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 June 30, 2001 Commission File no 000-03389 --------- WEIGHT WATCHERS INTERNATIONAL, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) <TABLE> <S> <C> Virginia 11-6040273 - ------------------------------------ ------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) </TABLE> 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 August 14, 2001 was 23,154,500. PART I -- FINANCIAL INFORMATION
2 2 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES INDEX - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Part I. FINANCIAL INFORMATION PAGE NO. - ------------------------------ -------- <S> <C> Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2001 (unaudited) and as of December 30, 2000 2 Unaudited Consolidated Statements of Operations for the three months ended June 30, 2001 and July 29, 2000 3 Unaudited Consolidated Statements of Operations for the six months ended June 30, 2001 and July 29, 2000 4 Unaudited Consolidated Statements of Changes in Stockholders' Deficit, Parent Company Investment and Comprehensive Income for the six months ended June 30, 2001, for the eight month period ended December 30, 2000, and for the fiscal year ended April 29, 2000 5 Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and July 29, 2000 6 Notes to Unaudited Consolidated Financial Statements 7 - 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 - 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Part II. OTHER INFORMATION 26 - 27 - --------------------------- Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters To a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K </TABLE>
3 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 2 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> JUNE 30, DECEMBER 30, 2001 2000 <S> <C> <C> ASSETS (UNAUDITED) CURRENT ASSETS Cash and cash equivalents $ 45,620 $ 44,501 Receivables, net 18,009 14,678 Notes receivable, current 608 2,106 Inventories 12,389 15,044 Prepaid expenses, other 11,743 17,111 -------------- -------------- TOTAL CURRENT ASSETS 88,369 93,440 Property and equipment, net 9,500 8,145 Notes and other receivables, noncurrent 240 5,601 Goodwill, net 225,514 150,901 Trademarks and other intangible assets, net 7,066 6,648 Deferred income taxes 67,207 67,207 Deferred financing costs, other 14,685 14,275 -------------- -------------- TOTAL ASSETS $ 412,581 $ 346,217 ============== ============== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Portion of long-term debt due within one year $ 16,157 $ 14,120 Accounts payable 8,784 11,989 Accrued liabilities 55,559 47,636 Income taxes 19,861 3,660 Deferred revenue 14,928 5,836 -------------- -------------- TOTAL CURRENT LIABILITIES 115,289 83,241 Long-term debt 462,548 456,530 Deferred income taxes 3,040 3,107 Other 890 121 -------------- -------------- TOTAL LONG-TERM DEBT AND OTHER LIABILITIES 466,478 459,758 Redeemable preferred stock 26,746 25,996 Common stock subject to a Put 14,402 -- Stockholders' deficit Common stock, par value $0 per share, authorized and issued 23,800 shares at June 30, 2001 and December 30, 2000; outstanding 23,155 shares at June 30, 2001 and 23,800 shares at December 30,2000 -- -- Treasury stock, at cost, 645 shares at June 30, 2001 (12,265) -- Accumulated deficit (182,378) (216,507) Accumulated other comprehensive loss (15,691) (6,271) -------------- -------------- TOTAL STOCKHOLDERS' DEFICIT (210,334) (222,778) -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 412,581 $ 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 ------------------------------------ JUNE 30, JULY 29, 2001 2000 (UNAUDITED) <S> <C> <C> Revenues, net $ 162,325 $ 103,073 Cost of revenues 71,701 48,295 -------------- ------------- Gross profit 90,624 54,778 Marketing expenses 13,469 6,678 Selling, general and administrative expenses 17,854 11,474 -------------- ------------- Operating income 59,301 36,626 Interest expense, net 13,248 14,021 Other expenses, net 3,321 4,249 -------------- ------------- Income before income taxes and minority interest 42,732 18,356 Provision for income taxes 16,642 4,556 -------------- ------------- Income before minority interest 26,090 13,800 Minority interest 12 95 -------------- ------------- Net Income $ 26,078 $ 13,705 =============== ============= </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
5 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 4 CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> SIX MONTHS ENDED ----------------------------------- JUNE 30, JULY 29, 2001 2000 (UNAUDITED) <S> <C> <C> Revenues, net $ 334,276 $ 235,935 Cost of revenues 149,144 111,158 -------------- ------------- Gross profit 185,132 124,777 Marketing expenses 40,569 25,290 Selling, general and administrative expenses 35,481 28,747 -------------- ------------- Operating income 109,082 70,740 Interest expense, net 27,368 29,018 Other expenses (income), net 3,871 (6,594) -------------- ------------- Income before income taxes and minority interest 77,843 48,316 Provision for income taxes 28,457 16,872 -------------- ------------- Income before minority interest 49,386 31,444 Minority interest 70 226 -------------- ------------- Net Income $ 49,316 $ 31,218 ============== ============= </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
6 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 5 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT, PARENT COMPANY INVESTMENT AND COMPREHENSIVE INCOME (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> ADDITIONAL COMMON STOCK TREASURY STOCK PAID IN SHARES AMOUNT SHARES AMOUNT CAPITAL -------- -------- ------ ----------- ---------- <S> <C> <C> <C> <C> <C> Balance at April 24, 1999 Net Parent settlements Recapitalization and settlement of Parent Company investment 23,800 (72,100) Deferred tax asset 72,100 Comprehensive Income: Net income Translation adjustment Total Comprehensive Income Preferred stock dividend -------- -------- ------ --------- ---------- Balance at April 29, 2000 23,800 $ -- -- $ -- $ -- Elimination of foreign subsidiaries one month reporting lag effective April 30, 2000 Comprehensive income: Net Income Translation adjustment Total Comprehensive Income Preferred stock dividend -------- -------- ------ --------- ---------- Balance at December 30, 2000 23,800 $ -- -- $ -- $ -- Comprehensive Income: Net Income Foreign currency translation adjustment Change in fair value of derivatives accounted for as hedges Total Comprehensive Income Preferred Stock Dividend Transfer of common stock to common stock subject to a Put Purchase of Treasury Stock 670 (12,730) -- Sale of Treasury Stock (25) 465 -- -------- -------- ------ --------- ---------- Balance at June 30, 2001 23,800 $ -- 645 $ (12,265) $ -- ======== ======== ====== ========= ========== </TABLE> <TABLE> <CAPTION> ACCUMULATED OTHER PARENT COMPREHENSIVE ACCUMULATED COMPANY'S LOSS DEFICIT INVESTMENT TOTAL --------- --------- --------- --------- <S> <C> <C> <C> <C> Balance at April 24, 1999 $ 248,948 $ 248,948 Net Parent settlements (252,883) (252,883) Recapitalization and settlement of Parent Company investment (12,764) (268,547) 3,935 (349,476) Deferred tax asset 72,100 Comprehensive Income: Net income 37,759 37,759 Translation adjustment 10,311 10,311 --------- Total Comprehensive Income 48,070 --------- Preferred stock dividend (875) (875) --------- --------- --------- --------- Balance at April 29, 2000 $ (2,453) $(231,663) $ -- $(234,116) Elimination of foreign subsidiaries one month reporting lag effective April 30, 2000 1,137 1,137 Comprehensive income: Net Income 15,019 15,019 Translation adjustment (3,818) (3,818) --------- Total Comprehensive Income 11,201 --------- Preferred stock dividend (1,000) (1,000) --------- --------- --------- --------- Balance at December 30, 2000 $ (6,271) $(216,507) $ -- $(222,778) Comprehensive Income: Net Income 49,316 49,316 Foreign currency translation adjustment (3,854) (3,854) Change in fair value of derivatives accounted for as hedges (5,566) (5,566) --------- Total Comprehensive Income 39,896 --------- Preferred Stock Dividend (750) (750) Transfer of common stock to common stock subject to Put (14,402) (14,402) Purchase of Treasury Stock -- (12,730) Sale of Treasury Stock (35) 430 --------- --------- --------- --------- Balance at June 30, 2001 $ (15,691) $(182,378) $ -- $(210,334) ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
7 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 6 CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) - ------------------------------------------------------------------------------- <TABLE> <CAPTION> SIX MONTHS ENDED -------------------- JUNE 30, JULY 29, 2001 2000 (UNAUDITED) <S> <C> <C> Cash provided by operating activities $ 92,869 $ 39,570 --------- -------- Investing activities: Capital expenditures (1,187) (1,314) Advances to equity investment (7,844) (4,800) Acquisition (84,353) -- Other items, net (1,532) (2,839) --------- -------- Cash used for investing activities (94,916) (8,953) --------- -------- Financing activities: Net decrease in short-term borrowings (257) (1,200) Proceeds from borrowings 60,000 -- Payments of long-term debt (42,735) (7,060) Deferred financing costs -- (165) Net Parent advances -- 2,171 Purchase of treasury stock (12,730) -- Proceeds from issuance of treasury stock 430 -- --------- -------- Cash provided by (used for) financing activities 4,708 (6,254) --------- -------- Effect of exchange rate changes on cash and cash equivalents (1,542) (2,523) Net increase in cash and cash equivalents 1,119 21,840 Cash and cash equivalents, beginning of period 44,501 34,446 --------- -------- Cash and cash equivalents, end of period $ 45,620 $ 56,286 ========= ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
8 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 7 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. RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 and 142, "Business Combinations" ("SFAS 141") and "Goodwill and Other Intangible Assets" ("SFAS 142"), respectively. SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for by the purchase method of accounting. SFAS 142 specifies that goodwill and indefinite lived intangible assets will no longer be amortized but instead will be subject to annual impairment testing. The Company will adopt SFAS 142 on December 30, 2001. The Company is currently evaluating the effect that implementation of the new standards will have on its financial position, results of operations and cash flows. 4. 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"), for an aggregate purchase price of approximately $83.8 million plus acquisition costs of approximately $.6 million. The acquisition was financed through additional borrowings of $60 million obtained pursuant to the Company's Amended and Restated Credit Agreement, dated January 16, 2001, and cash from operations. The acquisition has been accounted for under the purchase method of accounting and, accordingly, the results of operations are included in the financial statements from the date of the acquisition. Assets acquired include inventory ($2.0 million) and property and equipment ($1.8 million). The excess of investment over the net book value of assets acquired at the date of acquisition resulted in goodwill of $80.6 million which will be amortized over 20 years.
9 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 8 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The following table presents unaudited pro forma financial information that reflects the consolidated results of operations of the Company and Weighco as if the acquisition had occurred as of the beginning of the respective periods. This pro forma information does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of future results of operations of the consolidated companies. <TABLE> <CAPTION> PRO FORMA for the Three Months Ended for the Six Months Ended -------------------------- ------------------------ July 29, July 29, 2000 2000 (In thousands) (In thousands) <S> <C> <C> Revenue $ 116,096 $ 261,323 Net income $ 15,392 $ 34,477 </TABLE> 5. 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. 6. TREASURY STOCK On April 18, 2001, the Company entered into a Put/Call Agreement with Heinz, pursuant to which Heinz acquired the right and option to sell during the period ending on or before May 15, 2002, and the Company acquired the right and option to purchase after that date and on or before August 15, 2002, 1,428,000 shares 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.
10 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 9 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- On April 30, 2001, Heinz exercised its option to sell 670,000 shares for approximately $12.7 million, which was funded with cash from operations. By Put Notice dated July 19, 2001, Heinz notified the Company of its intention to exercise its option to sell an additional 650,000 shares for approximately $12.4 million effective August 15, 2001. The Company intends to fund this transaction 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. 7. COMPREHENSIVE INCOME Comprehensive income for the Company includes net income, the effects of foreign currency translation and changes in fair value of derivative instruments. Comprehensive income is as follows: <TABLE> <CAPTION> For the Three Months Ended For the Six Months Ended -------------------------- ------------------------ June 30, July 29, June 30, July 29, 2001 2000 2001 2000 (In thousands) (In thousands) <S> <C> <C> <C> <C> Net income $ 26,078 $ 13,705 $ 49,316 $ 31,218 Foreign currency translation adjustment 96 (886) (3,854) (2,974) Change in fair value of derivatives Cumulative effect of the adoption of SFAS 133 -- -- (5,086) -- Current period changes in fair value of derivatives (480) -- (480) -- -------- -------- -------- -------- Comprehensive income $ 25,694 $ 12,819 $ 39,896 $ 28,244 ======== ======== ======== ======== </TABLE> 8. LONG-TERM DEBT In connection with the Transaction, the Company entered into a credit facility ("Credit Facility") with The Bank of Nova Scotia, Credit Suisse First Boston and certain other lenders providing (i) a $75.0 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 4) 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 June 30, 2001, the interest rates were
11 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 10 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 7.58% for Term Loan A, 8.80% for Term Loan B, 8.02% 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 June 30, 2001, the 100.0 million EUR notes translated into $85.0 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. The Credit Facility contains a number of covenants that, among other things, restrict the Company's ability to dispose of assets, incur additional indebtedness, or engage in certain transactions with affiliates and otherwise restrict the Company's corporate activities. In addition, under the Credit Facility, the Company is required to comply with specified financial ratios and tests, including minimum fixed charge coverage and interest coverage ratios and maximum leverage ratios. 9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective December 31, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its related amendment, Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" ("SFAS 133"). These standards require that all derivative financial instruments be recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Changes in the fair value of derivatives will be recorded each period in earnings or accumulated other comprehensive loss, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive loss will be included in earnings in the periods in which earnings are affected by the hedged item. As of December 31, 2000, the adoption of these new standards resulted in an adjustment of $5.1 million to accumulated other comprehensive loss. The Company enters into forward and swap contracts to hedge certain transactions denominated in foreign currencies in order to reduce the currency risk associated with fluctuating exchange rates. Such contracts are used primarily to hedge certain intercompany cash flows and for payments arising from certain foreign denominated obligations. In addition, the Company enters into interest rate swaps to hedge a substantial portion of its variable rate debt which are accounted for as cash flow hedges. As of June 30, 2001, losses of $0.5 million for effective hedges, were reported as a component of accumulated other comprehensive loss. For the six months ended June 30, 2001, ineffectiveness related to cash flow hedges was not material. In addition, fair value adjustments for non-qualifying hedges resulted in a reduction of net income of $1.2 million for the six months ended June 30, 2001. The Company does not anticipate any reclassification to earnings from accumulated other comprehensive loss within the next twelve months.
12 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 11 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 10. 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 is 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 and six month period ended June 30, 2001, the Company advanced WeightWatchers.com $2.6 million and $7.8 million, respectively, pursuant to the note. In addition to the advance, $.7 million and $1.4 million, respectively, of interest, were classified in other expenses, net during the three month and six month period ended June 30, 2001. At June 30, 2001 the balance outstanding under the loan agreement was $24.6 million. 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. 11. LEGAL The Company is not a party to any material pending legal proceedings. The Company has had and continues to have disputes with the Company's franchisees regarding, among other things, operations and revenue sharing, including the interpretation of franchise territories as they relate to 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 results of operations, cash flows or financial position of the Company. 12. INCOME TAXES As a result of the Transaction, the Company has provided for a valuation allowance for its deferred tax assets. The determination of the net deferred tax assets deemed realizable was based on available historical evidence, and estimates of future taxable income. This amount may be subject to adjustment based on changes to those factors in future periods. The primary differences between the U.S. federal statutory tax rate and the Company's effective tax rate are the valuation allowance and state income taxes. The effective tax rate for the three month and six month period ended June 30, 2001 were 38.9% and 36.6%, respectively. 13. 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:
13 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 12 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 58 WW Food Corp.; Waist Watchers, Inc.; Weight Watchers Camps, Inc.; W.W. Camps and Spas, Inc.; Weight Watchers Direct, Inc.; W/W Twentyfirst Corporation; W.W. Weight Reduction Services, Inc.; W.W.I. European Services Ltd.; W.W. Inventory Service Corp.; Weight Watchers North America, Inc.; Weight Watchers UK Holdings Ltd.; Weight Watchers International Holdings Ltd.; Weight Watchers (U.K.) Limited; Weight Watchers (Exercise) Ltd.; Weight Watchers (Accessories & Publication) Ltd.; Weight Watchers (Food Products) Limited; Weight Watchers New Zealand Limited; Weight Watchers International Pty Limited; Fortuity Pty Ltd.; and Gutbusters Pty Ltd. (collectively, the "Guarantor Subsidiaries"). The obligations of each Guarantor Subsidiary under its guarantee of the Notes are subordinated to such subsidiary's obligations under its guarantee of the new senior credit facility. Presented below is condensed consolidating financial information for Weight Watchers International, Inc. ("Parent Company"), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries (primarily companies incorporated in European countries other than the United Kingdom). In the Company's opinion, separate financial statements and other disclosures concerning each of the Guarantor Subsidiaries would not provide additional information that is material to investors. Therefore, the Guarantor Subsidiaries are combined in the presentation below. Investments in subsidiaries are accounted for by the Parent Company on the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Parent Company's investments in subsidiaries' accounts. The elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
14 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 13 SUPPLEMENTAL UNAUDITED CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 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 $ 12,306 $ 19,521 $ 13,793 $ -- $ 45,620 Receivables, net 4,960 11,650 1,399 -- 18,009 Notes receivable, current 606 -- 2 -- 608 Inventories -- 9,397 2,992 -- 12,389 Prepaid expenses, other 419 9,593 1,731 -- 11,743 Intercompany receivables (payables) 24,074 (31,880) 7,806 -- -- --------- --------- --------- --------- --------- TOTAL CURRENT ASSETS 42,365 18,281 27,723 -- 88,369 Investment in consolidated subsidiaries 213,923 -- -- (213,923) -- Property and equipment, net 1,164 7,267 1,069 -- 9,500 Notes and other receivables, noncurrent 240 -- -- -- 240 Goodwill, net 27,568 197,308 638 -- 225,514 Trademarks and other intangible assets, net 837 6,216 13 -- 7,066 Deferred income taxes (44,713) 111,920 -- -- 67,207 Deferred financing costs, other 13,876 97 712 -- 14,685 --------- --------- --------- --------- --------- TOTAL ASSETS $ 255,260 $ 341,089 $ 30,155 $(213,923) $ 412,581 ========= ========= ========= ========= ========= LIABILITIES, AND STOCKHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES Portion of long-term debt due within one year $ 15,321 $ 836 $ -- $ -- $ 16,157 Accounts payable 492 6,437 1,855 -- 8,784 Accrued liabilities 28,033 20,076 7,450 -- 55,559 Income taxes (2,739) 19,073 3,527 -- 19,861 Deferred revenue -- 13,723 1,205 -- 14,928 --------- --------- --------- --------- --------- TOTAL CURRENT LIABILITIES 41,107 60,145 14,037 -- 115,289 Long-term debt 380,858 81,690 -- -- 462,548 Deferred income taxes 2,481 -- 559 -- 3,040 Other -- 775 115 -- 890 --------- --------- --------- --------- --------- TOTAL LONG-TERM DEBT AND OTHER LIABILITIES 383,339 82,465 674 -- 466,478 Redeemable preferred stock 26,746 -- -- -- 26,746 Common Stock subject to a Put 14,402 -- -- -- 14,402 Stockholders' (deficit) equity (210,334) 198,479 15,444 (213,923) (210,334) --------- --------- --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY $ 255,260 $ 341,089 $ 30,155 $(213,923) $ 412,581 ========= ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
15 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 14 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 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 AND SHAREHOLDERS' (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.
16 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 15 SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------ ----------- ------------ ----------- <S> <C> <C> <C> <C> <C> Revenues, net $ 1,949 $ 135,780 $ 24,596 $ -- $ 162,325 Cost of revenues 61 58,524 13,116 -- 71,701 --------- --------- --------- --------- --------- Gross profit 1,888 77,256 11,480 -- 90,624 Marketing expenses -- 11,681 1,788 -- 13,469 Selling, general and administrative expenses 3,990 11,309 2,555 -- 17,854 --------- --------- --------- --------- --------- Operating (loss) income (2,102) 54,266 7,137 -- 59,301 Interest expense (income), net 9,199 4,244 (195) -- 13,248 Other expenses, net 1,776 1,535 10 -- 3,321 Equity in income of consolidated subsidiaries 27,838 -- -- (27,838) -- Franchise commission income (loss) 13,262 (11,451) (1,811) -- -- --------- --------- --------- --------- --------- Income before income taxes and minority interest 28,023 37,036 5,511 (27,838) 42,732 Provision for income taxes 1,945 12,538 2,159 -- 16,642 --------- --------- --------- --------- --------- Income before minority interest 26,078 24,498 3,352 (27,838) 26,090 Minority interest 12 12 --------- --------- --------- --------- --------- Net income $ 26,078 $ 24,498 $ 3,340 $ (27,838) $ 26,078 ========= ========= ========= ========= ========= </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 OPERATIONS FOR THE THREE MONTHS ENDED JULY 29, 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Revenues, net $ 7,927 $ 81,408 $ 13,738 $ -- $103,073 Cost of revenues 265 39,331 8,699 -- 48,295 -------- -------- -------- -------- -------- Gross profit 7,662 42,077 5,039 -- 54,778 Marketing expenses 1,100 4,683 895 -- 6,678 Selling, general and administrative expenses 4,497 5,107 1,870 -- 11,474 -------- -------- -------- -------- -------- Operating income 2,065 32,287 2,274 -- 36,626 Interest expense (income), net 9,387 4,713 (79) -- 14,021 Other expenses (income), net 4,352 (99) (4) -- 4,249 Equity in income of consolidated subsidiaries 17,034 -- -- (17,034) -- Franchise commission income (loss) 2,202 (1,730) (472) -- -- -------- -------- -------- -------- -------- Income before income taxes and minority interest 7,562 25,943 1,885 (17,034) 18,356 (Benefit from) provision for income taxes (6,143) 10,471 228 -- 4,556 -------- -------- -------- -------- -------- Income before minority interest 13,705 15,472 1,657 (17,034) 13,800 Minority interest -- -- 95 -- 95 -------- -------- -------- -------- -------- Net income $ 13,705 $ 15,472 $ 1,562 $(17,034) $ 13,705 ======== ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
18 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 17 SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Revenues, net $ 2,830 $ 277,354 $ 54,092 $ -- $ 334,276 Cost of revenues 563 119,883 28,698 -- 149,144 --------- --------- --------- --------- --------- Gross profit 2,267 157,471 25,394 -- 185,132 Marketing expenses -- 33,769 6,800 -- 40,569 Selling, general and administrative expenses 9,669 20,929 4,883 -- 35,481 --------- --------- --------- --------- --------- Operating (loss) income (7,402) 102,773 13,711 -- 109,082 Interest expense (income), net 18,919 8,809 (360) -- 27,368 Other expenses, net 1,178 2,677 16 -- 3,871 Equity in income of consolidated subsidiaries 53,193 -- -- (53,193) -- Franchise commission income (loss) 26,336 (22,957) (3,379) -- -- --------- --------- --------- --------- --------- Income before income taxes and minority interest 52,030 68,330 10,676 (53,193) 77,843 Provision for income taxes 2,714 21,851 3,892 -- 28,457 --------- --------- --------- --------- --------- Income before minority interest 49,316 46,479 6,784 (53,193) 49,386 Minority interest -- -- 70 -- 70 --------- --------- --------- --------- --------- Net income $ 49,316 $ 46,479 $ 6,714 $ (53,193) $ 49,316 ========= ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
19 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 18 SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 29, 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Revenues, net $ 17,649 $ 183,716 $ 34,570 $ -- $ 235,935 Cost of revenues 2,375 87,957 20,826 -- 111,158 --------- --------- --------- --------- --------- Gross profit 15,274 95,759 13,744 -- 124,777 Marketing expenses 1,903 20,031 3,356 -- 25,290 Selling, general and administrative expenses 15,023 10,052 3,672 -- 28,747 --------- --------- --------- --------- --------- Operating (loss) income (1,652) 65,676 6,716 -- 70,740 Interest expense (income), net 21,191 7,914 (87) -- 29,018 Other (income) expenses, net (6,129) (484) 19 -- (6,594) Equity in income of consolidated subsidiaries 27,390 -- -- (27,390) -- Franchise commission income (loss) 17,100 (15,126) (1,974) -- -- --------- --------- --------- --------- --------- Income before income taxes and minority interest 27,776 43,120 4,810 (27,390) 48,316 (Benefit from) provision for income taxes (3,442) 18,381 1,933 -- 16,872 --------- --------- --------- --------- --------- Income before minority interest 31,218 24,739 2,877 (27,390) 31,444 Minority interest -- -- 226 -- 226 --------- --------- --------- --------- --------- Net income $ 31,218 $ 24,739 $ 2,651 $ (27,390) $ 31,218 ========= ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
20 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 19 SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001 (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ -------------- <S> <C> <C> <C> <C> <C> Cash provided by operating activities $ 27,388 $ 110,293 $ 8,381 $ (53,193) $ 92,869 --------- --------- --------- --------- --------- Investing activities: Capital expenditures (51) (867) (269) -- (1,187) Advances to equity investment (7,844) -- -- -- (7,844) Acquisition -- (84,353) -- -- (84,353) Other items, net (406) (1,041) (85) -- (1,532) --------- --------- --------- --------- --------- Cash used for investing activities (8,301) (86,261) (354) -- (94,916) --------- --------- --------- --------- --------- Financing activities: Net (decrease) increase in short-term borrowings (566) 309 -- -- (257) Parent company investment in subsidiaries (38,047) -- -- 38,047 -- Proceeds from borrowings 60,000 -- -- -- 60,000 Payment of dividends -- (11,585) -- 11,585 -- Payments on long-term debt (38,913) (3,822) -- -- (42,735) Net parent settlements -- -- 330 (330) -- Payments to acquire treasury stock (12,730) -- -- -- (12,730) Proceeds from issuance of treasury stock 430 -- -- -- 430 --------- --------- --------- --------- --------- Cash (used for) provided by financing activities (29,826) (15,098) 330 49,302 4,708 --------- --------- --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents (3,654) (604) (1,175) 3,891 (1,542) Net (decrease) increase in cash and cash equivalents (14,393) 8,330 7,182 -- 1,119 Cash and cash equivalents, beginning of period 26,699 11,191 6,611 -- 44,501 --------- --------- --------- --------- --------- Cash and cash equivalents, end of period $ 12,306 $ 19,521 $ 13,793 $ -- $ 45,620 ========= ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
21 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 20 SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS JULY 29, 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Cash provided by (used for) operating activities $ 54,914 $ 12,104 $ 1,079 $(28,527) $ 39,570 -------- -------- -------- -------- -------- Investing activities: Capital expenditures (235) (744) (335) -- (1,314) Advances to equity investment (4,800) -- -- -- (4,800) Other items, net (2,143) (740) 44 -- (2,839) -------- -------- -------- -------- -------- Cash (used for) provided by investing activities (7,178) (1,484) (291) -- (8,953) -------- -------- -------- -------- -------- Financing activities: Net increase (decrease) in short-term borrowings 196 (1,396) -- -- (1,200) Parent company investment in subsidiaries (25,208) -- -- 25,208 -- Proceeds from borrowings -- -- -- -- -- Payment of dividends -- -- (1,603) 1,603 -- Payments on long-term debt (6,625) (435) -- -- (7,060) Deferred financing costs (165) -- -- -- (165) Net Parent (settlements) advances 2,177 -- 1,217 (1,223) 2,171 -------- -------- -------- -------- -------- Cash (used for) provided by financing activities (29,625) (1,831) (386) 25,588 (6,254) -------- -------- -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents (2,903) (1,686) (873) 2,939 (2,523) Net increase (decrease) in cash and cash equivalents 15,208 7,103 (471) -- 21,840 Cash and cash equivalents, beginning of year 3,880 21,847 8,719 -- 34,446 -------- -------- -------- -------- -------- Cash and cash equivalents, end of year $ 19,088 $ 28,950 $ 8,248 $ -- $ 56,286 ======== ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
22 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2001 TO THREE MONTHS ENDED JULY 29, 2000 In the opinion of management the comparison of the three months ended June 30, 2001 to the three months ended July 29, 2000 most closely reflects the Company's performance. Revenues for the quarter increased 57.5% or $59.3 million, to $162.3 million. Of the $59.3 million increase, $31.3 million was attributable to domestic Company-owned classroom meeting fees, $20.1 million from product sales, $5.7 million from foreign Company-owned classroom meeting fees, $1.6 million from licensing, publications, and other royalties, and $0.6 million from franchise revenues. Domestic Company-owned classroom meeting fee revenues were $70.0 million for the three months ended June 30, 2001, an increase of $31.3 million from $38.7 million for the three months ended July 29, 2000. The Weighco acquisition accounted for $18.0 million of the total increase. Foreign Company-owned classroom meeting fee revenues were $38.7 million for the three months ended June 30, 2001, an increase of $5.7 million from $33.0 million for the three months ended July 29, 2000. The increase in domestic and foreign Company-owned classroom meeting fees was the result of increased member attendance, offset by negative exchange rate variances. Product revenues were $42.9 million for the three months ended June 30, 2001, an increase of $20.1 million from $22.8 million for the three months ended July 29, 2000. The increase in product revenues was primarily the result of increased member attendance and the Company's strategy to focus sales efforts on core classroom products. Domestic and international franchise revenues were $7.6 million for the three months ended June 30, 2001, an increase of $0.6 million from $7.0 million for the three months ended July 29, 2000. Domestic and international franchise revenues excluding Weighco increased 33.3% for the three months ended June 30, 2001. This increase was primarily the result of an increase in member attendance, offset by negative exchange rate variances. Gross profit margins for the quarter increased to 55.8% from 53.1% in the prior period. The increase in gross profit margins was due to higher margins generated by product sales, improved operating efficiencies, and an increase in attendance per meeting. Marketing expenses were $13.5 million for the three months ended June 30, 2001, an increase of $6.8 million or 101.7% from $6.7 million for the three months ended July 29, 2000. The increase in marketing was primarily the result of additional advertising to promote the new program innovations and timing differences related to the Company's shift in fiscal calendars. Selling, general and administrative expenses were $17.9 million for the three months ended June 30, 2001, an increase of $6.4 million from $11.5 million for the three months ended July 29, 2000. As a percentage of revenue, selling, general and administrative costs decreased from 11.1% for the three months ended July 29, 2000 to 11.0% for the three months ended June 30, 2001. As a result of the above, operating income was $59.3 million for the three months ended June 30, 2001, an increase of $22.7 million or 61.9% from $36.6 million for the three months ended July 29, 2000. The Weighco acquisition accounted for $9.2 million of the total increase in operating income.
23 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2001 TO SIX MONTHS ENDED JULY 29, 2000 In the opinion of management the comparison of the six months ended June 30, 2001 to the six months ended July 29, 2000 most closely reflects the Company's performance. Revenues for the six months increased 41.7% or $98.3 million, to $334.3 million. Of the $98.3 million increase, $51.5 million was attributable to domestic Company-owned classroom meeting fees, $35.7 million from product sales, $7.7 million from foreign Company-owned classroom meeting fees, $2.6 million from licensing, publications, and other royalties, and $0.8 million from franchise revenues. Domestic Company-owned classroom meeting fee revenues were $134.2 million for the six months ended June 30, 2001, an increase of $51.5 million from $82.7 million for the six months ended July 29, 2000. The Weighco acquisition accounted for $32.8 million of the total increase. Foreign Company-owned classroom meeting fee revenues were $85.9 million for the six months ended June 30, 2001, an increase of $7.7 million from $78.2 million for the six months ended July 29, 2000. The increase in domestic and foreign Company-owned classroom meeting fees was the result of increased member attendance, the roll-out of new program innovations and price increases in select markets offset by negative exchange rate variances. Product revenues were $92.7 million for the six months ended June 30, 2001, an increase of $35.7 million from $57.0 million for the six months ended July 29, 2000. The increase in product revenues was primarily the result of increased member attendance and the Company's strategy to focus sales efforts on core classroom products. Domestic and international franchise revenues were $15.9 million for the six months ended June 30, 2001, an increase of $0.8 million from $15.1 million for the six months ended July 29, 2000. Domestic and international franchise revenues excluding Weighco increased 24.2% for the six months ended June 30, 2001. This increase was primarily the result of an increase in member attendance and product sales, offset by negative exchange rate variances. Gross profit margins for the six months increased to 55.4% from 52.9% in the prior period. The increase in gross profit margins was due to price increases in selected markets, improved operating efficiencies, higher margins generated by product sales and an increase in attendance per meeting. Marketing expenses were $40.6 million for the six months ended June 30, 2001, an increase of $15.3 million or 60.4% from $25.3 million for the six months ended July 29, 2000. The increase in marketing was primarily the result of additional advertising to promote the new program innovations and timing differences related to the Company's shift in fiscal calendars. Selling, general and administrative expenses were $35.5 million for the six months ended June 30, 2001, an increase of $6.8 million from $28.7 million for the six months ended July 29, 2000. As a percentage of revenue, selling, general and administrative costs decreased from 12.2% for the six months ended July 29, 2000 to 10.6% for the six months ended June 30, 2001. As a result of the above, operating income was $109.1 million for the six months ended June 30, 2001, an increase of $38.4 million or 54.2% from $70.7 million for the six months ended July 29, 2000. The Weighco acquisition accounted for $16.2 million of the total increase in operating income.
24 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES For the six months ended June 30, 2001, the Company's primary source of funds to meet working capital needs was cash from operations. Cash and cash equivalents increased $1.1 million during the six months ended June 30, 2001. Cash flows provided by operating and financing activities of $92.9 million and $4.7 million, respectively, funded net cash flows used for investing activities of $94.9 million. On January 16, 2001, the Company acquired franchised territories and certain business assets, including inventory and property and equipment, of Weighco for $83.8 million. The acquisition was financed with available cash of $23.8 million and additional borrowings of $60.0 million. On April 30, 2001, Heinz exercised its option to sell 670,000 shares for $12.7 million, which was funded with cash from operations. During the quarter, in addition to the scheduled debt payments, the Company paid down $10 million on the Term loans from cash generated through operations. 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 six months ended June 30, 2001 was $1.2 million. The Company is significantly leveraged. As of June 30, 2001, there was outstanding $478.7 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. 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
25 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- - - 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.
26 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 25 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 June 30, 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 June 30, 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.
27 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 26 PART II - OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS Nothing to report under this item. ITEM 2. CHANGES IN SECURITIES Nothing to report under this item. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Nothing to report under this item. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Nothing to report under this item. ITEM 5. OTHER INFORMATION This report contains forward-looking statements regarding the Company's future performance. These forward-looking statements are based on management's views and assumptions, and involve unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statement. These include, but are not limited to, sales, earnings and volume growth, competitive conditions, production costs, currency valuations, global economic and industry conditions, and the other factors described in "Forward-Looking Statements" in the Company's Form 10-K for the eight month period ended December 30, 2000, as updated from time to time by the Company in its subsequent filings with the SEC. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required to be furnished by Item 601 of Regulation S-K are filed as part hereof. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulations S-K. EXHIBIT INDEX 10.1 Amended and Restated Note dated October 1, 2000, by WeightWatchers.com, Inc. to Weight Watchers International, Inc. 10.2 Warrant Agreement, dated as of May 3, 2001, between WeightWatchers.com, Inc. and Weight Watchers International, Inc. 10.3 Warrant Certificate WeightWatchers.com, Inc., No. 3, dated May 3, 2001. 10.4 Put/Call Agreement dated April 18, 2001 between Weight Watchers International, Inc. and H.J. Heinz Company. (b) Reports on Form 8-K On May 3, 2001, the Company filed Form 8-K to report under Item 5, the Put/Call Agreement dated April 18, 2001 with Heinz relating to the common stock of the Company owned by Heinz.
28 WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 27 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: August 14, 2001 By: /s/ LINDA HUETT ------------------------------------- Linda Huett President and Director (Principal Executive Officer) Date: August 14, 2001 By: /s/ THOMAS S. KIRITSIS ------------------------------------- Thomas S. Kiritsis Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)