WeightWatchers 2007 Annual Report Download - page 31

Watchers meetings fees in the U.K. should be fully subject to 17.5% standard rated value added tax, or VAT. For
over a decade prior to April 1, 2005, HMRC had determined that Weight Watchers meetings fees in the U.K.
were only partially subject to 17.5% VAT. It is our view that this prior determination by HMRC should remain in
effect and this view was further supported on March 8, 2007 when the VAT Tribunal ruled that Weight Watchers
meetings in the U.K. should only be partially subject to 17.5% VAT. On May 3, 2007, HMRC appealed to the
High Court of Justice Chancery Division, or the High Court, against the VAT Tribunal’s ruling in our favor, and
the appeal at the High Court was heard in November 2007.
On January 21, 2008, the High Court ruled by denying HMRC’s appeal in part by upholding the VAT
Tribunal’s decision to the extent that, at the first meeting which members attend, meetings fees associated with
such meeting are partially subject to 17.5% VAT. However, the High Court allowed HMRC’s appeal in relation
to meetings subsequent to the first meeting and concluded that meetings fees associated with subsequent
meetings are fully subject to 17.5% VAT. We intend to vigorously defend the VAT Tribunal’s ruling and to file
an appeal in part against the High Court’s ruling in relation to meetings subsequent to the first meeting. We
expect HMRC to file an appeal in part against the High Court’s ruling in relation to the first meeting which
members attend. If Weight Watchers meetings fees in the U.K. are deemed to be fully subject to 17.5% VAT, we
estimate the amount owed to HMRC would be approximately $50 million as of the end of fiscal 2007, covering
fiscal years 2005 through 2007, against which we have recorded a reserve of $23.4 million as of the end of fiscal
2007, which represents management’s most appropriate estimate of loss. If we are ultimately unsuccessful in
establishing that Weight Watchers meetings fees in the U.K. are partially subject to 17.5% VAT, or if it is
determined that a greater proportion of Weight Watchers meetings fees as compared to HMRC’s prior rulings is
subject to 17.5% VAT, we may incur monetary liability in excess of reserves previously recorded and our U.K.
results of operations may be adversely affected in the future. It is also possible that our cash flows and results of
operations in a particular fiscal quarter may be adversely affected by this matter. However, it is the opinion of
management that the ultimate disposition of this matter, to the extent not previously provided for, will not have a
material impact on our financial position, or ongoing results of operations or cash flows.
On July 27, 2007, HMRC issued to us notices of determination and decisions that, for the period April 2001
to April 2007, our leaders and certain other service providers should have been classified as employees for tax
purposes and, as such, we should have withheld tax from the leaders and certain other service providers pursuant
to the PAYE and NIC collection rules and remitted such amounts to the HMRC. As of the end of fiscal 2007, the
assessment associated with the notices of determination and decisions is approximately $27 million. It is our
view that the U.K. leaders and other service providers identified by HMRC in its notices and decisions are self-
employed and no withholding by us was required. On September 3, 2007, we appealed HMRC’s notices and
decisions as to these classifications and against any amount of PAYE and NIC liability claimed to be owed by us.
We intend to vigorously pursue this appeal and, although there can be no assurances, we believe we will
ultimately prevail in our appeal. If such appeal is unsuccessful, it is possible that our cash flows and results of
operations in a particular fiscal quarter may be adversely affected by this matter. However, it is the opinion of
management that the disposition of this matter will not have a material impact on our financial position, or
ongoing results of operations or cash flows.
Due to the nature of our activities, we are also, at times, subject to pending and threatened legal actions that
arise out of the normal course of business. We have had and continue to have disputes with certain of our
franchisees. 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 our results of operations, financial condition or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our shareholders during the last quarter of the fiscal year ended
December 29, 2007.
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