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 March 31, 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 May 13, 1998, is 9,529,788.
Page 1 of 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
(Dollars in thousands, except per share amounts)
1998 1997
--------- ---------
Sales of services and products $104,656 $ 89,252
--------- ---------
Costs and expenses:
Cost of services and products sold 63,231 53,889
Selling, general and administrative 33,836 29,141
Amortization of publishing rights, excess of cost
over net assets acquired, and other intangibles 4,339 3,149
Interest expense on long-term debt 2,849 1,759
Interest expense to affiliates 542 514
Other (income) expense, net (438) 235
--------- ---------
Total costs and expenses 104,359 88,687
--------- ---------
Income before income taxes and minority
interest in earnings of subsidiary 297 565
Income tax expense 205 323
Minority interest in earnings of subsidiary 69 74
--------- ---------
Net income $ 23 $ 168
========= =========
Earnings per share - basic and diluted $ 0.00 $ 0.02
========= =========
Average number of shares outstanding (000's) 9,530 9,406
========= =========
See accompanying Notes to the Consolidated Financial Statements.
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BERLITZ INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and temporary investments $ 28,404 $ 26,665
Accounts receivable, less allowance for
doubtful accounts of $2,831 and $2,415 45,232 50,622
Unbilled receivables 6,232 3,538
Inventories 9,788 9,159
Prepaid expenses and other current assets 9,541 8,323
----------- -----------
TOTAL CURRENT ASSETS 99,197 98,307
Property and equipment, net of accumulated
depreciation of $18,602 and $17,365 32,619 32,098
Publishing rights, net of accumulated amorti-
zation of $4,544 and $4,324 17,441 17,661
Excess of cost over net assets acquired and other intangibles,
net of accumulated amortization of $61,771 and $57,893 493,247 498,506
Other assets 16,808 14,943
----------- -----------
TOTAL ASSETS $ 659,312 $ 661,515
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 18,204 17,712
Accounts payable 11,112 9,990
Deferred revenues 37,528 36,071
Payrolls and commissions 13,204 17,988
Income taxes (prepaid) payable (503) 573
Accrued expenses and other current liabilities 18,657 15,505
----------- -----------
TOTAL CURRENT LIABILITIES 98,202 97,839
Long-term debt 141,610 142,369
Notes payable to affiliates 39,883 39,423
Deferred taxes and other liabilities 24,103 24,964
Minority interest 10,011 9,942
----------- -----------
TOTAL LIABILITIES 313,809 314,537
----------- -----------
Commitments and Contingencies (Note 7)
SHAREHOLDERS' EQUITY:
Common stock 1,003 1,003
Additional paid-in capital 372,518 372,518
Retained earnings 2,515 2,492
Treasury stock at cost (6,361) (6,361)
Accumulated other comprehensive loss:
Cumulative translation adjustment (24,172) (22,674)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 345,503 346,978
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 659,312 $ 661,515
=========== ===========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
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BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
(Dollars in thousands, except per share amounts)
1998 1997
--------- ---------
Net income $ 23 $ 168
Other comprehensive loss, net of tax:
Foreign currency items, including translation
adjustments, and the effects of certain
hedges and intercompany transactions (1,498) (6,924)
--------- ---------
Comprehensive loss $ (1,475) $ (6,756)
========= =========
The tax expenses allocated to each component of other comprehensive loss are as
follows:
Foreign currency items $ 505 $ 262
========= =========
See accompanying Notes to the Consolidated Financial Statements.
4
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BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
(DOLLARS IN THOUSANDS)
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23 $ 168
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,655 5,114
Other (primarily provision for bad debts, and
foreign exchange (gains) losses, net) 410 744
Changes in operating assets and liabilities 499 1,698
--------- ---------
Net cash provided by operating activities 7,587 7,724
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,871) (3,144)
Acquisition of business (1,340) -
--------- ---------
Net cash used in investing activities (5,211) (3,144)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (4,251) (3,931)
Net borrowings under revolving credit facility 4,000 -
Payment of deferred finance costs (177) -
--------- ---------
Net cash used in financing activities (428) (3,931)
--------- ---------
Effect of exchange rate changes on cash and
temporary investments (209) (831)
--------- ---------
Net increase (decrease) in cash and temporary investments 1,739 (182)
Cash and temporary investments, beginning of period 26,665 25,781
--------- ---------
Cash and temporary investments, end of period $ 28,404 $ 25,599
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 2,754 $ 204
========= =========
Income taxes $ 1,315 $ 978
========= =========
Cash refunds of income taxes $ 74 $ 16
========= =========
See accompanying Notes to the Consolidated Financial Statements.
5
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BERLITZ INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. GENERAL
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, $150 of internal-use
software development costs have been capitalized in the first quarter of
1998.
RECLASSIFICATIONS Certain reclassifications have been made to the prior
period financial statements to conform to the 1998 presentation.
2. ELS ACQUISITION
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.
3. LONG-TERM DEBT
Long-term debt consists of the following:
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
Term Loan $ 111,500 $ 115,750
Revolving credit facility 48,000 44,000
Other 314 331
------------ ------------
Total 159,814 160,081
Less current maturities 18,204 17,712
------------ ------------
Long-term debt $ 141,610 $ 142,369
============ ============
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4. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments at March 31, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---1------------------ ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
Assets: ---------------------- ----------------------
<S> <C> <C> <C> <C>
Cash and temporary investments $ 28,404 $ 28,404 $ 26,665 $ 26,665
Currency coupon swap agreements 1,998 1,998 719 719
Liabilities:
Long-term debt, including
current maturities 159,814 159,814 160,081 160,081
Notes payable to affiliates 39,883 34,789 39,423 34,101
Currency coupon swap agreements 240 240 406 406
Interest rate swap agreement - 751 - 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 (INCOME) EXPENSE, NET
THREE MONTHS THREE MONTHS
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
Interest income on temporary investments $ (145) $ (144)
Foreign exchange (gains) losses, net (418) 210
Other non-operating taxes 74 163
Term Loan administration fee 35 150
Other (income) expense, net 16 (144)
-------------- ---------------
Total other (income) expense, net $ (438) $ 235
============== ===============
6. EARNINGS PER SHARE
A reconciliation between Basic and Diluted earnings per share ("EPS")
computations for "net income" as of March 31, 1998 is as follows:
WEIGHTED
AVERAGE
NUMBER
OF SHARES PER-SHARE
INCOME OUTSTANDING AMOUNT
------ ----------- ---------
Basic EPS:
Net income $ 23 9,530 $ 0.00
Effect of dilutive securities:
Stock options 17
Diluted EPS:
Net income $ 23 9,547 $ 0.00
====== =========== =========
7
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There is no difference between Basic and Diluted EPS computations for the
three months ended March 31, 1997 since no dilutive securities were
outstanding prior to June 30, 1997.
7. CONTINGENCIES
In October 1996, the Internal Revenue Service issued a deficiency notice to
the Company relating to its 1989, 1990, 1992 and 1993 Federal tax returns.
The Company is contesting the deficiency notice and believes that any
liability that may ultimately result is adequately provided for at March
31, 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 is subject to
shareholder approval at the Company's June 2, 1998 annual shareholders'
meeting.
8
<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 MARCH 31, 1998 VS.
THREE MONTHS ENDED MARCH 31, 1997
Sales for the quarter ended March 31, 1998 were $104.7 million, 17.3% 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 Educational Services, Inc.
("ELS"), which was purchased in August 1997. Such increases were partially
offset by unfavorable exchange rate fluctuations of $6.8 million, which resulted
from a strengthened dollar against all foreign currencies (most significantly
the Irish punt, the German mark, and the Japanese yen.) Excluding the effects of
exchange rate fluctuations and ELS' revenues, sales increased from the prior
year by 11.2%.
Language Instruction sales for the quarter ended March 31, 1998 were $80.6
million, 23.4% above the same period in 1997. This improvement was primarily due
to volume and average revenue per lesson ("ARPL") increases in most countries
and $12.2 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 12.2% from the prior year.
On a geographic basis, Language Instruction revenue increases in Latin America,
and Central/Eastern Europe offset decreases in the other divisions. The increase
in Latin American revenues ($2.3 million, or 24.1%) was primarily attributable
to volume and ARPL increases in Brazil and Mexico. Central/Eastern Europe's
increase ($1.4 million, or 9.3%) primarily reflects volume and ARPL increases in
all countries, in particular Germany, partially offset by unfavorable exchange
rate fluctuations ($1.7 million, principally versus the German mark). North
America's sales decline, excluding ELS post-acquisition results of $12.2
million, was $0.5 million, or 3.3%, primarily due to reductions in business
originating from the Far East, principally Korea and Japan. Asia's revenues
declined $0.1 million, as unfavorable exchange rate fluctuations of $1.0 million
were largely offset by the positive effects of higher lesson volume in Japan
from special sales campaigns. Western Europe's decline of $0.1 million resulted
from unfavorable exchange rate fluctuations ($1.0 million, or 9.7%) primarily
for France, Belgium and Spain, which were largely offset by operating activity
improvements in France and Italy due to increases in lessons given to corporate
clients.
9
<PAGE>
During the three-month period ended March 31, 1998, the number of lessons given
was approximately 1.5 million, 12.1% above the same period in the prior year,
reflecting increases in all divisions. Lesson volume in North America increased
1.9% from the prior year, reflecting a growth in lessons in the U.S., partially
offset by declines in Canada due to adverse weather conditions and fewer
students traveling from abroad. Lesson volume in Asia rose 10.7% from 1997,
primarily reflecting the positive effects of special sales campaigns in Japan.
Lesson volume in Latin America increased by 23.8% from prior year, primarily
reflecting strong growth in Mexico and Brazil. Lesson volume in Central/Eastern
Europe increased 15.4% over the prior year, primarily reflecting growth in
Germany, Poland, and Israel. Lesson volume in Western Europe rose 9.4% from
1997, primarily due to increases in lessons given to corporate clients in France
and Italy.
For the 1998 first quarter, ARPL was $40.51, as compared to $42.17 in the
comparable prior-year period. The decline reflected the effects of unfavorable
exchange rate fluctuations of $2.40 and changes in the client mix in Japan. ARPL
ranged from a high of approximately $59.05 in Brazil to a low of $12.29 in
Thailand, reflecting effects of foreign exchange rates and differences in the
economic value of the service. The Company opened one Berlitz franchise during
1998 in Egypt.
Translation segment sales were $20.2 million for the three-month period ended
March 31, 1998, an increase of $0.6 million, or 3.2%, from the same period in
1997. Excluding the unfavorable effects of exchange rate fluctuations of $1.9
million, sales grew $2.5 million, or 12.9%. The operations sales growth was
primarily due to increased volume in North America, Singapore 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
from the existing customer base. Singapore's growth is due to the acquisition of
a new major account and the results of prior reorganization efforts. Sales in
Western Europe continue to grow due to increased volume from certain key
accounts in the software related industries and the expansion of new customer
base. These improvements were partially offset by declines in sales in Japan.
Publishing segment sales were $3.6 million for the three months ended March 31,
1998, compared with $3.7 million in 1997. Exchange rate fluctuations were not
significant.
Other sales, consisting primarily of franchising activity, were $0.2 million in
1998 compared with $0.6 million in the prior year.
The Company's cost of services and products sold as a percentage of sales in
1998 remained consistent with the comparable prior year's quarter at 60.4%.
Selling, general and administrative expenses as a percentage of sales were 32.3%
in the 1998 first quarter, compared with 32.7% in the comparable prior year
period. This improvement was favorably impacted by margin improvements in the
Translations and Publishing segments.
10
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EBITA(1) for the 1998 first quarter was $7.6 million, or 7.3% of sales, compared
to $6.2 million, or 7.0% of sales, in the same prior year period. A discussion
by business segment follows.
Instruction segment EBITA, excluding franchising activity, for the quarter ended
March 31, 1998 was $13.4 million, or 16.6% of segment sales, compared to $12.1
million, or 18.6% of segment sales, in the comparable prior year period.
Included in 1998 was $0.7 million of EBITA generated by ELS. Excluding these
results of ELS, which was acquired after the first quarter of 1997, the
Instruction segment's EBITA margins were 18.6% in both 1998 and 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 the first quarter of
1998 which was $0.5 million lower than in 1997. The Company has started to
implement certain restructuring and cost control measures designed to position
ELS/BOC for improved margins. The Asian economy has also created challenges for
Japan Instruction, which despite lesson volume increases, exhibited a 1998 EBITA
decline, excluding exchange rate fluctuations, of $0.5 million, or 20%, from
1997 due to higher administrative salary and advertising expense percentages.
The Company continues to focus on measures designed to protect Japan's
Instruction EBITA.
Translation segment EBITA for the three months ended March 31, 1998 was $ 1.5
million, or 7.3% of segment sales, compared to $1.3 million, or 6.4% of segment
sales, in the prior year. The 1998 EBITA increased due to higher volume in
certain Western European countries and Singapore and improvements in margins in
Germany as a result of recent reorganization efforts. These positive results
were partially offset by a one-time charge in North America and lower margins in
Ireland. The Ireland operation is being reorganized 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. 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 quarter was $0.5 million, compared
to $0.4 million in the prior year.
EBITA for franchising activity was break-even during the first quarter of 1998,
compared with an EBITA loss of $0.2 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. Non-segment related corporate expenses included in EBITA were $7.8
million for the three months ended March 31, 1998, compared with $7.4 million in
the same prior year period. This change was primarily due to increases in
administrative salaries.
11
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Amortization of intangibles increased $1.2 million, or 37.8%, 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
March 31, 1998 rose $1.1 million, or 62.0%, 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 three months ended March
31, 1998 improved by $0.7 million over the prior year, primarily due to higher
foreign exchange gains.
The Company recorded an income tax expense of $0.2 million, or an effective rate
of 69.0%, during the current period. This compared to an income tax expense of
$0.3 million, or an effective rate of 57.2%, 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.
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 $7.6 million for the quarter ended
March 31, 1998, down $0.1 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 totalled $5.2 million for the 1998 first
quarter, up $2.1 million from the comparable prior year quarter. This increase
included the payment in January 1998 of a $1.3 million post-close purchase price
adjustment related to the ELS acquisition, as well as an increase in capital
expenditures.
Net cash used for financing activities during the first quarter were $0.4
million in 1998, $3.5 million lower than the prior year. This decrease resulted
from a $4.0 million borrowing on the Company's revolving credit facility, partly
offset by higher long-term debt principal repayments.
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. In
connection with this notice, the Company made a payment of $2.5 million to
the IRS during the 1997 second quarter. The Company is contesting the
deficiency notice and intends to fund any remaining deficiency
12
<PAGE>
that may ultimately result through its cash resources. The Company believes
that it has adequate cash resources to pay any such deficiency and to
pursue its business plan.
o Reported within accrued expenses at March 31, 1998 were $3.0 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 is subject to
shareholder approval 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
to $70 million, via amendment, on March 23, 1998. At May 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 March 31, 1998, representing the amount that could
be settled based on estimates obtained from a dealer, was a net asset of
approximately $1.8 million.
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 $60.6 million at
March 31, 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 March 31, 1998,
representing the amount that could be settled based on estimates obtained
from a dealer, was a net liability of approximately $0.8 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
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<PAGE>
indebtedness to Benesse, having a balance at March 31, 1998 of $39.9
million, are deferred until all obligations under the Bank Facility are
satisfied.
o Included within cash and temporary investments at March 31, 1998 are $3.5
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 March 31, 1998, the Company's liquid assets of $28.4 million consisted of
cash and temporary investments. The Company does not currently have any material
commitments for capital expenditures. In the future, the Company anticipates
capital expenditures to 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 requirement 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 by June 1998. 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 $3.6 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.
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
14
<PAGE>
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 March 31, 1998.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 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: May 14, 1998 By: /s/ HENRY D. JAMES
----------------------
Henry D. James
Executive Vice President and
Chief Financial Officer
15
<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 MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 28,404
<SECURITIES> 0
<RECEIVABLES> 48,063
<ALLOWANCES> 2,831
<INVENTORY> 9,788
<CURRENT-ASSETS> 99,197
<PP&E> 51,221
<DEPRECIATION> 18,602
<TOTAL-ASSETS> 659,312
<CURRENT-LIABILITIES> 98,202
<BONDS> 0
<COMMON> 1,003
0
0
<OTHER-SE> 344,500
<TOTAL-LIABILITY-AND-EQUITY> 659,312
<SALES> 0
<TOTAL-REVENUES> 104,656
<CGS> 0
<TOTAL-COSTS> 63,231
<OTHER-EXPENSES> 4,339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,849
<INCOME-PRETAX> 297
<INCOME-TAX> 205
<INCOME-CONTINUING> 23
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
