UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission File Number 1-10390
Berlitz International, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-355-0016
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
400 Alexander Park, Princeton, New Jersey 08540-6306
----------------------------------------- ----------
(Address of principal executive offices)
(609) 514-9650
--------------------------------------------------
Registrant's telephone number, including area code
N/A
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Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
The number of shares outstanding of the registrant's common stock, at the close
of business on August 13, 1997, is 9,656,013.
Page 1 of 19
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED JUNE 30,
(Dollars in thousands, except per share amounts)
1997 1996
-------- -------
Sales of services and products $ 95,005 $91,332
-------- -------
Costs and expenses:
Cost of services and products sold 54,974 53,482
Selling, general and administrative 29,192 28,859
Amortization of publishing rights, excess of cost
over net assets acquired, and other intangibles 3,137 3,115
Interest expense on long-term debt 1,752 1,940
Interest expense to affiliates 513 475
Other (income) expense, net (410) 57
-------- -------
Total costs and expenses 89,158 87,928
-------- -------
Income before income taxes and minority
interest in earnings of subsidiary 5,847 3,404
Income tax expense 3,747 1,927
Minority interest in earnings of subsidiary 151 471
-------- -------
Net income $ 1,949 $ 1,006
======== =======
Earnings per share $ 0.20 $ 0.11
======== =======
Average number of shares outstanding (000's) 9,543 9,434
======== =======
See accompanying Notes to the Consolidated Financial Statements.
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BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30,
(Dollars in thousands, except per share amounts)
1997 1996
--------- --------
Sales of services and products $ 183,434 $180,598
--------- --------
Costs and expenses:
Cost of services and products sold 108,040 107,607
Selling, general and administrative 58,333 56,856
Amortization of publishing rights, excess of cost
over net assets acquired, and other intangibles 6,286 6,349
Interest expense on long-term debt 3,511 3,956
Interest expense to affiliates 1,027 858
Other (income) expense, net (175) 92
--------- --------
Total costs and expenses 177,022 175,718
--------- --------
Income before income taxes and minority
interest in earnings of subsidiary 6,412 4,880
Income tax expense 4,070 3,222
Minority interest in earnings of subsidiary 225 448
--------- --------
Net income $ 2,117 $ 1,210
========= ========
Earnings per share $ 0.22 $ 0.12
========= ========
Average number of shares outstanding (000's) 9,475 9,733
========= ========
See accompanying Notes to the Consolidated Financial Statements.
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BERLITZ INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
June 30, December 31,
1997 1996
--------- ---------
ASSETS
Current assets:
Cash and temporary investments $ 29,263 $ 25,781
Accounts receivable, less allowance for
doubtful accounts of $2,089 and $1,914 40,907 36,048
Unbilled receivables 5,166 3,807
Inventories 9,579 10,260
Prepaid expenses and other current assets 8,135 6,815
--------- ---------
Total current assets 93,050 82,711
Property and equipment, net of accumulated
depreciation of $16,331 and $15,275 29,841 29,363
Publishing rights, net of accumulated
amortization of $3,884 and $3,504 18,101 18,864
Excess of cost over net assets acquired and
other intangibles, net of accumulated
amortization of $51,462 and $46,049 408,228 417,611
Other assets 13,183 12,696
--------- ---------
Total assets $ 562,403 $ 561,245
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,324 $ 10,741
Accounts payable 5,987 5,943
Deferred revenues 38,740 34,748
Payrolls and commissions 12,124 10,227
Income taxes payable 2,107 4,207
Accrued expenses and other current liabilities 11,738 11,713
--------- ---------
Total current liabilities 74,020 77,579
Long-term debt 56,137 56,353
Notes payable to affiliates 39,419 38,294
Deferred taxes and other liabilities 22,468 22,348
Minority interest 9,487 9,264
--------- ---------
Total liabilities 201,531 203,838
--------- ---------
Commitments and Contingencies (Note 6)
Shareholders' equity:
Common stock 1,003 1,003
Additional paid-in capital 372,518 368,658
Retained earnings 5,543 3,426
Cumulative translation adjustment (14,799) (10,037)
Treasury stock at cost (3,393) (5,643)
--------- ---------
Total shareholders' equity 360,872 357,407
--------- ---------
Total liabilities and shareholders'
equity $ 562,403 $ 561,245
========= =========
See accompanying Notes to the Consolidated Financial Statements.
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BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30,
(Dollars in thousands)
1997 1996
-------- --------
Cash flows from operating activities:
Net income $ 2,117 $ 1,210
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,296 9,819
Minority interest, provision for bad debts,
foreign exchange (gains) losses, net, and
gains on currency swap agreements 853 819
Changes in operating assets and liabilities (1,640) (5,757)
-------- --------
Net cash provided by operating activities 11,626 6,091
-------- --------
Cash flows from investing activities:
Capital expenditures (6,117) (7,175)
-------- --------
Net cash used in investing activities (6,117) (7,175)
-------- --------
Cash flows from financing activities:
Proceeds of note payable to affiliate -- 6,000
Payments to acquire treasury stock (5,643)
Proceeds from sale of treasury stock 6,110 --
Repayment of long-term debt (7,617) (5,782)
-------- --------
Net cash used in financing activities (1,507) (5,425)
-------- --------
Effect of exchange rate changes on cash and
temporary investments (520) (613)
-------- --------
Net increase (decrease) in cash and temporary investments 3,482 (7,122)
Cash and temporary investments, beginning of period 25,781 25,402
-------- --------
Cash and temporary investments, end of period $ 29,263 $ 18,280
======== ========
Supplemental disclosures of cash flow information:
Cash payments for:
Interest $ 3,077 $ 3,526
======== ========
Income taxes $ 6,294 $ 2,887
======== ========
Cash refunds of income taxes $ 150 $ 415
======== ========
See accompanying Notes to the Consolidated Financial Statements.
5
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BERLITZ INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. General
a) Basis of Preparation - The Consolidated Financial Statements of
Berlitz International, Inc. (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and are unaudited. The
information reflects all adjustments which are of a normal recurring
nature which are, in the opinion of management, necessary for a fair
presentation of such financial statements. The financial statements
should be read in conjunction with the financial statements and
related notes to the Company's 1996 Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission.
b) Derivative Financial Instruments - Those currency coupon swap
agreements which have been designated by the Company as hedges of
its investments in certain foreign subsidiaries are considered
effective as hedges to the extent that quarterly changes in the fair
value of the agreements do not exceed the quarterly effect of
exchange rate changes on the underlying net investment. When these
agreements are effective, realized and unrealized gains and losses
are excluded from the Company's Consolidated Statements of
Operations, and included, net of deferred taxes, in the cumulative
translation adjustment of shareholders' equity. If the change in any
fiscal quarter in an agreement's fair value exceeds the exchange
rate fluctuation's effect on the underlying investment, such excess
is recognized in the Consolidated Statement of Operations within
"Foreign exchange (gains) losses, net". If, as a result of the
Company's periodic evaluation, it can no longer be established that
an agreement will prospectively be effective, the hedge accounting
described above is discontinued and all subsequent changes in the
agreement's fair value are recognized within the Consolidated
Statement of Operations.
c) Reclassifications - Certain reclassifications have been made to the
prior period financial statements to conform to the 1997
presentation.
2. Long-Term Debt
Long-term debt consists of the following:
June 30, December 31,
1997 1996
------- -----------
Term Loan $ 3,103 $10,500
Senior Notes 56,000 56,000
Other 358 594
------- -------
Total 59,461 67,094
Less current maturities 3,324 10,741
------- -------
Long-term debt $56,137 $56,353
======= =======
3. Fair Values of Financial Instruments
The carrying amounts and estimated fair values of the Company's financial
instruments at
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June 30, 1997 and December 31, 1996 were as follows:
1997 1996
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Assets:
Cash and temporary investments $29,263 $29,263 $25,781 $25,781
Currency coupon swap agreements 394 394 228 228
Liabilities:
Long-term debt, including
current maturities 59,461 63,495 67,094 71,652
Notes payable to affiliates 39,419 34,376 38,294 32,926
Currency coupon swap agreements 327 327 694 694
For cash and temporary investments, the carrying amount approximates fair
value due to their short maturities. The fair values of long-term debt and
notes payable to affiliates are estimated based on the interest rates
currently available for borrowings with similar terms and maturities. The
fair values of the coupon swap agreements represent the amounts that could
be settled based on estimates obtained from a dealer. The value of these
swaps will be affected by future interest rates and exchange rates.
4. Other (Income) Expense, net
Three months Three months
June 30, 1997 June 30, 1996
------------- -------------
Interest income on temporary investments $(187) $(168)
Foreign exchange (gains) losses, net (136) 186
Other non-operating taxes 86 190
Other investment income, net (100) (79)
Other income, net (73) (72)
----- -----
Total other (income) expense, net $(410) $ 57
===== =====
Six months Six months
June 30, 1997 June 30, 1996
------------- -------------
Interest income on temporary investments $(331) $(344)
Foreign exchange losses, net 74 258
Gain on currency coupon swap agreement -- (399)
Other non-operating taxes 249 299
Term Loan administration fee 150 150
Other investment income, net (199) (49)
Other (income) expense, net (118) 177
----- -----
Total other (income) expense, net $(175) $ 92
===== =====
5. Earnings Per Share
Earnings per share ("EPS") are computed by dividing net income by the
weighted average number of shares outstanding during the period. Primary
and fully diluted EPS are the same since the Company had no common stock
equivalents during the periods presented.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" ("SFAS 128"), which simplifies the
standards for computing EPS. SFAS 128 replaces the standards for computing
and presenting EPS found in Accounting Principles Board Opinion No. 15,
"Earnings Per Share" ("APB 15"). SFAS 128 requires dual presentation of
Basic (which replaces APB 15's Primary EPS) and Diluted EPS on the face of
the income statement for all entities with complex capital structures, and
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provides guidance on other computational changes. SFAS 128 will be
effective for financial statements for the year ended December 31, 1997,
including interim periods to be presented therein; however, earlier
application is not permitted. The Company does not expect that the
adoption of this statement will have a material effect on its calculation
of EPS, given the relatively small number of common stock equivalents
expected to be outstanding during 1997.
6. Contingencies
In October 1996, the Internal Revenue Service ("IRS") issued a deficiency
notice to the Company relating to its 1989, 1990, 1992 and 1993 Federal
tax returns. The Company is contesting the deficiency notice and believes
that any liability that may ultimately result is adequately provided for
at June 30, 1997. During the six months ended June 30, 1997, the Company
made a payment of $2.5 million to the IRS in connection with this notice.
7. Related Party Transaction
On April 29, 1997, the Company and Fukutake Holdings (America), Inc.
("FHAI"), a wholly owned subsidiary of Benesse Corporation ("Benesse"),
signed a definitive contract whereby the Company agreed to sell to FHAI
250,000 shares of Common at $24.44 per share, the average market price for
the ten days ended on April 29, 1997. This transaction, which was approved
by the Disinterested Directors Committee of the Company's Board of
Directors, was closed on May 12, 1997. The Company used 250,000 of its
treasury shares to complete this transaction, which was a private
placement exempt from registration under the Securities Act of 1933. It is
expected that proceeds of the sale will be used for general corporate
purposes. Following this private placement, Benesse beneficially owned
6,985,338 shares, or 72.34%, of the 9,656,013 shares of Common then
outstanding.
The issuance of the treasury shares under this private placement was
accounted for using the cost method, whereby the excess sale price per
share over the $9 cost per share was allocated to additional
paid-in-capital.
8. Stock Option and Incentive Plans
On April 17, 1997, the Compensation Committee of the Company's Board of
Directors approved a modification to the Company's 1996 Stock Option Plan
(the "Plan") whereby the total number of shares for which options may be
granted is 377,000. The Company has reserved 377,000 of its treasury
shares for use under the Plan, which was approved by the Company's
shareholders on May 15, 1997.
The Company granted 327,200 options under the Plan on June 30, 1997 (the
"June 1997 Options") at an exercise price of $24.9375, equal to the
closing price of the Company's common stock on the New York Stock Exchange
on the date of grant. Included within the 327,200 options are 100,250
options for Soichiro Fukutake, Chairman of the Board of Directors, of
which 50,000 have been granted (the "Relinquishment Options") in exchange
for the complete relinquishment by Mr. Fukutake of all benefits under the
Company's Supplemental Executive Retirement Plan ("SERP").
8
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The June 1997 Options may not be exercised prior to January 1, 1999. On
such date, they become fully exercisable until their normal expiration on
June 29, 2004, except for the Relinquishment Options, which expire on
December 31, 1999. Unexercised June 1997 Options expire earlier upon the
grantee's termination of service with the Company, unless a grantee's
service terminates by reason of death, disability, retirement after age
60, or termination by the Company other than for cause.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123"), issued in October 1995,
establishes financial accounting and reporting standards for stock-based
employee compensation plans. As permitted by SFAS 123, the Company
continues to apply APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations in accounting for its stock-based
employee compensation plans. Accordingly, no compensation expense has been
recognized for the grants under the Plan. Had compensation expense been
determined based on the fair value of awards at their grant date, as
contemplated by SFAS 123, the pro forma effects on net income and earnings
per share for the quarter and year-to-date periods ended June 30, 1997
would not have differed from the Company's reported results, due to the
grants occurring on the last day of the quarter.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model. The following
weighted-average assumptions were used for the June 30, 1997 grants under
the Plan: dividend yield of zero percent; expected volatility of 23%; risk
free interest rates of 5.79% for the Relinquishment Options and 6.08% for
all others; and expected lives of 1 1/2 years for the Relinquishment
Options and 4.25 years for all others. The fair value of each option
granted under the Plan on June 30, 1997 was $3.81 for the Relinquishment
Options and $7.50 for all others.
9. Subsequent Event
On July 23, 1997, the Company entered into an agreement to acquire ELS
Educational Services, Inc., a privately held provider of intensive English
language instruction, in a stock acquisition for a cash purchase price of
$95.0 million. Closing of the acquisition, which is subject to certain
conditions, including regulatory approvals, is expected to occur by early
September.
Financing for the transaction, and simultaneous refinancing of the
Company's existing long-term debt including related costs, will be
provided through bank borrowings in the aggregate principal amount of
$165.0 million. In connection with this refinancing, the Company has
provided notice to the holders of its Senior Notes of its intention to
settle such Notes during the 1997 third quarter and to pay related
prepayment penalties which are subject to adjustment, based upon movements
in U.S. Treasury interest rates, until three business days prior to the
date of prepayment. As a result of this early extinguishment of debt, the
Company anticipates incurring a third quarter extraordinary charge, net of
related tax benefit, of approximately $6.6 million, subject to final
adjustment and including prepayment penalties and the write-off of
unamortized deferred financing costs.
In anticipation of the refinancing transaction, the Company has also
entered into a forward
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start, five year interest rate swap agreement, effective July 1997, which
provides for quarterly exchanges of interest on an amortizing "notional"
(theoretical) amount originally set at $66.0 million. This agreement is
designed to comply with a proposed covenant requiring a hedge of a portion
of the floating interest rate debt under the transaction. In exchange for
U.S. dollar denominated interest receipts based on variable LIBOR, the
Company must make U.S. dollar denominated interest payments based on a
fixed rate of 6.30%. Credit loss from counterparty non-performance is not
anticipated. The Company will account for these interest rate swap
transactions under the accrual method of accounting, whereby: a) each net
receipt/payment is recognized in earnings during the period to which the
receipt/payment relates, as a yield adjustment to "Interest expense on
long-term debt"; b) gains and losses on terminated agreements are
amortized over the underlying debt obligations remaining life as a yield
adjustment; and c) there is no recognition on the balance sheet for the
derivative's fair value.
10
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BERLITZ INTERNATIONAL, INC.
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the attached
Consolidated Financial Statements and Notes thereto and with the Company's
audited Consolidated Financial Statements and Notes thereto for the fiscal year
ended December 31, 1996. Certain statements contained within this discussion
constitute forward looking statements. See "Special Note Regarding Forward
Looking Statements."
Beginning in 1997, the Company split its Asia division into two operating
divisions: Japan, and Asia (the latter consisting of all other countries within
the region). The following discussion reflects this change.
Results of Operations - Three Months Ended June 30, 1997 vs.
Three Months Ended June 30, 1996
Sales for the quarter ended June 30, 1997 were $95.0 million, 4.0% above the
same period in the prior year. This increase was due to operating activity
results in the Instruction and Translation business segments, partially offset
by unfavorable exchange rate fluctuations of $5.7 million, (primarily the result
of a strengthening dollar against the Japanese yen, the German mark, and most
other European currencies).
Language Instruction sales, excluding franchising activity, for the quarter
ended June 30, 1997 were $71.1 million, 1.7% above the same period in 1996, as
increases in Latin America, North America, and Asia were partially offset by
decreases in the other geographic divisions. The increase in Latin American
revenues ($2.1 million, or 18.7%) was primarily attributable to lesson volume
increases in all countries and average revenue per lesson ("ARPL") increases in
most countries, most notably Mexico. North America's sales growth ($0.9 million,
or 5.9%) primarily resulted from volume and ARPL improvements. Asia's sales rose
$0.4 million, or 47.4%, from 1996, primarily reflecting the startup of
operations in Singapore and improved volume in Hong Kong and Thailand. The sales
decline in Japan ($1.3 million, or 7.7%) primarily reflected unfavorable
exchange rate fluctuations ($2.1 million), partially offset by the effects of
special sales campaigns. Central/Eastern Europe's decrease ($0.7 million, or
4.6%) primarily reflects unfavorable exchange rate fluctuations ($2.0 million,
principally versus the German mark, the Swiss franc, the Austrian schilling and
the Polish zloty). This adverse exchange effect was partly mitigated by ARPL
improvements in most countries and by higher lesson volume, primarily in
Germany, Poland and Austria. The decline in Western Europe ($0.2 million, or
2.2%) was largely attributable to unfavorable exchange fluctuations, primarily
for France, Belgium and Spain, which were partially offset by volume increases
in France and Spain and by ARPL improvements in all
11
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countries except Holland.
During the three-month period ended June 30, 1997, the number of lessons given
was approximately 1.5 million, 9.1% above the same period in the prior year,
reflecting increases in all divisions. Lesson volume in North America and Japan
improved by 4.7% and 9.2%, respectively, due to improving economic conditions
and aggressive sales strategies. Lesson volume in Asia rose 32.8% from 1996,
reflecting the startup of operations in Singapore, and general growth in Hong
Kong. Latin America's lesson volume increased by 13.3% from prior year,
primarily reflecting improved economic conditions in the region. Lesson volume
in Central/Eastern Europe rose 11.0% over the prior year, primarily reflecting
improvements in most countries within the region, in particular Germany and
Poland, the latter of which is primarily due to improving market conditions and
newly opened language centers. Lesson volume in Western Europe improved 4.6%
from the 1996 second quarter.
For the 1997 second quarter, ARPL was $41.72, as compared to $44.66 in the
comparable prior-year period. The decline reflected the effect of unfavorable
exchange rate fluctuations of $3.16. ARPL ranged from a high of approximately
$61.89 in Brazil to a low of $12.81 in the Slovak Republic, reflecting effects
of foreign exchange rates and differences in the economic value of the service.
The Company opened three new language centers during the 1997 second quarter in
Chile, Israel and Mexico and sold two franchises in Austria and Costa Rica.
Translation segment sales were $20.7 million for the three-month period ended
June 30, 1997, an increase of $3.4 million, or 19.3%, from the same period in
1996, as results from operations were partially offset by unfavorable exchange
fluctuations of $0.6 million. The operations growth was primarily due to
activity in North America and Ireland. The North America revenue increase
resulted from the expansion of business of the existing client base, the
continued development of documentation translation services, and the timing of
certain contracts. Ireland's sales increase is the result of continued growth in
software related services. These increases were partially offset by a decrease
in revenue in Germany and Japan as a result of reorganization efforts and the
Scandinavian (Denmark, Finland, Norway and Sweden) region due to delay in
projects from a major customer.
Publishing segment sales were $3.5 million for the three months ended June 30,
1997, $0.6 million or 14.4% below 1996, primarily reflecting a decrease in
travel-related products worldwide, a delay in the release of certain titles, and
the difficult climate of the publishing retail industry. In addition, a delay in
the release of certain titles has resulted in a sales shortfall. Exchange rate
fluctuations did not significantly impact sales.
The Company's cost of services and products sold as a percentage of sales was
57.9% for the 1997 second quarter, compared to 58.6% in the same prior year
quarter. This change from the prior year reflected decreased percentages for
certain center-related operating expenses, partially offset by increases in
percentages for direct translator costs, primarily in Asia. Selling, general and
administrative expenses as a percentage of sales were 30.7% in the 1997 second
quarter, compared with 31.6% in the same prior year period. This improvement
resulted primarily from a lower percentage for advertising and from general cost
control measures.
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EBITA(1) for the three months ended June 30, 1997 was $10.8 million, or 11.4% of
sales, compared to $9.0 million, or 9.8% of sales, in the same prior year
period, reflecting improvements in the Instruction and Translations segments,
partially offset by an increase in non-segment related corporate expenses.
Instruction segment EBITA, excluding franchising activity, for the quarter ended
June 30, 1997 was $14.2 million, or 20.0% of segment sales, compared to $12.9
million, or 18.5% of segment sales, in the comparable prior year period. This
improvement was due to increased lesson volume, improvements in ARPL, and
general efforts to reduce expenses.
Translation segment EBITA for the three months ended June 30, 1997 was $ 2.0
million, or 9.6% of segment sales, compared to $0.5 million, or 2.7% of segment
sales, in the prior year. The 1997 EBITA results were positively affected by
continued expansion of software-related services, by growth from the recurring
client base, and by cost reduction efforts of certain general office and
administrative expenses. These positive results were partially offset by poor
results in Japan and Asia, where expansion and reorganization plans continue to
hamper financial results, and in the Scandinavian region due to a delay in
certain projects.
Publishing segment reported a break-even EBITA for the 1997 second quarter,
compared with a slight EBITA profit in the prior year. This decrease with the
prior year is due primarily to the sales shortfall, partially offset by the
absence of non-recurring prior year charges related to the shutdown of our
European production facility and by cost savings from the reorganization of the
production process.
Non-segment related corporate expenses, including an EBITA loss from franchising
activity, included in EBITA were $5.4 million for the three months ended June
30, 1997, compared with $4.5 million in the same prior year period. This
increase was primarily due to higher expenses in 1997 associated with: a)
franchising activity; b) the Company's Supplemental Executive Retirement Plan
(the "SERP"); c) the New Long-Term Executive Incentive Compensation Plan (the
"New LTIP"); and d) corporate training programs.
Interest expense on long-term debt for the three months ended June 30, 1997
decreased by $0.2 million, or 9.7%, from the comparable prior year period,
primarily due to scheduled principal repayments of the Company's long-term debt.
Other income, net for the three months ended June 30, 1997 increased $0.5
million primarily due to higher net foreign exchange gains.
The Company recorded an income tax expense of $3.7 million, or an effective rate
of 64.1%, during the current quarter. This compared to an income tax expense of
$1.9 million, or an effective rate of 56.6%, in the prior year's second quarter.
The effective tax rates in both 1997 and 1996 were above the U.S. Federal
statutory tax rate primarily as a result of nondeductible amortization charges.
- ----------
(1) EBITA as used herein is defined as sales less cost of services and products
sold, and selling, general and administrative expenses. It is calculated using
amounts determined in accordance with U.S. generally accepted accounting
principles ("U.S. GAAP"). EBITA is not a defined term under U.S. GAAP and is not
indicative of operating income or cash flows from operations as determined under
U.S. GAAP.
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Results of Operations - Six Months Ended June 30, 1997 vs.
Six Months Ended June 30, 1996
Sales for the six months ended June 30, 1997 were $183.4 million, 1.6% above the
same period in the prior year. This improvement was due to increases from
operating activity in the Instruction and Translation business segments,
partially offset by unfavorable exchange rate fluctuations of $10.8 million
(primarily the result of a strengthening dollar against the Japanese yen, the
German mark, and most other European currencies.)
Language Instruction sales, excluding franchising activity, for the six months
ended June 30, 1997 were $135.6 million, 0.6% below the same period in 1996, as
decreases in Japan, Central/Eastern Europe and Western Europe were partially
offset by increases in the other geographic divisions. The sales decline in
Japan ($3.6 million, or 10.9%) primarily reflected unfavorable exchange rate
fluctuations ($4.1 million). Central/Eastern Europe's decrease ($1.8 million, or
5.5%) primarily reflected unfavorable exchange rate fluctuations ($3.9 million,
principally versus the German mark and Swiss franc), partially offset by lesson
volume and ARPL increases in most countries within the division. The sales
decline in Western Europe ($1.0 million, or 4.7%) was attributable to
unfavorable exchange fluctuations ($1.9 million), primarily for France, Belgium
and Spain, partially offset by improvements in France due in large part to an
increase in volume from corporate clients. North America's sales increase ($2.0
million, or 6.9%) primarily resulted from volume and ARPL improvements. Asia's
sales improvement ($0.6 million, or 34.7%) mainly reflected the startup of
operations in Singapore. The increase in Latin American revenues ($3.0 million,
or 15.0%) was primarily attributable to volume increases in most countries. ARPL
improvements, most notably in Mexico, also favorably impacted Latin America
revenues.
During the six-month period ended June 30, 1997, the number of lessons given was
approximately 2.8 million, 5.5% above the same period in the prior year,
reflecting increases in all divisions. Lesson volume in North America and Japan
increased 4.8% and 4.9%, respectively, from the prior year due partly to special
sales campaigns. Lesson volume in Asia rose 21.3% from 1996, mainly reflecting
the startup of operations in Singapore. Lesson volume in Latin America increased
by 9.2% from prior year, primarily reflecting growth in all countries except
Chile, as well as the startup of operations in Lima, Peru. Lesson volume in
Central/Eastern Europe increased 5.9% over the prior year, primarily reflecting
an increase in Poland due to the opening of two new language centers toward the
latter part of 1996, and a recovery by Germany of its 1997 first quarter lesson
volume shortfall. Lesson volume in Western Europe improved by 0.7% from 1996,
primarily due to moderate increases in several countries including France, which
has shown an increase in sales to certain corporate clients. These increases
have more than offset decreased volume in certain other countries within the
division, particularly in Italy, whose economy continues to be stagnant.
For the 1997 first half, ARPL was $41.94, as compared to $44.89 in the
comparable prior-year period. The decline reflected the effect of unfavorable
exchange rate fluctuations of $3.23. ARPL ranged from a high of approximately
$60.94 in Brazil to a low of $14.54 in the Slovak Republic, reflecting effects
of foreign exchange rates and differences in the economic value of the service.
The Company opened four new language centers during the 1997 first half in
Chile, Israel, Mexico and Peru and sold four franchises in Austria, Costa Rica,
France, and Mexico.
Translation segment sales were $40.3 million for the six-month period ended June
30, 1997, an increase of $4.3 million, or 11.9%, from the same period in 1996,
as results from operations were
14
<PAGE>
partially offset by unfavorable exchange fluctuations of $0.9 million. The
operations growth was primarily due to an increase in Ireland, partially offset
by declines in Germany, Japan and the Scandinavian region. Ireland's revenue
increase resulted from continued growth in services provided in software-related
industries. Results in Germany and Japan were affected by general slowdowns in
local markets and certain reorganization efforts. Sales in the Scandinavian
region were negatively impacted by a delay in projects from a major customer.
Publishing segment sales were $7.2 million for the six months ended June 30,
1997, $0.9 million or 11.2% below 1996, primarily reflecting a decrease in
travel related products worldwide. Exchange rate fluctuations were not
significant.
The Company's cost of services and products sold as a percentage of sales was
58.9% for the first half of 1997, compared to 59.6% for the first half of 1996.
This change from the prior year reflected decreased percentages for certain
center-related operating expenses, partially offset by increases in percentages
for direct translator costs. Selling, general and administrative expenses as a
percentage of sales were 31.8% for the six months ended June 30, 1997, compared
with 31.5% during the first half of 1996. This increase was affected primarily
by higher administrative salary percentages, due in part to changes in
allocations of responsibilities under matrix management, partially offset by
lower advertising expenses.
EBITA for the six month period ended June 1997 was $17.1 million, or 9.3% of
sales, compared to $16.1 million, or 8.9% of sales, in the same prior year
period, reflecting EBITA improvements in all business segments, partially offset
by an increase in non-segment related corporate expenses.
Instruction segment EBITA, excluding franchising activity, for the six months
ended June 30, 1997 was $23.7 million, or 17.5% of segment sales, compared to
$23.0 million, or 16.9% of segment sales, in the same prior year period. This
improvement was largely due to increased lesson volume, improvements in ARPL,
and general efforts to reduce expenses.
Translation segment EBITA for the 1997 first half was $ 3.3 million, or 8.1% of
segment sales, compared to $2.2 million, or 6.2% of segment sales, in the prior
year. The 1997 EBITA results reflect the positive effects of expansion of
software-related services, continued growth in traditional documentation related
services, and the reduction of certain general corporate office and
administrative expenses, all of which were partially offset by the weakness in
certain European countries, Japan, Asia, and the Scandinavian region.
Publishing segment EBITA for the 1997 first half was $0.4 million, compared to
$0.1 million in the prior year. The improved EBITA was due primarily to the
absence of non-recurring prior year charges related to the shutdown of our
European production facility and to cost savings from the reorganization of the
production process.
Non-segment related corporate expenses, including an EBITA loss from franchising
activity, included in EBITA were $10.3 million for the six months ended June 30,
1997, compared with $9.2 million in the same prior year period. This increase
was primarily due to higher expenses in 1997 associated with the SERP, the New
LTIP, and corporate training programs.
Interest expense on long-term debt for the six months ended June 30, 1997
decreased by $0.4 million, or 11.2%, from the comparable prior year period,
primarily due to scheduled principal
15
<PAGE>
repayments of the Company's long-term debt.
Other income, net for the six months ended June 30, 1997 increased $0.3 million
primarily due to higher net foreign exchange gains and investment income,
partially offset by the absence of gains from the termination of currency coupon
swap agreements which provided income in 1996.
The Company recorded an income tax expense of $4.1 million, or an effective rate
of 63.5%, during the current period. This compared to an income tax expense of
$3.2 million, or an effective rate of 66.0%, in the prior year's first half. The
effective tax rates in both 1997 and 1996 were above the U.S. Federal statutory
tax rate primarily as a result of nondeductible amortization charges.
Financial Condition
Historically, the primary source of the Company's liquidity has been the cash
provided by operations, and capital expenditures, working capital requirements
and acquisitions have been funded from internally generated cash. Although each
geographic area exhibits different patterns of lesson volume over the course of
the year, the Company's sales are generally not seasonal in the aggregate.
Net cash provided by operating activities was $11.6 million for the six months
ended June 30, 1997, up $5.5 million from the comparable prior year period. This
improvement was due to a number of factors, including an increase in prepayment
of fees by the Company's customers, as well as the timing of payments for
certain accrued liabilities, most notably payrolls and commissions. The increase
was partially offset by higher accounts receivable, and by a $2.5 million tax
payment associated with the October 1996 Internal Revenue Service ("IRS")
deficiency notice, hereinafter discussed.
Capital expenditures during the six-month period ended June 30, 1997 were $6.1
million, primarily reflecting costs of refurbishments and purchases for new and
existing centers. Capital expenditures declined by $1.1 million from the
comparable prior year period, which included $2.5 million related to the April
1996 relocation of the Company's corporate headquarters to its new facility in
Princeton, New Jersey.
Pursuant to a covenant under the Acquisition Debt Facilities, the Company is
party to five currency coupon swap agreements with a financial institution.
These agreements require the Company, in exchange for U.S. dollar receipts, to
periodically make foreign currency payments, denominated in the Japanese yen,
the Swiss franc, the Canadian dollar, the British pound, and the German mark.
Credit loss from counterparty nonperformance is not anticipated. The fair market
value of these swap agreements at June 30, 1997, representing the amount that
could be settled based on estimates obtained from a dealer, was a net asset of
approximately $0.1 million.
In October 1996, the IRS issued a deficiency notice to the Company relating to
its 1989, 1990, 1992 and 1993 Federal tax returns. Such notice proposed
adjustments of approximately $9.3 million, plus accrued interest. In connection
with this notice, the Company made a payment of $2.5 million to the IRS during
the 1997 second quarter. The Company is contesting the deficiency notice and
intends to fund any remaining deficiency that may ultimately result through its
cash resources. The Company believes that it has adequate cash resources to pay
any such deficiency and to pursue its business plan.
16
<PAGE>
On March 28, 1997, the Company signed a nationwide interpreter service contract
with the Department of Justice, Executive Office for Immigration Review ("EOIR")
for the next two years, with three annual renewal options at the election of
EOIR. The time period within which a Government Accounting Office or Agency
Protest to this contract could have been made expired on April 7, 1997 and no
such Protest had been filed. The Department of Justice informed the Company that
any parties eligible to Protest have advised the Department of Justice in
writing that they would not do so.
On April 29, 1997, the Company and Fukutake Holdings (America), Inc. ("FHAI"), a
wholly owned subsidiary of Benesse Corporation, signed a definitive contract
whereby the Company agreed to sell to FHAI 250,000 shares of Common at $24.44
per share, the average market price for the ten days ending on April 29, 1997.
The Company used 250,000 of its treasury shares to complete this transaction,
which was closed on May 12, 1997. It is expected that proceeds of the sale will
be used for general corporate purposes.
On July 23, 1997, the Company entered into an agreement to acquire ELS
Educational Services, Inc., a privately held provider of intensive English
language instruction, in a stock acquisition for a cash purchase price of $95.0
million. Closing of the acquisition, which is subject to certain conditions,
including regulatory approvals, is expected to occur by early September.
Financing for the transaction, and simultaneous refinancing of the Company's
existing Acquisition Debt Facilities and related penalties and costs, will be
provided through a $165 million fully-underwritten bank loan commitment, to be
repaid over a five year period. In connection with this refinancing, the Company
expects to incur prepayment penalties of approximately $6.2 million on the
Senior Note portion of the Acquisition Debt Facilities, subject to adjustment,
based on U.S. Treasury interest yields, until three business days prior to the
date of prepayment.
In anticipation of the refinancing transaction, the Company has entered into a
five-year interest rate swap agreement, effective July 1997, which provides for
quarterly exchanges of interest on an amortizing "notional" (theoretical) amount
originally set at $66.0 million. In exchange for U.S. dollar denominated
interest receipts based on variable LIBOR, the Company must make U.S. dollar
denominated interest payments based on a fixed rate of 6.30%. Credit loss from
counterparty non-performance is not anticipated.
At June 30, 1997, the Company's liquid assets of $29.3 million consisted of cash
and temporary investments. The Company does not currently have any material
commitments for capital expenditures. During 1997, the Company anticipates
capital expenditures to increase compared with historical trends in connection
with the refurbishment of the Company's language centers, the expansion of the
Company's Translations segment, and technological expansion. The Company plans
to meet its debt service requirements and future working capital needs through
funds generated from operations.
Forward Looking Statements
17
<PAGE>
Certain statements in this Quarterly Report on Form 10Q constitute
"Forward-Looking Statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). The Company desires to take
advantage of certain "Safe Harbor" provisions of the Reform Act and is including
this special note to enable the Company to do so. Forward-Looking Statements
involve known and unknown risks, uncertainties, and other factors which could
cause the Company's actual results, performance (financial or operating) or
achievements to differ materially from the future results, performance
(financial or operating) or achievements expressed or implied by such
Forward-Looking Statements. Such risks, uncertainties and other factors include,
among others: the closing of the ELS purchase; the completion of the long-term
financing transaction under the bank loan commitment; the effect on the
Acquisition Debt Facilities prepayment penalty of fluctuations in the interest
rate market; the future continuation of the EOIR contract; the outcome of future
negotiations and/or litigation pertaining to the deficiency assessed by the IRS;
as well as more general factors affecting future cash flows, including
fluctuations in foreign currency exchange rates; demand for the Company's
products and services; the impact of competition; the effect of changing
economic and political conditions; the level of success and timing in
implementing corporate strategies and new technologies; changes in governmental
and tax laws, regulations, tax audits and other factors (known or unknown) which
may affect the Company. As a result, no assurance can be given as to future
results, levels of activity and achievements.
BERLITZ INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
All exhibits listed below are filed with this Quarterly Report on Form 10-Q.
Exhibit No.
27 Financial Data Schedule, for the six months ended June 30, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1997.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BERLITZ INTERNATIONAL, INC.
---------------------------
(Registrant)
Date: August 13, 1997 By: /s/ HENRY D. JAMES
-----------------------------
Henry D. James
Executive Vice President and
Chief Financial Officer
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q OF
BERLITZ INTERNATIONAL, INC. FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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