WeightWatchers 2007 Annual Report Download - page 88

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WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. Commitments and Contingencies
Legal:
On February 18, 2005, WWI settled two lawsuits with CoolBrands International, Inc. (“CoolBrands”) one
filed by WWI to enforce the termination provisions of the CoolBrands ice cream and frozen novelty license and
the other filed by CoolBrands against WWI and Wells Dairy, Inc. alleging breach of the CoolBrands license.
CoolBrands will no longer manufacture, sell, market or distribute ice cream and frozen novelty products using
WWI’s trademarks.
In March 2006, the Company agreed to settle a litigation filed on behalf of a purported class of employees
under the California Labor Code and the Federal Fair Labor Standards Act for $2,300 plus other costs and
expenses. The settlement was accrued for in fiscal 2005 and the funds were distributed in June 2007 following
final approval by the court.
On July 7, 2006, the Company filed an amended notice of appeal with the U.K. VAT and Duties Tribunal,
or VAT Tribunal, appealing a ruling by Her Majesty’s Revenue and Customs, or HMRC, that from April 1, 2005
Weight 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. The Company intends 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. The Company expects 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 $50,000 as of the end of fiscal
2007, covering fiscal years 2005 through 2007, against which we have recorded a reserve of $23,400 as of the
end of fiscal 2007, which represents management’s most appropriate estimate of loss. If the Company is
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
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