WeightWatchers 2005 Annual Report Download - page 56

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In accordance with the provisions of FAS 123R, we have 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 our pro-forma disclosures. We will not restate the results of prior
periods. Prior to the effective date of FAS 123R, we will continue to provide the pro forma disclosures
for past award grants as required under FAS 123. We believe the level of incremental expense that will
be recognized in accordance with FAS 123R for fiscal 2006 will be approximately $6.0 million.
However, the total expense recorded in future periods, including fiscal 2006, will depend on several
variables, including the number of stock-based 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 United
States. 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. This
legislation did not have a material impact to our results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to foreign currency fluctuations and interest rate changes. Our exposure to market
risk for changes in interest rates relates to interest expense of variable rate debt. Due to the repurchase
and retirement of the remaining balance of our 13% Senior Subordinated Notes in 2004, we no longer
have any fixed rate borrowings outstanding at December 31, 2005. Therefore, market interest rates no
longer affect the fair value of our long-term debt balances. Since 100% of our debt is now variable rate
based, any changes in market interest rates will cause an equal change in our net interest expense.
Other than inter-company transactions between our domestic and foreign entities, we generally do
not have significant transactions that are denominated in a currency other than the functional currency
applicable to each entity. From time to time we may enter into forward and swap contracts to hedge
transactions denominated in foreign currencies to reduce the currency risk associated with fluctuating
exchange rates. Realized and unrealized gains and losses from any of these transactions may be
included in net income for the period.
In addition, we enter into interest rate swaps to hedge a substantial portion of our variable rate
debt. Changes in the fair value of these derivatives will be recorded each period in earnings for
non-qualifying derivatives or accumulated other comprehensive income (loss) for qualifying derivatives.
Fluctuations in currency exchange rates may impact our shareholders’ equity. The assets and
liabilities of our non-U.S. subsidiaries are translated into U.S. dollars at the exchange rates in effect at
the balance sheet date. Revenues and expenses are translated into U.S. dollars at the weighted average
exchange rate for the period. The resulting translation adjustments are recorded in shareholders’ equity
as accumulated other comprehensive income (loss). In addition, fluctuations in the value of the euro
will cause the U.S. dollar translated amounts to change in comparison to prior periods.
Each of our subsidiaries, other than WeightWatchers.com, derives revenues and incurs expenses
primarily within a single country and, consequently, does not generally incur currency risks in
connection with the conduct of normal business operations.
Item 8. Financial Statements and Supplementary Data
This information is incorporated by reference to the ‘‘Consolidated Financial Statements and
Notes’’ on pages F-1 through F-35, including the report thereon of PricewaterhouseCoopers LLP on
page F-2.
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