WEIGHT WATCHERS
INTERNATIONAL, INC.
AND SUBSIDIARIES
Unaudited Condensed Consolidated
Financial Statements
For the Three and Nine Months Ended
January 22, 2000 and January 23, 1999
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
- ----------------------------------------------------
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------- --------
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of 2
April 24, 1999 and January 22, 2000
Unaudited Condensed Consolidated Statements of
Operations and Comprehensive Income (Loss) for the
three and nine months ended January 23, 1999 and 3
January 22, 2000
Unaudited Condensed Consolidated Statements of Cash
Flows for the nine months ended January 23, 1999 5
and January 22, 2000.
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of 20 -23
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 24
About Market Risk
-1-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
(Condensed Consolidated Balance Sheets (in thousands)
- ----------------------------------------------------
<TABLE>
<CAPTION>
April 24, January 22,
1999 2000
Assets --------- -----------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,515 $ 34,446
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,403 13,988
Notes receivable, current . . . . . . . . . . . . . . . . . . . . . . . . . 3,266 1,391
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,580 11,444
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 7,598 7,605
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,609 --
Due from related parties . . . . . . . . . . . . . . . . . . . . . . . . . 133,783 --
-------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 186,754 68,874
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 8,725 7,168
Notes and other receivables, noncurrent . . . . . . . . . . . . . . . . . . . 19,165 7,163
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,714 154,383
Trademarks and other intangible assets, net . . . . . . . . . . . . . . . . . 8,113 7,977
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,133 74,712
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . -- 15,097
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 830 553
-------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $371,434 $ 335,927
======== =========
Liabilities, Redeemable Preferred Stock, and Parent Company's
Investment/Stockholders' Deficit
Current Liabilities
Short-term borrowings and current portion of long-term debt . . . . . . . . $ 7,854 $ 10,590
Short-term borrowings due to related party . . . . . . . . . . . . . . . . 16,250 1,019
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . 49,905 58,848
Foreign currency contract payable . . . . . . . . . . . . . . . . . . . . . 7,169 --
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,962 5,998
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,414 2,622
-------- ---------
Total current liabilities 95,554 79,077
Long-term debt 15,500 477,260
Deferred income taxes 8,228 3,474
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,204 1,860
-------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,486 561,671
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . -- 25,000
Parent company's investment/stockholders' deficit . . . . . . . . . . . . . . 248,948 (250,744)
-------- ---------
Total liabilities, redeemable preferred stock, Parent company's investment $371,434 $ 335,927
and stockholders' deficit . . . . . . . . . . . . . . . . . . . . . . . . ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE>
Weight Watchers International, Inc. and Subsidiaries
(Condensed Consolidated Statements of Operations and Comprehensive Income
(Loss)(in thousands)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------
January 23, January 22,
1999 2000
---------------------- ----------------------
(unaudited)
<S> <C> <C>
Total revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89,403 $ 90,507
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,104 51,870
-------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,299 38,637
Marketing expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,863 12,666
Selling, general and administrative expenses . . . . . . . . . . . . . . . . 12,318 11,252
-------- --------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,118 14,719
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,327 859
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,607) (15,042)
Other income (expenses), net . . . . . . . . . . . . . . . . . . . . . . . . (11,199) 3,869
-------- --------
Income before income taxes and minority interests . . . . . . . . . . . . . 20,639 4,405
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 8,714 3,382
-------- --------
Income before minority interest . . . . . . . . . . . . . . . . . . . . . . 11,925 1,023
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419 111
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,506 912
Other comprehensive loss
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . (13,873) (66)
-------- --------
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . (2,367) (846)
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(in thousands)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------
January 23, January 22,
1999 2000
---------------------- ----------------------
(unaudited)
<S> <C> <C>
Total revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $253,405 $266,712
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,779 138,526
-------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,626 128,186
Marketing expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,188 32,841
Selling, general and administrative expenses . . . . . . . . . . . . . . . . 35,327 33,470
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 3,345
-------- --------
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,111 53,530
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,740 5,434
Other income (expenses), net . . . . . . . . . . . . . . . . . . . . . . . . (7,002) (21,516)
Income before income taxes and minority interests . . . . . . . . . . . . . (3,726) (492)
-------- --------
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 58,123 36,956
Income before minority interest . . . . . . . . . . . . . . . . . . . . . . 24,588 16,007
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,535 20,949
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,094 703
-------- --------
Other comprehensive income currency translation adjustments . . . . . . . . . 32,441 20,246
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . 30,160 12,399
-------- --------
$ 62,601 $ 32,645
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (in thousands)
- --------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------------------
January 23, January 22,
1999 2000
---------------------- ----------------------
(unaudited)
<S> <C> <C>
Cash provided by operating activities $ 23,209 $ 24,936
-------- --------
Investing activities
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . -- (15,900)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,465) (177)
-------- --------
Cash used for investing activities (1,465) (16,077)
-------- --------
Financing activities
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . -- 491,452
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . -- (324,476)
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . -- (15,696)
Parent settlements and capital contributions, net . . . . . . . . . . . . . (14,470) (133,674)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,772) (9,112)
-------- --------
Cash (used for) provided by financing activities (20,242) 8,494
-------- --------
Effect of exchange rate changes on cash and cash equivalents . . . . . . . (34) (2,422)
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . 1,468 14,931
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . 11,829 19,515
-------- --------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . 13,297 34,446
======== ========
Noncash financing and investing activities:
Deferred tax asset, net of valuation allowance, recorded as a reduction of
stockholders' deficit, in 1999, in conjunction with the recapitalization of
the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,100
Redeemable preferred stock, issued to H.J. Heinz . . . . . . . . . . . . . $ 25,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------
1. General
The accompanying consolidated financial statements include the
accounts of Weight Watchers International, Inc. and Subsidiaries (the
"Company"). The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States and include amounts that are based on management's best estimates
and judgments. While all available information has been considered,
actual amounts could differ from those estimates. The consolidated
financial statements are unaudited but, in the opinion of management,
reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation. These statements should be read in
conjunction with the combined financial statements and related notes
which appear in the Company's Offering Circular, dated September 29,
1999.
2. Recapitalization
On September 29, 1999, the Company effected a recapitalization and
stock purchase agreement ("Agreement") 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 Agreement 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 recapitalization, the Company incurred
approximately $8.3 million in transaction costs and $15.7 million in
deferred financing costs. For U.S. Federal and State tax purposes, the
recapitalization 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 statement 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.
3. Redeemable Preferred Stock
The Company issued 1.0 million shares of Series A Preferred Stock
in conjunction with the recapitalization 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
$500,000 dividend which is included in accrued expenses at January 22,
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 assets available for distribution to shareholders an
-6-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------
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 our 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.
The Company may redeem the Series A Preferred Stock, in whole or in
part, at any time or from time to time, at the Company's option 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 our 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 recapitalization, 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 January 22, 2000, the interest rates were 9.0725% for Term
Loan A and 9.8225% 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 of 13% Senior Subordinated Notes due 2009 (the "Notes")
to qualified institutional buyers under a private placement offering
pursuant to Rule 144A. At January 22, 2000 the 100.0 million EUR notes
translated into $100.9 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 footnote 6). 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
-7-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------
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>
(in thousands)
<S> <C>
2000 $ 10,590
2001 14,120
2002 14,120
2003 14,120
2004 and thereafter 434,900
487,850
--------
</TABLE>
5. Employee Benefits
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
related interpretations in accounting for its employee stock options.
Under APB 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 will be recorded. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (Statement 123).
Incentive Compensation
On December 16, 1999, the Board of Directors adopted the Company's
"1999 Stock Purchase and Option Plan" (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. Such
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 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 Plan, the Board of Directors authorized the Company
to enter into agreements under which certain members of management may
receive 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.
-8-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------
Under the stock purchase component of the plan discussed above,
318,000 shares of common stock were sold to 43 members of the Company's
management group at $10 a share.
6. Savings Plans
The Company sponsors the Weight Watchers Savings Plan for salaried
and 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 also sponsors the Weight Watchers Profit Sharing Plan
for all full-time salaried employees who are eligible to participate in
the Savings Plan (except for certain senior management personnel), which
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 also has a
supplemental employer contribution component, based on the Company's
achievement of certain annual performance targets, which may be
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 IRS definition the
plan is considered a Nonqualified Deferred Compensation Plan. There is a
promise of payment by the organization 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
Weight Watchers Savings Plan under section 401 (a) of the Code.
Based on review, it is the Company's opinion, that the Internal Revenue
Service will issue a favorable determination letter as to the qualified
status of the Plan.
7. Financial Instruments
The Company conducts classroom meetings globally, with facilities
throughout the world.
The Company can be exposed to market risks from
fluctuations in interest rates and foreign exchange rates. To reduce
this risk, the Company uses derivative financial instruments. The
Company does not use derivative financial instruments for trading or
speculative purposes, nor is the Company a party to leveraged
instruments.
The Company uses interest rate swaps to hedge portions of
interest payable on its debt. At January 22, 2000, the Company had a
short-term interest rate swap contract with a notional amount of USD237.0
million to effectively convert variable interest based on LIBOR to fixed
interest. The Company also had long-term interest rate swap contracts
with notional amounts of USD 21.0 million, EUR 24.0 million and GBP 3.0
million.
The Company uses foreign currency forward contracts to more
properly align the underlying sources of cash flows with debt servicing
requirements. At January 22, 2000 the Company had long-term foreign
currency forward contracts receivable with notional amounts of USD 44.0
-9-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------
million and EUR 52.0 million offset by foreign currency forward contracts
payable with notional amounts of GBP 59.2 million.
8. WeightWatchers.com Note and Warrant Agreement
The Company has a 19.8% equity investment in a corporation called
WeightWatchers.com and has agreed to loan 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. WeightWatchers.com as of January 22, 2000 owes the Company
$600,000.
Under a warrant agreement entered into with WeightWatchers.com,
the Company has received warrants to purchase an additional 20.2% of
WeightWatchers.com's common stock in connection with the loans described
above. These warrants will expire on November 24, 2009 and may be
exercised at a price of $500 per share. The exercise price and the
number of shares of WeightWatchers.com's common stock available for
purchase upon exercise of the warrants may be adjusted from time to time
upon the occurrence of certain events.
9. Income Taxes
The effective income tax rate for the three months ended January
22, 2000 was 77% due to valuation allowances required in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes (FAS 109).
10. Guarantor Subsidiaries
The Company's payment obligations under the Senior Subordinated
Notes are fully and unconditionally guaranteed on a joint and several
basis by the following wholly-owned subsidiaries: 58 WW Food Corp.; Waist
Watchers, Inc.; Weight Watchers Camps, Inc.; W.W. Camps and Spas, Inc.;
Weight Watchers Direct, Inc.; W/W Twentyfirst Corporation; W.W. Weight
Reduction Services, Inc.; W.W.I. European Services Ltd.; W.W. Inventory
Service Corp.; Weight Watchers North America, Inc.; Weight Watchers UK
Holdings Ltd.; Weight Watchers International Holdings Ltd.; Weight
Watchers (U.K.) Limited; Weight Watchers (Accessories & Publication)
Ltd.; Weight Watchers (Food Products) Limited; Weight Watchers New
Zealand Limited; Weight Watchers International Pty Limited; Fortuity Pty
Ltd.; and Gutbusters Pty Ltd. (collectively, the "Guarantor
Subsidiaries"). The obligations of each Guarantor Subsidiary under its
guarantee of the Notes are subordinated to such subsidiary's obligations
under its guarantee of the new senior credit facility.
The following presentations are 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 Company on the
equity method of accounting. Earnings of subsidiaries are, therefore,
-10-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------
reflected in the Company's investments in subsidiaries' accounts. The
elimination entries eliminate investments in subsidiaries and
intercompany balances and transactions.
-11-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Supplemental Unaudited Condensed Consolidating Balance Sheet
As of January 22, 2000 (in thousands)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents . . . . . . . . . . . $ 3,880 $ 21,847 $ 8,719 $ -- $ 34,446
Receivables, net . . . . . . . . . . . . . . . 5,833 7,007 1,148 -- 13,988
Notes receivable, current . . . . . . . . . . . 1,391 -- -- -- 1,391
Inventories . . . . . . . . . . . . . . . . . . -- 9,153 2,291 -- 11,444
Prepaid expenses and other current assets . . . 698 5,075 1,832 -- 7,605
Deferred income taxes . . . . . . . . . . . . . 2,846 (2,846) -- -- --
Due from related parties . . . . . . . . . . . -- -- -- -- --
Intercompany receivables/(payables) . . . . . . (93,139) 91,528 1,611 --
--------- --------- -------- --------- ---------
Total current assets (78,491) 131,764 15,601 -- 68,874
Investment in subsidiaries . . . . . . . . . . . 152,941 -- -- (152,941) --
Property and equipment, net . . . . . . . . . . . 1,785 4,061 1,322 -- 7,168
Notes and other receivables, noncurrent . . . . . 7,163 -- -- -- 7,163
Goodwill, net . . . . . . . . . . . . . . . . . . 26,188 127,392 803 -- 154,383
Trademarks and other intangible assets, net . . . 2,074 5,894 9 -- 7,977
Deferred income taxes . . . . . . . . . . . . . . 76,999 (2,287) -- -- 74,712
Deferred financing costs . . . . . . . . . . . . 15,097 -- -- 15,097
Other noncurrent assets . . . . . . . . . . . . . 75 285 193 -- 553
--------- -------- -------- --------- ---------
Total assets . . . . . . . . . . . . . . . . . $ 203,831 $267,109 $ 17,928 $(152,941) $ 335,927
========= ======== ======== ========= =========
Liabilities, Redeemable Preferred Stock, and Stockholders' Equity (Deficit)
Current liabilities
Short-term borrowings and current portion of
long-term debt . . . . . . . . . . . . . . . . $ 9,938 $ 652 $ -- $ -- $ 10,590
Short-term borrowings due to related party . . 1,019 -- -- -- 1,019
Accounts payable and accrued expenses 23,093 27,048 8,707 -- 58,848
Income taxes . . . . . . . . . . . . . . . . . 1,589 3,022 1,387 -- 5,998
Deferred revenue . . . . . . . . . . . . . . . -- 1,798 824 -- 2,622
--------- -------- -------- --------- ---------
Total current liabilities 35,639 32,520 10,918 -- 79,077
Long--term debt . . . . . . . . . . . . . . . . . 390,913 86,347 -- -- 477,260
Deferred income taxes . . . . . . . . . . . . . . 1,903 227 1,344 -- 3,474
Other . . . . . . . . . . . . . . . . . . . . . . 1,120 346 394 -- 1,860
--------- -------- -------- --------- ---------
Total liabilities 429,575 119,440 12,656 -- 561,671
Redeemable preferred stock 25,000 -- -- -- 25,000
Stockholders' equity (deficit) $(250,744) $147,669 $ 5,272 $(152,941) $(250,744)
--------- -------- -------- --------- ---------
Total liabilities, redeemable preferred stock $ 203,831 $267,109 $ 17,928 $(152,941) $ 335,927
and stockholders' equity (deficit) ========= ======== ======== ========= =========
</TABLE>
-12-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Supplemental Unaudited Condensed Consolidating Balance Sheet
As of April 24, 1999 (in thousands)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets
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 and other current assets . . . 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 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 intangible assets, net . . . 2,335 5,745 13 -- 8,113
Deferred income taxes . . . . . . . . . . . . . . (22) 4,155 -- -- 4,133
Other noncurrent assets . . . . . . . . . . . . . 138 510 182 830
-------- -------- -------- --------- --------
Total assets . . . . . . . . . . . . . . . . . $275,295 $ 49,232 $164,639 $(117,732) $371,434
======== ======== ======== ========= ========
Liabilities, Redeemable Preferred Stock, and Stockholders' Equity (Deficit)
Current liabilities
Short-term borrowings and current portion of
long-term debt . . . . . . . . . . . . . . . . $ 1,164 $ -- $ 6,690 $ -- $ 7,854
Short-term borrowings due to related party . . 16,638 (388) -- -- 16,250
Accounts payable and accrued expenses . . . . . 8,787 30,876 10,242 -- 49,905
Foreign currency contract payable . . . . . . . -- -- 7,169 -- 7,169
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 liabilities 28,555 66,283 27,648 -- 122,486
Redeemable preferred stock . . . . . . . . . . . -- -- -- -- --
Parent company's investment . . . . . . . . . . . 246,740 (17,051) 136,991 (117,732) 248,948
-------- -------- -------- --------- --------
Total liabilities, Redeemable preferred $275,295 $ 49,232 $164,639 $(117,732) $371,434
stock, and stockholders' equity (deficit) . ======== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-13-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Supplemental Unaudited Condensed Consolidating Statement of Operations
For the Three Months Ended January 23, 1999 (in thousands)
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total revenues, net . . . . . . . . . . . . . . . $ 17,061 $55,695 $16,647 $ -- $89,403
Cost of revenues . . . . . . . . . . . . . . . . 1,054 30,593 10,457 -- 42,104
-------- ------- ------- ------- -------
Gross profit . . . . . . . . . . . . . . . . . 16,007 25,102 6,190 -- 47,299
Marketing expenses . . . . . . . . . . . . . . . 4,599 7,713 2,551 -- 14,863
Selling, general and administrative . . . . . . . 5,820 4,606 1,892 -- 12,318
-------- ------- ------- ------- -------
Operating income . . . . . . . . . . . . . . . 5,588 12,783 1,747 -- 20,118
Interest income . . . . . . . . . . . . . . . . . 109 1,225 2,993 -- 4,327
Interest expense . . . . . . . . . . . . . . . . (878) (114) (1,615) -- (2,607)
Other expenses, net . . . . . . . . . . . . . . . (600) (594) (5) -- (1,199)
Equity in income of consolidated subsidiaries . . 3,753 -- -- (3,753) --
Franchise commission income (loss) . . . . . . . 1,878 (1,319) (559) -- --
-------- ------- ------- ------- -------
Income before income taxes and minority interest. 9,850 11,981 2,561 (3,753) 20,639
Provision for income taxes . . . . . . . . . . . -- 6,632 2,082 -- 8,714
-------- ------- ------- ------- -------
Income before minority interest . . . . . . . . . 9,850 5,349 479 (3,753) 11,925
Minority interest . . . . . . . . . . . . . . . . -- 301 118 -- 419
Net income . . . . . . . . . . . . . . . . . . . 9,850 5,048 361 (3,753) 11,506
======== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-14-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Supplemental Unaudited Condensed Consolidating Statement of Operations
For the Three Months ended January 22, 2000 (in thousands)
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total revenues, net $ 7,176 $65,867 $17,464 $ -- $90,507
Total costs 1,672 38,880 11,318 -- 51,870
-------- ------- ------- -------- -------
Gross profit 5,504 26,987 6,146 -- 38,637
Marketing expenses 3,322 6,960 2,384 -- 12,666
Selling, general and administrative 4,605 4,440 2,207 -- 11,252
-------- ------- ------- -------- -------
Operating income (loss) (2,423) 15,587 1,555 -- 14,719
Interest income 460 137 262 -- 859
Interest expense (12,581) (2,454) (7) -- (15,042)
Other income (expenses), net 4,700 (814) (17) -- 3,869
Equity in income of consolidated subsidiaries 2,821 -- -- (2,821) --
Franchise commission income (loss) 3,036 (2,497) (539) -- --
-------- ------- ------- -------- -------
Income (loss) before income taxes and minority
interest (3,987) 9,959 1,254 (2,821) 4,405
Provisions for (benefit from) income taxes (4,899) 7,400 881 -- 3,382
-------- ------- ------- -------- -------
Income before minority interest 912 2,559 373 (2,821) 1,023
Minority interest -- 111 -- 111
-------- ------- ------- -------- -------
Net Income $ 912 $ 2,559 $ 262 $ (2,821) $ 912
======== ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-15-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Supplemental Unaudited Condensed Consolidating Statement of Operations
For the Nine Months ended January 23, 1999 (in thousands)
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total revenues, net $32,498 $176,981 $43,926 $ -- $253,405
Total costs 2,354 97,097 27,328 -- 126,779
------- -------- ------- -------- --------
Gross profit 30,144 79,884 16,598 -- 126,626
Marketing expenses 7,626 20,702 5,860 -- 34,188
Selling, general and administrative 16,588 13,559 5,180 -- 35,327
------- -------- ------- -------- --------
Operating income (loss) 5,930 45,623 5,558 -- 57,111
Interest income 406 2,907 8,427 -- 11,740
Interest expense (2,503) (204) (4,295) -- (7,002)
Other income (expenses), net (1,457) (2,292) 23 -- (3,726)
Equity in income of consolidated subsidiaries 19,174 -- -- (19,174) --
Franchise commission income (loss) 5,105 (3,744) (1,361) -- --
------- -------- ------- -------- --------
Income (loss) before income taxes and minority
interest 26,655 42,290 8,352 (19,174) 58,123
Provisions for (benefit from) income taxes (270) 20,647 4,211 -- 24,588
------- -------- ------- -------- --------
Income before minority interest 26,925 21,643 4,141 (19,174) 33,535
Minority interest -- 807 287 -- 1,094
------- -------- ------- -------- --------
Net Income $26,925 $ 20,836 $ 3,854 (19,174) $ 32,441
======= ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-16-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Supplemental Unaudited Condensed Consolidating Statement of Operations
For the Nine Months ended January 22, 2000 (in thousands)
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total revenues, net $ 23,114 $197,907 $45,691 $ -- $266,712
Cost of revenues 2,801 106,625 29,100 -- 138,526
-------- -------- ------- -------- --------
Gross profit 20,313 91,282 16,591 -- 128,186
Marketing expenses 6,614 20,359 5,868 -- 32,841
Selling, general and administrative 12,540 15,412 5,518 -- 33,470
Transaction costs 8,247 98 -- -- 8,345
-------- -------- ------- -------- --------
Operating income (loss) (7,088) 55,413 5,205 -- 53,530
Interest income 1,371 1,664 2,399 -- 5,434
Interest expense (17,209) (3,070) (1,237) -- (21,516)
Other income (expenses), net 516 (924) (84) -- (492)
Equity in income of consolidated subsidiaries 34,085 -- -- (34,085) --
Franchise commission income (loss) 6,788 (5,104) (1,684) -- --
-------- -------- ------- -------- --------
Income before income taxes and minority interest 18,463 47,979 4,599 (34,085) 36,956
Provision for (benefit from) income taxes (1,783) 16,180 1,610 -- 16,007
-------- -------- ------- -------- --------
Income before minority interest 20,246 31,799 2,989 (34,085) 20,949
Minority interest -- 446 257 -- 703
-------- -------- ------- -------- --------
Net income $ 20,246 $ 31,353 $ 2,732 $(34,085) $ 20,246
======== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-17-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Supplemental Unaudited Condensed Consolidating Statement of Cash Flows
For the Nine Months ended January 23, 1999 (in thousands)
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used for) operating
activities $ (5,484) $46,806 $1,061 $(19,174) $23,209
-------- ------- ------ -------- -------
Investing activities
Acquisitions, net of cash acquired -- -- -- -- --
Other, net (265) (773) (427) -- (1,465)
-------- ------- ------ -------- -------
Cash used for investing activities (265) (773) (427) -- (1,465)
-------- ------- ------ -------- -------
Financing activities
Proceeds from borrowings -- -- -- -- --
Repurchase of common stock -- -- -- -- --
Deferred financing costs -- -- -- -- --
Parent settlements and capital contributions,
net 11,383 (41,434) 3,316 12,265 (14,470)
Other, net (6,386) (2,829) (3,250) 6,693 (5,772)
-------- ------- ------ -------- -------
Cash provided by (used for) financing
activities 4,997 44,263 66 18,958 (20,242)
-------- ------- ------ -------- -------
Effect of exchange rate changes on cash and
cash equivalents 856 (878) (228) 216 (34)
Net increase in cash and cash equivalents 104 892 472 -- 1,468
Cash and cash equivalents, beginning of period (104) 5,800 6,133 -- 11,829
-------- ------- ------ -------- -------
Cash and cash equivalents, end of period $ -- $ 6,692 $6,605 $ -- $13,297
======== ======= ====== ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-18-
<PAGE>
Weight Watchers International, Inc. and Subsidiaries
Supplemental Unaudited Condensed Consolidating Statement of Cash Flows
For the Nine Months ended January 22, 2000 (in thousands)
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash provided by operating activities $ (37,908) $ 3,066 $ 18,126 $(34,164) $ 24,936
--------- -------- -------- -------- ---------
Investing activities
Acquisition, net of cash acquired -- (15,900) -- -- (15,900)
Other, net (185) 360 (431) 79 (177)
--------- -------- -------- -------- ---------
Cash used for Investing activities (185) (15,540) (431) 79 (16,077)
--------- -------- -------- -------- ---------
Financing activities
Proceeds from borrowings 404,260 87,129 -- -- 491,452
Repurchase of common stock (324,476) -- -- -- (324,476)
Deferred financing costs (15,696) -- -- -- (15,696)
Parent settlements and capital contributions,
net (96,047) (59,124) (5,485) 26,982 (133,674)
Other, net (2,423) (3,121) (11,183) 7,615 (9,112)
--------- -------- -------- -------- ---------
Cash provided by (used for) financing
activities (34,382) 24,947 (16,668) 34,597 8,494
--------- -------- -------- -------- ---------
Effect of exchange rate changes on cash and cash
equivalents 613 (3,002) 479 (512) (2,422)
Net increase in cash and cash equivalents 3,954 9,471 1,506 -- 14,931
Cash and cash equivalents, beginning of period (74) 12,376 7,213 -- 19,515
--------- -------- -------- -------- ---------
Cash and cash equivalents, end of period $ 3,880 $ 21,847 $ 8,719 $ -- $ 34,446
========= ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-19-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -----------------------------------------------------------------------
Overview
Weight Watchers International, Inc., headquartered in Woodbury, New York,
is the largest provider of weight control programs in the world. It
operates in 29 countries through a network of company-owned and franchise
operations. On average over 1 million members attend weekly Weight
Watchers meetings to receive group support and education about healthful
eating patterns, behavior modification and physical activity.
On September 29, 1999, the Company effected a recapitalization and stock
purchase agreement ("Agreement") 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 $150.0 million USD
denominated and 100.0 million EUR denominated principal amount, due 2009.
A portion of the borrowings was utilized to refinance debt incurred prior
to the Agreement relating to the acquisition of the businesses in
Australia and New Zealand.
The Company's historical condensed consolidated financial statements
include the effects of the above transaction as of its closing date,
September 29, 1999.
Comparison of Three Months Ended January 22, 2000 to Three Months Ended
January 23, 1999
Net revenues were $90.5 million for the three months ended January 22,
2000, an increase of 14.3% from $79.2 million (excluding $8.7 million of
non-recurring revenue from Warnaco licensing agreement and $1.5 million
of discontinued food royalties) for the three months ended January 23,
1999. The increase in net revenues resulted from increased attendance in
most of our markets, strong growth in classroom product sales, and an
increase in franchise commissions that were partially offset by the lower
average meeting fees in the North American company-owned ("NACO")
operations resulting from the roll-out of Liberty/Loyalty.
Cost of revenues was $51.9 million for the three months ended January 22,
2000, an increase of 23.3% from $42.1 million for the three months ended
January 23, 1999. This increase was driven by an increase in product
sales and number of meetings held in company-owned areas to accommodate
attendance growth. In addition, startup costs relating to both a new
registration format and program material associated with the rollout of
an innovation in NACO contributed to the increase. An additional factor
was the reallocation of approximately $1.0 million of expenses in
Australia/New Zealand from selling, general and administrative expenses
("SG&A") to cost of revenues to improve the consistency of accounts
across subsidiaries.
Marketing expenses were $12.7 million for the three months ended January
22, 2000, a decrease of 14.8% from $14.9 million for the three months
ended January 23, 1999. The decrease is primarily due to differences in the
scheduling of marketing expenses.
-20-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -----------------------------------------------------------------------
Selling, general and administrative expenses declined by 8.1% to $11.3
million for the three months ended January 22, 2000, as compared to the
three months ended January 23, 1999. The reallocation of approximately
$1.0 million of expenses from SG&A to cost of revenues in Australia/New
Zealand to improve consistency of accounts across subsidiaries
contributed to the decline.
As a result of the above, operating income was $14.7 million for the
three months ended January 22, 2000, an increase of 48.5% from $9.9
million (excluding $8.7 million of non-recurring revenue from Warnaco
licensing agreement, and $1.5 million of discontinued food royalties),
for the three months ended January 23, 1999.
Interest Expense increased to $15.0 million for the three months ended
January 22, 2000 from $2.6 million for the three months ended January 23,
1999 as a result of borrowings related to the recapitalization and stock
purchase agreement.
The effective income tax rate for the three months ended January 22, 2000
of 77% increased from 42% for the three months ended January 23, 1999 due
to valuation allowances required in accordance with Statement of
Financial Accounting Standards No 109, Accounting for Income Taxes (FAS
109).
Comparison of Nine Months Ended January 22, 2000 to Nine Months Ended
January 23, 1999
Net revenues were $264.9 million for the nine months ended January 22,
2000, (excluding 1.8 million from discontinued food royalties) an
increase of 9.9% from $241.0 million (excluding $8.7 million from
non-recurring revenue from Warnaco licensing agreement and $3.7 million
from discontinued food royalties) for the nine months ended January
23,1999. This increase in net revenues resulted primarily from increased
attendance in most of our markets and strong growth in classroom product
sales that were partially offset by the lower Liberty/Loyalty average
meeting fees in NACO.
Cost of revenues was $138.5 million for the nine months ended January 22,
2000, an increase of 9.2% from $126.8 million for the nine months ended
January 23,1999. This increase was primarily the result of an increased
number of meetings to accommodate attendance growth and growing product
sales.
Marketing expenses were $32.8 million for the nine months ended
January 22, 2000, a decrease of 4.1% from $34.2 million for the nine
months ended January 23, 1999. This decrease is primarily due to
differences in the scheduling of marketing expenses.
Selling, general and administrative expenses declined by 5.1% to $33.5
million (excluding one-time charge of $8.3 million of transaction costs)
for the nine months ended January 22, 2000, as compared to the nine
months ended January 23,1999. This decrease primarily reflects
the reallocation of approximately $1.0 million of expenses from SG&A to
cost of revenues in Australia/New Zealand to improve the consistency of
accounts across subsidiaries.
-21-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -----------------------------------------------------------------------
As a result of the above, operating income was $60.0 million (excluding
one-time charge of $8.3 million of transaction costs and $1.8 million in
revenue from discontinued food royalties) for the nine months ended
January 22, 2000, an increase of 34.2% from $44.7 million (excluding $8.7
million of non-recurring revenue from Warnaco licensing agreement and
$3.7 million from discontinued food royalties) for the nine months ended
January 23, 1999.
Interest Expense increased to $21.5 million for the nine months ended
January 22, 2000 from $7.0 million for the nine months ended January 23,
1999 as a result of borrowings related to the recapitalization and stock
purchase agreement.
Summary Pro Forma Information
The unaudited pro forma consolidated statement of operations' information
for the three and nine months ended January 23, 1999 and January 22, 2000
give effect to the Recapitalization as if it had occurred at April 26,
1998. It does not purport to be indicative of, or a projection for, the
Company's results of operations for any future period or date. The pro
forma adjustments are based on available information and upon certain
assumptions which the Company believes are reasonable. These pro formas
have been prepared consistently with the methodology used in the 144A
Offering document.
<TABLE>
<CAPTION>
(in thousands)
-------------------------------------------------------------------
Three Months Ended Nine Months Ended
-------------------------------- ---------------------------------
January 23, January 22, January 23, January 22,
1999 2000 1999 2000
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total pro forma revenues $87,879 $90,507 $249,748 $264,921
Pro forma net income $3,059 $2,888 $7,872 $12,165
------- ------- -------- --------
EBITDA $22,756 $22,255 $65,431 $71,354
Adjusted pro forma EBITDA $17,455 $18,250 $62,500 $70,883
</TABLE>
-22-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -----------------------------------------------------------------------
EBITDA represents income before income taxes and minority interest plus
depreciation, amortization, and net interest expense. Pro forma EBITDA
adds back transaction expenses and adjusts revenues and costs for the
recapitalization agreement (e.g., elimination of food royalties), the
fact that Weight Watchers is now a stand-alone entity, and management's
planned restructurings. The exclusion of unrealized foreign currency
gains or losses included in Other Expenses and an addback of the minimum
Warnaco royalty payment, which had been booked in advance by Heinz but
which we received during the period, are the major adjustments made to
bridge from the pro forma EBITDA to Adjusted EBITDA.
Liquidity and Capital Resources
For the nine months ended January 22, 2000, our primary source of funds
to meet working capital needs was cash from operations. Cash and cash
equivalents increased $14.9 million during the nine months ended January
22, 2000. Cash flows provided by operating activities of $24.9 million
and financing activities of $8.5 million were in excess of cash flows
used in investing activities of $16.1 million. Cash flows used for
investing activities were principally related to the acquisition of the
Australian and New Zealand businesses. Cash flows provided by financing
activities include proceeds of $491.5 million from borrowings, which is
offset by $324.5 million used to repurchase common stock.
Capital spending has averaged $2.9 million annually over the last three
years and has consisted primarily of leasehold improvements for meeting
locations and administrative offices, computer equipment for field staff
and call centers and Year 2000 upgrades. Capital expenditures through
the nine months ended January 22, 2000 were $1.4 million.
We are significantly leveraged. As of January 22, 2000 after reflecting
the repurchase of common stock and related borrowings, we have
outstanding $487.9 million in aggregate indebtedness, with approximately
$30.0 million of additional borrowing capacity available under the
revolving credit facility, and total stockholders' deficit of $250.7
million. As a result of the Transactions, the Company's liquidity
requirements are significantly increased primarily due to increased debt
service obligations.
The Company believes that cash flows from operating activities, together
with borrowings available under the revolving credit facility, will be
sufficient to fund currently anticipated capital investment requirements,
debt service requirements and working capital requirements.
In addition, we have 1.0 million shares of Series A Preferred Stock
issued and outstanding. Holders of our Series A Preferred Stock are
entitled to receive dividends at an annual rate of 6% payable annually in
arrears.
-23-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -----------------------------------------------------------------------
Our ability to fund our capital investment requirements, interest,
principal and dividend payment obligations and working capital
requirements and to comply with all of the financial covenants under our
debt agreements depends on our 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 our
control.
Forward-Looking Statements
These consolidated financial statements include forward-looking
statements including, in particular, the statements about our plans,
strategies and prospects under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations." We have used
the words "may," "will," "expect," "anticipate," "believe," "estimate,"
"plan," "intend" and similar expressions in these consolidated financial
statements to identify forward-looking statements. We have based these
forward-looking statements on our current views with respect to future
events and financial performance. Actual results could differ materially
from those protected in the forward-looking statements. These
forward-looking statements are subject to risks, uncertainties and
assumptions, including, among other things:
- - risks associated with our ability to meet our debt obligations;
- - risks associated with the relative success of our marketing and
advertising;
- - risks associated with the continued attractiveness of our 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.
-24-
<PAGE>
Item 3. Quantitative and Qualitative Discussions about Market Risk
- ------------------------------------------------------------------
We are exposed to foreign currency fluctuations and interest rate
changes. Our 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. We have historically managed interest
rates through the use of, and our 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. In addition, to reduce this risk, the
Company uses derivative financial instruments. The Company does not use
derivative financial instruments for trading or speculative purposes, nor
is the Company a party to leveraged instruments.
Based on the overall interest rate exposure on our fixed rate borrowings
at January 22, 2000, a 10% change in market interest rates would have
less than an 8% impact on the fair value of our long-term debt. Based on
variable rate debt levels at January 22, 2000, a 10% change in market
interest rates would have less than a 3% impact on our interest expense,
net.
Fluctuations in currency exchange rates may also impact our stockholders'
equity. The assets and liabilities of our 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, we 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 our 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.
Foreign exchange gains and losses are included in our consolidated
statements of income.
-25-
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