1 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 March 31, 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 May 15, 2001 was 23,130,000. PART I - - FINANCIAL INFORMATION
2 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES INDEX - ------------------------------------------------------------------------------ Part I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2001 (unaudited) and as of December 30, 2000 2 Unaudited Consolidated Statements of Operations for the three months ended March 31, 2001 and April 29, 2000 3 Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and April 29, 2000 4 Notes to Unaudited Consolidated Financial Statements 5 - 16 Item 2. Management's Discussion and Analysis of Financial Condition 17 - 18 and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Part II. OTHER INFORMATION 20 - 21 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
3 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 2 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> March 31, December 30, 2001 2000 ASSETS (Unaudited) <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 36,886 $ 44,501 Receivables, net 21,402 14,678 Notes receivable, current 2,267 2,106 Inventories 11,766 15,044 Prepaid expenses, other 11,240 17,111 --------- --------- TOTAL CURRENT ASSETS 83,561 93,440 Property and equipment, net 7,941 8,145 Notes and other receivables, noncurrent 1,070 5,601 Goodwill, net 231,248 150,901 Trademarks and other intangible assets, net 7,110 6,648 Deferred income taxes 67,207 67,207 Deferred financing costs, other 15,046 14,275 --------- --------- TOTAL ASSETS $ 413,183 $ 346,217 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Portion of long-term debt due within one year $ 16,820 $ 14,120 Accounts payable 9,444 11,989 Accrued liabilities 59,357 47,636 Income taxes 12,190 3,660 Deferred revenue 14,700 5,836 --------- --------- TOTAL CURRENT LIABILITIES 112,511 83,241 Long-term debt 478,860 456,530 Deferred income taxes 3,059 3,107 Other 1,333 121 --------- --------- TOTAL LONG-TERM DEBT AND OTHER LIABILITIES 483,252 459,758 Redeemable preferred stock 26,371 25,996 Stockholders' deficit Common stock, par value $0 per share, 23,800 shares authorized, issued and outstanding -- -- Accumulated deficit (193,644) (216,507) Accumulated other comprehensive loss (15,307) (6,271) --------- --------- TOTAL STOCKHOLDERS' DEFICIT (208,951) (222,778) --------- --------- TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT $ 413,183 $ 346,217 ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
4 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 3 CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Three Months Ended -------------------------- March 31, April 29, 2001 2000 (Unaudited) <S> <C> <C> Revenues, net $ 171,951 $ 132,862 Cost of revenues 77,443 62,863 --------- --------- Gross profit 94,508 69,999 Marketing expenses 27,100 18,612 Selling, general and administrative expenses 17,627 17,273 --------- --------- Operating income 49,781 34,114 Interest expense, net 14,120 14,997 Other expenses (income), net 550 (10,843) --------- --------- Income before income taxes and minority interest 35,111 29,960 Provision for income taxes 11,815 12,316 --------- --------- Income before minority interest 23,296 17,644 Minority interest 58 131 --------- --------- Net Income $ 23,238 $ 17,513 ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
5 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 4 CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) - ------------------------------------------------------------------------------- <TABLE> <CAPTION> Three Months Ended ------------------------- March 31, April 29, 2001 2000 (Unaudited) <S> <C> <C> Operating activities: Net income $ 23,238 $ 17,513 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 3,448 2,750 Deferred tax benefit -- 6,507 Accounting for equity investment 5,863 -- Allowance for doubtful accounts 4,011 280 Reserve for inventory obsolescence, other 391 1,337 Foreign currency exchange rate gain (6,440) (9,690) Other items, net 80 (113) Changes in cash due to: Receivables (6,421) 1,456 Inventories 2,804 702 Prepaid expenses 462 (800) Accounts payable (1,858) 2,675 Accrued liabilities 12,122 (10,558) Deferred revenue 9,053 2,042 Income taxes 8,782 1,158 -------- -------- Cash provided by operating activities 55,535 15,259 -------- -------- Investing activities: Capital expenditures (691) (513) Advances to equity investment (5,863) -- Acquisition (83,800) -- Other items, net (1,805) (3,051) -------- -------- Cash used for investing activities (92,159) (3,564) -------- -------- Financing activities: Net (decrease) increase in short-term borrowings (629) 1,235 Proceeds from borrowings 60,000 (192) Payment of dividends -- (374) Payments of long-term debt (28,530) (3,530) Deferred financing costs -- (165) Net Parent advances -- 2,644 -------- -------- Cash provided by (used for) financing activities 30,841 (382) -------- -------- Effect of exchange rate changes on cash and cash equivalents (1,832) (1,716) Net (decrease) increase in cash and cash equivalents (7,615) 9,597 Cash and cash equivalents, beginning of period 44,501 34,446 -------- -------- Cash and cash equivalents, end of period $ 36,886 $ 44,043 ======== ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
6 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 5 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 1. GENERAL The accompanying consolidated financial statements include the accounts of Weight Watchers International, Inc. and Subsidiaries (the "Company"). The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States 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 month period 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 month period 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. ACQUISITION On January 16, 2001, the Company completed the acquisition of Weight Watchers' franchised territories and certain business assets of Weighco Enterprises, Inc., Weighco of Northeast, Inc., and Weighco of Southwest, Inc. ("Weighco"), pursuant to the terms of the Asset Purchase Agreement, dated as of December 11, 2000. The transaction was accounted for by the purchase method of accounting. On a preliminary basis, substantially all of the purchase price in excess of the net assets acquired was recorded as goodwill and will be adjusted once the agreement is finalized.
7 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 6 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- The purchase price for the acquisition was $83.8 million. Of this amount, the Company obtained $60 million pursuant to the Amended and Restated Credit Agreement, dated as of January 16, 2001, among Weight Watchers International, Inc., WW Funding Corp. and various financial institutions. The following table presents unaudited pro forma financial information that reflects the combined results of operations of the Company and Weighco as if the acquisition had occurred as of the beginning of the respective period. 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 combined companies. <TABLE> <CAPTION> Pro Forma for the Three Months Ended ----------------------- April 29, 2000 (In thousands) <S> <C> Revenue $ 145,227 Net income $ 19,085 </TABLE> 4. RECAPITALIZATION On September 29, 1999, the Company effected a recapitalization and stock purchase agreement (the "Transaction") with its former parent, H.J. Heinz Company ("Heinz"). The Company redeemed shares of common stock from Heinz for $349.5 million. The $349.5 million consisted of $324.5 million of cash and $25.0 million of the Company's redeemable Series A Preferred Stock. After the redemption, Artal Luxembourg S.A. purchased 94% of the Company's remaining common stock from Heinz for $223.7 million. The recapitalization and stock purchase was financed through borrowings under credit facilities amounting to approximately $237.0 million and by issuing Senior Subordinated Notes amounting to $255.0 million, due 2009. The balance of the borrowings was utilized to refinance debt incurred prior to the 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 $15.9 million of goodwill. In connection with the Transaction, the Company incurred approximately $8.3 million in transaction costs and $15.9 million 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 $72.1 million was established against the corresponding deferred tax asset of $144.2 million. Management concluded, more 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 the future periods. 5. COMPREHENSIVE INCOME Comprehensive income for the Company includes net income and the effects of foreign currency translation and derivative instruments.
8 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 7 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Comprehensive income for the three months ended March 31, 2001 and April 29, 2000 were as follows: <TABLE> <CAPTION> For the Three Months Ended -------------------------- March 31, April 29, 2001 2000 (In thousands) <S> <C> <C> Net income $ 23,238 $ 17,513 Foreign currency translation adjustment (3,950) (2,088) Cumulative effect of the adoption of SFAS 133 (5,086) -- -------- -------- Comprehensive income $ 14,202 $ 15,425 ======== ======== </TABLE> Accumulated other comprehensive loss, which is classified as a separate component of stockholders' equity, was $15,307 and $6,271 at March 31, 2001 and December 30, 2000, respectively. 6. 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 $75.0 million term loan A facility ("Term Loan A"), (ii) a $75.0 million term loan B facility ("Term Loan B"), (iii) an $87.0 million transferable loan certificate ("TLC") and (iv) a revolving credit facility with borrowings up to $30.0 million ("Revolving Credit Facility"). The Credit Facility was amended and restated on January 16, 2001 to provide for an additional $50 million in borrowings in connection with the acquisition of Weighco (see Note 3) as follows: (i) Term Loan A was increased by $15.0 million, (ii) the Revolving Credit Facility was increased by $15.0 million to $45.0 million and (iii) a new $20.0 million 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 March 31, 2001, the interest rates were 8.325% for Term Loan A, 9.5% for Term Loan B, 9.41% for the TLC and 8.7% for Term Loan D. All assets of the Company collateralize the Credit Facility. In addition, as part of the Transaction, the Company issued $150.0 million USD denominated and 100.0 million EUR denominated principal amount of 13% Senior Subordinated Notes due 2009 (the "Notes") to qualified institutional buyers. At March 31, 2001, the 100.0 million EUR notes translated into $87.8 million USD denominated equivalent. The impact of the change in foreign exchange rates related to euro denominated debt are reflected in the income statement. Interest is payable on the Notes semi-annually on April 1 and October 1 of each year, commencing April 1, 2000. The Company uses interest rate swaps and foreign currency forward contracts in association with its debt. The Notes are uncollateralized senior subordinated obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness of the Company, including the Credit Facility. The notes are guaranteed by certain subsidiaries of the Company.
9 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 8 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 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. 7. 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 No. 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 $5.1 million to accumulated other comprehensive loss. The Company enters into forward and swap contracts to hedge 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 its variable rate debt. The Company is currently evaluating its hedging designations for the quarter beginning April 1, 2001. Pursuant to the provisions of SFAS No. 133, the immaterial fair value adjustment for the quarter ended March 31, 2001 has been recorded in the consolidated statement of earnings within other expenses (income), net. 8. WEIGHTWATCHERS.COM NOTE AND WARRANT AGREEMENTS On May 3, 2001, the Company amended and restated its loan agreement with WeightWatchers.com increasing the aggregate principal amount from $23.5 million to $28.5 million. 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. All principal and interest outstanding under the note will be payable on September 30, 2003. The note may be prepaid at any time in whole or in part, without premium or penalty. During the three month period ended March 31, 2001, the Company advanced WeightWatchers.com $5.2 million pursuant to the note which in addition to $.7 million of interest, were classified in Other expenses, net. Under Warrant Agreements dated November 24, 1999, October 1, 2000 and May 3, 2001, each agreement entered into between WeightWatchers.com and the Company, the Company received warrants to purchase 5,861,664 shares of WeightWatchers.com's common stock in connection with the loans that the Company has made to WeightWatchers.com under the WeightWatchers.com Note described above. These warrants will expire on November 24, 2009, October 1, 2010 and May 2, 2011, respectively and may be exercised at a price of $7.14 per warrant share. The exercise price and the number of shares of WeightWatchers.com's common stock available for purchase upon exercise of the warrants may be adjusted from time to time upon the occurrence of certain described events.
10 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 9 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 9. 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 new media. 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 financial statements. 10. INCOME TAXES As a result of the Transaction, the Company has provided for a valuation allowance for its deferred tax assets. Although realization is not assured, management believes it is more likely than not, that the net deferred tax assets will be realized. 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 years. The primary differences between the U.S. federal statutory tax rate and the Company's effective tax rate of 33.7% are the valuation allowance and foreign income taxes. 11. SUBSEQUENT EVENTS 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, all of the common stock of the Company currently owned by Heinz. In the event all of the Put and Call options are exercised, the value of the transaction will approximate $27.1 million, plus related costs. On April 30, 2001, Heinz exercised its option to sell approximately 45% of their shares for $12.1 million, which was funded with cash from operations. The Company will fund any future transactions with cash from operations and, if needed, its existing credit facilities pursuant to the Amended and Restated Credit Agreement, dated as of January 16, 2001, as amended, among Weight Watchers International, Inc., WW Funding Corp., Various Financial Institutions, as the Lenders, Credit Suisse First Boston, BHF (USA) Capital Corporation, and The Bank of Nova Scotia. 12. 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
11 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 10 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 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.
12 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 11 SUPPLEMENTAL UNAUDITED CONSOLIDATING BALANCE SHEET AS OF MARCH 31, 2001 (IN THOUSANDS) - ------------------------------------------------------------------------------- <TABLE> <CAPTION> Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 13,053 $ 16,195 $ 7,638 $ -- $ 36,886 Receivables, net 5,306 14,016 2,080 -- 21,402 Notes receivable, current 2,265 -- 2 -- 2,267 Inventories -- 8,348 3,418 -- 11,766 Prepaid expenses, other 3,350 6,335 1,555 -- 11,240 Intercompany receivables (payables) 45,177 (55,995) 10,818 -- -- --------- --------- --------- --------- --------- TOTAL CURRENT ASSETS 69,151 (11,101) 25,511 -- 83,561 Investment in consolidated subsidiaries 188,793 -- -- (188,793) -- Property and equipment, net 1,212 5,612 1,117 -- 7,941 Notes and other receivables, noncurrent 1,070 -- -- -- 1,070 Goodwill, net 27,967 202,610 671 -- 231,248 Trademarks and other intangible assets, net 911 6,189 10 -- 7,110 Deferred income taxes (44,713) 111,920 -- -- 67,207 Deferred financing costs, other 14,405 266 375 -- 15,046 --------- --------- --------- --------- --------- TOTAL ASSETS $ 258,796 $ 315,496 $ 27,684 $(188,793) $ 413,183 ========= ========= ========= ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES Portion of long-term debt due within one year $ 15,950 $ 870 $ -- $ -- $ 16,820 Accounts payable 344 7,068 2,032 -- 9,444 Accrued liabilities 26,984 23,366 9,007 -- 59,357 Income taxes 2,017 7,920 2,253 -- 12,190 Deferred revenue -- 13,409 1,291 -- 14,700 --------- --------- --------- --------- --------- TOTAL CURRENT LIABILITIES 45,295 52,633 14,583 -- 112,511 Long-term debt 393,600 85,260 -- -- 478,860 Deferred income taxes 2,481 -- 578 -- 3,059 Other -- 1,150 183 -- 1,333 --------- --------- --------- --------- --------- TOTAL LONG-TERM DEBT AND OTHER LIABILITIES 396,081 86,410 761 -- 483,252 Redeemable preferred stock 26,371 -- -- -- 26,371 Stockholders' (deficit) equity (208,951) 176,453 12,340 (188,793) (208,951) --------- --------- --------- --------- --------- TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY $ 258,796 $ 315,496 $ 27,684 $(188,793) $ 413,183 ========= ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
13 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 12 SUPPLEMENTAL UNAUDITED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 30, 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> 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 STOCKHOLDERS' (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 Stockholders' (deficit) equity (222,778) 165,896 9,980 (175,876) (222,778) --------- --------- --------- --------- --------- TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY $ 216,398 $ 282,202 $ 23,493 $(175,876) 346,217 ========= ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
14 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 13 SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Revenues, net $ 881 $ 141,574 $ 29,496 $ -- $ 171,951 Cost of revenues 502 61,359 15,582 -- 77,443 --------- --------- --------- --------- --------- Gross profit 379 80,215 13,914 -- 94,508 Marketing expenses -- 22,088 5,012 -- 27,100 Selling, general and administrative expenses 5,679 9,620 2,328 -- 17,627 --------- --------- --------- --------- --------- Operating (loss) income (5,300) 48,507 6,574 -- 49,781 Interest expense (income), net 9,720 4,565 (165) -- 14,120 Other (income) expenses, net (598) 1,142 6 -- 550 Equity in income of consolidated subsidiaries 25,355 -- -- (25,355) -- Franchise commission income (loss) 13,074 (11,506) (1,568) -- -- --------- --------- --------- --------- --------- Income before income taxes and minority interest 24,007 31,294 5,165 (25,355) 35,111 Provision for income taxes 769 9,313 1,733 -- 11,815 --------- --------- --------- --------- --------- Income before minority interest 23,238 21,981 3,432 (25,355) 23,296 Minority interest -- -- 58 -- 58 --------- --------- --------- --------- --------- Net income $ 23,238 $ 21,981 $ 3,374 $ (25,355) $ 23,238 ========= ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
15 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 14 SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 29, 2000 (IN THOUSANDS) - ------------------------------------------------------------------------------- <TABLE> <CAPTION> Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Revenues, net $ 9,722 $ 102,308 $ 20,832 $ -- $ 132,862 Cost of revenues 2,110 48,626 12,127 -- 62,863 --------- --------- --------- --------- --------- Gross profit 7,612 53,682 8,705 -- 69,999 Marketing expenses 803 15,348 2,461 -- 18,612 Selling, general and administrative expenses 10,526 4,945 1,802 -- 17,273 --------- --------- --------- --------- --------- Operating (loss) income (3,717) 33,389 4,442 -- 34,114 Interest expense (income), net 11,804 3,201 (8) -- 14,997 Other (income) expenses, net (10,481) (385) 23 -- (10,843) Equity in income of consolidated subsidiaries 10,356 -- -- (10,356) -- Franchise commission income (loss) 14,898 (13,396) (1,502) -- -- --------- --------- --------- --------- --------- Income before income taxes and minority interest 20,214 17,177 2,925 (10,356) 29,960 Provision for income taxes 2,701 7,910 1,705 -- 12,316 --------- --------- --------- --------- --------- Income before minority interest 17,513 9,267 1,220 (10,356) 17,644 Minority interest -- -- 131 -- 131 --------- --------- --------- --------- --------- Net income $ 17,513 $ 9,267 $ 1,089 $ (10,356) $ 17,513 ========= ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
16 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 15 SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Operating activities: Net income $ 23,238 $ 21,981 $ 3,374 $ (25,355) $ 23,238 Adjustments to reconcile net income to cash (used for) provided by operating activities: Depreciation and amortization 1,096 2,228 124 -- 3,448 Accounting for equity investment 5,863 -- -- -- 5,863 Allowance for doubtful accounts 4,000 11 -- -- 4,011 Reserve for inventory obsolescence, other -- 391 -- -- 391 Foreign currency exchange rate gain (6,440) -- -- -- (6,440) Other items, net -- 15 65 -- 80 Changes in cash due to: Receivables 2,454 (8,142) (733) -- (6,421) Inventories -- 3,045 (241) -- 2,804 Prepaid expenses 457 (769) 774 -- 462 Intercompany receivables/payables (56,098) 59,142 (3,044) -- -- Accounts payable (233) (979) (646) -- (1,858) Accrued liabilities 3,475 6,338 2,309 -- 12,122 Deferred revenue -- 8,755 298 -- 9,053 Income taxes 340 8,634 (192) -- 8,782 --------- --------- --------- --------- --------- Cash (used for) provided by operating activities (21,848) 100,650 2,088 (25,355) 55,535 --------- --------- --------- --------- --------- Investing activities: Capital expenditures (20) (546) (125) -- (691) Advances to equity investment (5,863) -- -- -- (5,863) Acquisition -- (83,800) -- -- (83,800) Other items, net (404) (1,346) (55) -- (1,805) --------- --------- --------- --------- --------- Cash (used for) provided by investing activities (6,287) (85,692) (180) -- (92,159) --------- --------- --------- --------- --------- Financing activities: Net decrease in short-term borrowings (355) (274) -- -- (629) Parent company investment in subsidiaries (12,917) -- -- 12,917 -- Proceeds from borrowings 60,000 -- -- -- 60,000 Payment of dividends -- (8,488) -- 8,488 -- Payments on long-term debt (28,313) (217) -- -- (28,530) --------- --------- --------- --------- --------- Cash provided by (used for) financing activities 18,415 (8,979) -- 21,405 30,841 --------- --------- --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents (3,926) (975) (881) 3,950 (1,832) Net (decrease) increase in cash and cash equivalents (13,646) 5,004 1,027 -- (7,615) Cash and cash equivalents, beginning of period 26,699 11,191 6,611 -- 44,501 --------- --------- --------- --------- --------- Cash and cash equivalents, end of period $ 13,053 $ 16,195 $ 7,638 $ -- $ 36,886 ========= ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
17 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 16 SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 29, 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Operating activities: Net income $ 17,513 $ 9,267 $ 1,089 $(10,356) $ 17,513 Adjustments to reconcile net income to cash provided by (used for) operating activities: Depreciation and amortization 1,066 1,143 541 -- 2,750 Deferred tax provision (benefit) 86,853 (79,650) (696) -- 6,507 Allowance for doubtful accounts 213 67 -- -- 280 Reserve for inventory obsolescence, other -- 1,321 16 -- 1,337 Foreign currency exchange rate gain (9,690) -- -- -- (9,690) Other items, net -- (196) 83 -- (113) Changes in cash due to: Receivables 332 1,241 (117) -- 1,456 Inventories -- (72) 774 -- 702 Prepaid expenses (50) (1,210) 460 -- (800) Accounts payable 1,205 1,470 -- -- 2,675 Accrued liabilities (10,816) (589) 847 -- (10,558) Deferred revenue -- 2,058 (16) -- 2,042 Income taxes (3,435) 3,313 1,280 -- 1,158 -------- -------- -------- -------- -------- Cash provided by (used for) operating activities 83,191 (61,837) 4,261 (10,356) 15,259 -------- -------- -------- -------- -------- Investing activities: Capital expenditures (130) (232) (151) -- (513) Other items, net (2,051) (1,016) 16 -- (3,051) -------- -------- -------- -------- -------- Cash used for investing activities (2,181) (1,248) (135) -- (3,564) -------- -------- -------- -------- -------- Financing activities: Net increase in short-term borrowings -- 1,235 -- -- 1,235 Parent company investment in subsidiaries (9,379) -- -- 9,379 -- Proceeds from borrowings -- (192) -- -- (192) Payment of dividends (374) -- -- -- (374) Payments on long-term debt (3,312) (218) -- -- (3,530) Deferred financing costs (165) -- -- -- (165) Net Parent settlements (58,575) 63,986 (1,690) (1,077) 2,644 -------- -------- -------- -------- -------- Cash (used for) provided by financing activities (71,805) 64,811 (1,690) 8,302 (382) -------- -------- -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents (2,101) (1,107) (562) 2,054 (1,716) Net increase in cash and cash equivalents 7,104 619 1,874 -- 9,597 Cash and cash equivalents, beginning of year 3,880 21,847 8,719 -- 34,446 -------- -------- -------- -------- -------- Cash and cash equivalents, end of year $ 10,984 $ 22,466 $ 10,593 $ -- $ 44,043 ======== ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
18 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17 - -------------------------------------------------------------------------------- COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 TO THREE MONTHS ENDED APRIL 29, 2000 In the opinion of management the comparison of the three months ended March 31, 2001 to the three months ended April 29, 2000 most closely reflects the Company's performance. Revenues for the quarter increased 29.4%, or $39.1 million, to $172.0 million. The Weighco acquisition accounted for $17.1 million of the total increase. The revenue increase was driven by continued growth in meeting revenues and product sales resulting from increased attendance and the Company's strategy to focus on core classroom products together with the roll-out of new program innovations and price increases in selected markets. Gross profit margins for the quarter increased to 55.0% from 52.7% in the prior period. The increase in gross profit margins was due to price increases in selected markets, improved operating efficiencies and the higher margins generated by product sales. Marketing expenses were $27.1 million for the three months ended March 31, 2001, an increase of $8.5 million or 45.7% from $18.6 million for the three months ended April 29, 2000. Of the $8.5 million increase, $6.5 million was primarily the result of additional advertising to promote the new program innovations. Selling, general and administrative expenses were $17.6 million for the three months ended March 31, 2001, an increase of $0.3 million from $17.3 million for the three months ended April 29, 2000. As a percentage of revenue, selling, general and administrative costs decreased from 13.0% for the three months ended April 29, 2000 to 10.3% for the three months ended March 31, 2001. As a result of the above, operating income was $49.8 million for the three months ended March 31, 2001, an increase of $15.7 million or 46.0% from $34.1 million for the three months ended April 29, 2000. LIQUIDITY AND CAPITAL RESOURCES For the three months ended March 31, 2001, the Company's primary source of funds to meet working capital needs was cash from operations. Cash and cash equivalents decreased $7.6 million during the three months ended March 31, 2001. Cash flows provided by operating and financing activities of $55.5 million and $30.8 million, respectively, funded net cash flows used for investing activities of $92.2 million. Capital spending has averaged approximately $2.7 million annually over the last three years and has consisted primarily of leasehold improvements for meeting locations and administrative offices, computer equipment for field staff and call centers, and Year 2000 upgrades. Capital expenditures for the three months ended March 31, 2001 was $.7 million. The Company is significantly leveraged. As of March 31, 2001, there was outstanding $495.7 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.
19 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- 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.
20 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 19 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 March 31, 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 March 31, 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.
21 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 20 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. (b) Reports on Form 8-K On January 30, 2001, the Company filed Form 8-K to report under Item 2. Acquisition of Assets related to the acquisition of Weight Watchers' franchised territories and certain business assets of Weighco. On March 30, 2001, the Company filed an amendment to Form 8-K filed on January 30, 2001 to report under Item 7. Financial Statements and Exhibits, certain supplemental financial information in connection with the Weighco acquisition.
22 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 21 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: May 15, 2001 By: /s/ LINDA HUETT ----------------------------------------- Linda Huett President and Director (Principal Executive Officer) Date: May 15, 2001 By: /s/ THOMAS S. KIRITSIS ---------------------------------------- Thomas S. Kiritsis Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)