UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-10390
Berlitz International, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 13-355-0016
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
400 ALEXANDER PARK, PRINCETON, NEW JERSEY 08540-6306
----------------------------------------------------
(Address of principal executive offices)
(609) 514-9650
--------------------------------------------------
Registrant's telephone number, including area code
N/A
--------------------------------------------------
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 13, 1998, is 9,529,788.
Page 1 of 27
<PAGE>
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)
1998 1997
----------- -----------
Sales of services and products $ 114,396 $ 104,436
----------- -----------
Costs and expenses:
Cost of services and products sold 67,478 62,312
Selling, general and administrative 34,362 31,768
Amortization of publishing rights, excess of cost
over net assets acquired, and other intangibles 4,310 3,540
Interest expense on long-term debt 2,648 1,993
Interest expense to affiliates 571 542
Other expense (income), net 566 (29)
----------- -----------
Total costs and expenses 109,935 100,126
----------- -----------
Income before income taxes, minority
interest in earnings of subsidiary, and
extraordinary item 4,461 4,310
Income tax expense 3,490 3,259
Minority interest in earnings of subsidiary 48 223
----------- -----------
Income before extraordinary item 923 828
Extraordinary loss from early
extinguishment of debt, net of income tax
benefit of $1,949 - 6,285
----------- -----------
Net income (loss) $ 923 $ (5,457)
=========== ===========
Earnings (loss) per share - basic and diluted
Income before extraordinary item $ 0.10 $ 0.09
Extraordinary loss - (0.66)
----------- -----------
Income (loss) per share $ 0.10 $ (0.57)
=========== ===========
Average number of shares outstanding (000's) 9,530 9,656
=========== ===========
See accompanying Notes to the Consolidated Financial Statements.
2
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Dollars in thousands, except per share amounts)
1998 1997
----------- -----------
Sales of services and products $ 326,561 $ 289,582
----------- -----------
Costs and expenses:
Cost of services and products sold 193,870 172,064
Selling, general and administrative 101,948 90,101
Amortization of publishing rights, excess of cost
over net assets acquired, and other intangibles 12,925 9,826
Interest expense on long-term debt 8,265 5,504
Interest expense to affiliates 1,662 1,569
Other expense (income), net 917 (204)
----------- -----------
Total costs and expenses 319,587 278,860
----------- -----------
Income before income taxes, minority
interest in earnings of subsidiary, and
extraordinary item 6,974 10,722
Income tax expense 5,174 7,329
Minority interest in earnings of subsidiary 154 448
----------- -----------
Income before extraordinary item 1,646 2,945
Extraordinary loss from early
extinguishment of debt, net of income tax
benefit of $1,949 - 6,285
----------- -----------
Net income (loss) $ 1,646 $ (3,340)
=========== ===========
Earnings (loss) per share - basic and diluted
Income before extraordinary item $ 0.17 $ 0.31
Extraordinary loss - (0.66)
----------- -----------
Income (loss) per share $ 0.17 $ (0.35)
=========== ===========
Average number of shares outstanding (000's) 9,530 9,536
=========== ===========
See accompanying Notes to the Consolidated Financial Statements.
3
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPT. 30, DECEMBER 31,
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 34,831 $ 26,665
Accounts receivable, less allowance for
doubtful accounts of $2,331 and $2,415 46,103 50,622
Unbilled receivables 8,821 3,538
Inventories, net 10,940 9,159
Prepaid expenses and other current assets 7,888 8,323
--------------- ---------------
TOTAL CURRENT ASSETS 108,583 98,307
Property and equipment, net of accumulated
depreciation of $22,962 and $17,365 35,787 32,098
Publishing rights, net of accumulated amorti-
zation of $4,984 and $4,324 17,001 17,661
Excess of cost over net assets acquired and other intangibles,
net of accumulated amortization of $70,226 and $57,893 479,540 498,506
Other assets 17,944 14,943
--------------- ---------------
TOTAL ASSETS $ 658,855 $ 661,515
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 19,219 $ 17,712
Accounts payable 14,283 9,990
Deferred revenues 40,177 36,071
Payrolls and commissions 16,501 17,988
Income taxes payable 2,457 573
Accrued expenses and other current liabilities 18,451 15,505
--------------- ---------------
TOTAL CURRENT LIABILITIES 111,088 97,839
Long-term debt 132,100 142,369
Notes payable to affiliates 40,864 39,423
Deferred taxes and other liabilities 13,877 24,964
Minority interest 10,106 9,942
--------------- ---------------
TOTAL LIABILITIES 308,035 314,537
--------------- ---------------
Commitments and Contingencies (Note 8)
SHAREHOLDERS' EQUITY:
Common stock 1,003 1,003
Additional paid-in capital 372,518 372,518
Retained earnings 4,138 2,492
Treasury stock at cost (6,361) (6,361)
Accumulated other comprehensive loss:
Cumulative translation adjustment (20,478) (22,674)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 350,820 346,978
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 658,855 $ 661,515
=============== ===============
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
4
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
--------------- ---------------
<S> <C> <C>
Net income (loss) $ 923 $ (5,457)
Other comprehensive income (loss), net of tax:
Foreign currency items, including translation
adjustments, and the effects of certain
hedges and intercompany transactions 5,002 (3,564)
--------------- ---------------
Comprehensive income (loss) $ 5,925 $ (9,021)
=============== ===============
The tax (benefit) expense allocated to each component of other comprehensive income (loss) is as follows:
Foreign currency items $ (347) $ 154
=============== ===============
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
--------------- ---------------
<S> <C> <C>
Net income (loss) $ 1,646 $ (3,340)
Other comprehensive income (loss), net of tax:
Foreign currency items, including translation
adjustments, and the effects of certain
hedges and intercompany transactions 2,196 (8,513)
--------------- ---------------
Comprehensive income (loss) $ 3,842 $ (11,853)
=============== ===============
The tax expenses allocated to each component of other comprehensive income (loss) are as follows:
Foreign currency items $ 600 $ 341
=============== ===============
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
5
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,646 $ (3,340)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 20,337 15,960
Other (primarily provision for bad debts, foreign exchange
(gains) losses, net, minority interest, and deferred tax provision) 908 1,297
Changes in operating assets and liabilities 10,245 (2,775)
--------------- ---------------
Net cash provided by operating activities 33,136 11,142
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (12,925) (9,487)
Acquisitions of businesses (3,347) (90,522)
--------------- ---------------
Net cash used in investing activities (16,272) (100,009)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of treasury stock - 6,110
Proceeds from bank loans - 120,000
Net borrowings under revolving credit facility 4,000 44,000
Repayment of long-term debt (12,763) (66,724)
Payment of deferred finance costs (177) (725)
--------------- ---------------
Net cash (used in) provided by financing activities (8,940) 102,661
--------------- ---------------
Effect of exchange rate changes on cash and
temporary investments 242 (1,315)
--------------- ---------------
Net increase in cash and temporary investments 8,166 12,479
Cash and temporary investments, beginning of period 26,665 25,781
--------------- ---------------
Cash and temporary investments, end of period $ 34,831 $ 38,260
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 8,076 $ 4,958
=============== ===============
Income taxes $ 6,451 $ 8,321
=============== ===============
Cash refunds of income taxes $ 669 $ 248
=============== ===============
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
6
<PAGE>
BERLITZ INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. GENERAL
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 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 1997 Annual
Report on Form 10-K, as filed with the Securities and Exchange
Commission.
INTERNAL-USE SOFTWARE
On March 4, 1998, the American Institute of Certified Public
Accountants issued its Statement of Position ("SOP") 98-1, which
provides guidance on accounting for the costs of computer software
developed or obtained for internal use. The SOP is effective for
financial statements for fiscal years beginning after December 15,
1998, with earlier application encouraged in fiscal years for which
financial statements have not been issued. The Company has elected to
apply this SOP to all costs incurred on and after January 1, 1998.
Consequently, $529 of internal-use software costs have been capitalized
for the first nine months of 1998.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform to the 1998 presentation.
2. SUBSEQUENT EVENT
Pursuant to definitive investment agreements (the "Investment
Agreements") dated as of October 2, 1998, the Company has agreed to
issue, subject to shareholder approval and certain other conditions,
$155,000 aggregate principal amount of 12-year convertible debentures
(the "Convertible Debentures") in a private placement. It is
anticipated that the date of original issuance (the "Issue Date") for
the Convertible Debentures will occur in December 1998. Such debentures
will be issued as follows: a) $100,000 aggregate principal (the "Apollo
Debentures") to two affiliates of Apollo Management IV, L.P.
("Apollo"), a private investment firm; and b) $55,000 aggregate
principal (the "Benesse Debentures") to Benesse Holdings International,
Inc ("BHI"), the Company's majority shareholder. The Convertible
Debentures bear interest at 5% per annum, payable semi-annually.
Principal amounts outstanding under such debentures are not due until
2010, and the Company is not required to establish a bond sinking fund
for repayment of this principal.
The Convertible Debentures are convertible at any time into shares of
the Company's common stock at a conversion price of $33.05 per share,
subject to anti-dilution related adjustments to offset the effects of
stock dividends and other changes in equity. The Company will, at all
times, reserve out of its authorized but unissued common stock the full
number of shares then issuable upon conversion of all outstanding
Convertible
7
<PAGE>
Debentures.
The Apollo and Benesse Debentures each independently provide for
optional redemption by the Company, in whole but not in part, anytime
after 3 years and 2 months. If the average closing price of the
Company's common stock for the 30 trading days following the third
anniversary of the Issue Date exceeds $39.66 per share, the Company may
redeem at par. Otherwise, the Company shall pay a redemption premium,
expressed as a percentage of outstanding principal, as follows: a) 4%
for redemptions occurring in the fourth year after issue; b) 2% for
redemptions occurring in the fifth year after issue; and c) 0% for
redemptions occurring thereafter. All such redemptions are subject to
the holders' rights to first convert into common stock of the Company.
The Convertible Debentures also allow Apollo and BHI to elect to
exchange their convertible debentures, in whole, into non-convertible,
7-year fixed rate debt (the "Fixed Rate Debentures"). Such election may
only be made if the average closing price of the Company's common stock
during the 30 trading days immediately preceding the third anniversary
of the Issue Date does not exceed $33.05. Furthermore, BHI may only
effect an exchange if Apollo does so. Upon the determination, by an
independent financial institution, of fixed interest rates that
accurately price the Fixed Rate Debentures at par under specified
circumstances at the time of the exchange, Apollo and BHI shall
irrevocably decide whether to proceed with their exchanges. If only
Apollo proceeds with such an exchange, the Company, no later than 150
days from the third anniversary of the Issue Date, must either a)
redeem all of the Apollo Debentures at par, or b) deliver the Fixed
Rate Debentures to Apollo. If both Apollo and BHI proceed with their
exchanges, the Company, within the same 150 day period, shall either a)
redeem both the Apollo and Benesse Debentures, or b) deliver the Fixed
Rate Debentures to both Apollo and BHI.
Principal amounts outstanding under the Fixed Rate Debentures would not
be payable until maturity, while interest payments would be made
semi-annually. The Fixed Rate Debentures interest rate is subject to a
cap of a) the applicable U.S. treasury rate + 5% (not to exceed 13%) if
only Apollo receives Fixed Rate Debentures, or b) the applicable U.S.
treasury rate + 7% (not to exceed 14%) if both Apollo and BHI receives
Fixed Rate Debentures. The Fixed Rate Debentures may be redeemed by the
Company after the third anniversary of their issue upon payment of
principal amounts of the Fixed Rate Debentures and the following
redemption premiums, expressed as a percentage of the outstanding
principal amount: a) one half of the per annum interest rate for
redemptions occurring in the fourth year after issue; b) one quarter of
the per annum interest rate for redemptions occurring in the fifth year
after issue; and c) no premium for redemptions occurring thereafter.
Prior to the third anniversary of the Issue Date, if Benesse sells 80%
or more of the shares of Berlitz common stock owned directly or
indirectly by it on the Issue Date, the Company shall be required to
make an offer to repurchase for cash: i) the Apollo Debentures at a
value equal to 110% of the principal amount then outstanding; and ii)
the Benesse Debentures at a value equal to 101% of the principal amount
then outstanding. In addition, if at any time on or after the Issue
Date a change of control, as defined in the Investment Agreements,
occurs but Benesse sells less than 80% of its shares, or if
8
<PAGE>
Benesse sells 80% of its shares on or after the third anniversary of
the Issue Date, the Company shall be required to make an offer to
repurchase for cash the Convertible Debentures (but not the Fixed Rate
Debentures) at a value equal to 101% of the principal amount of the
Convertible Debentures.
The Convertible Debentures are subject to standard affirmative
covenants, including financial and other informational reporting,
compliance with laws, maintenance of insurance, maintenance of
properties, payment of taxes, and preservation of corporate existence.
Negative covenants that the Convertible Debentures are subject to
include: prohibitions on certain mergers, consolidations and asset
transfers; forbearance from restrictions on rights of holders to
convert or exchange the Convertible Debentures; and, in the case of the
Apollo Debentures, forbearance from amending certain understandings
between the Company, Berlitz Japan, Inc. and Benesse.
The Investment Agreements include a number of other provisions,
including: a) the granting of certain demand and piggyback registration
rights to the holders of the Convertible Debentures; b) the granting of
a certain number of board seats to Apollo on the Company's Board of
Directors; c) the granting of approval rights to Apollo, at the
Company's Board level, over certain transactions; and d) certain
restrictions on the transferability of the Apollo Debentures.
In a separate transaction contingent upon the closing of the
Convertible Debenture transactions, BHI has agreed to loan $50,000 to
the Company, evidenced by a 12-year fixed rate subordinated promissory
note (the "BHI Note"). Such note would bear interest for the first five
years at 5.9% per annum, and, thereafter, at a renegotiated fixed rate
approximating LIBOR plus a margin based on the Company's then existing
leverage. Interest would be payable semiannually in cash while
principal repayment would be deferred until maturity. The BHI Note
includes standard covenants similar to those included in the Benesse
Debentures. In the event of a change in control, the BHI Note provides
for redemption by the Company, at the option of BHI, at a price equal
to 101% of the note's principal amount.
The Company intends to use proceeds from the sale of the Convertible
Debentures, as well as proceeds from the BHI Note issuance, to repay in
full all outstanding indebtedness pursuant to the Company's existing
bank credit agreement (see Note 4) and existing notes payable to
affiliates, and for general corporate purposes. However, the Company
does not expect to currently terminate its interest rate swap agreement
(See Note 5) which hedges the floating rate bank indebtedness. Since
the interest rate swap agreement will no longer qualify for hedge
accounting treatment, changes in its fair market value will be recorded
in the Consolidated Statements of Operations. The Company expects to
record an extraordinary item in the 1998 fourth quarter equal to the
interest rate swap's fair market value at the time of extinguishment of
the underlying debt. Subsequent changes in the agreement's market value
will periodically be recorded to "Other income/expense, net".
The Company anticipates incurring approximately $3,500 in transaction
costs in connection with the issuance of the Convertible Debentures and
BHI Note. Such costs will be amortized over the 12 year life of the
Convertible Debentures and BHI Note.
9
<PAGE>
3. ACQUISITIONS OF BUSINESSES
In January 1998, in connection with its August 1997 acquisition of ELS
Educational Services, Inc. ("ELS"), the Company paid $1,340 related to
certain post-closing purchase price adjustments. In addition, in June
1998, the Company paid $2,007 to purchase the assets of a major
corporation's translations division in France.
4. LONG-TERM DEBT
Long-term debt consists of the following:
SEPT. 30, DECEMBER 31,
1998 1997
--------------- ---------------
Term Loan $ 103,000 $ 115,750
Revolving credit facility 48,000 44,000
Other 319 331
--------------- ---------------
Total 151,319 160,081
Less current maturities 19,219 17,712
--------------- ---------------
Long-term debt $ 132,100 $ 142,369
=============== ===============
5. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's
financial instruments at September 30, 1998 and December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Assets:
Currency coupon swap agreements $ 2,437 $ 2,437 $ 719 $ 719
Liabilities:
Long-term debt, including
current maturities 151,319 151,319 160,081 160,081
Notes payable to affiliates 40,864 31,658 39,423 34,101
Currency coupon swap agreements 1,239 1,239 406 406
Interest rate swap agreement - 2,270 - 680
</TABLE>
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.
10
<PAGE>
6. OTHER EXPENSE (INCOME), NET
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPT. 30, 1998 SEPT. 30, 1997
-------------- --------------
<S> <C> <C>
Interest income on temporary investments $ (200) $ (222)
Foreign exchange losses (gains), net 567 (38)
Other non-operating taxes 165 50
Other investment income, net (80) (38)
Other expense, net 114 219
-------------- --------------
Total other expense (income), net $ 566 $ (29)
============== ==============
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPT. 30, 1998 SEPT. 30, 1997
-------------- --------------
Interest income on temporary investments $ (510) (553)
Foreign exchange losses (gains), net 782 (63)
Other non-operating taxes 272 299
Term Loan administration fee 35 150
Loss on disposal of fixed assets 244 29
Other investment income, net (104) (138)
Other expense, net 198 72
-------------- --------------
Total other expense (income), net $ 917 $ (204)
============== ==============
</TABLE>
7. EARNINGS PER SHARE
Reconciliations between Basic and Diluted earnings per share ("EPS")
computations for "income before extraordinary item" for the three and
nine month periods ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER
OF SHARES PER-SHARE
INCOME OUTSTANDING AMOUNT
============== ============== ==============
<S> <C> <C> <C>
PERIOD ENDING SEPTEMBER 30, 1998:
Three months:
-------------
Basic EPS:
Income before extraordinary item $ 923 9,530 $ 0.10
Effect of dilutive securities:
Stock options 28
-------------- -------------- --------------
Diluted EPS:
Income before extraordinary item $ 923 9,558 $ 0.10
============== ============== ==============
Nine months:
------------
Basic EPS:
Income before extraordinary item $ 1,646 9,530 $ 0.17
Effect of dilutive securities:
Stock options 27
-------------- -------------- --------------
Diluted EPS:
Income before extraordinary item $ 1,646 9,557 $ 0.17
============== ============== ==============
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER
OF SHARES PER-SHARE
INCOME OUTSTANDING AMOUNT
============== ============== ==============
<S> <C> <C> <C>
PERIOD ENDING SEPTEMBER 30, 1997:
Three months:
-------------
Basic EPS:
Income before extraordinary item $ 828 9,656 $ 0.09
Effect of dilutive securities:
Stock options 9
-------------- -------------- --------------
Diluted EPS:
Income before extraordinary item $ 828 9,656 $ 0.09
============== ============== ==============
Nine months:
------------
Basic EPS:
Income before extraordinary item $ 2,945 9,536 $ 0.31
Effect of dilutive securities:
Stock options 9
-------------- -------------- --------------
Diluted EPS:
Income before extraordinary item $ 2,945 9,656 $ 0.31
============== ============== ==============
</TABLE>
8. 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 reached a final settlement with
the IRS in August 1998 for $2,150 plus interest. Such settlement had
been adequately provided for, and was fully paid by the Company as of
September 30, 1998 through a payment of $2,500 during the 1997 second
quarter, and a payment of $680 during the 1998 second quarter.
9. STOCK OPTION AND INCENTIVE PLANS
On February 25, 1998, 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 increased to 503,225 from 377,000. This increase was
approved by the shareholders at the Company's June 2, 1998 annual
shareholders' meeting.
10. OPERATING SEGMENTS
The Company's operations are principally conducted through four
reportable segments: Instruction, Translations, Publishing and
Franchising. These are strategic business units that offer different
products and services and that are managed separately by senior
management due to different technology and marketing strategies.
Through the use of proprietary methods and materials, the Instruction
segment provides predominantly live language education in virtually all
spoken languages, as well as cross-cultural training. The Translations
segment provides high quality technical documentation translation,
software localization (i.e. the translation of software-related
products), software quality assurance testing, interpretation services,
electronic publishing services, and other foreign language-related
services. The Publishing segment offers a wide range of publishing
products such as dictionaries, phrase books, travel guides and
self-study language materials, including CD-ROMs and audiocassettes.
The Franchising segment sells Berlitz language center franchises to
12
<PAGE>
independent franchisees in certain locations.
The Company evaluates operating segment performance based on EBITA,
defined as sales of services and products, less costs of services and
products sold and selling, general and administrative expenses. EBITA
includes depreciation and similar non-cash charges, but excludes
amortization of publishing rights, excess of cost over net assets
acquired, and other intangibles.
The following tables present information about reported segment profit
or loss and segment assets, and reconcile reportable segment revenues,
profit or loss, and assets to the Company's consolidated totals:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Revenues from external customers:
Instruction $ 88,824 $ 77,074 $ 252,441 $ 214,386
Translation 21,130 23,447 62,115 63,762
Publishing 4,406 3,476 11,360 10,638
Franchising 52 552 652 928
----------- ----------- ----------- -----------
Total external revenues 114,412 104,549 326,568 289,714
----------- ----------- ----------- -----------
Intersegment revenues:
Franchising 96 - 443 556
----------- ----------- ----------- -----------
Total intersegment revenues 96 - 443 556
----------- ----------- ----------- -----------
Total revenues for reportable segments 114,508 104,549 327,011 290,270
Elimination of intersegment and
other amounts (112) (113) (450) (688)
=========== =========== =========== ===========
Total consolidated revenues $ 114,396 $ 104,436 $ 326,561 $ 289,582
=========== =========== =========== ===========
INCOME BEFORE TAXES AND MINORITY INTEREST:
Operating Profit:
Segment EBITA:
Instruction $ 16,893 $ 15,908 $ 46,852 $ 44,796
Translation 2,904 2,443 6,624 5,706
Publishing 738 70 1,172 459
Franchising (207) (147) (162) (640)
----------- ----------- ----------- -----------
Total EBITA for reportable segments 20,328 18,274 54,486 50,321
General corporate and nonsegment
expenses (7,772) (7,918) (23,743) (22,904)
----------- ----------- ----------- -----------
Total EBITA 12,556 10,356 30,743 27,417
----------- ----------- ----------- -----------
Amortization of publishing rights,
excess of cost over net assets
acquired, and other intangibles:
Instruction (3,870) (3,055) (11,644) (8,361)
Translation (341) (385) (982) (1,163)
Publishing (99) (100) (299) (302)
----------- ----------- ----------- -----------
Total intangible amortization (4,310) (3,540) (12,925) (9,826)
----------- ----------- ----------- -----------
Total operating profit 8,246 6,816 17,818 17,591
Interest expense on long-term debt (2,648) (1,993) (8,265) (5,504)
Interest expense to affiliates (571) (542) (1,662) (1,569)
Other income (expense), net (566) 29 (917) 204
=========== =========== =========== ===========
Total consolidated income before
taxes and minority interest $ 4,461 $ 4,310 $ 6,974 $ 10,722
=========== =========== =========== ===========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
ASSETS:
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Segment assets:
Instruction $ 539,562 $ 544,179
Translation 79,343 82,420
Publishing 25,493 21,410
Franchising 5,830 4,649
--------------- ---------------
Total assets for reportable segments 650,228 652,658
General corporate and nonsegment assets 10,153 9,845
Eliminations of intersegment receivables (1,526) (988)
=============== ===============
Total consolidated assets $ 658,855 $ 661,515
=============== ===============
<CAPTION>
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
DEPRECIATION:
Segment depreciation:
Instruction $ 1,487 $ 1,190 $ 4,241 $ 3,420
Translation 522 549 1,552 1,472
Publishing 376 149 869 616
Franchising 5 5 20 14
----------- ----------- ----------- -----------
Total depreciation for reportable
segments 2,390 1,893 6,682 5,522
General corporate and divisional 252 239 729 620
----------- ----------- ----------- -----------
Total consolidated depreciation $ 2,642 $ 2,132 $ 7,411 $ 6,142
=========== =========== =========== ===========
CAPITAL EXPENDITURES:
Segment capital expenditures:
Instruction $ 2,448 $ 1,404 $ 8,402 $ 5,651
Translation 1,403 520 2,133 1,394
Publishing 355 1,095 1,857 2,000
Franchising - - - 3
----------- ----------- ----------- -----------
Total capital expenditures for
reportable segments 4,206 3,019 12,392 9,048
General corporate and divisional 213 351 533 439
----------- ----------- ----------- -----------
Total consolidated capital
expenditures $ 4,419 $ 3,370 $ 12,925 $ 9,487
=========== =========== =========== ===========
The following tables present certain information about the geographic areas in which the Company operates:
<CAPTION>
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES FROM EXTERNAL CUSTOMERS:
United States $ 48,456 $ 37,276 $ 121,342 $ 86,791
Japan 13,808 17,163 42,757 48,055
Germany 10,795 8,720 30,508 27,175
Ireland 5,042 6,534 18,724 21,478
Brazil 5,402 5,625 16,104 15,517
Other foreign countries 30,909 29,231 97,133 90,698
----------- ----------- ----------- -----------
Total $ 114,412 $ 104,549 $ 326,568 $ 289,714
=========== =========== =========== ===========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING PROFIT:
EBITA:
United States $ 8,754 $ 6,811 $ 16,119 $ 13,832
Japan 1,561 3,026 4,574 7,089
Germany 1,266 553 3,739 1,605
Ireland 633 622 1,707 2,657
Brazil 824 985 2,426 2,298
Other foreign countries 3,570 2,985 14,316 11,829
General corporate expenses (4,052) (4,626) (12,138) (11,893)
----------- ----------- ----------- -----------
Total EBITA 12,556 10,356 30,743 27,417
----------- ----------- ----------- -----------
Amortization of publishing rights,
excess of cost over net assets
acquired, and other intangibles:
United States (3,583) (2,715) (10,746) (7,276)
Japan (278) (331) (872) (980)
Germany (65) (65) (193) (203)
Ireland (13) (85) (61) (263)
Brazil (16) (16) (48) (48)
Other foreign countries (355) (328) (1,005) (1,056)
----------- ----------- ----------- -----------
Total intangible amortization (4,310) (3,540) (12,925) (9,826)
----------- ----------- ----------- -----------
Intercompany royalties:
United States 3,881 4,097 11,648 12,494
Japan (1,193) (1,608) (3,159) (4,372)
Germany (360) (321) (1,109) (1,017)
Ireland (249) (326) (927) (1,071)
Other foreign countries (2,079) (1,842) (6,453) (6,034)
----------- ----------- ----------- -----------
Total intercompany royalties - - - -
----------- ----------- ----------- -----------
Total operating profit $ 8,246 $ 6,816 $ 17,818 $ 17,591
=========== =========== =========== ===========
<CAPTION>
LONG LIVED ASSETS: PROPERTY &
EQUIPMENT OTHER INTANGIBLE
NET ASSETS ASSETS TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998:
United States $ 7,565 $ 6,445 $ 402,024 $ 416,034
Japan 7,268 89 41,747 49,104
Germany 2,917 - 9,482 12,399
Brazil 2,920 - 2,160 5,080
Ireland 1,643 33 1,815 3,491
Other foreign countries 11,649 157 37,717 49,523
General corporate 1,825 1,866 1,596 5,287
----------- ----------- ----------- -----------
Total $ 35,787 $ 8,590 $ 496,541 $ 540,918
=========== =========== =========== ===========
DECEMBER 31, 1997:
United States $ 6,363 $ 5,250 $ 421,766 $ 433,379
Japan 5,806 - 43,925 49,731
Germany 2,823 - 9,020 11,843
Brazil 2,219 - 2,208 4,427
Ireland 2,003 33 1,796 3,832
Other foreign countries 10,988 216 35,856 47,060
General corporate 1,896 1,727 1,596 5,219
----------- ----------- ----------- -----------
Total $ 32,098 $ 7,226 $ 516,167 $ 555,491
=========== =========== =========== ===========
</TABLE>
15
<PAGE>
BERLITZ INTERNATIONAL, INC.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the attached
Consolidated Financial Statements and notes thereto and with the Company's
audited Consolidated Financial Statements and notes thereto for the fiscal year
ended December 31, 1997. Certain statements contained within this discussion
constitute forward looking statements. See "Special Note Regarding Forward
Looking Statements."
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 VS. THREE MONTHS
ENDED SEPTEMBER 30, 1997
Sales for the quarter ended September 30, 1998 were $114.4 million, 9.5% above
the same period in the prior year. This improvement was primarily due to
increases from operating activity in the Instruction and Publishing business
segments, including the results of ELS Educational Services, Inc. ("ELS"), which
was purchased on August 28, 1997. Such increases were partially offset by
unfavorable exchange rate fluctuations of $4.7 million, which resulted from a
strengthened dollar against most foreign currencies (most significantly the
Japanese yen, the Irish punt, and the Latin American currencies). Excluding the
effects of exchange rate fluctuations and ELS' revenues, sales increased from
the prior year by 0.9%.
Language Instruction sales for the quarter ended September 30, 1998 were $88.8
million, 15.2% above the same period in 1997. This improvement was primarily due
to volume and average revenue per lesson ("ARPL") increases in most countries
and a $13.8 million increase in ELS due primarily to only a partial quarter
being reported by ELS in 1997. These increases were partially offset by
unfavorable exchange rate fluctuations of $4.2 million. Excluding ELS' revenues
and the unfavorable exchange rate fluctuations, revenues increased 3.0% from the
prior year.
On a geographic basis, Language Instruction revenue increased in Latin America,
Central/Eastern Europe, and Western Europe offsetting decreases in the other
divisions. The increase in Latin American revenues ($0.3 million, or 2.4%) was
primarily attributable to volume and ARPL increases in almost all countries
(most significantly Mexico), offset by unfavorable exchange rate fluctuations of
$1.6 million (primarily in Mexico, Brazil and Colombia). Central/Eastern
Europe's increase ($1.4 million, or 10.5%) primarily reflects volume and ARPL
increases in most countries, in particular Germany, Israel, Austria and Poland.
Western Europe's sales increase ($0.8 million, or 9.2%) is mainly attributable
to corporate lesson volume increases in France, Italy and Ireland. The volume
increase in these countries is partially offset by volume decreases in England
and ARPL decrease in Spain. North America's sales decline, excluding ELS'
results, was $0.8 million, or 4.4%, primarily due to reduced enrollments in
Berlitz on Campus ("BOC") for business originating from the Far East,
principally Korea and Japan. Asia's revenues declined $3.6 million. This is
attributable to unfavorable exchange rate fluctuations of $2.7 million and
lesson volume decreases in Japan, Hong Kong, and Thailand mainly attributable to
the current economic recession in this region.
16
<PAGE>
During the three-month period ended September 30, 1998, the number of lessons
given at language centers (exclusive of ELS/BOC programs) was approximately 1.4
million, 3.4% above the same period in the prior year, reflecting increases in
all divisions except for Asia. Lesson volume in North America language centers
increased 1.4% from the prior year, reflecting growth in both the USA and
Canada. Lesson volume in Asia dropped 5.8% over prior year due to the weakness
in the Asian economy. Lesson volume in Latin America increased by 8.9% from
prior year, primarily reflecting higher volume in Mexico and Colombia, as well
growth in the newer markets (Peru and Uruguay). Lesson volume in Central/Eastern
Europe increased 5.9% over the prior year, primarily reflecting growth in
Germany, Israel, and Poland. Lesson volume in Western Europe rose 7.1% from
1997, primarily due to increases in lessons given in France, Spain, Italy, and
Ireland which helped cover the shortfalls in the UK due to slow trend of the
enrollment of overseas students.
For the 1998 third quarter, ARPL was $40.51, as compared to $41.72 in the
comparable prior-year period. The decline reflected the effects of unfavorable
exchange rate fluctuations of $2.61. ARPL ranged from a high of approximately
$57.92 in Brazil to a low of $13.65 in Thailand, reflecting effects of foreign
exchange rates and differences in the economic value of the service.
Translation segment sales were $21.1 million for the three-month period ended
September 30, 1998, a decrease of 9.9% from the same period in 1997. Excluding
the unfavorable effects of exchange rate fluctuations of $0.5 million, sales
decreased by $1.8 million. The operations sales decline was primarily due to
lower volume in the USA, Canada, and certain European countries. The reduction
in the US was a result of flattening of the production cycle of one major
customer where prior year volume was exceptionally high during such period.
Lower sales volume in Ireland, Denmark and Norway was the result of a delay in
certain major customer projects. The decline in volume in these countries is
partially offset by increased sales in France due to an acquisition completed in
June 1998.
Publishing segment sales were $4.4 million for the three months ended September
30, 1998, compared with $3.5 million in 1997. Exchange rate fluctuations were
not significant. The increase is due to a large sale to a German distributor for
the German version of Think and Talk(R).
Other sales, consisting primarily of franchising activity, were minimal for the
third quarter of 1998, compared to $0.4 million in the prior year quarter. The
Company opened five Berlitz franchises and one ELS franchise in the third
quarter of 1998. The new Berlitz franchise locations are in Austria, Chile,
Germany, Guatemala, and Kuwait. The new ELS franchise is located in Panama.
The Company's cost of services and products sold as a percentage of sales was
59.0% in the 1998 third quarter, compared to 59.7% in the same prior year
period. The decrease in the percentage is mainly attributable to reductions in
the teacher salary and translator cost percentages, and the provision for
doubtful accounts. Selling, general and administrative expenses as a percentage
of sales were 30.0% in the 1998 third quarter, compared with 30.4% in the
comparable prior year period. The decrease is due to lower advertising expense
percentage.
17
<PAGE>
EBITA(1) for the 1998 third quarter was $12.6 million, or 11.0% of sales,
compared to $10.4 million, or 9.9% of sales, in the same prior year period. A
discussion by business segment follows.
Instruction segment EBITA for the quarter ended September 30, 1998 was $16.9
million, or 19.0% of segment sales, compared to $15.9 million, or 20.6% of
segment sales, in the comparable prior year period. The comparison to prior year
was impacted by unfavorable exchange rate fluctuations of $0.9 million (most
significantly in Japan, Mexico, Colombia, and Brazil). $2.6 million of the
increase in EBITA was generated from ELS which was purchased by Berlitz at the
end of August 1997. Excluding the results of ELS, the Instruction segment's
EBITA margin was 19.7% in 1998 and 21.4% in 1997.
Within the Instruction segment's North America division, both ELS and Berlitz on
Campus ("BOC") have experienced reduced enrollments due to the economic turmoil
in Asia. Consequently, the Company reported EBITA for BOC in the third quarter
of 1998 which was $0.6 million lower than in 1997. The Company has implemented
certain restructuring and cost control measures designed to position ELS/BOC for
improved margins. The Asian economy has also created challenges in Japan, which
exhibited a 1998 EBITA decline, excluding exchange rate fluctuations, of $1.2
million, due to lower lesson volume, and higher rent and certain other fixed
operating expenses. The Company continues to focus on measures designed to
protect Asia division's EBITA.
The other geographic divisions within the Instruction segment all reported
increased EBITA over prior year for the three months. The increases are mainly
attributable to lesson and price increases in these divisions, most notably in
Germany and Mexico.
Despite the decline in sales for the quarter, Translation segment EBITA for the
three months ended September 30, 1998 was $2.9 million, or 13.7% of segment
sales, compared to $2.4 million, or 10.4% of segment sales, in the prior year.
The 1998 EBITA increased due to improved production efficiencies resulting in
lower translator costs in all the divisions. In addition, Translations
experienced significant improved margins in all the Asian countries as a result
of recent reorganization efforts.
Publishing segment EBITA was $0.7 million for the 1998 third quarter, compared
to $0.1 million in the prior year. The increase is due to increased volume and
the collection of certain accounts receivable previously reserved for as being
uncollectible.
EBITA loss for franchising activity was $0.2 million during the third quarter of
1998, compared with an EBITA loss of $0.1 million in the prior year. These
results reflect the start-up nature of this operation, as the Company is not yet
collecting significant royalty income.
- --------------------------------------------------------------------------------
(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.
18
<PAGE>
Non-segment related corporate expenses included in EBITA were $7.8 million for
the three months ended September 30, 1998, compared with $7.9 million in the
same prior year period. The reduction in expenses is due to the exchange rate
fluctuations in Japan and Latin America. Excluding the effects of exchange, the
expenses increased $0.1 million over prior year due primarily to increases in
administrative salaries.
Amortization of intangibles increased $0.8 million, or 21.8%, over 1997, as a
result of higher intangible assets arising out of the acquisition of ELS.
Additionally, interest expense on long-term debt for the three months ended
September 30, 1998 rose $0.7 million, or 32.9%, from the comparable prior year
period, due to higher borrowings outstanding under the Company's refinanced
August 1997 credit facility (the "Bank Facility"). Other expense, net for the
three months ended September 30, 1998 increased by $0.6 million over the prior
year, primarily due to higher foreign exchange losses.
The Company recorded an income tax expense of $3.5 million, or an effective rate
of 78.2%, during the current period. This compared to an income tax expense of
$3.3 million, or an effective rate of 75.6%, in the prior year's quarter. The
effective tax rates in both 1998 and 1997 were above the U.S. Federal statutory
tax rate primarily as a result of nondeductible amortization charges. Benefits
realized from the revaluation of reserves for tax disputes in 1998 were offset
by the expiry of foreign tax losses which reduced the effective rate in 1997.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 VS. NINE MONTHS
ENDED SEPTEMBER 30, 1997
Sales for the nine months ended September 30, 1998 were $326.6 million, 12.8%
above the same period in the prior year. This improvement was due to increases
from operating activity in the Instruction and Publishing business segments,
including the results of ELS, which was purchased on August 28, 1997. Such
increases were partially offset by unfavorable exchange rate fluctuations of
$17.2 million, which resulted from a strengthened dollar against all foreign
currencies (most significantly the Japanese yen, the Irish punt, and the German
mark). Excluding the effects of exchange rate fluctuations and ELS' revenues,
sales increased from the prior year by 5.9%.
Language Instruction sales for the nine months ended September 30, 1998 were
$252.4 million, 17.8% above the same period in 1997. This improvement was
primarily due to volume and ARPL increases in most countries and $37.5 million
in increased results due to the ELS purchase. The increase in sales is partially
offset by unfavorable exchange rate fluctuations of $13.7 million. Excluding the
effects of the ELS acquisition and the unfavorable exchange rate fluctuations,
revenues increased 6.8% from the prior year.
On a geographic basis, Language Instruction revenue increased in Latin America,
Central/Eastern and Western Europe, offsetting decreases in the other divisions.
The increase in Latin American revenues ($3.6 million, or 9.8%) was primarily
attributable to volume and ARPL increases in Mexico, Brazil, Venezuela and
Colombia. The sales increase in the Latin American countries is partially offset
by unfavorable exchange rate fluctuations of $4.0 million. Central/Eastern
Europe's increase ($3.4 million, or 7.9%) primarily reflects volume
19
<PAGE>
and ARPL increases in most countries, in particular Germany, Israel and Poland.
The increase is partially offset by unfavorable exchange rate fluctuations ($2.5
million, principally versus the German mark). Western Europe sales increased by
$0.9 million due mainly to volume growth in France and Italy, which was
partially offset by unfavorable exchange rate fluctuations of $1.3 million, and
volume decreases in England and Belgium. North America's sales decline,
excluding ELS sales increase of $37.5 million, was $1.6 million, or 3.2%,
primarily due to reductions in business originating from the Far East,
principally Korea and Japan. Asia's revenues declined $5.5 million due to
unfavorable exchange rate fluctuations of $5.6 million.
During the nine-month period ended September 30, 1998, the number of lessons
given at language centers (exclusive of ELS/BOC programs) was approximately 4.4
million, 6.7% above the same period in the prior year, reflecting increases in
all divisions. Lesson volume in North America increased 1.7% from the prior
year, reflecting a growth in lessons in the U.S.. Despite the current economic
recession, in Asia lesson volume rose 1.2% from 1997, primarily reflecting the
positive effects of special sales campaigns in Japan and expansion in new Asian
markets. Lesson volume in Latin America increased by 12.6% from prior year,
primarily reflecting strong growth in Mexico, Brazil, Peru and Venezuela. Lesson
volume in Central/Eastern Europe increased 9.7% over the prior year, primarily
reflecting growth in Germany, Poland and Israel. Lesson volume in Western Europe
rose 7.6% from 1997, primarily due to increases in lessons given to corporate
clients in France and Italy. The increase is partially offset by a 25.4%
decrease in lesson volume in England due in part to a decline in activity from
overseas students applying for the Berlitz Study Abroad program.
For the nine-month period ended September 30, 1998, ARPL was $40.42, as compared
to $41.88 in the comparable prior-year period. The decline reflected the effects
of unfavorable exchange rate fluctuations of $2.80, and was negatively affected
by changes in the client and lesson product mix in France and Spain. Excluding
the effects of exchange rate fluctuations the ARPL increased 3.2% over the prior
year. ARPL ranged from a high of approximately $59.11 in Brazil to a low of
$13.28 in Thailand, reflecting effects of foreign exchange rates and differences
in the economic value of the service.
Translation segment sales were $62.1 million for the nine-month period ended
September 30, 1998, a decrease of $1.6 million, or 2.6%, from the same period in
1997. Excluding the unfavorable effects of exchange rate fluctuations of $3.5
million, sales grew $1.8 million, or 2.8%. The operations sales growth was
primarily due to increased external sales in France, Singapore, Germany, Norway
and Denmark. The growth in France is primarily due to an acquisition consummated
in June 1998. Singapore and Germany had external sales growth due to management
restructuring, and internal strengthening and training of its sales staff. The
increased sales from these countries is partially offset by delayed start of
major projects in certain Western European countries.
Publishing segment sales were $11.4 million for the nine months ended September
30, 1998, compared with $10.6 million in 1997. The increase is primarily due to
a large sale to a German distributor for the German version of Think and Talk
(R). Exchange rate fluctuations were not significant.
Other sales, consisting primarily of franchising activity, were $0.6 million in
1998 compared with $0.8 million in the prior year. The Company opened seven
Berlitz franchises during 1998 in Austria, Chile, Egypt, Germany, Guatemala,
Kuwait and United Arab Emirate, and two
20
<PAGE>
ELS franchises in Costa Rica and Panama.
The Company's cost of service and products sold as a percentage of sales for the
nine months ended September 30, 1998 was 59.4%, the same as the prior year
period. Selling, general and administrative expenses as a percentage of sales
were 31.2% in the 1998 first nine months, compared with 31.1% in the comparable
prior year period. The increase is due to higher administrative salary
percentages.
EBITA for the nine months ended September 30, 1998 was $30.7 million, or 9.4% of
sales, compared to $27.4 million, or 9.5% of sales, in the same prior year
period. A discussion by business segment follows.
Instruction segment EBITA for the nine months ended September 30, 1998 was $46.9
million, or 18.6% of segment sales, compared to $44.8 million, or 20.9% of
segment sales, in the comparable prior year period. The comparison to prior year
was impacted by unfavorable exchange rate fluctuations of $3.2 million, caused
mainly by Japan, Latin America, Germany and Poland. Included in the 1998 sales
increase was $4.0 million of EBITA generated by ELS. Excluding the results of
ELS, which was acquired on August 28, 1997, the Instruction segment's EBITA
margin was 20.2% in 1998, compared with 21.2% in 1997.
Within the Instruction segment's North America division, both ELS and Berlitz on
Campus ("BOC") have experienced reduced enrollments due to the economic turmoil
in Asia. Consequently, the Company reported EBITA for BOC in the first nine
months of 1998, which was $1.3 million lower than in 1997. The Company has
implemented certain restructuring and cost control measures designed to position
ELS/BOC for improved margins. The Asian economy has also created challenges for
the Asia division, which despite lesson volume increases, exhibited a 1998 EBITA
decline due to higher administrative salaries and rent expense in Japan. The
Company continues to focus on measures designed to protect Asia's Instruction
EBITA.
Excluding the effects of exchange fluctuations, Latin America and
Central/Eastern Europe divisions had EBITA increases of $2.6 million and $2.3
million over prior year. The increases are mainly attributable to lesson and
price increases in Brazil, Mexico and Germany. Excluding exchange rate
fluctuations, Western Europe's EBITA was $0.1 million higher than prior year,
primarily due to sale increases in France and Italy.
Translation segment EBITA for the nine months ended September 30, 1998 was $6.6
million, or 10.7% of segment sales, compared to $5.7 million, or 8.9% of segment
sales, in the prior year. The 1998 EBITA increases in Asia, and Germany were a
result of recent reorganization efforts and improved production efficiencies.
These positive results were partially offset by lower margins and sales volume
in Ireland and the USA.
As a result of the recent economic turmoil in Asia, the Translations segment's
North America division has experienced lower sales backorder on Asian projects
as existing clients delay and/or cancel production of certain Asian projects
until the uncertainty of the market is stabilized. Japan Translations also faces
a weak market which has resulted in lower sales volume. However, previous
reorganization efforts have positioned Japan and Singapore for growth and,
despite the challenging economies, have improved the Asia division's
Translations segment EBITA over the prior year.
21
<PAGE>
Publishing segment EBITA for the first nine months of 1998 was $1.2 million,
compared to $0.5 million in the prior year. The EBITA margin increased to 10.3%
from 4.3% in the prior year. The increase is due to a sales volume increase due
to a large sale in Germany.
EBITA for franchising activity was a loss of $0.2 million during the first nine
months of 1998, compared with an EBITA loss of $0.6 million in the prior year.
These results still reflect the start-up nature of this operation, as the
Company is not yet collecting significant royalty income.
Non-segment related corporate expenses included in EBITA were $23.7 million for
the nine months ended September 30, 1998, compared with $22.9 million in the
same prior year period. This change was primarily due to increases in
administrative salaries.
Amortization of intangibles increased $3.1 million, or 31.5%, over 1997, as a
result of higher intangible assets arising from the acquisition of ELS.
Additionally, interest expense on long-term debt for the nine months ended
September 30, 1998 rose $2.8 million, or 50.2%, from the comparable prior year
period, due to higher borrowings outstanding under the Company's refinanced
August 1997 credit facility. Other income, net for the nine months ended
September 30, 1998 decreased by $1.1 million over the prior year, primarily due
to higher foreign exchange losses, and loss on disposal of fixed assets.
The Company recorded an income tax expense of $5.2 million, or an effective rate
of 74.2%, during the current period. This compared to an income tax expense of
$7.3 million, or an effective rate of 68.4%, in the prior year. The effective
tax rates in both 1998 and 1997 were above the U.S. Federal statutory tax rate
primarily as a result of nondeductible amortization charges. Benefits realized
from the revaluation of reserves for tax disputes in 1998 were offset by the
expiry of foreign tax losses which reduced the effective rate in 1997.
FINANCIAL CONDITION
Historically, the primary source of the Company's liquidity has been the cash
provided by operations, and capital expenditures, working capital requirements
and acquisitions (except ELS) 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 $33.1 million for the nine months
ended September 30, 1998, an increase of $22.0 million from the comparable prior
year period. This fluctuation primarily resulted from increased receivable
collections, offset by higher inventory expenditures, and higher payment of
year-end bonuses. In addition, cash-flow in 1997 had been reduced by a $5.8
million prepayment penalty on the Company's Senior Notes.
Net cash used in investing activities totaled $16.3 million for the nine months
ended September 30, 1998, down $83.7 million from the comparable prior year
period which had included $90.5 million for the August 1997 purchase of ELS.
Acquisitions of businesses in 1998 included the January payment of a $1.3
million post-close purchase price adjustment related to the ELS acquisition and
$2.0 million for a translation segment acquisition in France in June 1998.
Capital expenditures increased $3.4 million over the prior year.
22
<PAGE>
Net cash used for financing activities during the nine months ended September
30, 1998 was $8.9 million in 1998, compared with net cash provided by financing
activities of $102.7 million in the prior year. The change primarily resulted
from net proceeds in the prior year from bank borrowing in connection with the
ELS acquisition and the Company's refinancing of its then existing long-term
debt, as well as from higher long-term debt principal payments and the absence
of treasury stock sales activity, which contributed $6.1 million in proceeds in
the prior year, partly offset by a $4.0 million borrowing on the Company's
revolving credit facility made during the current year.
Other items impacting the Company's liquidity and capital resources are as
follows:
o 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. The
company reached a final settlement of $2.1 million plus interest with the
IRS in August 1998. Such settlement has been fully paid by the Company as
of September 30, 1998. The Company made payments of $0.1 million in
December 1996, $2.5 million to the IRS during the 1997 second quarter, and
a payment of $0.7 million during the 1998 second quarter.
o Reported within accrued expenses at September 30, 1998 were $2.9 million
related to the ELS acquisition.
o On February 25, 1998, 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 increased to 503,225 from 377,000. This increase was approved by
the shareholders at the Company's June 2, 1998 annual shareholders'
meeting. The Company plans to reserve its treasury shares for use under
this Plan.
o The revolving credit commitment under the Bank Facility was increased from
$55 million to $70 million, via amendment, on March 23, 1998. At November
13, 1998, the Company had $48 million outstanding under this revolving
credit facility.
o The Company's SERP provides retirement income / disability retirement
benefits, retiree medical benefits and death benefits to certain designated
executives and their designated beneficiaries. The Company intends to fund
the SERP through a combination of funds generated from operations and life
insurance policies on the participants.
o Pursuant to a covenant under the Bank Facility, the Company is party to
currency coupon swap agreements with a financial institution to hedge the
Company's net investments in certain foreign subsidiaries and to help
manage the effect of foreign currency fluctuations on the Company's ability
to repay its U.S. dollar debt. 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 estimated fair value of
these swap agreements at September 30, 1998, representing the amount that
could be settled based on estimates obtained from a dealer, was a net asset
of approximately $1.2 million.
23
<PAGE>
o In connection with another covenant under the Bank Facility, the Company is
party to 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 and currently at $57.2 million at
September 30, 1998. 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.
The estimated fair value of this interest rate swap at September 30, 1998,
representing the amount that could be settled based on estimates obtained
from a dealer, was a net liability of approximately $2.3 million.
o Certain financial covenants contained in the Bank Facility restrict the
ability of the Company to pay dividends and the Company does not expect to
pay dividends during the term of the Bank Facility. Further pursuant to the
Bank Facility, principal and interest repayment of indebtedness to Benesse,
having a balance at September 30, 1998 of $40.9 million, are deferred until
all obligations under the Bank Facility are satisfied.
o Pursuant to definitive investment agreements dated as of October 2, 1998,
the Company has agreed to issue, subject to shareholder approval and
certain other conditions, $155 million aggregate principal amount of
12-year convertible debentures (the "Convertible Debentures") in a private
placement with Apollo Management IV, L.P. and Benesse Holdings
International, Inc. ("BHI"). The issuance is expected to occur in December
1998. The Convertible Debentures bear interest at 5% per annum, payable
semi-annually. Principal amounts outstanding under such debentures are not
due until 2010, and the Company is not required to establish a bond sinking
fund for repayment of this principal. The Convertible Debentures are
convertible at any time into shares of the Company's common stock at a
conversion price of $33.05 per share, subject to anti-dilution related
adjustments.
In a separate transaction contingent upon the closing of the Convertible
Debenture transactions, BHI has agreed to loan $50 million to the Company,
evidenced by a 12-year fixed rate subordinated promissory note (the "BHI
Note"). Such note would bear interest for the first five years at 5.9% per
annum, and, thereafter, at a renegotiated fixed rate approximating LIBOR
plus a margin based on the Company's then existing leverage. Interest would
be payable semiannually in cash while principal repayment would be deferred
until maturity.
The Company intends to use proceeds from the sale of the Convertible
Debentures, as well as proceeds from the BHI Note issuance, to repay in
full all outstanding indebtedness pursuant to the Company's existing Bank
Facility and existing notes payable to Benesse, and for general corporate
purposes. However, the Company does not expect to currently terminate its
interest rate swap agreement or currency coupon swap agreements. Berlitz
anticipates incurring approximately $3.5 million in transaction costs in
connection with the issuance of the Convertible Debentures and BHI Note.
At September 30, 1998, the Company's liquid assets of $34.8 million consisted of
cash and temporary investments. The Company does not currently have any material
commitments for capital expenditures, except as disclosed below under "The Year
2000 Issue". In the future, the Company anticipates capital expenditures to
continue to be in line with recent historical trends due to 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.
THE YEAR 2000 ISSUE
INTRODUCTION
The Year 2000 issue is the result of certain computerized systems' use of a two
rather than four digit year, e.g., 95 vs. 1995. As a result of the ambiguous
century in such systems, the introduction of twenty-first century dates may
cause systems to function abnormally or not at all.
Recognizing the need to ensure operations will not be adversely affected by Year
2000 failures, the Company established a committee to address any possible
exposure. This committee is responsible for carrying out the Company's awareness
program, assessing key financial and operational systems, for assessing external
relationships with customers and vendors, and for developing and implementing
detailed divisional action plans.
The Company has divided the Year 2000 issue into three areas: (i)
Infrastructure; (ii) Internal Use Financial and Operational Software; and (iii)
Key Third Party Customer and Vendor Relationships. For each area, the committee
is responsible for carrying out the following steps: Inventory, Assessment,
Remediation and Testing, and Contingency Plan Development and Implementation.
24
<PAGE>
The infrastructure area contains all hardware, embedded systems, and software,
excepting financial and operational software. Non-compliant internal use
financial software is currently being replaced in conjunction with the global
deployment of PeopleSoft systems. Such PeopleSoft systems are warranted to be
Year 2000 compliant and have been successfully tested as such. Key third party
relationships include external interfaces between the Company and its suppliers,
service providers, and customers that are deemed material to the continued
operation of the Company.
STATE OF READINESS
Overall, the Company's Year 2000 project is currently proceeding on schedule and
is expected to be fully completed according to the original schedule by
September 29, 1999.
As of April 1998, the committee had completed a worldwide systems inventory and
assessment for the infrastructure and internal use financial and operational
systems areas. To minimize complicating factors, the Company chose to replace
rather than upgrade most non-compliant systems without commercially available
remediation paths at the time of assessment. The Company is employing both
internal and external resources in its remediation efforts.
Remediation and testing of systems began in July 1998 and is scheduled to
continue through September 30, 1999. Testing is scheduled to occur in line with
remediation efforts; as systems are upgraded or replaced, compliance testing of
the system will begin. Based on current progress, the Company reasonably expects
that all internal remediation efforts in this area will be completed on or
before the scheduled completion date. Further, the Company believes it is
unlikely that its efforts to remediate non-compliant financial and operational
software would extend beyond the scheduled completion date.
The Company has begun formal communications with all key vendors and customers
to identify and assess their states of readiness. Based on the results of this
process, the committee will estimate the impact of a failure in a third party's
own Year 2000 remediation program. Communications with key third parties will
continue to minimize the exposure to the Company and its ability to conduct
normal business. The Company expects to complete its assessment of external
vendor relationships by the end of 1998.
Since it is in the midst of gathering information, the Company is not yet able
to estimate the cost for Year 2000 compliance with respect to its customers and
suppliers.
RISK
The Company expects to achieve internal compliance and does not believe that any
reasonably likely risk of failure exists. Based on management estimates and the
uncertainty surrounding the Company's ability to guarantee the compliance of
third parties, the Company expects that the most likely worst case is that some
third parties fail to successfully and completely remediate all Year 2000
issues. Third party failures could range from the loss of a utility or service
such as electricity or telecommunications to a loss of revenue due to a
customer's inability to conduct normal business based on the failure of the
customer's or vendor's own systems or those of its own critical third party
relationships.
25
<PAGE>
Third parties deemed material to the Company fall primarily into the following
categories: banks, accounting bureaus, telecommunications providers, utilities,
and customers. Although management estimates that it is reasonably likely that
some third parties may experience failures, the Company does not believe that
the aggregate effect of such failures will have a material effect on the
Company's consolidated future results. This estimate is based on the nature of
the Company's services, its widespread geographic dispersion, and the diversity
of its customer base.
Although third party failures are beyond the reasonable control of the Company,
the Company is making every effort to reduce any negative effect by closely
communicating with third parties to follow the progress of their remediation
programs and minimize the risks associated with a third party's failure to
achieve compliance.
CONTINGENCY PLANS
To further minimize any risk associated with any internal or third party failure
to achieve compliance, the Company is currently in the process of developing
contingency plans for those critical systems and third party relationships that
have the potential to materially interrupt the Company's ability to conduct
normal business. Decisions regarding the implementation of specific contingency
plans are expected to be made by the end of the first quarter of 1999 and, if
deemed necessary, are expected to be fully implemented by the end of the third
quarter of 1999.
COSTS TO ADDRESS THE YEAR 2000 ISSUE
Based on its worldwide hardware and software inventories, the Company currently
estimates the cost for Year 2000 compliance with respect to its information and
production systems to be approximately $4.2 million, consisting of: $2.9 million
for replacements of financial accounting systems with the remainder dedicated to
infrastructure and third party relationship remediation.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, including information
appearing under the captions "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" 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 Company's success in
selling new franchises; the economic conditions in the Asian region; the Year
2000 issues, including the success with which the Company's customers and
suppliers address their Year 2000 exposures; the successful completion of the
Convertible Debenture transactions and BHI note issuance with Apollo Management
IV, L.P. and BHI; as well as more general factors affecting future cashflows 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
26
<PAGE>
technologies; changes in governmental and tax laws and regulations, tax audits
and other factors (known or unknown) which may affect the Company. As a result,
no assurance can be given as to future results, levels of activity and
achievements.
BERLITZ INTERNATIONAL, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
All exhibits listed below are filed with this Quarterly Report on Form 10-Q.
Exhibit No.
27 Financial Data Schedule, for the quarterly period ended September
30, 1998.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 1998.
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 16, 1998 By: /s/ HENRY D. JAMES
------------------
Henry D. James
Executive Vice President and
Chief Financial Officer
27
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<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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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<RECEIVABLES> 48,434
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