SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 28, 1997
BERLITZ INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 1-10390 13-3550016
-------- ------- ----------
(State or other Commission (I.R.S. Employer
jurisdiction of incorporation) File Number 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
NOT APPLICABLE
--------------
Former name, former address and former fiscal year,
if changed since last report
Page 1 of 22
Exhibit Index on Page 2
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On August 28, 1997, pursuant to a Stock Purchase Agreement dated July 23, 1997,
Berlitz International, Inc. (the "Registrant" or "Berlitz") completed the
acquisition of ELS Educational Services, Inc. ("ELS"), a privately held provider
of intensive English language instruction, in a stock acquisition for a cash
purchase price of $95.0 million. ELS was sold following an auction process
directed by ELS' investment banker, Montgomery Securities. Berlitz was
represented in the acquisition by its investment banker, Goldman Sachs & Co. The
selling shareholders of ELS were: Roger O. Walther S.P. Trust, Wendy Walther,
Christine Walther Tripp, Edward Walther, Anne Dunning, and John Dunning
(collectively, the "Sellers").
Financing for the transaction was provided by NationsBank, N.A., as part of a
refinancing of Berlitz's existing long-term debt, for a total amount of $165.0
million.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of business acquired.
Financial statements and accompanying notes of ELS Educational Services,
Inc. as of December 31, 1996 and 1995 and for the years then ended,
together with Independent Auditors' Report.
Unaudited interim financial statements of ELS Educational Services, Inc. as
of June 15, 1997.
(b) Pro forma financial information.
Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1997.
Unaudited Pro Forma Consolidated Statement of Operations for the six months
ended June 30, 1997.
Unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1996.
Notes to Unaudited Pro Forma Consolidated Financial Statements.
(c) Exhibits.
1. Stock Purchase Agreement, dated as of July 23, 1997, between ELS, the
Sellers, and Berlitz. Exhibit 1 to Berlitz's Current Report on Form 8-K
dated July 23, 1997 is incorporated by reference herein.
2.* Credit Agreement, dated as of August 28, 1997, among Berlitz, NationsBank,
N.A. (as Agent and as Lender) and the Lenders party thereto from time to
time.
3.* Press release of Berlitz, dated August 28, 1997.
* Previously filed.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BERLITZ INTERNATIONAL, INC.
Dated: November 11, 1997 By: /s/ Henry D. James
-------------------
Henry D. James
Executive Vice President and
Chief Financial Officer
3
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ELS Educational Services, Inc.:
We have audited the accompanying balance sheets of ELS Educational Services,
Inc. as of December 31, 1996 and 1995 and the related statements of income,
stockholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to about present fairly, in
all material respects, the financial position of ELS Educational Services, Inc.
as of December 31, 1996 and 1995 and the results of its operations and cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
February 28, 1997
4
<PAGE>
ELS EDUCATIONAL SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,046,733 $ 2,873,387
Accounts receivable, less allowance for doubtful
accounts of $50,000 in 1996 and 1995 (note 2) 1,653,786 771,151
Prepaid expenses 804,703 778,090
Refundable income taxes - 164,407
Deferred income taxes (note 3) 12,057 12,057
----------------- ------------------
Total current assets 4,517,279 4,599,092
Property, plant and equipment, at cost, less
accumulated depreciation (note 4) 1,682,156 1,115,054
Note receivable from officer (note 5) 1,861,724 898,000
Other assets 316,719 378,361
Goodwill and other intangibles, less amortization
of $88,306 in 1996 and $81,853 in 1995 167,786 174,239
----------------- ------------------
Total assets $ 8,545,664 $ 7,164,746
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable $ 1,012,788 $ 775,003
Accrued liabilities 6,192,855 5,978,865
Current installments of long-term debt (note 6) - 92,000
Subordinated note payable (note 6) - 283,000
Deferred revenue (note 1) 1,586,363 831,194
Income taxes payable 9,582 -
----------------- ------------------
Total current liabilities 8,801,588 7,960,062
----------------- ------------------
Long-term debt, less current installments (note 6) - 322,000
Deferred revenue (note 1) 456,422 576,422
Other long-term liabilities 298 51,948
Stock options subject to redemption (note 7) 2,110,998 1,145,615
Stockholders' equity (deficit):
Common stock, $.001 par value. Authorized
1,000,000 shares; issued and outstanding
827,710 shares 828 828
Additional paid-in capital 371,760 371,760
Accumulated deficit (3,130,840) (3,235,246)
Foreign currency translation adjustment (65,390) (28,643)
----------------- -----------------
Total stockholders' equity (deficit) (2,823,642) (2,891,301)
----------------- ------------------
Total liabilities and stockholders' equity (deficit) $ 8,545,664 $ 7,164,746
================= ==================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
ELS EDUCATIONAL SERVICES, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Student tuition and fee revenue $ 62,638,272 $ 45,315,244
Operating costs:
Direct costs 42,219,979 27,382,536
Selling, general and administrative expenses 18,223,245 15,174,201
----------------- ------------------
Operating income 2,195,048 2,758,507
Loss on sale of subsidiary (note 9) - (838,884)
Interest income (expense), net 78,610 (192,905)
Other income (expense) 293,286 (231,072)
----------------- ------------------
Income before provision for income taxes 2,566,944 1,495,646
Provision for income taxes 124,738 1,302,714
----------------- ------------------
Net income $ 2,442,206 $ 192,932
================= ==================
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
ELS EDUCATIONAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,442,206 $ 192,932
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 504,069 531,709
Deferred income taxes - 369,530
Loss on sale of subsidiary - 838,884
Stock options subject to redemption 965,383 30,550
Foreign currency translation adjustment (36,747) (68)
Changes in operating assets and liabilities:
Accounts receivable (882,635) (89,826)
Prepaid expenses (26,613) (199,472)
Accounts payable and accrued liabilities 451,775 1,563,001
Deferred revenue 635,169 15,925
Other assets 59,142 (58,287)
Other liabilities (51,650) -
Refundable income taxes 164,407 (132,177)
Income taxes payable 9,582 -
----------------- ------------------
Net cash provided by operating activities 4,234,088 3,062,701
----------------- ------------------
Cash used in investing activities - capital expenditures (1,062,218) (401,652)
----------------- ------------------
Cash flows from financing activities:
Note receivable from shareholders (963,724) 25,000
Cash dividends paid (2,337,800) (99,325)
Payment of bank note (283,000) (340,000)
Repayment of long-term debt (414,000) (59,237)
----------------- ------------------
Net cash used in financing activities (3,998,524) (473,562)
----------------- ------------------
Net increase (decrease) in cash and
cash equivalents (826,654) 2,187,487
Cash and cash equivalents at beginning of year 2,873,387 685,900
----------------- ------------------
Cash and cash equivalents at end of year $ 2,046,733 $ 2,873,387
================= ==================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 46,201 $ 263,905
Income taxes 89,250 1,089,341
================= ==================
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
ELS EDUCATIONAL SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
FOREIGN TOTAL
COMMON STOCK ADDITIONAL CURRENCY STOCKHOLDER'S
------------------------- PAID-IN ACCUMULATED TRANSLATION EQUITY
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 827,710 $828 $371,760 $(3,328,853) $(28,575) $(2,984,840)
Cash dividends - - - (99,325) - (99,325)
Net income - - - 192,932 - 192,932
Foreign currency translation
adjustment - - - - (68) (68)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 827,710 828 371,760 (3,235,246) (28,643) (2,891,301)
Cash distributions - - - (2,337,800) - (2,337,800)
Net income - - - 2,442,206 - 2,442,206
Foreign currency translation
adjustment - - - - (36,747) (36,747)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 827,710 $828 $371,760 $(3,130,840) $(65,390) $(2,823,642)
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
ELS EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) BASIS OF PRESENTATION, DESCRIPTION OF COMPANY AND
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as
of December 31, 1996 and the reported amounts of income and expenses
during the period. Actual results could differ from those estimates.
THE COMPANY
The Company was incorporated in Delaware in 1966 and became a
subchapter S Corporation in 1995. The Company's employees teach English
as a second language to foreign students at 23 language centers located
throughout the United States. The Company licenses the operations of
language centers abroad.
TUITION AND FEE REVENUE
Tuition charges are initially recorded as deferred tuition revenue when
students are enrolled. If a student withdraws prior to completion of
the course, the Company refunds the tuition paid by the student for any
time remaining in the course. Tuition, net of refunds, is recognized as
income ratably over the course period, generally four weeks.
Nonrefundable application fees, paid upon application, are recognized
as income at the time of receipt.
Deferred revenue at December 31, 1996 includes $516,422 associated with
a prepaid license fee received from the Company's licensee in Korea,
which amount is being amortized over the term of the license agreement
(ten years).
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments with original
maturities of three months or less to be cash and cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense when incurred.
Depreciation is provided principally by the straight-line method over
estimated useful lives ranging from 3 to 40 years for building and
improvements and 3 to 7 years for equipment and furniture. Leasehold
improvements are amortized over the shorter of their useful lives or
the term of the related leases.
9
<PAGE>
ELS EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
ACCOUNTS RECEIVABLE
Trade accounts receivable result mainly from amounts due from students
and sponsors related to tuition and housing, Such amounts are generated
by students throughout the world, with the Company generally not
requiring collateral. However, in most cases, the Company collects the
tuition and other fees when the student is enrolled.
INCOME TAXES
The Company is an S Corporation for Federal and state income tax
purposes. Under provisions of the Internal Revenue Code, S Corporations
are generally not subject to Federal income taxes. For Federal income
tax purposes, income or loss will be included in the tax returns of the
individual stockholders.
States differ in their treatment of the responsibility for the payment
of state income taxes. States not recognizing S Corporation status
require the corporation to pay state taxes, while states recognizing S
Corporation status generally require the individual stockholders to
include their share of the corporation's income on their personal tax
returns.
GOODWILL AND OTHER INTANGIBLES
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121 (SFAS No. 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, " in March 1995 which is effective for fiscal years
beginning after December 15, 1995. It requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company adopted the
provisions of SFAS No. 121 in fiscal 1996 which resulted in no impact
on the financial statements.
Goodwill generated through an acquisition is being amortized on a
straight-line basis over 30 years. The Company evaluates the carrying
value of its unamortized goodwill at least annually. Where the balance
of goodwill exceeds the value of expected future undiscounted cash
flows, the difference would be charged against income.
(2) ACCOUNTS RECEIVABLE
Accounts receivable for the years ended December 31, 1996 and 1995
consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
<S> <C> <C>
Trade $ 1,542,856 $ 693,651
Other 160,930 127,500
------------------ ------------------
1,703,786 821,151
Less allowance for doubtful accounts 50,000 50,000
------------------ ------------------
$ 1,653,786 $ 771,151
================== ==================
</TABLE>
10
<PAGE>
ELS EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(3) INCOME TAXES
On December 22, 1995, the Company filed an application for Subchapter S
Corporation status with the Internal Revenue Service (IRS). The
election was approved by the IRS, and effective January 1, 1996, the
Company began filing tax returns under Subchapter S Corporation status.
Under the provisions of the California franchise tax law, S Corporation
earnings are assessed a 1.5% surtax at the corporate level and flow
through to the stockholder to be taxed at the individual level.
The provisions for income taxes for the years ended December 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
<S> <C> <C>
Current:
Federal $ - $ 703,630
State 124,738 210,171
Foreign - 19,383
------------------ ------------------
124,738 933,184
------------------ ------------------
Deferred:
Federal - 325,483
State - 44,047
------------------ ------------------
- 369,530
------------------ ------------------
$ 124,738 $ 1,302,714
================== ==================
</TABLE>
Deferred tax assets relate primarily to differences between book and
state tax basis of assets and liabilities.
(4) PROPERTY AND EQUIPMENT
Property and equipment for the year ended December 31, 1996 and 1995
consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
<S> <C> <C>
Equipment and furniture $ 5,325,544 $ 4,378,720
Leasehold improvements 584,465 468,771
------------------ ------------------
5,910,009 4,847,491
Less accumulated depreciation
and amortization 4,227,853 3,732,437
------------------ ------------------
$ 1,682,156 $ 1,115,054
================== ==================
</TABLE>
11
<PAGE>
ELS EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(5) RELATED PARTY TRANSACTIONS
The Company leases from a related party, Mr. Roger Walther, its office
space in San Francisco, California at an annual rental of $198,000
through 1999 plus a 4% management fee.
During 1995, the Company sold ELS Real Estate, Inc., which included two
properties housing its executive office and a language center as well
as the associated mortgage debt, in exchange for a note in the amount
of $898,000. The subsidiary was purchased by a partnership in which Mr.
Roger Walther is the general partner. Immediately thereafter, the
Company leased back the two properties.
The Company has advanced to its shareholders/officers in the amount of
$965,200.
The Company has an employment agreement with Mr. Roger Walther. The
agreement provides for base annual compensation of approximately
$500,000, subject to annual adjustment. The Company may terminate this
agreement on a one-year notice.
(6) LONG-TERM DEBT AND SUBORDINATED NOTE PAYABLE
The Company has fully paid off the note payable to bank in July 1996
and the subordinated promissory note in December 1996 which had
outstanding balances of $414,000 and $283,000, respectively, at
December 31, 1995.
(7) REDEEMABLE STOCK OPTIONS
Pursuant to the Nonqualified Stock Option Agreement, the Company has
granted options to purchase 118,063 shares of the Company's common
stock to certain executives. The exercise price ranges between $3.51
and $6.50 per share with the options expiring December 31, 2002. These
options are redeemable by the Company at the greater of a formula price
(as defined) or a floor price of $15.00 per share. All of the options
are currently exercisable as of January 1, 1993, with none of the
options being exercised through December 31, 1996.
During 1993, pursuant to a nonqualified stock option plan, the Company
set aside options to purchase 40,000 shares of the Company's common
stock. Under this plan, the Company has granted options to purchase
32,500 shares of the Company's common stock to certain executives. The
exercise price is $13.52 per share with the options expiring April 28,
2003. The options are redeemable by the Company at a formula price (as
defined). All of the options are currently exercisable as of April 30,
1993, with none of the options being exercised through December 31,
1996.
12
<PAGE>
ELS EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
A liability has been recorded in the accompanying financial statements
representing the excess of the redemption price over the exercise price
for all options. The Company recorded a charge of $1,008,163 and
$30,500 related to the stock options for the years ended December 31,
1996 and 1995, respectively.
In January 1997, the Company reached a Stock Appreciation Rights (SAR)
agreement with an officer of the Company. SAR provides for cash
payments for appreciation in value of the Company above the baseline of
$25,000,000.
(8) LEASE COMMITMENTS
The Company is obligated under noncancelable operating lease agreements
expiring in various years from 1996 through 2002, for leases of
classroom and administrative office space and office equipment
requiring minimum annual rental payments, as follows:
Year ending December 31:
1997 $ 2,030,989
1998 1,517,357
1999 1,509,100
2000 1,247,930
2001 1,877,649
Thereafter 1,865,347
-----------------
$ 10,048,372
=================
In addition, the Company rents classroom space at various colleges and
universities on a month-to-month basis. Rentals for these facilities
are generally determined as a percentage of the net tuition received
from students enrolled (contingent rentals). Rental expense amounted to
$4,911,208 and $4,558,000 for the years ended December 31, 1996 and
1995, respectively. The Company also subleases certain portions of its
administrative office facility, with sublease income amounting to
$151,392 and $135,000 in 1996 and 1995, respectively.
(9) RETIREMENTS SAVINGS PLAN
The Company participates in a retirement savings plan (which includes a
Contributory 401(k) provision). All full-time employees are eligible to
participate in the plan on January 1 or July 1 upon attainment of age
21 and completion of 500 hours of service within a six-month period.
Contributions to the profit sharing portion of the plan are made in
such amounts (if any) as determined by the Board of Directors of the
Company. Contributions to the Contributory Salary Reduction (401(k))
provision for employees are in an amount equal to the lesser of (a) 50%
of the employees salary reduction contributions or (b) 3% of the
employees annual compensation. The Company incurred and charged to
expense
13
<PAGE>
ELS EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
$547,735 and $482,983 related to the retirement savings plan for the
years ended December 31, 1996 and 1995, respectively.
(10) CASH DISTRIBUTION
The Company distributes earnings, other than amounts sufficient to
cover S Corporation related tax liabilities, to its shareholders based
on a calculation of pretax earnings less capital expenditures and loan
repayments not including depreciation and amortization costs. The cash
distribution for December 1996 was $2,337,800.
14
<PAGE>
ELS EDUCATIONAL SERVICES, INC..
BALANCE SHEET (UNAUDITED)
JUNE 15, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 510,042
Accounts receivable, less allowance for doubtful
accounts 1,413,246
Prepaid expenses 816,340
Refundable income taxes 112,151
Deferred income taxes 12,057
------------------
Total current assets 2,863,836
Property, plant and equipment, at cost, less
accumulated depreciation 1,735,056
Other assets 276,712
Goodwill and other intangibles, less amortization 164,807
------------------
Total assets $ 5,040,411
==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable $ 900,788
Accrued liabilities 2,726,993
Accrued payrolls 1,899,964
Deferred revenue 1,120,971
------------------
Total current liabilities 6,648,716
------------------
Deferred revenue 456,422
Other long-term liabilities 1,883
Stockholders' equity (deficit):
Common stock 828
Additional paid-in capital 371,760
Accumulated deficit (2,535,928)
Foreign currency translation adjustment (81,394)
Suspense 178,124*
------------------
Total stockholders' equity (deficit) (2,066,610)
------------------
Total liabilities and stockholders' equity (deficit) $ 5,040,411
==================
</TABLE>
* Represents the net of Note Receivable from Officer, Stock Options Subject to
Redemption, and certain net headquarter property and equipment, all of which are
not being acquired by Berlitz.
15
<PAGE>
ELS EDUCATIONAL SERVICES, INC.
STATEMENT OF INCOME (UNAUDITED)
YEAR-TO-DATE PERIOD ENDED JUNE 15, 1997
<TABLE>
<S> <C>
Student tuition and fee revenue $ 27,208,914
Operating Costs:
Direct costs 17,933,577
Selling, general and administrative expenses 8,053,151
-----------------
Operating income 1,222,186
Interest expense, net (1,250)
Other income 136,692
-----------------
Income before provision for income taxes 1,357,628
Provision for income taxes -
-----------------
Net income $ 1,357,628
=================
</TABLE>
16
<PAGE>
ELS EDUCATIONAL SERVICES, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
YEAR-TO-DATE PERIOD ENDED JUNE 15, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 1,357,628
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 222,408
Foreign currency translation adjustment (16,004)
Changes in operating assets and liabilities (1,937,007)
-----------------
Net cash used in operating activities (372,975)
-----------------
Cash used in investing activities - capital expenditures (401,000)
-----------------
Cash used in financing activities - cash dividends paid (762,716)
-----------------
Net decrease in cash and cash equivalents (1,536,691)
Cash and cash equivalents at beginning of period 2,046,733
-----------------
Cash and cash equivalents at end of period $ 510,042
=================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,250
State income taxes 125,000
=================
</TABLE>
17
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Berlitz acquired ELS on August 28, 1997 in a stock acquisition for a cash
purchase price of $95.0 million (the "ELS Acquisition"). Berlitz also incurred
various transaction-related expenditures, and simultaneously refinanced its
existing long-term debt. The acquisition was accounted for by the purchase
method of accounting, which contemplates an allocation of the acquisition cost
to the acquired company's assets and liabilities based upon their fair value.
The following unaudited pro forma consolidated balance sheet at June 30, 1997
reflects the historical consolidated balance sheets of Berlitz and ELS, adjusted
to give effect to the ELS acquisition and the simultaneous refinancing of
long-term debt, as if such transactions had occurred at June 30, 1997.
The following unaudited pro forma consolidated pro forma statements of
operations for the six months ended June 30, 1997 and the year ended December
31, 1996 reflect the historical financial statements of Berlitz and ELS,
adjusted to give effect to the ELS Acquisition and simultaneous refinancing of
long-term debt as if such transactions had occurred on January 1 of each period
presented.
The unaudited pro forma consolidated financial statements should be read in
conjunction with the respective historical audited financial statements of ELS
contained herein and the historical audited consolidated financial statements of
Berlitz.
The pro forma adjustments are based upon available information and upon certain
assumptions that Berlitz's management believes are reasonable given the
circumstances. The unaudited pro forma financial statements are provided for
comparative purposes only and are not necessarily indicative of the results that
would have occurred had the transaction happened on the dates indicated or that
may be achieved in the future.
18
<PAGE>
BERLITZ INTERNATIONAL, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
BERLITZ ELS ADJMTS PRO FORMA
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 29,263 $ 510 $ 1,438 $ 31,211
Accounts receivable, net 40,907 1,413 - 42,320
Unbilled receivables 5,166 - - 5,166
Inventories 9,579 - - 9,579
Prepaid expenses and other current assets 8,135 940 - 9,075
------------- -------------- ------------- --------------
TOTAL CURRENT ASSETS 93,050 2,863 1,438 97,351
Property and equipment, net 29,841 1,735 - 31,576
Publishing rights, net 18,101 - - 18,101
Excess of cost over net assets acquired
and other intangibles, net 408,228 165 100,000 (a) 508,393
Other assets 13,183 277 (1,965) (c) 11,495
------------- -------------- ------------- --------------
TOTAL ASSETS $ 562,403 $ 5,040 $ 99,473 $ 666,916
============= ============== -============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,324 $ - $ 13,897 (b)$ 17,221
Accounts payable 5,987 901 - 6,888
Deferred revenues 38,740 1,121 - 39,861
Payrolls and commissions 12,124 1,900 - 14,024
Income taxes payable 2,107 - (487) (c) 1,620
Accrued expenses and other current liabilities 11,738 2,727 829 15,294
------------- -------------- ------------- --------------
TOTAL CURRENT LIABILITIES 74,020 6,649 14,239 94,908
Long-term debt 56,137 - 91,000 (b) 147,137
Notes payable to affiliates 39,419 - - 39,419
Deferred taxes and other liabilities 22,468 458 (1,462) (c) 21,464
Minority interest 9,487 - - 9,487
------------- -------------- ------------- --------------
TOTAL LIABILITIES 201,531 7,107 103,777 312,415
------------- -------------- ------------- --------------
SHAREHOLDERS' EQUITY:
Common stock 1,003 1 (1) 1,003
Additional paid-in capital 372,518 550 (550) 372,518
Retained earnings (deficit) 5,543 (2,537) (3,834) (c) (828)
Cumulative translation adjustment (14,799) (81) 81 (14,799)
Treasury stock at cost (3,393) - - (3,393)
------------- ------------- ------------- --------------
TOTAL SHAREHOLDERS' EQUITY 360,872 (2,067) (4,304) 354,501
------------- -------------- ------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 562,403 $ 5,040 $ 99,473 $ 666,916
============= ============== ============= ==============
</TABLE>
See accompanying Notes to the Pro Forma Consolidated Financial Statements.
19
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
BERLITZ ELS ADJMTS PRO FORMA
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Sales of services and products $ 183,434 $ 27,209 $ - $ 210,643
------------- -------------- ------------- --------------
Costs and expenses:
Cost of services and products sold 108,040 17,934 - 125,974
Selling, general and administrative 58,333 8,053 (1,201) (d) 65,185
Amortization of publishing rights, excess
of cost over net assets acquired, and
other intangibles 6,286 3 2,500 (a) 8,789
Interest expense on long-term debt 3,511 - 2,305 (b) 5,816
Interest expense to affiliates 1,027 - - 1,027
Other income, net (175) (139) - (314)
------------- -------------- ------------- --------------
Total costs and expenses 177,022 25,851 3,604 206,477
------------- -------------- ------------- --------------
Income (loss) before income taxes, minority
interest in earnings of subsidiary, and
extraordinary item 6,412 1,358 (3,604) 4,166
Income tax expense (benefit) 4,070 - (786) (e) 3,284
Minority interest in earnings of subsidiary 225 - - 225
------------- -------------- ------------- --------------
Income (loss) before extraordinary item 2,117 1,358 (2,818) 657
Extraordinary loss from early
extinguishment of debt, net of income
tax benefit of $1,949 - - 6,721 (c) 6,721
------------- -------------- ------------- --------------
Net income (loss) $ 2,117 $ 1,358 $ (9,539) $ (6,064)
============= ============== ============= ==============
Earnings (loss) per share:
Income before extraordinary loss $ 0.22 $ 0.07
Extraordinary loss - (0.71)
------------- --------------
Earnings (loss) per share $ 0.22 $ (0.64)
============= ==============
Average number of shares outstanding (000's) 9,475 9,475
============= ==============
</TABLE>
See accompanying Notes to the Pro Forma Consolidated Financial Statements.
20
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
BERLITZ ELS ADJMTS PRO FORMA
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Sales of services and products $ 366,067 $ 62,638 $ - $ 428,705
------------- -------------- ------------- --------------
Costs and expenses:
Cost of services and products sold 218,758 42,220 - 260,978
Selling, general and administrative 113,695 18,223 (3,000) (d) 128,918
Amortization of publishing rights, excess
of cost over net assets acquired, and
other intangibles 12,746 6 5,000 (a) 17,752
Interest expense on long-term debt 7,647 - 3,687 (b) 11,334
Interest expense to affiliates 1,848 - - 1,848
Other income, net (1,441) (378) - (1,819)
------------- -------------- ------------- --------------
Total costs and expenses 353,253 60,071 5,687 419,011
------------- ------------- ------------- --------------
Income (loss) before income taxes, minority
interest in earnings of subsidiary, and
extraordinary item 12,814 2,567 (5,687) 9,694
Income tax expense (benefit) 7,508 125 (1,217) (e) 6,416
Minority interest in earnings of subsidiary 1,503 - - 1,503
------------- -------------- ------------- --------------
Income (loss) before extraordinary item 3,803 2,442 (4,470) 1,775
Extraordinary loss from early
extinguishment of debt, net of income
tax benefit of $1,949 - - 7,510 (c) 7,510
------------- -------------- ------------- --------------
Net income (loss) $ 3,803 $ 2,442 $ (11,980) $ (5,735)
============= ============== ============= ==============
Earnings (loss) per share:
Income before extraordinary loss $ 0.40 $ 0.18
Extraordinary loss - (0.78)
------------- --------------
Earnings (loss) per share $ 0.40 $ (0.60)
============= ==============
Average number of shares outstanding (000's) 9,569 9,569
============= ==============
</TABLE>
See accompanying Notes to the Pro Forma Consolidated Financial Statements.
21
<PAGE>
BERLITZ INTERNATIONAL, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) On August 28, 1997 (the "Closing Date"), Berlitz completed its
acquisition of ELS in a stock acquisition accounted for under the
purchase method of accounting. Consequently, other intangibles
(consisting primarily of tradenames) and the excess of cost over net
assets acquired increased by approximately $100 million. The pro forma
financial statements reflect the amortization of this increase in other
intangibles and excess of cost over net assets acquired on a
straight-line basis, preliminarily over 20 years pending completion of
an indepth review of the valuation of the acquisition.
(b) In connection with the ELS Acquisition, Berlitz refinanced its existing
long-term debt through borrowings under a new bank facility (the "Bank
Facility") consisting of term loan and revolving credit facility
commitments aggregating $165 million at the Closing Date. Outstanding
borrowings under the Bank Facility essentially bear interest at
variable rates equivalent to the rate offered by certain reference
banks to prime banks in the interbank Eurodollar market plus a margin
ranging from .375% to .875%; such margin is dependent on a specified
leverage ratio of Berlitz.
The pro forma adjustments reflect initial outstanding borrowings of
$164.0 million (equal to the amount outstanding as of the Closing
Date), with quarterly repayments of $4.25 million ($17 million
annualized) during the first year of the Bank Facility. The average
interest rate on outstanding borrowings under the Bank Facility for the
pro forma periods presented was assumed to be 7.0%.
(c) Berlitz used a portion of the proceeds from the Bank Facility to repay
existing long-term debt (which had a principal balance outstanding of
$59.1 million outstanding at June 30, 1997). As a result of this early
extinguishment of debt, Berlitz incurred an extraordinary loss
consisting of prepayment penalties of $5.8 million and the write-off of
unamortized deferred financing costs (which were classified as other
assets on the balance sheet and which had a balance of $3.6 million at
January 1, 1996, $2.8 million at January 1, 1997, and $2.5 million at
June 30, 1997). The tax benefit related to this extraordinary loss,
consisting of a current and a deferred portion, was approximately $1.9
million.
(d) Represents reversal of certain ELS headquarter expenses which will not
recur subsequent to the acquisition by Berlitz.
(e) The following items have been tax effected at 35%, the U.S. Federal
statutory rate.:
i) incremental interest expense on long-term debt.
ii) ELS reported profit before tax as if ELS were a C corporation.
(Beginning in 1996, ELS filed Federal tax returns under subchapter
S Corporation status.)
iii) amortization expense for ELS acquisition goodwill and intangibles.
(It is anticipated that a 338(h)(10) election will be made under
the Internal Revenue Code, which allows amortization expense on
the ELS acquisition goodwill and intangibles to be tax
deductible.)
iv) the reversal of certain ELS headquarter expenses.
22
