UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
August 13, 1998, is 9,529,788.
Page 1 of 24
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30,
(Dollars in thousands, except per share amounts)
1998 1997
-------- --------
Sales of services and products .................... $107,509 $ 95,894
-------- --------
Costs and expenses:
Cost of services and products sold ............... 63,161 55,863
Selling, general and administrative .............. 33,750 29,192
Amortization of publishing rights, excess of cost
over net assets acquired, and other intangibles 4,276 3,137
Interest expense on long-term debt ............... 2,768 1,752
Interest expense to affiliates ................... 549 513
Other expense (income), net ...................... 789 (410)
-------- --------
Total costs and expenses ...................... 105,293 90,047
-------- --------
Income before income taxes and minority
interest in earnings of subsidiary ............ 2,216 5,847
Income tax expense ............................... 1,479 3,747
Minority interest in earnings of subsidiary ...... 37 151
-------- --------
Net income ....................................... $ 700 $ 1,949
======== ========
Earnings per share - basic and diluted ........... $ 0.07 $ 0.20
======== ========
Average number of shares outstanding (000's) ..... 9,530 9,543
======== ========
See accompanying Notes to the Consolidated Financial Statements.
2
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
(Dollars in thousands, except per share amounts)
1998 1997
--------- ---------
Sales of services and products .................... $ 212,165 $ 185,145
--------- ---------
Costs and expenses:
Cost of services and products sold ............... 126,397 109,751
Selling, general and administrative .............. 67,581 58,333
Amortization of publishing rights, excess of cost
over net assets acquired, and other intangibles 8,615 6,286
Interest expense on long-term debt ............... 5,617 3,511
Interest expense to affiliates ................... 1,091 1,027
Other expense (income), net ...................... 351 (175)
--------- ---------
Total costs and expenses ...................... 209,652 178,733
--------- ---------
Income before income taxes and minority
interest in earnings of subsidiary ............ 2,513 6,412
Income tax expense ............................... 1,684 4,070
Minority interest in earnings of subsidiary ...... 106 225
--------- ---------
Net income ....................................... $ 723 $ 2,117
========= =========
Earnings per share - basic and diluted ........... $ 0.08 $ 0.22
========= =========
Average number of shares outstanding (000's) ..... 9,530 9,475
========= =========
See accompanying Notes to the Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary investments ............................... $ 29,293 $ 26,665
Accounts receivable, less allowance for
doubtful accounts of $2,476 and $2,415 ..................... 40,707 50,622
Unbilled receivables ......................................... 8,095 3,538
Inventories .................................................. 11,083 9,159
Prepaid expenses and other current assets .................... 7,841 8,323
--------- ---------
TOTAL CURRENT ASSETS ....................................... 97,019 98,307
Property and equipment, net of accumulated
depreciation of $19,286 and $17,365 ........................ 33,509 32,098
Publishing rights, net of accumulated amorti-
zation of $4,764 and $4,324 ................................ 17,221 17,661
Excess of cost over net assets acquired and other intangibles,
net of accumulated amortization of $65,433 and $57,893 ..... 486,424 498,506
Other assets ................................................. 17,517 14,943
--------- ---------
TOTAL ASSETS ............................................... $ 651,690 $ 661,515
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............................ $ 18,706 $ 17,712
Accounts payable ............................................. 10,004 9,990
Deferred revenues ............................................ 37,610 36,071
Payrolls and commissions ..................................... 15,736 17,988
Income taxes (prepaid) payable ............................... (995) 573
Accrued expenses and other current liabilities ............... 17,058 15,505
--------- ---------
TOTAL CURRENT LIABILITIES .................................. 98,119 97,839
========= =========
Long-term debt ............................................... 136,854 142,369
Notes payable to affiliates .................................. 39,885 39,423
Deferred taxes and other liabilities ......................... 21,873 24,964
Minority interest ............................................ 10,064 9,942
--------- ---------
TOTAL LIABILITIES .......................................... 306,795 314,537
========= =========
Commitments and Contingencies (Note 7)
SHAREHOLDERS' EQUITY:
Common stock ................................................. 1,003 1,003
Additional paid-in capital ................................... 372,518 372,518
Retained earnings ............................................ 3,215 2,492
Treasury stock at cost ....................................... (6,361) (6,361)
Accumulated other comprehensive loss:
Cumulative translation adjustment .......................... (25,480) (22,674)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ................................. 344,895 346,978
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................. $ 651,690 $ 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)
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------
1998 1997
-------- --------
Net income .................................... $ 700 $ 1,949
Other comprehensive (loss) income, net of tax:
Foreign currency items, including translation
adjustments, and the effects of certain
hedges and intercompany transactions ....... (1,308) 1,975
-------- --------
Comprehensive (loss) income.................... $ (608) $ 3,924
======== ========
The tax expenses (benefit) allocated to each component of other comprehensive
(loss) income are as follows:
Foreign currency items ........................ $ 442 $ (75)
======== ========
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------
1998 1997
-------- --------
Net income .................................... $ 723 $ 2,117
Other comprehensive loss, net of tax:
Foreign currency items, including translation
adjustments, and the effects of certain
hedges and intercompany transactions ....... (2,806) (4,949)
-------- --------
Comprehensive loss ............................ $ (2,083) $ (2,832)
======== ========
The expenses allocated to each component of other comprehensive
loss are as follows:
Foreign currency items ........................ $ 947 $ 187
======== ========
See accompanying Notes to the Consolidated Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
BERLITZ INTERNATIONAL, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 723 $ 2,117
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................................... 13,384 10,296
Other (primarily provision for bad debts, and
foreign exchange (gains) losses, net) ............................. 1,160 887
Changes in operating assets and liabilities ...................... 4,410 (1,674)
--------- ---------
Net cash provided by operating activities ....................... 19,677 11,626
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................... (8,506) (6,117)
Acquisitions of businesses ......................................... (3,347) -
--------- ---------
Net cash used in investing activities ........................... (11,853) (6,117)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ........................................ (8,509) (7,617)
Proceeds from sale of treasury stock ............................... - 6,110
Net borrowings under revolving credit facility ..................... 4,000 -
Payment of deferred finance costs .................................. (177) -
--------- ---------
Net cash used in financing activities ........................... (4,686) (1,507)
--------- ---------
Effect of exchange rate changes on cash and
temporary investments ............................................. (510) (520)
--------- ---------
Net increase in cash and temporary investments ...................... 2,628 3,482
Cash and temporary investments, beginning of period ................. 26,665 25,781
--------- ---------
Cash and temporary investments, end of period ....................... $ 29,293 $ 29,263
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest ............................................. $ 5,442 $ 3,077
========= =========
Income taxes ......................................... $ 4,544 $ 6,294
========= =========
Cash refunds of income taxes ....................................... $ 666 $ 150
========= =========
</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 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 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, $241 of internal-use software costs have been
capitalized in the first half of 1998.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform to the 1998 presentation.
2. ACQUISITION 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 June 1998, the Company
paid $2,007 to purchase the assets of a major corporation's translations
division in France.
3. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30, DECEMBER 31,
1998 1997
--------------- ---------------
Term Loan $ 107,250 $ 115,750
Revolving credit facility 48,000 44,000
Other 310 331
--------------- ---------------
Total 155,560 160,081
Less current maturities 18,706 17,712
--------------- ---------------
Long-term debt $ 136,854 $ 142,369
=============== ===============
7
<PAGE>
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's
financial instruments at June 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:
Cash and temporary investments ......... $ 29,293 $ 29,293 $ 26,665 $ 26,665
Currency coupon swap agreements ........ 2,311 2,311 719 719
Liabilities:
Long-term debt, including
current maturities ................... 155,560 155,560 160,081 160,081
Notes payable to affiliates ............ 39,885 35,540 39,423 34,101
Currency coupon swap agreements ........ 120 120 406 406
Interest rate swap agreement ........... - 896 - 680
</TABLE>
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 EXPENSE (INCOME), NET
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
Interest income on temporary investments .......$ (165) $ (187)
Foreign exchange (gains) losses, net ........... 633 (136)
Other non-operating taxes ...................... 33 86
Loss on disposal of fixed assets ............... 91 5
Other investment income, net ................... (48) (100)
Other expense (income), net .................... 245 (78)
------------- -------------
Total other expense (income), net .........$ 789 $ (410)
============= =============
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
Interest income on temporary investments .......$ (310) $ (331)
Foreign exchange losses, net ................... 215 74
Other non-operating taxes ...................... 107 249
Term Loan administration fee ................... 35 150
Loss on disposal of fixed assets ............... 207 30
Other investment income, net ................... (24) (199)
Other expense (income), net .................... 121 (148)
------------- -------------
Total other expense (income), net .........$ 351 $ (175)
============= =============
6. EARNINGS PER SHARE
Reconciliations between Basic and Diluted earnings per share ("EPS")
computations for
8
<PAGE>
"net income" for the three and six month periods ended June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER
OF SHARES PER-SHARE
INCOME OUTSTANDING AMOUNT
----------- ----------- -----------
<S> <C> <C> <C>
Basic EPS:
Net income - three months ........................ $ 700 9,530 $ 0.07
Effect of dilutive securities:
Stock options .................................... 36
----------- ----------- -----------
Diluted EPS:
Net income - three months ........................ $ 700 9,566 $ 0.07
=========== =========== ===========
Basic EPS:
Net income - six months .......................... $ 723 9,530 $ 0.08
Effect of dilutive securities:
Stock options .................................... 27
----------- ----------- -----------
Diluted EPS:
Net income - six months .......................... $ 723 9,557 $ 0.08
=========== =========== ===========
</TABLE>
There is no difference between Basic and Diluted EPS computations for the
three and six months ended June 30, 1997 since no dilutive securities were
outstanding prior to June 30, 1997.
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 has reached a preliminary settlement with the IRS
subject to Joint Committee approval. The Company believes that any
liability that may ultimately result is adequately provided for at June 30,
1998.
8. 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.
9. 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
9
<PAGE>
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 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:
10
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Revenues from external customers:
Instruction ..................................... $ 82,989 $ 71,985 $ 163,617 $ 137,312
Translation ..................................... 20,763 20,727 40,984 40,315
Publishing ...................................... 3,386 3,461 6,954 7,162
Franchising ..................................... 368 (119) 601 377
---------- ---------- ---------- ----------
Total external revenues ....................... 107,506 96,054 212,156 185,166
---------- ---------- ---------- ----------
Intersegment revenues:
Franchising ..................................... 262 525 346 556
---------- ---------- ---------- ----------
Total intersegment revenues ................... 262 525 346 556
---------- ---------- ---------- ----------
Total revenues for reportable segments.............. 107,768 96,579 212,502 185,722
Elimination of intersegment and
other amounts ................................... (259) (686) (337) (577)
---------- ---------- ---------- ----------
Total consolidated revenues ................... $ 107,509 $ 95,893 $ 212,165 $ 185,145
========== ========== ========== ==========
INCOME BEFORE TAXES AND MINORITY INTEREST:
Operating Profit:
Segment EBITA:
Instruction ..................................... $ 16,548 $ 16,759 $ 29,959 $ 28,887
Translation ..................................... 2,250 2,000 3,720 3,263
Publishing ...................................... (103) (7) 433 389
Franchising ..................................... 82 (290) 44 (493)
---------- ---------- ---------- ----------
Total EBITA for reportable segments ................ 18,777 18,462 34,156 32,046
General corporate and nonsegment expenses........... (8,179) (7,623) (15,969) (14,985)
---------- ---------- ---------- ----------
Total EBITA 10,598 10,839 18,187 17,061
---------- ---------- ---------- ----------
Amortization of publishing rights, excess of cost
over net assets acquired, and other intangibles:
Instruction ................................. (3,868) (2,650) (7,774) (5,306)
Translation ................................. (308) (386) (641) (778)
Publishing .................................. (100) (101) (200) (202)
---------- ---------- ---------- ----------
Total intangible amortization ................. (4,276) (3,137) (8,615) (6,286)
---------- ---------- ---------- ----------
Total operating profit ................................. 6,322 7,702 9,572 10,775
Interest expense on long-term debt ..................... (2,768) (1,752) (5,617) (3,511)
Interest expense to affiliates ......................... (549) (513) (1,091) (1,027)
Other income (expense), net ............................ (789) 410 (351) 175
---------- ---------- ---------- ----------
Total consolidated income before taxes and
minority interest ...................................... $ 2,216 $ 5,847 $ 2,513 $ 6,412
========== ========== ========== ==========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
ASSETS:
JUNE 30,
---------
1998 1997
---------- ----------
<S> <C> <C>
Segment assets:
Instruction ............................... $ 533,600 $ 454,235
Translation ............................... 76,793 75,174
Publishing ................................ 23,717 21,549
Franchising ............................... 5,701 4,008
---------- ----------
Total assets for reportable segments 639,811 554,966
General corporate and nonsegment assets ...... 13,424 8,123
Eliminations of intersegment receivables ..... (1,545) (686)
---------- ----------
Total consolidated assets ................. $ 651,690 $ 562,403
========== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Depreciation:
Segment depreciation:
Instruction ........................... $ 1,393 $ 1,138 $ 2,754 $ 2,230
Translation ........................... 515 496 1,031 923
Publishing ............................ 279 226 493 468
Franchising ........................... 5 5 15 9
--------- --------- --------- ---------
Total depreciation for reportable segments.... 2,192 1,865 4,293 3,630
General corporate and divisional ............. 261 180 476 379
--------- --------- --------- ---------
Total consolidated depreciation ........... $ 2,453 $ 2,045 $ 4,769 $ 4,009
========= ========= ========= =========
CAPITAL EXPENDITURES:
Segment capital expenditures:
Instruction ........................... $ 2,919 $ 1,733 $ 5,586 $ 4,247
Translation ........................... 466 599 772 874
Publishing ............................ 1,126 624 1,828 905
Franchising ........................... -- 3 -- 3
--------- --------- --------- ---------
Total capital expenditures for reportable
segments............................... 4,511 2,959 8,186 6,029
General corporate and divisional .......... 121 14 320 88
--------- --------- --------- ---------
Total consolidated capital expenditures $ 4,632 $ 2,973 $ 8,506 $ 6,117
========= ========= ========= =========
</TABLE>
The following tables presents certain information about the geographic
areas in which the Company operates:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues from external customers:
United States ................................ $ 36,881 $ 25,493 $ 72,887 $ 49,516
Japan ........................................ 14,629 16,486 28,949 30,892
Germany ...................................... 9,987 9,016 19,713 18,455
Ireland ...................................... 6,790 7,993 13,682 14,943
Brazil ....................................... 5,805 5,684 10,702 9,891
Other foreign countries ...................... 33,414 31,382 66,223 61,469
---------- ---------- ---------- ----------
Total ..................................... $ 107,506 $ 96,054 $ 212,156 $ 185,166
========== ========== ========== ==========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating profit:
EBITA :
United States ............................. $ 4,167 $ 3,777 $ 7,357 $ 7,019
Japan ..................................... 2,056 2,660 3,024 4,063
Germany ................................... 1,288 571 2,471 1,054
Ireland ................................... 595 1,008 1,074 2,035
Brazil .................................... 1,063 997 1,602 1,313
Other foreign countries ................... 5,839 6,032 10,746 8,845
General corporate expenses ................ (4,410) (4,206) (8,087) (7,268)
---------- ---------- ---------- ----------
Total EBITA.............................. 10,598 10,839 18,187 17,061
---------- ---------- ---------- ----------
Amortization of publishing rights,
excess of cost over net assets acquired,
and other intangibles:
United States ............................. (3,569) (2,305) (7,163) (4,561)
Japan ..................................... (288) (325) (594) (649)
Germany ................................... (64) (68) (128) (138)
Ireland ................................... (12) (87) (48) (178)
Brazil .................................... (16) (16) (32) (32)
Other foreign countries ................... (327) (336) (650) (728)
---------- ---------- ---------- ----------
Total intangible amortization ........... (4,276) (3,137) (8,615) (6,286)
---------- ---------- ---------- ----------
Intercompany royalties:
United States ............................. 4,470 4,888 7,769 8,397
Japan ..................................... (1,485) (1,865) (1,965) (2,764)
Germany ................................... (373) (342) (749) (696)
Ireland ................................... (333) (404) (678) (746)
Other foreign countries ................... (2,279) (2,277) (4,377) (4,191)
---------- ---------- ---------- ----------
Total intercompany royalties ............ -- -- -- --
---------- ---------- ---------- ----------
Total operating profit ........................... $ 6,322 $ 7,702 $ 9,572 $ 10,775
========== ========== ========== ==========
LONG LIVED ASSETS: Property &
Equipment Other Intangible
net Assets Assets Total
---------- ---------- ---------- ----------
June 30, 1998:
United States ................................ $ 6,691 6,285 $ 412,944 $ 425,920
Japan ........................................ 6,743 77 39,929 46,749
Germany ...................................... 2,696 -- 8,825 11,521
Brazil ....................................... 2,653 -- 2,176 4,829
Ireland ...................................... 1,736 44 1,769 3,549
Other foreign countries ...................... 11,155 283 36,406 47,844
General corporate............................. 1,835 1,995 1,596 5,426
---------- ---------- ---------- ----------
Total ..................................... $ 33,509 $ 8,684 $ 503,645 $ 545,838
========== ========== ========== ==========
JUNE 30, 1997:
United States ................................ $ 4,343 $ 3,428 $ 325,028 $ 332,799
Japan ........................................ 6,783 -- 48,609 55,392
Germany ...................................... 2,979 25 9,461 12,465
Brazil ....................................... 1,682 -- 2,239 3,921
Ireland ...................................... 1,781 26 2,070 3,877
Other foreign countries ...................... 10,469 333 37,326 48,128
General corporate............................. 1,804 3,348 1,596 6,748
---------- ---------- ---------- ----------
Total ..................................... $ 29,841 $ 7,160 $ 426,329 $ 463,330
========== ========== ========== ==========
</TABLE>
13
<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 JUNE 30, 1998 VS. THREE MONTHS ENDED
JUNE 30, 1997
Sales for the quarter ended June 30, 1998 were $107.5 million, 12.1% above the
same period in the prior year. This improvement was primarily due to increases
from operating activity in the Instruction and Translation business segments,
including the post-acquisition results of ELS Educational Services, Inc.
("ELS"), which was purchased in August 1997. Such increases were partially
offset by unfavorable exchange rate fluctuations of $5.9 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 6.2%.
Language Instruction sales for the quarter ended June 30, 1998 were $83.0
million, 15.3% above the same period in 1997. This improvement was primarily due
to volume and average revenue per lesson ("ARPL") increases in most countries
and $11.6 million in post-acquisition results for ELS, partially offset by
unfavorable exchange rate fluctuations of $4.8 million. Excluding the effects of
the ELS acquisition and the unfavorable exchange rate fluctuations, revenues
increased 5.8% from the prior year.
On a geographic basis, Language Instruction revenue increases in Latin America,
Central/Eastern Europe, and Western Europe offset decreases in the other
divisions. The increase in Latin American revenues ($0.9 million, or 6.8%) was
primarily attributable to volume and ARPL increases in Brazil, Mexico, and
Venezuela. Central/Eastern Europe's increase ($0.6 million, or 4.2%) primarily
reflects volume and ARPL increases in most countries, in particular Germany,
Poland, and Israel. The volume and ARPL increase is partially offset by
unfavorable exchange rate fluctuations ($0.9 million, principally versus the
German mark). Western Europe's Sales increase of ($0.2 million, or 1.6%) is
mainly attributable to corporate lesson volume increases in France and Italy.
The growth in volume is partially offset by unfavorable exchange rate
fluctuations of $0.5 million. North America's sales decline, excluding ELS
post-acquisition results of $11.6 million, was $0.3 million, or 1.6%, primarily
due to reductions in business originating from the Far East, principally Korea
and Japan. Asia's revenues declined $1.9 million. This is attributable to
unfavorable exchange rate fluctuations of $1.9 million.
During the three-month period ended June 30, 1998, the number of lessons given
was
14
<PAGE>
approximately 1.5 million, 5.0% above the same period in the prior year,
reflecting increases in all divisions. Lesson volume in North America increased
1.8% from the prior year, reflecting growth in both the U.S.A. and Canada.
Lesson volume in Asia rose slightly over prior year due to activity generated
from new markets. Lesson volume in Latin America increased by 8.3% from prior
year, primarily reflecting high volume in Mexico and Venezuela, as well growth
in the newer markets (Peru and Uruguay). Lesson volume in Central/Eastern Europe
increased 7.6% over the prior year, primarily reflecting growth in Israel,
Poland and Germany. Lesson volume in Western Europe rose 6.2% from 1997,
primarily due to increases in lessons given to corporate clients in France and
Italy.
For the 1998 second quarter, ARPL was $40.25, as compared to $41.77 in the
comparable prior-year period. The decline reflected the effects of unfavorable
exchange rate fluctuations of $2.80. ARPL ranged from a high of approximately
$60.28 in Brazil to a low of $13.95 in Thailand, reflecting effects of foreign
exchange rates and differences in the economic value of the service.
Translation segment sales were $20.8 million for the three-month period ended
June 30, 1998, an increase of 0.2% from the same period in 1997. Excluding the
unfavorable effects of exchange rate fluctuations of $1.1 million, sales grew
$1.2 million, or 5.6%. The operations sales growth was primarily due to
increased volume in the USA, Germany, France and certain other Western European
countries. The USA sales growth was due to the continued growth in demand for
interpretation services and expansion of business from the existing customer
base. Germany's growth is due to increased volume from its key clients. Sales
increased in France due to an acquisition completed in June 1998. Sales in
certain Western Europe countries continue to grow due to increased volume from
certain key accounts in the software related industries and the acquisition of
new customers. These improvements were partially offset by declines in sales in
Ireland due to cyclical fluctuations.
Publishing segment sales were $3.4 million for the three months ended June 30,
1998, compared with $3.5 million in 1997. Exchange rate fluctuations were not
significant.
Other sales, consisting primarily of franchising activity and intersegment sales
elimination's, were $0.4 million in 1998 compared with negative $0.3 million in
the prior year. The Company opened a Berlitz franchise in the United Arab
Emirates during the second quarter of 1998.
The Company's cost of services and products sold as a percentage of sales was
58.8% in the 1998 second quarter, compared to 58.3% in the same prior year
period. The increase in the percentage is attributable to the inclusion of ELS
student housing expenses in 1998; The fees collected from students for such
housing are only slightly above the Company's costs. Selling, general and
administrative expenses as a percentage of sales were 31.4% in the 1998 second
quarter, compared with 30.4% in the comparable prior year period. The increase
is due to higher administrative salary percentages.
15
<PAGE>
EBITA(1) for the 1998 second quarter was $10.6 million, or 9.9% of sales,
compared to $10.8 million, or 11.3% of sales, in the same prior year period. A
discussion by business segment follows.
Instruction segment EBITA, excluding franchising activity, for the quarter ended
June 30, 1998 was $16.5 million, or 19.9% of segment sales, compared to $16.8
million, or 23.3% of segment sales, in the comparable prior year period. The
comparison to prior year was impacted by unfavorable exchange rate fluctuations
of $1.2 million (most significantly in Japan, Colombia, Brazil and Mexico), as
well as the inclusion in 1998 of $0.7 million of EBITA generated by ELS.
Excluding these results of ELS, which was acquired after the second quarter of
1997, the Instruction segment's EBITA margin was 22.2% in 1998.
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 second quarter
of 1998 which was $0.3 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 exhibited a 1998 EBITA decline, excluding exchange rate
fluctuations, of $0.3 million, or 7.8%, from 1997 due to higher administrative
salary, rent, and certain other center operating percentages. The Company
continues to focus on measures designed to protect Asia division's EBITA.
In other geographic divisions, excluding the effects of exchange fluctuations,
Latin America and Central/Eastern Europe divisions had EBITA increases of 14.2%
and 26.0% above prior year. The increases are mainly attributable to lesson and
price increases in Brazil, Mexico, Venezuela, and Germany. Western Europe
remained flat as improvements in Italy were offset by declines in England.
Translation segment EBITA for the three months ended June 30, 1998 was $ 2.3
million, or 10.8% of segment sales, compared to $2.0 million, or 9.6% of segment
sales, in the prior year. The 1998 EBITA increased due to higher volume in
Germany and certain Western European countries. In addition Translations
experienced improved margins in all the Asian countries as a result of recent
reorganization efforts. These positive results were partially offset by lower
margins in the USA and Ireland due to lower volume. The Ireland operation has
been reorganized in an effort to restore margins.
Publishing segment EBITA reported a loss of $0.1 million for the 1998 second
quarter, compared to a breakeven in the prior year.
EBITA for franchising activity was $0.1 million during the second quarter of
1998, compared with an EBITA loss of $0.3 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.
16
<PAGE>
Non-segment related corporate expenses included in EBITA were $8.2 million for
the three months ended June 30, 1998, compared with $7.6 million in the same
prior year period. This change was primarily due to increases in administrative
salaries.
Amortization of intangibles increased $1.1 million, or 36.3%, 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 June
30, 1998 rose $1.0 million, or 58.0%, from the comparable prior year period, due
to higher borrowings outstanding under the Company's refinanced August 1997
credit facility. Other expense, net for the three months ended June 30, 1998
increased by $1.2 million over the prior year, primarily due to higher foreign
exchange losses.
The Company recorded an income tax expense of $1.5 million, or an effective rate
of 66.7%, during the current period. This compared to an income tax expense of
$3.7 million, or an effective rate of 64.1%, 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.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 VS. SIX MONTHS ENDED JUNE
30, 1997
Sales for the six months ended June 30, 1998 were $212.2 million, 14.6% above
the same period in the prior year. This improvement was due to increases from
operating activity in the Instruction and Translation business segments,
including the post-acquisition results of ELS, which was purchased in August
1997. Such increases were partially offset by unfavorable exchange rate
fluctuations of $12.7 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 8.6%.
Language Instruction sales for the six months ended June 30, 1998 were $163.6
million, 19.2% above the same period in 1997. This improvement was primarily due
to volume and average revenue per lesson ("ARPL") increases in most countries
and $23.7 million in post-acquisition results for ELS, partially offset by
unfavorable exchange rate fluctuations of $9.5 million. Excluding the effects of
the ELS acquisition and the unfavorable exchange rate fluctuations, revenues
increased 8.8% from the prior year.
On a geographic basis, Language Instruction revenue increases in Latin America,
Central/Eastern and Western Europe offset decreases in the other divisions. The
increase in Latin American revenues ($3.2 million, or 14.1%) was primarily
attributable to volume and ARPL increases in Brazil, Mexico, Venezuela and
Colombia. Central/Eastern Europe's increase ($2.0 million, or 6.8%) primarily
reflects volume and ARPL increases in most countries, in particular Germany,
Poland and Israel. The increase is partially offset by unfavorable exchange rate
fluctuations ($2.6 million, principally versus the German mark). Western Europe
sales increased by $0.1 million due mainly to volume growth in France and Italy,
which was partially offset by unfavorable exchange rate fluctuations of $1.5
million, and volume decreases in England and Belgium. North America's sales
decline, excluding ELS
17
<PAGE>
post-acquisition results of $23.7 million, was $0.8 million, or 2.4%, primarily
due to reductions in business originating from the Far East, principally Korea
and Japan. Asia's revenues declined $1.9 million as unfavorable exchange rate
fluctuations of $2.9 million, were largely offset by the positive effects of
higher lesson volume in Japan from special sales campaigns.
During the six-month period ended June 30, 1998, the number of lessons given was
approximately 3.0 million, 8.3% above the same period in the prior year,
reflecting increases in all divisions. Lesson volume in North America increased
1.8% from the prior year, reflecting a growth in lessons in the U.S., partially
offset by declines in Canada due to adverse winter weather conditions and fewer
students traveling from abroad. Lesson volume in Asia rose 5.4% 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
14.8% from prior year, primarily reflecting strong growth in Mexico, Brazil and
Venezuela. Lesson volume in Central/Eastern Europe increased 11.4% over the
prior year, primarily reflecting growth in Germany, Poland and Israel. Lesson
volume in Western Europe rose 7.8% from 1997, primarily due to increases in
lessons given to corporate clients in France and Italy. The increase is
partially offset by a 27.7% 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 1998 first half, ARPL was $40.37, as compared to $41.96 in the
comparable prior-year period. The decline reflected the effects of unfavorable
exchange rate fluctuations of $2.90, and was negatively affected by changes in
the client and lesson product mix in Japan, France and Spain. ARPL ranged from a
high of approximately $59.72 in Brazil to a low of $13.08 in Thailand,
reflecting effects of foreign exchange rates and differences in the economic
value of the service.
Translation segment sales were $41.0 million for the six-month period ended June
30, 1998, an increase of $0.7 million, or 1.7%, from the same period in 1997.
Excluding the unfavorable effects of exchange rate fluctuations of $3.0 million,
sales grew $3.6 million, or 9.0%. The operations sales growth was primarily due
to increased volume in all divisions except for Japan. The more notable
increases were in North America, Singapore, Germany and certain Western European
countries. The North America sales growth was due to the continued growth in
demand for interpretation services and expansion of business beyond the existing
customer base. Singapore's growth is due to the acquisition of a new major
account and the results of prior reorganization efforts. The growth in Germany
sales are due to an increase of orders from its major clients, and internal
strengthening and training of its sales staff. Sales in Western Europe continue
to grow due to increased volume from certain key accounts in the software
related industries and the expansion of the customer base.
Publishing segment sales were $7.0 million for the six months ended June 30,
1998, compared with $7.2 million in 1997. Exchange rate fluctuations were not
significant.
Other sales, consisting primarily of franchising activity, were $0.6 million in
1998 compared with $0.4 million in the prior year. The Company opened three
Berlitz franchises during 1998 in Egypt, Costa Rica and United Arab Emirate.
The Company's cost of services and products sold as a percentage of sales in
1998 was 59.6%, compared to 59.3% in the same prior year period. The increase in
the percentage is due to low
18
<PAGE>
margin student housing revenues for ELS, which was acquired after the second
half of 1997. Excluding the impact of ELS, the percentage remained flat @ 59.3%.
Selling, general and administrative expenses as a percentage of sales were 31.9%
in the 1998 first half, compared with 31.5% in the comparable prior year period.
The increase is due to higher administrative salary percentages.
EBITA for the 1998 first half was $18.2 million, or 8.6% of sales, compared to
$17.1 million, or 9.2% of sales, in the same prior year period. A discussion by
business segment follows.
Instruction segment EBITA, excluding franchising activity, for the six months
ended June 30, 1998 was $30.0 million, or 18.3% of segment sales, compared to
$28.9 million, or 21.0% of segment sales, in the comparable prior year period.
Included in 1998 was $1.4 million of EBITA generated by ELS. Excluding these
results of ELS, which was acquired after the first half of 1997, the Instruction
segment's EBITA margin was 20.4% in 1998.
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 half of
1998 which was $0.8 million lower than in 1997. The Company has implement
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,
excluding exchange rate fluctuations, of $0.9 million, or 12.9%, from 1997 due
to higher administrative salaries and a decrease in the ARPL. The Company
continues to focus on measures designed to protect Asia's Instruction EBITA.
Exchange rate fluctuations has a $2.1 million negative effect on the Instruction
EBITA, Japan, Colombia, Germany, Brazil, and Mexico being the countries impacted
the most. Excluding the effect of the exchange rate fluctuations Latin America
and Central/Eastern Europe divisions had EBITA increases of 30.4% and 37.4% over
prior year. The increases are mainly attributable to lesson and price increases
in Brazil, Mexico and Germany. Western Europe's EBITA was $0.3 million lower
than prior year, primarily due to unfavorable exchange rate fluctuations.
Translation segment EBITA for the six months ended June 30, 1998 was $3.7
million, or 9.1% of segment sales, compared to $3.3 million, or 8.1% of segment
sales, in the prior year. The 1998 EBITA increased in Germany, certain Western
European countries and Asia as a result of recent reorganization efforts and
increased volume. These positive results were partially offset by a one-time
charge in North America and lower margins in Ireland. The Ireland operation has
been reorganized in an effort to restore margins.
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.
Publishing segment EBITA for the 1998 first half was flat with the prior year at
$0.4 million.
19
<PAGE>
The EBITA margin increased to 6.2% from 5.4% in the prior year.
EBITA for franchising activity was break-even during the first half of 1998,
compared with an EBITA loss of $0.5 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 $16.0 million for
the six months ended June 30, 1998, compared with $15.0 million in the same
prior year period. This change was primarily due to increases in administrative
salaries.
Amortization of intangibles increased $2.3 million, or 37.1%, over 1997, as a
result of higher intangible assets arising from the acquisition of ELS.
Additionally, interest expense on long-term debt for the six months ended June
30, 1998 rose $2.1 million, or 60.0%, 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 six months ended June 30, 1998
decreased by $0.5 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 $1.7 million, or an effective rate
of 67.0%, during the current period. This compared to an income tax expense of
$4.1 million, or an effective rate of 63.5%, 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.
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 $19.7 million for the six months
ended June 30, 1998, an increase of $8.1 million from the comparable prior year
period. This fluctuation primarily resulted from increased receivable
collections, offset by higher inventory expenditures, higher payment of year-end
bonuses, and a reduction in prepayment of fees by the Company's customers.
Net cash used in investing activities totaled $11.9 million for the 1998 first
half, up $5.7 million from the comparable prior year period. This increase
included the January 1998 payment of a $1.3 million post-close purchase price
adjustment related to the ELS acquisition, a $2.0 million translation segment
acquisition in France in June 1998, and an increase in overall capital
expenditures.
Net cash used for financing activities during the first half was $4.7 million in
1998, $3.2 million higher than the prior year. This increase resulted from the
absence of treasury stock sales activity, which contributed $6.1 million in
proceeds in the prior year, and higher long-term debt principal payments, partly
offset by a $4.0 million borrowing on the Company's
20
<PAGE>
revolving credit facility made during the current year.
Other items impacting the Company's liquidity and capital resources are as
follows:
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, and a payment of $0.7 million during
the 1998 second quarter. In June, 1998, the Company reached a preliminary
settlement with the IRS. Such settlement is subject to Joint Committee
approval. The Company believes that it has adequate cash resources to pay
any deficiency that may ultimately result and to pursue its business plan.
Reported within accrued expenses at June 30, 1998 were $2.9 million related
to the ELS acquisition.
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.
The revolving credit commitment under the Bank Facility was increased from
$55 million to $70 million, via amendment, on March 23, 1998. At August 13,
1998, the Company had $48 million outstanding under this revolving credit
facility.
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.
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 June 30, 1998, representing the amount that could
be settled based on estimates obtained from a dealer, was a net asset of
approximately $2.2 million.
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 $58.9 million at
June 30, 1998. This notional amount amortizes
21
<PAGE>
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 June 30, 1998, representing the amount that could be
settled based on estimates obtained from a dealer, was a net liability of
approximately $0.9 million.
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 June 30, 1998 of $39.9 million, are deferred until all
obligations under the Bank Facility are satisfied.
Included within cash and temporary investments at June 30, 1998 are $2.8
million in restricted funds set aside in an escrow account pursuant to the
Bank Facility. Such funds may be used to pay rent, interest, taxes,
dividends or long-term debt principal at any time after January 1, 1998.
At June 30, 1998, the Company's liquid assets of $29.3 million consisted of cash
and temporary investments. The Company does not currently have any material
commitments for capital expenditures, 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
Recognizing the need to ensure operations will not be adversely affected by Year
2000 software failures, the Company established a committee to address any
possible exposure. This committee is responsible for assessing key financial and
operational systems, for assessing external relationships with customers and
vendors, and for developing and implementing detailed divisional action plans.
This committee has completed its gathering of worldwide hardware and software
inventories and expects to complete its assessment of external vendor
relationships in the 1998 third quarter. Software selection and development is
scheduled for the second half of 1998, and the installation of hardware and
software is anticipated to begin in 1999. The Company expects to be Year 2000
compliant by September 29, 1999.
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 primarily of
replacements of financial accounting systems and desktop hardware and software.
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. However, management does not currently believe that such incremental
costs will have a material adverse effect on the Company's future consolidated
results, due to the nature of the Company's services, and the diversity of its
customer base.
22
<PAGE>
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 outcome of future
negotiations and/or litigation pertaining to the deficiency assessed by the IRS;
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 future
continuation of the Executive Office for Immigration Review ("EOIR") contract;
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 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 three months ended June 30, 1998.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BERLITZ INTERNATIONAL, INC.
---------------------------
(Registrant)
Date: August 13, 1998 By: /s/ HENRY D. JAMES
------------------
Henry D. James
Executive Vice President and
Chief Financial Officer
24
<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 JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 29,293
<SECURITIES> 0
<RECEIVABLES> 43,183
<ALLOWANCES> 2,476
<INVENTORY> 11,083
<CURRENT-ASSETS> 97,019
<PP&E> 52,795
<DEPRECIATION> 19,286
<TOTAL-ASSETS> 651,690
<CURRENT-LIABILITIES> 97,434
<BONDS> 0
<COMMON> 1,003
0
0
<OTHER-SE> 343,892
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<INCOME-PRETAX> 2,513
<INCOME-TAX> 1,684
<INCOME-CONTINUING> 723
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 723
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
