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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 29, 2000
Commission File no 000-03389
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WEIGHT WATCHERS INTERNATIONAL, INC.
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(Exact name of Registrant as specified in its charter)
Virginia 11-6040273
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 Crossways Park West, Woodbury, New York 11797-2055
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (516) 390-1400
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Securities registered pursuant to Section 12 (b) of the Act: None
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Name of each exchange
Title of each class None on which registered None
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Securities registered pursuant to Section 12 (g) of the Act:
None
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(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value, as determined by the date of the sale, of
the voting stock held by non-affiliates (shareholders holding less than 5% of
the outstanding common stock, excluding directors and officers), as of July 28,
2000 was $3,700,000.
The number of common shares outstanding as of July 28, 2000 was
23,800,000.
- Documents incorporated by reference: None
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PART I
ITEM 1. BUSINESS
Weight Watchers International, Inc. (herein, together with its
subsidiaries unless the context otherwise requires, generally referred to as the
"Company" or "Registrant") was incorporated in Virginia in 1974, as a successor
to a business founded in 1963. The Company's trademarks included in this Form
10-K appear in italics.
The Company is the largest provider of weight control programs in the
world, operating in 29 countries through a network of company-owned and
franchise operations. At the core of the business are weekly meetings, in which
is presented a scientifically designed program, incorporating group support and
education about healthy eating patterns, behavior modification and physical
activity. The Company has developed the Weight Watchers program through
continuous improvement over its 37-year history and the brand name is recognized
globally today as the standard for healthy, safe and drug free weight control.
Careful management of the brand identity and reputation is a fundamental element
of the Company's long-term success. According to a Gallup study conducted in
1998, more than 84% of adults and 94% of dieting adults in the United States
recognize the brand name. In an independent survey of U.S. doctors in 1998,
among those doctors who had recommended weight loss programs in the preceding
year, 65% recommended Weight Watchers. The next most frequently recommended
program received recommendations from less than 13% of those doctors. The
Company believes that the combination of its brand recognition, extensive global
network and 9,000 classroom leaders provide a significant competitive advantage.
Throughout its history, the Company has based its program on four core
elements: group support, behavior modification, diet and exercise. The group
support system remains the cornerstone method of presenting the program. Group
support assists members in dealing with issues such as depression-eating and
habitual eating behaviors. This support is offered through meetings that are
interactive and encourage learning through group activities and discussions.
Members learn strategies from leaders who have learned how to lose weight and
maintain their weight loss on the program. These leaders are trained to respond
to member needs by using internally developed techniques and actively modeling
the Company's principles. The group support system continues throughout the
maintenance period of the program when members learn how to stay within their
appropriate weight range.
Behavior modification and education on eating habits have also always
been key elements of the program. Motivation, education and support are used to
help members manage their weight and to change their habits. Members are taught
how to meet and overcome these challenges. Discussions on topics such as staying
motivated, overeating and managing stress offer valuable insight and provide the
reassurance that no one must diet alone.
Exercise is an important component of weight management and the Company's
overall program to lose weight. U.S. members currently receive The Weight
Watchers Activity Guide which is designed to promote exercise and activity
outside of the classroom. It is consistent with the recommendations for physical
activity outlined by both the Center for Disease Control and
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Prevention and the American College of Sports Medicine. International members
receive similar publications.
The final key element of the program is diet which is described in detail
below. The diets are based on healthy food selection rather than prepackaged
meals. This allows members to tailor and modify their diet to their personal
tastes. In order to keep the diets at the forefront of weight loss science, each
diet is designed in consultation with doctors and other scientific advisors. The
Company continually strives to improve its diets by periodically testing, then
introducing new features. There are currently two diets: 1-2-3 Success and
Success Signals.
In 1996, the United Kingdom subsidiary developed and introduced 1-2-3
Success, a state-of-the-art diet management system that helps participants
manage their calorie intake through a simple and flexible POINTS system. Unlike
some competing diets, 1-2-3 Success allows participants to eat regular meals
instead of prepackaged servings, allowing members freedom to choose what they
eat. In 1997, the 1-2-3 Success diet was successfully rolled out to select
international operations, North American franchises and North American
Company-Owned ("NACO") operations. 1-2-3 Success features the POINTS food
system, which is based on a formula involving calories, fat and fiber. The
formula for POINTS differs from country to country in order to suit local
tastes, as well as package labeling differences between countries.
In 1996, local management in Europe successfully developed a diet called
Success Signals based on a green-yellow-red food selection system. Success
Signals helps guide dieters to low fat foods (green) instead of high fat foods
(red). This system is similar to 1-2-3 Success in that it does not require
weighing of portions. It is now used in nine Continental European countries and
Brazil. The Company intends to introduce a POINTS based plan in these markets as
a program innovation.
The Company works closely with doctors, scientists and nutritionists, to
ground the program in scientific and medically sound principles of weight
control. As part of the program, the Company is sponsoring a two-year scientific
study to quantify the health benefits of its program as compared to self-help
dieting. The Company believes that the publication of this study will serve to
encourage a greater number of employers and health insurance companies to
partner with them to cover or reimburse the cost of joining the Weight Watchers
program.
The Company uses several delivery methods as a means to provide services
to its members. At the core of the business is the classroom meeting, which
members attend to learn the key weight loss techniques, to celebrate their
success with other dieters, and to receive motivation and group support. An
estimated 9,000 classroom leaders run the meetings and educate members on the
process of successful and sustained weight loss. Field management and current
leaders constantly identify new leaders as members with strong interpersonal
skills, personality and communication skills. Leaders are part-time employees
and earn an hourly wage and commissions based on sales. The program is presented
in a series of weekly classes which average one hour in duration. Classes are
conveniently scheduled throughout the day. Classes are held in either leased
locations, such as space at shopping malls, or in meeting rooms typically rented
from civic or religious organizations.
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Typically, classes begin with registration and a weigh-in where the
weight change of attendees since their last session is noted in their attendance
book which serves as a permanent record of the participants' progress. Leaders
are trained to engage the members at the weigh-in to talk about their weight
control efforts during the previous week and provide encouragement and advice,
making them feel at ease. After the weigh-in, the leader introduces the class.
Part of the class is educational, where the leader uses personal anecdotes,
games or open questions to demonstrate some of the core aspects of weight loss,
such as self-belief and discipline. During another part of the class, the leader
focuses on a variety of topics, such as achievements people have made in the
prior week and celebrating and applauding successes. Participants who have
reached their weight goal are singled out for their accomplishment. Discussions
can range from dealing with a holiday office party to making time to exercise.
The leader encourages substantial class participation and promotes supporting
products and materials as appropriate. At the end of the class, new members are
given special tutoring in the 1-2-3 Success plan.
Generally, group leaders help set a member's weight goal within a healthy
range by using a body mass index. When members reach their weight goal and
maintain it for six weeks, they achieve lifetime member status. This gives them
the privilege to attend the Company's meetings free of charge as long as they
maintain their weight within a certain range. Successful members also become
eligible to apply for class leader positions.
The At Work program was designed to address the weight loss needs of
people in the workforce by operating on-site in their place of employment. This
program represents a significant amount of total revenue for NACO operations and
is expanding in other countries. Employees can attend the At Work program
meetings that are held either before work, during lunch hours, or after work. At
Work is particularly popular in the United States as employees, and increasingly
employers, are receptive to the Weight Watchers classes in the work place. In
many cases, employers subsidize employee participation and typically provide
meeting space without charge. The Community Meetings program was designed to
meet the needs of people in rural areas that would otherwise be unable to
support traditional meetings. Members in Community Meetings prepay for a series
of meetings to ensure adequate enrollment.
The Company provides additional programs designed for people who, either
through circumstance or personal preference, do not wish to attend the
traditional classes. The At Home self-help program was developed to provide
guidance and support needed to lose weight without having to attend classes.
In Australia, the Company is testing the Gut Buster mail-order program
which has been scientifically designed for male weight control. Customers who
order this program receive audio cassettes and literature. In France, the
Company also has a One-On-One program which offers members supplemental private
tutoring.
In addition to meetings, the Company generates additional revenues
through product sales. In the classroom operations, the Company sells books,
CD-Rom's, 1-2-3 Success POINTS calculators, healthy snack bars and other items.
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GENERAL
Members have demonstrated strong loyalty towards the Weight Watchers
program, which is characterized by a high predictable pattern of repeat consumer
behavior. The Company believes the quality and flexibility of its program helps
attract and retain new members and contributes to significant repeat
enrollments. Given the Company's 37-year operating history, the Company has
created a powerful referral network. An important source of new members is
through referrals from existing or prior members. There are incentive programs
for member referrals, such as the bring a friend promotion. In fiscal year ended
April 29, 2000, approximately 4.8 million people enrolled in classes worldwide.
The Company's business is heavily reliant on marketing and promotion.
Advertising supports the three key enrollment-generating seasons during the
year: winter, spring and fall. In addition to enhancing brand image and
awareness, advertising is designed to motivate both former members and its
potential members to take immediate action and join the program. Media
investments are allocated on a market-by-market basis, as well as by media
vehicle (television, radio, magazines and newspaper), taking into account such
characteristics as penetration, market vitality, media efficiencies and
effectiveness. Direct mail is a critical element of the Company's marketing mix
because it targets former members who account for the majority of the Company's
attendance.
The focus of the Company's public relations efforts is at the grass roots
level. Leaders and successful members engage in local promotions, information
presentations and charity events to promote Weight Watchers and demonstrate the
program's efficacy. Public relations programs are specifically designed to
facilitate this type of promotion. For many years, the Company has used
celebrities to promote and endorse the program. Since 1997, the Company has
retained Sarah Ferguson, the Duchess of York, to promote and endorse the program
in North America. Her contract, which runs through 2000, requires her to devote
approximately 20 days per year on activities such as appearances at major events
and filming television advertisements.
The most popular payment structure is a "pay-as-you-go" arrangement
without contracts, although the Company also offers discounted pre-pay options.
A new member pays an initial registration fee and then a weekly fee for each
class attended, although free registration is often offered as a promotion.
In 1996, a new pricing structure, called Liberty/Loyalty, was developed
in France. Liberty/Loyalty provides members the option of committing to
consecutive weekly attendance and paying a lower weekly fee with penalties for
missed classes, or paying a higher weekly fee without the missed meeting
penalties. Following the successful introduction in France, the Liberty/Loyalty
pricing plan was rolled out to most of the rest of Europe and, following a
successful test marketing, it was rolled out to the Company's NACO operations in
April/May 1999.
COMPANY OWNED OPERATIONS
The Company's NACO operations consist of approximately 1,300 meeting
locations, that for the fiscal year ended April 29, 2000, attracted 13.2 million
attendances and generated $158.4 million in revenue including product sales. In
1997, NACO operations were restructured by eliminating the prepackaged meals
program, improving customer service, restoring employee morale and introducing
1-2-3 Success and Liberty/Loyalty programs. In connection with the elimination
of the prepackaged meals program, the Company eliminated over $18.0 million in
costs. As a result of all these efforts, NACO attendance has increased to 13.2
million in fiscal year 2000.
International company-owned operations consist of approximately 8,100
meeting locations in 13 countries outside the United States. In the fiscal year
ended April 29, 2000, these operations attracted 20.0 million attendances and
generated meeting fee revenue of $192.3 million.
In fiscal year 2000, in the United Kingdom there were on average 5,100
weekly meetings in 3,800 different locations, with approximately 97% in
third-party locations, such as meeting rooms rented from civil organizations
and church halls. In the rest of Europe there were on average 3,400 weekly
meetings in 2,200 different locations, with approximately 95% in third-party
locations. In Australia/New Zealand there were on average 1,880 weekly meetings
in 794 different locations, with approximately 97% in third-party locations.
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INTERNATIONAL OPERATIONS
The Company's international operations are subject to certain customary
risks inherent in carrying on business abroad, including the risk of adverse
currency fluctuations.
FRANCHISE OPERATIONS
The Company operates its domestic and international businesses through a
combination of company-owned and franchise operations. Over the last 37-years,
the Company has developed a strong group of franchisees throughout the world.
There are franchise operations in 16 countries, including the United States. The
Company estimates that in the fiscal year ended April 29, 2000, these franchised
operations attracted attendance of 23.7 million.
Franchisees are responsible for running classroom operations in their
territory using the Company developed program. Franchisees are obliged to adhere
strictly to the program content guidelines, with the freedom to control pricing,
locations, operational structure and local promotions. Franchisees have the
option to buy approved merchandise from the Company or from other vendors to
sell to members. Franchisees are required to keep accurate attendance records
that are audited on a periodic basis. Most franchise agreements are in
perpetuity and can only be terminated upon a material breach or bankruptcy of
the franchisee.
The Company provides a central support system for the program and the
brand. It also produces and sells program and marketing material to the
franchisees. Franchisees provide local operational expertise, advertising and
public relations. The franchise owners are close to the business and generally
participate actively in all aspects of the business. Franchisees typically pay a
fee equal to 10% of their meeting fee revenues.
LICENSING
Another source of revenue for the Company is generated through the
licensing arrangements with third parties. Under an agreement between the
Company and a third-party publisher, the Company granted the publisher the
exclusive right to use its trademarks in developing, publishing, licensing,
selling and distributing books, audio products, video products, calendars,
recipe cards and other products for sale at meetings, book clubs and retail
stores. The publisher holds this exclusive license through October 2001. In
return for this license, the publisher agreed to pay a non-returnable fee and
certain ongoing royalties. Nearly four million copies of recipe collections have
been sold since 1994.
Weight Watchers Magazine was published in North America and the United
Kingdom by Southern Progress and by the Company in Australia. The Company
reacquired all rights to publish the Magazine, including in North America and
the United Kingdom, by an agreement dated February 18, 2000 and it has
introduced a new magazine in May, 2000. Southern Progress still has the
exclusive right to publish Weight Watchers books through direct response
marketing.
The Company has entered into an ongoing licensing relationship with Heinz
to develop and market the Weight Watchers brand for certain food products. Under
the agreement, the Company retains all food licenses except that Heinz retains
an exclusive, royalty-free global license to use the brand for certain food
categories, including frozen foods, soups, condiments, canned fish and canned
pasta. Heinz will also receive royalty payments from an existing portfolio of
third-party licenses for various food products through 2004. After 2004, Heinz
will assign those licenses to the Company.
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In January 1999, the Company entered into a licensing agreement with
Warnaco, an established clothing/shapewear manufacturer, to produce a broad
range of Weight Watchers branded shapewear in the United States and Canada.
Under this agreement, the Company will receive minimum average royalty payments
of $2.1 million per year. Warnaco's exclusive license runs through July 31,
2004, and is renewable at Warnaco's option for an additional five years.
TRADE NAMES AND TRADEMARKS
The Weight Watchers brand is recognized worldwide. Careful management of
the Company's brand identity and reputation is a fundamental element to its
long-term success. As a result, the Company constantly monitors and acts as
necessary to protect its intellectual property rights.
COMPETITION
The market for weight control includes commercial weight loss programs,
self-help weight loss products, weight loss services administered by doctors,
nutritionists and dieticians and weight loss drugs. Competition among commercial
weight loss programs is largely based on the effectiveness of the program and
price.
The most significant direct competitor in the United Kingdom is Slimming
World. There are few direct competitors in the rest of Europe. In Australia/New
Zealand, the Company's closest competitor is Jenny Craig. In the United States,
the Company competes in the commercial weight control segment, along with other
companies such as Jenny Craig, The Diet Workshop and Nutri/System, although the
Company believes its business platforms are not comparable. For example, many of
the competitors' businesses are based on the sale of prepackaged meals and meal
replacements, whereas Weight Watchers program uses group support, education and
behavior modification to help members change their eating habits without
prepackaged foods. The Company believes that weight control is a lifelong
challenge and that quick results offered by certain of these products are not
sustainable and may have side effects.
When the diet drugs Phen/Fen and Redux became popular in 1996, many
competitors turned to prescription drug sales as a way to boost sagging
profitability. In September 1997, the United States Food and Drug Administration
requested the withdrawal of fenfluramine (one of the pharmaceuticals used in
"Phen/Fen") and dexfenfluramine ("Redux") from the U.S. market citing potential
health risks. The manufacturer and distributor of these pharmaceuticals agreed
to an immediate recall of these drugs. The resultant negative publicity and
lawsuits over these drugs further weakened these competitors. Two new drugs have
received approval from the FDA for the treatment of obesity. Meridia, approved
in November 1997, and Xenical, approved in April 1999, are being marketed to
physicians for use in their patients and directly to consumers. To date,
competitors have not turned to the use of these drugs as part of their offering
to clients. Any increase in competition, including scientific developments in
weight control, new drugs and other technologies may have a material adverse
impact on the Company.
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REGULATION
A number of laws and regulations govern the Company's advertising,
franchise operations and relations with consumers. The Federal Trade Commission
and certain states regulate advertising, disclosures to consumers and
franchisees, and other consumer matters. Company customers may file actions on
their own behalf, as a class or otherwise, and may file complaints with the FTC
or state or local consumer affairs offices and these agencies may take action on
their own initiative or on a referral from consumers or others.
The Company and the FTC have entered into a Consent Order settling all
contested issues raised in a complaint filed against the Company alleging that
it violated the Federal Trade Commission Act by the use and content of certain
advertisements for its weight loss program featuring testimonials, claims for
the program's success and safety, and statements as to the program's costs to
participants. The Consent Order does not admit any issue of fact or law or any
violation by the Company of any law or regulation, and does not involve payment
by the Company of any civil money penalty, damages, or other financial relief.
The Consent Order requires certain procedures and disclosures in connection with
the Company's advertisements of products and services. The FTC accepted the
Consent Order, and it became effective as of December 24, 1997. The Company does
not believe that compliance with the Consent Order will have a material adverse
effect on its consolidated financial position or results of operations or its
current advertising and marketing practices.
The Company's foreign operations and franchises are also generally
subject to regulations of the applicable country regarding the offer and sale of
franchises, the content of advertising and promotion of diet products and
programs.
Future legislation or regulations including, without limitation,
legislation or regulations affecting its marketing and advertising practices,
relations with consumers or franchisees or the Company's food products, could
have a material adverse impact on the Company.
EMPLOYEES
As of April 29, 2000, the Company had approximately 22,400 service
providers and employees, of which 6,600 were located in the United States, 8,400
were located in the United Kingdom, 2,600 were located in Continental Europe and
4,800 were located in Australia and New Zealand. 119 employees work full-time as
management and support personnel in the Woodbury, New York offices, 172
employees work full-time as management and support personnel at the regional
offices in the three NACO regions, and 221 employees work full-time as
management and support personnel in the head offices of the other countries in
which the Company operates worldwide. Approximately 6,900 service providers work
part-time as leaders and approximately 14,900 work part-time as receptionists
worldwide. None of the
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service providers or employees are represented by a labor union. The Company
considers its employee relations to be good.
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,"
"Industry" and "Business." 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.
ITEM 2. PROPERTIES
The Company is headquartered in Woodbury, New York in a 35,000
square-foot leased office. Each of the three NACO regions has a small regional
office. The Woodbury lease expires in 2005 and the Paramus, New Jersey call
center lease expires in 2007. The remaining North American office leases are
short-term. Each country operation also has one head office.
The Company holds its classes either in retail centers (typically
leased spaces in strip malls for short-terms, generally less than five years) or
third-party locations (typically meeting rooms in well-located civic or
religious organizations). In fiscal year ended April 29, 2000, there were
approximately 1,300 NACO meeting locations in North America, including
approximately 300 retail centers and 1,000 third-party locations. In the United
Kingdom, there were approximately 3,800 meeting locations, with approximately
97% in third-party locations. In Continental Europe, there are approximately
2,200 meeting locations, with approximately 95% in third-party locations. In
Australia/New Zealand, there were approximately 794 meeting locations, with
approximately 97% in third-party locations.
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ITEM 3. 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no established trading market for the Registrants' Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
Revenues net $ 399,574 $ 364,608 $ 297,245 $ 292,846 $ 323,316
Net income (loss) $ 37,759 $ 47,982 $ 23,771 $ (24,089) $ 21,490
Working capital $ (958) $ 91,200 $ 65,792 $ 64,869 $ 83,593
Total assets $ 334,207 $ 371,434 $ 370,799 $ 372,997 $ 393,387
Long-term obligations $ 500,505 $ 16,664 $ 17,745 $ 71,613 $ 72,950
EBITDA $ 107,280 $ 88,253 $ 48,484 $ (21,216) $ 32,144
</TABLE>
EBITDA represents income before income taxes and minority interest plus
depreciation, amortization and net interest expense. EBITDA should not be
construed as an alternative to operating income or cash flows from operating
activities, as determined in accordance with generally accepted accounting
principles.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is the largest provider of weight control programs in the
world, operating in 29 countries through a network of company-owned and
franchise operations. The Company earns revenues by conducting meetings,
selling products, collecting commissions from franchisees operating under its
name and by collecting royalties related to licensing agreements.
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Domestic and international operations are run through a combination of
company-owned and franchise operated locations. Franchisees typically pay a
royalty fee of 10% of their meeting fee revenues.
A number of factors have affected the Company's revenues and
profitability over the last several years. In fiscal year ended 1990, Heinz
began introducing and promoting the sale of prepackaged meals through the North
American ("NACO") network. These changes forced group leaders to become food
salespeople and retail managers for food products, detracting from their
function as role models and motivators for members. These changes caused a
significant drop in customer satisfaction and employee morale, and NACO's
attendance declined. Prior to the introduction of prepackaged meal sales in
fiscal year ended 1990, NACO's annual classroom attendance was 12.9 million,
but by fiscal year ended 1997, attendance had dropped to 7.8 million. In
contrast, in the international operations, where the prepackaged meals sales
strategy was not implemented, attendance remained stable over this period. As
North American focus turned to promoting and selling prepackaged meals, program
development began to suffer. In response, the Company shifted to a more
decentralized management approach, allowing the management of its international
operations to begin to develop their own local business strategies and program
innovations. This approach was successful and by 1996 international growth
began to accelerate rapidly. Beginning in 1997, NACO operations were
restructured by:
- eliminating the prepackaged meals programs,
- introducing 1-2-3 Success and Liberty/Loyalty,
- improving customer service,
- restoring employee morale,
- relocating classes from fixed to rented meeting rooms,
- reducing back office and field headcount, and
- eliminating certain field offices.
This restructuring allowed the Company to eliminate over $18.0 million in
costs related to the food sales system. As a result of these efforts, NACO
attendance has grown by 70% from 7.8 million in fiscal year ended 1997 to 13.2
million in fiscal year ended April 29, 2000.
Over this period, international operations continued to generate
significant growth which had started when local management was allowed to
create new strategies and program innovations. Between fiscal year ended 1997
and fiscal year ended April 29, 2000, in continental Europe, net revenues
increased by 31%, in the United Kingdom by 54% and in Australia/New Zealand by
58%, respectively.
The combination of the revitalization of the North American operation and
the continued strong performance of international business contributed to the
strong growth in revenues and profitability.
In addition to franchise revenue and company-owned classroom revenues,
the Company also sells to the Company's members ancillary products which
complement its program such as calendars, books, healthy snack bars and
CD-ROMS.
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RESULTS OF OPERATIONS
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 which were expensed 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 will record a
step-up in the tax basis of net assets. For financial reporting purposes, a
valuation allowance of approximately $72.1 million has been established against
the corresponding deferred tax asset as management has concluded it is more
likely than not that this amount will not be utilized to reduce future tax
payments.
The Company issued 1.0 million shares of Series A Preferred Stock in
conjunction with the Transaction. Holders of the Series A Preferred Stock are
entitled to receive dividends at an annual rate of 6% payable annually in
arrears. The Company has recorded a $875,000 dividend at April 29, 2000. The
liquidation preference of the Series A Preferred Stock is $25 per share. If
there is a liquidation, dissolution or winding up, the holders of shares of
Series A Preferred Stock are entitled to be paid out of the Company's assets
available for distribution to shareholders an amount in cash equal to the $25
liquidation preference per share plus all accrued and unpaid dividends prior to
the distribution of any assets to holders of shares of common stock.
The Transaction has been accounted for as a leveraged recapitalization,
which will have no impact on the historical book basis of the Company's assets
or liabilities.
During the fourth quarter of fiscal year ended 1997, the Company
announced a reorganization and restructuring program. The reorganization plan
was designed to strengthen the Company's classroom business and improve
profitability and global growth.
Charges related to the restructuring were recognized to reflect the exit
from the Personal Cuisine Food Option in the United States company-owned
locations, the relocation of classes from certain fixed retail outlets to
traveling locations, and other initiatives involving the exit of certain
under-performing businesses and product lines.
Restructuring and related costs recorded in fiscal year ended 1997
totalled $51.7 million pretax. Pretax charges of $49.7 million were classified
as classroom operating expenses and $2.0 million as selling, general and
administrative expenses. The major components of the
12
<PAGE> 13
fiscal year ended 1997 restructuring charges and the remaining accrual balances
as of April 25, 1998, April 24, 1999 and April 29, 2000 were as follows:
<TABLE>
<CAPTION>
Employee Exit cost
Termination ---------------------------
Non-Cash and Accrued
Asset Severance Exit Implementation
Write-downs Costs Costs Costs Total
----------- ----------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Initial charge-1997 $ 27,402 $ 4,723 $ 19,569 $ - $ 51,694
Amounts utilized-1997 (27,402) (339) (46) - (27,787)
----------- ----------- --------- ------------- ----------
Accrued restructuring costs-
April 26, 1997 - 4,384 19,523 23,907
Implementation costs-1998 - - - 999 999
Amounts utilized-1998 - (3,709) (8,553) (999) (13,261)
----------- ----------- --------- ------------- ----------
Accrued restructuring costs-
April 25, 1998 - 675 10,970 - 11,645
Implementation costs 1999 - - - 32 32
Amounts utilized-1999 - (186) (3,769) (32) (3,987)
----------- ----------- --------- ------------- ----------
Accrued restructing costs-
April 24, 1999 - 489 7,201 - 7,690
Amounts utilized-2000 - - (2,904) - (2,904)
----------- ----------- --------- ------------- ----------
Accrued restructuring costs-
April 29,2000 $ - $ 489 $ 4,297 $ - $ 4,786
=========== =========== ========= ============= ==========
</TABLE>
Asset write-downs of $16.9 million consisted primarily of fixed assets
and other long-term asset impairments that were recorded as a direct result of
the Company's decision to exit businesses or facilities. Such assets were
written down based on management's estimate of fair value. Write-downs of $10.5
million were also recognized for estimated losses from disposals of classroom
inventories, packaging materials and other assets related to product line
rationalizations and process changes as a direct result of the Company's
decision to exit businesses or facilities.
Employee severance costs were expensed. For the fiscal year ended April
24, 1998 the workforce was reduced by approximately 337 employees. Severance
costs include charges related to both involuntary terminations and voluntary
terminations. As part of the voluntary termination agreements, enhanced
retirement benefits were offered to the affected employees. These amounts were
included in the Employee Termination and Severance costs component of the
restructuring charge.
Exit costs consist primarily of contract and lease termination costs
associated with the Company's decision to exit the activities described above.
In fiscal year ended April 29, 2000 $2.9 million was utilized. The remaining
accrued exit costs will be utilized through fiscal year ended 2002.
13
<PAGE> 14
The results for fiscal year ended 1998 included costs related to the
implementation of the restructuring program of $999 thousand pretax, which were
classified as selling, general and administrative expenses. These costs consist
primarily of center relocation and training. The results for fiscal year ended
1999 included costs related to the implementation of the restructuring program
of $32 thousand pretax, which was classified as selling, general and
administrative expenses. These costs consist primarily of relocation and
training costs.
COMPARISON OF FISCAL YEAR ENDED APRIL 29, 2000 TO FISCAL YEAR ENDED APRIL 24,
1999.
Net revenues were $399.6 million for the fiscal year ended April 29, 2000
an increase of $35.0 million or 9.6% from $364.6 million for the fiscal year
ended April 24, 1999 (net of promotional allowances of $23.0 million and $40.2
million, respectively). Of the $35.0 million increase, $8.5 million was
attributable to domestic company-owned classroom meeting fees, $8.8 million from
foreign company-owned classroom meeting fees, $2.6 million from franchise
commissions, and $26.9 million from product sales, which were offset by an $11.8
million decline in royalties from licensing, publications, and other. The
decline in royalties is directly related to the discontinuation of food
royalties from Heinz as a result of the Transaction and the recognition in
fiscal year ended 1999 of the present value of the guaranteed future payments
from the Warnaco licensing agreement. Adjusting for the discontinued food
royalties of $1.8 million, net revenues were $397.8 million for the fiscal year
ended April 29, 2000, an increase of 13.5% from $350.6 million (excluding $8.7
million from non-recurring revenue from the Warnaco licensing agreement and $5.3
million from discontinued food royalties) for the fiscal year ended April 24,
1999.
Domestic company-owned classroom meeting fee revenues were $130.8 million
for the fiscal year ended April 29, 2000 an increase of 6.9% from $122.3 million
for the fiscal year ended April 24, 1999 (net of promotional allowances of $5.7
million and $23.0 million, respectively). This increase in domestic
company-owned classroom meeting fee revenues was the result of a 22% increase in
member attendance, partially offset by lower average meeting fee revenue per
attendee as a result of the rollout of the Liberty/Loyalty pricing strategy.
Foreign company-owned classroom meeting fee revenues were $152.7 million for the
fiscal year ended April 29, 2000, an increase of 6.1% from $143.9 million for
the fiscal year ended April 24, 1999 (net of promotional allowances of $17.4
million and $17.2 million, respectively). This increase in foreign company-owned
classroom meeting fee revenues was the result of a 6.1% increase in
international attendance in the UK, Continental Europe, and Australia.
Domestic franchise revenues were $21.3 million for the fiscal year ended
April 29, 2000, an increase of 11.5% from $19.1 million for the fiscal year
ended April 24, 1999. This increase in domestic franchise revenues was
primarily the result of an increase in member attendance, due to improved
training and support and increased marketing effectiveness. Foreign franchise
revenues were $4.5 million for the fiscal year ended April 29, 2000, an
increase of 9.8% from $4.1 million for the fiscal year ended April 24, 1999.
This increase was primarily the result of a strong performance in Canada and
Ireland.
Product revenues were $84.2 million for the fiscal year ended April 29,
2000, an increase of 47.0% from $57.3 million for the fiscal year ended April
24, 1999. This 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, including its newly introduced nutrition bars.
14
<PAGE> 15
Royalties from licensing, publications and other were $4.3 million
(excluding $1.8 million from discontinued food royalties) for the fiscal year
ended April 29, 2000, an increase of 10.3% from $3.9 million (excluding $8.7
million from non-recurring revenue from the Warnaco licensing agreement and
$5.3 million from discontinued food royalties) for the fiscal year ended April
24, 1999.
Cost of revenues was $201.4 million for the fiscal year ended April 29,
2000, an increase of 12.6% from $178.9 million for the fiscal year ended April
24, 1999. This increase was primarily the result of an increased number of
meetings to accommodate attendance growth and growing product sales. Gross
profit margin was 49.4% for fiscal year ended April 29, 2000 (excluding $1.8
million from discontinued food royalties) compared to 49.0% for the fiscal year
ended April 24, 1999 (excluding $8.7 million from non-recurring revenue from
the Warnaco licensing agreement and $5.3 million from discontinued food
royalties).
Marketing expenses were $51.5 million for the fiscal year ended April 29,
2000, a decrease of 2.6% from $52.9 million for the fiscal year ended April 24,
1999 (net of promotional allowances of $23.0 million and $40.2 million,
respectively). The Company's marketing program remains unchanged. The decrease
of $1.4 million is related to amounts expended under Heinz's marketing programs
in fiscal year ended 1999 and the discontinuation of food royalty related
marketing rebate expenses.
Selling, general and administrative expenses were $50.7 million for the
fiscal year ended April 29, 2000, an increase of 3.7% from $48.9 million for
the fiscal year ended April 24, 1999. As a percentage of net revenues,
(excluding $1.8 million from discontinued food royalties in fiscal year ended
April 29, 2000 and excluding $8.7 million from non-recurring revenue from the
Warnaco licensing agreement and $5.3 million from discontinued food royalties
in fiscal year ended April 24, 1999), these costs were 12.7% for the fiscal
year ended April 29, 2000 compared to 13.9% for fiscal year ended April 24,
1999. This percentage decrease was due to the continued benefit of the
Company's restructuring and reorganization program.
As a result of the above, operating income was $94.2 million (excluding a
one-time charge of $8.3 million of transaction costs and $1.8 million in
revenue from discontinued food royalties) for the year ended April 29, 2000, an
increase of 34.8% from operating income of $69.9 million (excluding $8.7
million of non-recurring revenue from the Warnaco licensing agreement and $5.3
million from discontinued food royalties) for the fiscal year ended April 24,
1999.
15
<PAGE> 16
COMPARISON OF FISCAL YEAR ENDED APRIL 24, 1999 TO FISCAL YEAR ENDED APRIL 25,
1998.
Net revenues were $364.6 million for the fiscal year ended April 24,
1999, an increase of $67.4 million or 22.7%, from $297.5 million for the fiscal
year ended April 25, 1998 (net of promotional allowances of $40.2 million and
$37.1 million, respectively). Of the $67.4 million increase, $28.5 million was
attributable to domestic company-owned classrooms, $14.8 million to foreign
company-owned classrooms, $5.3 million to franchise commissions, $9.8 million
to products sales and $9.0 million to royalties from licensing publications,
and other. The increase in royalties was due to the recognition, in fiscal year
ended April 24, 1999, of the present value of the guaranteed future payments
from the Warnaco licensing agreement. Adjusting for the Warnaco licensing
agreement of $8.7 million, net revenues were $355.9 million for the fiscal
year ended April 24, 1999, an increase of $58.7 million, or 19.8%, from $297.2
million for the fiscal year ended April 25, 1998.
Domestic company-owned classroom meeting fee revenues were $122.3 million
for the fiscal year ended April 24, 1999, an increase of 30.4% from $93.8
million for the fiscal year ended April 25, 1998 (net of promotional allowances
of $23.0 million and $19.5 million, respectively). This increase in domestic
company-owned classroom meeting fee revenues was the result of a 29% increase
in member attendance. The Company believes the increase in member attendance
was due to the continued improvement in member satisfaction which resulted from
the full year impact of 1-2-3 Success and the elimination of its prepackaged
meals program. Foreign company-owned classroom meeting fee revenues were $143.8
million for the fiscal year ended April 24, 1999, an increase of 11.5% from
$129.0 million for the fiscal year ended April 25, 1998 (net of promotional
allowances of $17.2 million and $17.6 million, respectively). This increase in
foreign company-owned classroom meeting fee revenues was the result of a 6%
increase in international attendance in the UK, continental Europe and
Australia.
Domestic franchise revenues were $19.1 million for the fiscal year ended
April 24, 1999, an increase of 32.9% from $14.4 million for the fiscal year
ended April 25, 1998. This increase in domestic franchise revenues was
primarily the result of an increase in member attendance, which was due to the
full year impact of 1-2-3 Success, improved training and support and increase
marketing effectiveness. Foreign franchise revenues were $4.1 million for the
fiscal year ended April 24, 1999, an increase of 15.3% from $3.5 million for
the fiscal year ended April 25, 1998. This increase was primarily the result of
a strong performance in Canada and Ireland.
Product revenues were $57.3 million for the fiscal year ended April 24,
1999, an increase of 20.6% from $47.5 million for the fiscal year ended April
25, 1998. This increase in product revenues was primarily the result of
increased member attendance. In addition, the elimination of approximately
two-thirds of items in NACO allowed the Company to focus its sales efforts on
its core products.
Royalties from licensing, publications and other were $9.3 million
(excluding $8.7 million of non-recurring revenue from the Warnaco licensing
agreement) for the fiscal year ended April 24, 1999, an increase of 3.3% from
$9.0 million for the fiscal year ended April 25, 1998.
16
<PAGE> 17
Cost of revenues was $178.9 million for the fiscal year ended April 24,
1999, an increase of 11.8% from $160.0 million for the fiscal year ended April
25, 1998. This increase was attributable to the increased levels of attendance.
Gross profit margin (net of promotional allowances of $40.2 million and $37.1
million, respectively), however, increased from 46.2% for the fiscal year ended
April 25, 1998 to 49.7% (excluding $8.7 million of non-recurring revenue from
the Warnaco licensing agreement) for the fiscal year ended April 24, 1999. This
increase in gross margin was due to various factors, including an increase in
attendance per meeting, an increase in the ratio of third-party locations to
total locations, and a change in product mix with a focus on higher margin core
products.
Marketing expenses were $52.9 million for the fiscal year ended April 24,
1999, an increase of 7.5% from $49.2 million for the fiscal year ended April
25, 1998 (net of promotional allowances of $40.2 million and $37.1 million,
respectively). This increase in marketing expenses was the result of an
increase in advertising .
Selling, general and administrative expenses were $48.9 million for the
fiscal year ended April 24, 1999, an increase of 10.9% from $44.1 million for
the fiscal year ended April 25, 1998. As a percentage of total revenues,
(excluding $8.7 million of non-recurring revenue from the Warnaco licensing
agreement), these costs decreased from 14.8% for fiscal year ended April 25,
1998 to 13.7% for fiscal year ended April 24, 1999. This percentage decrease
was due to the continued benefit of the Company's restructuring and
reorganization program, which allowed the Company to eliminate certain costs
that were not directly associated with its core business, classroom operations
and related products.
As a result of the above, operating income was $75.2 million (excluding
$8.7 million of non-recurring revenue from the Warnaco licensing agreement) for
the fiscal year ended April 24, 1999, an increase of 70.9% from operating
income of $43.9 million for the fiscal year ended April 25, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year ended April 29, 2000, the primary source of funds to
meet working capital needs was cash from operations. Cash and cash equivalents
increased $24.5 million during the fiscal year ended April 29, 2000. Cash flows
provided by operating and financing activities of $49.9 million and $8.1
million, respectively, were in excess of cash flows used in investing activities
of $19.6 million. Cash flows used for investing activities were principally
related to acquisitions of minority interest.
The total cash required to effect the Transaction was $496.0 million. The
Company funded the Transaction and related costs from available cash, the
proceeds of the Senior Subordinated Notes of $255.0 million and $237.0 million
in borrowings under the credit facilities.
Capital spending has averaged $2.6 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.
17
<PAGE> 18
The Company is significantly leveraged. As of April 29, 2000, there was
outstanding $474.6 million in aggregate indebtedness, with $30 million of
additional borrowing capacity available under the revolving credit facility,
and total stockholders' deficit of $234.1 million. 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 flow from operating activities, together
with borrowings available under the revolving credit facility, will be
sufficient to fund its currently anticipated capital investment requirements,
debt service requirements and working capital requirements. Any future
acquisitions, joint ventures or other similar transaction will likely require
additional capital and the Company cannot assure that any such capital will be
available to it on acceptable terms, or at all.
The Company's credit facilities provide senior secured financing of up to
$267.0 million, consisting of the $75.0 million term loan A facility with a
maturity of six years, the $75.0 million term loan B facility with a maturity
of seven years, the $87.0 million transferable loan certificate facility with a
maturity of seven years and a $30.0 million revolving credit facility. The
Company drew the full amount of the term loan A facility, the term loan B
facility and the transferable loan certificate facility upon closing of the
Transaction. The revolving credit facility commitment will terminate six years
from the date of the closing of the credit facilities.
The term loan A facility, the term loan B facility, the transferable loan
certificate facility and the revolving credit facility will initially bear
interest, subject to performance based stepdowns applicable to the term loan A
facility and the revolving credit facility, at a rate equal to (a) in the case
of the term loan A facility and the revolving credit facility, LIBOR plus 3.25%
or, at the Company's option, the alternate base rate (as defined in the credit
facilities) plus 2.25%; or (b) in the case of the term loan B facility and the
transferable loan certificate facility, LIBOR plus 4.00% or, at the Company's
option, the alternate base rate plus 3.00%.
In addition to paying interest on outstanding principal under the credit
facilities, the Company is required to pay a commitment fee to the lenders
under the revolving credit facility in respect to the unused commitments at a
rate equal to 0.50% per year.
The term loan A facility, the term loan B facility and the transferable
loan certificate facility will amortize each year in equal quarterly amounts in
the following approximate aggregate principals amounts for each year set forth
below:
18
<PAGE> 19
<TABLE>
<CAPTION>
Term Term
Loan A Loan B TLC
Year Facility Facility Facility
---- ----------- ---------- -----------
(in millions)
<S> <C> <C> <C>
1........................ $ 3.13 $ 0.19 $ 0.22
2........................ 12.50 0.75 0.87
3........................ 12.50 0.75 0.87
4........................ 12.50 0.75 0.87
5........................ 12.50 0.75 0.87
6........................ 14.06 0.75 0.87
7........................ 7.81 35.72 41.43
8........................ 35.34 41.00
----------- ---------- -----------
Total $ 75.0 $ 75.0 $ 87.0
=========== ========== ===========
</TABLE>
Amounts outstanding under the revolving credit facility are due and
payable in full at maturity, six years from the date of the closing of the
credit facilities.
The credit facilities contain a number of covenants that, among other
things, restrict the Company's ability to dispose of assets, incur additional
indebtedness, incur guarantee obligations, repay other indebtedness, make
certain restricted payments and dividends, create liens on assets, make
investments, loans or advances, make certain acquisitions, engage in mergers or
consolidations, make capital expenditures, enter into sale and leaseback
transactions, or engage in certain transactions with affiliates and otherwise
restrict the Company's corporate activities. In addition, under the credit
facilities, 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. The credit facilities also contain certain
customary events of default.
The notes will mature in 2009. The Company's obligations under the notes
are subordinate and junior in right of payment to all of its existing and
future senior indebtedness, including all indebtedness under the credit
facilities. The indentures restrict, among other things, its ability to incur
additional indebtedness, issue shares of disqualified stock and preferred
stock, pay dividends or make certain other restricted payments and enter into
certain transactions with affiliates, and impose certain restrictions on the
ability of its subsidiaries to pay dividends or make certain payments to the
Company, merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its assets.
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
<PAGE> 20
The Company's ability to fund its 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.
OTHER MATTERS
See discussion of recently issued accounting pronouncements included in
Note 2 to the "Consolidated Financial Statements."
ITEM 7A. 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 April 29, 2000 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'
equity. 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 year. The resulting translation adjustments are recorded
in stockholders' equity as accumulated other comprehensive income/loss. In
addition, fluctuations in the value of the euro will cause the U.S. dollar
translated amounts to change in comparison to prior periods and may impact
interest expense. Furthermore, the Company will revalue the outstanding euro
notes at the end of each period, and the resulting change in value will be
reflected in the income statement of the corresponding period.
Each of 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 uses foreign currency forward contracts to more properly
align the underlying sources of cash flow with debt servicing requirements. At
April 29, 2000, the
20
<PAGE> 21
Company had long-term foreign currency forward contracts receivable with
notional amounts of USD 44.0 million and EUR 52.0 million offset by foreign
currency forward contracts payable with notional amounts of GBP 59.2 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information is incorporated by reference to the "Consolidated
Financial Statements and Notes" on pages F-1 through F-35, together with the
report thereon of Pricewaterhouse-Coopers LLP on page F-34.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The following table sets forth certain information concerning each of the
Company's executive officers. All officers serve at the pleasure of the Board
of Directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Linda Huett.............55 President and Director
Thomas Kiritsis.........55 Vice President and Chief Financial Officer
Robert W. Hollweg.......57 Vice President, General Counsel and Secretary
Clive Brothers..........46 Vice President, Continental Europe
John Dennis.............43 General Manager, United Kingdom
Robert Mallow...........42 Vice President, NACO Operations
Scott Penn..............28 Vice President, Australasia
Raymond Debbane.........45 Chairman of the Board
Jonas M. Fajgenbaum.....27 Director
Kent Q. Kreh............64 Director
Sacha Lainovic..........44 Director
Richard Penn............54 Director
Christopher J. Sobecki..42 Director
</TABLE>
21
<PAGE> 22
Linda Huett. Ms. Huett is the President and a Director of the Company.
Ms. Huett joined the Company in 1984 as a classroom leader. Ms. Huett was
promoted to U.K. Training Manager in 1986. In 1990, Ms. Huett was appointed
Director of the United Kingdom operation and in 1993 was appointed Vice
President of Weight Watchers U.K. Ms. Huett graduated from Gustavas Adolphus
College and received her Masters in Theater from Yale University.
Thomas Kiritsis. Mr. Kiritsis is Vice President and Chief Financial
Officer. Mr. Kiritsis joined the Company in May 2000. From June 1994 to
April 2000, he was Senior Vice President of Finance of Olsten Corporation. Mr.
Kiritsis received a B.B.A. in Accounting from Hofstra University and is a
Certified Public Accountant.
Robert W. Hollweg. Mr. Hollweg is Vice President, General Counsel and
Secretary. He joined the Company in 1969 as an Assistant Counsel in the Law
Department. He transferred to the Heinz Law Department subsequent to the
acquisition of the Company by Heinz in 1978 and served there in various
capacities. He rejoined the Company after its acquisition by Artal in
September 1999. Mr. Hollweg graduated from Fordham University and received
his Juris Doctor degree from Fordham University School of Law. He is a member
of the American and New York State Bar Associations and a former President of
the International Trademark Association.
Clive Brothers. Mr. Brothers is Vice President Continental Europe. Mr.
Brothers was appointed to this position in 1993. Mr. Brothers joined the
Company in 1985 as Marketing Manager, U.K. In 1990, Mr. Brothers was appointed
General Manager, France. Mr. Brothers received a B.A. from Leeds Polytechnic
in England and a Diploma in Marketing from the Chartered Institute of
Marketing.
John Dennis. Mr. Dennis is General Manger, Weight Watchers (U.K.)
Limited. Mr. Dennis was appointed to this position in 1999. He joined Weight
Watchers (U.K.) Limited in 1992 as Head of Finance, having previously worked
for Nabisco Brands Ltd. and Grand Metropolitan Foods Ltd. Mr. Dennis qualified
as a member of the Chartered Institute of Management Accountants in 1984.
Robert Mallow. Mr. Mallow is Vice President, NACO Operations. He joined
Weight Watchers International, Inc. in 1983 as Northeastern Regional Manager,
Franchise Department. In January 1986 Mr. Mallow was promoted to National
Franchise Manager, Weight Watchers International Inc. In April 1987, he became
Vice President, General Manager Business Operations, Weight Watchers of
Syracuse, Inc. In November 1991, Mr. Mallow was promoted to Regional Field
Director, Weight Watchers North America, Inc. In September 1996, Mr. Mallow was
appointed to his present position. Mr. Mallow received a B.A. in Economics from
the State University of New York at Cortland and an M.B.A. from the State
University of New York at Binghamton.
Scott Penn. Mr. Penn is Vice President, Australasia operations. Mr.
Penn joined the Company in 1994 as a Marketing Services Manager in Australia.
In 1996, Mr. Penn was
22
<PAGE> 23
promoted in Australia to Group Marketing Manager and in 1997 he was promoted to
General Manager-Marketing & Finance. In 1999, Mr. Penn was promoted to his
present position.
Raymond Debbane. Mr. Debbane became Chairman of the Board upon
completion of the Transaction. Mr. Debbane is a co-founder and President of
Invus. Prior to forming Invus in 1985, Mr. Debbane was a manger and consultant
for The Boston Consulting Group in Paris, France. He holds an M.B.A. from
Stanford Graduate School of Business, an M.S. in Food Science and Technology
from the University of California, Davis and a B.S. in Agricultural Sciences
and Agricultural Engineering from American University of Beirut. Mr. Debbane
is director of Artal Group S.A., Ceres, Inc., Financial Technologies
International Inc., Nellson Neutraceuticals, Inc. and the Advisory Board of
Oxford BioScience Partners and also served as a director of Keebler Foods
Company from 1996 to 1999.
Jonas M. Fajgenbaum. Mr. Fajgenbaum became a Director upon completion of
the Transaction. Mr. Fajgenbaum is a director at Invus. He joined the firm
in 1996. Prior to joining Invus, Mr. Fajgenbaum was a consultant for McKinsey
& Company in New York from 1994 to 1996. He graduated with a B.S. from the
Wharton School of Business and a B.A. in Economics from the University of
Pennsylvania in 1994.
Kent Q. Kreh. Mr. Kreh, a Director since 1997, served as President and
Chief Executive Officer of Weight Watchers International, Inc. from 1997 to
1999. He joined Weight Watchers in 1972 as Marketing Director and was named
Executive Vice President and Publisher of Weight Watchers publications in 1983.
Prior to joining the Company, he was employed by General Mills, Bristol Myers
and Ford Motor Company. Mr. Kreh received his B.A. from the University of
Missouri, Columbia. Mr. Kreh is a board member of the Public Health Research
Institute, New York City, the American Obesity Association, Washington D.C. and
the American Heart Association, New York City.
Sacha Lainovic. Mr. Lainovic became a Director upon completion of the
Transaction. Mr. Lainovic is a co-founder and Executive Vice President of
Invus. Prior to forming Invus in 1985, Mr. Lainovic was a manager and
consultant for the Boston Consulting Group in Paris, France. He holds an
M.B.A. from Stanford Graduate School for Business and an M.S. in engineering
from Insa de Lyon in Lyon, France. Mr. Lainovic is a director of Financial
Technologies International Inc., Nellson Nutraceuticals, Inc., and Delta Radio,
and also served as a director of Keebler Foods Company from 1996 to 1999.
Richard Penn. Mr. Penn became a Director upon completion of the
Transaction. From 1984 to 1999, Mr. Penn was Managing Director of Weight
Watchers Australia. Mr. Penn began his career with McCann Erickson in
advertising and joined the Coca-Cola Company (Australia) in 1968. Mr. Penn
served as the first President of the International Weight Watchers franchise
Association from 1993 to 1995. Richard Penn is the father of Scott Penn.
Christopher J. Sobecki. Mr. Sobecki became a Director upon completion of
the Transaction. Mr. Sobecki, a Managing Director of Invus, joined the firm
in 1989. He received an M.B.A. from Harvard Business School. He also hold a
B.S. in Industrial Engineering from Purdue University. Mr. Sobecki is a
director of Nellson Neutraceuticals, inc. Financial Technologies International
Inc. and iLife, Inc. He also served as director of Keebler Foods Company
from 1996 to 1998.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION PROGRAMS
The Board of Directors oversees the Compensation Programs of the Company,
with particular attention to the compensation of the Company's Chief Executive
Officer and the other Executive Officers. It is the responsibility of the Board
of Directors to review, recommend and approve changes to the Company's
compensation policies and benefits programs, to administer the Company's stock
plans, including approving stock option grants to executive officers and
certain other stock option grants, and to otherwise ensure that the Company's
compensation philosophy is consistent with the Company's best interests and is
properly implemented.
The compensation philosophy of the Company is to (i) provide a
competitive total compensation package that enables the Company to attract and
retain key executive and employee talent needed to accomplish the Company's
goals and (ii) directly link compensation to improvements in Company financial
and operational performance.
Total compensation is comprised of base salary, both cash and noncash
incentive compensation and is based on the Company's financial performance and
other factors and is delivered through a combination of cash and equity-based
awards. This approach results in overall compensation levels which follow the
financial performance of the Company.
The Board of Directors reviews each senior executive officer's base
salary annually. In determining appropriate base salary levels, consideration is
given to the officer's impact level, scope of responsibility, prior experience,
past accomplishments, and data on prevailing compensation levels in relevant
executive labor markets.
The Board of Directors believes that granting stock options on an ongoing
basis provides officers with a strong economic interest in maximizing
shareholder returns over the longer term. The Company believes that the
practice of granting stock options is critical to retaining and recruiting the
key talent necessary at all employee levels to ensure the Company's continued
success.
The Board of Directors will continue to monitor the Company's
compensation program in order to maintain the proper balance between cash
compensation and equity-based incentives and may consider further revisions in
the future, although it is expected that equity-based compensation will remain
one of the principal components of compensation.
23
<PAGE> 24
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended April 29, 2000 and
April 24, 1999, the compensation paid to the Company's President and to each of
the next four most highly compensated executive officers whose total annual
salary and bonus was in excess of $100,000.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------
AWARD(1)
ANNUAL --------------
COMPENSATION SECURITIES
------------------ UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (NO. AWARDED) ($)(2)
---------------------------------------------- -------- ------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
LINDA HUETT
President
Officer.............................. 2000 183,750 215,159 71,385 288,905
1999 138,574 219,435 40,000 -
CLIVE BROTHERS
Vice President
Continental Europe................... 2000 143,423 158,597 71,385 12,908
1999 138,574 219,435 40,000 -
ROBERT MALLOW
Vice President
Weight Watchers North America 2000 162,839 79,244 71,385 10,005
1999 124,380 213,547 35,000 27,218
JOHN DENNIS
General Manager
United Kingdom 2000 108,702 112,338 17,846 9,710
1999 89,667 48,871 500 7,998
STEPHANIE KONECOFF
Vice President
Franchise Business Relations.... 2000 126,792 65,828 71,385 10,021
1999 121,266 165,830 11,000 10,000
KENT KREH(3)
President And Chief Executive
Officer.............................. 2000 118,385 - - -
1999 231,048 651,511 90,000 140,552
</TABLE>
-------------------------------------------------
(1) Awards of stock were made to the named executives. Prior to
9/29/99, options were granted to the named executives under the
H.J. Heinz, 1996 Stock Option Plan. Subsequent to 9/29/99, options
were granted to named executives under the 1999 Stock Purchase and
Option Plan of Weight Watchers International, Inc. and
Subsidiaries and Weight Watchers.com Stock Incentive Plan of
Weight Watchers International, Inc. and Subsidiaries.
(2) Includes amounts contributed under the Weight Watchers 401(k)
Savings Plan and the Weight Watchers Non-Qualified Executive
Profit Sharing Plan of $5,661 for Ms. Huett, $10,005 for Mr.
Mallow, and $10,021 for Ms. Konecoff. Includes contributions to
the UK Pension Plan of $283,244 for Ms. Huett and $12,908 for Mr.
Brothers.
(3) Mr. Kreh resigned his position from Weight Watchers International
as of 9/29/99.
24
<PAGE> 25
In December 1999 the Board of Directors adopted the "1999 Stock Purchase
and Option Plan of Weight Watchers International, Inc. and Subsidiaries",
pursuant to which selected employees were afforded the opportunity to purchase
shares of the Company's common stock and/or were granted options to purchase
shares of the Company's common stock. The number of shares available for grant
under this plan is 1,200,000 shares of authorized common stock of the Company.
The following table sets forth certain information regarding options granted
during fiscal year ended April 29, 2000, to the named executive officers under
the Weight Watchers International, Inc. and Subsidiaries Option Plan.
<TABLE>
<CAPTION>
Weight Watchers International, Inc. and Subsidiaries Option Grants
for the fiscal year ended April 29, 2000
Individual Grants
------------------------------------------------------------------------------------------
Number of Percent of Total
Securities Options
Underlying Granted to Exercise or Grant Date
Options Employees in Base Price Expiration Present
Name Granted (1) Fiscal Year (2) ($/Share) Date Value ($)(3)
----------------------- -------------- ------------------ ----------- --------- --------------
<S> <C> <C> <C> <C> <C>
Linda Huett............. 60,000 5.72% $ 10.00 12/17/09 291,600
Clive Brothers.......... 60,000 5.72% $ 10.00 12/17/09 291,600
Robert Mallow........... 60,000 5.72% $ 10.00 12/17/09 291,600
John Dennis............. 15,000 1.43% $ 10.00 12/17/09 72,900
Stephanie Konecoff...... 60,000 5.72% $ 10.00 12/17/09 291,600
-----------------------
</TABLE>
(1) Options were granted on December 17, 1999 pursuant to the terms of the
option plan. No options under the plan were exercised during fiscal year
ended April 29, 2000. Options are exercisable based on vesting provisions
outlined in the agreement.
(2) Percentage of total options granted are based on total grants made to all
employees during fiscal year ended April 29, 2000.
(3) The estimated grant date's present value is determined using the
Black-Scholes model. The adjustments and assumptions incorporated in the
Black-Scholes model in estimating the value of the grants include the
following: (a) exercise price of options equals the fair market value of
the underlying stock on the date of grant; (b) option term 10 years; (c)
dividend yield and volatility of 0%; and (d) a risk free interest rate
ranging from 6.49% to 6.65%. The ultimate value, if any, an optionee will
realize upon exercise of an option will depend on the excess of the
market value of the Company's common stock over the exercise price on the
date the option is granted.
25
<PAGE> 26
In April 2000 of Weight Watchers International, Inc. and subsidiaries, the
Board of Directors adopted the "WeightWatchers.com Stock Incentive Plan",
pursuant to which selected employees were granted options to purchase shares of
common stock of WeightWatchers.com, Inc. that are owned by the Company. The
number of shares available for grant under this Plan is 400,000 shares of
authorized common stock of WeightWatchers.com, Inc. The following table sets
forth certain information regarding options granted during fiscal year ended
April 29, 2000, to the named executive officers under the WeightWatchers.com
Option Plan.
<TABLE>
<CAPTION>
Weight Watchers.com Option Grants for the fiscal year ended April 29, 2000
Individual Grants
------------------------------------------------------------------------------------------
Number of Percent of Total
Securities Options
Underlying Granted to Exercise or Grant Date
Options Employees in Base Price Expiration Present
Name Granted (1) Fiscal Year (2) ($/Share) Date Value ($)(3)
----------------------- -------------- ------------------ ----------- --------- --------------
<S> <C> <C> <C> <C> <C>
Linda Huett............. 11,385 7.73% .01 4/28/10 1,822
Clive Brothers.......... 11,385 7.73% .01 4/28/10 1,822
Robert Mallow........... 11,385 7.73% .01 4/28/10 1,822
John Dennis............. 2,846 1.93% .01 4/28/10 455
Stephanie Konecoff...... 11,385 7.73% .01 4/28/10 1,822
-----------------------
</TABLE>
(1) Options were granted on April 28, 2000 pursuant to the terms of the option
plan. Options are exercisable based on vesting provisions outlined in the
agreement.
(2) Percentage of total options granted are based on total grants made to
Weight Watchers employees during fiscal year ended April 29, 2000.
(3) The estimated grant date's present value is determined using the
Black-Scholes model. The adjustments and assumptions incorporated in the
Black-Scholes model in estimating the value of the grants include the
following: (a) price paid per share of $.01; (b) option term 10 years;
(c) dividend yield and volatility of 0%; and (d) a risk free interest rate
of 6.5%. The ultimate value, if any, an optionee will realize upon exercise
of an option will depend on the excess of the market value of the Company's
common stock over the exercise price on the date the option is granted.
26
<PAGE> 27
Certain qualifying employees of the Company were granted options to purchase
common stock under the H.J. Heinz Stock Option Plan. Options under the plan
have been granted at not less than market prices on the date of grants. The
following table sets forth certain information regarding Heinz options granted
during fiscal year ended April 24, 1999, to the named executive officers:
<TABLE>
<CAPTION>
H.J. Heinz Option Grants for the Fiscal Year ended April 24, 1999
Individual Grants
------------------------------------------------------------------------------------------------------
Percent of Total
Number of Securities Options Granted to Exercise or Grant Date
Underlying Options Employees in Fiscal Base Price Expiration Present Value
Name Granted Year (3) ($/Share) Date ($)(4)
---------------------- -------------------- ---------------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Kent Q. Kreh.......... 40,000(1) 0.45% 54.625 6/9/08 467,200
50,000(2) 0.56% 49.6875 4/20/09 634,000
Linda Huett........... 15,000(1) 0.17% 54.625 6/9/08 175,200
25,000(2) 0.28% 49.6875 4/20/09 317,000
Clive Brothers........ 15,000(1) 0.17% 54.625 6/9/08 175,200
25,000(2) 0.28% 49.6875 4/20/09 317,000
Robert Mallow......... 10,000(1) 0.11% 54.625 6/9/08 116,800
25,000(2) 0.28% 49.6875 4/20/09 317,000
John Dennis........... -(1) - - - -
500(2) 0.00% 49.6875 4/20/09 6,340
Stephanie Konecoff.... 4,000(1) 0.04% 54.625 6/9/08 46,720
7,000(2) 0.08% 49.6875 4/20/09 88,760
----------------------
</TABLE>
(1) Options were granted on June 10, 1998 pursuant to the terms of Heinz's 1996
Stock Option Plan. The fair value of the stock was $54.625 on the date of
grant. Options to purchase 40% of the shares granted vested on June 10,
1999 and the remaining options became exercisable upon closing of the
Transaction.
(2) Options were granted on April 21, 1999 pursuant to the terms of Heinz's
1996 Stock Option Plan and these options vested upon closing of the
Transaction.
(3) Percentages of total options granted are based on total grants made to all
Heinz employees.
(4) The estimated grant date's present value is determined using the
Black-Scholes model. The material assumptions and adjustments incorporated
in the Black-Scholes model in estimating the value of the option grants
referred to in Note (1) include the following: (a) exercise price of the
options equal to the fair market value of the underlying stock on the date
of grant; (b) option term of 10 years; (c) dividend yield of 2.15%; (d) a
risk-free interest rate of 5.8%; and (e) volatility of 22.8%. The material
assumptions and adjustments with respect to the options grants referred to
in Note (2) include the following: (a) exercise price of the options equal
to the fair market value of the underlying stock on the date of grant; (b)
option term of 10 years; (c) dividend yield of 2.6%; (d) a risk-free
interest rate of 5.18%; and (e) volatility of 27.1%. The ultimate values of
the options will depend on the future market price of Heinz's stock, which
cannot be forecast. The actual value, if any, an optionee will realize upon
exercise of an option will depend on the excess of the market value of
Heinz's common stock over the exercise price on the date the option is
exercised.
27
<PAGE> 28
DIRECTOR COMPENSATION
Kent Q. Kreh receives $25,000 per year for his services as director and
Richard Penn receives $50,000 for his services. Other directors do not receive
compensation, except in their capacity as officers or employees.
EMPLOYMENT AGREEMENTS AND SEVERANCE POLICIES
As of August 30, 1996, the Company entered into an employment agreement with
Robert Mallow, Vice President of NACO Operations. Mr. Mallow's employment
agreement provides for a base salary, subject to increases, and for
participation in an annual incentive bonus scheme. Under the letter agreement,
in the event of a termination of Mr. Mallow's employment by the Company for just
cause (which term is not defined in the agreement), Mr. Mallow is eligible for
salary continuation for a period of one year from the date of termination.
The Company is in the process of establishing a severance policy to cover all
full-time salaried employees. It is intended that the severance policy will
provide continuation of base salary for employees for some period of time after
an individual's employment is terminated under specified circumstances. The
Company is still in the process of establishing the guidelines for this policy.
EXECUTIVE SAVINGS AND PROFIT SHARING PLAN
The Company sponsors the Weight Watchers Savings Plan for salaried and
eligible hourly employees, a defined contribution plan which provides for
employer matching contributions up to 100% of the first 3% of an employee's
eligible compensation. The Savings Plan also permits employees to contribute
between 1% and 13% of eligible compensation on a pre-tax basis.
The Company has established the Weight Watchers Executive Profit Sharing
Plan, which provides a nonqualified profit sharing plan for key management
personnel who are not eligible to participate in the Weight Watchers Profit
Sharing Plan. This nonqualified profit sharing plan has similar features as the
Weight Watchers Profit Sharing Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock by (1) all persons known by the Company
to own beneficially more than 5% of the Company's common stock, (2) each
director who is a stockholder, (3) the President and each of the named executive
officers and (4) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED PERCENT OF CLASS
------------------------------------ ----- ----------------
<S> <C> <C>
Artal Luxembourg S.A. (1)...................... 21,083,200 88.6%
105 Grand-Rue
Luxembourg City, Luxembourg L-1661
H.J. Heinz Company............................. 1,428,000 6.0%
600 Grant Street
Pittsburgh, Pennsylvania 15219
Linda Huett (3)(4)............................. 20,000 *
Clive Brothers (3)............................. 20,000 *
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
<S> <C> <C>
John Dennis (3) .................................. 5,000 *
Robert Mallow (3) ................................ 20,000 *
Stephanie Konecoff (3) ........................... 20,000 *
Richard Penn (4) ................................. 250,000 1.1%
All directors and executive officers as a group .. 370,000 1.6%
</TABLE>
(1) The parent entity of Artal Luxembourg S.A. is Artal Group S.A. ("Artal
Group"). The address of Artal Group is the same as the address of Artal
Luxembourg.
(2) The Company's directors and officers may be contacted c/o Weight Watchers
International, Inc., 175 Crossways Park West, Woodbury, New York, 11797.
(3) Executive Officer
(4) Director
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The summaries of the agreements described below are not complete. You
should read the agreements in their entirety, copies of which are available
upon request from the Company.
STOCKHOLDERS' AGREEMENT
Simultaneously with the closing of the Transaction, the Company
entered into a stockholders' agreement with Artal and Heinz governing the
relationship between and among the Company and these holders of its common
stock. Subsequent transferees of Artal and Heinz must, subject to certain
limited exceptions, agree to be bound by the terms and provisions of the
agreement.
The stockholders' agreement imposes on Heinz certain restrictions on
the transfer of the Company's common stock until the earlier to occur of
(1) the fifth anniversary of the Transaction and (2) its initial public
offering of common stock under the Securities Act, subject to certain
exceptions. Heinz will have the right to participate pro rata in certain
transfers of the Company's common stock by Artal, and Artal will have the
right to force Heinz to participate on a pro rata basis on certain
transfers of the Company's common stock by Artal.
REGISTRATION RIGHTS AGREEMENT
Simultaneously with the closing of the Transaction, the Company
entered into a registration rights agreement with Artal and Heinz. The
registration rights agreement grants Artal certain demand rights and grants
Artal and Heinz certain incidental registration rights to register their
shares of the Company's common stock for public sale under the Securities
Act.
PREFERRED STOCKHOLDERS' AGREEMENT
Simultaneously with the closing of the Transaction, the Company
entered into a preferred stockholders' agreement with Heinz governing the
relationship between and among the Company and the holders of its Series A
Preferred Stock. Subsequent transferees of Heinz, subject to certain
limited exceptions, must agree to be bound by the terms and provisions of
this agreement.
The preferred stockholders' agreement imposes on Heinz certain
restrictions on transfer of the Company's Series A Preferred Stock until
the second anniversary of the Transaction. In addition, at any time
after the second anniversary but prior to the fifth anniversary of the
Transaction, the Company, Artal and the Company's respective designees
will have a right of first refusal with respect to transfers of the
Company's preferred stock by Heinz.
29
<PAGE> 30
LIMITED LIABILITY COMPANY AGREEMENT
Simultaneously with the closing of the Transaction, the Company
contributed $2,500 in exchange for a 50% membership interest in WW Foods,
LLC (the "LLC"), a Delaware limited liability company. Heinz owns the
remaining 50% interest. The purpose of the LLC is to own, maintain and
preserve certain food and beverage trademarks to be contributed to the LLC
by Heinz. The LLC serves as the vehicle for licensing certain rights in
those food and beverage trademarks to the Company and to Heinz, and for the
licensing of program information by the Company to Heinz.
LICENSING AGREEMENTS
The licensing agreements govern the ownership and rights to use Weight
Watchers and other trademarks, service marks and related rights among the
Company, Heinz and the LLC. As described below, the licensing agreements
and the recapitalization and stock purchase agreement address the parties'
respective ownership and rights to use food and beverage trademarks,
service marks, program standards, program information, program information
trademarks and third party licenses. Heinz is also a party to the operating
agreement, which will help preserve and enhance these trademarks, service
marks and related rights and will facilitate their orderly use by each
party.
Food and Beverage Trademarks
Under the licensing agreements and recapitalization and stock purchase
agreement, the Company distributed to Heinz and Heinz contributed to the
LLC all Weight Watchers trademarks and certain other trademarks the Company
owned relating to food and beverage products ("Food & Beverage
Trademarks"), except for certain trademarks previously used by Heinz in
connection with the Food & Beverage Trademarks that do not include the
Weight Watchers name (including, for example, Smart Ones), which the
Company distributed to Heinz and Heinz retained (the "Heinz Retained
Trademarks"). At the closing of the Transaction, the LLC granted an
exclusive, worldwide, royalty-free license to use the Food & Beverage
Trademarks (1) to Heinz, for worldwide use on food products in certain
defined product categories (including frozen dinners, frozen breakfasts,
frozen desserts (excluding ice cream), frozen pizza and pizza snacks,
frozen potatoes, frozen rice products, ketchup, tomato sauce, gravy, canned
tuna or salmon products, soup, noodles (excluding pasta), and canned beans
and pasta products), and for use only in Australia and New Zealand in
certain additional food product categories (including mayonnaise, frozen
vegetables, canned fruits and canned vegetables) (the "Heinz Licensed
Products"); and (2) to us, for use on all other food and beverage products
(the "Weight Watchers Licensed Products"). The Company may promote, endorse
and sell both Heinz Licensed Products and Weight Watchers Licensed Products
through its classroom business and related activities, subject to certain
non-competition provisions with Heinz. Additionally, the Company may
continue to sell any food and beverage product (or comparable product) sold
by it in a particular country within the year preceding the closing of the
Transaction, even if that product is a Heinz Licensed Product, but may
do so only within that country and by using the same channels of
distribution through which the product was sold during that one-year
period.
Certain Food & Beverage Trademarks and trademark applications were not
distributed to Heinz for contribution to the LLC. These trademarks and
trademark applications include (1) trademarks consisting of registrations
in multiple trademark classes, where such classes include both food and
beverage product classes and classes relating to other types of products or
services ("Multi-Class Registrations"); (2) pending applications that could
not be transferred until a registration is granted; (3) trademark
registrations and applications in countries that do not recognize ownership
of trademarks by an entity such as the LLC; (4) trademark registrations and
applications in countries where the local law imposes restrictions or
limitations on the ownership or registration of similar trademarks by
unrelated parties; and
30
<PAGE> 31
(5) the Program Information Trademarks (as defined below). The Company
retained legal ownership of the Food & Beverage Trademarks identified in
clauses (1) through (4) above (the "Custodial Trademarks") which are held
in custody for the benefit of the LLC.
At the closing of the Transaction, the Company granted to Heinz an
exclusive, worldwide, royalty-free license to use the Custodial Trademarks
(or any portion covering food and beverage products) in connection with
Heinz Licensed Products. The Company has undertaken to contribute any of
the Custodial Trademarks (or any portion covering food and beverage
products) to the LLC if the LLC determines that the transfer may be
achieved under local law. If local law does not permit an existing
Multi-Class Registration to be severed so as to reflect separate ownership
of registrations in food and beverage product classes from registrations in
classes covering other types of products or services, (1) the LLC will
apply for new registrations to cover the food and beverage products, (2)
the Company will cancel the portion of the Multi-Class Registration
covering food and beverage products upon issuance of the new registrations
and (3) the Company will retain ownership of all remaining portions of the
Multi-Class Registration. Heinz will pay the Company an annual fee of $1.2
million for five years in exchange for the Company's serving as the
custodian of the Custodial Trademarks.
Other Marks
The licensing agreements provide that the Company retain exclusive
ownership of all service marks and trademarks other than food and beverage
trademarks and, except for the rights granted to the LLC and to Heinz, the
Company has the exclusive right to use all these marks for any purpose,
including their use as trademarks for all products other than food and
beverage products.
Program Standards
The licensing agreements and operating agreement provide that the
Company has exclusive control of the dietary principles (the "Standards")
to be followed in any eating or lifestyle regimen to facilitate weight loss
or weight control employed by the classroom business (a "Program"), such as
1-2-3 SUCCESS. Except for certain limitations concerning products currently
sold and extensions of existing product lines, Heinz will use the Food &
Beverage Trademarks and Custodial Trademarks only on Heinz Licensed
Products that have been specially formulated to be compatible with the
then-current Program Standards. The Company will have exclusive
responsibility for enforcing compliance with the Standards.
Program Information and Program Information Trademarks
The licensing agreements and the recapitalization and stock purchase
agreement provide that the Company retain exclusive ownership of all
Program Information, consisting of (1) all information and know-how
relating to any Program, (2) all terminology and (3) all trademarks or
service marks used to identify the programs or terminology ("Program
Information Trademarks"). The Company granted an exclusive, worldwide,
royalty-free license to the LLC (for sublicense to Heinz) to use the
terminology and Program Information Trademarks on Heinz Licensed Products,
and the Company provided the LLC (and through the LLC, Heinz) with access
to and a right to use this information as may be reasonably necessary to
develop, manufacture or market food and beverage products in accordance
with the Standards. Heinz granted a worldwide, royalty-free license to the
LLC to use certain improvements that Heinz may develop in the course of its
use of Program Information, which the LLC sublicensed in turn to the
Company.
Third Party Licenses
Under the licensing agreements the Company assigned to Heinz all
licenses that the Company previously granted to third parties, and Heinz
retained all existing sublicenses granted by it to third parties under a
license previously granted to Heinz, that relate to the manufacture,
distribution or sale of food and beverage products ("Third Party
Licenses"). Heinz assumed the Company's obligations under the Third Party
Licenses, and has the right to collect and keep all proceeds from the Third
Party Licenses for a period of five years. Ownership of the Third Party
Licenses, to the extent they pertain to Weight Watchers Licensed Products,
will be transitioned to the Company over the five-year period. All proceeds
from any Third Party License that cannot be transitioned to the Company
31
<PAGE> 32
by the end of that five-year period will thereafter be collected by Heinz and
paid over to the Company. Any sublicense granted after the closing date of the
Transaction by Heinz or the Company relating to use of the Food & Beverage
Trademarks must conform to the terms of the licenses granted to each Heinz and
the Company by the LLC.
MANAGEMENT AGREEMENT
Simultaneously with the closing of the Transaction, the Company entered
into a management agreement with The Invus Group, LTD, an independent investment
arm of Artal, pursuant to which Invus renders to the Company management,
consulting and certain other services in exchange for an annual fee equal to the
greater of $1.0 million and 1.0% of the Company's EBITDA (as defined in the
indentures) and any related out-of-pocket expenses.
TRANSITION SERVICES
The recapitalization and stock purchase agreement provides that Heinz will
continue to provide administrative services to the Company for approximately one
year.
WEIGHTWATCHERS.COM SUBSCRIPTION AGREEMENT
On September 29, 1999 the Company entered into a subscription agreement with
WeightWatchers.com, Artal and Heinz under which Artal, Heinz and the Company
purchased common stock of WeightWatchers.com for a nominal amount. As of April
29, 2000, the Company owns approximately 19.8% of WeightWatchers.com's common
stock while Artal and Heinz own 75.4% and 4.8%, respectively, of
WeightWatchers.com's common stock.
WEIGHTWATCHERS.COM NOTE
The Company has agreed to loan to WeightWatchers.com up to an aggregate
principal amount of $10.0 million at any time or from time to time prior to
October 31, 2000. The unpaid principal amount under the note will bear interest
at a rate of 11% per year. All principal and interest outstanding under the note
will be repayable on December 30, 2000. The note may be prepaid at any time and
from time to time, in whole or in part, without premium or penalty. During
2000, the Company loaned WeightWatchers.com $2.0 million pursuant to the note.
WEIGHTWATCHERS.COM WARRANT AGREEMENT
Under a warrant agreement entered into between WeightWatchers.com and the
Company, the Company has received warrants to purchase an additional 20.2% 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 and may be exercised at a
price of $7.14 per share of WeightWatchers.com's common stock until then. The
exercise price and the number of shares of WeightWatchers.com's common stock
available for purchase upon exercise of the warrants may be adjusted from time
to time upon the occurrence of certain events.
WEIGHTWATCHERS.COM INTERNET LICENSE AGREEMENT
WeightWatchers.com will develop a web site on the Internet that uses the
WeightWatchers brand name and other proprietary information for "e-commerce" and
related purposes. Prior to the closing of the Company's Transaction, and except
for some existing agreements, the Company granted WeightWatchers.com an
exclusive license to use all of the Company's trademarks, copyrights and domain
names on the Internet and any other similar or related forms of electronic
delivery or digital transmission (other than broadband technology) that now
exist or may be developed later. In exchange for
32
<PAGE> 33
these rights, WeightWatchers.com will pay the Company 10% of its annual net
profit related to its Internet activities. The Company and WeightWatchers.com
are currently renegotiating the provisions of the license agreement and, among
other things, expect to amend the licensing fee to reflect a revenue-based
royalty scheme.
WEIGHTWATCHERS.COM STOCKHOLDERS' AGREEMENT
The Company entered into a stockholders' agreement with WeightWatchers.com,
Artal and Heinz governing the relationship between and among WeightWatchers.com
and Artal, Heinz and the Company as holders of common stock of
WeightWatchers.com. Subsequent transferees of Artal, Heinz and the Company must,
except for some limited exceptions, agree to be bound by the terms and
provisions of the agreement.
The stockholders' agreement imposes on Heinz and the Company certain
restrictions on the transfer of common stock of WeightWatchers.com until the
earlier to occur of (1) the fifth anniversary of the Transaction and (2)
WeightWatchers.com's initial public offering of common stock under the
Securities Exchange Act, except for certain exceptions. Heinz and the Company
have the right to participate pro rata in certain transfers of common stock of
WeightWatchers.com by Artal, and Artal has the right to force Heinz and the
Company to participate on a pro rata basis in certain transfers of
WeightWatchers.com's common stock by Artal.
WEIGHTWATCHERS.COM REGISTRATION RIGHTS AGREEMENT
The Company entered into a registration rights agreement with
WeightWatchers.com, Artal and Heinz with respect to its shares in
WeightWatchers.com. The registration rights agreement grants Artal certain
demand rights and grants Artal, Heinz and the Company certain incidental
registration rights to register shares of WeightWatchers.com's common stock for
public sale under the Securities Exchange Act.
NELLSON CO-PACK AGREEMENT
On February 8, 1999, the Company entered into an agreement with Nellson
Neutraceutical, Inc., a subsidiary of Artal, to purchase nutrition
bar products manufactured by Nellson for sale at the Company's meetings. Under
the agreement, Nellson agrees to produce sufficient nutrition bar products to
fill the Company's purchase orders within 30 days of Nellson's receipt of these
purchase orders, and the Company is not bound to purchase a minimum quantity of
nutrition bar products. The term of the agreement is two years, and the Company
may renew the agreement for successive one-year periods by providing written
notice to Nellson.
33
<PAGE> 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORT ON FORM 8-K.
(a) 1. Financial Statements
The financial statements listed in the Index to Financial Statements and
Financial Statement Schedule on page F-1 are filed as part of this Form 10-K.
2. Financial Statement Schedule
The financial statement schedule listed in the Index to Financial Statements and
Financial Statement Schedule on page F-1 is filed as part of this Form 10-K.
3. Exhibits
The exhibits listed in the Exhibit Index are filed as part of this Form 10-K
report.
(b) Reports on Form 8-K
None.
34
<PAGE> 35
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS
ITEMS 14(a) 1&2
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Consolidated Balance Sheets as of April 29, 2000 and April 24, 1999 F-2
Consolidated Statements of Operations for the fiscal years ended F-3
April 29, 2000, April 24, 1999 and April 25, 1998
Consolidated Statements of Changes in Stockholders' Deficit, Parent F-4
Company Investment and Comprehensive Income for the fiscal years
ended April 29, 2000, April 24, 1999 and April 25, 1998
Consolidated Statements of Cash Flows for the fiscal years ended F-5
April 29, 2000, April 24, 1999 and April 25, 1998
Notes to Consolidated Financial Statements F-6-33
Report of Independent Accountants F-34
Schedule II - Valuation and Qualifying Accounts and Reserves for the F-35
fiscal years ended April 29, 2000, April 24, 1999 and April 25, 1998.
</TABLE>
All other schedules are omitted for the reason that they are either not
required, not applicable, not material or the information is included in the
consolidated financial statements or notes thereto.
F-1
<PAGE> 36
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 29, 2000 AND APRIL 24, 1999
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
April 29, April 24,
ASSETS 2000 1999
--------------------- -------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 44,043 $ 19,515
Receivables (net of allowances: 2000-$609; 1999-$994) 12,877 11,403
Notes receivable, current 2,791 3,266
Inventories 9,328 7,580
Prepaid expenses 8,360 7,598
Deferred income taxes 94 3,609
Due from related parties - 133,783
--------------------- -------------------
TOTAL CURRENT ASSETS 77,493 186,754
--------------------- -------------------
Property and equipment, net 7,001 8,725
Notes and other receivables, noncurrent 7,045 19,165
Goodwill (net of accumulated amortization: 2000-$55,430;1999-$49,888) 152,565 143,714
Trademarks and other intangible assets (net of accumulated 7,163 8,113
amortization: 2000-$17,638; 1999 - $18,982)
Deferred income taxes 67,574 4,133
Deferred financing costs 14,666 -
Other noncurrent assets 700 830
--------------------- -------------------
TOTAL ASSETS $ 334,207 $ 371,434
===================== ===================
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
PARENT COMPANY'S INVESTMENT/STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Short-term borrowings and line of credit $ - $ 6,690
Short-term borrowings due to related party 1,489 16,250
Portion of long-term debt due within one year 14,120 1,164
Accounts payable 12,362 12,710
Salaries and wages 10,125 11,285
Accrued interest 4,082 2,176
Accrued restructuring costs 4,786 7,690
Foreign currency contract payable 486 7,169
Other accrued liabilities 19,583 16,044
Income taxes 6,786 7,962
Deferred revenue 4,632 6,414
--------------------- -------------------
TOTAL CURRENT LIABILITIES 78,451 95,554
--------------------- -------------------
Long-term debt 460,510 15,500
Deferred income taxes 2,941 8,228
Other 546 3,204
--------------------- -------------------
TOTAL LONG-TERM DEBT AND OTHER LIABILITIES 463,997 26,932
--------------------- -------------------
Redeemable preferred stock 25,875 -
Common stock, par value $0 per share, 23,800 shares authorized,
issued and outstanding - -
Accumulated deficit (231,663) -
Accumulated other comprehensive loss (2,453) -
Parent company's investment - 248,948
--------------------- -------------------
TOTAL PARENT COMPANY'S INVESTMENT AND STOCKHOLDERS' DEFICIT (234,116) 248,948
--------------------- -------------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK, PARENT COMPANY'S
INVESTMENT AND STOCKHOLDERS' DEFICIT $ 334,207 $ 371,434
===================== ===================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 37
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED APRIL 29, 2000
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
APRIL 29, APRIL 24, APRIL 25
2000 1999 1998
-------------------- ----------------- -------------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
<S> <C> <C> <C>
Revenues, net $ 399,574 $ 364,608 $ 297,245
Cost of revenues 201,389 178,925 159,961
-------------------- ----------------- -------------------
Gross profit 198,185 185,683 137,284
Marketing expenses 51,453 52,856 49,227
Selling, general and administrative expenses 50,743 48,912 44,067
Transaction costs 8,345 - -
-------------------- ----------------- -------------------
Operating income 87,644 83,915 43,990
Interest income 5,792 16,027 13,452
Interest expense (36,871) (8,859) (8,576)
Other income (expense) net 10,351 (5,248) (4,281)
-------------------- ----------------- -------------------
Income before income taxes and minority interest 66,916 85,835 44,585
Provision for income taxes 28,323 36,360 19,969
-------------------- ----------------- -------------------
Income before minority interest 38,593 49,475 24,616
Minority interest 834 1,493 845
-------------------- ----------------- -------------------
Net income $ 37,759 $ 47,982 $ 23,771
==================== ================= ===================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 38
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT,
PARENT COMPANY INVESTMENT AND COMPREHENSIVE INCOME
FOR THE THREE YEARS ENDED APRIL 29,2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER PARENT
COMMON STOCK PAID IN COMPREHENSIVE ACCUMULATED COMPANY'S
SHARES AMOUNT CAPITAL LOSS DEFICIT INVESTMENT TOTAL
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance April 26, 1997 $ 188,936 $ 188,936
Comprehensive Income:
Net income (10,212) 23,771
Translation adjustment (10,212)
---------
Total Comprehensive Income 13,559
---------
Net Parent advances 29,115 29,115
Dividend (2,521) (2,521)
----------------------------------------------------------------------------------------------------------------------------------
Balance at April 25, 1998 229,089 229,089
Comprehensive Income:
Net income 47,982 47,982
Translation adjustment 19,660 19,660
-- ---------
Total Comprehensive Income 67,642
---------
Net Parent settlements (42,851) (42,851)
Dividend (4,932) (4,932)
----------------------------------------------------------------------------------------------------------------------------------
Balance at April 24, 1999 248,948 248,948
Net Parent settlements (252,883) (252,883)
Recapitalization and settlement
of Parent company investment 23,800 $-- $(72,100) $ (12,764) $(268,547) 3,935 (349,476)
Deferred tax asset 72,100 72,100
Comprehensive Income:
Net income 37,759 37,759
Translation adjustment 10,311 10,311
---------
Total Comprehensive Income 48,070
---------
Preferred stock dividend (875) (875)
----------------------------------------------------------------------------------------------------------------------------------
Balance at April 29, 2000 23,800 $-- $ -- $ (2,453) $(231,663) $ -- $(234,116)
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 39
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED APRIL 29, 2000
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
April 29, April 24, April 25,
2000 1999 1998
--------- --------- ---------
(53 Weeks) (52 Weeks) (52 Weeks)
<S> <C> <C> <C>
Operating activities:
Net income $ 37,759 $ 47,982 $ 23,771
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 10,398 9,586 8,775
Deferred tax provision 6,883 9,279 15,563
Allowance for doubtful accounts 385 (118) (143)
Reserve for inventory obsolescence (121) 2,525 (3,489)
Other items, net (2,492) 38 415
Changes in cash due to:
Receivables 12,654 (7,041) (2,348)
Inventories (1,696) (2,451) 664
Prepaid expenses (801) (1,454) 1,913
Due from related parties (14,765) 3,693 (8,610)
Accounts payable (1,512) 3,083 (2,250)
Accrued liabilities 5,780 (10,076) (414)
Deferred revenue (1,753) (716) 1,872
Income taxes (834) 3,571 647
--------- --------- ---------
Cash provided by operating activities 49,885 57,901 36,366
--------- --------- ---------
Investing activities:
Capital expenditures (1,874) (2,474) (3,389)
Acquisitions, net of cash acquired - - (1,412)
Acquisitions of minority interest (15,900) - -
Other items, net (1,867) (565) (121)
--------- --------- ---------
Cash used for investing activities (19,641) (3,039) (4,922)
--------- --------- ---------
Financing activities:
Net (decrease) increase in short-term borrowings (5,455) 856 (2,174)
Proceeds from borrowings 491,260 - -
Repurchase of common stock (324,476) - -
Payment of dividends (2,796) (10,368) (8,470)
Payments on long-term debt (3,530) (1,081) (1,368)
Deferred financing cost (15,861) - -
Net Parent settlements (131,030) (37,076) (18,630)
--------- --------- ---------
Cash provided by (used for) financing activities 8,112 (47,669) (30,642)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents (13,828) 493 (44)
Net increase in cash and cash equivalents 24,528 7,686 758
Cash and cash equivalents, beginning of year 19,515 11,829 11,071
--------- --------- ---------
Cash and cash equivalents, end of year $ 44,043 $ 19,515 $ 11,829
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 40
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1.BASIS OF PRESENTATION:
Weight Watchers International, Inc. (the "Company") operates and
franchises territories offering weight loss and control programs through the
operation of classroom type meetings to the general public in the United States,
Canada, Mexico, the United Kingdom, Continental Europe, Australia, New Zealand,
South Africa, Latin America and South America.
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 Transaction 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 will record a step-up in the tax basis of net assets. For financial
reporting purposes, a valuation allowance of approximately $72.1
million has been established against the corresponding deferred tax asset as
management has concluded it is more likely than not that this amount will not be
utilized to reduce future tax payments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation. The Company's fiscal year
ends on the Saturday nearest April 30, which was April 29, April 24 and April 25
for 2000, 1999 and 1998, respectively. However, in order to facilitate timely
reporting, certain foreign subsidiaries end their fiscal year one month prior to
the fiscal years referenced above and have no material impact on the
consolidated financial statements.
Use of Estimates:
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
F-6
<PAGE> 41
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Translation of Foreign Currencies:
For all foreign operations, the functional currency is the local currency.
Assets and liabilities of these operations are translated at the exchange rate
in effect at each year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from the use of differing exchange rates from period to period are
included in accumulated other comprehensive income. Gains and losses from
foreign currency transactions are included in net income for the period.
Cash Equivalents:
Cash and cash equivalents are defined as highly liquid investments with
original maturities of three months or less.
Inventories:
Inventories, which consist of finished goods, are stated at the lower of
cost or market on a first-in, first-out basis, net of reserves.
Property and Equipment:
Property and equipment are recorded at cost. For financial reporting
purposes, equipment is depreciated on the straight-line method over the
estimated useful lives of the assets (5 to 10 years). Leasehold improvements are
amortized on the straight-line method over the shorter of the term of the lease
or the useful life of the related assets (5 to 10 years). Accelerated
depreciation methods are generally used for income tax purposes. Expenditures
for new facilities and improvements that substantially extend the useful life of
an asset are capitalized. Ordinary repairs and maintenance are expensed as
incurred. When assets are retired or otherwise disposed of, the cost and related
depreciation are removed from the accounts and any related gains or losses are
included in income.
Intangibles:
Goodwill, trademarks and other intangibles arising from acquisitions,
including the acquisition of previously franchised areas, are being amortized on
a straight-line basis over periods ranging from 3 to 40 years. The Company
regularly reviews the individual components of the balances by evaluating the
future cash flows of the businesses to determine the recoverability of the
assets and recognizes, on a current basis, any diminution in value. Amortization
of goodwill, trademarks and other intangibles for 2000, 1999 and 1998 was $6.4
million, $6.0 million and $5.6 million, respectively.
The Company accounts for software costs under the AICPA Statement of
Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". SOP No. 98-1 requires capitalization of
certain costs incurred in connection with developing or obtaining internally
used software. Software costs are amortized over 3 to 5 years.
F-7
<PAGE> 42
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
Revenue Recognition:
The Company earns revenue by conducting meetings, selling products and
aids in its own facilities, by collecting commissions from franchisees operating
under the Weight Watchers name and by collecting royalties related to licensing
agreements. Revenue is recognized when services are rendered, products are sold
and commissions and royalties are earned. Deferred revenue, consisting of
prepaid lecture income, is amortized into income over the period earned.
Advertising Costs:
Advertising costs consist primarily of national and local direct mail,
television, and spokesperson's fees. All costs related to advertising are
expensed in the period incurred. Total advertising expenses for 2000, 1999, and
1998 were approximately $48.0 million, $48.8 million, and $45.7 million,
respectively.
Income Taxes:
The Company provides for taxes based on current taxable income and the
future tax consequences of temporary differences between the financial reporting
and income tax carrying values of its assets and liabilities. Under SFAS No.
109, assets and liabilities acquired in purchase business combinations are
assigned their fair values and deferred taxes are provided for lower or higher
tax bases.
Foreign Currency Contracts:
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 currency denominated obligations. Realized and unrealized gains
and losses from instruments qualifying as hedges are included in net income for
the period.
Investments:
The Company uses the cost method to account for investments in which the Company
holds 20% or less of the investee's voting stock. Where the Company holds 50% or
less of the investee's voting stock or where the Company has the ability to
exercise significant influence over operating and financial policies of the
investee, the investment is accounted for under the equity method.
F-8
<PAGE> 43
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
Deferred Financing Costs:
Deferred financing costs consists of costs associated with the establishment of
the Company's credit facilities resulting from the Transaction. Such costs are
being amortized using the interest rate method over the term of the related
debt. Amortization expense was approximately $1.1 million for 2000.
Comprehensive Income:
In 1999, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and display of comprehensive income in
the financial statements. Comprehensive income consists of net income and
foreign currency translation adjustments.
Business Segment Information:
In 1999, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," which established new standards for
reporting information about operating segments (see Note 15).
Stock-Based Compensation:
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees." Under APB No. 25, if
the exercise price of employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recorded. The
Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation."
Recently Issued Accounting Standards:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement established accounting and
reporting standards for derivative instruments. The statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative instruments
and Hedging Activities-Deferral of the Effective Date of Statement 133," which
postponed the adoption date of SFAS No. 133. As such, the Company is not
required to adopt the statement until fiscal year ended 2002. The Company does
not believe this standard will have a material impact on its financial
statements.
F-9
<PAGE> 44
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
Reclassification:
Certain 1999 and 1998 amounts have been reclassified to conform to the current
year presentation.
3. REDEEMABLE PREFERRED STOCK:
The Company issued one million shares of Series A Preferred Stock in
conjunction with the Transaction. Holders of the Series A Preferred Stock are
entitled to receive dividends at an annual rate of 6% payable annually in
arrears. The liquidation preference of the Series A Preferred Stock is $25 per
share. If there is a liquidation, dissolution or winding up, the holders of
shares of Series A Preferred Stock are entitled to be paid out of the Company
assets available for distribution to shareholders an amount in cash equal to the
$25 liquidation preference per share plus all accrued and unpaid dividends prior
to the distribution of any assets to holders of shares of common stock.
Except as required by law, the holders of the preferred stock have no
voting rights with respect to their shares of preferred stock, except that (1)
the approval of holders of a majority of the outstanding shares of preferred
stock, voting as a class, is required to amend, repeal or change any of the
provisions of the Company's certificate of incorporation in any manner that
would alter or change the powers, preferences or special rights of the shares of
preferred stock in a way that would affect them adversely and (2) the consent of
each holder of Series A Preferred Stock is required for any amendment that
reduces the dividend payable on or the liquidation value of the Series A
Preferred Stock.
At the Company's option, the Company may redeem the Series A Preferred
Stock, in whole or in part, at any time, at a price per share equal to 100% of
its liquidation value plus all accrued and unpaid dividends.
In addition, the Series A Preferred Stock is redeemable at the option
of its holders upon the occurrence of a change of control or upon a sale of the
Company's common stock by Artal in a registered public offering. If that occurs,
the redemption price will be equal to 100% of the liquidation value plus accrued
and unpaid dividends.
4. LONG-TERM DEBT:
In connection with the 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"). Borrowings under the Credit Facility are paid quarterly and
initially bear interest at a rate equal to LIBOR plus (a) in the case of Term
Loan A and the Revolving Credit Facility, 3.25% or, at the Company's option, the
alternate base rate, as defined, plus 2.25% or (b) in the case of Term Loan B
and the TLC, 4.00% or, at the Company's option, the alternate base rate plus
3.00%. At April 29, 2000, the interest rates were 9.00% for Term Loan A and
10.13% for Term Loan B and the TLC. Borrowings under Term Loan A and the
Revolving Credit Facility mature in six years and Term Loan B and the TLC mature
in seven years. Assets of the Company collateralize the Credit Facility.
In addition, the Company issued $150.0 million USD denominated and 100.0 million
EUR denominated principal amount 13% Senior Subordinated Notes due 2009 (the
"Notes") to qualified institutional buyers.
F-10
<PAGE> 45
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
At April 29, 2000 the 100.0 million EUR notes translated into $91.2 million USD
denominated equivalent. The impact of the change in foreign exchange rates
related to euro denominated debt are reflected in the income statement. Interest
is payable on the Notes semi-annually on April 1 and October 1 of each year,
commencing April 1, 2000. The Company uses interest rate swaps and foreign
currency forward contracts in association with its debt (see Note 16). The Notes
are uncollateralized senior subordinated obligations of the Company,
subordinated in right of payment to all existing and future senior indebtedness
of the Company, including the Credit Facility.
Each of the aforementioned debt facilities contains restrictive covenants and
requires the Company to maintain certain financial ratios, as defined.
The aggregate amounts of existing long-term debt maturing in each of the next
five years and thereafter are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2001 $ 14,120
2002 14,120
2003 14,120
2004 14,120
2005 and thereafter 418,150
--------
$474,630
--------
</TABLE>
Effective with the Transaction on September 29, 1999, outstanding lines
of credit of $6.7 million and promissory notes of $16.7 million have been
settled. The lines of credit had a weighted-average interest rate during 1999.
The promissory notes represent amounts due various former franchisees as a
result of the Company acquiring certain franchised operations.
The Company has guaranteed Term Loans and Letters of Credit of
franchisees that originated as part of a franchisees' acquisition of certain
Weight Watchers franchised areas. The balance of the guaranteed indebtedness was
$24.5 million in 1999.
5. STOCK PLANS:
Weight Watchers Incentive Compensation Plans
On December 16, 1999, the Board of Directors adopted the "1999 Stock
Purchase and Option Plan of Weight Watchers International, Inc. and
Subsidiaries" (the "Plan"). The Plan is designed to promote the long-term
financial interests and growth of the Company and its subsidiaries by attracting
and retaining management with the ability to contribute to the success of the
business. The Plan is to be administered by the Board of Directors or a
committee thereof.
Under the stock purchase component of the Plan, 318,800 shares of
common stock were sold to 43 members of the Company's management group at $10
per share.
Under the option component of the Plan, grants may take the following
forms in the Committee's sole discretion: Incentive Stock Options, Other Stock
Options (other than incentive options), Stock Appreciation Rights, Restricted
Stock, Purchase Stock, Dividend
F-11
<PAGE> 46
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
Equivalent Rights, Performance Units, Performance Shares and Other Stock - Based
Grants. The maximum number shares available for grant under this plan shall be
1,200,000 shares of authorized common stock as of the effective date of the
Plan.
Pursuant to the option component of the Plan, the Board of Directors
authorized the Company to enter into agreements under which certain members of
management received Non-Qualified Time and Performance Stock Options providing
them the opportunity to purchase shares of the Company's common stock at an
exercise price of $10 per share. The options are exercisable based on the terms
outlined in the agreement.
The weighted average fair value of options granted was $10 per share
in 2000. The fair value of each option is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2000: dividend yield of 0%; expected volatility
of 0% risk; risk free interest rate ranging from 6.49% to 6.65%; and expected
live of 10 years. The exercise price was equivalent to the fair market value at
the date of grant. A summary of the Company's stock options for the year ended
April 29, 2000 is as follows:
F-12
<PAGE> 47
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted
average
exercise price
Shares in dollars
--------- --------------
<S> <C> <C>
Options outstanding,
Beginning of year --
Granted 1,048,500 $ 10.00
Exercised --
Cancelled --
Options outstanding, end of year 1,048,500 $ 10.00
Options exercisable, end of year 34,950 $ 10.00
Options available for grant, end of year 151,500 $ 10.00
Weighted-average fair value of options $ 10.00
granted during the year
</TABLE>
The weighted average remaining contractual life of options outstanding
at April 29, 2000 was 9.5.
WeightWatchers.com Stock Incentive Plan of Weight Watchers International, Inc.
and Subsidiaries
In April 2000, the Board of Directors adopted the WeightWatchers.com
Stock Incentive Plan of Weight Watchers International, Inc. and Subsidiaries,
pursuant to which selected employees were granted options to purchase shares of
common stock of WeightWatchers.com, Inc. that are owned by the Company. The
number of shares available for grant under this plan is 400,000 shares of
authorized common stock of WeightWatchers.com, Inc. On April 28, 2000, 147,319
options were granted to selected employees. The options vest based on certain
performance targets, outlined in the agreement.
The weighted average fair value of options granted was $0.01 per share
in fiscal year ended April 29, 2000. The fair value of each option is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 2000: dividend yield
of 0%; expected volatility of 0% risk; risk free interest rate 6.5%; and
expected life of ten years. A summary of the Company's stock options for the
year ended April 29, 2000 is as follows:
F-13
<PAGE> 48
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted
average
exercise price
Shares in dollars
------------ --------------
<S> <C> <C>
Options outstanding,
Beginning of year --
Granted 147,319 $ 0.50
Exercised --
Cancelled --
Options outstanding, end of year 147,319 $ 0.50
Options exercisable, end of year -- $ 0.50
Options available for grant, end of year 252,681 $ 0.50
Weighted-average fair value of options $ 0.50
granted during the year
</TABLE>
The weighted average remaining contractual life of options outstanding
at April 29, 2000 was 10 years.
The pro forma effect of SFAS No. 123 on the Company's financial
statements would have been as follows under the 1999 Stock Purchase and Option
Plan of Weight Watchers International, Inc. and Subsidiaries and the
WeightWatchers.com Stock Incentive Plan of Weight Watchers International, Inc.
and Subsidiaries.
<TABLE>
<CAPTION>
2000
------
<S> <C>
As reported 37,759
Pro forma 36,738
</TABLE>
Heinz Incentive Compensation Plans - Prior to the Transaction
Certain qualifying employees of the Company were granted options to
purchase Heinz common stock under Heinz's stock option plans. These options have
been granted at not less than market prices on the date of grant. Stock options
granted have a maximum term of ten years. Vesting occurs from one to three years
after the date of grant. Beginning in fiscal 1998, in order to place greater
emphasis on creation of shareholder value, performance-accelerated stock options
were granted to certain key executives. These options vest eight years after the
grant date, subject to acceleration if predetermined share price goals are
achieved.
The pro forma effect of SFAS No. 123 on the Company's financial
statements would have been as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Net Income:
As reported $47,982 $23,771
Pro forma 47,621 23,485
</TABLE>
F-14
<PAGE> 49
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
The fair value of each option is estimated on the date of grant using
the Black-Scholes option pricing model with the following weight-average
assumptions:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Dividend yield 2.5% 2.5%
Volatility 22.0 20.0
Risk-free interest rate 5.1 6.2
Expected term (years) 5.0 5.0
</TABLE>
6. EMPLOYEE BENEFIT PLANS:
Weight Watchers Sponsored Plans:
Effective September 29, 1999, the net assets of the Heinz sponsored
employee savings plan were transferred into the Weight Watchers sponsored plan
upon execution of the Transaction. The Company sponsors the Weight Watchers
Savings Plan (the "Savings Plan") for salaried and hourly employees. The Savings
Plan is a defined contribution plan which provides for employer matching
contributions up to 100% of the first 3% of an employee's eligible compensation.
The Savings Plan also permits employees to contribute between 1% and 13% of
eligible compensation on a pre-tax basis. Company contributions in 2000 were
$1.0 million.
The Company sponsors the Weight Watchers Profit Sharing Plan (the
"Profit Sharing Plan") for all full-time salaried employees who are eligible to
participate in the Savings Plan (except for certain senior management
personnel). The Profit Sharing Plan provides for a guaranteed monthly employer
contribution on behalf of each participant based on the participant's age and a
percentage of the participant's eligible compensation. The Profit Sharing Plan
has a supplemental employer contribution component, based on the Company's
achievement of certain annual performance targets, which are determined annually
by the Company's Board of Directors. The Company also reserves the right to make
additional discretionary contributions to the Profit Sharing Plan.
For certain senior management personnel, the Company sponsors the
Weight Watchers Executive Profit Sharing Plan. Under the Internal Revenue
Service ("IRS") definition, this plan is considered a Nonqualified Deferred
Compensation Plan. There is a promise of payment by the Company made on the
employees' behalf instead of an individual account with a cash balance. The
account is valued at the end of each fiscal month, based on an annualized
interest rate of prime plus 2%, with an annualized cap of 15%.
The Company is currently applying for a determination letter to qualify
the Savings Plan under Section 401(a) of the IRS Code. It is the Company's
opinion that the IRS will issue a favorable determination letter as to the
qualified status of the Savings Plan.
Heinz Sponsored Plans - Prior to the Transaction:
Domestic employees participate in certain defined pension plans, a
defined contribution 401(k) savings plan and, for employees affected by certain
IRS limits, a section 415 Excess Plan, all of which are
F-15
<PAGE> 50
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
sponsored by Heinz. The Company also provides post-retirement health care and
life insurance benefits for employees who meet the eligibility requirements of
the Heinz plans. Retirees share in the cost of these benefits based on age and
years of service.
Company contributions to the Heinz Savings Plan include a qualified
age-related contribution and a matching of the employee's contribution, up to a
specified amount.
The following amounts were included in the Company's result of
operations:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Defined Benefit Pension Plans $ 421 $1,456 $ 726
Defined Benefit Postretirement Medical $ 253 $ 577 $ 261
Savings Plan $ 994 $2,170 $1,668
</TABLE>
In addition, foreign employees participate in certain Company sponsored
pension plans and such charges, which are included in the results of operations,
are not material.
7. WEIGHTWATCHERS.COM WARRANT AND NOTE AGREEMENT:
On September 29, 1999, the Company entered into a subscription
agreement with WeightWatchers.com, Artal and Heinz under which Artal, Heinz and
the Company purchased common stock of WeightWatchers.com for a nominal amount.
The Company owns approximately 19.8% of WeightWatchers.com's common stock while
Artal and Heinz own 75.4% and 4.8%, respectively, of WeightWatchers.com's common
stock.
Under a warrant agreement entered into with WeightWatchers.com, the
Company has warrants to purchase an additional 20.2% 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 below. These
warrants will expire on November 24, 2009 and may be exercised at a price of
$7.14 per share of WeightWatchers.com's common stock until then. The exercise
price and the number of shares of WeightWatchers.com's common stock available
for purchase upon exercise of the warrants may be adjusted from time to time
upon the occurrence of certain events.
In connection therewith, the Company has agreed to loan to
WeightWatchers.com up to an aggregate principal amount of $10.0 million at any
time or from time to time prior to October 31, 2000. The unpaid principal amount
under the note will bear interest at a rate of 11% per year. All principal and
interest outstanding under the note will be repayable on December 30, 2000. The
note may be prepaid at any time and from time to time, in whole or in part,
without premium or penalty at fiscal year end and during 2000 the Company loaned
WeightWatchers.com $2.0 million pursuant to the note.
8. RESTRUCTURING CHARGES:
During the fourth quarter of fiscal year ended 1997, the Company
announced a reorganization and restructuring program. The reorganization plan
was designed to strengthen the Company's classroom business and improve
profitability and global growth.
F-16
<PAGE> 51
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
Charges related to the restructuring, were recognized to reflect the
exit from the Personal Cuisine Food Option in United States Company-owned
locations, the relocation of classes from certain fixed retail outlets to
traveling locations, and other initiatives involving the exit of certain
under-performing business and product liens.
Restructuring and related costs recorded in fiscal year ended 1997
totaled $51.7 million pretax. Pretax charges of $49.7 million were classified as
classroom operating expenses and $2.0 million as selling, general and
administrative expenses. The major components of the year ended 1997 charges and
the remaining accrual balances for 1997, 1998, 1999 and 2000 were as follows:
<TABLE>
<CAPTION>
Employee Exit Costs
Termination ------------------------------
Non-Cash and Accrued
Asset Severance Exit Implementation
Write-downs Costs Costs Costs Total
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Initial charge -1997 $ 27,402 $ 4,723 $ 19,569 $ -- $ 51,694
Amounts utilized -1997 (27,402) (339) (46) -- (27,787)
------------- ------------- ------------- ------------- -------------
Accrued restructuring costs -
April 26, 1997 -- 4,384 19,523 23,907
Implementation costs - 1998 -- -- -- 999 999
Amounts utilized -1998 -- (3,709) (8,553) (999) (13,261)
------------- ------------- ------------- ------------- -------------
Accrued restructuring costs -
April 25, 1998 -- 675 10,970 -- 11,645
Implementation costs -1999 -- -- -- 32 32
Amounts utilized -1999 -- (186) (3,769) (32) (3,987)
------------- ------------- ------------- ------------- -------------
Accrued restructuring costs -
April 24, 1999 -- 489 7,201 -- 7,690
Amounts utilized - 2000 -- -- (2,904) -- (2,904)
------------- ------------- ------------- ------------- -------------
Accrued restructuring costs -
April 29, 2000 $ -- $ 489 $ 4,297 $ -- $ 4,786
============= ============= ============= ============= =============
</TABLE>
Asset write-downs of $16.9 million consisted primarily of fixed assets
and other long-term asset impairments that were recorded as a direct result of
the Company's decision to exit businesses or facilities. Such assets were
written down based on management's estimate of fair value. Write-downs of $10.5
million were also recognized for estimated losses from disposals of classroom
inventories, packaging materials and other assets related to product line
rationalizations and process changes as a direct result of the Company's
decision to exit businesses or facilities.
Employee severance costs include charges related to both voluntary
terminations and involuntary terminations. As part of the voluntary termination
agreements, enhanced retirement benefits were offered to the affected employees.
These amounts were included in the Employee Termination and Severance costs
component of the restructuring charge.
F-17
<PAGE> 52
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
Exit costs consist primarily of contract and lease termination costs
associated with the Company's decision to exit the activities described above.
The remaining accrued exit costs will be utilized through 2002.
The results for 1998 included costs related to the implementation of
the restructuring program of $999 thousand pretax, which were classified as
selling, general and administrative expenses. These costs consist primarily of
center relocation and training. The results for 1999 included costs related to
the implementation of the restructuring program of $32 thousand pretax, which
was classified as selling, general and administrative expenses. These costs
consist primarily of relocation and training costs.
9. PROPERTY AND EQUIPMENT:
The components of property and equipment were:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Leasehold improvements $ 17,954 $ 18,343
Equipment 30,900 36,559
---------- ----------
48,854 54,902
Less: Accumulated depreciation and amortization 41,911 46,428
---------- ----------
6,943 8,474
Construction in progress 58 251
---------- ----------
$ 7,001 $ 8,725
========== ==========
</TABLE>
Depreciation and amortization expense of property and
equipment was $2.9 million, $3.6 million, and $3.3 million, in 2000, 1999 and
1998 respectively.
10. RELATED PARTY TRANSACTIONS:
On February 8, 1999, the Company entered into an agreement with Nellson
Neutraceutical, Inc. ("Nellson"), a wholly-owned subsidiary of Artal, to
purchase nutrition bar products manufactured by Nellson for sale at the
Company's meetings. Under the agreement, Nellson agrees to produce sufficient
nutrition bar products to fill the Company's purchase orders within 30 days of
receipt. The Company is not bound to purchase a minimum quantity of nutrition
bar products. The term of the agreement is one year and the Company may renew
the agreement for successive one-year periods by providing written notice to
Nellson. Total purchases from Nellson amounted to $4.3 million from the date of
the Transaction through the end of 2000.
At the closing of the Transaction, the Company granted to Heinz an
exclusive, worldwide, royalty-free license to use the Custodial Trademarks (or
any portion covering food and beverage products) in connection with Heinz
licensed products. Heinz will pay the Company an annual fee of $1.2 million for
five years in exchange for the Company serving as the custodian of the Custodial
Trademarks.
F-18
<PAGE> 53
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
Prior to the Transaction, the following related party transactions
existed.
Certain of Heinz' general and administrative expenses were allocated to
the Company. Total costs allocated include charges for salaries of corporate
officers and staff and other Heinz corporate overhead. Total costs charged to
the Company for these services were $1.0 million, $2.2 million and $1.8 million
in 2000, 1999 and 1998, respectively.
Heinz charged the Company for its share of group health insurance costs
for eligible Company employees based upon location specific costs, overall
insurance costs and loss experience incurred during a calendar year. In
addition, various other insurance coverages were also provided to the Company
through Heinz' consolidated programs. Workers compensation, auto, property,
product liability and other insurance coverages are charged directly based on
the Company's loss experience. Amounts charged to the Company for insurance
costs were $3.8 million, $4.3 million and $4.2 in 2000, 1999 and 1998,
respectively , and are recorded in selling, general and administrative expenses
in the accompanying statement of operations.
Total costs charged to the Company by Heinz for other miscellaneous
services were $93 thousand, $520 thousand and $579 thousand in 2000, 1999 and
1998, respectively, and were recorded in selling, general and administrative
expenses in the accompanying statement of operations.
The Company maintained a cash management arrangement with Heinz. On a
daily basis, all available domestic cash was deposited and disbursements were
withdrawn. Heinz charged (credited) the Company interest on the average daily
balance maintained in an intercompany account. Net interest (income) expense
related to this arrangement included in the statement of operations was $1.7
million, $3.1 million and $965 thousand in 2000, 1999 and 1998, respectively.
The interest rate charged to or received by the Company was 5.5% in 2000 and
6.25% in 1999 and 1998.
Substantially all of the due from related parties of $133.8 million at
April 24, 1999 represents a note receivable from an affiliate of Heinz which
was repaid in June 1999. Interest income reflected in the statement of
operations related to this note receivable was $10.0 million and $9.6 million,
in 1999 and 1998, respectively. The interest rate charged by the Company was
LIBOR plus 25 basis points in both years.
Short-term borrowings due to an affiliate of Heinz of $16.3 million at
April 24, 1999 represented a note payable due April 28, 1999. Interest expense
related to the note payable was $35 thousand in 2000 and $1.0 million in 1999
and 1998.
Long-term borrowings of $52.5 million due to a related party were
contributed to capital during fiscal year ended 1998. Interest expense related
to these long-term borrowings was $961 thousand and the interest rate was 10.5%.
Pension costs and postretirement costs are also charged to the Company
based upon eligible employees participating in the Plans. See Note 6.
F-19
<PAGE> 54
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
11. INCOME TAXES:
The following tables summarizes the provision (benefit) for U.S.
federal, state and foreign taxes on income:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Current:
U.S. federal $ 5,727 $ 11,997 $ (4,798)
State 2,464 3,247 346
Foreign 11,591 11,837 8,858
---------- ---------- ----------
19,782 27,081 4,406
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Deferred:
U.S. federal 7,800 6,368 10,493
State 368 312 502
Foreign 373 2,599 4,568
---------- ---------- ----------
8,541 9,279 15,563
---------- ---------- ----------
Total tax provision $ 28,323 $ 36,360 $ 19,969
========== ========== ==========
</TABLE>
The components of income before income taxes consist of the following:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Domestic $ 33,538 $ 48,199 $ 13,143
Foreign 32,544 36,143 30,597
---------- ---------- ----------
$ 66,082 $ 84,342 $ 43,740
========== ========== ==========
</TABLE>
F-20
<PAGE> 55
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
The difference between the U.S. federal statutory tax rate and the
Company's consolidated effective tax rate are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
U.S. federal statutory 35.0% 35.0% 35.0%
Foreign income taxes 1.7 3.8 7.8
States' income taxes (net of federal benefit) 2.7 2.9 1.7
Goodwill amortization 0.4 0.9 1.8
Other 3.1 0.5 (0.6)
----- ----- -----
Effective tax rate
42.9% 43.1% 45.7%
===== ===== =====
</TABLE>
The deferred tax assets and deferred tax (liabilities) recorded on the
balance sheet as of April 29, 2000 and April 24, 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Depreciation 304
Provision for estimated expenses 1,771 3,288
Operating loss carryforwards 4,369 4,430
Transaction Expenses 2,933 --
Benefits plans -- 5,878
Other 216 1,998
Amortization 135,329 --
--------- --------
Total Deferred tax Assets 144,922 15,594
========= ========
Depreciation/amortization $ -- $ (9,620)
Deferred income (4,985) (3,767)
Other (3,231) (2,063)
--------- --------
Total Deferred tax liabilities (8,216) (15,450)
--------- --------
Less: Valuation allowance 71,979 630
--------- --------
Net deferred tax assets (liabilities) $ 64,727 $ (486)
========= ========
</TABLE>
At the end of 2000, net operating loss carryforward's totalled $11.8
million, all of which will expire by 2020. As of April 29, 2000, 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
F-21
<PAGE> 56
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNT)
--------------------------------------------------------------------------------
will be realized. The amount of the net deferred tax assets considered
realizable could be reduced if estimates of future taxable income are reduced.
Undistributed earnings of foreign subsidiaries considered to be reinvested
permanently amounted to $23.2 million as of April 29, 2000.
12. CASH FLOW INFORMATION:
Net cash paid during the year for:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Interest expense $ 31,402 $ 2,748 $ 5,818
Income taxes $ 13,601 $ 5,380 $ 4,706
Noncash investing and financing activities
was as follows:
Deferred tax asset recorded as a
component of stockholders' deficit
in conjunction with the
recapitalization of the Company $ 72,100 -- --
Redeemable preferred stock issued to
Heinz $ 25,875 -- --
Contribution of related party debt to
capital $ -- $ -- $ 52,500
</TABLE>
13. COMMITMENTS AND CONTINGENCIES:
Legal:
Due to the nature of its activities, the Company is, at times, subject to
pending and threatened legal actions which arise out of the normal course of
business. In the opinion of management, based in part upon advice of legal
counsel, the disposition of such matters will not have a material effect on the
consolidated financial statements.
F-22
<PAGE> 57
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNT)
--------------------------------------------------------------------------------
Lease Commitments:
Minimum rental commitments under non-cancelable operating leases, primarily
for office and rental facilities at April 29, 2000, consists of the following:
<TABLE>
<S> <C>
2001 $13,292
2002 8,240
2003 3,966
2004 2,123
2005 1,614
2006 and thereafter 2,444
-------
Total $31,679
=======
</TABLE>
Total rent expense charged to operations under these leases was $12.3
million, $11.0 million and $10.3 million in 2000, 1999 and 1998, respectively.
Repurchase Agreements:
The Company is a party to repurchase agreements related to the 10% minority
interests in the classroom operations in Finland and Sweden. Pursuant to the
agreements, the Company may elect or be required to repurchase the minority
shareholders' interests in these operations. If the Company repurchases the
minority interests within five years of the original sale, the repurchase price
is based on the original sales price times the increase in the consumer price
index since the date of the sale. If the Company repurchases the minority
interest after five years from the original sale, the repurchase price is based
on a multiple of the average operating income during the last three years.
14. FRANCHISE PROFIT SHARING FUND:
The Company's franchise agreement with certain North American franchisees
provides for an annual franchise profit sharing distribution based upon
specified formulas. Profit sharing expense under this arrangement was $.4
million, $.8 million and $.7 million in 2000, 1999 and 1998, respectively.
Unpaid amounts are included in accrued liabilities.
15. SEGMENT AND GEOGRAPHIC DATA:
The Company is engaged principally in one line of business, weight control,
which represents more than 92% of consolidated sales. The following table
presents information about the Company by geographic area. There were no
material amounts of sales or transfers among geographic areas and no material
amounts of United States export sales.
<TABLE>
<CAPTION>
EXTERNAL SALES LONG-LIVED ASSETS
-------------- -----------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
United States $207,256 $189,366 $143,765 $142,675 $149,054 $155,360
United Kingdom 90,778 76,143 73,146 949 1,198 1,272
Continental Europe 66,524 65,119 54,850 1,973 2,422 2,463
Australia and New Zealand 35,016 33,980 25,484 21,132 7,878 8,208
-------- -------- -------- -------- -------- --------
$399,574 $364,608 $297,245 $166,729 $160,552 $167,303
======== ======== ======== ======== ======== ========
</TABLE>
F-23
<PAGE> 58
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNT)
--------------------------------------------------------------------------------
16. FINANCIAL INSTRUMENTS:
Fair value of Financial Instruments:
The Company's significant financial instruments include cash and cash
equivalents, short-and-long-term debt, current and noncurrent notes receivable,
currency exchange agreements and guarantees.
In evaluating the fair value of significant financial instruments, the
Company generally uses quoted market prices of the same or similar instruments
or calculates an estimated fair value on a discounted cash flow basis using the
rates available for instruments with the same remaining maturities. As of April
29, 2000 and April 24, 1999, the fair value of financial instruments held by the
Company approximated the recorded value.
Foreign Currency Contracts:
As of April 29, 2000 and April 24, 1999, the Company held currency and
interest rate swap contracts to purchase certain foreign currencies totaling
$139.4 million and $127.2 million, respectively. The Company also held separate
currency and interest rate swap contracts to sell foreign currencies of $138.9
million and $134.4 million, respectively. Net unrealized gains and losses
associated with the Company's foreign currency contracts were not material.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED APRIL 29, 2000
Revenues $ 92,174 $ 84,031 $ 90,507 $132,862
Operating income $ 28,302 $ 10,508 $ 14,719 $ 34,115
Net income $ 17,095 $ 2,239 $ 912 $ 17,513
YEAR ENDED APRIL 24, 1999
Revenues $ 84,036 $ 79,966 $ 89,403 $111,203
Operating income $ 22,488 $ 14,505 $ 20,118 $ 26,804
Net income $ 12,708 $ 8,227 $ 11,506 $ 15,541
</TABLE>
18. GUARANTOR SUBSIDIARIES
The Company's payment obligations under the Senior Subordinated Notes will
be 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,
F-24
<PAGE> 59
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNT)
--------------------------------------------------------------------------------
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 & Publications) 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.
F-25
<PAGE> 60
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
AS OF APRIL 29, 2000
(IN THOUSANDS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
Assets COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 10,984 $ 22,465 $ 10,594 $ - $ 44,043
Receivables, net 6,006 5,606 1,265 - 12,877
Notes receivable, current 2,791 - - - 2,791
Inventories - 7,827 1,501 - 9,328
Prepaid expenses 748 6,240 1,372 - 8,360
Deferred income taxes 2,846 (2,752) - - 94
Due from related parties - - - - -
Intercompany receivables (payables) (32,114) 27,742 4,372 - -
---------- ------------- ------------- ------------- ------------
Total current assets (8,739) 67,128 19,104 - 77,493
Investment in consolidated subsidiaries 162,320 - - 162,320 -
Property and equipment, net 1,809 3,974 1,218 - 7,001
Notes and other receivables, noncurrent 7,045 - - - 7,045
Goodwill, net 25,833 125,977 755 - 152,565
Trademarks and other intangible assets, net 1,960 5,193 10 - 7,163
Deferred income taxes (9,854) 77,428 - - 67,574
Deferred financing costs 14,749 (83) - - 14,666
Other noncurrent assets 163 365 172 - 700
---------- ------------- ------------- ------------- ------------
Total assets $ 195,286 $ 279,982 $ 21,259 $ (162,320) $ 334,207
---------- ------------- ------------- ============= =============
<CAPTION>
Liabilities, Redeemable Preferred Stock and
Stockholders Equity (Deficit)
<S> <C> <C> <C> <C> <C>
Current liabilities
Short-term borrowings and line of credit $ - $ - $ - $ - -
Short-term borrowings due to related party 1,489 - - - 1,489
Portion of long-term debt due within one year 13,250 870 - - 14,120
Accounts payable 1,438 9,084 1,840 - 12,362
Salaries and wages 2,301 4,256 3,568 - 10,125
Accrued interest 3,521 561 - - 4,082
Accrued restructuring costs - 4,786 - - 4,786
Foreign currency contract payable 486 - - - 486
Other accrued liabilities 6,387 9,049 4,147 - 19,583
Income taxes (1,846) 5,965 2,667 - 6,786
Deferred revenue - 3,824 808 - 4,632
---------- ------------- ------------- ------------- -----------
Total current liabilities 27,026 38,395 13,030 - 78,451
Long-term debt 374,598 85,912 - - 460,510
Deferred income taxes 1,903 390 648 - 2,941
Other - - 546 - 546
---------- ------------- ------------- ------------- ------------
Total long-term debt and other liabilities 376,501 86,302 1,194 - 463,997
Redeemable preferred stock 25,875 2,507 254 (2,761) 25,875
Stockholders' equity (deficit) (234,116) 152,778 6,781 (159,559) (234,116)
---------- ------------- ------------- ------------- ------------
Total liabilities, redeemable preferred
stock and stockholders' equity (deficit) $ 195,286 $ 279,982 $ 21,259 $ (162,320) $ 334,207
========== ============= ============= ============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-26
<PAGE> 61
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENT CONSOLIDATING BALANCE SHEET
AS OF APRIL 24, 1999
(IN THOUSANDS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
Assets COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ----------- ------------ ------------
Current Assets
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ (74) $ 12,376 $ 7,213 $ - $ 19,515
Receivables, net 5,134 4,364 1,905 - 11,403
Notes receivable, current 3,266 - - - 3,266
Inventories - 5,775 1,805 - 7,580
Prepaid expenses 856 4,588 2,154 - 7,598
Deferred income taxes 1,758 (1,949) 3,800 - 3,609
Due from related parties 1,034 242 132,507 - 133,783
Intercompany receivables (payables) 103,588 (107,373) 3,785 - -
---------- ---------- ----------- ------------ -----------
total current assets 115,562 (81,977) 153,169 - 186,754
Investment in consolidated subsidiaries 117,732 - - (117,732) -
Property and equipment, net 1,981 5,231 1,513 - 8,725
Notes and other receivables, noncurrent 10,295 - 8,870 - 19,165
Goodwill, net 27,254 115,568 892 - 143,714
Trademarks and other intangibles assets, net 2,355 5,745 13 - 8,113
Deferred income taxes (22) 4,155 - - 4,133
Deferred financing costs - - - -
Other noncurrent assets 138 510 182 - 830
---------- ---------- ----------- ------------ -----------
Total Assets $ 275,295 $ 49,232 $ 164,639 $ (117,732) $ 371,434
========== ========== =========== ============ ===========
Liabilities and Parent Company's Investment
Current liabilities
Short-term borrowings and line of credit $ - $ - $ 6,690 $ - $ 6,690
Short-term borrowings due to related party 16,638 (388) - - 16,250
Portion of long-term debt due within one year 1,164 - - - 1,164
Accounts payable 631 9,192 2,887 - 12,710
Salaries and wages 4,189 7,096 - - 11,285
Accrued interest 2,161 - 15 - 2,176
Accrued restructuring costs 8 7,929 (247) - 7,690
Foreign currency contract payable - - 7,169 - 7,169
Other accrued liabilities 1,798 6,659 7,587 - 16,044
Income taxes (11,168) 17,118 2,012 - 7,962
Deferred revenue - 5,680 734 - 6,414
---------- ---------- ----------- ------------ -----------
Total current liabilities 15,421 53,286 26,847 - 95,554
Long-term debt 15,500 - - - 15,500
Deferred income taxes (2,366) 10,338 256 - 8,228
Other - 2,659 545 - 3,204
---------- ---------- ----------- ------------ -----------
Total long-term debt and other liabilities 13,134 12,997 801 - 26,932
Parent company's investment 246,740 (17,051) 136,991 (117,732) 248,948
---------- ---------- ----------- ------------ -----------
Total liabilities
and parent company's investment $ 275,295 $ 49,232 $ 164,639 $ (117,732) $ 371,434
========== ========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-27
<PAGE> 62
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR 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 $ 32,836 $ 300,215 $ 66,523 $ - $ 399,574
Cost of revenues 4,911 155,251 41,227 - 201,389
----------- ------------ ----------- ------------ ------------
Gross profit 27,925 144,964 25,296 - 198,185
Marketing expense 7,417 35,707 8,329 - 51,453
Selling, general & administrative 23,066 20,357 7,320 - 50,743
Transaction costs 8,247 98 - - 8,345
----------- ------------ ----------- ------------ ------------
Operating (loss) income (10,805) 88,802 9,647 - 87,644
Interest income 1,462 1,864 2,466 - 5,792
Interest expense (29,104) (6,471) (1,296) - (36,871)
Other income (expense), net 10,997 (151) (495) - 10,351
Equity in income of consolidated subsidiaries 44,441 - - (44,441) -
Franchise commission income (loss) 21,686 (18,500) (3,186) - -
----------- ------------ ----------- ------------ ------------
Income before income taxes and minority
interest 38,677 65,544 7,136 (44,441) 66,916
Provision for income taxes 918 24,090 3,315 - 28,323
----------- ------------ ----------- ------------ ------------
Income before minority interest 37,759 41,454 3,821 (44,441) 38,593
Minority interest - 834 - - 834
----------- ------------ ----------- ------------ ------------
Net income $ 37,759 $ 40,620 $ 3,821 $ (44,441) $ 37,759
=========== ============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-28
<PAGE> 63
\
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 24, 1999
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues, net $ 42,288 $ 257,202 $ 65,118 $ - $ 364,608
Cost of revenues 3,685 135,095 40,145 - 178,925
----------- ------------ ----------- ------------ ------------
Gross profit 38,603 122,107 24,973 - 185,683
Marketing expense 8,815 35,381 8,660 - 52,856
Selling, general & administrative 23,715 17,794 7,403 - 48,912
----------- ------------ ----------- ------------ ------------
Operating income 6,073 68,932 8,910 - 83,915
Interest income 615 5,096 10,938 (622) 16,027
Interest expense (3,537) (357) (5,587) 622 (8,859)
Other (expense) income, net (1,930) (3,361) 43 - (5,248)
Equity in income of consolidated
subsidiaries 37,310 - - (37,310) -
Franchise commission income (loss) 8,697 (6,072) (2,625) - -
----------- ------------ ----------- ------------ ------------
Income before income taxes and
minority interest 47,228 64,238 11,679 (37,310) 85,835
Provision for income taxes 7,944 22,860 5,556 - 36,360
----------- ------------ ----------- ------------ ------------
Income before minority interest 39,284 41,378 6,123 (37,310) 49,475
Minority interest - 1,108 385 - 1,493
----------- ------------ ----------- ------------ ------------
Net income $ 39,284 $ 40,270 $ 5,738 $ (37,310) $ 47,982
=========== ============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-29
<PAGE> 64
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 25, 1998
(IN THOUSANDS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
============ ============ ============ ============ ============
<S> <C> <C> <C> <C> <C>
Revenues, net $ 28,465 $ 213,929 $ 54,851 $ - $ 297,245
Cost of revenues 3,264 122,148 34,549 - 159,961
------------ ------------ ----------- ---------- ------------
Gross profit 25,201 91,781 20,302 - 137,284
Marketing expense 7,916 33,499 7,812 - 49,227
Selling, general & administrative 21,154 16,578 6,335 - 44,067
------------ ------------ ----------- ---------- ------------
Operating (loss) income (3,869) 41,704 6,155 - 43,990
Interest income 831 2,297 10,641 (317) 13,452
Interest expense (4,033) (607) (4,253) 317 (8,576)
Other expense net (1,695) (2,494) (92) - (4,281)
Equity in income of consolidated subsidiaries 16,837 - - (16,837) -
Franchise commission income (loss) 8,038 (5,984) (2,054) - -
------------ ------------ ----------- ---------- ------------
Income before income taxes and minority interest 16,109 34,916 10,397 (16,837) 44,585
(Benefit from) provision for income taxes (1,979) 16,355 5,593 - 19,969
------------ ------------ ----------- ---------- ------------
Income before minority interest 18,088 18,561 4,804 (16,837) 24,616
Minority interest - 629 216 - 845
------------ ------------ ----------- ---------- ------------
Net income $ 18,088 $ 17,932 $ 4,588 $ (16,837) $ 23,771
============ ============ =========== ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-30
<PAGE> 65
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOW
FOR THE YEAR 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 $ 37,759 $ 40,620 $ 3,821 $ (44,441) $ 37,759
Adjustments to reconcile net income
to cash provided by (used for)
operating activities:
Depreciation and amortization 3,438 6,028 932 - 10,398
Deferred tax provision (benefit) 85,113 (82,422) 4,192 - 6,883
Allowance for doubtful accounts 352 29 4 - 385
Reserve for inventory obsolescence - (93) (28) - (121)
Other items, net - (2,492) - - (2,492)
Changes in cash due to:
Receivables 4,501 (1,353) 9,506 - 12,654
Inventories - (2,028) 332 - (1,696)
Prepaid expense 108 (1,691) 782 - (801)
Due from related parties (15,149) 384 - - (14,765)
Accounts payable 807 (1,272) (1,047) - (1,512)
Accrued liabilities 4,538 (1,845) 3,087 - 5,780
Deferred revenue (1,827) 74 (1,753)
Income taxes 9,322 (10,811) 655 - (834)
------------ ------------ ------------ ----------- ------------
Cash provided by (used for) operating activities 130,789 (58,773) 22,310 (44,441) 49,885
------------ ------------ ------------ ----------- ------------
Investing activities:
Capital expenditures (299) (1,004) (571) - (1,874)
Acquisitions, net of cash acquired - - - - -
Acquisitions of minority interest (15,900) - - (15,900)
Other items, net (2,067) 116 84 - (1,867)
------------ ------------ ------------ ----------- ------------
Cash used for investing activities (2,366) (16,788) (487) - (19,641)
------------ ------------ ------------ ----------- ------------
Financing activities:
Net increase(decrease) in short-term borrowings - 1,235 (6,690) - (5,455)
Parent company investment in subsidiaries (34,693) - - 34,693 -
Proceeds from borrowings 404,260 87,000 - - 491,260
Repurchase of common stock (324,476) - - - (324,476)
Payment of dividends (2,797) (3,120) (4,494) 7,615 (2,796)
Payments on long-term debt (3,312) (218) - - (3,530)
Deferred financing costs (15,861) - - - (15,861)
Net Parent (settlements) advances (138,998) 14,552 (7,175) 591 (131,030)
------------ ------------ ------------ ----------- ------------
Cash (used for) provided by financing activities (115,877) 99,449 (18,359) 42,899 8,112
------------ ------------ ------------ ----------- ------------
Effect of exchange rate changes on cash equivalents (1,488) (13,799) (83) 1,542 (13,828)
Net increase in cash equivalents 11,058 10,089 3,381 - 24,528
Cash and cash equivalents, beginning of year (74) 12,376 7,213 - 19,515
------------ ------------ ------------ ----------- ------------
Cash and cash equivalents, end of year $ 10,984 $ 22,465 $ 10,594 $ - $ 44,043
============ ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-31
<PAGE> 66
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOW
FOR THE YEAR ENDED APRIL 24, 1999
(IN THOUSANDS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
============ ============ ============ ============ ============
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income $ 39,284 $ 40,270 $ 5,738 $ (37,310) $ 47,982
Adjustments to reconcile net income
to cash provided by (used for)
operating activities:
Depreciation and amortization 2,378 6,609 599 - 9,586
Deferred tax provision 1,735 4,345 3,199 - 9,279
Allowance for doubtful accounts (84) (30) (4) - (118)
Reserve for inventory obsolescence - 2,528 (3) - 2,525
Other items, net - 153 (115) - 38
Changes in cash due to:
Receivables (7,219) 1,378 (1,200) - (7,041)
Inventories - (2,476) 25 - (2,451)
Prepaid expense (20) (1,141) (293) - (1,454)
Due from related parties 38,317 (35,394) 770 - 3,693
Accounts payable (288) 3,698 (327) - 3,083
Accrued liabilities 1,003 (2,572) (8,507) - (10,076)
Deferred revenue - (1,450) 734 (716)
Income taxes (36,393) 38,362 1,602 - 3,571
------------ ------------ ------------ ----------- ------------
Cash provided by operating activities 38,713 54,280 2,218 (37,310) 57,901
------------ ------------ ------------ ----------- ------------
Investing activities:
Capital expenditures (271) (1,612) (591) - (2,474)
Other items, net (278) (286) (1) - (565)
------------ ------------ ------------ ----------- ------------
Cash used for investing activities (549) (1,898) (592) - (3,039)
------------ ------------ ------------ ----------- ------------
Financing activities:
Net increase (decrease) in short-term borrowings - 1,262 (406) - 856
Payment of dividends (5,435) (14,446) (3,670) 13,183 (10,368)
Payments on long-term debt (1,081) - - - (1,081)
Net Parent (settlements) advances (31,483) (32,903) 3,316 23,994 (37,076)
------------ ------------ ------------ ----------- ------------
Cash used for financing activities (37,999) (46,087) (760) 37,177 (47,669)
------------ ------------ ------------ ----------- ------------
Effect of exchange rate changes on cash and cash
equivalents (135) 281 214 133 493
Net increase in cash and cash equivalents 30 6,576 1,080 - 7,686
Cash and cash equivalents, beginning of year (104) 5,800 6,133 - 11,829
------------ ------------ ------------ ----------- ------------
Cash and cash equivalents, end of year $ (74) $ 12,376 7,213 $ - $ 19,515
============ ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-32
<PAGE> 67
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOW
FOR THE YEAR ENDED APRIL 25, 1998
(IN THOUSANDS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
============ ============ ============ ============ ============
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income $ 18,088 $ 17,932 $ 4,588 $ (16,837) $ 23,771
Adjustments to reconcile net income
to cash provided by (used for)
operating activities:
Depreciation and amortization 2,390 5,764 621 - 8,775
Deferred tax provision 1,628 10,463 3,472 - 15,563
Allowance for doubtful accounts 66 (209) - - (143)
Reserve for inventory obsolescence - (3,489) - - (3,489)
Other items, net (120) 139 396 - 415
Change in cash due to:
Receivables 380 (3,069) 341 - (2,348)
Inventories - 982 (318) - 664
Prepaid expense (298) 2,091 120 - 1,913
Due from related parties (5,092) 1,546 (5,064) - (8,610)
Accounts payable (45) (3,024) 819 - (2,250)
Accrued liabilities (1,311) (5,849) 6,746 - (414)
Deferred revenue - 1,872 - - 1,872
Income taxes 12,315 (10,428) (1,240) - 647
------------ ------------ ------------ ----------- ------------
Cash provided by operating activities 28,001 14,721 10,481 (16,837) 36,366
------------ ------------ ------------ ----------- ------------
Investing activities:
Capital expenditures (170) (2,539) (680) - (3,389)
Acquisitions, net of cash acquired - (1,007) (405) (1,412)
Other items, net (627) 521 (15) - (121)
------------ ------------ ------------ ----------- ------------
Cash used for investing activities (797) (3,025) (1,100) - (4,922)
------------ ------------ ------------ ----------- ------------
Financing activities:
Net decrease in short-term borrowings (1,250) (133) (791) - (2,174)
Payment of dividends (5,949) (8,378) (1,145) 7,002 (8,470)
Payments on long-term debt 2,382 (3,750) - - (1,368)
Net Parent (settlements) advances (21,818) (42) (6,373) 9,603 (18,630)
------------ ------------ ------------ ----------- ------------
Cash used for financing activities (26,635) (12,303) (8,309) 16,605 (30,642)
------------ ------------ ------------ ----------- ------------
Effect of exchange rate changes on cash and cash
equivalents (229) 689 (736) 232 (44)
Net increase in cash and cash equivalents 340 82 336 - 758
Cash and cash equivalents, beginning of year (444) 5,718 5,797 - 11,071
------------ ------------ ------------ ----------- ------------
Cash and cash equivalents, end of year $ (104) $ 5,800 $ 6,133 $ - $ 11,829
============ ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-33
<PAGE> 68
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Weight Watchers International, Inc.:
In our opinion, the consolidated financial statements and financial statement
schedule listed in the Index appearing under Item 14(a) (1) and (2) on page F-1
present fairly, in all material respects, the financial position of Weight
Watchers International, Inc. and its subsidiaries at April 29, 2000 and April
24, 1999, and the results of their operations and their cash flows for each of
the three years in the period ended April 29, 2000 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statement in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
July 10, 2000
Melville, New York
F-34
<PAGE> 69
WEIGHT WATCHERS INTERNATIONAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D COLUMN E
---------- --------- ------------- ----------
COLUMN A ADDITIONS
---------
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) PERIOD
----------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED APRIL 29, 2000..............
Allowance for doubtful accounts...... $ 994 $ (385) $ $ 609
Inventory reserves................... 1,436 3,360 (3,329) 1,557
YEAR ENDED APRIL 24, 1999..............
Allowance for doubtful accounts...... $ 876 $ 118 $ 994
Inventory reserves................... 3,961 3,910 $ (6,435) 1,436
YEAR ENDED APRIL 25, 1998..............
Allowance for doubtful accounts...... $ 733 $ 143 $ 876
Inventory reserves................... 472 4,505 $ (1,016) 3,961
</TABLE>
------------
(1) Primarily represents the utilization of established reserves, net of
recoveries
F-35
<PAGE> 70
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on his
behalf by the undersigned, thereunto duly authorized.
WEIGHT WATCHERS INTERNATIONAL, INC.
Date: July 28, 2000
By: /s/ LINDA HUETT
--------------------------------------------
Linda Huett
President and Director
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: July 28, 2000 By: /s/ Linda Huett
--------------------------------------------
Linda Huett
President and Director
(Principal Executive Officer)
Date: July 28, 2000 By: /s/ THOMAS S. KIRITSIS
--------------------------------------------
Thomas S. Kiritsis
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: July 28, 2000 By: /s/ RAYMOND DEBBANE
--------------------------------------------
Raymond Debbane
Director
Date: July 28, 2000 By: /s/ JONAS M. FAIGENBAUM
--------------------------------------------
Jonas M. Faigenbaum
Director
Date: July 28, 2000 By: /s/ KENT Q. KREH
--------------------------------------------
Kent Q. Kreh
Director
Date: July 28, 2000 By: /s/ SACHA LAINOVIC
--------------------------------------------
Sacha Lainovic
Director
Date: July 28, 2000 By: /s/ RICHARD PENN
--------------------------------------------
Richard Penn
Director
Date: July 28, 2000 By: /s/ CHRISTOPHER J. SOBECKI
--------------------------------------------
Christopher J. Sobecki
Director
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C> <C>
**2 - Recapitalization and Stock Purchase Agreement, dated July 22,
1999, among Weight Watchers International, Inc., H.J. Heinz
Company and Artal International S.A. is incorporated herein by
reference to Exhibit 2 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**3.1 - Amended and Restated Articles of Incorporation of Weight Watchers
International, Inc. is incorporated herein by reference to
Exhibit 3.1 filed with Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-92005) as filed
on March 2, 2000.
**3.2 - Amended and Restated By-laws of Weight Watchers International,
Inc. is incorporated herein by reference to Exhibit 3.2 filed
with Amendment No. 1 to the Registrant's Registration Statement
on Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**3.3 - Certificate of Incorporation of 58 WW Food Corp. is incorporated
herein by reference to Exhibit 3.3 filed with Amendment No. 1 to
the Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**3.4 - By-laws of 58 WW Food Corp. is incorporated herein by reference
to Exhibit 3.4 filed with Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-92005) as filed
on March 2, 2000.
**3.5 - Certificate of Incorporation of Waist Watchers, Inc. is
incorporated herein by reference to Exhibit 1 filed with
Amendment No. 3.5 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**3.6 - By-laws of Waist Watchers, Inc. is incorporated herein by
reference to Exhibit 3.6 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**3.7 - Certificate of Incorporation of Weight Watchers Camps, Inc. is
incorporated herein by reference to Exhibit 3.7 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**3.8 - By-laws of Weight Watchers Camps, Inc. is incorporated herein by
reference to Exhibit 3.8 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**3.9 - Certificate of Incorporation of W.W. Camps and Spas, Inc. is
incorporated herein by reference to Exhibit 3.9 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**3.10 - By-laws of W.W. Camps and Spas, Inc. is incorporated herein by
reference to Exhibit 3.10 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**3.11 - Certificate of Incorporation of Weight Watchers Direct, Inc. is
incorporated herein by reference to Exhibit 3.11 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**3.12 - By-laws of Weight Watchers Direct, Inc. is incorporated herein by
reference to Exhibit 3.12 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**3.13 - Certificate of Incorporation of W/W Twentyfirst Corporation is
incorporated herein by reference to Exhibit 3.13 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**3.14 - By-laws of W/W Twentyfirst Corporation is incorporated herein by
reference to Exhibit 3.14 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**3.15 - Certificate of Incorporation of W.W. Weight Reduction Services,
Inc. is incorporated herein by reference to Exhibit 3.15 filed
with Amendment No. 1 to the Registrant's Registration Statement
on Form S-4 (File No. 333-92005) as filed on March 2, 2000.
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
**3.16 - By-laws of W.W. Weight Reduction Services, Inc. is incorporated
herein by reference to Exhibit 3.16 filed with Amendment No. 1 to
the Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**3.17 - Certificate of Incorporation of W.W.I. European Services, Ltd. is
incorporated herein by reference to Exhibit 3.17 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**3.18 - By-laws of W.W.I. European Services, Ltd. is incorporated herein
by reference to Exhibit 3.18 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**3.19 - Certificate of Incorporation of W.W. Inventory Service Corp. is
incorporated herein by reference to Exhibit 3.19 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**3.20 - By-laws of W.W. Inventory Service Corp. is incorporated herein by
reference to Exhibit 3.20 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**3.21 - Certificate of Incorporation of Weight Watchers North America,
Inc. is incorporated herein by reference to Exhibit 3.21 filed
with Amendment No. 1 to the Registrant's Registration Statement
on Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**3.22 - By-laws of Weight Watchers North America, Inc. is incorporated
herein by reference to Exhibit 3.22 filed with Amendment No. 1 to
the Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**3.23 - Certificate of Incorporation and Memorandum and Articles of
Association of Weight Watchers UK Holdings Ltd. is incorporated
herein by reference to Exhibit 3.23 filed with Amendment No. 1 to
the Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**3.24 - Certificate of Incorporation and Memorandum and Articles of
Association of Weight Watchers International Holdings Ltd. is
incorporated herein by reference to Exhibit 3.24 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**3.25 - Certificate of Incorporation and Memorandum and Articles of
Association of Weight Watchers (U.K.) Limited is incorporated
herein by reference to Exhibit 3.25 filed with Amendment No. 1 to
the Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**3.26 - Certificate of Incorporation and Memorandum and Articles of
Association of Weight Watchers (Accessories & Publications) Ltd.
is incorporated herein by reference to Exhibit 3.26 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**3.27 - Certificate of Incorporation and Memorandum and Articles of
Association of Weight Watchers (Food Products) Limited is
incorporated herein by reference to Exhibit 3.27 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**3.28 - Certificate of Incorporation and Constitution of Weight Watchers
New Zealand Limited is incorporated herein by reference to
Exhibit 3.28 filed with Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-92005) as filed
on March 2, 2000.
**3.29 - Certificate of Registration and Memorandum and Articles of
Association of Weight Watchers International Pty Limited is
incorporated herein by reference to Exhibit 3.29 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**3.30 - Certificate of Registration and Memorandum and Articles of
Association of Fortuity Pty Ltd. is incorporated herein by
reference to Exhibit 3.30 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**3.31 - Certificate of Registration and Memorandum and Articles of
Association of Gutbusters Pty Ltd. is incorporated herein by
reference to Exhibit 3.31 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**4.1 - Dollar Securities Indenture, dated as of September 29, 1999,
between Weight Watchers International, Inc. and Norwest Bank
Minnesota, National Association is incorporated herein by
reference to Exhibit 4.1 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**4.2 - Guarantee Agreement, dated as of March 3, 2000, given by 58 WW
Food Corp., Waist Watchers, Inc., Weight Watchers Camps and Spas,
Inc., Weight Watchers Direct, Inc., W/W Twentyfirst Corporation,
W.W. Weight Reductions Services, Inc., W.W.I. European Services,
Ltd., W.W. Inventory Service Corp., Weight Watchers
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
North America, Inc., Weight Watchers UK Holdings Ltd., Weight
Watchers International Holdings, Ltd., Weight Watchers U.K.
Limited , Weight Watchers (Accessories & Publications) Ltd.,
Weight Watchers (Food Products) Limited, Weight Watchers New
Zealand Limited, Weight Watchers International Pty Limited,
Fortuity Pty Ltd. and Gutbusters Ltd. is incorporated herein by
reference to Exhibit 4.2 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**4.3 - Euro Securities Indenture, dated as of September 29, 1999,
between Weight Watchers International Inc. and Norwest Bank
Minnesota, National Association is incorporated herein by
reference to Exhibit 4.3 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**4.4 - Guarantee Agreement, dated as of March 3, 2000, given by 58 WW
Food Corp., Waist Watchers, Inc., Weight Watchers Camps and Spas,
Inc., Weight Watchers Direct, Inc., W/W Twentyfirst Corporation,
W.W. Weight Reductions Services, Inc., W.W.I. European Services,
Ltd., W.W. Inventory Service Corp., Weight Watchers North
America, Inc., Weight Watchers UK Holdings Ltd., Weight Watchers
International Holdings, Ltd., Weight Watchers U.K. Limited ,
Weight Watchers (Accessories & Publications) Ltd., Weight
Watchers (Food Products) Limited, Weight Watchers New Zealand
Limited, Weight Watchers International Pty Limited, Fortuity Pty
Ltd. and Gutbusters Ltd. is incorporated herein by reference to
Exhibit 4.4 filed with Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-92005) as filed
on March 2, 2000.
**10.1 - Credit Agreement, dated as of September 29, 1999, among Weight
Watchers International, Inc., WW Funding Corp., Credit Suisse
First Boston, BHF (USA) Capital Corporation, The Bank of Nova
Scotia and various financial institutions is incorporated herein
by reference to Exhibit 10.1 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**10.2 - Preferred Stock Stockholders' Agreement, dated as of September
29, 1999, among Weight Watchers International, Inc., Artal
Luxembourg S.A. and H.J. Heinz Company is incorporated herein by
reference to Exhibit 10.2 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**10.3 - Stockholders' Agreement, dated as of September 29, 1999, among
Weight Watchers International, Inc., Artal Luxembourg S.A. and
H.J. Heinz Company is incorporated herein by reference to Exhibit
10.3 filed with Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 (File No. 333-92005) as filed on March 2,
2000.
**10.4 - License Agreement, dated as of September 29, 1999, between WW
Foods, LLC and Weight Watchers International, Inc. is
incorporated herein by reference to Exhibit 10.4 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**10.5 - License Agreement, dated as of September 29, 1999, between Weight
Watchers International, Inc. and H.J. Heinz Company is
incorporated herein by reference to Exhibit 10.5 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**10.6 - License Agreement, dated as of September 29, 1999, between WW
Foods, LLC and H.J. Heinz Company is incorporated herein by
reference to Exhibit 10.6 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**10.7 - LLC Agreement, dated as of September 29, 1999, between H.J. Heinz
Company and Weight Watchers International, Inc. is incorporated
herein by reference to Exhibit 10.7 filed with Amendment No. 1 to
the Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**10.8 - Operating Agreement, dated as of September 29, 1999, between
Weight Watchers International, Inc. and H.J. Heinz Company is
incorporated herein by reference to Exhibit 10.8 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**10.9 - Subscription Agreement, dated as of September 29, 1999, among
WeightWatchers.com, Inc., Weight Watchers International, Inc.,
Artal Luxembourg S.A. and H.J. Heinz Company is incorporated
herein by reference to Exhibit 10.9 filed with Amendment No. 1 to
the Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**10.10 - Registration Rights Agreement, dated September 29, 1999, among
WeightWatchers.com, Weight Watchers International, Inc., H.J.
Heinz Company and Artal Luxembourg S.A. is incorporated herein by
reference to Exhibit 10.10 filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
**10.11 - Stockholders' Agreement, dated September 29, 1999, among
WeightWatchers.com, Weight Watchers
</TABLE>
<PAGE> 74
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
International, Inc., Artal Luxembourg S.A., H.J. Heinz Company is
incorporated herein by reference to Exhibit 10.11 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**10.12 - Letter Agreement, dated as of September 29, 1999, between Weight
Watchers International, Inc. and The Invus Group, Ltd. is
incorporated herein by reference to Exhibit 10.12 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**10.13 - Agreement of Lease, dated as of August 1, 1995, between
Industrial & Research Associates Co. and Weight Watchers
International, Inc. is incorporated herein by reference to
Exhibit 10.13 filed with Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-92005) as filed
on March 2, 2000.
**10.14 - Lease Agreement, dated as of April 1, 1997, between Junto
Investments and Weight Watchers North America, Inc. is
incorporated herein by reference to Exhibit 10.14 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**10.15 - Lease Agreement, dated as of August 31, 1995, between 89 State
Line Limited Partnership and Weight Watchers North America, Inc.
is incorporated herein by reference to Exhibit 10.15 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
**10.16 - Employment Agreement, dated as of August 30, 1996, between Weight
Watchers International, Inc. and Robert Mallow is incorporated
herein by reference to Exhibit 10.16 filed with Amendment No. 1
to the Registrant's Registration Statement on Form S-4 (File No.
333-92005) as filed on March 2, 2000.
*10.17 - Weight Watchers Savings Plan, dated as of October 3, 1999.
*10.18 - Weight Watchers Executive Profit Sharing Plan, dated as of
October 4, 1999.
*10.19 - 1999 Stock Purchase and Option Plan of Weight Watchers
International, Inc. and Subsidiaries.
*10.20 - WeightWatchers.com Stock Incentive Plan of Weight Watchers
International, Inc. and Subsidiaries.
*10.21 - Warrant Agreement, dated as of November 24, 1999 between
WeightWatchers.com, Inc. and Weight Watchers International, Inc.
*10.22 - Warrant Certificate Weightwatchers.com, Inc. No. 01, dated
November 24, 1999.
*12.1 - Computation of Ratio of Earnings to Fixed Charges.
*12.2 - Computation of Pro Forma Ratio of Earnings to Fixed Charges.
**21 - Subsidiaries of Weight Watchers International, Inc. is
incorporated herein by reference to Exhibit 21 filed with
Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-92005) as filed on March 2, 2000.
*27 - Financial Data Schedules.
</TABLE>
* Filed herewith.
** Previously filed.
