<Page>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2002
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 April 30, 2002 was
105,836,909.
<Page>
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<Table>
<Caption>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets as of March 30, 2002 and
December 29, 2001 2
Unaudited Consolidated Statements of Operations
for the three months ended March 30, 2002 and March 31, 2001 3
Unaudited Consolidated Statements of Changes in Shareholders' Deficit
and Comprehensive Income for the three months ended March 30, 2002,
and for the fiscal year ended December 29, 2001 4
Unaudited Consolidated Statements of Cash Flows
for the three months ended March 30, 2002 and March 31, 2001 5
Notes to Unaudited Consolidated Financial Statements 6 - 18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19 - 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
PART II. OTHER INFORMATION 26 - 27
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters To a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</Table>
<Page>
2
ITEM 1. FINANCIAL STATEMENTS
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
MARCH 30, DECEMBER 29,
2002 2001
--------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 34,494 $ 23,338
Receivables, net 16,634 13,619
Inventories, net 22,217 26,205
Prepaid expenses, other 18,879 20,717
--------------- --------------
TOTAL CURRENT ASSETS 92,224 83,879
Property and equipment, net 10,922 10,725
Notes and other receivables, noncurrent 243 325
Goodwill, trademarks and other intangible assets, net 288,029 241,165
Deferred income taxes 135,861 136,281
Deferred financing costs, other 10,252 10,473
--------------- --------------
TOTAL ASSETS $ 537,531 $ 482,848
=============== ==============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Portion of long-term debt due within one year $ 32,199 $ 15,699
Accounts payable 13,016 17,698
Accrued liabilities 61,429 52,454
Income taxes 22,771 9,139
Deferred revenue 20,725 13,020
--------------- --------------
TOTAL CURRENT LIABILITIES 150,140 108,010
Long-term debt 453,498 458,320
Deferred income taxes 3,169 3,169
Other 812 870
--------------- --------------
TOTAL LONG-TERM DEBT AND OTHER LIABILITIES 457,479 462,359
Redeemable preferred stock - 25,996
SHAREHOLDERS' DEFICIT
Common stock, $0 par; 1,000,000 shares authorized; 111,988 shares issued;
105,748 shares outstanding at March 30, 2002 and 105,500 shares at December 29, 2001 - -
Treasury stock, at cost, 6,240 shares at March 30, 2002 and 6,488 shares at December 29, 2001 (25,198) (26,196)
Accumulated deficit (36,470) (73,998)
Accumulated other comprehensive loss (8,420) (13,323)
--------------- --------------
TOTAL SHAREHOLDERS' DEFICIT (70,088) (113,517)
--------------- --------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT $ 537,531 $ 482,848
=============== ==============
</Table>
The accompanying notes are an integral part of the
consolidated financial statements.
<Page>
3
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
THREE MONTHS ENDED
--------------------------------------------
MARCH 30, MARCH 31,
2002 2001
-------------------- ------------------
(UNAUDITED)
Meeting fees, net $ 134,356 $ 111,446
Product sales and other, net 78,147 60,505
-------------------- ------------------
Revenues, net 212,503 171,951
Cost of revenues 96,017 77,443
-------------------- ------------------
Gross profit 116,486 94,508
Marketing expenses 29,325 27,100
Selling, general and administrative expenses 16,105 19,163
-------------------- ------------------
Operating income 71,056 48,245
Interest expense, net 10,814 14,120
Other income, net (621) (986)
-------------------- ------------------
Income before income taxes and minority interest 60,863 35,111
Provision for income taxes 23,553 11,815
-------------------- ------------------
Income before minority interest 37,310 23,296
Minority interest 26 58
-------------------- ------------------
Net income $ 37,284 $ 23,238
==================== ==================
Preferred stock dividends 254 375
-------------------- ------------------
Net income available to common shareholders $ 37,030 $ 22,863
==================== ==================
Net income per share:
Basic $ 0.35 $ 0.20
==================== ==================
Diluted $ 0.34 $ 0.20
==================== ==================
Weighted average common shares outstanding:
Basic 105,639 111,988
==================== ==================
Diluted 108,083 113,613
==================== ==================
</Table>
The accompanying notes are an integral part of the
consolidated financial statements.
<Page>
4
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' DEFICIT AND COMPREHENSIVE INCOME
(IN THOUSANDS)
<Table>
<Caption>
ACCUMULATED
COMMON STOCK TREASURY STOCK OTHER
------------------- -------------------- COMPREHENSIVE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT LOSS DEFICIT TOTAL
-------- -------- -------- --------- ------------- ----------- ------------
Balance at December 30, 2000 111,988 - - - $ (6,271) $ (216,507) $ (222,778)
Comprehensive Income:
Net income 147,187 147,187
Translation adjustment (3,132) (3,132)
Change in fair value of derivatives
accounted for as hedges (3,920) (3,920)
-----------
Total Comprehensive Income 140,135
-----------
Preferred stock dividend (1,500) (1,500)
Purchase of treasury stock 6,719 $ (27,132) - (27,132)
Stock options exercised (93) 375 (177) 198
Sale of common stock (138) 561 (36) 525
Cost of public equity offering (2,965) (2,965)
------- -------- -------- --------- ----------- ----------- -----------
Balance at December 29, 2001 111,988 - 6,488 (26,196) (13,323) (73,998) (113,517)
Comprehensive Income:
Net income 37,284 37,284
Translation adjustment 4,710 4,710
Change in fair value of derivatives
accounted for as hedges 193 193
-----------
Total Comprehensive Income 42,187
-----------
Preferred stock dividend (254) (254)
Stock options exercised (248) 998 (472) 526
Tax benefit of stock options exercised 970 970
------- -------- -------- --------- ----------- ----------- -----------
Balance at March 30, 2002 111,988 $ - 6,240 $ (25,198) $ (8,420) $ (36,470) $ (70,088)
======= ======== ======== ========= =========== =========== ===========
</Table>
The accompanying notes are an integral part of the
consolidated financial statements.
<Page>
5
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED
--------------------------------------
MARCH 30, MARCH 31,
2002 2001
---------------- ----------------
(UNAUDITED)
Cash provided by operating activities $ 73,154 $ 55,535
---------------- ----------------
Investing activities:
Capital expenditures (1,041) (691)
Advances and interest in equity investment - (5,863)
Acquisitions (46,548) (83,800)
Other items, net (161) (1,805)
---------------- ----------------
Cash used for investing activities (47,750) (92,159)
---------------- ----------------
Financing activities:
Net decrease in short-term borrowings (1,395) (629)
Proceeds from borrowings 58,500 60,000
Payment of dividends (1,249) -
Payments of long-term debt (45,602) (28,530)
Redemption of redeemable preferred stock (25,000) -
Proceeds from stock options exercised 526 -
---------------- ----------------
Cash (used for) provided by financing activities (14,220) 30,841
---------------- ----------------
Effect of exchange rate changes on cash and cash equivalents (28) (1,832)
Net increase (decrease) in cash and cash equivalents 11,156 (7,615)
Cash and cash equivalents, beginning of period 23,338 44,501
---------------- ----------------
Cash and cash equivalents, end of period $ 34,494 $ 36,886
================ ================
</Table>
The accompanying notes are an integral part of the
consolidated financial statements.
<Page>
6
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
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.
The Management's Discussion and Analysis of Financial Condition and
Results of Operations which follows these notes contains additional
information on the results of operations, the financial position and cash
flows of the Company. Those comments should be read in conjunction with
these notes. The Company's Annual Report on Form 10-K for the fiscal year
ended December 29, 2001 includes additional information about the Company,
its results of operations, its financial position and its cash flows, and
should be read in conjunction with this Quarterly Report on Form 10-Q.
RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards, or SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 addresses the mandatory use of the
purchase method of accounting for business combinations, elimination of
indefinite life goodwill amortization, a revised framework for testing
goodwill, impairment at a "reporting unit" level and new criteria for the
identification and potential amortization of other intangible assets. The
Company adopted SFAS No. 142 on December 30, 2001. See Note 3.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No.
143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and the accounting and reporting provisions of AICPA Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
and addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The Company adopted SFAS No. 144 on December
30, 2001 and will adopt SFAS No. 143 on December 29, 2002. The adoption of
SFAS No. 144 did not have a material impact on the Company's consolidated
financial position or results of operations, nor does the Company expect
the adoption of SFAS No. 143 to have any such material impact.
2. ACQUISITIONS
On January 18, 2002, the Company completed the acquisition of one of
its franchisees, Weight Watchers of North Jersey, Inc., pursuant to the
terms of an Asset Purchase Agreement executed on December 31, 2001 among
Weight Watchers of North Jersey, Inc., the Company and Weight Watchers
North America, Inc., a wholly-owned subsidiary of the Company. The
acquisition has been accounted for by the purchase method of accounting
and, accordingly, the results of operations are
<Page>
7
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
included in the financial statements from the date of acquisition.
Substantially all of the purchase price in excess of the net assets
acquired has been recorded as goodwill and other intangible assets.
Management is in the process of determining the allocation between goodwill
and other intangible assets and expects this allocation to be finalized
during the second quarter of fiscal 2002. The purchase price for the
acquisition was $46,500. The acquisition was financed through additional
borrowings pursuant to the Company's Amended and Restated Credit Agreement,
as amended on January 16, 2001 and December 21, 2001 (the "Credit
Facility"). See Note 4.
On January 16, 2001, the Company completed the acquisition of the
Company's franchised territories and certain business assets of Weighco
Enterprises, Inc., Weighco of Northwest, Inc., and Weighco of Southwest,
Inc. ("Weighco"), for an aggregate purchase price of $83,800 plus
acquisition costs of $577. The acquisition has been accounted for under the
purchase method of accounting and, accordingly, the results of operations
are included in the financial statements from the date of the acquisition.
Assets acquired include inventory ($1,884) and property and equipment
($1,801). The excess of investment over the net book value of assets
acquired at the date of acquisition resulted in goodwill of $80,692. The
acquisition was financed through additional borrowings of $60,000 obtained
pursuant to the Credit Facility, and cash from operations.
3. INTANGIBLE ASSETS
In accordance with SFAS No. 142, the Company has performed a fair
value impairment test on its goodwill and determined that no impairment
loss was necessary as of December 30, 2001. As of March 30, 2002, certain
intangible assets relating to the Company's acquisition of Weight Watchers
of North Jersey, Inc. have not been allocated from goodwill. The Company
expects this allocation to be finalized during the second quarter of fiscal
2002. See Note 2.
The carrying amount of amortized intangible assets as of March 30,
2002 and December 29, 2001 is as follows:
<Table>
<Caption>
MARCH 30, 2002 DECEMBER 29, 2001
------------------------------- -----------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED AMORTIZATION
AMOUNT AMORTIZATION AMOUNT AMORTIZATION PERIOD
-------------- -------------- ------------- ------------- ----------------
Trademarks
and other $ 21,565 $ 18,979 $ 21,238 $ 18,659 3 - 5 years
</Table>
Unamortized goodwill is due mainly to acquisitions of the Company's
franchised territories. The changes in the carrying amount of goodwill for
the three months ended March 30, 2002 is due to the acquisition of Weight
Watchers of North Jersey, Inc. and translation of the Company's foreign
subsidiaries into U.S. Dollars. Aggregate amortization expense of definite
lived intangible assets for the three months ended March 30, 2002 and March
31, 2001 was approximately $252 and $126, respectively.
<Page>
8
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Estimated amortization expense for the next five fiscal years is as
follows:
<Table>
2002 $ 942
2003 $ 690
2004 $ 621
2005 $ 474
2006 $ 79
</Table>
As required by SFAS No. 142, the results for the three months ended
March 31, 2001 have not been restated. A reconciliation of net income, as
if SFAS No. 142 had been adopted, is presented below for the three months
ended March 30, 2002 and March 31, 2001:
<Table>
<Caption>
THREE MONTHS ENDED
------------------------------------
MARCH 30, 2002 MARCH 31, 2001
---------------- ----------------
Reported net income available to common shareholders $ 37,030 $ 22,863
Addback: goodwill amortization (net of tax) - 1,452
---------------- ----------------
Adjusted net income available to common shareholders $ 37,030 $ 24,315
================ ================
Basic earnings per share:
Reported net income available to common shareholders $ 0.35 $ 0.20
Addback: goodwill amortization - 0.01
---------------- ----------------
Adjusted net income available to common shareholders $ 0.35 $ 0.21
================ ================
Diluted earnings per share:
Reported net income available to common shareholders $ 0.34 $ 0.20
Addback: goodwill amortization - 0.01
---------------- ----------------
Adjusted net income available to common shareholders $ 0.34 $ 0.21
================ ================
</Table>
4. LONG-TERM DEBT
In connection with the Transaction (See Note 5), the Company entered
into the Credit Facility. As amended on January 16, 2001, the Credit
Facility provided for (i) a $90,000 term loan A facility ("Term Loan A"),
(ii) a $75,000 term loan B facility ("Term Loan B"), (iii) an $87,000
transferable loan certificate ("TLC"), (iv) a $20,000 term loan D facility
("Term Loan D") and (v) a revolving credit facility with borrowings up to
$45,000 ("Revolving Credit Facility"). On December 21, 2001, the Credit
Facility was refinanced as follows: (i) Term Loan B, term Loan D and the
TLC in the amount of $71,000, $19,000 and $82,000, respectively were repaid
and replaced with a new Term Loan B of $108,000 and a new TLC of $64,000.
Borrowings under the Credit Facility are paid quarterly and bear interest
at rates which varied through the three months ended March 30, 2002 from
3.65% to 5.5%.
In addition, as part of the Transaction, the Company issued 150,000
USD denominated and 100,000 EUR denominated principal amount of 13% Senior
Subordinated Notes due 2009 (the "Notes") to qualified institutional
buyers. At March 30, 2002, the 100,000 EUR notes translated into 87,160 USD
denominated equivalent.
<Page>
9
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. REDEEMABLE PREFERRED STOCK
The Company issued one million shares of Series A Preferred Stock in
conjunction with a recapitalization and stock purchase agreement (the
"Transaction") with its former parent, H.J. Heinz Company ("Heinz"). The
liquidation preference of the Series A Preferred Stock is $25 per share.
On March 1, 2002, the Company redeemed from Heinz all of the Company's
Series A Preferred Stock for a redemption price of $25,000 plus accrued and
unpaid dividends. The redemption was financed through additional borrowings
of $12,000 under the Revolving Credit Facility and cash from operations.
6. EARNINGS PER SHARE
Basic earnings per share ("EPS") computations are calculated utilizing
the weighted average number of common shares outstanding during the periods
presented. Diluted EPS includes the weighted average number of common
shares outstanding and the effect of common stock equivalents. The
following table sets forth the computation of basic and diluted EPS.
<Table>
<Caption>
THREE MONTHS ENDED
--------------------------------
MARCH 30, MARCH 31,
2002 2001
-------------- --------------
Numerator:
Net income $ 37,284 $ 23,238
Preferred stock dividends 254 375
-------------- --------------
Numerator for basic and diluted EPS-net income available
to common shareholders $ 37,030 $ 22,863
-------------- --------------
Denominator:
Denominator for basic EPS-weighted-average shares 105,639 111,988
Effect of dilutive securities:
Stock options 2,444 1,625
-------------- --------------
Denominator for diluted EPS-weighted-average
shares 108,083 113,613
============== ==============
EPS:
Basic EPS $ 0.35 $ 0.20
============== ==============
Diluted EPS $ 0.34 $ 0.20
============== ==============
</Table>
<Page>
10
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. INCOME TAXES
The effective tax rate for the three months ended March 30, 2002 and
March 31, 2001 were 38.7% and 33.7%, respectively. For the three months
ended March 30, 2002, the primary differences between the U.S. federal
statutory tax rate and the Company's effective tax rate were state income
taxes, offset by lower statutory tax rates in certain foreign
jurisdictions. For the three months ended March 31, 2001, the primary
differences between the U.S. federal statutory tax rate and the Company's
effective tax rate were state income taxes, offset by lower statutory tax
rates in certain foreign jurisdictions and the deferred tax asset valuation
allowance.
8. WEIGHTWATCHERS.COM
LOAN AGREEMENT:
Pursuant to the amended loan agreement dated September 10, 2001,
between the Company and WeightWatchers.com, through fiscal year 2001, the
Company provided loans to WeightWatchers.com aggregating $34,500. The
Company is not required to provide any additional funding to
WeightWatchers.com. As WeightWatchers.com is an equity investee, and the
Company has been the only entity providing funding, through fiscal year
2001, the Company reduced its loan receivable balances by all of
WeightWatchers.com's losses. The remaining loan receivable balances were
then reviewed for impairment. As a result of such review, the Company
recorded a full valuation allowance against the remaining loan receivable
balances.
The note bears interest at 13% per year, beginning on January 1, 2002,
and beginning March 31, 2002, interest shall be paid to the Company
semi-annually. All principal outstanding under the agreement is payable in
six semi-annual installments commencing on March 31, 2004. For the three
months ended March 30, 2002, the Company recorded interest income of $1,100
on the note, for which payment in full was received in April 2002.
In addition, the Company has guaranteed an operating lease of
WeightWatchers.com for office space. The annual rental rate is $459 plus
increases for operating expenses and real estate taxes. The lease expires
in September 2003. If it is determined that WeightWatchers.com cannot meet
its obligations under the terms of the operating lease, the Company will be
required to fund this obligation and record a liability for the remaining
lease payments, less any estimated sublease revenues.
INTELLECTUAL PROPERTY LICENSE:
The Company entered into an amended and restated intellectual property
license agreement dated September 29, 2001, with WeightWatchers.com. In
fiscal 2002, the Company began earning royalties pursuant to the
agreement. For the three months ended March 30, 2002, the Company recorded
royalty income of $720, for which payment in full was received in May 2002.
9. 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
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11
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
part upon advice of legal counsel, the disposition of all such matters is
not expected to have a material effect on the Company's results of
operations, its financial condition and its cash flows.
10. DERIVATIVE INSTRUMENTS AND HEDGING
The Company enters into forward and swap contracts to hedge
transactions denominated in foreign currencies to reduce currency risk
associated with fluctuating exchange rates. These contracts are used
primarily to hedge certain foreign currency cash flows and for payments
arising from some of the Company's foreign currency denominated debt
obligations. In addition, the Company enters into interest rate swaps to
hedge a substantial portion of its variable rate debt. As of March 30,
2002 and March 31, 2001, the Company held currency and interest rate swap
contracts to purchase certain foreign currencies totaling $202,473 and
$202,011, respectively. The Company also held separate currency and
interest rate swap contracts to sell foreign currencies of $206,437
and $207,047, respectively.
As of March 30, 2002, losses of $82 ($51 net of taxes) for qualifying
hedges, were reported as a component of accumulated other comprehensive
loss. For the three months ended March 30, 2002, the ineffective portion of
changes in fair values of cash flow hedges were not material. Fair value
adjustments for non-qualifying hedges resulted in a reduction of net income
of $280 ($444 before taxes) for the three months ended March 31, 2002. In
addition, for the three months ended March 30, 2002 reclassification to
earnings from accumulated other comprehensive loss resulted in a decrease
to net income of $142 ($225 before taxes).
11. COMPREHENSIVE INCOME
Comprehensive income for the Company includes net income, the effects
of foreign currency translation and changes in fair value of derivative
instruments.
Comprehensive income is as follows:
<Table>
<Caption>
THREE MONTHS ENDED
------------------------------
MARCH 30, MARCH 31,
2002 2001
-------------- -------------
Net income $ 37,284 $ 23,238
Foreign currency translation adjustment 4,710 (3,950)
Change in fair value of derivatives
Cumulative effect of the adoption of SFAS 133 (5,086)
Current period changes in fair value of derivatives 193 -
-------------- -------------
Comprehensive income $ 42,187 $ 14,202
============== =============
</Table>
<Page>
12
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. GUARANTOR SUBSIDIARIES
The Company's payment obligations under the Notes are fully and
unconditionally guaranteed on a joint and several basis by the following
wholly-owned subsidiaries: 58 WW Food Corp.; Waist Watchers, Inc.; Weight
Watchers Camps, Inc.; W.W. Camps and Spas, Inc.; Weight Watchers Direct,
Inc.; W/W Twentyfirst Corporation; W.W. Weight Reduction Services, Inc.;
W.W.I. European Services Ltd.; W.W. Inventory Service Corp.; Weight
Watchers North America, Inc.; Weight Watchers UK Holdings Ltd.; Weight
Watchers International Holdings Ltd.; Weight Watchers (U.K.) Limited;
Weight Watchers (Exercise) Ltd.; Weight Watchers (Accessories &
Publication) Ltd.; Weight Watchers (Food Products) Limited; Weight Watchers
New Zealand Limited; BLTC Pty Ltd.; LLTC Pty Ltd.; Weight Watchers Asia
Pacific Finance Limited Partnership (APF); 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 Credit Facility.
Presented below is condensed consolidating financial information for
Weight Watchers International, Inc. ("Parent Company"), the Guarantor
Subsidiaries and the Non-Guarantor Subsidiaries (primarily companies
incorporated in European countries other than the United Kingdom). In the
Company's opinion, separate financial statements and other disclosures
concerning each of the Guarantor Subsidiaries would not provide additional
information that is material to investors. Therefore, the Guarantor
Subsidiaries are combined in the presentation below.
Investments in subsidiaries are accounted for by the Parent Company on
the equity method of accounting. Earnings of subsidiaries are, therefore,
reflected in the Parent Company's investments in subsidiaries' accounts.
The elimination entries eliminate investments in subsidiaries and
intercompany balances and transactions.
<Page>
13
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL UNAUDITED CONSOLIDATING BALANCE SHEET
AS OF MARCH 30, 2002
(IN THOUSANDS)
<Table>
<Caption>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,139 $ 17,529 $ 7,826 $ - $ 34,494
Receivables, net 1,817 11,577 3,240 - 16,634
Inventories - 17,547 4,670 - 22,217
Prepaid expenses, other 1,194 15,546 2,139 - 18,879
Intercompany (payables) receivables (169,490) 155,003 14,487 - -
---------- ------------ ------------ ------------ ------------
TOTAL CURRENT ASSETS (157,340) 217,202 32,362 - 92,224
Investment in consolidated subsidiaries 458,374 - - (458,374) -
Property and equipment, net 1,160 8,397 1,365 - 10,922
Notes and other receivables, noncurrent 243 - - - 243
Goodwill, trademarks and other intangibles, net 27,610 259,749 670 - 288,029
Deferred income taxes 34,699 100,073 1,089 135,861
Deferred financing costs, other 9,299 (435) 1,388 10,252
---------- ------------ ------------ ------------ ------------
TOTAL ASSETS $ 374,045 $ 584,986 $ 36,874 $ (458,374) $ 537,531
========== ============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES
Portion of long-term debt due within one year $ 31,719 $ 480 $ - $ - $ 32,199
Accounts payable 483 9,224 3,309 - 13,016
Accrued liabilities 27,405 25,846 8,178 - 61,429
Income taxes (7,933) 28,531 2,173 - 22,771
Deferred revenue - 19,081 1,644 - 20,725
---------- ------------ ------------ ------------ ------------
TOTAL CURRENT LIABILITIES 51,674 83,162 15,304 - 150,140
Long-term debt 389,978 63,520 - - 453,498
Deferred income taxes 2,481 112 576 - 3,169
Other - 525 287 - 812
---------- ------------ ------------ ------------ ------------
TOTAL LONG-TERM DEBT AND OTHER LIABILITIES 392,459 64,157 863 - 457,479
Shareholders' (deficit) equity (70,088) 437,667 20,707 (458,374) (70,088)
---------- ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' (DEFICIT) EQUITY $ 374,045 $ 584,986 $ 36,874 $ (458,374) $ 537,531
========== ============ ============ ============ ============
</Table>
The accompanying notes are an integral part of the
consolidated financial statements.
<Page>
14
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL UNAUDITED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 29, 2001
(IN THOUSANDS)
<Table>
<Caption>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,230 $ 8,804 $ 8,304 $ - $ 23,338
Receivables, net 2,638 9,229 1,752 - 13,619
Inventories - 21,902 4,303 - 26,205
Prepaid expenses, other 1,263 16,743 2,711 - 20,717
Intercompany (payables) receivables (157,902) 147,317 10,585 - -
---------- ------------ ------------ ------------ ------------
TOTAL CURRENT ASSETS (147,771) 203,995 27,655 - 83,879
Investment in consolidated subsidiaries 416,812 - - (416,812) -
Property and equipment, net 1,221 8,132 1,372 - 10,725
Notes and other receivables, noncurrent 325 - - - 325
Goodwill, trademarks and other intangibles, net 27,643 212,843 679 - 241,165
Deferred income taxes 35,253 101,028 - - 136,281
Deferred financing costs, other 9,626 (537) 1,384 - 10,473
---------- ------------ ------------ ------------ ------------
TOTAL ASSETS $ 343,109 $ 525,461 $ 31,090 $ (416,812) $ 482,848
========== ============ ============ ============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES
Portion of long-term debt due within one year $ 15,219 $ 480 $ - $ - $ 15,699
Accounts payable 1,287 14,077 2,334 - 17,698
Accrued liabilities 28,537 16,490 7,427 - 52,454
Income taxes (11,694) 18,544 2,289 - 9,139
Deferred revenue - 11,121 1,899 - 13,020
---------- ------------ ------------ ------------ ------------
TOTAL CURRENT LIABILITIES 33,349 60,712 13,949 - 108,010
Long-term debt 394,800 63,520 - - 458,320
Deferred income taxes 2,481 109 579 - 3,169
Other - 624 246 - 870
---------- ------------ ------------ ------------ ------------
TOTAL LONG-TERM DEBT AND OTHER LIABILITIES 397,281 64,253 825 - 462,359
Redeemable preferred stock 25,996 - - - 25,996
Shareholders' (deficit) equity (113,517) 400,496 16,316 (416,812) (113,517)
---------- ------------ ------------ ------------ ------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' (DEFICIT) EQUITY $ 343,109 $ 525,461 $ 31,090 $ (416,812) $ 482,848
========== ============ ============ ============ ============
</Table>
The accompanying notes are an integral part of the
consolidated financial statements.
<Page>
15
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 30, 2002
(IN THOUSANDS)
<Table>
<Caption>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
Revenues, net $ 1,510 $ 181,482 $ 29,511 $ - $ 212,503
Cost of revenues 60 80,122 15,835 - 96,017
---------- ------------ ------------ ------------ ------------
Gross profit 1,450 101,360 13,676 - 116,486
Marketing expenses - 24,743 4,582 - 29,325
Selling, general and administrative expenses 4,265 9,519 2,321 - 16,105
---------- ------------ ------------ ------------ ------------
Operating (loss) income (2,815) 67,098 6,773 - 71,056
Interest expense (income), net 8,625 2,379 (190) - 10,814
Other (income) expenses, net (1,410) 804 (15) - (621)
Equity in income of consolidated subsidiaries 36,807 - - (36,807) -
Franchise commission income (loss) 16,469 (14,821) (1,648) - -
---------- ------------ ------------ ------------ ------------
Income before income taxes and minority interest 43,246 49,094 5,330 (36,807) 60,863
Provision for income taxes 5,962 15,684 1,907 - 23,553
---------- ------------ ------------ ------------ ------------
Income before minority interest 37,284 33,410 3,423 (36,807) 37,310
Minority interest - - 26 - 26
---------- ------------ ------------ ------------ ------------
Net income $ 37,284 $ 33,410 $ 3,397 $ (36,807) $ 37,284
========== ============ ============ ============ ============
</Table>
The accompanying notes are an integral part of the
consolidated financial statements.
<Page>
16
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS)
<Table>
<Caption>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
Revenues, net $ 881 $ 141,574 $ 29,496 $ - $ 171,951
Cost of revenues 502 61,359 15,582 - 77,443
---------- ------------ ------------ ------------ ------------
Gross profit 379 80,215 13,914 - 94,508
Marketing expenses - 22,088 5,012 - 27,100
Selling, general and administrative expenses 6,079 10,750 2,334 - 19,163
---------- ------------ ------------ ------------ ------------
Operating (loss) income (5,700) 47,377 6,568 - 48,245
Interest expense (income), net 9,720 4,565 (165) - 14,120
Other (income) expenses, net (998) 12 - - (986)
Equity in income of consolidated subsidiaries 25,355 - - (25,355) -
Franchise commission income (loss) 13,074 (11,506) (1,568) - -
---------- ------------ ------------ ------------ ------------
Income before income taxes and minority interest 24,007 31,294 5,165 (25,355) 35,111
Provision for income taxes 769 9,313 1,733 - 11,815
---------- ------------ ------------ ------------ ------------
Income before minority interest 23,238 21,981 3,432 (25,355) 23,296
Minority interest - - 58 - 58
---------- ------------ ------------ ------------ ------------
Net income $ 23,238 $ 21,981 $ 3,374 $ (25,355) $ 23,238
========== ============ ============ ============ ============
</Table>
The accompanying notes are an integral part of the
consolidated financial statements.
<Page>
17
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 30, 2002
(IN THOUSANDS)
<Table>
<Caption>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
Cash provided by (used for) operating activities $ 53,428 $ 58,981 $ (2,448) $ (36,807) $ 73,154
-------- ----------- ------------ ------------ ------------
Investing activities:
Capital expenditures (25) (864) (152) - (1,041)
Acquisition - (46,548) - - (46,548)
Other items, net (64) (97) - - (161)
-------- ----------- ------------ ------------ ------------
Cash used for investing activities (89) (47,509) (152) - (47,750)
-------- ----------- ------------ ------------ ------------
Financing activities:
Net decrease in short-term borrowings (741) (654) - - (1,395)
Parent company investment in subsidiaries (41,562) - - 41,562 -
Proceeds from borrowings 58,500 - - - 58,500
Payment of dividends (1,249) - - - (1,249)
Payments on long-term debt (45,602) - - - (45,602)
Redemption of redeemable preferred stock (25,000) - - - (25,000)
Proceeds from stock options exercised 526 - - - 526
-------- ----------- ------------ ------------ ------------
Cash used for financing activities (55,128) (654) - 41,562 (14,220)
-------- ----------- ------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents 4,698 (2,093) 2,122 (4,755) (28)
Net increase (decrease) in cash and cash equivalents 2,909 8,725 (478) - 11,156
Cash and cash equivalents, beginning of period 6,230 8,804 8,304 - 23,338
-------- ----------- ------------ ------------ ------------
Cash and cash equivalents, end of period $ 9,139 $ 17,529 $ 7,826 $ - $ 34,494
======== =========== ============ ============ ============
</Table>
The accompanying notes are an integral part of the
consolidated financial statements.
<Page>
18
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS MARCH 31, 2001
(IN THOUSANDS)
<Table>
<Caption>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
Cash (used for) provided by operating activities $ (21,848) $ 100,650 $ 2,088 $ (25,355) $ 55,535
--------- ------------ ------------- ------------ ------------
Investing activities:
Capital expenditures (20) (546) (125) - (691)
Advances to equity investment (5,863) - - - (5,863)
Acquisition - (83,800) - - (83,800)
Other items, net (404) (1,346) (55) - (1,805)
--------- ------------ ------------- ------------ ------------
Cash used for investing activities (6,287) (85,692) (180) - (92,159)
--------- ------------ ------------- ------------ ------------
Financing activities:
Net decrease in short-term borrowings (355) (274) - - (629)
Parent company investment in subsidiaries (12,917) - - 12,917 -
Proceeds from borrowings 60,000 - - - 60,000
Payment of dividends - (8,488) - 8,488 -
Payments on long-term debt (28,313) (217) - - (28,530)
--------- ------------ ------------- ------------ ------------
Cash provided by (used for) financing activities 18,415 (8,979) - 21,405 30,841
--------- ------------ ------------- ------------ ------------
Effect of exchange rate changes on cash and cash equivalents (3,926) (975) (881) 3,950 (1,832)
Net (decrease) increase in cash and cash equivalents (13,646) 5,004 1,027 - (7,615)
Cash and cash equivalents, beginning of year 26,699 11,191 6,611 - 44,501
--------- ------------ ------------- ------------ ------------
Cash and cash equivalents, end of period $ 13,053 $ 16,195 $ 7,638 $ - $ 36,886
========= ============ ============= ============ ============
</Table>
The accompanying notes are an integral part of the
consolidated financial statements.
<Page>
19
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ended December 29, 2001 which
includes additional information about the Company, its results of operations,
its financial position and its cash flows. Except for historical information
contained herein, the matters discussed in this Quarterly Report on Form 10-Q
include "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to the Company's results
of operations, financial position, cash flows, financing plans and business
strategies. The Company has based these forward-looking statements on the
Company's 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:
- competition, including price competition and competition with
self-help, medical and other weight-loss programs and products;
- risks associated with the relative success of the Company's marketing
and advertising;
- risks associated with the continued attractiveness of the Company's
programs;
- risks associated with the Company's ability to meet its obligations
related to its outstanding indebtedness;
- risks associated with general economic conditions; 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.
You should not put undue reliance on any forward-looking statements. You
should understand that many important factors could cause the Company's results
to differ materially from those expressed or suggested in any forward-looking
statements. The Company does not undertake any obligation to publicly release
any revisions to these forward-looking statements to reflect events or
circumstances that occur after the date of this Quarterly Report or to reflect
the occurrence of unanticipated events.
CRITICAL ACCOUNTING POLICIES
For a discussion of the critical accounting policies affecting the Company,
see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Significant Accounting Policies" beginning on page 11 of
the Company's Annual Report on Form 10-K for the fiscal year ended December 29,
2001. The critical accounting policies affecting the Company have not changed
since December 29, 2001.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 30, 2002 TO THE THREE MONTHS ENDED
MARCH 31, 2001
Net revenues were $212.5 million for the three months ended March 30, 2002,
an increase of $40.5 million or 23.5%, from $172.0 million for the three months
ended March 31, 2001. Of the $40.5 million
<Page>
20
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
increase, $23.0 million was attributable to classroom meeting fees, $15.7
million to total company product sales, $1.3 million to franchise royalties
and $0.5 million to licensing, publications and other royalties. The
Company's business is seasonal, with revenues generally highest in the first
half of the fiscal year.
Classroom meeting fees were $134.4 million for the three months ended March
30, 2002 as compared to $111.4 million for the three months ended March 30,
2001. North American Company Owned ("NACO") classroom meeting fees were $90.3
million for the three months ended March 30, 2002, an increase of $26.1 million
or 40.7%, from $64.2 million for the three months ended March 31, 2001. The
increase in NACO classroom meeting fees was the result of a 35.9% increase in
member attendance. International company-owned classroom meeting fees were $44.1
million for the three months ended March 30, 2002, a decrease of $3.1 million or
6.6%, from $47.2 million for the three months ended March 31, 2001. The decrease
in international company-owned classroom meeting fees was the result of negative
exchange rate variances and a 2.2% decrease in member attendance.
Product sales were $65.5 million for the three months ended March 30, 2002,
an increase of $15.7 million or 31.5%, from $49.8 million for the three
months ended March 31, 2001. Product sales increased 48.4% to $41.1 million
domestically and 10.4% to $24.4 million internationally, reflecting the
Company's strategy to focus product sales efforts on core classroom products.
Average product sales per attendance have increased in all regions.
Franchise royalties were $7.9 million domestically and $1.6 million
internationally for the three months ended March 30, 2002. In total, franchise
royalties increased $1.3 million or 15.9%, from $8.2 million for the three
months ended March 31, 2001, on the strength of increased member attendance.
Royalties from licensing, publications and other were $3.1 million for the
three months ended March 30, 2002, up $0.5 million or 19.2%, from $2.6 million
for the three months ended March 31, 2001. This increase was primarily the
result of licensing royalty income from WeightWatchers.com.
Cost of revenues was $96.0 million for the three months ended March 30,
2002, an increase of $18.6 million or 24.0%, from $77.4 million for the three
months ended March 31, 2001. Gross profit margin was 54.8% for the three months
ended March 30, 2002, slightly lower than the 55.0% level of the three months
ended March 31, 2001.
Marketing expenses were $29.3 million for the three months ended March 30,
2002, an increase of $2.2 million or 8.1%, as compared to $27.1 million for the
three months ended March 31, 2001. The increase in marketing expenses was
primarily in support of the continued enrollment growth of the business. As a
percentage of net revenues, marketing expenses decreased from 15.8% for the
three months ended March 31, 2001 to 13.8% for the three months ended March 30,
2002.
Selling, general and administrative expenses were $16.1 million for the
three months ended March 30, 2002, a decrease of $3.1 million or 16.1%, from
$19.2 million for the three months ended March 31, 2001. The decrease in
selling, general and administrative expenses was the result of two items that
occurred in the three months ended March 31, 2001: a one-time charge of $4.0
million for the write-off of a receivable from a licensing agreement and $2.2
million of goodwill amortization. As a result of the adoption of SFAS Nos.
141 and 142, the Company no longer amortizes goodwill, but rather reviews
goodwill annually for impairment. These decreases were partially offset by an
increase in salary and incentive compensation for the three months ended March
30, 2002.
<Page>
21
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As a result of the above, operating income was $71.1 million for the three
months ended March 30, 2002, an increase of $22.8 million or 47.2%, from $48.3
million for the three months ended March 31, 2001.
Other income, net was $0.6 million for the three months ended March 30,
2002 as compared to $1.0 million for the three months ended March 31, 2001. In
the three months ended March 31, 2001, a loan to WeightWatchers.com was more
than offset by an unrealized currency gain. In the three months ended March 30,
2002, the Company experienced a lesser unrealized currency gain and did not make
any advances to WeightWatchers.com.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 30, 2002, the Company's primary source of
funds to meet working capital needs was cash from operations. Cash and cash
equivalents increased $11.2 million for the three months ended March 30, 2002,
to $34.5 million.
Cash flows of $73.2 million provided by operating activities and $58.5
million of proceeds from borrowings under the Company's Credit Facility were
used primarily for investing and financing activities.
Investing activities totaled $47.8 million in the three months ended March
30, 2002 and were primarily attributable to $46.5 million paid in connection
with the acquisition of the Company's North Jersey franchise and $1.0 invested
in capital expenditures. Capital spending consisted primarily of leasehold
improvements for meeting locations and administrative offices, computer
equipment for field staff and call centers, and information system upgrades.
Cash used for financing activities included repayments of $45.6 million in
principal on the Company's Credit Facility, the repurchase of one million shares
of the Company's preferred stock held by Heinz for $25.0 million, and the
cumulative final payment of $1.2 million of dividends on the Company's preferred
stock. In total, after proceeds from borrowings of $58.5 million, net cash used
for financing activities totaled $14.2 million.
The Company's total debt was $485.7 million and $474.0 million at March 30,
2002 and December 29, 2001, respectively. As of March 30, 2002, the Company had
approximately $28.5 million of additional borrowing capacity available under the
Company's Revolving Credit Facility.
The Company's debt consists of both fixed and variable-rate instruments. At
March 30, 2002 fixed-rate debt constituted approximately 48.9% of the Company's
total debt. The following schedule sets forth the Company's long term debt
obligations as of the three month period ended March 30, 2002.
<Page>
22
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LONG-TERM DEBT
AS OF MARCH 30, 2002
(in millions)
<Table>
<Caption>
BALANCE INTEREST RATE
----------- --------------
EURO $100.0 million 13% Senior
Subordinated Notes Due 2009 $ 87.2 13.00%
US $150.0 million 13% Senior
Subordinated Notes Due 2009 150.0 13.00%
Term A Loan due 2005 60.0 3.73%
Term B Loan due 2007 108.0 4.56%
Transferable Loan Certificate due 2007 64.0 4.24%
Revolving Credit Facility 16.5 3.65%
-----------
485.7
Less Current Portion (including revolver) (32.2)
-----------
Total Long-Term Debt $ 453.5
===========
</Table>
The term loan A facility, the term loan B facility, the transferable loan
certificate facility and the Revolving Credit Facility bear interest at a rate
equal to (a) in the case of the Term Loan A facility and the Revolving Credit
Facility, LIBOR plus 1.75% or, at the Company's option, the alternate base rate
(as defined in the Credit Facility) plus 0.75%, (b) in the case of the Term Loan
B facility and the transferable loan certificate facility, LIBOR plus 2.50% or,
at the Company's option, the alternate base rate plus 1.50%. In addition to
paying interest on outstanding principal under the Credit Facility, the Company
is required to pay a commitment fee to the lenders under the Revolving Credit
Facility with respect to the unused commitments at a rate equal to 0.50% per
year.
The Company's Credit Facility contains covenants that restrict the
Company's ability to incur additional indebtedness, pay dividends on and redeem
capital stock, make other restricted payments, including investments, sell the
Company's assets and enter into consolidations, mergers and transfers of all or
substantially all of the Company's assets. The Company's Credit Facility also
requires the Company to maintain specified financial ratios and satisfy
financial condition tests. These tests and financial ratios become more
restrictive over the life of the Credit Facility.
The Company's obligations under the Notes are subordinate and junior in
right of payment to all of the Company's existing and future senior
indebtedness, including all indebtedness under the Credit Facility. The
indentures, pursuant to which the Notes were issued, restrict the Company's
ability to incur additional indebtedness, issue shares of disqualified stock and
preferred stock, pay dividends, make other restricted payments, including
investments, create limitations on the ability of the Company's subsidiaries to
pay dividends or make certain payments to the Company, merge or consolidate with
any other person or sell, assign, transfer, lease, convey or otherwise dispose
of all or substantially all of the Company's assets.
The Company's credit ratings by Moody's at March 30, 2002 for the Credit
Facility and the Notes were "Ba1" and "Ba3", respectively. The Company's credit
ratings by Standard & Poor's at March 30, 2002 for the Credit Facility and the
Notes were "BB - " and "B", respectively.
<Page>
23
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following schedule sets forth the Company's year by year long term debt
obligations as of March 30, 2002.
LONG-TERM DEBT OBLIGATIONS
(INCLUDING CURRENT PORTION)
AS OF MARCH 30, 2002
(in millions)
<Table>
<Caption>
Payments Due by Fiscal Year
---------------------------
Remainder of Year 2002 $ 28.6
2003 20.2
2004 17.6
2005 17.0
2006 1.7
Thereafter 400.6
-----------
Total $ 485.7
===========
</Table>
On January 18, 2002, the Company completed the acquisition of Weight
Watchers of North Jersey, Inc. for a purchase price of $46.5 million. The
acquisition was financed through additional borrowings under the Company's
Revolving Credit Facility.
On March 1, 2002, the Company redeemed all of the Company's Series A
Preferred Stock held by Heinz for a redemption price of $25.0 million plus
accrued and unpaid dividends. The redemption was financed through additional
borrowings of $12.0 million under the Revolving Credit Facility and cash from
operations.
Debt obligations due to be repaid in the next twelve months are expected to
be satisfied with operating cash flows. The Company is not aware of factors that
are reasonably likely to adversely affect liquidity trends or increase the
Company's risk beyond the risk factors presented in other Company filings. The
Company believes that cash flows from operating activities, together with
borrowings available under the Company's Revolving Credit Facility, will be
sufficient for the next twelve months to fund currently anticipated capital
expenditure requirements, debt service requirements and working capital
requirements. Our expected capital expenditure requirements include, but are not
limited to, leasehold improvements for meeting locations and administrative
offices, computer equipment for field staff and call centers and system
upgrades. Any future acquisitions, joint ventures or other similar transactions
could require additional capital and the Company cannot be certain that any
additional capital will be available on acceptable terms or at all. The
Company's ability to fund the Company's capital expenditure requirements,
interest and principal payment obligations and working capital requirements and
to comply with all of the financial covenants under the Company's 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 the Company's control.
OFF-BALANCE SHEET TRANSACTIONS
As part of its on-going business, the Company does not participate in
transactions that generate relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities, which would have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
<Page>
24
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RELATED PARTY TRANSACTIONS
For a discussion of related party transactions affecting the Company, see
"Item 13. Certain Relationships and Related Transactions" beginning on page 32
of the Company's Annual Report on Form 10-K for the fiscal year ended December
29, 2001. The related party transactions affecting the Company have not changed
since December 29, 2001.
SEASONALITY
The Company's business is seasonal, with revenues generally decreasing at
year end and during the summer months. The Company's advertising schedule
supports the three key enrollment-generating seasons of the year: winter, spring
and fall. Due to the timing of the Company's marketing expenditures,
particularly the higher level of expenditures in the first quarter, the
Company's operating income for the second quarter is generally the strongest,
with the fourth quarter being the weakest.
ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses the mandatory use of the purchase method of
accounting for business combinations, elimination of indefinite life goodwill
amortization, a revised framework for testing goodwill, impairment at a
"reporting unit" level and new criteria for the identification and potential
amortization of other intangible assets. The Company adopted SFAS No. 142 on
December 30, 2001. See Note 3 to the consolidated financial statements for
further discussion.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards, or SFAS No. 143, "Accounting for Asset
Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and the accounting and reporting provisions of AICPA
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," and
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The Company adopted SFAS No. 144 on December 30, 2001 and
will adopt SFAS No. 143 on December 29, 2002. The adoption of SFAS No. 144 did
not have a material impact on the Company's consolidated financial position or
results of operations nor does the Company expect the adoption of SFAS No. 143
to have any material impact.
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25
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Based on the overall interest rate exposure on the Company's fixed rate
borrowings at March 30, 2002, 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. Based
on variable rate debt levels at March 30, 2002, a 10% change in market interest
rates would have less than a 5% impact on the Company's net interest expense.
The Company uses foreign currency forward contracts to more properly align
the underlying sources of cash flow with the Company's debt servicing
requirements. At March 30, 2002, the Company had long-term foreign currency
forward contracts receivables with notional amounts of $44.0 million and Euro
76.0 million, offset by foreign currency forward contracts payables with
notional amounts of (pound)59.2 million and $21.9 million.
For a more detailed discussion of the quantitative and qualitative
disclosures about market risks affecting the Company, see Item 7A "Quantitative
and Qualitative Disclosure About Market Risk" beginning on page 21 of the
Company's Annual Report on Form 10-K for the fiscal year ended December 29,
2001. The Company's exposure to market risks has not changed materially since
December 29, 2001.
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26
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
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
Nothing to report under this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No exhibits are filed as part hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
March 30, 2002.
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27
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 2002
By: /s/ LINDA HUETT
-----------------------------------------------
Linda Huett
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 14, 2002
By: /s/ ANN M. SARDINI
-----------------------------------------------
Ann M. Sardini
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)