UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

ý           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 2, 2005

 

 

WEIGHT WATCHERS INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

 

Virginia		11-6040273
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer 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.

 

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

 

 

The number of common shares outstanding as of April 29, 2005 was 102,917,320.

 

 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX

 

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
Unaudited Consolidated Balance Sheets as of April 2, 2005 and January 1, 2005		2
Unaudited Consolidated Statements of Operations for the three months ended April 2, 2005 and April 3, 2004		3
Unaudited Consolidated Statement of Changes in Shareholders’ Equity for the three months ended April 2, 2005 and for the fiscal year ended January 1, 2005		4
Unaudited Consolidated Statements of Cash Flows for the three months ended April 2, 2005 and April 3, 2004		5
Notes to Unaudited Consolidated Financial Statements		6-14
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15-23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 2.	Changes in Securities and Use of Proceeds and Issuer Purchases of Equity Securities	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Submission of Matters to a Vote of Security Holders	25
Item 5.	Other Information	25
Item 6.	Exhibits	26
Signatures		27
Exhibits		28

 

 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

 

		April 2, 2005			January 1, 2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	50,319		$	35,156
Receivables, net		27,521			21,778
Inventories, net		29,406			32,929
Prepaid expenses and other current assets		28,035			35,953
TOTAL CURRENT ASSETS		135,281			125,816
Property and equipment, net		16,526			17,480
Franchise rights acquired		556,709			557,121
Goodwill		25,121			25,125
Trademarks and other intangible assets, net		5,993			5,721
Deferred income taxes		75,369			77,964
Deferred financing costs and other noncurrent assets		6,538			6,959
TOTAL ASSETS		$	821,537		$	816,186
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Portion of long-term debt due within one year		$	3,000		$	3,000
Accounts payable		21,514			20,760
Accrued liabilities		72,611			62,252
Income taxes payable		39,806			34,684
Deferred income taxes		8,679			4,844
Deferred revenue		37,927			27,082
TOTAL CURRENT LIABILITIES		183,537			152,622
Long-term debt		388,375			466,125
Deferred income taxes		67			715
Other		719			285
TOTAL LIABILITIES		572,698			619,747
SHAREHOLDERS’ EQUITY
Common stock, $0 par; 1,000,000 shares authorized; 111,988 shares issued and outstanding		—			—
Treasury stock, at cost, 9,077 shares at April 2, 2005 and 9,575 shares at January 1, 2005		(234,093		)	(222,547		)
Deferred compensation		(1,818		)	(233		)
Retained earnings		477,899			413,425
Accumulated other comprehensive income		6,851			5,794
TOTAL SHAREHOLDERS’ EQUITY		248,839			196,439
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	821,537		$	816,186

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

		Three Months Ended
		April 2, 2005			April 3, 2004
Meeting fees, net		$	195,133		$	180,475
Product sales and other, net		108,613			100,892
Online subscription fees		26,252			—
Revenues, net		329,998			281,367
Cost of meetings, products and other		141,342			130,956
Cost of online subscriptions		6,736			—
Cost of revenues		148,078			130,956
Gross profit		181,920			150,411
Marketing expenses		61,103			46,538
Selling, general and administrative expenses		30,790			21,657
Operating income		90,027			82,216
Interest expense, net		4,736			4,400
Other (income)/expense, net		611			(3,733		)
Early extinguishment of debt		—			3,254
Income before income taxes and cumulative effect of accounting change		84,680			78,295
Provision for income taxes		33,052			29,597
Income before cumulative effect of accounting change		51,628			48,698
Cumulative effect of accounting change, net of tax		—			(11,941		)
Net income		$	51,628		$	36,757
Basic Earnings Per Share:
Income before cumulative effect of accounting change		$	0.50		$	0.46
Cumulative effect of accounting change, net of tax		—			(0.11		)
Net income		$	0.50		$	0.35
Diluted Earnings Per Share:
Income before cumulative effect of accounting change		$	0.49		$	0.45
Cumulative effect of accounting change, net of tax		—			(0.11		)
Net income		$	0.49		$	0.34
Weighted average common shares outstanding:
Basic		102,673			106,013
Diluted		104,610			108,563

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY
(IN THOUSANDS)

 

															Accumulated
															Other
		Common Stock					Treasury Stock					Deferred			Comprehensive			Retained
		Shares		Amount			Shares		Amount			Compensation			Income			Earnings			Total
Balance at January 3, 2004		111,988		$	—		5,639		$	(48,421	)	$	(214	)	$	6,266		$	223,557		$	181,188
Comprehensive Income:
Net income																		183,084			183,084
Translation adjustment, net of taxes of ($650)															(673		)				(673		)
Change in fair value of derivatives accounted for as hedges, net of taxes of ($128)															201						201
Total Comprehensive Income																					182,612
Stock options exercised							(732	)	2,955									(1,076		)	1,879
Tax benefit of stock options exercised																		7,678			7,678
Purchase of treasury stock							4,668		(177,081		)										(177,081		)
Restricted stock issued to employees												(162		)				162			—
Compensation expense on restricted stock awards												143									143
Cumulative effect of accounting change																		20			20
Balance at January 1, 2005		111,988		$	—		9,575		$	(222,547	)	$	(233	)	$	5,794		$	413,425		$	196,439
Comprehensive Income:
Net income																		51,628			51,628
Translation adjustment, net of taxes of $168															(229		)				(229		)
Change in fair value of derivatives accounted for as hedges, net of taxes of ($822)															1,286						1,286
Total Comprehensive Income																					52,685
Stock options exercised							(854	)	3,451									(1,597		)	1,854
Tax benefit of stock options exercised																		12,818			12,818
Purchase of treasury stock							356		(14,997		)										(14,997		)
Restricted stock issued to employees												(1,625		)				1,625			—
Compensation expense on restricted stock awards												40									40
Balance at April 2, 2005		111,988		$	—		9,077		$	(234,093	)	$	(1,818	)	$	6,851		$	477,899		$	248,839

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

 

		Three Months Ended
		April 2,			April 3,
		2005			2004
Cash provided by operating activities		$	108,076		$	85,174
Investing activities:
Capital expenditures		(1,563		)	(1,017		)
Website development expenditures		(496		)	—
Repayments from equity investment		—			4,917
Other items, net		(160		)	(100		)
Cash (used for)/provided by investing activities		(2,219		)	3,800
Financing activities:
Net increase/(decrease) in short-term borrowings		772			(1,209		)
Net proceeds from revolver		—			270,000
Payments of long-term debt		(77,750		)	(454,555		)
Proceeds from new term loan		—			150,000
Premium paid on extinguishment of debt and other costs		—			(321		)
Proceeds from stock options exercised		1,854			883
Repurchase of treasury stock		(14,997		)	(42,040		)
Deferred financing costs		—			(2,534		)
Cash used for financing activities		(90,121		)	(79,776		)
Effect of exchange rate changes on cash/cash equivalents and other		(573		)	(966		)
Impact of consolidating WeightWatchers.com		—			5,693
Net increase in cash and cash equivalents		15,163			13,925
Cash and cash equivalents, beginning of period		35,156			23,442
Cash and cash equivalents, end of period		$	50,319		$	37,367

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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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., its majority-owned subsidiaries and WeightWatchers.com, Inc. (“WeightWatchers.com” or “WW.com”), the entity required to be consolidated pursuant to Financial Accounting Standards Board Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”).  The term “WWI” as used throughout this document is used to indicate Weight Watchers International and its majority-owned subsidiaries.  The term “the Company” as used throughout this document is used to indicate WWI as well as WeightWatchers.com.  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 and adjustments required upon adoption of FIN 46R) necessary for a fair statement.

 

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 January 1, 2005 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 December 2004, the Financial Accounting Standards Board issued Statement No. 123R, “Share-Based Payment” (“FAS 123R”), which replaces FAS 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees.”  FAS 123R eliminates the option of using the intrinsic value method to record compensation expense related to stock-based awards to employees and instead requires companies to recognize the cost of such awards based on their grant-date fair value over the related service period of such awards.  In April 2005, the Securities and Exchange Commission approved a new rule that amended the effective date of FAS 123R, whereby the Company will now be required to adopt this standard beginning in the first quarter of 2006.

 

In accordance with FAS 123R, the Company has elected to apply the modified prospective transition method to all past awards outstanding and unvested as of the date of adoption and will recognize the associated expense over the remaining vesting period based on the fair values previously determined and disclosed as part of its pro-forma disclosures.  The Company will not restate the results of prior periods.  Prior to the effective date of FAS 123R, the Company will continue to provide the pro forma disclosures for past award grants as required under FAS 123.  The Company believes the pro forma disclosures in Note 2 to its consolidated financial statements for the year ended January 1, 2005 provide an appropriate short-term indicator of the level of expense that will be recognized in accordance with FAS 123R.  However, the total expense recorded in future periods will depend on several variables, including the number of share-based payment awards that are granted in future periods and the fair value of those awards.

 

The American Jobs Creation Act of 2004 (the “AJCA”) was enacted on October 22, 2004 and includes a special one-time deduction of 85% of certain foreign earnings repatriated to the U.S.  In December 2004, the FASB issued FSP FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the AJCA, allowing companies additional time to evaluate the effect of the AJCA on plans for reinvestment or repatriation of foreign earnings.  The Company is in the process of evaluating the effects of the repatriation provision; however, it does not expect to complete this

 

6

 

evaluation until after Congress or the U.S. Treasury Department provides further clarification on key elements of the provision.  As such, the Company has not concluded its analysis to determine whether, and to what extent, it might repatriate foreign earnings. The Company expects to be in a position to finalize the assessment within a reasonable amount of time after the issuance of clarifying Congressional or U.S. Treasury guidance.

 

2.     Summary of Significant Accounting Policies

 

For a complete discussion of the Company’s significant accounting policies, see “Summary of Significant Accounting Policies” beginning on page F-7 of the Company’s annual report on Form 10-K for the fiscal year ended January 1, 2005.

 

3.     Acquisitions

 

All acquisitions have been accounted for under the purchase method of accounting and, accordingly, earnings have been included in the consolidated operating results of the Company since the date of acquisition.  No acquisitions were made during the first quarter of 2005.  During fiscal 2004 the Company acquired certain assets of its franchises as outlined below.

 

On August 22, 2004, the Company completed the acquisition of certain assets of its Fort Worth franchisee, Weight Watchers of Fort Worth, Inc., for a purchase price of $30,000, which was financed through cash from operations.  The purchase price has been allocated to franchise rights ($29,421), fixed assets ($226), inventory ($286), and other assets ($67).  Pro forma results of operations, assuming this acquisition had been completed at the beginning of each period presented, would not differ materially from the reported results.

 

On May 9, 2004, the Company completed the acquisition of certain assets of its Washington, D.C. area franchisee, F-W Family Corporation (d/b/a Weight Watchers of Washington, D.C.) for a purchase price of $30,500, which was financed through cash from operations, plus assumed liabilities of $348.  The total purchase price has been allocated to franchise rights ($30,286), fixed assets ($300), inventory ($228) and other assets ($52).  Pro forma results of operations, assuming this acquisition had been completed at the beginning of each period presented, would not differ materially from the reported results.

 

4.     Goodwill and Intangible Assets

 

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company no longer amortizes goodwill or other indefinite lived intangible assets.  The Company performed its annual fair value impairment testing as of January 1, 2005 on its goodwill and other indefinite lived intangible assets and determined that no impairment existed.  Unamortized goodwill is due mainly to the acquisition of the Company by the H.J. Heinz Company in 1978.  Franchise rights acquired are due mainly to acquisitions of the Company’s franchised territories.  For the three months ended April 2, 2005, goodwill and franchise rights acquired decreased due to foreign currency fluctuations.

 

In accordance with SFAS No. 142, aggregate amortization expense for finite lived intangible assets was recorded in the amounts of $755 (including $482 for amortization of intangible assets of WeightWatchers.com) and $273 for the three months ended April 2, 2005 and April 3, 2004, respectively.

 

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The carrying amount of the Company’s finite-lived intangible assets was as follows:

 

 

Estimated amortization expense on the Company’s finite lived intangible assets for the next five fiscal years is as follows:

 

 

5.     Long-Term Debt

 

The Company’s long-term debt is entirely attributable to WWI.  WeightWatchers.com does not have any credit facilities.

 

WWI’s Credit Agreement dated as of January 16, 2001 and amended and restated as of December 21, 2001, April 1, 2003, August 21, 2003, January 21, 2004 and October 19, 2004 (the “Credit Facility”) consists of Term Loans and a revolving line of credit (“the Revolver”).

 

On January 21, 2004, WWI refinanced its Credit Facility as follows:  the Term Loan A, Term Loan B, and the transferable loan certificate (“TLC”) in the aggregate amount of $454,180 were repaid and replaced with a new Term Loan B in the amount of $150,000 and borrowings under the Revolver of $310,000.  In connection with this refinancing, available borrowings under the Revolver increased from $45,000 to $350,000.

 

Due to the early extinguishment of the Term Loans resulting from this refinancing, the Company recognized expenses of $3,254 for the three months ended April 3, 2004, which included the write-off of unamortized debt issuance costs of $2,933 and $321 of fees associated with the transaction.

 

On October 19, 2004, WWI increased its net borrowing capacity by adding an Additional Term Loan B to its existing Credit Facility in the amount of $150,000.  Coterminous with the previously existing Credit Facility, these funds were initially used to reduce borrowings under WWI’s Revolver, resulting in no increase in WWI’s net borrowing.

 

8

 

The Term Loan B and the Revolver bear interest at a rate equal to LIBOR plus 1.75% or, at WWI’s option, the alternate base rate (as defined in the Credit Facility) plus 0.75%.  The Additional Term Loan B bears interest at a rate equal to LIBOR plus 1.50%, or at WWI’s option, the alternative base rate (as defined in the Credit Facility), plus 0.50%.  In addition to paying interest on outstanding principal under the Credit Facility, WWI is required to pay a commitment fee to the lenders under the Revolver with respect to the unused commitments at a rate equal to 0.375% per year.

 

The Credit Facility contains customary covenants including covenants that in certain circumstances restrict WWI’s ability to incur additional indebtedness, pay dividends on and redeem capital stock, make other restricted payments, including investments, sell its assets and enter into consolidations, mergers and transfers of all or substantially all of its assets.  The Credit Facility also requires WWI to maintain specified financial ratios and satisfy financial condition tests.  The Credit Facility contains customary events of default.  Upon the occurrence of an event of default under the Credit Facility, the lenders may cease making loans and declare amounts outstanding to be immediately due and payable.

 

6.     Treasury Stock

 

On October 9, 2003, the Company, at the direction of WWI’s Board of Directors, authorized a program to repurchase up to $250,000 of the Company’s outstanding common stock.  The repurchase program allows for shares to be purchased from time to time in the open market or through privately negotiated transactions.  No shares will be purchased from Artal Luxembourg (as described in Note 1 of the Company’s Annual Report on Form 10-K for the year ended January 1, 2005) or its affiliates under the program.  During the three months ended April 2, 2005 and April 3, 2004, respectively, the Company purchased 356 and 1,116 shares of common stock in the open market at a total cost of $14,997 and $42,040.

 

7.     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 is calculated utilizing the weighted average number of common shares outstanding adjusted for the effect of dilutive common stock equivalents.

 

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The following table sets forth the computation of basic and diluted earnings per share:

 

 

For the three months ended April 2, 2005 and April 3, 2004, 42 and 387 stock options, respectively, were excluded from the calculation of weighted average shares for diluted EPS because their effects were anti-dilutive.

 

8.     Stock Plans

 

The Company has stock-based employee compensation plans and, as permitted by SFAS No. 123, continues to apply the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for those plans.  No compensation expense for employee stock options is reflected in earnings, as all options granted under the plans had an exercise price equal to the market value of the common stock on the date of grant.

 

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The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123:

 

 

9.     Income Taxes

 

Although consolidated for financial reporting purposes under FIN 46R, WWI and WeightWatchers.com are separate tax paying entities.

 

The effective tax rate for the three months ended April 2, 2005 and April 3, 2004 was 39.0% and 37.8%, respectively, on the consolidated results of the Company.  For the three months ended April 2, 2005 and April 3, 2004, 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.

 

10.  Transactions with WeightWatchers.com

 

WeightWatchers.com was formed on September 22, 1999 to develop and market safe, sensible online weight management products on the Internet.  WeightWatchers.com provides these weight management products to consumers through access to specified areas of its website, on a monthly subscription basis.  It also provides online marketing services to WWI.

 

For the first quarter of 2004, WWI’s transactions with WeightWatchers.com were not considered intercompany activities and therefore, the resulting income/(expense) has been included in the Company’s consolidated results of operations.  Beginning in the second quarter of 2004 with the adoption of FIN 46R, all transactions with WeightWatchers.com are now considered intercompany activities and therefore, eliminated in consolidation.

 

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Therefore, the Company’s consolidated results for the three months ended April 2, 2005 contain no income/(expense) related to WWI’s activities with WeightWatchers.com since all such activity was eliminated in consolidation.  However, the Company’s consolidated results for the three months ended April 3, 2004 include all the income/(expense) resulting from WWI’s activities with WeightWatchers.com that took place during that period.

 

Loan Agreement:

 

Pursuant to the amended loan agreement, dated September 10, 2001, between WWI and WeightWatchers.com, WWI provided loans to WeightWatchers.com through fiscal 2001 aggregating $34,500.  WWI has no further obligation to provide funding to WeightWatchers.com.  By the end of 2001, having reviewed the loan balances quarterly for impairment, WWI recorded a full valuation allowance against the balances.  Beginning on January 1, 2002, the loan bears interest at 13% per year, and beginning March 31, 2002, interest has been and shall be paid to WWI semi-annually.  All principal outstanding under the agreement is payable in six semi-annual installments which commenced on March 31, 2004.

 

Interest income on the WW.com loan recorded by the Company was $0 and $949 for the three months ended April 2, 2005 and April 3, 2004, respectively.  Other income recorded by the Company resulting from loan repayments was $0 and $4,917 for the three months ended April 2, 2005 and April 3, 2004, respectively.

 

Intellectual Property License:

 

WWI entered into an amended and restated intellectual property license agreement dated September 10, 2001 with WeightWatchers.com.  In fiscal 2002, WWI began earning royalties pursuant to the agreement.  Royalty income recorded by the Company was $0 and $1,954 for the three months ended April 2, 2005 and April 3, 2004, respectively.  These amounts are included in product sales and other, net.

 

Service Agreement:

 

Simultaneous with the signing of the amended and restated intellectual property license agreement, WWI entered into a service agreement with WeightWatchers.com under which WeightWatchers.com provides certain types of services.  WWI is required to pay for all expenses incurred by WeightWatchers.com directly attributable to the services it performs under this agreement, plus a fee of 10% of those expenses.  Service expense recorded by the Company was $0 and $558 for the three months ended April 2, 2005 and April 3, 2004, respectively.  These amounts were included in marketing expenses.

 

11.  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 all such matters is not expected to have a material effect on the Company’s results of operations, financial condition or cash flows.

 

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12.  Derivative Instruments and Hedging

 

The Company enters into interest rate swaps to hedge a substantial portion of its variable rate debt.  In addition, in fiscal 2004, the Company entered into forward and swap contracts to hedge transactions denominated in foreign currencies in order to reduce currency risk associated with fluctuating exchange rates.  These contracts were used primarily to hedge certain foreign currency cash flows and for payments arising from some of the Company’s foreign currency denominated debt obligations.  The Company no longer requires hedges for foreign currency fluctuations.  As of April 2, 2005, the Company held contracts to purchase interest rate swaps with notional amounts totaling $150,000 and to sell interest rate swaps with notional amounts totaling $150,000.  As of April 3, 2004, the Company held currency and interest rate swap contracts to purchase foreign currency and interest rate swaps with notional amounts totaling $209,156.  The Company also held separate foreign currency and interest rate swap contracts to sell foreign currency and interest rate swaps with notional amounts totaling $210,178.  The Company is hedging forecasted transactions for periods not exceeding the next 3 years.  At April 2, 2005, given the current configuration of its debt, the Company estimates that no derivative gains or losses reported in accumulated other comprehensive income will be reclassified to the Statement of Operations within the next 12 months.

 

As of April 2, 2005 and April 3, 2004, cumulative gains/(losses) for qualifying hedges were reported as a component of accumulated other comprehensive income in the amounts of $1,216, or $1,993 before taxes, and ($173), or ($283) before taxes, respectively.  For the three months ended April 2, 2005 there were no fair value adjustments since all hedges are considered qualifying.  For the three months ended April 3, 2004, fair value adjustments for non-qualifying hedges resulted in a decrease to net income of $202 ($330 before taxes), included within other expense, net.

 

13.  Comprehensive Income

 

Comprehensive income for the Company includes net income, the effects of foreign currency translation and changes in the fair value of derivative instruments.  Comprehensive income is as follows:

 

 

14.  Segment Data

 

Effective with the adoption of FIN 46R in the first quarter of 2004 (See Note 1), the Company now has two reportable operating segments: Weight Watchers International and WeightWatchers.com, its affiliate and licensee.  Since these are two separate and distinct businesses, the financial information for each company is maintained and managed separately.  The results of operations and assets for each of these segments are derived from each company’s financial reporting system.  All intercompany activity is eliminated in consolidation.  Since FIN 46R was adopted as of the last day of the first quarter of 2004, WeightWatchers.com’s results of operations for the three months ended April 3, 2004 have been included

 

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in the charge for the cumulative effect of accounting change.  Therefore, only total assets are shown by segment for the three months ended April 3, 2004.

 

Information about the Company’s reportable operating segments is as follows:

 

		Three Months Ended April 2, 2005
								Intercompany
		WWI			WW.com			Eliminations			Consolidated
Revenues from external customers		$	303,746		$	26,252		$	—		$	329,998
Intercompany revenue		2,633			598			(3,231		)	—
Total revenue		306,379			26,850			(3,231		)	329,998
Depreciation and amortization		2,042			1,040			—			3,082
Operating income		84,826			5,201			—			90,027
Interest expense, net		4,212			567			(43		)	4,736
Other (income)/expense, net		(9,332		)	109			9,834			611
Provision for taxes		34,989			1,898			(3,835		)	33,052
Net income		54,957			2,627			(5,956		)	51,628
Weighted average diluted shares outstanding											104,610
Total assets		$	801,914		$	27,129		$	(7,506	)	$	821,537

 

 

		Three Months Ended April 3, 2004
								Intercompany
		WWI			WW.com			Eliminations			Consolidated
Total assets		$	758,467		$	13,901		$	(10,369	)	$	761,999

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 1, 2005 that includes additional information about us, our results of operations, our financial position and our 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 Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 including, in particular, statements about our plans, strategies and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  We have used the words “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “intend,” and similar expressions in this Quarterly Report on Form 10-Q and the documents incorporated by reference in this Quarterly Report on Form 10-Q to identify forward-looking statements.  We have based these forward-looking statements on our current views with respect to future events and financial performance.  Actual results could differ materially from those 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, pharmaceutical, surgical, dietary supplements and meal replacement products, and other weight-loss brands, diets, programs and products;

 

•      risks associated with the relative success of our marketing and advertising;

 

•      risks associated with the continued attractiveness of our programs;

 

•      risks associated with our ability to meet our obligations related to our outstanding indebtedness;

 

•      risks associated with general economic conditions; and

 

•      more aggressive enforcement of existing legislation or regulation or a change in the interpretation of existing legislation or regulation.

 

You should not put undue reliance on any forward-looking statements.  You should understand that many important factors, including those discussed herein could cause our results to differ materially from those expressed or suggested in any forward-looking statements.  Except as required by law, we do 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 us, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Significant Accounting Policies” beginning on page 17 of our Annual Report on Form 10-K for the fiscal year ended January 1, 2005.  The critical accounting policies affecting us have not changed since January 1, 2005.

 

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RESULTS OF OPERATIONS

 

Figures are rounded to the nearest one hundred thousand; percentage changes are based on rounded figures.  Attendance percentage changes are based on rounded figures to the nearest thousand.

 

Impact of FIN 46R

 

As a result of our adoption of FIN 46R, we began consolidating the results of our affiliate and licensee, WeightWatchers.com, at the beginning of the second quarter 2004.  In the first quarter 2004, we recorded a cumulative charge to reflect the impact to our results of operations had WeightWatchers.com been consolidated since its inception at September 1999.  In the first quarter of 2005, we have consolidated the current period results of WeightWatchers.com.

 

The table below shows the impact this adoption had on the consolidated income statement for the three months ended April 2, 2005 and April 3, 2004.

 

		Three months ended April 2, 2005									Three months ended April 3, 2004
					Impact of			Company						Impact of			Company
		WWI			Adopting			Consolidated			WWI			Adopting			Consolidated
		Results			FIN 46R			Results			Results			FIN 46R			Results
Revenues		$	306.4		$	23.6		$	330.0		$	281.4		$	—		$	281.4
Cost of revenues		141.2			6.9			148.1			131.0			—			131.0
Gross profit		165.2			16.7			181.9			150.4			—			150.4
Marketing expenses		53.4			7.7			61.1			46.5			—			46.5
Selling, general and administrative expenses		27.0			3.8			30.8			21.7			—			21.7
Operating income		84.8			5.2			90.0			82.2			—			82.2
Interest expense, net		4.2			0.5			4.7			4.4			—			4.4
Other (income)/expense, net		(9.3		)	9.9			0.6			(3.8		)	—			(3.8		)
Early extinguishment of debt		—			—			—			3.3			—			3.3
Income before taxes and cumulative effect of accounting change		89.9			(5.2		)	84.7			78.3			—			78.3
Provision for income taxes		34.9			(1.8		)	33.1			29.6			—			29.6
Income before cumulative effect of accounting change		55.0			(3.4		)	51.6			48.7			—			48.7
Cumulative effect of accounting change		—			—			—			—			(11.9		)	(11.9		)
Net income		$	55.0		$	(3.4	)	$	51.6		$	48.7		$	(11.9	)	$	36.8
Weighted average diluted common shares outstanding		104.6			104.6			104.6			108.6			108.6			108.6
Diluted EPS		$	0.53		$	(0.04	)	$	0.49		$	0.45		$	(0.11	)	$	0.34

 

The impact of the consolidation on the three months ended April 2, 2005 is to add $23.6 million in revenues and $16.7 million of gross profit.  Operating income for the quarter increased by $5.2 million after incremental marketing expenses of $7.7 million, and selling, general and administrative expenses of $3.8 million.  Below operating income, loan repayments of $9.8 million made to Weight Watchers International by WeightWatchers.com in the quarter decrease income in consolidation. Since the loan was

 

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