UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MarkOne)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 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 to
-------- --------
Commission File Number 1-10390
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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
---------------------------------------------------
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 November 14, 1997, is 9,529,788.
Page 1 of 22
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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 SEPTEMBER 30,
(Dollars in thousands, except per share amounts)
1997 1996
--------- --------
Sales of services and products $ 104,436 $ 94,373
--------- --------
Costs and expenses:
Cost of services and products sold 62,312 57,273
Selling, general and administrative 31,768 28,873
Amortization of publishing rights,
excess of cost over net assets
acquired, and other intangibles 3,540 3,205
Interest expense on long-term debt 1,993 1,862
Interest expense to affiliates 542 495
Other income, net (29) (5)
--------- --------
Total costs and expenses 100,126 91,703
--------- --------
Income before income taxes, minority
interest in earnings of subsidiary, and
extraordinary item 4,310 2,670
Income tax expense 3,259 1,673
Minority interest in earnings of subsidiary 223 558
--------- --------
Income before extraordinary item 828 439
Extraordinary loss from early
extinguishment of debt, net of income
tax benefit of $1,949 6,285 --
--------- --------
Net income (loss) $ (5,457) $ 439
========= ========
Earnings (loss) per share:
Income before extraordinary loss $ 0.09 $ 0.05
Extraordinary loss (0.66) --
--------- --------
Earnings (loss) per share $ (0.57) $ 0.05
========= ========
Average number of shares outstanding (000's) 9,656 9,406
========= ========
See accompanying Notes to the Consolidated Financial Statements.
2
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BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Dollars in thousands, except per share amounts)
1997 1996
--------- --------
Sales of services and products $ 289,582 $276,579
Costs and expenses:
Cost of services and products sold 172,064 166,488
Selling, general and administrative 90,101 85,729
Amortization of publishing rights,
excess of cost over net assets
acquired, and other intangibles 9,826 9,554
Interest expense on long-term debt 5,504 5,818
Interest expense to affiliates 1,569 1,353
Other (income) expense, net (204) 87
--------- --------
Total costs and expenses 278,860 269,029
--------- --------
Income before income taxes, minority
interest in earnings of subsidiary, and
extraordinary item 10,722 7,550
Income tax expense 7,329 4,895
Minority interest in earnings of subsidiary 448 1,006
--------- --------
Income before extraordinary item 2,945 1,649
Extraordinary loss from early
extinguishment of debt, net of income
tax benefit of $1,949 6,285 --
--------- --------
Net income (loss) $ (3,340) $ 1,649
========= ========
Earnings (loss) per share:
Income before extraordinary loss $ 0.31 $ 0.17
Extraordinary loss (0.66) --
--------- --------
Earnings (loss) per share $ (0.35) $ 0.17
========= ========
Average number of shares outstanding (000's) 9,536 9,623
========= ========
See accompanying Notes to the Consolidated Financial Statements.
3
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BERLITZ INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SEPT. 30, DEC. 31,
1997 1996
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 38,260 $ 25,781
Accounts receivable, less allowance for
doubtful accounts of $2,389 and $1,914 45,505 36,048
Unbilled receivables 8,849 3,807
Inventories 8,526 10,260
Prepaid expenses and other current assets 8,664 6,815
--------- ---------
TOTAL CURRENT ASSETS 109,804 82,711
Property and equipment, net of accumulated
depreciation of $17,103 and $15,275 31,306 29,363
Publishing rights, net of accumulated amorti-
zation of $4,104 and $3,504 17,881 18,864
Excess of cost over net assets acquired
and other intangibles, net of accumulated
amortization of $54,351 and $46,049 500,112 417,611
Other assets 12,787 12,696
--------- ---------
TOTAL ASSETS $ 671,890 $ 561,245
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 17,213 $ 10,741
Accounts payable 7,275 5,943
Deferred revenues 38,259 34,748
Payrolls and commissions 16,346 10,227
Income taxes payable 2,807 4,207
Accrued expenses and other current liabilities 20,281 11,713
--------- ---------
TOTAL CURRENT LIABILITIES 102,181 77,579
Long-term debt 147,135 56,353
Notes payable to affiliates 39,499 38,294
Deferred taxes and other liabilities 21,326 22,348
Minority interest 9,744 9,264
--------- ---------
TOTAL LIABILITIES 319,885 203,838
--------- ---------
Commitments and Contingencies (Note 7)
SHAREHOLDERS' EQUITY:
Common stock 1,003 1,003
Additional paid-in capital 372,518 368,658
Retained earnings 86 3,426
Cumulative translation adjustment (18,209) (10,037)
Treasury stock at cost (3,393) (5,643)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 352,005 357,407
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 671,890 $ 561,245
========= =========
See accompanying Notes to the Consolidated Financial Statements.
4
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BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS)
1997 1996
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,340) $ 1,649
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 15,960 15,199
Minority interest, provision for bad debts,
foreign exchange (gains) losses, net, and
gains on currency swap agreements 1,297 1,758
Changes in operating assets and liabilities (2,775) (2,437)
--------- --------
Net cash provided by operating activities 11,142 16,169
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,487) (9,791)
Acquisition of businesses, net of cash acquired (90,522) --
--------- --------
Net cash used in investing activities (100,009) (9,791)
--------- --------
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 --
Proceeds from bank term loans 120,000 --
Net borrowings under revolving credit facility 44,000 --
Repayment of long-term debt (66,724) (8,595)
Payment of deferred finance costs (725) --
--------- --------
Net cash provided by (used in)
financing activities 102,661 (8,238)
--------- --------
Effect of exchange rate changes on cash and
temporary investments (1,315) (743)
--------- --------
Net increase (decrease) in cash and
temporary investments 12,479 (2,603)
Cash and temporary investments,
beginning of period 25,781 25,402
--------- --------
Cash and temporary investments, end of period $ 38,260 $ 22,799
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 4,958 $ 3,838
========= ========
Income taxes $ 8,321 $ 4,431
========= ========
Cash refunds of income taxes $ 248 $ 483
========= ========
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 SHARE AND 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. ELS ACQUISITION
On August 28, 1997 (the "Closing Date"), the Company completed its
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 (the "ELS Acquisition"), subject
to certain post-closing adjustments specified in the related stock purchase
agreement. The Company also incurred various transaction-related
expenditures.
The ELS 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 Company
is currently undergoing an indepth valuation of the acquisition. It is
expected that a significant portion of the excess purchase price over the
net assets and liabilities acquired will be allocated to intangible assets
such as tradenames, franchise value and sales agent network. A summary of
the preliminary purchase price allocation as of September 30, 1997 follows:
6
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Acquisition cost (including transaction expenses) $ 96,555
Net assets and liabilities acquired:
Cash 6,033
Other assets (primarily receivables and
property and equipment) 5,705
Liabilities (primarily accounts payable, accrued
expenses and payroll, and deferred
revenue) (13,645)
-------
Total net liabilities acquired (1,907)
--------
Intangibles and excess of cost over net
liabilities acquired $ 98,462
========
The acquisition-related intangibles and excess of cost over net liabilities
acquired are amortized on a straight-line basis, tentatively over a 20 year
life pending completion of the Company's valuation of the acquisition.
The results of operations of ELS subsequent to the Closing Date are
included in the Company's Consolidated Statement of Operations. The
following table presents selected unaudited proforma information assuming
that the ELS Acquisition (and the simultaneous refinancing of the Company's
long-term debt; see Note 3) had occurred on January 1 of each period
presented, and is not indicative of the results of operations which would
actually have occurred had the transaction taken place on the dates
indicated or of the results which may occur in the future.
PROFORMA PROFORMA
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
Sales of services and products $ 337,161 $ 325,719
Income before income taxes, minority
interest in earnings of subsidiary,
and extraordinary item 8,960 6,753
Income before extraordinary item 1,800 1,131
Extraordinary loss (6,721) (7,510)
Net loss $ (4,921) $ (6,379)
========= =========
Earnings (loss) per share:
Income before extraordinary loss $ 0.19 $ 0.12
Extraordinary loss (0.70) (0.78)
--------- ---------
Loss per share $ (0.51) $ (0.66)
========= =========
The primary differences between the unaudited pro forma income statement
data and the amounts as reported are as follows:
PROFORMA PROFORMA
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
Pre-acquisition ELS revenues $ 47,579 $ 49,140
Pre-acquisition ELS net income 2,266 4,027
Decrease in ELS administrative
expenses not recurring after
Berlitz acquisition 2,413 1,679
Increase in amortization of
intangibles and excess of
cost over net assets acquired (3,333) (3,750)
Increase in interest expense on
long-term debt (3,108) (2,753)
Decrease in income tax expense 617 279
Increase in extraordinary loss,
net of tax $ (436) $ (7,510)
========= =========
7
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3. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
Term loans $ 120,000 $ 10,500
Revolving credit facility 44,000 --
Senior Notes -- 56,000
Other 348 594
--------- ---------
Total 164,348 67,094
Less current maturities 17,213 10,741
--------- ---------
Long-term debt $ 147,135 $ 56,353
========= =========
On August 28, 1997, in connection with the ELS Acquisition, the Company
refinanced its then existing indebtedness through borrowings under a new
bank facility (the "Bank Facility"). The Bank Facility, secured by the
capital stock of certain Company subsidiaries, consists of term loans,
originally in an amount aggregating $120 million, and, as amended (see Note
10), a $55 million revolving credit facility (against which the Company
borrowed $44 million during the third quarter), for a total amount of $175
million. The term loans provide for quarterly amortization, beginning
December 31, 1997 and ending September 30, 2002, and mature as follows:
Year 1, $17,000; Year 2, $19,000; Year 3, $20,000; Year 4, $22,000; Year 5,
$22,000, plus a balloon at maturity of $20,000. There are no scheduled
repayments required under the revolving credit facility prior to its
expiration on September 30, 2002, at which time all outstanding balances
are due. The Bank Facility is subject to mandatory prepayment equal to a
portion of the proceeds from certain asset sales or equity offerings in
excess of specified amounts.
Outstanding borrowings under the Bank Facility bear interest at variable
rates based on, at the option of the Company, (i) NationsBank's alternate
base rate (essentially equivalent to the prime rate) or (ii) the rate
offered by certain reference banks to prime banks in the interbank
Eurodollar market, fully adjusted for reserves plus a margin ranging from
.375% to .875%; such margin is dependent on a specified leverage ratio of
the Company. In addition, a commitment fee ranging from .125% to .25% is
charged on the available but unused amounts under the revolving credit
facility, depending on a specified leverage ratio. The average interest
rate on outstanding borrowings under the Bank Facility for the period
ending September 30, 1997 was 6.9%.
The Bank Facility contains certain covenants, including (i) limitations on
the ability of the Company and its subsidiaries to incur indebtedness and
guarantee obligations, to prepay indebtedness, to redeem or repurchase
capital stock or subordinated debt, to enter into, grant or suffer to exist
liens or sale-leaseback transactions, to make loans or investments, to
enter into mergers, acquisitions or sales of assets, to change the nature
of the business conducted, to amend material agreements, to enter into
8
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agreements restricting the ability of the Company and its subsidiaries to
grant or to suffer to exist liens, to enter into transactions with
affiliates or to limit the ability of subsidiaries to pay dividends or make
loans to the Company, (ii) limitations on the payment of dividends by the
Company on its capital stock, (iii) a requirement that the Company maintain
foreign currency hedge agreements to fix the rate of exchange between the
U.S. dollar and such foreign currencies, and (iv) a requirement that the
Company maintain interest rate hedge agreements covering at least 25% of
the outstanding borrowings. The Bank Facility also contain financial
covenants requiring the Company to maintain certain levels of liquidity and
net worth and imposes limitations on capital expenditures, cash flow and
total debt. As of September 30, 1997, the Company was in compliance with
all Bank Facility covenants.
The Company used a portion of the proceeds from the Bank Facility to repay
its pre-existing Term Loan and Senior Notes outstanding. As a result of
this early extinguishment of debt, the Company incurred an extraordinary
charge, net of taxes, of $6.3 million, consisting of prepayment penalties
on the Senior Notes and the write-off of unamortized deferred financing
costs.
4. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES
a) Interest rate swap agreement
Pursuant to a covenant requirement under the Bank Facility, the Company
entered into a five-year interest rate swap agreement which provides for
quarterly exchanges of interest on an amortizing "notional" (i.e.
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%. The notional amount amortizes proportionately with the scheduled
principal payments under the Bank Facility. Credit loss from counterparty
non-performance is not anticipated. The Company accounts 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.
b) Fair values of financial instruments
The carrying amounts and estimated fair values of the Company's financial
instruments at September 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 $ 38,260 $ 38,260 $25,781 $25,781
Currency coupon swap
agreements 663 663 228 228
Liabilities:
Long-term debt,
including current
maturities 164,348 164,348 67,094 71,652
Notes payable to
affiliates 39,499 33,074 38,294 32,926
Currency coupon swap
agreements 273 273 694 694
Interest rate swap
agreement -- 279 -- --
9
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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 and the interest rate swap
agreement 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.
5. OTHER (INCOME) EXPENSE, NET
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPT. 30, 1997 SEPT. 30, 1996
-------------- --------------
Interest income on temporary
investments $(222) $(148)
Foreign exchange (gains)
losses, net (38) 3
Other non-operating taxes 50 101
Other investment (income)
expense, net (38) 30
Other expense, net 219 9
----- -----
Total other income, net $ (29) $ (5)
===== =====
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPT. 30, 1997 SEPT. 30, 1996
-------------- --------------
Interest income on temporary
investments $(553) $(492)
Foreign exchange (gains)
losses, net (63) 199
Gain on currency coupon swap
agreement -- (399)
Other non-operating taxes 299 400
Term Loan administration fee 150 150
Other investment (income)
expense, net (138) 43
Other expense, net 101 186
----- -----
Total other (income)
expense, net $(204) $ 87
===== =====
6. 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 considered dilutive 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
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.
10
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7. 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
September 30, 1997. During the nine months ended September 30, 1997, the
Company made a payment of $2.5 million to the IRS in connection with this
notice.
8. 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 the Company's common stock ("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.
9. 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").
11
<PAGE>
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 both the quarter and year-to-date periods ended September 30,
1997 would have been a decrease of $241 and $0.03, respectively.
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 22%; 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 $3.71 for the Relinquishment Options and $7.37 for all
others.
10. SUBSEQUENT EVENTS
a) Share repurchase
On November 14, 1997, the Company acquired 126,225 shares of its
Common from MCC Proceeds, Inc., as Trustee for the Maxwell Macmillan
Realization Trust. The negotiated purchase price was $23.5125 per share, or
$3.0 million, which was below the market price at the date of negotiation.
The transaction was funded from cash generated by operations. The
repurchased shares were placed into treasury and reserved for future
uses permitted under the Bank Facility.
b) Increase in revolving credit commitment
The revolving credit commitment under the Bank Facility was increased from
$45 million to $55 million, via amendment, on October 28, 1997.
12
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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
GENERAL
The following management's 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 management's discussion reflects this change.
On August 28, 1997 (the "Closing Date"), the Company completed its 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 (the "ELS Acquisition") subject to certain post-
closing adjustments specified in the related stock purchase agreement. The
Company also incurred various transaction-related expenditures. Financing
for the transaction, and simultaneous refinancing of the Company's existing
Senior Notes, Term Loan, and related prepayment penalties and costs, was
provided through a bank loan facility (the "Bank Facility") consisting of term
loans and a revolving credit facility aggregating $165 million at the Closing
Date.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1997 VS.
THREE MONTHS ENDED SEPTEMBER 30, 1996
Sales for the quarter ended September 30, 1997 were $104.4 million, 10.7% above
the same period in the prior year. This increase was due to operating activity
results in the Instruction and Translation business segments, including the post
acquisition results of ELS, partially offset by unfavorable exchange rate
fluctuations of $6.9 million, (primarily the result of a strengthened dollar
against the Japanese yen, the German mark, and almost all other European
currencies). Excluding the effect of exchange rate fluctuations, revenues
increased from the prior year's quarter by 17.9%.
Language Instruction sales, excluding franchising activity, for the quarter
ended September 30, 1997 were $77.1 million, 9.6% above the same period in 1996,
primarily as a result of increased volume and average revenue per lesson
("ARPL"), and the inclusion in 1997 of $5.2 million attributed to the post-
aquisition results of ELS, partially offset by unfavorable exchange rate
fluctuations of $5.5 million. Excluding exchange rate fluctations, revenues
increased 17.4% from the prior year's third quarter.
On a geographic basis, Language Instruction revenue increases in Latin
America, North America, and Asia were partially offset by decreases in the other
geographic divisions. The increase in Latin American revenues ($1.8
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million, or 16.1%) was primarily attributable to lesson volume increases in
all countries and ARPL increases in most countries, most notably Venezuela and
Mexico. North America's sales growth, excluding ELS, was $1.7 million, or 9.9%,
and primarily resulted from volume and ARPL improvements, the latter of which
was evident only in the U.S. Asia's sales rose $0.3 million, or 28.9%, from
1996, primarily reflecting the startup of operations in Singapore and improved
volume in Hong Kong and Thailand. The sales decline in Japan ($0.3 million, or
1.5%) primarily reflected unfavorable exchange rate fluctuations ($1.5 million),
partially offset by the positive effects of special sales campaigns.
Central/Eastern Europe's decrease ($1.4 million, or 10.0%) primarily reflects
unfavorable exchange rate fluctuations ($2.6 million, principally versus the
German mark, the Swiss franc, and the Austrian schilling). This adverse exchange
effect was partly mitigated by ARPL improvements in most countries and by higher
lesson volume, primarily in Germany and Poland. The decline in Western Europe
($0.7 million, or 7.8%) was largely attributable to unfavorable exchange
fluctuations ($1.3 million) in most countries, and in particular France and
Belgium, which were partially offset by volume increases in a majority of the
countries within the region, most notably France. ARPL improvements in all
countries except Holland and Denmark also favorably impacted sales for the
quarter.
During the three-month period ended September 30, 1997, the number of lessons
given was approximately 1.4 million, 9.8% above the same period in the prior
year, reflecting increases in all divisions. Lesson volume in North America and
Japan improved by 5.7% and 12.5%, respectively. North America's improvement
resulted from improving economic conditions and aggressive sales strategies,
whereas Japan's improvement was largely attributed to a seasonal sales and
advertising campaign. Lesson volume in Asia rose 28.2% from 1996, reflecting the
startup of operations in Singapore, and general growth in the Hong Kong and
Thailand markets. Latin America's lesson volume increased by 12.7% from prior
year, primarily reflecting improved economic conditions in most of the region,
particularly in Mexico and Venezuela. Lesson volume in Central/Eastern Europe
rose 10.3% 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 recently opened
language centers. Lesson volume in Western Europe improved 4.5% from the 1996
third quarter, primarily in France.
For the 1997 third quarter, ARPL was $41.72, as compared to $45.38 in the
comparable prior-year period. The decline mainly reflected the effect of
unfavorable exchange rate fluctuations of $3.48. ARPL ranged from a high of
approximately $60.72 in Brazil to a low of $15.65 in Hungary, 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 third quarter in
Brazil, Colombia and Ireland and sold five franchises in Egypt (2), Germany,
Japan and the United Kingdom.
Translation segment sales were $23.4 million for the three-month period ended
September 30, 1997, an increase of $3.3 million, or 16.4%, from the same period
in 1996, as results from operations were partially offset by unfavorable
exchange fluctuations of $1.4 million. The operations growth was primarily due
to activity in North America and Ireland. The North America revenue increase
resulted from the continued expansion of business from the existing client base,
primarily an increase in the demand for Asian language services, the continued
development of documentation and interpretation services, and the timing of
certain contracts. Ireland's sales increase is the result of continued growth of
certain key accounts in the software related industries and expansion of new
client base. These increases were partially offset by decreased revenue in
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Germany and Japan as a result of reorganization efforts, and by decreases in
certain Western European countries due to the cyclical effects of projects from
a major customer.
Publishing segment sales were $3.5 million for the three months ended September
30, 1997, $0.3 million or 7.2% 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. Exchange rate
fluctuations did not significantly impact sales.
The Company's cost of services and products sold as a percentage of sales
was 59.7% for the 1997 third quarter, compared to 60.7% 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. Selling, general and administrative
expenses as a percentage of sales were 30.4% in the 1997 third quarter, compared
with 30.6% in the same prior year period. This improvement resulted primarily
from a lower percentage for advertising and from a focus on general cost
control.
EBITA(1) for the three months ended September 30, 1997 was $10.4 million, or
9.9% of sales, compared to $8.2 million, or 8.7% 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
September 30, 1997 was $13.4 million, or 17.5% of segment sales, compared to
$11.4 million, or 16.3% 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 September 30, 1997 was $2.4
million, or 10.4% of segment sales, compared to $1.3 million, or 6.6% of segment
sales, in the prior year. The 1997 EBITA results were positively affected by a
favorable product mix, by growth from the recurring client base, and by
reduction 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 results, and in certain Western
European countries due to the timing of a significant client project cycle. In
addition, 1996 results were negatively impacted by certain low margin contracts
and non-recurring costs.
Publishing segment reported an EBITA profit of $0.1 million for the 1997 third
quarter, compared with an EBITA profit of $0.4 million 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 $5.6 million for the three months ended
September 30, 1997, compared with $5.0 million in the same prior year period.
This increase was primarily due to higher expenses in 1997 associated with the
Company's New Long-Term Executive Incentive Compensation Plan ("New LTIP") and
its Supplemental Executive Retirement Plan (the "SERP").
- ----------
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.
15
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Interest expense on long-term debt for the three months ended September 30, 1997
increased by $0.1 million, or 7.0%, from the comparable prior year period,
reflecting the effect of increased long-term debt outstanding in 1997 related to
the ELS Acquisition.
The Company recorded an income tax expense of $3.3 million, or an effective rate
of 75.6%, during the current quarter. This compared to an income tax expense of
$1.7 million, or an effective rate of 62.7%, in the prior year's third 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.
Due to the early extinguishment of debt outstanding prior to the ELS
Acquisition, the Company incurred an extraordinary charge, net of taxes, of $6.3
million in the 1997 third quarter, consisting of prepayment penalties on its
Senior Notes and the write-off of unamortized deferred financing costs. The
Company's refinanced debt had an effective interest rate of approximately 7.0%
at September 30, 1997, compared with an effective interest rate of 9.79% on the
Senior Notes.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997 VS.
NINE MONTHS ENDED SEPTEMBER 30, 1996
Sales for the nine months ended September 30, 1997 were $289.6 million, 4.7%
above the same period in the prior year. This improvement was due to increases
from operating activity in the Instruction and Translation business segments,
including the post acquisition results of an acquired business, partially offset
by unfavorable exchange rate fluctuations of $17.6 million (primarily the result
of a strengthened dollar against the Japanese yen, the German mark, and almost
all other European currencies.) Excluding the effect of exchange rate
fluctuations, revenues increased from the prior year by 11.1%.
Language Instruction sales, excluding franchising activity, for the nine months
ended September 30, 1997 were $214.4 million, 2.9% above the same period in 1996
primarily due to volume and ARPL increases and the post-acquisition results of
ELS, partially offset by unfavorable exchange rate fluctuations of $15.4
million. Excluding the unfavorable exchange rate fluctuations, revenues
increased 10.3% from the prior year.
On a geographic basis, Language Instruction revenue decreases in Japan,
Central/Eastern Europe and Western Europe were partially offset by increases in
the other geographic divisions. The sales decline in Japan ($3.9 million,or
7.8%) reflected unfavorable exchange rate fluctuations ($5.6 million) partially
offset by the positive effects of special sales campaigns. Central/Eastern
Europe's decrease ($3.2 million, or 6.9%) was also due to unfavorable exchange
rate fluctuations ($6.6 million, principally versus the German mark and Swiss
franc), partially offset by lesson volume increases in all countries and ARPL
increases in most countries within the division. The sales decline in Western
Europe ($1.7 million, or 5.6%) was attributable to unfavorable exchange
fluctuations ($3.2 million), primarily for France, Belgium and Spain, partially
offset by operational improvements in most countries within the division,
particularly France, whose improvements reflected increased volume from
corporate clients. North America's sales increase, excluding ELS, was $3.8
million, or 8.0%, and primarily resulted from volume and ARPL improvements, the
latter of which was evident in the United States only. Asia's sales improvement
($0.9 million, or 32.5%) mainly reflected the startup of operations in
Singapore, as well as volume and ARPL increases in Hong Kong. The increase in
16
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Latin American revenues ($4.8 million, or 15.4%) was primarily attributable to
volume increases in all countries. ARPL improvements, most notably in Mexico,
also favorably impacted Latin America revenues.
During the nine-month period ended September 30, 1997, the number of lessons
given was approximately 4.1 million, 6.8% above the same period in the prior
year, reflecting increases in all divisions. Lesson volume in North America and
Japan increased 5.1% and 7.5%, respectively, from the prior year. North
America's improvement resulted from improving economic conditions and aggressive
sales strategies whereas Japan's improvement was largely attributed to special
sales and advertising campaigns. Lesson volume in Asia rose 23.9% from 1996,
mainly reflecting the startup of operations in Singapore. Lesson volume in Latin
America increased by 10.5% from prior year, primarily reflecting growth in all
countries due to expanding economic conditions in most countries, as well as the
startup of operations in Peru. Lesson volume in Central/Eastern Europe increased
7.0% 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 from its 1997 first quarter lesson volume shortfall. Lesson
volume in Western Europe improved by 1.8% from 1996, primarily due to increases
in most countries, in particular 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 first nine months of 1997, ARPL was $41.88 as compared to $45.05 in the
comparable prior-year period. The decline reflected the effect of unfavorable
exchange rate fluctuations of $3.32. ARPL ranged from a high of approximately
$60.86 in Brazil to a low of $16.95 in the Slovak Republic, reflecting effects
of foreign exchange rates and differences in the economic value of the service.
The Company opened seven new language centers during the nine month period ended
September 30, 1997 in Brazil, Chile, Colombia, Ireland, Israel, Mexico and Peru,
and sold nine franchises in Austria, Costa Rica, Egypt (2), France, Germany,
Japan, Mexico and the United Kingdom.
Translation segment sales were $63.8 million for the nine-month period ended
September 30, 1997, an increase of $7.6 million, or 13.5%, from the same period
in 1996, as results from operations were partially offset by unfavorable
exchange fluctuations of $2.4 million. The operations growth was primarily due
to increases in the U.S., Canada, Singapore and Ireland, partially offset by
declines in Germany, Japan and certain Western European countries. The North
America (U.S. and Canada) revenue increase resulted from the continued expansion
of business from the existing client base, primarily the increase in demand for
Asian language services, the continued development of documentation and
interpretation services, the acquisition of new accounts and the timing of
certain contracts. Singapore's revenue increase is a direct result of the
expanding demand for Asian language services. Ireland's sales increase is the
result of continued growth in the software related industries. These increases
were partially offset by a decrease in revenue in Germany and Japan resulting
from reorganization efforts, and by decreases in certain Western European
countries due to the cyclical effects of projects from a major customer.
Publishing segment sales were $10.6 million for the nine months ended September
30, 1997, $1.2 million or 9.9% below 1996, primarily reflecting a decrease in
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<PAGE>
travel related products worldwide, a delay in the release of certain titles, and
the difficult climate of the publishing retail industry. Exchange rate
fluctuations were not significant.
The Company's cost of services and products sold as a percentage of sales was
59.4% for the first nine months of 1997, compared to 60.2% in the same prior
year period. 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 31.1% for the nine months ended September
30, 1997, compared with 31.0% during the first nine months 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 nine month period ended September 30, 1997 was $27.4 million, or
9.5% of sales, compared to $24.4 million, or 8.8% of sales, in the same prior
year period, primarily reflecting EBITA improvements in the Instruction and
Translation business segments, partially offset by an increase in non-segment
related corporate expenses.
Instruction segment EBITA, excluding franchising activity, for the nine months
ended September 30, 1997 was $37.1 million, or 17.3% of segment sales, compared
to $34.4 million, or 16.5% 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 first nine months of 1997 was $5.7 million, or
8.9% of segment sales, compared to $3.6 million, or 6.4% of segment sales, in
the prior year. The 1997 EBITA results reflect the positive effects of a
favorable product mix, expansion of software-related services, continued growth
in traditional documentation translation and interpretation services, and by
reduction of certain general office and administrative expenses. These positive
results were partially offset by weaknesses in certain European countries and
Japan. Thailand results were negatively impacted by certain one-time charges. In
addition, 1996 results were negatively impacted by certain low margin contracts
and non-recurring costs, primarily in Germany.
Publishing segment EBITA for the nine month period ended September 30, 1997 was
$0.5 million, slightly lower than in the prior year. The EBITA was due primarily
to a decrease in sales, partially offset by the absence of non-recurring prior
year charges related to the shutdown of the Company's 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 $15.9 million for the nine months ended
September 30, 1997, compared with $14.2 million in the same prior year period.
This increase was primarily due to higher expenses in 1997 associated with the
New LTIP and the SERP.
Interest expense on long-term debt for the nine months ended September 30, 1997
decreased by $0.3 million, or 5.4%, from the comparable prior year period,
primarily due to scheduled principal repayments of the Company's long-term debt
prior to the ELS acquisition, offset by an increase in long-term debt concurrent
with the ELS acquisition.
18
<PAGE>
Other income, net for the nine months ended September 30, 1997 increased $0.3
million primarily due to higher investment income and foreign exchange gains and
reduced non-operating taxes, partially offset by the absence of gains from the
termination of a currency coupon swap agreement that provided income in 1996.
The Company recorded an income tax expense of $7.3 million, or an effective rate
of 68.4%, during the current period. This compared to an income tax expense of
$4.9 million, or an effective rate of 64.8%, in the comparable prior year
period. 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.
Due to the early extinguishment of debt outstanding prior to the ELS
acquisition, the Company incurred an extraordinary charge, net of taxes, of $6.3
million for the nine months ended September 30, 1997, consisting of prepayment
penalties on its Senior Notes and the write-off of unamortized deferred
financing costs. The Company's refinanced debt had an effective interest rate of
approximately 7.0% at September 30, 1997, compared with an effective interest
rate of 9.79% on the Senior Notes.
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 most 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 $11.1 million for the nine months
ended September 30, 1997, down $5.0 million from the comparable prior year
period. This decline was due to a number of factors, including a $5.8 million
prepayment penalty on the Company's Senior Notes, higher accounts receivable,
and a $2.5 million tax payment associated with the October 1996 Internal Revenue
Service ("IRS") deficiency notice, hereinafter discussed. The decrease was
partially offset by 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.
Net cash used in investing activities was $100.0 million for the nine months
ended September 30, 1997, up $90.2 million from the comparable prior year. This
fluctuation was primarily due to the acquisition of ELS for $90.5 million,
including various transaction-related expenditures and net of cash acquired of
$6.0 million. Capital expenditures during the nine-month period ended September
30, 1997 were $9.5 million, primarily reflecting costs of refurbishments and
purchases for new and existing centers. Capital expenditures declined by $0.3
million from the comparable prior year period, which included $2.7 million
related to the April 1996 relocation of the Company's corporate headquarters to
its new facility in Princeton, New Jersey.
Net cash provided by financing activities was $102.7 million for the nine months
ended September 30, 1997, up $110.9 million from the same prior year period.
This change primarily reflected proceeds of $164.0 million under the Bank
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Facility, partially offset by the repayment of $66.7 million on the Company's
pre-existing long-term debt. In addition, 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 ($6.1 million) will be used for general
corporate purposes.
Pursuant to a covenant under the Bank Facility, 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 September 30, 1997, representing the amount that could be
settled based on estimates obtained from a dealer, was a net asset of
approximately $0.4 million.
In connection with another covenant under the Bank Facility, the Company entered
into a five-year interest rate swap agreement which provides for quarterly
exchanges of interest on an amortizing "notional" (theoretical) amount
originally set at $66.0 million. This notional amount amortizes proportionately
with the scheduled principal payments under the Bank Facility. 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.
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.
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 November 14, 1997, the Company acquired 126,225 shares of its Common from MCC
Proceeds, Inc., as Trustee for the Maxwell Macmillan Realization Trust. The
negotiated purchase price was $23.5125 per share, or $3.0 million, which was
below the market price at the date of negotiation. The transaction was funded
from cash generated by operations. The repurchased shares were placed into
treasury and reserved for future uses permitted under the Bank Facility.
20
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The revolving credit commitment under the Bank Facility was increased from $45
million to $55 million, via amendment, on October 28, 1997. At November 14,
1997, the Company had $44 million outstanding under this revolving credit
facility.
At September 30, 1997, the Company's liquid assets of $38.3 million consisted of
cash and temporary investments. The Company does not currently have any material
commitments for capital expenditures. In the future, 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
Certain statements in this Quarterly Report on Form 10-Q 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 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 and their
effects on the Company's ability to meet its debt service requirements and
future working capital needs, 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.
10.1 Amendment No. 1, dated September 12, 1997, to 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.
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10.2 Amendment No. 2, dated October 28, 1997, to 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.
10.3 Stock Purchase Agreement, dated as of November 14, 1997 between
MCC Proceeds, Inc. and Berlitz International, Inc.
27 Financial Data Schedule, for the nine months ended September 30, 1997.
(B) REPORTS ON FORM 8-K
A Form 8-K was filed on July 30, 1997 related to the Stock Purchase Agreement,
dated as of July 23, 1997, between ELS, its selling shareholders, and the
Company (the "Stock Purchase Agreement").
A Form 8-K was filed on September 11, 1997 related to a) the completion by the
Company of its acquisition of ELS pursuant to the Stock Purchase Agreement, and
b) the Credit Agreement, dated as of August 28, 1997, among the Company and its
lenders, which governs the Company's Bank Facility.
A Form 8-K/A was filed on November 12, 1997, amending the Form 8-K filed on
September 11, 1997 to provide financial statements of the business acquired and
certain pro forma financial information.
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: November 14, 1997 By: /S/ HENRY D. JAMES
------------------------
Henry D. James
Executive Vice President and
Chief Financial Officer
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23
EXHIBIT 10.1
AMENDMENT NO. 1 TO CREDIT AGREEMENT
AND
AMENDMENT NO. 1 TO PLEDGE AGREEMENT
THIS AMENDMENT NO. 1 TO CREDIT AGREEMENT AND AMENDMENT NO. 1 TO PLEDGE
AGREEMENT (this "Agreement") is made and entered into as of this 12th day of
September, 1997 by and between BERLITZ INTERNATIONAL, INC., a New York
corporation (the "Borrower"), each of the undersigned subsidiaries of the
Borrower (the "Subsidiary Pledgors", and together with the Borrower, the
"Pledgors", and each individually a "Pledgor"), NATIONSBANK, NATIONAL
ASSOCIATION, a national banking association organized and existing under the
laws of the United States, in its capacity as a Lender ("NationsBank"), and each
other financial institution executing and delivering a signature page hereto and
each other financial institution which may hereafter execute and deliver an
instrument of assignment with respect to the Credit Agreement described below
pursuant to SECTION 13.1 thereof (hereinafter such financial institutions may be
referred to individually as a "Lender" or collectively as the "Lenders"), and
NATIONSBANK, NATIONAL ASSOCIATION, a national banking association organized and
existing under the laws of the United States, as Agent (the "Agent") for the
Lenders party to the Credit Agreement described below.
W I T N E S S E T H:
-------------------
WHEREAS, the Borrower, the Agent and the Lenders have entered into a Credit
Agreement dated as of August 28, 1997 (the "Credit Agreement");
WHEREAS, the Pledgors and the Agent, on behalf of the Lenders, have entered
into that certain Pledge Agreement dated as of August 28, 1997 (the "Pledge
Agreement");
WHEREAS, the Borrower and the Agent and the Lenders have agreed, subject to
the terms and conditions of this Agreement, to amend the Credit Agreement to,
among other things, amend and update SCHEDULE 8.4 thereto;
WHEREAS, the Pledgors and the Agent have agreed, subject to the terms and
conditions of this Agreement, to amend the Pledge Agreement with respect to
certain pledges contained therein and to amend and update SCHEDULE I thereto,
among other things;
NOW, THEREFORE, in consideration of the mutual covenants, promises and
conditions herein set forth, it is hereby agreed as follows:
1. DEFINITIONS. The term "Credit Agreement" as used herein and in the
Credit Agreement and the other Loan Documents shall mean the Credit Agreement as
hereby amended and as from time to time further amended or modified. The term
"Pledge Agreement" as used herein and in the Credit Agreement and the other Loan
Documents shall mean the Pledge Agreement as hereby amended and as from time to
time further amended or modified. Unless the context otherwise requires, all
capitalized terms used herein without definition shall have the meaning provided
therefor in the Credit Agreement or the Pledge Agreement, as applicable.
26
<PAGE>
2. AMENDMENT TO CREDIT AGREEMENT. Subject to the conditions set forth
herein, the Credit Agreement shall be and hereby is amended, effective as of the
date hereof, by deleting SCHEDULE 8.4 in its entirety and inserting in
replacement thereof the amended SCHEDULE 8.4 set forth as Exhibit A hereto.
3. AMENDMENT TO PLEDGE AGREEMENT. Subject to the conditions set forth
herein, the Pledge Agreement shall be and hereby is amended, effective as of the
date hereof, as follows:
(a) The third "WHEREAS" clause of the Pledge Agreement is hereby deleted in
its entirety and the following is inserted in replacement thereof:
WHEREAS, as collateral security for the payment and performance
of the Borrower's obligations under the Credit Agreement and the
Subsidiary Pledgors' obligations under the Guaranty, each Pledgor is
willing to pledge and grant to the Agent for the benefit of the
Lenders a security interest in all or a portion of the issued and
outstanding shares of capital stock, whether now in existence or
hereafter issued, of each of its Subsidiaries required to be subject
to a Pledge Agreement pursuant to the Credit Agreement (the "Pledged
Stock"), including without limitation the Pledged Stock in such
Subsidiaries more particularly described on SCHEDULE I hereto (such
Subsidiaries, together with all other Subsidiaries whose capital stock
may be required to be subject to a Pledge Agreement from time to time,
are hereinafter referred to collectively as the "Pledged
Subsidiaries"); and
(b) The first paragraph of Section 2 of the Pledge Agreement is hereby
deleted in its entirety and the following is inserted in replacement
thereof:
27
<PAGE>
Each Pledgor hereby represents and warrants to the Agent for the
benefit of the Lenders that (i) all of the issued and outstanding
shares of capital stock of the Pledged Subsidiaries owned by the
Pledgor (the "Stock") are validly issued and outstanding, fully paid
and nonassessable and constitute all the authorized, issued and
outstanding shares of capital stock of each of the Pledged
Subsidiaries of such Pledgor, (ii) the Pledged Stock constitutes the
number of shares of the authorized Stock of the Pledged Subsidiaries
set forth in the column labeled "No. shares Pledged" on SCHEDULE I
hereto, (iii) such Pledgor is the registered and record and beneficial
owner of the Stock, free and clear of all Liens, charges, equities,
encumbrances and restrictions on pledge or transfer (other than Liens
in favor of the Agent and the Lenders and restrictions imposed by
applicable law), (iv) such Pledgor has full corporate power, legal
right and lawful authority to execute this Agreement and to pledge,
assign and transfer the Pledged Stock in the manner and form hereof,
and (v) the pledge, assignment and delivery of the Certificated
Pledged Stock to the Agent for the benefit of the Lenders pursuant to
this Agreement creates, together with the delivery of the certificates
evidencing the Certificated Pledged Stock, which delivery has
heretofore been accomplished, a valid and perfected first priority
security interest in the Certificated Pledged Stock in favor of the
Agent for the benefit of the Lenders, securing the payment of the
Secured Obligations. Except as permitted under SECTIONS 10.3 OR 10.5
of the Credit Agreement, none of the Pledged Stock (nor any interest
therein or thereto) shall be sold, transferred or assigned, nor any
Lien created therein, without the Agent's prior written consent, which
may be withheld for any reason. Each Pledgor covenants with the Agent
for the benefit of the Lenders that it shall at all times cause the
Certificated Pledged Stock to be represented by the certificates now
and hereafter delivered to the Agent in accordance with SECTION 1
hereof and that it shall not cause, suffer or permit any of the
Pledged Subsidiaries to issue any capital stock, or securities
convertible into, or exercisable or exchangeable for, capital stock,
at any time during the term of this Agreement other than to the
Pledgors and subject to this Agreement pursuant to SECTION 17 hereof.
(c) SCHEDULE I is hereby deleted in its entirety and the amended SCHEDULE I
set forth as Exhibit B hereto is inserted in replacement thereof.
4. BORROWER'S REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents, warrants and certifies that:
(1) The representations and warranties made by it in Article VIII of
the Credit Agreement are true and correct in all material respects on and
as of the date hereof before and after giving effect to this Agreement;
(2) The Borrower has the power and authority to execute and perform
this Agreement and has taken all action required for the lawful execution,
delivery and performance thereof;
(3) No Default or Event of Default has occurred and is continuing on
the date hereof, or will occur after giving effect to this Agreement.
5. PLEDGORS' REPRESENTATIONS AND WARRANTIES. Each Pledgor hereby
represents, warrants and certifies that it has the power and authority to
execute and perform this Agreement and has taken all action required for the
lawful execution, delivery and performance thereof.
28
<PAGE>
6. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding and
agreement of the parties hereto in relation to the subject matter hereof and
supersedes any prior negotiations and agreements among the parties relative to
such subject matter. None of the terms or conditions of this Agreement may be
changed, modified, waived or canceled orally or otherwise, except by writing,
signed by all the parties hereto, specifying such change, modification, waiver
or cancellation of such terms or conditions, or of any proceeding or succeeding
breach thereof.
7. FULL FORCE AND EFFECT OF AGREEMENT. Except as hereby specifically
amended, modified or supplemented, the Credit Agreement and all of the other
Loan Documents are hereby confirmed and ratified in all respects and shall
remain in full force and effect according to their respective terms.
8. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and all the counterparts taken together shall be deemed to
constitute one and the same instrument.
9. ENFORCEABILITY. Should any one or more of the provisions of this
Agreement be determined to be illegal or unenforceable as to one or more of the
parties hereto, all other provisions nevertheless shall remain effective and
binding on the parties hereto.
[Signature pages follow.]
29
<PAGE>
SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers, all as of the day and year
first above written.
BORROWER AND PLEDGOR:
BERLITZ INTERNATIONAL, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
OTHER PLEDGORS:
BERLITZ INVESTMENT CORPORATION
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
BERLITZ LANGUAGES, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
BERLITZ DO BRASIL, INC.
AGENT:
NATIONSBANK, NATIONAL ASSOCIATION,
as Agent and as Lender
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
30
EXHIBIT 10.2
AMENDMENT NO. 2 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 2 TO CREDIT AGREEMENT (this "Amendment Agreement") is
made and entered into effective as of the 28th day of October, 1997, by and
between BERLITZ INTERNATIONAL, INC, a New York corporation (the "Borrower"),
EACH OF THE GUARANTORS SIGNATORY HERETO (the "Guarantors"), and NATIONSBANK,
NATIONAL ASSOCIATION, a national banking association organized and existing
under the laws of the United States ("NationsBank"), in its capacity as agent
for the Lenders ("Agent") under the Credit Agreement (as defined below). Unless
the context otherwise requires, all terms used herein without definition shall
have the definitions provided therefor in the Credit Agreement.
W I T N E S S E T H:
-------------------
WHEREAS, the Agent and the Borrower have entered into that certain Credit
Agreement dated as of August 28, 1997, as amended by that certain Amendment No.
1 to Credit Agreement and Amendment No. 1 to Pledge Agreement dated as of
September 12, 1997 (as hereby and from time to time amended, supplemented or
replaced, the "Credit Agreement"), pursuant to which the Lenders have agreed to
make certain revolving and term credit facilities available to the Borrower; and
WHEREAS, the parties hereto desire to amend the Credit Agreement in the
manner herein set forth effective as of the date hereof and prior to the
effectiveness of any Assignment and Acceptance by NationsBank in its capacity as
a Lender to any Person of its rights and obligations under the Credit Agreement
(collectively, "Assignments").
NOW, THEREFORE, the parties hereby agree as follows:
1. DEFINITIONS. The term "Credit Agreement" or "Agreement" (as the case may
be) as used herein and in the Loan Documents shall mean the Credit Agreement as
hereby amended and modified, and as further amended, modified or supplemented
from time to time as permitted thereby.
2. AMENDMENTS. Subject to the conditions hereof, the Credit Agreement is
hereby amended, effective as of the date hereof, as follows:
(a) The definition of "Eligible Assignee" is hereby deleted in its
entirety and the following is inserted in replacement thereof:
"Eligible Assignee" means (i) a Lender, (ii) an affiliate of a
Lender, and (iii) any other Person approved by the Agent and, unless
an Event of Default has occurred and is continuing at the time any
assignment is effected in accordance with SECTION 13.1, the Borrower,
such approval not to be unreasonably withheld or delayed by the Agent
or the Borrower, PROVIDED, HOWEVER, that neither the Borrower nor an
Affiliate shall qualify as an Eligible Assignee.
31
<PAGE>
(b) The definition of "Total Letter of Credit Commitment" is hereby
deleted in its entirety and the following is inserted in replacement
thereof:
"Total Letter of Credit Commitment" means an amount not to exceed
$3,000,000.
(c) The definition of "Total Revolving Credit Commitment" is hereby
deleted in its entirety and the following is inserted in replacement
thereof:
"Total Revolving Credit Commitment" means a principal amount
equal to $55,000,000, as reduced from time to time in accordance with
SECTION 3.7 hereof.
(d) Section 9.1(e) of the Credit Agreement is hereby deleted in its
entirety and the following is inserted in replacement thereof:
(e) not later than thirty days prior to the end of each Fiscal
Year of the Borrower, deliver to the Agent and each Lender (through
the Agent) a copy of the monthly operating budget and cash flow budget
of the Borrower and its Subsidiaries for the succeeding fiscal year,
such budgets to be accompanied by a certificate of the Borrower signed
by an Authorized Officer to the effect that such budgets have been
prepared in good faith on the basis of sound financial planning
practice and that such Authorized Officer has no reason to believe
they are incorrect or misleading in any material respect; and
(e) Section 9.7 of the Credit Agreement is hereby deleted in its
entirety and the following is inserted in replacement thereof:
9.7 RIGHT OF INSPECTION. Permit any Person designated by any
Lender or the Agent, at the expense of the Agent or such Lender, if
occurring more than once in any Fiscal Year to visit and inspect any
of the properties, corporate books and financial reports of the
Borrower or any Subsidiary and to discuss its affairs, finances and
accounts with its principal officers and independent certified public
accountants, all in their Permitted Discretion, at reasonable times,
at reasonable intervals and with reasonable prior notice; PROVIDED,
HOWEVER, that, notwithstanding the foregoing, after the occurrence and
during the continuance of an Event of Default, such visits and
inspections may be conducted at any reasonable interval and any
reasonable number of occasions and all reasonable and documented
out-of-pocket expenses incurred by the Agent or the Lenders in
conducting such visits and inspections shall be paid by the Borrower;
(f) Section 10.1(c) of the Credit Agreement is hereby deleted in its
entirety and the following is inserted in replacement thereof:
32
<PAGE>
(c) CONSOLIDATED NET WORTH. Permit at any time Consolidated Net
Worth to be less than $300,000,000, such amount to be increased as at
the first day of each fiscal quarter, beginning with the fiscal
quarter ending December 31, 1997, by an amount equal to (a) fifty
percent (50%) of Consolidated Net Income during the immediately
preceding fiscal quarter, plus (b) one hundred percent (100%) of the
Net Proceeds of any Equity Offering consummated during the immediately
preceding fiscal quarter; PROVIDED, HOWEVER, in no event shall the
Consolidated Net Worth requirement be decreased as a result of a net
loss of the Borrower and its Subsidiaries (i.e., negative Consolidated
Net Income) for any fiscal quarter. Any increase calculated pursuant
hereto shall be determined based upon financial statements delivered
in accordance with SECTION 9.1(A) and (B) hereof; PROVIDED, HOWEVER
such increase shall be deemed effective as of the first day of the
fiscal quarter in which such financial statements are delivered.
(g) Section 10.8 of the Credit Agreement is hereby deleted in its
entirety and the following is inserted in replacement thereof:
10.8 RESTRICTED PAYMENTS. Make any Restricted Payments or apply
or set apart any of their assets therefor or agree to do any of the
foregoing other than (a) conversion of any of the Borrower's
securities into Common Stock which are so convertible in accordance
with their terms, (b) dividends payable by any Subsidiary to a
Guarantor or to the Borrower, (c) payments of up to $3,000,000 made by
the Borrower during any Fiscal Year to (i) repurchase shares of
capital stock, or options to purchase shares of capital stock, of the
Borrower or any Subsidiary owned by any officer, director or employee
of the Borrower or any Subsidiary pursuant to (A) an employee or
management stock option plan or other compensation plan or (B) any
arrangement in connection with the death or termination of employment
of such officer, director or employee or (ii) repurchase shares of
capital stock of the Borrower at a price equal to or less than the
market price for such shares either (y) in order to enable the
Borrower to contribute such shares to an employee or management stock
option plan, which contribution shall occur prior to the end of the
next succeeding Fiscal Year, or (z) for any other corporate purpose of
the Borrower approved by the Board of Directors of the Borrower, the
Disinterested Directors Committee thereof, the Agent and the Required
Lenders, and (d) cash dividends payable by the Borrower in any fiscal
quarter following a period of two consecutive fiscal quarters for
which the Borrower shall have maintained a Consolidated Leverage Ratio
of less than 2.50 to 1.00 for each such fiscal quarter, in an amount
not in excess of 6.25% of Consolidated Net Income for the Four-Quarter
Period most recently ended, but in any case above, only if immediately
prior and immediately after giving effect thereto no Default or Event
of Default shall exist or occur and be continuing;
(h) Section 11.1(A) of the Credit Agreement is hereby deleted in its
entirety and the following is inserted in replacement thereof:
33
<PAGE>
(A) either or both of the following actions may be taken: (i) the
Agent, with the consent of the Required Lenders may, and at the
direction of the Required Lenders shall, declare any obligation of the
Lenders and the Issuing Bank to make further Revolving Loans or to
issue additional Letters of Credit terminated, whereupon the
obligation of each Lender to make further Revolving Loans and of the
Issuing Bank to issue additional Letters of Credit, hereunder shall
terminate immediately, and (ii) the Agent shall at the direction of
the Required Lenders, at their option, declare by notice to the
Borrower any or all of the Obligations to be immediately due and
payable, and the same, including all interest accrued thereon and all
other obligations of the Borrower to the Agent and the Lenders, shall
forthwith become immediately due and payable without presentment,
demand, protest, notice or other formality of any kind, all of which
are hereby expressly waived, anything contained herein or in any
instrument evidencing the Obligations to the contrary notwithstanding;
PROVIDED, HOWEVER, that notwithstanding the above, if there shall
occur an Event of Default under clause (g) or (h) above with respect
to the Borrower, then the obligation of the Lenders to make Revolving
Loans and of the Issuing Bank to issue Letters of Credit hereunder
shall automatically terminate and any and all of the Obligations shall
be immediately due and payable without the necessity of any action by
the Agent or the Required Lenders or notice to the Agent or the
Lenders;
(i) Section 13.9(b) of the Credit Agreement is hereby deleted in its
entirety and the following is inserted in replacement thereof:
(b) The Borrower agrees that no Indemnified Party shall have any
liability (whether direct or indirect, in contract or tort or
otherwise) to it, any of its Subsidiaries, any Guarantor, or any
security holders or creditors thereof arising out of, related to or in
connection with the transactions contemplated herein, except to the
extent that such liability is found in a final non-appealable judgment
by a court of competent jurisdiction to have directly resulted from
such Indemnified Party's gross negligence or willful misconduct;
provided, HOWEVER, in no event shall any Indemnified Party be liable
for punitive, consequential, indirect or special damages, as opposed
to direct damages.
(j) EXHIBIT A to the Credit Agreement is hereby amended and restated
in its entirety as set forth on EXHIBIT A attached hereto and incorporated
herein by reference.
3. GUARANTORS. Each Guarantor hereby (i) consents and agrees to the
amendments to the Credit Agreement set forth herein and (ii) confirms its joint
and several guarantee of payment of all the Obligations pursuant to the
Subsidiary Guaranty.
34
<PAGE>
4. REPRESENTATIONS AND WARRANTIES. The Borrower hereby certifies that:
(1) The representations and warranties made by the Borrower in Article
VIII of the Credit Agreement are true and correct in all material respects
on and as of the date hereof, with the same effect as though such
representations and warranties were made on the date hereof, except to the
extent that such representations and warranties expressly relate to an
earlier date.
(2) No event has occurred and no condition exists which, upon the
consummation of the transaction contemplated hereby, will constitute a
Default or an Event of Default on the part of the Borrower under the Credit
Agreement or any other Loan Document either immediately or with the lapse
of time or the giving of notice, or both.
5. ENTIRE AGREEMENT. This Amendment Agreement sets forth the entire
understanding and agreement of the parties hereto in relation to the subject
matter hereof and supersedes any prior negotiations and agreements among the
parties relative to such subject matter. No promise, condition, representation
or warranty, express or implied, not herein set forth shall bind any party
hereto, and not one of them has relied on any such promise, condition,
representation or warranty. Each of the parties hereto acknowledges that, except
as otherwise expressly stated herein, no representations, warranties or
commitments, express or implied, have been made by any party to the other. None
of the terms or conditions of this Amendment Agreement may be changed, modified,
waived or canceled orally or otherwise, except by writing, signed by all the
parties hereto, specifying such change, modification, waiver or cancellation of
such terms or conditions, or of any proceeding or succeeding breach thereof.
6. FULL FORCE AND EFFECT OF AGREEMENT. Except as hereby specifically
amended, modified or supplemented, the Credit Agreement and all of the other
Loan Documents are hereby confirmed and ratified in all respects and shall
remain in full force and effect according to their respective terms.
7. COUNTERPARTS. This Amendment Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
8. GOVERNING LAW. This Agreement shall in all respects be governed by, and
construed in accordance with, the laws of the state of New York.
9. ENFORCEABILITY. Should any one or more of the provisions of this
Amendment Agreement be determined to be illegal or unenforceable as to one or
more of the parties hereto, all other provisions nevertheless shall remain
effective and binding on the parties hereto.
35
<PAGE>
10. CREDIT AGREEMENT. All references in any of the Loan Documents to the
"Credit Agreement" shall mean the Credit Agreement as amended hereby and all
references to the amount of the Total Revolving Credit Commitment or the
principal amount of the Revolving Credit Facility in any of the Loan Documents
shall be to the amount of $55,000,000 as set forth herein.
11. SUCCESSORS AND ASSIGNS. This Amendment Agreement shall be binding upon
and inure to the benefit of each of the Borrower, the Lenders and the Agent and
their respective successors, assigns and legal representatives; PROVIDED,
however, that the Borrower, without the prior consent of the Agent, may not
assign any rights, powers, duties or obligations hereunder.
12. EXPENSES. Borrower agrees to pay to the Agent and the Lenders all
reasonable out-of-pocket expenses incurred or arising in connection with the
negotiation and preparation of this Amendment Agreement.
13. EFFECTIVENESS. The amendments of the Credit Agreement set forth in
Sections 2(a), (b) and (c) hereof shall be effective prior to any Assignments,
and the amendment of the Credit Agreement set forth in Section 2(d) hereof shall
be effective on the date hereof immediately following effectiveness of the
Assignments.
[Signature pages follow.]
36
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment Agreement
to be duly executed by their duly authorized officers, all as of the day and
year first above written.
BERLITZ INTERNATIONAL, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
NATIONSBANK, NATIONAL ASSOCIATION,
as Agent for the Lenders and as Lender
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
GUARANTORS:
BERLITZ LANGUAGES, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
BERLITZ INVESTMENT CORPORATION
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
BERLITZ PUBLISHING COMPANY, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
BERLITZ DO BRASIL, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
37
<PAGE>
ELS EDUCATIONAL SERVICES, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
38
<PAGE>
EXHIBIT A
APPLICABLE COMMITMENT PERCENTAGES
<TABLE>
<CAPTION>
LENDER TRANCHE A TRANCHE B REVOLVING APPLICABLE
TERM LOAN TERM LOAN CREDIT COMMITMENT
COMMITMENT COMMITMENT COMMITMENT PERCENTAGE
<S> <C> <C> <C> <C>
NationsBank, $2,607,142.83 $9,907,142.87 $5,735,714.30 10.428571429%
National
Association
Fleet Bank, N.A $2,321,428.57 $8,821,428.57 $5,107,142.86 9.285714286%
Summit Bank $2,321,428.57 $8,821,428.57 $5,107,142.86 9.285714286%
The Long-Term $2,321,428.57 $8,821,428.57 $5,107,142.86 9.285714286%
Credit Bank
of Japan, Ltd.
The Chugoku Bank, $1,714,285.72 $6,514,285.71 $3,771,428.57 6.857142857%
Limited
Corestates Bank, $1,714,285.72 $6,514,285.71 $3,771,428.57 6.857142857%
N.A
The Sumitomo $1,714,285.72 $6,514,285.71 $3,771,428.57 6.857142857%
Bank, Limited
PNC Bank, N.A $1,714,285.72 $6,514,285.71 $3,771,428.57 6.857142857%
The Bank of $1,428,571.43 $5,428,571.43 $3,142,857.14 5.714285714%
Nova Scotia
The Bank of $1,428,571.43 $5,428,571.43 $3,142,857.14 5.714285714%
Tokyo-Mitsubishi,
Ltd.
Banque Paribas $1,428,571.43 $5,428,571.43 $3,142,857.14 5.714285714%
Caisse Nationale de $1,428,571.43 $5,428,571.43 $3,142,857.14 5.714285714%
Credit Agricole
The Dai-Ichi $1,428,571.43 $5,428,571.43 $3,142,857.14 5.714285714%
Kangyo Bank,
Limited
The Sakura Bank, $1,428,571.43 $5,428,571.43 $3,142,857.14 5.714285714%
Limited
</TABLE>
39
---------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
between
MCC PROCEEDS, INC.
and
BERLITZ INTERNATIONAL, INC.
------------------------------
Dated as of November 14, 1997
------------------------------
---------------------------------------------------------------------
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of November 14,
1997, by and between MCC Proceeds, Inc., as Trustee of the Maxwell Macmillan
Realization Liquidation Trust (the "Seller"), and Berlitz International, Inc., a
New York Corporation (the "Purchaser").
WHEREAS, the Seller is the record and beneficial owner of the
Berlitz Shares (as hereinafter defined);
WHEREAS, the Seller desires to sell to the Purchaser, and the
Purchaser desires to purchase from the Seller, the Berlitz Shares, subject to
and upon the terms and conditions described below;
NOW, THEREFORE, in consideration of the mutual promises made herein
and of the mutual benefits to be derived herefrom, the parties hereto agree as
follows:
1. SALE AND PURCHASE OF THE SECURITIES.
(a) SALE AND PURCHASE. Subject to the terms and conditions
hereof, the Purchaser hereby agrees to purchase from the Seller, and the Seller
hereby agrees to sell to the Purchaser the Berlitz Shares on the Closing Date
(as defined herein) and on the terms and conditions provided for herein.
(b) PURCHASE PRICE. The aggregate purchase price (the
"Purchase Price") for the Berlitz Shares shall be $2,967,865.31, or $23.5125 per
share.
(c) CLOSING DATE. The closing with respect to the purchase and
sale of the Berlitz Shares (the "Closing") shall take place at the New York
office of Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the Americas,
New York, New York, 10019, at 11:00 A.M. local time on the date (the "Closing
Date") that is the earliest of:
(i) November 14, 1997; or
(ii) such other date as the Seller and Purchaser agree
to in writing.
The Closing shall be effective as of the close of business on that date.
(d) DELIVERY OF AND PAYMENT FOR THE SHARES. At the Closing,
the Seller shall deliver to the Purchaser (or its representative) certificates
representing the Berlitz Shares to be purchased by the Purchaser, duly endorsed
in blank (with such signature guarantees as the Purchaser or its counsel may
reasonably request), in
<PAGE>
2
proper form for transfer, and accompanied by all requisite stock transfer tax
stamps, if any. The Purchaser shall pay to the Seller the Purchase Price in U.S.
dollars by wire transfer of immediately available funds to such account as
designated by the Seller. All parties to the transaction shall execute such
documents as are otherwise appropriate.
2. BERLITZ SHARES.
The term "Berlitz Shares" shall mean an aggregate of 126,225
shares of common stock, par value $.10 per share, of the Purchaser owned by the
Seller on the date hereof.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller
represents and warrants to the Purchaser as follows:
(a) The Seller is validly existing as a corporation under the
laws of Delaware, and has the full and legal right and power to enter into,
execute and deliver this Agreement and to perform fully its obligations
hereunder. This Agreement has been duly executed and delivered by the Seller and
is the legal, valid and binding obligation of the Seller, enforceable in
accordance with its terms.
(b) No consent, license, approval, order or authorization of,
or registration, declaration or filing with any individual, corporation, joint
venture, partnership, trust, unincorporated association, government or any
department or agency thereof (each a "Person"), is required to be obtained by
the Seller in connection with the sale of the Berlitz Shares to the Purchaser
pursuant to and in accordance with the terms of this Agreement other than those
which have been heretofore obtained.
(c) The sale of the Berlitz Shares to the Purchaser hereunder
will not (i) conflict with, or result in a violation or breach of any provision
of, or constitute a default (or an event which with notice of lapse of time or
both, would constitute a default) under (a) any contract or other agreement or
instrument binding upon the Seller or applicable to the Berlitz Shares or (b)
any judgment, decree, award, injunction, governmental order or other restriction
or obligation to which the Seller is a party or by which it or any of its assets
or properties may be bound; (ii) violate any statute, law or regulation of any
jurisdiction applicable to the Seller or the assets or properties of the Seller;
or (iii) result in a breach of the terms or conditions of, constitute a default
under or otherwise cause an impairment of any license, permit, order, approval,
registration, authorization or qualification of the Seller under any local,
state, federal or foreign law.
<PAGE>
3
(d) Neither the Seller nor any intermediary acting on its
behalf has engaged in any form of general solicitation or advertising with
respect to the sale of the Berlitz Shares.
(e) The Seller is the beneficial owner of the Berlitz Shares
free and clear of any lien, charge, security interest, encumbrance, title
retention agreement, adverse claim, option or right of others (each a "Lien"),
other than those, if any, created by this Agreement. Assuming the Purchaser has
no prior knowledge or notice of any adverse claims to the Berlitz Shares, upon
the purchase and payment for the Berlitz Shares by the Purchaser as provided in
this Agreement, the Purchaser will acquire good and valid title to the Berlitz
Shares, free and clear of any Lien, other than Liens created or suffered to
exist by the Purchaser.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser
represents and warrants to the Seller as follows:
(a) The Purchaser is duly organized, validly existing and in
good standing as a Corporation under the laws of the State of New York, and has
the full legal right and power to enter into, execute and deliver this Agreement
and to perform fully its obligations hereunder. This Agreement has been duly
executed and delivered by the Purchaser and is the legal, valid and binding
obligation of the Pur chaser, enforceable in accordance with its terms.
(b) No consent, license, approval, order or authorization of,
other than approval by the Purchaser's Board of Directors which will have been
obtained by the time of Closing, or registration, declaration or filing with any
Person, is required to be obtained by the Purchaser in connection with the
purchase of the Berlitz Shares by the Purchaser pursuant to and in accordance
with the terms of this Agreement or the performance by the Purchaser of its
other obligations hereunder.
(c) The purchase of the Berlitz Shares by the Purchaser
hereunder and the performance by the Purchase of its other obligations hereunder
will not (i) conflict with, or result in a violation or breach of any provision
of, or constitute a default (or an event which with notice of lapse of time or
both, would constitute a default) under (a) any Contract or Other Agreement or
Instrument binding upon the Purchaser or applicable to the Berlitz Shares or (b)
any judgment, decree, award, injunction, governmental order or other restriction
or obligation to which the Purchaser is a party or by which it or any of its
assets or properties may be bound; (ii) violate any statute, law or regulation
of any jurisdiction applicable to the Purchaser or the assets or properties of
the Purchaser; or (iii) result in a breach of the terms or conditions of,
constitute a default under or otherwise cause an impairment of any license,
permit, order, approval, registration, authorization or qualification of the
Purchaser under any local, state, federal or foreign law.
<PAGE>
4
(d) Neither the Purchaser nor, to the knowledge of the
Purchaser, any other Person (including any affiliate of the Purchaser) has any
plan or current intention to make a tender, exchange or other similar offer to
the public holders of the common stock of the Purchaser for the purpose of
acquiring such common stock.
5. SURVIVAL OF THE REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
AND OF THE SELLER AFTER CLOSING.
(a) Notwithstanding any right of the Purchaser or Seller to
investigate and notwithstanding any knowledge of facts determined or
determinable by the Purchaser or Seller pursuant to such investigation or right
of investigation, the Purchaser and the Seller each have the right to rely fully
upon the representations and warranties of the other contained in this
Agreement.
(b) Notwithstanding any waiver by the Purchaser or the Seller
of any condition precedent to its obligation to close, all representations and
warranties shall survive the execution and delivery of this Agreement and the
Closing hereunder.
6. CONDITIONS PRECEDENT TO OBLIGATION OF THE SELLER TO CLOSE. The
following shall be conditions to the obligation of the Seller to sell the
Berlitz Shares pursuant to Section 1 hereof:
(a) The representations and warranties of the Purchaser
contained in Section 4 of this Agreement shall be true and correct as of the
Closing Date.
7. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PURCHASER TO CLOSE.
The following shall be conditions to the obligation of the Purchaser to purchase
the Berlitz Shares pursuant to Section 1 hereof:
(a) The representations and warranties of the Seller contained
in Section 3 of this Agreement shall be true and correct as of the Closing Date.
8. PURCHASER'S COVENANTS IN THE EVENT OF A TENDER OFFER OR OTHER
OFFER TO PURCHASE.
(a) If a tender offer or a similar offer to purchase some or
all of the outstanding shares of the Purchaser is commenced or is publicly
announced by Benesse Corporation, or any affiliate thereof, (a "Tender Offer"),
within ninety (90) days of the Closing Date, the Purchaser shall pay the Seller
an amount equal to the difference between the per share purchase price offered
in such Tender Offer and
<PAGE>
5
the per share Purchase Price paid under this Agreement, multiplied by the
product of (a) the number of Berlitz Shares purchased by the Purchaser hereunder
and (b) the percentage of the outstanding shares of the Purchaser purchased in
such Tender Offer, on the closing date of such Tender Offer by wire transfer of
immediately available funds.
9. GENERAL RESTRICTIONS; ALL TRANSFERS IN COMPLIANCE WITH LAW. All
sales, assignments, transfers, pledges, grants of a security interest in, and
other dispositions (a "Transfer") of the Berlitz Shares are subject to and
governed by the terms and conditions of this Agreement. Notwithstanding anything
to the contrary in this Agreement, any transfer of the Berlitz Shares permitted
or required by this Agreement shall be in compliance with federal and state
securities laws, including, without limitation, the Securities Act of 1933, as
amended, and the Purchaser may require an opinion, reasonably satisfactory to
the Purchaser, of counsel to the transferor as to such compliance.
10. INDEMNIFICATION.
(a) The Seller agrees to indemnify, defend and hold harmless
the Purchaser from and against all losses, liabilities, damages, deficiencies,
costs and expenses, including reasonable attorneys' fees, disbursements and
other charges, based upon, arising out of, or otherwise in respect of any
inaccuracy in or any breach of any representation, warranty, covenant or
agreement of the Seller contained in this Agreement.
(b) The Purchaser agrees to indemnify, defend and hold
harmless the Seller (and its officers, employees, affiliates and assigns) from
and against all losses, liabilities, damages, deficiencies, costs and expenses,
including reasonable attorneys' fees, disbursements and other charges, based
upon, arising out of, or otherwise in respect of any inaccuracy in or any breach
of any representation, warranty, covenant or agreement of the Purchaser
contained in this Agreement.
11. EXPENSES. Each party to this Agreement will pay its own expenses
and costs incidental to the purchase and sale of the Berlitz Shares and their
other respective obligations under this Agreement.
12. NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed given if telecopied or delivered personally or
mailed by registered or certified mail (return receipt requested) to the
following address (or at such other address as shall be specified by like
notice; provided, that notice of a change of address shall be effective only
upon receipt thereof):
<PAGE>
6
(a) IF TO THE SELLER:
MCC Proceeds, Inc.
c/o Price Waterhouse
No. 1 London Bridge
London SE1 9QL
England
Attention: Alan R.D. Jamieson
Telecopier Number: 011-44-71-939-4173
(b) with copies to:
Denis O'Connor
MCC Proceeds, Inc.
c/o Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
Telecopier: (212) 596-8869
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
Attention: John T. O'Connor, Esq.
Telecopier Number: (212) 530-5219
(c) IF TO THE PURCHASER:
c/o Berlitz International, Inc.
400 Alexander Park
Princeton, NJ 08540-6306
Attention: Robert C. Hendon, Jr., Esq.
Telecopier Number: (609) 514-9670
(d) with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064
Attention: Matthew Nimetz, Esq.
Telecopier Number: (212) 373-2101
All notices given by telecopier or delivered personally shall be
deemed to have been received by the recipient thereof if received on a business
day during the normal business hours of such recipient; otherwise, such notices
shall be deemed
<PAGE>
7
received on the next following business day. All notices mailed shall be deemed
to be received on the fifth business day following deposit of such notice into
the mail.
13. TERMINATION. This Agreement, and all of the rights and
obligations contained herein, except for obligations to consummate transactions
properly initiated prior to November 14, 1997, shall terminate as of December 1,
1997 if the Closing Date has not occurred prior thereto, unless the parties
hereto agree otherwise in writing.
14. GOVERNING LAW.
THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF
NEW YORK (OTHER THAN THE LAWS GOVERNING CONFLICT OF LAW MATTERS).
15. ENTIRE AGREEMENT; WAIVERS AND AMENDMENTS.
This Agreement embodies the entire agreement and understanding between the
parties hereto with respect to the subject matter hereof. This Agreement does
not modify any existing agreements. This Agreement may be changed, waived,
superseded, discharged or terminated only by an instrument in writing signed by
each of the parties hereto.
16. SEVERABILITY OF PROVISIONS. If any provision or any portion of
this Agreement, or the application of any such provision or any portion thereof
to any Person or circumstance, shall be held invalid or unenforceable, the
remaining portion of such provision and the remaining provisions of this
Agreement, and the application of such provision or portion of such provision as
is held invalid or unenforceable to Persons or circumstances other than those as
to which it is held invalid or unenforceable, shall not be affected thereby.
17. JOINT ADMINISTRATORS AND PRICE WATERHOUSE. The parties hereto
acknowledge and agree that:
(a) None of the Joint Administrators of the Seller (the "Joint
Administrators") shall incur any personal liability of any kind under, and the
United Kingdom accounting firm Price Waterhouse, a United Kingdom partnership
("PRICE WATERHOUSE") shall not incur any liability of any kind under, or by
virtue of, this Agreement, or in relation to any related matter or claim,
whether in contract or tort or by reference to any other remedy or right, in any
jurisdiction or forum.
(b) Without prejudice to Section 17(a) hereof, none of the
Joint Administrators or Price Waterhouse shall be liable under this Agreement or
any document executed with a view to, or for the purpose of, giving effect to
this Agreement.
<PAGE>
8
(c) The parties hereto have placed no reliance in entering
into and performing this Agreement on any representations, warranties,
statements or undertakings (oral or in writing) made by or on behalf of any of
the Joint Administrators, in their personal capacity or Price Waterhouse, and
any such representations, warranties, statements or undertakings which might
otherwise be implied by law are hereby expressly excluded and waived by all
parties hereto; PROVIDED, HOWEVER, that nothing in this Section 17 shall limit
the liability of the Seller under this Agreement or otherwise.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above written.
THE PURCHASER:
BERLITZ INTERNATIONAL, INC.
By: /s/ Robert Minsky
-------------------------------------
Name: Robert Minsky
Title: Executive Vice President
THE SELLER:
MCC Proceeds, Inc.
As Trustee of the
Maxwell Macmillan Realization Trust
By: /s/ Denis O'Connor
-------------------------------------
Name: Denis O'Connor
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-Q OF BERLITZ INTERNATIONAL, INC. FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 38,260
<SECURITIES> 0
<RECEIVABLES> 47,894
<ALLOWANCES> 2,389
<INVENTORY> 8,526
<CURRENT-ASSETS> 109,804
<PP&E> 48,409
<DEPRECIATION> 17,103
<TOTAL-ASSETS> 671,890
<CURRENT-LIABILITIES> 102,181
<BONDS> 0
<COMMON> 1,003
0
0
<OTHER-SE> 351,002
<TOTAL-LIABILITY-AND-EQUITY> 671,890
<SALES> 0
<TOTAL-REVENUES> 289,582
<CGS> 0
<TOTAL-COSTS> 172,064
<OTHER-EXPENSES> 9,826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,504
<INCOME-PRETAX> 10,722
<INCOME-TAX> 7,329
<INCOME-CONTINUING> 2,945
<DISCONTINUED> 0
<EXTRAORDINARY> (6,285)
<CHANGES> 0
<NET-INCOME> (3,340)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
