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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Weight Watchers International, Incorporated
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Weighco Enterprises, Incorporated and Subsidiaries (the "Company") at December
30, 2000, and the results of their operations and their cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
On December 11, 2000, the Company entered into an Asset Purchase Agreement with
Weight Watchers International, Incorporated ("WWI"), under which WWI was to
acquire substantially all of the assets of the Company. The acquisition was
completed on January 16, 2001 and is more fully described in Note 15 to the
consolidated financial statements.
Pricewaterhousecoopers, LLP
March 3, 2001
Charlotte, NC
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WEIGHCO ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 30, 2000
ASSETS
Current assets:
Cash $ 6,172,489
Accounts receivable 25,226
Inventories 2,139,007
Prepaid member materials 476,619
Prepaid consulting and other expenses 492,996
------------
Total current assets 9,306,337
------------
Property and equipment, net 1,553,703
------------
Other assets:
Cash surrender value - life insurance 511,319
Intangible assets, net 35,647,444
Other non-current assets 196,254
------------
Total other assets 36,355,017
------------
Total assets $ 47,215,057
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - current portion $ 4,080,000
Accounts payable 2,156,604
Accrued expenses 6,456,142
Interest payable 345,434
Deferred income 2,694,820
Deferred compensation 1,000,000
------------
Total current liabilities 16,733,000
------------
Long-term liabilities:
Notes payable - net of current portion 21,203,345
------------
Stockholders' equity:
Common stock - $.331/3 par value, 30,000 shares authorized;
shares issued and 16,783 outstanding 5,593
Additional paid-in capital 3,107,941
Treasury stock - at cost, 2,189 shares (2,189)
Retained earnings 6,167,367
------------
Total stockholders' equity 9,278,712
------------
Total liabilities and stockholders' equity $ 47,215,057
============
The accompanying notes are an integral part of these consolidated financial
statements.
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WEIGHCO ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 30, 2000
REVENUES:
Meeting income $ 51,661,934
Product sales 8,027,742
------------
Total revenue 59,689,676
------------
COST OF REVENUE:
Meeting and facility expenses 20,579,961
Cost of products sold 3,889,031
Franchise royalty fees 5,959,779
------------
Total cost of revenue 30,428,771
------------
Gross profit 29,260,905
OPERATING EXPENSES:
General and administrative expenses 5,934,717
Marketing expense 4,114,108
Management and incentive compensation (Note 13) 3,786,749
Amortization expense 3,307,040
Acquisition related expenses (Note 15) 8,929,493
------------
Income from operations 3,188,798
------------
Other income (expense):
Interest income 238,858
Interest expense (2,430,107)
Loss on sale of franchise (226,945)
Other (24,154)
------------
Total other expense (2,442,348)
------------
Net income $ 746,450
============
The accompanying notes are an integral part of these consolidated financial
statements.
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WEIGHCO ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 30, 2000
ADDITIONAL TOTAL
COMMON COMMON PAID-IN TREASURY RETAINED STOCKHOLDERS'
SHARES STOCK CAPITAL STOCK EARNINGS EQUITY
BALANCES, DECEMBER 25, 1999 16,400 $5,466 $2,954,534 $(2,189) $7,485,343 $10,443,154
Shares issued 383 127 153,407 - - 153,534
Net income - - - - 746,450 746,450
Stockholder distributions - - - - (2,064,426) (2,064,426)
------ ------ ---------- ------- ---------- -----------
BALANCES, DECEMBER 30, 2000 16,783 $5,593 $3,107,941 $(2,189) $6,167,367 $9,278,712
====== ====== ========== ======= ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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WEIGHCO ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 30, 2000
OPERATING ACTIVITIES:
Net income $ 746,450
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 6,847,022
Loss from sale of franchise 226,945
Changes in:
Accounts receivable 6,313
Prepaid member materials and expenses (249,376)
Inventories (695,099)
Other non-current assets (168,986)
Accounts payable and accrued expenses 4,175,075
Deferred compensation and revenue 1,435,243
------------
Net cash provided by operating activities 12,323,587
------------
INVESTING ACTIVITIES:
Acquisition of franchises (7,262,815)
Purchase of property and equipment (793,316)
Proceeds from sale of franchise 365,000
------------
Net cash used by investing activities (7,691,131)
------------
FINANCING ACTIVITIES:
Stockholder distributions (2,064,426)
Repayment of borrowings and line of credit (6,026,914)
Proceeds from borrowings and line of credit 3,976,462
Proceeds from common shares issued 153,534
------------
Net cash used by financing activities (3,961,344)
------------
Net increase in cash 671,112
Cash, beginning of year 5,501,377
------------
Cash, end of year $ 6,172,489
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 2,227,423
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Cash paid for franchise taxes $ 120,039
============
The accompanying notes are an integral part of these consolidated financial
statements.
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WEIGHCO ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 2000
1. NATURE OF BUSINESS
Weighco Enterprises, Incorporated (the "Company") was incorporated on
January 26, 1988 and was organized under the laws of the State of
Delaware. Weighco Enterprises, Incorporated, prior to April 28, 2000 was
previously known as Weighco of Florida, Incorporated. The Company
operates and conducts meetings as a Weight Watchers International
("WWI") franchise in the states of Florida, Georgia, Alabama, Texas,
Oklahoma, North and South Carolina, Washington and Alaska.
On December 11, 2000, the Company entered into an Asset Purchase
Agreement with Weight Watchers International, Incorporated ("WWI"),
under which WWI was to acquire substantially all of the assets of the
Company. The acquisition was completed on January 16, 2001 and is
further described in Note 15.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Weighco
Enterprises, Incorporated and its wholly-owned subsidiaries, Weighco of
Southwest, Inc. and Weight Watchers Northwest, Inc., after elimination
of all material intercompany accounts and transactions.
CASH EQUIVALENTS
The Company considers short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents. The
Company invests excess cash reserves daily in Repurchase Agreements and
Government Securities.
PREPAID MEMBER MATERIALS
Prepaid member materials consists of promotional and educational
material provided to program participants.
INVENTORIES
Inventories, consisting principally of cookbooks, points managers, mugs
and other resale items, are stated at the lower of cost, as determined
on an average cost basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated on the
straight-line method over the estimated useful lives of the assets. When
assets are retired or otherwise disposed of, the cost and related
depreciation are removed from the accounts and any related gains or
losses are included in income.
INTANGIBLES
Goodwill, franchise costs and other intangibles arising from
acquisitions are amortized on a straight-line basis over the estimated
useful lives of the assets.
The carrying values of intangible assets are reviewed for impairment by
management at least annually, or whenever changes in circumstances or
events indicate that such carrying values may not be recoverable, by
assessing the recoverability of such assets through estimated
undiscounted future net cash flows.
REVENUE RECOGNITION
The Company earns revenue by conducting meetings and by selling products
and aids. Revenue is recognized when services are rendered and products
are sold. Deferred revenue, consisting of prepaid lecture income, is
recognized in income over the period earned.
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WEIGHCO ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 2000
ADVERTISING COSTS
It is the Company's policy to expense advertising costs as incurred.
Advertising costs totaled approximately $3.4 million for the year ended
December 30, 2000.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. ACQUISITIONS
In December 1999, the Company acquired twenty-five (25%) percent of the
outstanding stock of Weight Watchers of British Columbia, Ltd. ("British
Columbia") for $25,000. In October 2000, this investment interest was
sold at cost to a stockholder of the Company.
On March 28, 2000, the Company purchased certain assets and franchise
rights of Weight Watchers of Greater Washington State, Inc. and Weight
Watchers of Alaska, Inc. The transaction was accounted for as a
purchase, and accordingly, the consolidated financial statements of
Weighco Enterprises, Inc. include the results of operations of Weight
Watchers of Greater Washington State, Inc. and Weight Watchers of
Alaska, Inc. from the date of acquisition. The franchises were purchased
for $9,330,000 and $650,000, respectively, paid through a combination of
cash ($6,500,000) and the issuance of a note payable to the seller
($3,480,000). The purchase price was allocated to current assets
($110,000) and intangibles and other assets ($9,870,000) based on the
estimated fair values of assets acquired and liabilities assumed, if
any, at the date of acquisition.
Unaudited sales and operating income of the acquired franchises were
approximately $2.3 million and $315,000, respectively, for the three
months ended March 31, 2000.
The Company capitalized professional fees totaling approximately
$113,000 related to these acquisitions. Other expenses, including travel
and meals, totaled approximately $77,000 and were recorded as general
and administrative expenses in the statement of operations.
4. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2000 is summarized as follows:
USEFUL
LIVES
Furniture and fixtures 5 - 7 years $1,268,222
Machinery and equipment 5 - 10 years 880,544
Leasehold improvements Term of lease 833,664
---------
2,982,430
Less accumulated depreciation (1,428,727)
---------
$1,553,703
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Depreciation expense totaled $164,648 for the year ended December 30,
2000.
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WEIGHCO ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 2000
5. INTANGIBLES
Intangibles as of December 31, 2000 are summarized as follows:
USEFUL
LIVES
Franchise costs and tradenames 30 - 40 years $41,003,392
Goodwill 40 years 905,129
Noncompete agreements Term of agreement 6,100,000
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48,008,521
Less accumulated amortization (12,361,077)
-----------
$35,647,444
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Amortization expense totaled $6,682,374 for the year ended December 30,
2000. Of this amount, $3,375,334 related to write-offs of non-compete
agreements (see Note 15) and has been classified as part of acquisition
related expenses.
6. COMMITMENTS
The Company entered into a management agreement with Weight Watchers of
North Carolina, Inc. ("WWNC"). The agreement permits the Company to
conduct all activities contained in the restated franchise agreement
with Weight Watchers International, Inc. ("WWI"). This agreement
provides for annual royalty fees of $350,000, payable in quarterly
installments, without interest and secured by a bank letter of credit.
The management agreement was terminated in conjunction with the
acquisition, and WWNC was sold to the Company and included in assets
purchased by WWI.
The Company is obligated, under franchise agreements with WWI, to pay
monthly royalty fees of 10% of the gross receipts from meeting and
certain product sales of the Company. Total royalty fees were
approximately $5,182,864 in the year ended December 30, 2000. These
agreements were terminated upon the sale of the Company to WWI.
The Company is obligated under various deferred compensation, incentive
bonus and consulting agreements entered into as part of various
franchise acquisitions. As discussed in Note 15, these agreements were
terminated and settled through various payments upon the sale of the
Company to WWI.
7. INCOME TAXES
The Company has elected treatment as a small business corporation (S
Corporation) for Federal and state income tax purposes and accordingly,
the Company has not recorded an income tax provision for the year ended
December 30, 2000 or for any prior periods.
8. CONCENTRATIONS
The Company maintains cash and cash equivalents balances at various
financial institutions, which are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to $100,000. At certain times during
the year, the Company's cash balances may exceed this limit. Cash and
cash equivalents held with financial institutions exceeding FDIC limits
was approximately $5,329,000 as of December 30, 2000. The Company has
not experienced any losses associated with these balances.
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WEIGHCO ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 2000
In the course of its operations, the Company grants trade credits to its
customers. Due to the number and geographic dispersion of its customers,
the Company does not have any significant concentrations of business
transacted with a particular customer. However, the Company purchases
substantially all of its inventory from WWI under the provisions of
their various franchise agreements.
9. LINE OF CREDIT
The Company has a revolving credit line of $2.1 million with a bank.
Borrowings under the line of credit accrue interest at 3/4% below the
prime rate (8.75% at December 30, 2000) and is payable on demand. The
line of credit is collateralized by inventories, property and equipment,
and customer contacts. The line of credit expires March 30, 2001. At
December 30, 2000, the Company had no balances outstanding under the
line of credit.
10. NOTES PAYABLE
Notes payable consist of the following:
Note payable - H.J. Heinz Company, interest payable annually
each March at 9%, principal installments of $250,000
annually each March, note matures March 2003 $2,015,000
Bank note payable $33,333 per month, plus interest at prime minus 1/2% (9% at
December 30, 2000), maturing January 2003 when all outstanding principal
and interest are due 1,688,345
Bank notes payable in escalating monthly principal payments, plus interest at
prime (9.5% at December 30, 2000), maturing in October 2005 14,500,000
Various bank notes payable in monthly installments ranging from $8,333 -
$50,000, over their respective terms, plus interest at prime minus 1/2% (9%
at December 30, 2000), maturing at various dates through August 2004 3,600,000
Note payable to former owners of acquired franchises in annual installments of
$580,000 through March 2006, plus interest at 8% 3,480,000
-----------
25,283,345
Less: current portion 4,080,000
-----------
Long-term portion $21,203,345
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The various notes payable are collateralized by franchise agreements and
various assets of the Company and certain guarantees as defined in the
respective agreements. Certain of these notes contain restrictions,
which include limitations on subsequent indebtedness, prohibitions
against guarantees, limits on stockholder distributions, and future
consolidation or merger of the Company.
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WEIGHCO ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 2000
Following are the maturities of notes payable for each for the next five
years and in the aggregate as of December 30, 2000:
2001 $4,080,000
2002 4,830,000
2003 6,683,337
2004 4,530,000
2005 4,580,008
Thereafter 580,000
-----------
$25,283,345
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The outstanding notes payable were paid in full subsequent to year-end
in conjunction with the acquisition of the Company.
11. LEASING ARRANGEMENTS
The Company leases space for its executive offices and meeting
facilities under operating leases expiring in various years through
2005. Certain of the leases contain provisions for renewal at the option
of the Company upon expiration. Following are the approximate annual
future minimum lease payments under noncancelable operating leases
having a remaining term in excess of one year as of December 30, 2000:
2001 $2,476,760
2002 1,603,661
2003 967,129
2004 470,986
2005 163,029
----------
$5,681,565
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Rent expense was approximately $4,657,000 in the year ended December 30,
2000.
12. STOCK INCENTIVE PLAN
The Company has 1995 and 1998 share appreciation plans whereby share
appreciation rights ("SARs") may be granted to officers and others.
Under the terms of the plans, SARs are valued as specified in the
Stockholders' Agreement. The SARs may be exercised in exchange for cash
or a combination of cash and the Company's stock, not to exceed 50% in
Company stock (at a value also specified in the Stockholders'
Agreement). Upon grant, the SARs vest at a rate of 20% per year. The
1995 SARs were fully vested as of December 31, 1999. The 1995 and 1998
SARs may be paid on or before March 31, 2003. In March 2000, settlement
for 482 of the 1995 SARs was made in the form of both cash and Company
stock. Compensation expense under the terms of the plans included in
operating expenses totaled $636,724 in the year ended December 30, 2000.
In conjunction with the acquisition of the Company and related
termination of these plans, an additional lump-sum payment was made and
included in acquisition related expenses, as described in Note 15.
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WEIGHCO ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 2000
13. MANAGEMENT AND INCENTIVE COMPENSATION
Management and incentive compensation consists primarily of amounts paid
to or for a certain stockholder of the Company, certain current and
former franchise owners and a certain officer of the Company. For the
year ended December 30, 2000, management and incentive compensation
included in operating expenses consists of the following:
Office expense paid to a stockholder $ 139,737
Management fees paid to a stockholder and a former franchise owner 240,000
Rental fees paid to an owner of a Company managed franchise 350,004
Key man life insurance premiums 79,284
Stock Appreciation Rights compensation expense 636,724
Incentive compensation paid to a stockholder, a former franchise owner
and an officer of the Company 2,341,000
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$3,786,749
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14. RELATED PARTY TRANSACTIONS
The Company has a management agreement with Grant Peacock & Company,
Inc. for financial, management, and administrative services. Grant
Peacock & Company, Inc. is owned by a stockholder of the Company. This
agreement has no expiration date and can be terminated by either party
at the end of any fiscal year. Fees incurred under this agreement
totaled $120,000 for the year ended December 30, 2000. The Company also
reimburses Grant Peacock & Company for certain expenses in performing
its management and administrative duties. Expenses reimbursed for the
year ended December 30, 2000 totaled $139,737. The management agreement
was terminated subsequent to year-end upon the acquisition of the
Company by WWI.
Grant Peacock & Company, Inc. is also entitled to an incentive
management fee based on net income of the Company after certain
adjustments. Incentive management fees included in operating results
totaled $1,472,000 in the year ended December 30, 2000. No future
payments will be made under this agreement.
Purchases from WWI of inventory and member materials totaled $4.7
million in the year ended December 30, 2000.
15. ACQUISITION OF THE COMPANY
On December 11, 2000, the Company entered into an Asset Purchase
Agreement with Weight Watchers International, Incorporated ("WWI"),
under which WWI was to acquire substantially all of the assets of the
Company. In connection with this agreement, the Company agreed to settle
and/or cancel various employment, compensation and non-compete
agreements, the cost of which totaled approximately $8,929,493 and is
included in acquisition related expenses in the statement of operations
for the year ended December 30, 2000 as follows:
Professional fees $ 167,638
Incentive compensation paid to an officer of the Company and
a former franchise owner 5,386,521
Additional amortization expense related to termination of
non-compete agreements 3,375,334
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$8,929,493
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The aforementioned acquisition was completed on January 16, 2001.
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