WeightWatchers 2002 Annual Report Download - page 74

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. Income Taxes (Continued)
On September 29, 1999, the Company effected a recapitalization and stock purchase agreement
with its former parent, Heinz. For U.S. tax purposes, the Transaction was treated as a taxable sale
under IRC section 338(h)(10), resulting in a step-up in the tax basis of net assets and, recognition of a
deferred tax asset in the amount of $144,200. At the time of the Transaction, the Company determined
that it was more likely than not that a portion of the deferred tax asset would not be utilized.
Therefore, a valuation allowance of $72,100 was established against the corresponding deferred tax
asset. Based on the Company’s performance since the Transaction, the Company determined that the
valuation allowance was no longer required. Accordingly, the provision for taxes for the fiscal year
ended December 29, 2001 includes a one-time reversal (credit) of the remaining balance of the
valuation allowance of $71,903 related to the Transaction.
As of December 28, 2002 and December 29, 2001, various foreign subsidiaries of the Company had
net operating loss carry forwards of approximately $12,359 and $13,953, respectively, which can be
carried forward indefinitely.
As of December 29, 2001, the Company’s undistributed earnings of foreign subsidiaries are no
longer considered to be reinvested permanently. The Company will record a deferred tax liability or
asset, if any, based on the expected type of taxable or deductible amounts in future years, taking into
account any related foreign tax credits and withholding taxes. No deferred tax liability or asset was
required to be recorded for undistributed earnings of foreign subsidiaries as of December 28, 2002 and
December 29, 2001.
12. Related Party Transactions
WeightWatchers.com:
On September 29, 1999, the Company entered into a subscription agreement with
WeightWatchers.com, Artal and Heinz under which Artal, Heinz and the Company purchased common
stock of WeightWatchers.com for a nominal amount. The Company owns approximately 19.9% of
WeightWatchers.com’s common stock while Artal owns approximately 72.7% of WeightWatchers.com’s
common stock. The Company accounts for its investment in WeightWatchers.com under the equity
method of accounting.
Under the agreement with WeightWatchers.com, the Company granted it an exclusive license to
use its trademarks, copyrights and domain names on the Internet in connection with its online
weight-loss business. The license agreement provides the Company with control of how its intellectual
property is used. In particular, the Company has the right to approve WeightWatchers.com’s
e-commerce activities, strategies and operational plans, marketing programs, privacy policy and
materials publicly displayed on the Internet.
Under warrant agreements dated November 24, 1999, October 1, 2000, May 3, 2001, and
September 10, 2001, the Company has received warrants to purchase an additional 6,395 shares of
WeightWatchers.com’s common stock in connection with the loans that the Company has made to
WeightWatchers.com under the note described below. These warrants will expire from November 24,
2009 to September 10, 2011 and may be exercised at a price of $7.14 per share of
WeightWatchers.com’s common stock until their expiration. The exercise price and the number of
shares of WeightWatchers.com’s common stock available for purchase upon exercise of the warrants
may be adjusted from time to time upon the occurrence of certain events.
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