months ended October 28, 2000

The comparison of the three months ended October 28, 2000, is, in the opinion of management, the available period most comparable to the three months ended September 29, 2001.

Net revenues were $144.1 million for the three months ended September 29, 2001, an increase of $36.5 million or 33.9% from $107.6 million for the three months ended October 28, 2000. Of the $36.5 million increase, $27.7 million was attributable to domestic company-owned classroom meeting fees, and $9.9 million to total product sales. These increases were offset by decreases of $0.4 million from international company-owned classroom meeting fees, $0.4 million from franchise royalties, and $0.3 million from royalties from licensing, publications and other. Pro forma for the acquisition of Weighco, net revenues for the three months ended October 28, 2000, were $120.6 million.

Domestic company-owned classroom meeting fees were $64.4 million for the three months ended September 29, 2001, an increase of 75.5% from $36.7 million for the three months ended October 28, 2000. Domestic company-owned classroom meeting fees increased due to growth in member attendance and benefited from the inclusion of Weighco in the current three month period. International company-owned classroom meeting fees were $34.0 million for the three months ended September 29, 2001, a decrease of 1.2% from $34.4 million for the three months ended October 28, 2000. The decrease in international company-owned meeting fees was the result of the timing differences related to the shift in fiscal calendars as well as negative exchange rate variances.

Product sales were $37.3 million for the three months ended September 29, 2001, an increase of 36.1% from $27.4 million for the three months ended October 28, 2000. Domestic and international company-owned product sales were $22.0 million and $15.3 million, respectively. The increase in product sales was primarily the result of increased member attendance and the Company’s strategy to focus sales efforts on core classroom products, which has increased average product sales per attendance.

Franchise royalties were $6.8 million for the three months ended September 29, 2001, a decrease of 5.6% from $7.2 million for the three months ended October 28, 2000. For the three months ended September 29, 2001, domestic and international franchise royalties were $5.7 million and $1.1 million, respectively. Pro forma for the Weighco acquisition, franchise royalties increased 18.8% for the three months ended September 29, 2001. This increase was primarily the result of increased member attendance in our franchise operations.

Royalties from licensing, publications and other were $1.6 million for the three months ended September 29, 2001, a decrease of 15.8% from $1.9 million for the three months ended October 28, 2000. The decrease in royalties from licensing, publications and other was the result of one fewer issue of the Company's magazine in the current period versus last year.

Cost of revenues were $65.9 million for the three months ended September 29, 2001, an increase of 17.5% from $56.1 million for the three months ended October 28, 2000. Gross profit margins were 54.2% for the three months ended September 29, 2001, compared to 47.9% for the three months ended October 28, 2000. The increase in margin was in part due to a $3.8 million non-recurring expense related to the elimination of a profit sharing agreement with certain franchisees in last year’s quarter. Excluding this charge, the gross profit margin in last year’s quarter was 51.5%. The remaining increase in margin reflects increases in attendance, price increases and cost control initiatives.

Marketing expenses were $10.9 million for the three months ended September 29, 2001, a decrease of 7.6% from $11.8 million for the three months ended October 28, 2000. The decrease in marketing was primarily the result of timing differences related to the Company’s

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   23
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  
CONDITION AND RESULTS OF OPERATIONS  

shift in fiscal calendars. As a percentage of net revenues, marketing expenses decreased from 11.0% for the three months ended October 28, 2000, to 7.6% for the three months ended September 29, 2001.

Selling, general and administrative expenses were $16.2 million for the three months ended September 29, 2001, an increase of 35.0% from $12.0 million for the three months ended October 28, 2000. This increase was partly the result of higher year over year bonus accruals as well as an increase in other professional fees incurred. As a percentage of net revenues, selling, general and administrative expenses remained relatively constant from 11.2% for the three months ended October 28, 2000, to 11.3% for the three months ended September 29, 2001.

As a result of the above, operating income was $51.0 million for the three months ended September 29, 2001, an increase of 84.1% from $27.7 million for the three months ended October 28, 2000. Pro forma for the acquisition of Weighco, operating income for the three months ended October 28, 2000, was $31.2 million. On a pro forma basis, operating income for the Company increased by 63.5% for the three months ended September 29, 2001.

Comparison of the nine months ended September 29, 2001 to the nine months ended October 28, 2000

The comparison of the nine months ended October 28, 2000, is, in the opinion of management, the available period most comparable to the nine months ended September 29, 2001.

Net revenues were $478.3 million for the nine months ended September 29, 2001, an increase of $134.8 million or 39.2% from $343.5 million for the nine months ended October 28, 2000. Of the $134.8 million increase, $79.2 million was attributable to domestic company-owned classroom meeting fees, $7.3 million from international company-owned classroom meeting fees, $0.3 million from franchise royalties, $45.6 million from product sales and $2.4 million from royalties from licensing, publications and other. Pro forma for the acquisition of Weighco, net revenues for the nine months ended October 28, 2000, were $382.1 million.

Domestic company-owned classroom meeting fees were $198.6 million for the nine months ended September 29, 2001, an increase of 66.3% from $119.4 million for the nine months ended October 28, 2000. International company-owned classroom meeting fees were $119.9 million for the nine months ended September 29, 2001, an increase of 6.5% from $112.6 million for the nine months ended October 28, 2000. Domestic company-owned meeting fees benefited from the inclusion of Weighco in the current nine month period. Additionally, the increase in domestic and international company-owned meeting fees was the result of increased member attendance and the roll-out of new program innovations and price increases in select markets, offset by negative exchange rate variances.

Product sales were $130.0 million for the nine months ended September 29, 2001, an increase of 54.0% from $84.4 million for the nine months ended October 28, 2000. International and domestic company-owned product sales were $55.3 million and $74.7 million, respectively. The increase in product sales was primarily the result of increased member attendance and the Company’s strategy to focus sales efforts on core classroom products, which has increased average product sales per attendance.

Franchise royalties were $22.4 million for the nine months ended September 29, 2001, an increase of 1.4% from $22.1 million for the nine months ended October 28, 2000. For the nine months ended September 29, 2001, domestic and international franchise royalties were $18.5 million and $3.9 million, respectively. Pro forma for the Weighco acquisition, franchise royalties increased 22.1% for the nine months ended September 29, 2001. This increase was primarily the result of increased member attendance, offset by negative exchange rate variances.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   24
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  
CONDITION AND RESULTS OF OPERATIONS  

Royalties from licensing, publications and other were $7.4 million for the nine months ended September 29, 2001, an increase of 48.0% from $5.0 million for the nine months ended October 28, 2000. This increase was driven by an increase in advertising revenue from the Company's magazine and an increase in licensing royalties.

Cost of revenues were $215.1 million for the nine months ended September 29, 2001, an increase of 28.6% from $167.2 million for the nine months ended October 28, 2000. Gross profit margins were 55.0% for the nine months ended September 29, 2001, compared to 51.3% for the nine months ended October 28, 2000. The increase in margin was in part due to a $3.8 million non-recurring expense related to the elimination of a profit sharing agreement with certain franchisees in last year’s nine month period. Excluding this charge, the gross profit margin in the prior year was 52.4%. The remaining increase in margin reflects increases in attendance, price increases and cost control initiatives.

Marketing expenses were $51.5 million for the nine months ended September 29, 2001, an increase of 38.8% from $37.1 million for the nine months ended October 28, 2000. The increase in marketing was primarily the result of additional advertising to promote the new program innovations and timing differences related to the Company’s shift in fiscal calendars. As a percentage of net revenues, marketing expenses remained constant at 10.8% for the nine months ended September 29, 2001 and the nine months ended October 28, 2000.

Selling, general and administrative expenses were $51.7 million for the nine months ended September 29, 2001, an increase of 26.7% from $40.8 million for the nine months ended October 28, 2000. As a percentage of net revenues, selling, general and administrative costs decreased from 11.9% for the nine months ended October 28, 2000, to 10.8% for the nine months ended September 29, 2001.

As a result of the above, operating income was $160.1 million for the nine months ended September 29, 2001, an increase of 62.7% from $98.4 million for the nine months ended October 28, 2000. Pro forma for the acquisition of Weighco, operating income for the nine months ended October 28, 2000, was $109.3 million. On a pro forma basis, operating income for the Company increased by 46.5% for the nine months ended September 29, 2001.

Liquidity and Capital Resources

During the nine months ended September 29, 2001, the Company’s primary source of funds to meet working capital needs was cash from operations. Cash and cash equivalents decreased $6.6 million during the nine months ended September 29, 2001. For the nine months ended September 29, 2001, cash flows provided by operating activities of $120.2 million were used primarily for investing activities. Cash flows used for investing activities of $110.7 million were attributable to $84.4 million and $13.5 million in cash paid in connection with the Weighco and Oregon acquisition, respectively, the loans of $9.0 million made to WeightWatchers.com and capital expenditures of $1.9 million. Net cash flows provided by financing activities of $15.5 million consisted of proceeds from borrowings under the Company's senior credit facility of $60.0 million, offset by the payment of dividends on the Company’s preferred stock of $1.5 million, repayments of principal on the Company's outstanding senior credit facilities of $46.8 million and the repurchase of 1.4 million shares of the Company's common stock held by Heinz for $27.1 million.

Capital spending has averaged approximately $2.7 million annually over the last three years which 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 for the nine months ended September 29, 2001 were $1.9 million.

 


Table of Contents

     
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  
CONDITION AND RESULTS OF OPERATIONS  

The Company is significantly leveraged. As of September 29, 2001, there was outstanding $480.8 million in aggregate indebtedness with approximately $45.0 million of additional borrowing capacity available under the revolving credit facility. As a result of the Transaction, 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, the Company has 1.0 million shares of Series A Preferred Stock issued and outstanding. Holders of Series A Preferred Stock are entitled to receive dividends at an annual rate of 6% payable annually in arrears.

Forward-Looking Statements

The information contained in this report, other than historical information, includes forward-looking statements including, in particular, the statements about plans, strategies and prospects under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” Words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “intend” and similar expressions in this report identify forward-looking statements. These forward-looking statements are based on current views with respect to future events and financial performance. Actual results could differ materially from those projected in the forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things:

  risks associated with the Company’s ability to meet the Company’s debt obligations;
 
  risks associated with the relative success of marketing and advertising;
 
  risks associated with the continued attractiveness of the Company’s 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.

 


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WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  

The Company is exposed to foreign currency fluctuations and interest rate changes. Its 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. The Company has historically managed interest rates through the use of, and its 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.

Based on the overall interest rate exposure on the Company’s fixed rate borrowings at September 29, 2001, a 10% change in market interest rates would have less than a 5% impact on the fair value of the Company’s long-term debt.

Other than intercompany transactions between its domestic and foreign entities and the portion of the notes which are denominated in euro dollars, the Company generally does not have significant transactions that are denominated in a currency other than the functional currency applicable to each entity.

Fluctuations in currency exchange rates may also impact its stockholders’ deficit. The assets and liabilities of its 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 reporting period. The resulting translation adjustments are recorded in stockholders’ deficit 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, the Company translates the outstanding euro notes at the end of each period into U.S. dollars, and the resulting change will be reflected in the income statement of the corresponding period.

Each of its 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.

The Company maintains foreign currency forward contracts denominated in the euro and pounds sterling to more properly align the underlying sources of cash flow with debt servicing requirements. At September 29, 2001, the Company had long-term foreign currency forward contracts receivable with notional amounts of USD 44.0 million and EUR 76.0 million offset by foreign currency forward contracts payable with notional amounts of GBP 59.2 million and USD 21.9 million.

The Company’s ability to fund capital investment requirements, interest, principal and dividend payment obligations and working capital requirements and to comply with all of the financial covenants under its debt agreements depends on the Company’s 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 its control.

 


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WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   27
PART II – OTHER INFORMATION  

ITEM 1. LEGAL PROCEEDINGS

         Nothing to report under this item.

ITEM 2. CHANGES IN SECURITIES

         Nothing to report under this item.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

         Nothing to report under this item.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Nothing to report under this item.

ITEM 5. OTHER INFORMATION

         This report contains forward-looking statements regarding the Company’s future performance. These forward-looking statements are based on management’s views and assumptions, and involve unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statement. These include, but are not limited to, sales, earnings and volume growth, competitive conditions, production costs, currency valuations, global economic and industry conditions, and the other factors described in “Forward-Looking Statements” in the Company’s Form 10-K for the eight month period ended December 30, 2000, as updated from time to time by the Company in its subsequent filings with the SEC.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits required to be furnished by Item 601 of Regulation S-K are filed as part hereof. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulations S-K.

         EXHIBIT INDEX

  10.1   Second Amended and Restated Note, dated as of September 10, 2001, by WeightWatchers.com, Inc. to Weight Watchers International, Inc. (Incorporated by reference to Exhibit 10.24 of Weight Watchers International, Inc.’s Amendment No. 1 to Form S-1 Registration Statement No. 333-69362).
 
  10.2   Warrant Agreement, dated as of September 10, 2001, between WeightWatchers.com, Inc. and Weight Watchers International, Inc. (Incorporated by reference to Exhibit 10.29 of Weight Watchers International, Inc.’s Amendment No. 1 to Form S-1 Registration Statement No. 333-69362).
 
  10.3   Warrant Certificate of WeightWatchers.com, Inc., No. 4, dated as of September 10, 2001. (Incorporated by reference to Exhibit 10.30 of Weight Watchers International, Inc.’s Amendment No. 1 to Form S-1 Registration Statement No. 333-69362).

         (b)  Reports on Form 8-K

       None.

 


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WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES   28
PART II – OTHER INFORMATION  

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

     
Date: October 31, 2001    
    By: /s/ LINDA HUETT
    Linda Huett
    President, Chief Executive Officer and Director
    (Principal Executive Officer)
     
Date: October 31, 2001    
    By: /s/ THOMAS S. KIRITSIS
    Thomas S. Kiritsis
    Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer)