WeightWatchers 2005 Annual Report Download - page 85

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WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
weeks. WeightWatchers.com’s fiscal year ends on December 31st of each year. This difference in fiscal
years does not have a material effect on the consolidated financial statements.
Consolidation:
On January 17, 2003, the Financial Accounting Standards Board (‘‘FASB’’) issued Interpretation
No. 46 (‘‘FIN 46’’), to clarify when an entity should consolidate another entity known as a variable
interest entity (‘‘VIE’’). The standard required that, under certain circumstances, separate businesses
with some common ownership be consolidated for financial reporting purposes. Upon adoption of the
original FIN 46, the Company would not have met those circumstances, and it therefore would not
have consolidated WeightWatchers.com’s financial statements.
On December 24, 2003, the FASB issued FIN 46R, which replaced FIN 46. FIN 46R is applicable
for financial statements issued for reporting periods after March 15, 2004. FIN 46R requires that an
entity consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the
VIE’s expected losses, will receive a majority of the VIE’s expected residual returns, or both.
Based on the revisions in FIN 46R, WWI was required to reevaluate its relationship with its
affiliate and licensee, WeightWatchers.com. In the course of this reevaluation, it determined that
WeightWatchers.com was a VIE under FIN 46R and that WWI was its primary beneficiary. Effective
April 3, 2004, the Company consolidated WeightWatchers.com. In accordance with the provisions of
FIN 46R, the Company recorded a charge of $11,941, including a tax charge of $9,866, in the quarter
ended April 3, 2004 for the cumulative effect of this accounting change. This charge reflected the
cumulative impact to the Company’s results of operations had WeightWatchers.com been consolidated
since its inception in September 1999. Beginning in the first fiscal quarter ended April 3, 2004, the
Company’s consolidated balance sheet includes the balance sheet of WeightWatchers.com. Effective at
the beginning of the second fiscal quarter of 2004, the Company’s consolidated statement of operations
and statement of cash flows include the results of WeightWatchers.com. All intercompany balances have
been eliminated in consolidation.
On June 13, 2005, the Company entered into an agreement to acquire control of
WeightWatchers.com. On July 1 and 2, 2005, the Company increased its ownership interest in
WeightWatchers.com from approximately 20% to approximately 53% by exercising its outstanding
warrants to purchase WeightWatchers.com stock and by acquiring all of the equity interest in
WeightWatchers.com not owned by Artal. On December 16, 2005, WeightWatchers.com repurchased all
of its shares owned by Artal giving the Company a 100% ownership interest in WW.com. Because the
Company gained operational control of WW.com as of July 2, 2005, and as of December 16, 2005, owns
100% of WW.com beginning with the third quarter of fiscal 2005, the Company consolidates 100% of
the results of operations and financial position of WW.com under the traditional rules of consolidation
rather than under the provisions of FIN 46R. Since the Company adopted FIN 46R on the last day of
the first quarter of 2004, the annual consolidated results of operations for the Company are not
comparable with respect to the inclusion of WeightWatchers.com’s results for all periods presented.
However, the financial position of the Company for all periods presented is comparable.
Use of Estimates:
The preparation of financial statements, in conformity with accounting principles generally
accepted in the United States of America, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
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