<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period year ended July 29, 2000
Commission File no 000-03389
-----------
WEIGHT WATCHERS INTERNATIONAL, INC.
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Virginia 11-6040273
---------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 Crossways Park West, Woodbury, New York 11797-2055
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (516) 390-1400
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -----
The number of common shares outstanding as of July 29, 2000 was
23,800,000.
PART I - - FINANCIAL INFORMATION
<PAGE> 2
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION PAGE NO.
------------------------------ --------
<S> <C>
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets as of July 29, 2000 and
April 29, 2000 2
Unaudited Consolidated Statements of Operations and Comprehensive
Income for the three months ended July 29, 2000 and July 24, 1999 3
Unaudited Consolidated Statements of Cash Flows for the three months
ended July 29, 2000 and July 24, 1999 4
Notes to Unaudited Consolidated Financial Statements 5-13
Item 2. Management's Discussion and Analysis of Financial Condition 14-15
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16-18
Part II. OTHER INFORMATION 18-19
---------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters To a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE> 3
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 2
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JULY 29, APRIL 29,
ASSETS 2000 2000
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 57,166 $ 44,043
Receivables, net 8,321 12,877
Notes receivable, current 3,111 2,791
Inventories 10,945 9,328
Prepaid expenses, other 8,130 8,454
---------- ----------
Total current assets 87,673 77,493
Property and equipment, net 6,595 7,001
Notes and other receivables, noncurrent 6,680 7,045
Goodwill, net 151,139 152,565
Trademarks and other intangible assets, net 7,024 7,163
Deferred income taxes 68,268 67,574
Deferred financing costs, other 15,028 15,366
---------- ----------
Total assets $ 342,407 $ 334,207
========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities
Short-term borrowings due to related party $ 1,707 $ 1,489
Portion of long-term debt due within one year 14,120 14,120
Accounts payable 7,675 12,362
Accrued liabilities 41,537 39,062
Income taxes 8,759 6,786
Deferred revenue 4,596 4,632
---------- ----------
Total current liabilities 78,394 78,451
Long-term debt 458,200 460,510
Deferred income taxes 2,569 2,941
Other 312 546
---------- ----------
Total long-term debt and other liabilities 461,081 463,997
Redeemable preferred stock 26,250 25,875
Stockholders' deficit
Common stock, par value $0 per share, 23,800 shares authorized, issued and outstanding - -
Accumulated deficit (219,978) (231,663)
Accumulated other comprehensive loss (3,340) (2,453)
---------- ----------
Total stockholders' deficit (223,318) (234,116)
---------- ----------
Total liabilities, redeemable preferred stock, and stockholders' deficit $ 342,407 $ 334,207
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 4
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 3
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
JULY 29, JULY 24,
2000 1999
(UNAUDITED)
<S> <C> <C>
Revenues, net $ 103,542 $ 92,174
Cost of revenues 47,786 42,709
---------- ----------
Gross profit 55,756 49,465
Marketing expenses 10,085 8,769
Selling, general and administrative expenses 11,419 12,394
---------- ----------
Operating income 34,252 28,302
Interest income 881 3,124
Interest expense 14,976 1,454
Other expenses, net 4,260 1,165
---------- ----------
Income before income taxes and minority interest 15,897 28,807
Provision for income taxes 3,833 11,338
---------- ----------
Income before minority interest 12,064 17,469
Minority interest 95 374
---------- ----------
Net income 11,969 17,095
Other comprehensive income:
Foreign currency translation adjustment (887) 9,946
---------- ----------
Comprehensive income $ 11,082 $ 27,041
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 5
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
JULY 29, JULY 24,
2000 1999
(UNAUDITED)
<S> <C> <C>
Operating activities:
Net income $ 11,969 $ 17,095
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 2,921 2,301
Deferred tax provision (benefit) (1,068) 382
Accounting for equity investment 6,800 -
Allowance for doubtful accounts 66 (200)
Reserve for inventory obsolescence 641 1,020
Other items, net (803) (129)
Changes in cash due to:
Receivables 2,535 5,398
Inventories (2,255) (1,141)
Prepaid expense 326 472
Due to related parties 218 132,601
Accounts payable (2,249) (4,246)
Accrued liabilities 2,480 (3,308)
Deferred revenue (37) (4,160)
Income taxes 1,945 2,021
---------- ----------
Cash provided by operating activities 23,489 148,106
---------- ----------
Investing activities:
Capital expenditures (445) (301)
Advances to equity investment (4,800) -
Other items, net 178 81
---------- ----------
Cash used for investing activities (5,067) (220)
---------- ----------
Financing activities:
Net decrease in short-term borrowings (2,435) (8,059)
Payment of dividends - (1,923)
Payments on long-term debt (3,530) -
Net Parent (settlements) advances 93 (130,345)
---------- ----------
Cash used for financing activities (5,872) (140,327)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents 573 (1,040)
Net increase in cash and cash equivalents 13,123 6,519
Cash and cash equivalents, beginning of period 44,043 19,515
---------- ----------
Cash and cash equivalents, end of period $ 57,166 $ 26,034
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 6
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 5
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 of
America and include amounts that are based on management's best estimates
and judgments. While all available information has been considered,
actual amounts could differ from those estimates. The consolidated
financial statements are unaudited but, in the opinion of management,
reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation. This report should be read in
conjunction with the Company's annual report filed on Form 10K for the
fiscal year ending April 29, 2000.
2. 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 had 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. RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1998, the FASB issued SFAS No. 133, "Accounting for the
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 to 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 material
impact on its financial statements.
<PAGE> 7
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 July 29, 2000, the interest rates were 9.745% for Term Loan A
and 10.870% 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 July
29, 2000, the 100.0 million EUR notes translated into $92.4 million USD
denominated equivalent. The impact of the change in foreign exchange
rates related to euro denominated debt are reflected in the income
statement. Interest is payable on the Notes semi-annually on April 1 and
October 1 of each year, commencing April 1, 2000. The Company uses
interest rate swaps and foreign currency forward contracts in association
with its debt. The Notes are uncollateralized senior subordinated
obligations of the Company, subordinated in right of payment to all
existing and future senior indebtedness of the Company, including the
Credit Facility. 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 $ 10,590
2002 14,120
2003 14,120
2004 14,120
2005 15,683
2006 and thereafter 403,687
----------
$ 472,320
==========
</TABLE>
5. WEIGHT WATCHERS.COM NOTE
The Company has agreed to advance 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
<PAGE> 8
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
outstanding under the note will be payable on December 30, 2000. The note
may be prepaid at any time, in whole or in part, without premium or
penalty. As of July 29, 2000, the Company has advanced WeightWatchers.com
$6.8 million pursuant to the note. The $6.8 million in advances were
classified in Other expenses, net.
6. LEGAL
Due to the nature of its activities, the Company is, at times, subject to
pending and threatened legal actions that arise out of the normal course
of business. In the opinion of management, based in part upon advice of
legal counsel, the disposition of such matters will not have a material
effect on the consolidated financial statements.
7. 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 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.
<PAGE> 9
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 8
SUPPLEMENTAL UNAUDITED CONSOLIDATING BALANCE SHEET
AS OF JULY 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 $ 19,088 $ 27,037 $ 11,041 $ - $ 57,166
Receivables, net 3,411 3,819 1,091 - 8,321
Notes receivable, current 3,111 - - - 3,111
Inventories - 9,758 1,187 - 10,945
Prepaid expenses, other 3,181 3,321 1,628 - 8,130
Intercompany receivables (payables) (41,748) 39,670 2,078 - -
--------- --------- --------- --------- ---------
Total current assets (12,957) 83,605 17,025 - 87,673
Investment in consolidated subsidiaries 175,276 - - (175,276) -
Property and equipment, net 1,783 3,658 1,154 - 6,595
Notes and other receivables, noncurrent 6,680 - - - 6,680
Goodwill, net 25,390 125,015 734 - 151,139
Trademarks and other intangible assets, net 1,920 5,094 10 - 7,024
Deferred income taxes (1,329) 69,597 - - 68,268
Deferred financing costs, other 14,420 430 178 - 15,028
--------- --------- --------- --------- ---------
Total assets $ 211,183 $ 287,399 $ 19,101 $(175,276) $ 342,407
========= ========= ========= ========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)
Current liabilities
Short-term borrowings due to related party $ 1,707 $ - $ - $ - $ 1,707
Portion of long-term debt due within one year 13,250 870 - - 14,120
Accounts payable 429 5,851 1,395 - 7,675
Accrued liabilities 18,032 17,446 6,059 - 41,537
Income taxes 425 6,192 2,142 - 8,759
Deferred revenue - 3,693 903 - 4,596
--------- --------- --------- --------- ---------
Total current liabilities 33,843 34,052 10,499 - 78,394
Long-term debt 372,505 85,695 - - 458,200
Deferred income taxes 1,903 31 635 - 2,569
Other - - 312 - 312
--------- --------- --------- --------- ---------
Total long term debt and other liabilities 374,408 85,726 947 - 461,081
Redeemable preferred stock 26,250 - - - 26,250
Stockholders' equity (deficit) (223,318) 167,621 7,655 (175,276) (223,318)
--------- --------- --------- --------- ---------
Total liabilities, redeemable preferred
stock and stockholders' equity (deficit) $ 211,183 $ 287,399 $ 19,101 $(175,276) $ 342,407
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 10
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 9
SUPPLEMENTAL UNAUDITED 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, other 3,594 3,488 1,372 - 8,454
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, other 14,912 282 172 - 15,366
--------- --------- --------- --------- ---------
Total assets $ 195,286 $ 279,982 $ 21,259 $(162,320) $ 334,207
========= ========= ========= ========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)
Current liabilities
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
Accrued liabilities 12,695 18,652 7,715 - 39,062
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.
<PAGE> 11
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 10
SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 29, 2000
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues, net $ 7,927 $ 80,044 $ 15,571 $ - $103,542
Cost of revenues 265 38,247 9,274 - 47,786
-------- -------- -------- -------- --------
Gross profit 7,662 41,797 6,297 - 55,756
Marketing expense 1,100 7,705 1,280 - 10,085
Selling, general & administrative expenses 4,497 5,110 1,812 - 11,419
-------- -------- -------- -------- --------
Operating income 2,065 28,982 3,205 - 34,252
Interest income 456 335 90 - 881
Interest expense 9,843 5,121 12 - 14,976
Other (income) expenses, net 4,352 (99) 7 - 4,260
Equity in income of consolidated subsidiaries 15,298 - - (15,298) -
Franchise commission income (loss) 2,202 (1,730) (472) - -
-------- -------- -------- -------- --------
Income before income taxes and minority interest 5,826 22,565 2,804 (15,298) 15,897
Provision for (benefit from) income taxes (6,143) 9,532 444 - 3,833
-------- -------- -------- -------- --------
Income before minority interest 11,969 13,033 2,360 (15,298) 12,064
Minority interest - - 95 - 95
-------- -------- -------- -------- --------
Net income $ 11,969 $ 13,033 $ 2,265 $(15,298) $ 11,969
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 12
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES 11
SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 24, 1999
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues, net $ 7,889 $ 68,831 $ 15,454 $ - $ 92,174
Cost of revenues 745 32,948 9,016 - 42,709
-------- -------- -------- -------- --------
Gross profit 7,144 35,883 6,438 - 49,465
Marketing expense 1,591 5,829 1,349 - 8,769
Selling, general & administrative expenses 5,418 4,952 2,024 - 12,394
-------- -------- -------- -------- --------
Operating income 135 25,102 3,065 - 28,302
Interest income 617 781 1,726 - 3,124
Interest expense 721 10 723 - 1,454
Other expenses, net 377 730 58 - 1,165
Equity in income of consolidated subsidiaries 13,140 - - (13,140) -
Franchise commission income (loss) 1,554 (996) (558) - -
-------- -------- -------- -------- --------
Income before income taxes and minority interest 14,348 24,147 3,452 (13,140) 28,807
Provision for (benefit from) income taxes (308) 10,993 653 - 11,338
-------- -------- -------- -------- --------
Income before minority interest 14,656 13,154 2,799 (13,140) 17,469
Minority interest - 257 117 - 374
-------- -------- -------- -------- --------
Net income $ 14,656 $ 12,897 $ 2,682 $(13,140) $ 17,095
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 13
Weight Watchers International, Inc. and Subsidiaries 12
Supplemental Unaudited Consolidating Statement of Cash Flows
For the Three Months Ended July 29, 2000
(in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income $ 11,969 $ 13,033 $ 2,265 $(15,298) $ 11,969
Adjustments to reconcile net income
to cash provided by operating
activities:
Depreciation and amortization 1,110 1,670 141 - 2,921
Deferred tax provision (benefit) (8,525) 7,470 (13) - (1,068)
Accounting for equity investment 6,800 - - - 6,800
Allowance for doubtful accounts - 66 - - 66
Reserve for inventory obsolescence - 632 9 - 641
Other items, net - (572) (231) - (803)
Changes in cash due to:
Receivables 640 1,721 174 - 2,535
Inventories - (2,560) 305 - (2,255)
Prepaid expense 413 169 (256) - 326
Intercompany receivables/payables 9,634 (11,928) 2,294 - -
Due to related parties 218 - - - 218
Accounts payable (1,205) (599) (445) - (2,249)
Accrued liabilities 5,337 (1,203) (1,654) - 2,480
Deferred revenue - (132) 95 - (37)
Income taxes 2,271 199 (525) - 1,945
-------- -------- -------- -------- --------
Cash provided by operating activities 28,662 7,966 2,159 (15,298) 23,489
-------- -------- -------- -------- --------
Investing activities:
Capital expenditures (105) (236) (104) - (445)
Advances to equity investment (4,800) - - - (4,800)
Other items, net (92) 256 14 - 178
-------- -------- -------- -------- --------
Cash provided by (used for) investing activities (4,997) 20 (90) - (5,067)
-------- -------- -------- -------- --------
Financing activities:
Net increase (decrease) in short-term borrowings 196 (2,631) - - (2,435)
Parent company investment in subsidiaries (12,956) - - 12,956 -
Payment of dividends - - (1,603) 1,603 -
Payments on long-term debt (3,313) (217) - - (3,530)
Net parent settlements 93 - 146 (146) 93
-------- -------- -------- -------- --------
Cash used for financing activities (15,980) (2,848) (1,457) 14,413 (5,872)
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash and cash equivalents 419 (566) (165) 885 573
Net increase in cash and cash equivalents 8,104 4,572 447 - 13,123
Cash and cash equivalents, beginning of period 10,984 22,465 10,594 - 44,043
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period $ 19,088 $ 27,037 $ 11,041 $ - $ 57,166
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 14
Weight Watchers International, Inc. and Subsidiaries 13
Supplemental Unaudited Consolidating Statement of Cash Flows
For the Three Months Ended July 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 $ 14,656 $ 12,897 $ 2,682 $ (13,140) $ 17,095
Adjustments to reconcile net income
to cash provided by (used for) operating
activities:
Depreciation and amortization 515 1,656 130 - 2,301
Deferred tax provision (benefit) (2,287) 2,283 386 - 382
Allowance for doubtful accounts (86) (122) 8 - (200)
Reserve for inventory obsolescence - 993 27 - 1,020
Other items, net (1) 163 (291) - (129)
Changes in cash due to:
Receivables 2,947 1,416 1,035 - 5,398
Inventories - (1,436) 295 - (1,141)
Prepaid expense 131 (119) 460 - 472
Intercompany receivables/payables (6,736) 4,349 2,387 - -
Due from related parties 52 243 132,306 - 132,601
Accounts payable (631) (2,444) (1,171) - (4,246)
Accrued liabilities (3,259) (2,230) 2,181 - (3,308)
Deferred revenue - (4,229) 69 - (4,160)
Income taxes (7,177) 9,596 (398) - 2,021
--------- --------- --------- --------- ---------
Cash provided by (used for) operating activities (1,876) 23,016 140,106 (13,140) 148,106
--------- --------- --------- --------- ---------
Investing activities:
Capital expenditures (57) (244) - - (301)
Other items, net 26 53 2 - 81
--------- --------- --------- --------- ---------
Cash provided by (used for) investing activities (31) (191) 2 - (220)
--------- --------- --------- --------- ---------
Financing activities:
Net decrease in short-term borrowings (464) (1,292) (6,303) - (8,059)
Payment of dividends (1,922) (2) (4,224) 4,225 (1,923)
Net Parent (settlements) advances 4,717 (17,731) (126,000) 8,669 (130,345)
--------- --------- --------- --------- ---------
Cash provided by (used for) financing activities 2,331 (19,025) (136,527) 12,894 (140,327)
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents (249) (842) (195) 246 (1,040)
Net increase in cash and cash equivalents 175 2,958 3,386 - 6,519
Cash and cash equivalents, beginning of period (74) 12,376 7,213 - 19,515
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period $ 101 $ 15,334 $ 10,599 $ - $ 26,034
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 14
--------------------------------------------------------------------------------
COMPARISON OF THREE MONTHS ENDED JULY 29, 2000 TO THREE MONTHS ENDED JULY 24,
1999
Net revenues were $103.5 million for the three months ended July 29, 2000, an
increase of 12.3% from $92.2 million for the three months ended July 24, 1999.
The increase in net revenues resulted from increased attendance in most of the
Company's markets, strong growth in product sales, and an increase in domestic
franchise commissions. Adjusting for discontinued food royalties of $0.8
million, net revenues were $103.5 million for the three months ended July 29,
2000, an increase of $12.2 million, or 13.2% from $91.4 million for the three
months ended July 24, 1999.
Cost of revenues was $47.8 million for the three months ended July 29, 2000, an
increase of 11.9% from $42.7 million for the three months ended July 24, 1999.
This increase resulted from an increase in product sales and the number of
meetings held in Company-owned classrooms.
Marketing expenses were $10.1 million for the three months ended July 29, 2000,
an increase of 15.0% from $8.8 million for the three months ended July 24, 1999.
The increase is primarily due to media expenses relating to new marketing
programs.
Selling, general and administrative expenses declined by 7.9% to $11.4 million
for the three months ended July 29, 2000, as compared to $12.4 million for the
three months ended July 24, 1999. The decrease was due to the continued benefit
of the Company's restructuring and reorganization program.
As a result of the above, operating income was $34.3 million for the three
months ended July 29, 2000, an increase of 21.0% from $28.3 million for the
three months ended July 24, 1999. Adjusting for discontinued food royalties of
$0.8 million, operating income was $34.3 million for the three months ended July
29, 2000, an increase of $6.8 million and 24.5% from $27.5 million for the three
months ended July 24, 1999.
Interest expense increased to $15.0 million for the three months ended July 29,
2000 from $1.5 million for the three months ended July 24, 1999 as a result of
borrowings related to the Transaction.
SUMMARY PRO FORMA INFORMATION
The unaudited pro forma consolidated statement of operations' information for
the three months ended July 29, 2000 and July 24, 1999 gives effect to the
Transaction as if it had occurred at April 25, 1999. 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. This pro forma information has been prepared consistent with the
methodology used in the Company's S-4 registration statement.
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 15
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands)
---------------------------
Three Months Ended
July 29, July 24,
2000 1999
<S> <C> <C>
Total pro forma revenues $ 103,542 $ 91,028
Pro forma net income $ 11,594 $ 8,413
--------- ---------
Pro forma EBITDA $ 32,418 $ 31,006
Adjusted pro forma EBITDA $ 36,310 $ 31,518
</TABLE>
EBITDA represents income before income taxes and minority interest,
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 the Company received during the period, are
the major adjustments from the pro forma EBITDA to adjusted EBITDA.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended July 29, 2000, the Company's primary source of funds
to meet working capital needs was cash from operations. Cash and cash
equivalents increased $13.1 million during the three months ended July 29, 2000.
Cash flows provided by operating activities of $23.5 million was in excess of
cash flows used for investing activities of $5.1 million and financing
activities of $5.9 million.
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 for the three months ended July 29,
2000 was $0.5 million.
The Company is significantly leveraged. As of July 29, 2000, after reflecting
the repurchase of common stock and related borrowings, there was outstanding
$472.3 million in aggregate indebtedness, with approximately $30.0 million of
additional borrowing capacity available under the revolving credit facility. As
a result of the Transaction, the Company's liquidity requirements are
significantly increased primarily due to increased debt service obligations.
The Company believes that cash flows from operating activities, together with
borrowings available under the revolving credit facility, will be sufficient to
fund currently anticipated capital investment requirements, debt service
requirements and working capital requirements.
In addition, the Company has 1.0 million shares of Series A Preferred Stock
issued and outstanding. Holders of Series A Preferred Stock are entitled to
receive dividends at an annual rate of 6% payable annually in arrears.
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
16
--------------------------------------------------------------------------------
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.
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 July 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'
deficit. The assets and liabilities of its non-U.S. subsidiaries are translated
into U.S. dollars at the exchange rates in effect at the balance sheet date.
Revenues and expenses are translated into U.S. dollars at the weighted average
exchange rate for period. The resulting translation adjustments are recorded in
stockholders' deficit as accumulated other comprehensive income (loss). In
addition, fluctuations in the value of the euro will cause the U.S. dollar
translated amounts to change in comparison to prior periods and may impact
interest expense. Furthermore, the Company 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.
<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
--------------------------------------------------------------------------------
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 July 29,
2000, the Company had long-term foreign currency forward contracts receivable
with notional amounts of USD 44.0 million and EUR 76.0 million offset by foreign
currency forward contracts payable with notional amounts of GBP 59.2 million and
USD 21.9 million.
<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
--------------------------------------------------------------------------------
The Company's ability to fund capital investment requirements, interest,
principal and dividend payment obligations and working capital requirements and
to comply with all of the financial covenants under its debt agreements depends
on the Company's future operations, performance and cash flow. These are subject
to prevailing economic conditions and to financial, business and other factors,
some of which are beyond its control.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nothing to report under this item.
ITEM 2. CHANGES IN SECURITIES
Nothing to report under this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report under this item.
ITEM 5. OTHER INFORMATION
This report contains forward-looking statements regarding the Company's
future performance. These forward-looking statements are based on management's
views and assumptions, and involve unknown risks, uncertainties and other
important factors that could cause actual results to differ materially from
those expressed or implied in the forward-looking statement. These include, but
are not limited to, sales, earnings and volume growth, competitive conditions,
production costs, currency valuations, global economic and industry conditions,
and the other factors described in "Forward-Looking Statements" in the Company's
Form 10-K for the fiscal year ended April 29, 2000, as updated from time to time
by the Company in its subsequent filings with the SEC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be furnished by Item 601 of Regulation S-K are
listed below and are filed as part hereof. The paragraph numbers correspond to
the exhibit numbers designated in Item 601 of Regulations S-K.
27. Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended July 29,
2000.
<PAGE> 20
19
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: September 12, 2000
By: /s/ LINDA HUETT
--------------------------------------------
Linda Huett
President and Director
(Principal Executive Officer)
Date: September 12, 2000
By: /s/ THOMAS S. KIRITSIS
--------------------------------------------
Thomas S. Kiritsis
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
