-----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, Rsg2sSn9xTWzan0+FgzwTx4bStxyxn7Bnlc64FP1J3L9Pfv7G/tJW+BakfWyCYkH wb7fjPBds+M6LRzDWMCNYw== 0000912057-02-042011.txt : 20021112 0000912057-02-042011.hdr.sgml : 20021111 20021112155541 ACCESSION NUMBER: 0000912057-02-042011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020928 FILED AS OF DATE: 20021112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WEIGHT WATCHERS INTERNATIONAL INC CENTRAL INDEX KEY: 0000105319 IRS NUMBER: 116040273 STATE OF INCORPORATION: VA FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16769 FILM NUMBER: 02817238 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 a2093378z10-q.txt FORM 10-Q 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 28, 2002 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, 2002 was 106,183,498. WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Consolidated Balance Sheets as of September 28, 2002 and December 29, 2001 2 Unaudited Consolidated Statements of Operations for the three months ended September 28, 2002 and September 29, 2001 3 Unaudited Consolidated Statements of Operations for the nine months ended September 28, 2002 and September 29, 2001 4 Unaudited Consolidated Statements of Changes in Shareholders' Equity (Deficit) and Comprehensive Income for the nine months ended September 28, 2002, and for the fiscal year ended December 29, 2001 5 Unaudited Consolidated Statements of Cash Flows for the nine months ended September 28, 2002 and September 29, 2001 6 Notes to Unaudited Consolidated Financial Statements 7 - 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 - 32 Item 3. Quantitative and Qualitative Disclosures About Market Risk 33 Item 4. Controls and Procedures 34 PART II. OTHER INFORMATION Item 1. Legal Proceedings 35 Item 2. Changes in Securities 35 Item 3. Defaults Upon Senior Securities 35 Item 4. Submission to Matters to a Vote of Security Holders 35 Item 5. Other Information 35 Item 6. Exhibits and Reports on Form 8-K 35 Signatures 36 Certifications 37 - 38 Exhibits
2 ITEM I. FINANCIAL STATEMENTS WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 28, DECEMBER 29, 2002 2001 ------------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 61,899 $ 23,338 Receivables, net 16,462 13,619 Inventories, net 26,105 26,205 Prepaid expenses and other current assets 19,541 20,717 --------- --------- TOTAL CURRENT ASSETS 124,007 83,879 Property and equipment, net 11,920 10,725 Notes and other receivables, noncurrent 243 325 Goodwill, net 303,020 234,302 Trademarks and other intangible assets, net 6,752 6,863 Deferred income taxes 129,615 136,281 Deferred financing costs, other 9,681 10,473 --------- --------- TOTAL ASSETS $ 585,238 $ 482,848 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Portion of long-term debt due within one year $ 14,688 $ 15,699 Accounts payable 21,641 17,698 Accrued liabilities 60,008 52,454 Income taxes 11,070 9,139 Deferred revenue 21,983 13,020 --------- --------- TOTAL CURRENT LIABILITIES 129,390 108,010 Long-term debt 437,373 458,320 Deferred income taxes 3,169 3,169 Other 692 870 --------- --------- TOTAL LONG-TERM DEBT AND OTHER LIABILITIES 441,234 462,359 Redeemable preferred stock - 25,996 SHAREHOLDERS' EQUITY (DEFICIT) Common stock, $0 par; 1,000,000 shares authorized; 111,988 shares issued; 106,139 shares outstanding at September 28, 2002 and 105,500 shares outstanding at December 29, 2001 - - Treasury stock, at cost, 5,849 shares at September 28, 2002 and 6,488 shares at December 29, 2001 (23,617) (26,196) Accumulated income (deficit) 43,586 (73,998) Accumulated other comprehensive loss (5,355) (13,323) --------- --------- TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 14,614 (113,517) --------- --------- TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) $ 585,238 $ 482,848 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 3 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED ------------------------------- SEPTEMBER 28, SEPTEMBER 29, 2002 2001 -------------- --------------- (UNAUDITED) Meeting fees, net $ 123,210 $ 98,411 Product sales and other, net 65,962 45,653 ------------ ------------ Revenues, net 189,172 144,064 Cost of revenues 85,617 65,949 ------------ ------------ Gross profit 103,555 78,115 Marketing expenses 14,392 10,914 Selling, general and administrative expenses 14,756 18,053 ------------ ------------ Operating income 74,407 49,148 Interest expense, net 10,576 14,643 Other expenses, net 3,526 8,246 ------------ ------------ Income before income taxes and minority interest 60,305 26,259 Provision for income taxes 23,464 10,133 ------------ ------------ Income before minority interest 36,841 16,126 Minority interest 9 8 ------------ ------------ Net income $ 36,832 $ 16,118 ============ ============ Preferred stock dividends - 375 ------------ ------------ Net income available to common shareholders $ 36,832 $ 15,743 ============ ============ Net income per share: Basic $ 0.35 $ 0.15 ============ ============ Diluted $ 0.34 $ 0.14 ============ ============ Weighted average common shares outstanding: Basic 106,094 107,355 ============ ============ Diluted 109,567 109,295 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 4 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED ------------------------------ SEPTEMBER 28, SEPTEMBER 29, 2002 2001 -------------- -------------- (UNAUDITED) Meeting fees, net $ 399,007 $ 318,496 Product sales and other, net 220,561 159,844 ------------ ------------ Revenues, net 619,568 478,340 Cost of revenues 277,646 215,093 ------------ ------------ Gross profit 341,922 263,247 Marketing expenses 60,852 51,483 Selling, general and administrative expenses 45,086 56,875 ------------ ------------ Operating income 235,984 154,889 Interest expense, net 31,795 42,011 Other expenses, net 15,701 8,776 ------------ ------------ Income before income taxes and minority interest 188,488 104,102 Provision for income taxes 73,134 38,590 ------------ ------------ Income before minority interest 115,354 65,512 Minority interest 18 78 ------------ ------------ Net income $ 115,336 $ 65,434 ============ ============ Preferred stock dividends 254 1,125 ------------ ------------ Net income available to common shareholders $ 115,082 $ 64,309 ============ ============ Net income per share: Basic $ 1.09 $ 0.59 ============ ============ Diluted $ 1.05 $ 0.58 ============ ============ Weighted average common shares outstanding: Basic 105,872 109,762 ============ ============ Diluted 109,553 111,726 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 5 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (IN THOUSANDS)
ACCUMULATED COMMON STOCK TREASURY STOCK OTHER ACCUMULATED ------------------------ ------------------- COMPREHENSIVE INCOME SHARES AMOUNT SHARES AMOUNT LOSS (DEFICIT) TOTAL ---------- --------- ------ -------- ------------- ------------- ------------ Balance at December 30, 2000 111,988 - - - $ (6,271) $ (216,507) $ (222,778) Comprehensive Income: Net income 147,187 147,187 Translation adjustment (3,132) (3,132) Change in fair value of derivatives accounted for as hedges (3,920) (3,920) ------------ Total Comprehensive Income 140,135 ------------ Preferred stock dividend (1,500) (1,500) Purchase of treasury stock 6,719 $(27,132) - (27,132) Stock options exercised (93) 375 (177) 198 Sale of common stock (138) 561 (36) 525 Cost of public equity offering (2,965) (2,965) ---------- --------- ------ -------- ------------ ------------ ------------ Balance at December 29, 2001 111,988 - 6,488 (26,196) (13,323) (73,998) (113,517) Comprehensive Income: Net income 115,336 115,336 Translation adjustment 7,676 7,676 Change in fair value of derivatives accounted for as hedges 292 292 ------------ Total Comprehensive Income 123,304 ------------ Preferred stock dividend (254) (254) Stock options exercised (639) 2,579 (1,187) 1,392 Tax benefit of stock options exercised 4,539 4,539 Cost of public equity offering (850) (850) ---------- --------- ------ -------- ------------ ------------ ------------ Balance at September 28, 2002 111,988 $ - 5,849 $(23,617) $ (5,355) $ 43,586 $ 14,614 ========== ========= ====== ======== ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 6 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED ------------------------------- SEPTEMBER 28, SEPTEMBER 29, 2002 2001 ------------- ------------- (UNAUDITED) Cash provided by operating activities $ 166,399 $ 120,234 ------------- ------------- Investing activities: Capital expenditures (3,425) (1,865) Advances and interest in equity investment - (9,044) Acquisitions (68,148) (97,853) Other items, net (355) (1,896) ------------- ------------- Cash used for investing activities (71,928) (110,658) ------------- ------------- Financing activities: Net decrease in short-term borrowings (1,253) (622) Proceeds from borrowings 58,500 60,000 Payment of dividends (1,249) (1,500) Payments of long-term debt (90,166) (46,774) Redemption of redeemable preferred stock (25,000) - Proceeds from stock options exercised 1,392 - Cost of public equity offering (262) - Purchase of treasury stock - (27,132) Proceeds from sale of common stock - 525 ------------- ------------- Cash used for financing activities (58,038) (15,503) ------------- ------------- Effect of exchange rate changes on cash and cash equivalents 2,128 (670) Net increase (decrease) in cash and cash equivalents 38,561 (6,597) Cash and cash equivalents, beginning of period 23,338 44,501 ------------- ------------- Cash and cash equivalents, end of period $ 61,899 $ 37,904 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 7 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. BASIS OF PRESENTATION 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. The Management's Discussion and Analysis of Financial Condition and Results of Operations which follows these notes contains additional information on the results of operations, the financial position and cash flows of the Company. Those comments should be read in conjunction with these notes. The Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001 includes additional information about the Company, its results of operations, its financial position and its cash flows, and should be read in conjunction with this Quarterly Report on Form 10-Q. RECENTLY ISSUED ACCOUNTING STANDARDS: In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards, or SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses the mandatory use of the purchase method of accounting for business combinations, elimination of indefinite life goodwill amortization, a revised framework for testing goodwill, impairment at a "reporting unit" level and new criteria for the identification and potential amortization of other intangible assets. The Company adopted SFAS No. 142 on December 30, 2001. See Note 3. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of AICPA Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS No. 144 on December 30, 2001 and will adopt SFAS No. 143 on December 29, 2002. The adoption of SFAS No. 144 did not have a material impact on the Company's results of operations, the financial position or cash flows, nor does the Company expect the adoption of SFAS No. 143 to have any such material impact. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB No. 13 and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from the extinguishment of debt to be classified as an extraordinary item, and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 are effective for the Company beginning December 29, 2002. The Company does not expect the adoption of SFAS No. 145 to have a material impact on its results of operations, financial position or cash flows. 8 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability for the cost associated with an exit or disposal activity be recognized when the liability is incurred and also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. RECLASSIFICATION: Certain prior year amounts have been reclassified to conform to the current year presentation. 2. ACQUISITIONS During the period December 30, 2000 to September 28, 2002, the Company acquired the assets of five of its franchises as outlined below. On September 1, 2002, the Company completed the acquisition of the assets of one of its franchisees, AZIS Properties of Raleigh Durham, Inc. (d/b/a Weight Watchers of Raleigh Durham), pursuant to the terms of an Asset Purchase Agreement among Weight Watchers of Raleigh Durham, the Company and Weight Watchers North America, Inc., a wholly owned subsidiary of the Company. Substantially all of the purchase price in excess of the net assets acquired has been recorded as goodwill. The purchase price for the acquisition was $10,600 and was financed through cash from operations. On July 2, 2002, the Company completed the acquisition of the assets of one of its franchisees, Weight Watchers of San Diego and The Inland Empire, Inc., pursuant to the terms of an Asset Purchase Agreement among Weight Watchers of San Diego, the Company and Weight Watchers North America, Inc. Substantially all of the purchase price in excess of the net assets acquired has been recorded as goodwill. The purchase price for the acquisition was $11,000 and was financed through cash from operations. On January 18, 2002, the Company completed the acquisition of its franchisee Weight Watchers of North Jersey, Inc., pursuant to the terms of an Asset Purchase Agreement executed on December 31, 2001 among Weight Watchers of North Jersey, Inc., the Company and Weight Watchers North America, Inc. Substantially all of the purchase price in excess of the net assets acquired has been recorded as goodwill. The purchase price for the acquisition was $46,500. The acquisition was financed through additional borrowings from the Company's Revolving Credit Facility under its Amended and Restated Credit Agreement, as amended on January 16, 2001 and December 21, 2001 (the "Credit Facility"). This borrowing was subsequently repaid by the end of the second quarter 2002. See Note 4. 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. On January 16, 2001, the Company completed the acquisition of one of its largest franchised territories, Weighco Enterprises, Inc., Weighco of Northwest, Inc., and Weighco of Southwest, Inc. (collectively "Weighco"), for an aggregate purchase price of $83,800 plus acquisition costs of $577. Assets acquired included inventory ($1,884) and property and equipment ($1,801). The excess of 9 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) investment over the net book value of assets acquired at the date of acquisition resulted in goodwill of $80,692. The acquisition was financed through additional borrowings of $60,000 obtained pursuant to the Company's Credit Facility, and cash from operations. These acquisitions have been accounted for under the purchase method of accounting and, accordingly, earnings have been included in the consolidated operating results of the Company since the date of acquisition. 3. INTANGIBLE ASSETS In accordance with SFAS No. 142, the Company no longer amortizes goodwill. The Company performed a fair value impairment test as of December 30, 2001 on its goodwill which determined that no impairment loss was necessary. Unamortized goodwill is due mainly to acquisitions of the Company's franchised territories. For the nine months ended September 28, 2002, goodwill increased due to the acquisitions of Weight Watchers of North Jersey, Inc. ($46,309), Weight Watchers of San Diego and The Inland Empire, Inc. ($10,804), Weight Watchers of Raleigh Durham ($10,600) and due to the translation of the assets of the Company's foreign subsidiaries into U.S. Dollars ($1,005). Also, in accordance with SFAS No. 142, aggregate amortization expense for definite lived intangible assets was recorded in the amounts of $221 and $684 for the three and nine months ended September 28, 2002, respectively. Aggregate amortization expense of definite lived intangible assets for the three and nine months ended September 29, 2001 was $190 and $555, respectively. The carrying amount of amortized intangible assets as of September 28, 2002 and December 29, 2001 was as follows:
SEPTEMBER 28, 2002 DECEMBER 29, 2001 ---------------------------- ----------------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMORTIZATION AMOUNT AMORTIZATION AMOUNT AMORTIZATION PERIOD -------- ------------ --------- ------------ ------------ Trademarks and other $ 21,726 $ 19,338 $ 21,238 $ 18,659 3 - 5 years
Estimated amortization expense of definite lived intangible assets for the next five fiscal years is as follows: Remainder of 2002 $ 257 2003 $ 690 2004 $ 621 2005 $ 474 2006 $ 79
10 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) As required by SFAS No. 142, the results for the three and nine months ended September 29, 2001 have not been restated. A reconciliation of net income, as if SFAS No. 142 had been adopted, is presented below for the three and nine months ended September 28, 2002 and September 29, 2001:
THREE MONTHS ENDED NINE MONTHS ENDED -------------- -------------- -------------- -------------- SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29, 2002 2001 2002 2001 -------------- -------------- -------------- -------------- Reported net income available to common shareholders $ 36,832 $ 15,743 $ 115,082 $ 64,309 Addback: goodwill amortization (net of tax) - $ 2,530 - $ 7,268 -------------- -------------- -------------- -------------- Adjusted net income available to common shareholders $ 36,832 $ 18,273 $ 115,082 $ 71,577 ============== ============== ============== ============== Basic earnings per share: Reported net income available to common shareholders $ 0.35 $ 0.15 $ 1.09 $ 0.59 Addback: goodwill amortization (net of tax) - 0.02 - 0.06 -------------- -------------- -------------- -------------- Adjusted net income available to common shareholders $ 0.35 $ 0.17 $ 1.09 $ 0.65 ============== ============== ============== ============== Diluted earnings per share: Reported net income available to common shareholders $ 0.34 $ 0.14 $ 1.05 $ 0.58 Addback: goodwill amortization (net of tax) - 0.02 - 0.06 -------------- -------------- -------------- -------------- Adjusted net income available to common shareholders $ 0.34 $ 0.16 $ 1.05 $ 0.64 ============== ============== ============== ==============
11 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. LONG-TERM DEBT In connection with the Transaction (See Note 5), the Company entered into the Credit Facility. As amended on January 16, 2001, the Credit Facility provided for (i) a $90,000 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"), (iv) a $20,000 term loan D facility ("Term Loan D") and (v) a revolving credit facility with borrowings up to $45,000 ("Revolving Credit Facility"). On December 21, 2001, the Credit Facility was refinanced as follows: (i) Term Loan B, Term Loan D and the TLC in the amount of $71,000, $19,000 and $82,000, respectively, were repaid and replaced with a new Term Loan B of $108,000 and a new TLC of $64,000. Borrowings under the Credit Facility are paid quarterly and bear interest at rates which varied through the three and nine months ended September 28, 2002 from 3.72% to 5.50%. 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"). At September 28, 2002, the 100,000 EUR Notes translated into 98,090 USD denominated equivalent. 5. REDEEMABLE PREFERRED STOCK The Company issued one million shares of Series A Preferred Stock in conjunction with a recapitalization and stock purchase agreement (the "Transaction") on September 29, 1999 with its former parent, H.J. Heinz Company ("Heinz"). The liquidation preference of the Series A Preferred Stock was $25 per share. On March 1, 2002, the Company redeemed from Heinz all of the Company's Series A Preferred Stock for a redemption price of $25,000 plus accrued and unpaid dividends. The redemption was financed through additional borrowings of $12,000 under the Revolving Credit Facility, which was repaid by the end of the second quarter 2002, and cash from operations. 6. 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. 12 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following table sets forth the computation of basic and diluted EPS.
THREE MONTHS ENDED NINE MONTHS ENDED -------------- -------------- -------------- -------------- SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29, 2002 2001 2002 2001 -------------- -------------- -------------- -------------- Numerator: Net income $ 36,832 $ 16,118 $ 115,336 $ 65,434 Preferred stock dividends - 375 254 1,125 ------------ ------------ ------------ ------------ Numerator for basic and diluted EPS-net income available to common shareholders $ 36,832 $ 15,743 $ 115,082 $ 64,309 ------------ ------------ ------------ ------------ Denominator: Weighted-average shares 106,094 107,355 105,872 109,762 Effect of dilutive securities: stock options 3,473 1,940 3,681 1,964 ------------ ------------ ------------ ------------ Denominator for diluted EPS - weighted-average shares 109,567 109,295 109,553 111,726 ============ ============ ============ ============ EPS: Basic EPS $ 0.35 $ 0.15 $ 1.09 $ 0.59 ============ ============ ============ ============ Diluted EPS $ 0.34 $ 0.14 $ 1.05 $ 0.58 ============ ============ ============ ============
7. INCOME TAXES The effective tax rates for the three and nine months ended September 28, 2002 were 38.9% and 38.8%, respectively. The effective tax rates for the three and nine months ended September 29, 2001 were 38.6% and 37.1%, respectively. For the three and nine months ended September 28, 2002, the primary differences between the U.S. federal statutory tax rate and the Company's effective tax rate were state income taxes, offset by lower statutory tax rates in certain foreign jurisdictions. For the three and nine months ended September 29, 2001, the primary differences between the U.S. federal statutory tax rate and the Company's effective tax rate were state income taxes, offset by lower statutory tax rates in certain foreign jurisdictions and adjustments to the deferred tax asset valuation allowance. 8. WEIGHTWATCHERS.COM LOAN AGREEMENT: Pursuant to the amended loan agreement dated September 10, 2001 between the Company and WeightWatchers.com, through fiscal year 2001, the Company provided loans to WeightWatchers.com aggregating $34,500. The Company has no further obligation to provide funding to WeightWatchers.com. Beginning on January 1, 2002, the note bears interest at 13% per 13 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) year, and beginning March 31, 2002, interest has been and shall be paid to the Company semi-annually. All principal outstanding under the agreement is payable in six semi-annual installments commencing on March 31, 2004. For the three and nine months ended September 28, 2002, the Company recorded interest income of $1,118 and $3,336, respectively, on the note. As of September 28, 2002, the interest receivable balance was $2,236 which was paid in October 2002, and is included within receivables, net. As WeightWatchers.com is an equity investee, and the Company has been the only entity providing funding, through fiscal year 2001, the Company reduced its loan receivable balances by 100% of WeightWatchers.com's losses. Additionally, the remaining loan receivable balances were reviewed for impairment on a quarterly basis and, accordingly, during fiscal 2001 the Company recorded a full valuation allowance against the remaining balances. INTELLECTUAL PROPERTY LICENSE: The Company entered into an amended and restated intellectual property license agreement dated September 29, 2001 with WeightWatchers.com. In fiscal 2002, the Company began earning royalties pursuant to the agreement. For the three and nine months ended September 28, 2002, the Company recorded royalty income of $1,192 and $2,898, respectively, which was included in product sales and other, net. As of September 28, 2002, the receivable balance was $1,192 and is included within receivables, net. SERVICE AGREEMENT: Simultaneously with the signing of the amended and restated intellectual property license agreement, the Company entered into a service agreement with WeightWatchers.com, under which WeightWatchers.com provides certain types of services. The Company is required to pay for all expenses incurred by WeightWatchers.com directly attributable to the services it performs under this agreement, plus a fee of 10% of those expenses. The Company recorded service expense for the three and nine months ended September 28, 2002, of $549 and $1,303, respectively, and for the three and nine months ended September 29, 2001 of $120 and $360, respectively, all of which was included in marketing expenses. The accrued service payable at September 28, 2002 and September 29, 2001 was $449 and $360, respectively, and is netted against receivables, net. LEASE GUARANTEE: The Company has guaranteed an operating lease of WeightWatchers.com for office space. The annual rental rate is $459 plus increases for operating expenses and real estate taxes. The lease expires in September 2003. If it is determined that WeightWatchers.com cannot meet its obligations under the terms of the operating lease, the Company will be required to fund this obligation and record a liability for the remaining lease payments, less any estimated sublease revenues. 9. LEGAL 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 is not expected to have a material effect on the Company's results of operations, financial condition or cash flows. 14 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 10. DERIVATIVE INSTRUMENTS AND HEDGING The Company enters into forward and swap contracts to hedge transactions denominated in foreign currencies to reduce currency risk associated with fluctuating exchange rates. These contracts are used primarily to hedge certain foreign currency cash flows and for payments arising from some of the Company's foreign currency denominated debt obligations. In addition, the Company enters into interest rate swaps to hedge a substantial portion of its variable rate debt. As of September 28, 2002 and September 29, 2001, the Company held currency and interest rate swap contracts to purchase certain foreign currencies totaling $209,481 and $207,556, respectively. The Company also held separate currency and interest rate swap contracts to sell foreign currencies of $214,845 and $212,920, respectively. As of September 28, 2002, gains of $2,656 ($1,673 net of taxes) for qualifying hedges were reported as a component of accumulated other comprehensive loss. For the three and nine months ended September 28, 2002, the ineffective portion of changes in fair values of cash flow hedges was not material. Fair value adjustments for non-qualifying hedges resulted in a reduction of net income of $1,493 ($2,369 before taxes) and $1 ($2 before taxes) for the three months ended September 28, 2002 and September 29, 2001, respectively. Fair value adjustments for non-qualifying hedges resulted in a (reduction of) net income of $(1,153) ($(1,831) before taxes) for the nine months ended September 28, 2002. Fair value adjustments for non-qualifying hedges resulted in an increase to net income of $427 ($679 before taxes) for the nine months ended September 29, 2001. In addition, for the three months ended September 28, 2002, reclassification to earnings from accumulated other comprehensive loss resulted in a reduction of net income of $159 ($252 before taxes). For the nine months ended September 28, 2002, reclassification to earnings from accumulated other comprehensive loss resulted in an increase to net income of $1,381 ($2,192 before taxes). 11. COMPREHENSIVE INCOME Comprehensive income for the Company includes net income, the effects of foreign currency translation and changes in the fair value of derivative instruments. Comprehensive income is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED -------------- -------------- -------------- -------------- SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29, 2002 2001 2002 2001 -------------- -------------- -------------- -------------- Net income $ 36,832 $ 16,118 $ 115,336 $ 65,434 Foreign currency translation adjustment 162 950 7,676 (2,904) Change in fair value of derivatives Cumulative effect of the adoption of SFAS 133 - - - (5,086) Current period changes in fair value of derivatives 22 (511) 292 (991) -------------- -------------- -------------- -------------- Comprehensive income $ 37,016 $ 16,557 $ 123,304 $ 56,453 ============== ============== ============== ==============
15 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. GUARANTOR SUBSIDIARIES The Company's payment obligations under the 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; BLTC Pty Ltd.; LLTC Pty Ltd.; Weight Watchers Asia Pacific Finance Limited Partnership (APF); 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 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 regarding 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. 16 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES SUPPLEMENTAL UNAUDITED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 28, 2002 (IN THOUSANDS)
NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 21,372 $ 26,922 $ 13,605 $ - $ 61,899 Receivables, net 3,033 9,565 3,864 - 16,462 Inventories - 18,888 7,217 - 26,105 Prepaid expenses, other 445 16,459 2,637 - 19,541 Intercompany (payables) receivables (229,965) 219,177 10,788 - - ------------ ------------ ------------ ------------ ------------ TOTAL CURRENT ASSETS (205,115) 291,011 38,111 - 124,007 Investment in consolidated subsidiaries 529,237 - - (529,237) - Property and equipment, net 1,344 8,988 1,588 - 11,920 Notes and other receivables, noncurrent 243 - - - 243 Goodwill, trademarks and other intangibles, net 27,621 281,427 724 - 309,772 Deferred income taxes 39,829 89,786 - - 129,615 Deferred financing costs, other 8,642 697 342 - 9,681 ------------ ------------ ------------ ------------ ------------ TOTAL ASSETS $ 401,801 $ 671,909 $ 40,765 $ (529,237) $ 585,238 ============ ============ ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Portion of long-term debt due within one year $ 14,106 $ 582 $ - $ - $ 14,688 Accounts payable 451 17,287 3,903 - 21,641 Accrued liabilities 31,304 22,092 6,612 - 60,008 Income taxes (41,218) 51,275 1,013 - 11,070 Deferred revenue 100 20,127 1,756 - 21,983 ------------ ------------ ------------ ------------ ------------ TOTAL CURRENT LIABILITIES 4,743 111,363 13,284 - 129,390 Long-term debt 379,963 57,410 - - 437,373 Deferred income taxes 2,481 41 647 - 3,169 Other - 400 292 - 692 ------------ ------------ ------------ ------------ ------------ TOTAL LONG-TERM DEBT AND OTHER LIABILITIES 382,444 57,851 939 - 441,234 Shareholders' equity (deficit) 14,614 502,695 26,542 (529,237) 14,614 ------------ ------------ ------------ ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 401,801 $ 671,909 $ 40,765 $ (529,237) $ 585,238 ============ ============ ============ ============ ============
17 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES SUPPLEMENTAL UNAUDITED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 29, 2001 (IN THOUSANDS)
NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------ ------------ ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 6,230 $ 8,804 $ 8,304 $ - $ 23,338 Receivables, net 2,638 9,229 1,752 - 13,619 Inventories - 21,902 4,303 - 26,205 Prepaid expenses, other 1,263 16,743 2,711 - 20,717 Intercompany (payables) receivables (157,902) 147,317 10,585 - - ---------- ---------- ---------- ---------- ---------- TOTAL CURRENT ASSETS (147,771) 203,995 27,655 - 83,879 Investment in consolidated subsidiaries 416,812 - - (416,812) - Property and equipment, net 1,221 8,132 1,372 - 10,725 Notes and other receivables, noncurrent 325 - - - 325 Goodwill, trademarks and other intangibles, net 27,643 212,843 679 - 241,165 Deferred income taxes 35,253 101,028 - - 136,281 Deferred financing costs, other 9,626 (537) 1,384 - 10,473 ---------- ---------- ---------- ---------- ---------- TOTAL ASSETS $ 343,109 $ 525,461 $ 31,090 $ (416,812) $ 482,848 ========== ========== ========== ========== ========== LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Portion of long-term debt due within one year $ 15,219 $ 480 $ - $ - $ 15,699 Accounts payable 1,287 14,077 2,334 - 17,698 Accrued liabilities 28,537 16,490 7,427 - 52,454 Income taxes (11,694) 18,544 2,289 - 9,139 Deferred revenue - 11,121 1,899 - 13,020 ---------- ---------- ---------- ---------- ---------- TOTAL CURRENT LIABILITIES 33,349 60,712 13,949 - 108,010 Long-term debt 394,800 63,520 - - 458,320 Deferred income taxes 2,481 109 579 - 3,169 Other - 624 246 - 870 ---------- ---------- ---------- ---------- ---------- TOTAL LONG-TERM DEBT AND OTHER LIABILITIES 397,281 64,253 825 - 462,359 Redeemable preferred stock 25,996 - - - 25,996 Shareholders' equity (deficit) (113,517) 400,496 16,316 (416,812) (113,517) ---------- ---------- ---------- ---------- ---------- TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) $ 343,109 $ 525,461 $ 31,090 $ (416,812) $ 482,848 ========== ========== ========== ========== ==========
18 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2002 (IN THOUSANDS)
NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ Revenues, net $ 2,150 $ 159,626 $ 27,396 $ - $ 189,172 Cost of revenues (971) 70,228 16,360 - 85,617 ------------ ------------ ------------ ------------ ------------ Gross profit 3,121 89,398 11,036 - 103,555 Marketing expenses - 10,767 3,625 - 14,392 Selling, general and administrative expenses 1,954 10,091 2,711 - 14,756 ------------ ------------ ------------ ------------ ------------ Operating income 1,167 68,540 4,700 - 74,407 Interest expense (income), net 8,611 2,164 (199) - 10,576 Other expenses (income), net 2,587 941 (2) - 3,526 Equity in income of consolidated subsidiaries 39,911 - - (39,911) - Franchise commission income (loss) 14,619 (13,558) (1,061) - - ------------ ------------ ------------ ------------ ------------ Income before income taxes and minority interest 44,499 51,877 3,840 (39,911) 60,305 Provision for income taxes 7,667 14,350 1,447 - 23,464 ------------ ------------ ------------ ------------ ------------ Income before minority interest 36,832 37,527 2,393 (39,911) 36,841 Minority interest - - 9 - 9 ------------ ------------ ------------ ------------ ------------ Net income $ 36,832 $ 37,527 $ 2,384 $ (39,911) $ 36,832 ============ ============ ============ ============ ============
19 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 29, 2001 (IN THOUSANDS)
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 5,237 10,376 2,440 - 18,053 ------------ ------------ ------------ ------------ ------------ Operating (loss) income (4,674) 49,186 4,636 - 49,148 Interest expense (income), net 10,925 3,911 (193) - 14,643 Other expenses, net 8,176 70 - - 8,246 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 ============ ============ ============ ============ ============
20 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2002 (IN THOUSANDS)
NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ Revenues, net $ 6,271 $ 527,629 $ 85,668 $ - $ 619,568 Cost of revenues (852) 230,294 48,204 - 277,646 ------------ ------------ ------------ ------------ ------------ Gross profit 7,123 297,335 37,464 - 341,922 Marketing expenses - 48,814 12,038 - 60,852 Selling, general and administrative expenses 6,520 30,826 7,740 - 45,086 ------------ ------------ ------------ ------------ ------------ Operating income 603 217,695 17,686 - 235,984 Interest expense (income), net 25,345 7,065 (615) - 31,795 Other expenses (income), net 14,468 1,255 (22) - 15,701 Equity in income of consolidated subsidiaries 123,744 - - (123,744) - Franchise commission income (loss) 48,512 (44,051) (4,461) - ------------ ------------ ------------ ------------ ------------ Income before income taxes and minority interest 133,046 165,324 13,862 (123,744) 188,488 Provision for income taxes 17,710 50,420 5,004 - 73,134 ------------ ------------ ------------ ------------ ------------ Income before minority interest 115,336 114,904 8,858 (123,744) 115,354 Minority interest - - 18 - 18 ------------ ------------ ------------ ------------ ------------ Net income $ 115,336 $ 114,904 $ 8,840 $ (123,744) $ 115,336 ============ ============ ============ ============ ============
21 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001 (IN THOUSANDS)
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 15,705 33,835 7,335 - 56,875 ------------ ------------ ------------ ------------ ------------ Operating (loss) income (12,875) 149,429 18,335 - 154,889 Interest expense (income), net 29,844 12,720 (553) - 42,011 Other expenses, net 8,555 217 4 - 8,776 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 ============ ============ ============ ============ ============
22 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2002 (IN THOUSANDS)
NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ Cash provided by operating activities $ 173,199 $ 112,457 $ 4,487 $ (123,744) $ 166,399 ------------ ------------ ------------ ------------ ------------ Investing activities: Capital expenditures (378) (2,481) (566) - (3,425) Acquisitions - (68,148) - - (68,148) Other items, net (276) (106) 27 - (355) ------------ ------------ ------------ ------------ ------------ Cash used for investing activities (654) (70,735) (539) - (71,928) ------------ ------------ ------------ ------------ ------------ Financing activities: Net decrease in short-term borrowings (741) (512) - - (1,253) Parent company investment in subsidiaries (112,425) - - 112,425 - Proceeds from borrowings 58,500 - - - 58,500 Payment of dividends (1,249) (18,723) - 18,723 (1,249) Payments on long-term debt (84,160) (6,006) - - (90,166) Redemption of redeemable preferred stock (25,000) - - - (25,000) Proceeds from stock options exercised 1,392 - - - 1,392 Cost of public equity offering (262) - - (262) ------------ ------------ ------------ ------------ ------------ Cash used for financing activities (163,945) (25,241) - 131,148 (58,038) ------------ ------------ ------------ ------------ ------------ Effect of exchange rate changes on cash and cash equivalents 6,542 1,637 1,353 (7,404) 2,128 Net increase in cash and cash equivalents 15,142 18,118 5,301 - 38,561 Cash and cash equivalents, beginning of period 6,230 8,804 8,304 - 23,338 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period $ 21,372 $ 26,922 $ 13,605 $ - $ 61,899 ============ ============ ============ ============ ============
23 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001 (IN THOUSANDS)
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) Acquisitions - (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 settlements - - 986 (986) - Purchase of treasury stock (27,132) - - - (27,132) Proceeds from sale of common stock 525 - - - 525 ----------- ----------- ----------- ----------- ----------- Cash (used for) provided by 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 year 26,699 11,191 6,611 - 44,501 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents, end of period $ 15,457 $ 11,522 $ 10,925 $ - $ 37,904 =========== =========== =========== =========== ===========
24 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001 that includes additional information about the Company, its results of operations, its financial position and its cash flows. Except for historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company's results of operations, financial position, cash flows, financing plans and business strategies. The Company has used the words "may", "will", "expect", "anticipate", "believe", "estimate", "plan", "intend", and similar expressions in this Quarterly Report on Form 10-Q and the documents incorporated by reference in this Quarterly Report on Form 10-Q to identify forward-looking statements. The Company has based these forward-looking statements on the Company's 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: - competition, including price competition and competition with self-help, medical and other weight-loss programs and products; - risks associated with the relative success of the Company's marketing and advertising; - risks associated with the continued attractiveness of the Company's programs; - risks associated with the Company's ability to meet its obligations related to its outstanding indebtedness; - risks associated with general economic conditions; 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. You should not put undue reliance on any forward-looking statements. You should understand that many important factors could cause the Company's results to differ materially from those expressed or suggested in any forward-looking statements. Except as required by law, the Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances that occur after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. CRITICAL ACCOUNTING POLICIES For a discussion of the critical accounting policies affecting the Company, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Significant Accounting Policies" beginning on page 11 of the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001. The critical accounting policies affecting the Company have not changed since December 29, 2001. 25 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Figures are rounded to the nearest one hundred thousand; percentage changes are based on rounded figures. Attendance percentage changes are based on rounded figures to the nearest thousand. COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 28, 2002 TO THE THREE MONTHS ENDED SEPTEMBER 29, 2001 Net revenues were $189.2 million for the three months ended September 28, 2002, an increase of $45.1 million or 31.3%, from $144.1 million for the three months ended September 29, 2001. Of the $45.1 million increase in net revenues, $24.8 million was attributable to classroom meeting fees, $16.5 million to total Company product sales, $0.9 million to franchise royalties and $2.9 million to publications, licensing and other royalties. On a geographical basis, net revenues from classroom meeting fees and product sales were up 34.2% in North America and 23.7% internationally. The positive impact of foreign currency exchange rates on international net revenues was $5.1 million in the three months ended September 28, 2002, accounting for 10.2% of the 23.7% total international net revenue increase. Classroom meeting fees were $123.2 million for the three months ended September 28, 2002 as compared to $98.4 million for the three months ended September 29, 2001. North American Company Owned ("NACO") classroom meeting fees were $83.7 million for the three months ended September 28, 2002, an increase of $19.3 million or 30.0%, from $64.4 million for the three months ended September 29, 2001. The increase in NACO classroom meeting fees was the result of a 29.2% increase in member attendance. Excluding the impact of franchise acquisitions, NACO organic attendance growth was 20.4%. International Company-owned classroom meeting fees were $39.5 million for the three months ended September 28, 2002, an increase of $5.5 million or 16.2%, from $34.0 million for the three months ended September 29, 2001. The increase in international Company-owned classroom meeting fees was the result of a 5.9% increase in international member attendance, driven by a strong performance in Continental Europe and Australasian operations, and the result of positive exchange rate variances. Product sales were $53.8 million for the three months ended September 28, 2002, an increase of $16.5 million or 44.2%, from $37.3 million for the three months ended September 29, 2001. Product sales increased 46.6% to $32.1 million domestically and 40.3% to $21.6 million internationally as a result of increased attendance and the Company's strategy to focus product sales efforts worldwide on core classroom products. Average product sales per attendance increased in all regions. Franchise royalties were $6.4 million domestically and $1.3 million internationally for the three months ended September 28, 2002. In total, franchise royalties increased $0.9 million or 13.2%, from $6.8 million for the three months ended September 29, 2001. The 13.2% increase is net of a reduction in franchise royalties to the Company resulting from the acquisition by the Company of three franchises subsequent to September 29, 2001. At the franchise level, revenue growth was the direct result of increased member attendance in their operations. Revenues generated from publications, licensing and other royalties were $4.5 million for the three months ended September 28, 2002, an increase of $2.9 million or 181.3%, from $1.6 million for the three months ended September 29, 2001. This increase was primarily the result of royalty income from WeightWatchers.com, which began to pay royalties in the first quarter of 2002, and higher revenues from advertising arrangements. 26 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cost of revenues was $85.6 million for the three months ended September 28, 2002, an increase of $19.6 million or 29.7%, from $66.0 million for the three months ended September 29, 2001. Gross profit margin was 54.7% for the three months ended September 28, 2002, up from 54.2% for the three months ended September 29, 2001. Marketing expenses were $14.4 million for the three months ended September 28, 2002, an increase of $3.5 million or 32.1%, as compared to $10.9 million for the three months ended September 29, 2001. Marketing expenses increased primarily as a result of further efforts to drive and support continued enrollment growth of the business, including investments made to support the launch of a program innovation in Continental Europe. As a percentage of net revenues, marketing expenses remained relatively flat for the three months ended September 28, 2002 compared to the three months ended September 29, 2001. Selling, general and administrative expenses were $14.8 million for the three months ended September 28, 2002, a decrease of $3.3 million or 18.2%, from $18.1 million for the three months ended September 29, 2001. The decrease in selling, general and administrative expenses was primarily the result of $2.5 million of goodwill amortization recorded in the three months ended September 29, 2001. As a result of the adoption of SFAS Nos. 141 and 142, the Company no longer amortizes goodwill, but rather reviews goodwill annually for impairment. In addition, legal and other professional fees, which rose last year in conjunction with our becoming a public company, are lower this year. As a result of the above, operating income was $74.4 million for the three months ended September 28, 2002, an increase of $25.3 million or 51.5%, from $49.1 million for the three months ended September 29, 2001. The operating income margin rose to 39.3% for the three months ended September 28, 2002 from 34.1% for the three months ended September 29, 2001 partially as a result of lower selling, general and administrative expenses, as noted above. Other expenses, net were $3.5 million for the three months ended September 28, 2002 as compared to $8.2 million for the three months ended September 29, 2001. For the three months ended September 28, 2002, the Company recorded unrealized currency losses on its foreign currency denominated debt and other obligations net of hedges of $2.8 million as compared to $7.1 million of losses net of hedges, in the three months ended September 29, 2001. COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 28, 2002 TO THE NINE MONTHS ENDED SEPTEMBER 29, 2001 Net revenues were $619.6 million for the nine months ended September 28, 2002, an increase of $141.3 million or 29.5%, from $478.3 million for the nine months ended September 29, 2001. Of the $141.3 million increase in net revenues, $80.5 million was attributable to classroom meeting fees, $52.3 million to total Company product sales, $3.3 million to franchise royalties and $5.2 million to publications, licensing and other royalties. On a geographical basis, meeting fees and product sales were up 40.7% in North America and 12.4% internationally, with 3.0% of the international increase resulting from currency fluctuations. The Company's business is seasonal, with revenues generally highest in the first half of the fiscal year. Classroom meeting fees were $399.0 million for the nine months ended September 28, 2002 as compared to $318.5 million for the nine months ended September 29, 2001. NACO classroom meeting fees were $272.2 million for the nine months ended September 28, 2002, an increase of $73.6 million or 37.1%, from $198.6 million for the nine months ended September 29, 2001. The increase in NACO classroom meeting fees was the result of a 34.1% increase in member attendance. Excluding the impact of three franchise acquisitions made during 2002, NACO organic attendance rose 24.6%. 27 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS International Company-owned classroom meeting fees were $126.8 million for the nine months ended September 28, 2002, an increase of $6.9 million or 5.8%, from $119.9 million for the nine months ended September 29, 2001. On a year to date basis, the impact of foreign currency exchange rates was 2.9%. International member attendances increased 2.0% overall. Continental Europe and Other regions posted gains of 4.2% and 6.5%, respectively, while attendances in the United Kingdom were down slightly, 0.8%. Product sales were $182.3 million for the nine months ended September 28, 2002, an increase of $52.3 million or 40.2%, from $130.0 million for the nine months ended September 29, 2001. Product sales increased 50.2% to $112.2 million domestically and 26.5% to $70.1 million internationally, reflecting attendance growth in NACO as well as the Company's strategy to focus product sales efforts worldwide on core classroom products. Average product sales per attendance have increased in all regions. Franchise royalties were $21.3 million domestically and $4.4 million internationally for the nine months ended September 28, 2002. In total, franchise royalties increased $3.3 million or 14.7%, from $22.4 million for the nine months ended September 29, 2001, on the strength of increased member attendance and product sales partially offset by the loss of franchise royalties revenue from three franchises which were acquired by the Company subsequent to September 29, 2001. Revenues from publications, licensing and other royalties were $12.6 million for the nine months ended September 28, 2002, an increase of $5.2 million or 70.3%, from $7.4 million for the nine months ended September 29, 2001. This increase was in large part the result of licensing royalty income from WeightWatchers.com which began to pay royalties in the first quarter of 2002. Cost of revenues was $277.6 million for the nine months ended September 28, 2002, an increase of $62.5 million or 29.1%, from $215.1 million for the nine months ended September 29, 2001. Gross profit margin was 55.2% for the nine months ended September 28, 2002, slightly higher than the 55.0% level of the nine months ended September 29, 2001. Marketing expenses were $60.8 million for the nine months ended September 28, 2002, an increase of $9.3 million or 18.1%, as compared to $51.5 million for the nine months ended September 29, 2001. Marketing expenses increased to support the continuing growth of the business. As a percentage of net revenues, marketing expenses decreased from 10.8% for the nine months ended September 29, 2001 to 9.8% for the nine months ended September 28, 2002, as the Company continues to leverage its marketing efforts across the growing revenue base. Selling, general and administrative expenses were $45.1 million for the nine months ended September 28, 2002, a decrease of $11.7 million or 20.6%, from $56.8 million for the nine months ended September 29, 2001. The decrease in selling, general and administrative expenses was the result of two non-recurring items in the nine months ended September 29, 2001: a one-time charge of $6.1 million for the write-off of a receivable from a licensing agreement and $7.3 million of goodwill amortization, which is no longer required under SFAS Nos. 141 and 142. Excluding these items selling, general and administrative expenses, which were down as a percentage of revenues, rose 3.9% in absolute dollars as a result of normal increases for salaries and other expenses. As a result of the above, operating income was $236.0 million for the nine months ended September 28, 2002, an increase of $81.1 million or 52.4%, from $154.9 million for the nine months ended September 29, 2001. The operating income margin for the nine months ended September 28, 2002 was 38.1% as compared to 32.4% for the nine months ended September 29, 2001. Excluding the two non-recurring 28 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS selling, general and administrative items mentioned above, last year's operating income margin for the nine months was 35.2%. Other expenses, net were $15.7 million for the nine months ended September 28, 2002 as compared to $8.8 million for the nine months ended September 29, 2001. For the nine months ended September 28, 2002, the Company recorded unrealized currency losses on its foreign currency denominated debt and other obligations net of hedges of $12.8 million as compared to a $2.4 million gain in the nine months ended September 29, 2001, an unfavorable impact of $15.2 million. Reserves recorded against the loan to WeightWatchers.com in 2001 more than offset the impact of the unrealized currency gains. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended September 28, 2002, the Company's primary source of funds to meet working capital needs was cash from operations. Cash and cash equivalents increased $38.6 million during the nine month period ended September 28, 2002, to $61.9 million. Cash provided by operating activities of $166.4 million in the nine months ended September 28, 2002 was augmented during the first quarter of 2002 by borrowings under the Company's Revolving Credit Facility. These borrowings were fully repaid by the end of the second quarter. Funds were used primarily for investing and financing activities. Investing activities totaled $71.9 million in the nine months ended September 28, 2002 and were partially attributable to $46.5 million paid in connection with the acquisition of the Company's North Jersey franchise, acquired on January 18, 2002, and $3.4 million invested in capital expenditures. The North Jersey franchise acquisition was financed through borrowings under the Company's Revolving Credit Facility. Two other acquisitions made during the period were fully paid with $21.6 million of cash from operations. Capital spending during the period consisted primarily of leasehold improvements, furniture and equipment for meeting locations and information system expenditures. Cash used for financing activities totaled $58.0 million. Included were repayments of $66.1 million in principal on the Company's Credit Facility, including $20.0 million in addition to the scheduled payments of $46.1 million, the repurchase of one million shares of the Company's Series A Preferred Stock held by Heinz for $25.0 million on March 1, 2002 and the cumulative final payment of $1.2 million of dividends on the Company's Series A Preferred Stock. The Company's total debt was $452.1 million and $474.0 million at September 28, 2002 and December 29, 2001, respectively. As of September 28, 2002, the Company had approximately $45.0 million of additional borrowing capacity available under the Company's Revolving Credit Facility. The Company's debt consists of both fixed and variable-rate instruments. At September 28, 2002, fixed-rate debt constituted approximately 55% of the Company's total debt. 29 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following schedule sets forth the Company's long-term debt obligations as of September 28, 2002. LONG-TERM DEBT AS OF SEPTEMBER 28, 2002 (in millions, except percentages)
BALANCE INTEREST RATE ---------- ------------- EURO 100.0 million 13% Senior Subordinated Notes Due 2009 $ 98.1 13.00% US $150.0 million 13% Senior Subordinated Notes Due 2009 150.0 13.00% Term A Loan due 2005 48.1 3.72% Term B Loan due 2007 97.9 4.31% Transferable Loan Certificate due 2007 58.0 4.36% Revolving Credit Facility - - ---------- Total Debt 452.1 Less Current Portion (14.7) ---------- Total Long-Term Debt $ 437.4 ==========
The Term Loan A facility, the Term Loan B facility, the TLC facility and the Revolving Credit Facility bear interest at a rate equal to (a) in the case of the Term Loan A facility and the Revolving Credit Facility, LIBOR plus 1.75% or, at the Company's option, the alternate base rate (as defined in the Credit Facility) plus 0.75%, (b) in the case of the Term Loan B facility and the TLC facility, LIBOR plus 2.50% or, at the Company's option, the alternate base rate plus 1.50%. In addition to paying interest on outstanding principal under the Credit Facility, the Company is required to pay a commitment fee to the lenders under the Revolving Credit Facility with respect to the unused commitments at a rate equal to 0.50% per year. The Company's Credit Facility contains covenants that restrict the Company's ability to incur additional indebtedness, pay dividends on and redeem capital stock, make other restricted payments, including investments, sell the Company's assets and enter into consolidations, mergers and transfers of all or substantially all of the Company's assets. The Company's Credit Facility also requires the Company to maintain specified financial ratios and satisfy financial condition tests. The Company's obligations under the Notes are subordinate and junior in right of payment to all of the Company's existing and future senior indebtedness, including all indebtedness under the Credit Facility. The indentures, pursuant to which the Notes were issued, restrict the Company's ability to incur additional indebtedness, issue shares of disqualified stock and preferred stock, pay dividends, make other restricted payments, including investments, create limitations on the ability of the Company's subsidiaries to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the Company's assets. The Company and/or affiliates of the Company, including entities related to Artal Luxembourg S.A., may from time to time, depending on market conditions, purchase the Notes in the open market or by other means. The Company's credit ratings by Moody's at September 28, 2002 for the Credit Facility and the Notes were "Ba1" and "Ba3", respectively. The Company's credit ratings by Standard & Poor's at September 28, 2002 for the Credit Facility and the Notes were "BB - " and "B", respectively. 30 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following schedule sets forth the Company's year by year long-term debt obligations as of September 28, 2002. LONG-TERM DEBT OBLIGATIONS (INCLUDING CURRENT PORTION) AS OF SEPTEMBER 28, 2002 (in millions) PAYMENTS DUE BY FISCAL YEAR Remainder of Year 2002 $ 3.7 2003 18.3 2004 16.1 2005 15.5 2006 1.6 Thereafter 396.9 --------- Total $ 452.1 =========
Debt obligations due to be repaid in the next twelve months are expected to be satisfied with operating cash flows. The Company is not aware of factors that are reasonably likely to adversely affect liquidity trends or increase the Company's risk beyond the risk factors presented in other Company filings. The Company believes that cash flows from operating activities, together with borrowings available under the Company's Revolving Credit Facility, will be sufficient for the next twelve months to fund currently anticipated capital expenditure requirements, debt service requirements and working capital requirements. Our expected capital expenditure requirements over the next 12 months include, but are not limited to, leasehold improvements, furniture and equipment for meeting locations and administrative offices and information system upgrades. Any future acquisitions, joint ventures or other similar transactions could require additional capital and the Company cannot be certain that any additional capital will be available on acceptable terms or at all. The Company's ability to fund the Company's capital expenditure requirements, interest and principal payment obligations, and working capital requirements as well as its ability to comply with all of the financial covenants under the Company's 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 the Company's control. OFF-BALANCE SHEET TRANSACTIONS As part of its on-going business, the Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 31 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RELATED PARTY TRANSACTIONS For a discussion of related party transactions affecting the Company, see "Item 13. Certain Relationships and Related Transactions" beginning on page 32 of the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001. Other than during the normal course of business and as set forth below, the related party transactions affecting the Company have not changed since December 29, 2001. Nellson Nutraceutical, a subsidiary of Artal Luxembourg, S.A. and a supplier of Weight Watchers International, was sold by Artal Luxembourg, S.A. on October 4, 2002. See Note 8 to the unaudited consolidated financial statements contained herein for further discussion. SEASONALITY The Company's business is seasonal, with revenues generally decreasing at year end and during the summer months. The Company's advertising schedule supports the three key enrollment-generating seasons of the year: winter, spring and fall. Due to the timing of the Company's marketing expenditures, particularly the higher level of expenditures in the first quarter, the Company's operating income for the second quarter is generally the strongest, with the fourth quarter generally being the weakest. ACCOUNTING STANDARDS In June 2001, FASB issued Statement of Financial Accounting Standards, or SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses the mandatory use of the purchase method of accounting for business combinations, elimination of indefinite life goodwill amortization, a revised framework for testing goodwill, impairment at a "reporting unit" level and new criteria for the identification and potential amortization of other intangible assets. The Company adopted SFAS No. 142 on December 30, 2001. See Note 3 to the unaudited consolidated financial statements contained herein for further discussion. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of AICPA Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS No. 144 on December 30, 2001 and will adopt SFAS No. 143 on December 29, 2002. The adoption of SFAS No. 144 did not have a material impact on the Company's results of operations, the financial position or cash flows nor does the Company expect the adoption of SFAS No. 143 to have any such material impact. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB No. 13 and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from the extinguishment of debt to be classified as an extraordinary item, and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 are effective for the Company beginning December 29, 2002. The Company does not expect the 32 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS adoption of SFAS No. 145 to have a material impact on its results of operations, financial position or cash flows. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability for the cost associated with an exit or disposal activity be recognized when the liability is incurred and also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. 33 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Based on the overall interest rate exposure on the Company's fixed rate borrowings at September 28, 2002, 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. Based on variable rate debt levels at September 28, 2002, a 10% change in market interest rates would have less than a 5% impact on the Company's net interest expense. The Company uses foreign currency forward contracts to more properly align the underlying sources of cash flow with the Company's debt servicing requirements. At September 28, 2002, the Company had long-term foreign currency forward contracts receivables with notional amounts of $44.0 million and Euro 76.0 million, offset by foreign currency forward contracts payables with notional amounts of L59.2 million and $21.9 million. For a more detailed discussion of the quantitative and qualitative disclosures about market risks affecting the Company, see Item 7A "Quantitative and Qualitative Disclosure About Market Risk" beginning on page 21 of the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001. The Company's exposure to market risks has not changed materially since December 29, 2001. 34 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES ITEM 4. CONTROLS AND PROCEDURES Based on their evaluation, as of a date within 90 days of the filing of this Quarterly Report on Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer have concluded the Company's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 35 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 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 Nothing to report under this item. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended September 28, 2002. 36 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 12, 2002 By: /s/ LINDA HUETT ----------------------------------------------- Linda Huett President, Chief Executive Officer and Director (Principal Executive Officer) Date: November 12, 2002 By: /s/ ANN M. SARDINI ----------------------------------------------- Ann M. Sardini Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 37 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION CERTIFICATIONS I, Linda Huett, President and Chief Executive Officer of Weight Watchers International, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Weight Watchers International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data, and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 Signature: /s/ Linda Huett ------------------------------- Linda Huett President and Chief Executive Officer 38 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION I, Ann M. Sardini, Vice President and Chief Financial Officer of Weight Watchers International, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Weight Watchers International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data, and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 Signature: /s/ Ann M. Sardini ------------------------------- Ann M. Sardini Vice President and Chief Financial Officer EX-99.1 3 a2093378zex-99_1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Weight Watchers International, Inc. (the "Company") on Form 10-Q for the period ended September 28, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Linda Huett, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Linda Huett Linda Huett Chief Executive Officer Date: November 12, 2002 EX-99.2 4 a2093378zex-99_2.txt EXHIBIT 99.2 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Weight Watchers International, Inc. (the "Company") on Form 10-Q for the period ended September 28, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ann M. Sardini, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Ann M. Sardini Ann M. Sardini Chief Financial Officer Date: November 12, 2002 -----END PRIVACY-ENHANCED MESSAGE-----