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, 1999
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 14, 1999, is 9,529,788.
Page 1 of 28
<PAGE>
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)
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Sales of services and products $ 104,362 $ 104,656
------------------ ------------------
Costs and expenses:
Cost of services and products sold 64,717 63,231
Selling, general and administrative 36,031 33,836
Amortization of publishing rights, excess of cost
over net assets acquired, and other intangibles 4,353 4,339
Interest expense on long-term debt 1,853 2,849
Interest expense on Convertible Debentures
with related parties 431 -
Interest expense on notes to affiliates 588 542
Other income, net (965) (438)
------------------ ------------------
Total costs and expenses 107,008 104,359
------------------ ------------------
(Loss) income before income taxes, minority
interest in (loss) earnings of subsidiary, and
extraordinary item (2,646) 297
Income tax expense 162 205
Minority interest in (loss) earnings
of subsidiaries (119) 69
------------------ ------------------
(Loss) income before extraordinary item (2,689) 23
Extraordinary loss from extinguishment of
debt, net of income tax benefit of $44 2,140 -
------------------ ------------------
Net (loss) income $ (4,829) $ 23
================== ==================
Loss per share - basic and diluted
Loss before extraordinary item $ (0.28) $ -
Extraordinary loss (0.23) -
------------------ ------------------
Loss per share $ (0.51) $ -
================== ==================
Average number of shares outstanding (000's) 9,530 9,530
================== ==================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
2
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 29,125 $ 25,327
Accounts receivable, less allowance for
doubtful accounts of $2,278 and $2,295 48,544 46,650
Unbilled receivables 8,328 6,873
Inventories, net 10,785 11,606
Prepaid expenses and other current assets 8,874 7,965
--------------- --------------
Total current assets 105,656 98,421
Property and equipment, net of accumulated
depreciation of $24,724 and $25,530 41,027 41,144
Publishing rights, net of accumulated amorti-
zation of $5,423 and $5,203 16,562 16,782
Excess of cost over net assets acquired and other intangibles,
net of accumulated amortization of $78,761 and $75,573 476,586 486,232
Other assets 23,003 20,882
--------------- --------------
Total assets $ 662,834 $ 663,461
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,021 $ 20,135
Accounts payable 10,576 11,280
Deferred revenues 39,184 41,603
Payrolls and commissions 11,241 15,079
Income taxes payable 150 365
Due to affiliates 150 -
Accrued expenses and other current liabilities 20,423 17,255
--------------- --------------
Total current liabilities 82,745 105,717
Long-term debt 2,224 129,387
Convertible Debentures with related parties 155,000 -
Notes payable to affiliates 50,000 42,755
Other liabilities 18,778 20,333
Minority interest 10,164 10,283
--------------- --------------
Total liabilities 318,911 308,475
--------------- --------------
Shareholders' equity:
Common stock 1,003 1,003
Additional paid-in capital 372,518 372,518
(Accumulated deficit) retained earnings (256) 4,574
Treasury stock at cost (6,361) (6,361)
Accumulated other comprehensive loss:
Cumulative translation adjustment (22,981) (16,748)
-------------- --------------
Total shareholders' equity 343,923 354,986
--------------- --------------
Total liabilities and shareholders' equity $ 662,834 $ 663,461
=============== ==============
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
3
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Net (loss) income $ (4,829) $ 23
Other comprehensive loss, net of tax:
Foreign currency items, including translation
adjustments, and the effects of certain
hedges and intercompany transactions (6,233) (1,498)
--------------- --------------
Comprehensive loss $ (11,062) $ (1,475)
=============== ==============
The tax expense allocated to each component of other comprehensive loss is as
follows:
Foreign currency items $ 752 $ 505
=============== ==============
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
4
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (4,829) $ 23
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 7,072 6,655
Other (primarily provision for bad debts and foreign exchange
(gains) losses) (798) 410
Changes in operating assets and liabilities (8,117) 499
--------------- --------------
Net cash (used in) provided by operating activities (6,672) 7,587
--------------- --------------
Cash flows from investing activities:
Capital expenditures (4,711) (3,871)
Acquisitions of businesses - (1,340)
--------------- --------------
Net cash used in investing activities (4,711) (5,211)
--------------- --------------
Cash flows from financing activities:
Proceeds from issuance of Convertible Debentures 155,000 -
Proceeds from issuance of note payable to affiliate 50,000 -
Net borrowings under revolving credit facility - 4,000
Repayment of long-term debt (146,268) (4,251)
Repayment of notes to affiliates (42,366) -
Payment of deferred finance costs (16) (177)
--------------- --------------
Net cash provided by (used in) financing activities 16,350 (428)
--------------- --------------
Effect of exchange rate changes on cash and
temporary investments (1,169) (209)
--------------- --------------
Net increase in cash and temporary investments 3,798 1,739
Cash and temporary investments, beginning of period 25,327 26,665
--------------- --------------
Cash and temporary investments, end of period $ 29,125 $ 28,404
=============== ==============
Supplemental disclosures of cash flow information:
Cash payments for:
Interest $ 2,271 $ 2,754
=============== ==============
Income taxes $ 1,323 $ 1,315
=============== ==============
Cash refunds of income taxes $ 83 $ 74
=============== ==============
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
5
<PAGE>
BERLITZ INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. General
The Consolidated Financial Statements of Berlitz International, Inc.
(the "Company") have been prepared in accordance with the instructions
to Form 10-Q and are unaudited. The information reflects all
adjustments of a normal recurring nature which are, in the opinion of
management, necessary for a fair presentation of such financial
statements. The financial statements should be read in conjunction with
the financial statements and related notes to the Company's 1998 Annual
Report on Form 10-K, as filed with the Securities and Exchange
Commission.
2. Long-Term Debt
Long-term debt consists of the following:
March 31, December 31,
1999 1998
------------------ ------------------
Term Loan $ - $ 98,250
Revolving credit facility - 48,000
Other 3,245 3,272
------------------ ------------------
Total 3,245 149,522
Less current maturities 1,021 20,135
------------------ ------------------
Long-term debt $ 2,224 $ 129,387
================== ==================
As discussed in Notes 3 and 4, on March 11, 1999 the Company issued
Convertible Debentures, as well as a promissory note to Benesse
Holdings International, Inc. ("BHI"), and used a portion of the
resulting proceeds to repay in full all outstanding indebtedness under
the Term Loan and revolving credit facility (collectively, the "Bank
Facility"). The existing revolving credit facility was then terminated.
On March 31, 1999, the Company entered into a new $25,000 revolving
credit facility (the "Revolving Facility"), which expires in February
2002. At the option of the Company, outstanding borrowings under the
Revolving Facility bear interest at variable rates equal to either (i)
a base rate approximating the U.S. prime rate or (ii) the rate offered
by certain reference banks to prime banks in the interbank Eurodollar
market, fully adjusted for reserves plus a margin ranging from 0.375%
to 0.5%; such margin is dependent on a specified leverage ratio of the
Company. In addition, a commitment fee ranging from .125% to .20% will
be charged on the available but unused amounts under the revolving
credit facility, depending on a specified leverage ratio. There are no
outstanding borrowings under the Revolving Facility at March 31, 1999.
The Revolving Facility is subject to standard affirmative covenants,
including financial and other informational reporting, compliance with
laws, maintenance of insurance, maintenance of properties, payment of
taxes, and preservation of corporate existence. The Revolving Facility
also includes limitations on the ability of the Company and its
subsidiaries to: (i) enter into mergers, acquisitions or sales of
assets; (ii) incur, create or
6
<PAGE>
permit to exist liens; (iii) incur indebtedness and guarantee
obligations; (iv) make loans or investments; (v) enter into
transactions with affiliates; (vi) prepay subordinated indebtedness;
and (vii) change the nature of the business conducted. Financial
covenants included within the Revolving Facility require the Company to
maintain certain levels of cash flow and impose limitations on total
and senior debt.
3. Convertible Debentures
On March 11, 1999 (the "Issue Date"), the Company's shareholders
approved the issuance of, and the Company issued, $155,000 aggregate
principal amount of 12-year convertible debentures (the "Convertible
Debentures") in a private placement, pursuant to definitive investment
agreements (the "Investment Agreements") dated as of October 2, 1998.
Such debentures were issued as follows: a) $100,000 aggregate principal
(the "Apollo Debentures") to two affiliates of Apollo Management IV,
L.P. ("Apollo"), a private investment firm; and b) $55,000 aggregate
principal (the "Benesse Debentures") to BHI, the Company's majority
shareholder. The Convertible Debentures bear interest at 5% per annum,
payable semi-annually. Principal amounts outstanding under such
debentures are not due until March 2011, and the Company is not
required to establish a bond sinking fund for repayment of this
principal.
The Convertible Debentures are convertible at any time into shares of
the Company's common stock at a conversion price of $33.05 per share,
subject to anti-dilution related adjustments to offset the effects of
stock dividends and other changes in equity. The Company will, at all
times, reserve out of its authorized but unissued common stock the full
number of shares then issuable upon conversion of all outstanding
Convertible Debentures.
The Apollo and Benesse Debentures each independently provide for
optional redemption by the Company, in whole but not in part, anytime
after 3 years and 2 months. If the average closing price of the
Company's common stock for the 30 trading days following the third
anniversary of the Issue Date exceeds $39.66 per share, the Company may
redeem at par. Otherwise, if the Convertible Debentures are redeemed,
the Company shall pay a redemption premium, expressed as a percentage
of outstanding principal, as follows: a) 4% for redemptions occurring
in the fourth year after issue; b) 2% for redemptions occurring in the
fifth year after issue; and c) 0% for redemptions occurring thereafter.
All such redemptions are subject to the holders' rights to first
convert into common stock of the Company.
The Convertible Debentures also allow Apollo and BHI to elect to
exchange their convertible debentures, in whole, into non-convertible,
7-year fixed rate debt (the "Fixed Rate Debentures"). Such election may
only be made if the average closing price of the Company's common stock
during the 30 trading days immediately preceding the third anniversary
of the Issue Date does not exceed $33.05. Furthermore, BHI may only
effect an exchange if Apollo does so. Upon the determination, by an
independent financial institution, of fixed interest rates that
accurately price the Fixed Rate Debentures at par under specified
circumstances at the time of the exchange, Apollo and BHI shall
irrevocably decide whether to proceed with their exchanges. If only
Apollo proceeds with such an exchange, the Company,
7
<PAGE>
no later than 150 days from the third anniversary of the Issue Date,
must either a) redeem all of the Apollo Debentures at par, or b)
deliver the Fixed Rate Debentures to Apollo. If both Apollo and BHI
proceed with their exchanges, the Company, within the same 150 day
period, shall either a) redeem both the Apollo and Benesse Debentures,
or b) deliver the Fixed Rate Debentures to both Apollo and BHI.
Principal amounts outstanding under the Fixed Rate Debentures would not
be payable until maturity, while interest payments would be made
semi-annually. The Fixed Rate Debentures interest rate is subject to a
cap of a) the applicable U.S. treasury rate + 5% (not to exceed 13%) if
only Apollo receives Fixed Rate Debentures, or b) the applicable U.S.
treasury rate + 7% (not to exceed 14%) if both Apollo and BHI receives
Fixed Rate Debentures. The Fixed Rate Debentures may be redeemed by the
Company after the third anniversary of their issue upon payment of
principal amounts of the Fixed Rate Debentures and the following
redemption premiums, expressed as a percentage of the outstanding
principal amount: a) one half of the per annum interest rate for
redemptions occurring in the fourth year after issue; b) one quarter of
the per annum interest rate for redemptions occurring in the fifth year
after issue; and c) no premium for redemptions occurring thereafter.
Prior to the third anniversary of the Issue Date, if Benesse sells 80%
or more of the shares of Berlitz common stock owned directly or
indirectly by it on the Issue Date, the Company shall be required to
make an offer to repurchase for cash: i) the Apollo Debentures at a
value equal to 110% of the principal amount then outstanding; and ii)
the Benesse Debentures at a value equal to 101% of the principal amount
then outstanding. In addition, if at any time on or after the Issue
Date a change of control, as defined in the Investment Agreements,
occurs but Benesse sells less than 80% of its shares, or if Benesse
sells 80% of its shares on or after the third anniversary of the Issue
Date, the Company shall be required to make an offer to repurchase for
cash the Convertible Debentures (but not the Fixed Rate Debentures) at
a value equal to 101% of the principal amount of the Convertible
Debentures.
The Convertible Debentures are subject to standard affirmative
covenants, including financial and other informational reporting,
compliance with laws, maintenance of insurance, maintenance of
properties, payment of taxes, and preservation of corporate existence.
Negative covenants that the Convertible Debentures are subject to
include: prohibitions on certain mergers, consolidations and asset
transfers; forbearance from restrictions on rights of holders to
convert or exchange the Convertible Debentures; and, in the case of the
Apollo Debentures, forbearance from amending certain understandings
between the Company, Berlitz Japan, Inc. and Benesse.
The Investment Agreements include a number of other provisions,
including: a) the granting of certain demand and piggyback registration
rights to the holders of the Convertible Debentures; b) the granting of
a certain number of board seats to Apollo on the Company's Board of
Directors; c) the granting of approval rights to Apollo, at the
Company's Board level, over certain transactions; and d) certain
restrictions on the transferability of the Apollo Debentures. The
Company expanded its Board of Directors from 10 to 12 seats effective
March 11, 1999, and granted two board seats to Apollo.
8
<PAGE>
4. Transactions with Affiliates
On March 11, 1999, BHI loaned $50,000 to the Company, evidenced by a
12-year fixed rate subordinated promissory note (the "BHI Note"). Such
note bears interest for the first five years at 5.2% per annum, and,
thereafter, at a renegotiated fixed rate approximating LIBOR plus a
margin based on the Company's then existing leverage. Interest is
payable semiannually in cash while principal repayment is deferred
until maturity. The BHI Note includes standard covenants similar to
those included in the Benesse Debentures. In the event of a change in
control, the BHI Note provides for redemption by the Company, at the
option of BHI, at a price equal to 101% of the note's principal amount.
The Company has used a portion of the proceeds from the issuance of the
BHI Note and Convertible Debentures to repay in full the existing notes
payable to affiliates.
The Company accrued approximately $3,500 in deferred finance costs
associated with the issuance of the Convertible Debentures and BHI
Note. Such costs will be amortized over the 12-year life of the
Convertible Debentures and BHI Note.
5. Extraordinary Loss
On March 11, 1999, in connection with the issuance of the Convertible
Debentures and BHI Notes and the extinguishment of the Bank Facility,
the Company terminated its interest rate swap agreement, which hedged
the floating rate Bank Facility, for a cash payment of approximately
$1,100. In the first quarter of 1999, the Company has recorded an
extraordinary loss, net of tax benefit, of $2,140, consisting of the
interest rate swap's fair market value and existing unamortized
deferred finance costs at the time of extinguishment of the underlying
debt.
6. Fair Values of Financial Instruments
The carrying amounts and estimated fair values of the Company's
financial instruments at March 31, 1999 and December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Assets:
Cash and temporary investments $ 29,125 $ 29,125 $ 25,327 $ 25,327
Currency coupon swap agreements 113 113 - -
Liabilities:
Long-term debt, including
current maturities 3,245 3,245 149,522 149,522
Convertible Debentures 155,000 142,600 - -
Notes payable to affiliates 50,000 31,955 42,755 35,623
Currency coupon swap agreements 1,063 1,063 3,098 3,098
Interest rate swap agreement - - - 1,713
</TABLE>
The fair values of long-term debt and notes payable to affiliates are
estimated based on the interest rates currently available for
borrowings with similar terms and
9
<PAGE>
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.
The fair values of the Convertible Debentures are estimated based on
current interest rates and the Company's stock price volatility.
7. Other Income, net
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Interest income on temporary investments $ (91) $ (145)
Foreign exchange gains, net (908) (418)
Other non-operating taxes 120 74
Loss on disposal of fixed assets 19 116
Other investment (expense) income, net (57) 24
Other expense, net (48) (89)
-------------- --------------
Total other income, net $ (965) $ (438)
============== ==============
</TABLE>
8. Earnings (Loss) Per Share
Reconciliations between Basic and Diluted earnings (loss) per share
("EPS") computations for "income (loss) before extraordinary item" for
the three months ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Weighted
average
number
(Loss) of shares Per-share
Income outstanding amount
------------- -------------- --------------
<S> <C> <C> <C>
Three months ending March 31, 1999:
Basic EPS:
Loss before extraordinary item $ (2,689) 9,530 $ (0.28)
Effect of dilutive securities:
Stock options - - -
------------- -------------- --------------
Diluted EPS:
Loss before extraordinary item $ (2,689) 9,530 $ (0.28)
============= ============== ==============
Three months ending March 31, 1998:
Basic EPS:
Income before extraordinary item $ 23 9,530 $ 0.00
Effect of dilutive securities:
Stock options - 17 -
------------- -------------- --------------
Diluted EPS:
Income before extraordinary item $ 23 9,547 $ 0.00
============= ============== ==============
</TABLE>
9. Stock Option and Incentive Plans
In 1999, the Company paid $2,855 in awards under its 1996 New Long-Term
Executive Incentive Compensation Plan (the "New LTIP").
10
<PAGE>
10. Operating Segments
Effective January 1, 1999, the Company's operations are principally
conducted through two segments: Language Services (consisting of the
Instruction, Publishing, Franchising, Cross Cultural, and ELS/BOC sub
segments (i.e., ELS Educational Services, Inc. ("ELS") and Berlitz on
Campus ("BOC")), and Berlitz GlobalNET (formerly Translation Services).
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.
Within Language Services, the Instruction sub-segment (through the use
of proprietary methods and materials) provides predominantly live
language education in virtually all spoken languages. The Publishing
sub-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
sub-segment sells Berlitz language center franchises to independent
franchisees in certain locations. The ELS/BOC sub-segment provides
intensive English education programs. The Cross Cultural sub-segment
complements language study by providing expatriates with detailed
practical and cultural information about the countries to which they
are relocating.
Berlitz GlobalNET provides high quality technical documentation
translation, software localization (i.e., the translation of
software-related products), software quality assurance testing,
interpretation services, electronic publishing services, and other
foreign language-related services.
The 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:
11
<PAGE>
<TABLE>
<CAPTION>
Three Months ended March 31,
1999 1998
---- ----
<S> <C> <C>
Revenues:
Revenues from external customers:
Language Services:
Instruction $ 66,402 $ 65,099
ELS/BOC 12,472 15,087
Publishing 3,088 3,568
Franchising 241 233
Cross Cultural 585 582
Other (1) 6
----------- -----------
Total Language Services 82,787 84,575
Berlitz GlobalNET 21,575 20,081
----------- -----------
Total external revenues 104,362 104,656
----------- -----------
Intersegment revenues:
Language Services:
Instruction - 9
Franchising 113 84
----------- -----------
Total Language Services 113 93
Berlitz GlobalNET 9 1
----------- -----------
Total intersegment revenues 122 94
----------- -----------
Total revenues for reportable segments 104,484 104,750
Elimination of intersegment revenues (122) (94)
----------- -----------
Total consolidated revenues $ 104,362 $ 104,656
=========== ===========
Three Months ended March 31,
1999 1998
---- ----
(Loss) income before taxes, minority interest, and
extraordinary item:
Operating Profit:
Segment EBITA:
Language Services:
Instruction $ 11,881 $ 12,666
ELS/BOC (387) 924
Publishing (192) 536
Franchising (38) (38)
Cross Cultural 153 172
Language Service overhead expenses and other (5,136) (4,716)
----------- -----------
Total Language Services 6,281 9,544
Berlitz GlobalNET 645 984
General corporate HQ expenses (3,312) (2,939)
----------- -----------
Total EBITA 3,614 7,589
----------- -----------
Amortization of publishing rights, excess of cost over net
assets acquired, and other intangibles:
Language Services:
Instruction (2,545) (2,544)
ELS/BOC (1,347) (1,360)
Publishing (100) (100)
Cross Cultural (3) (3)
----------- -----------
Total Language Services (3,995) (4,007)
Berlitz GlobalNET (358) (332)
----------- -----------
Total intangible amortization (4,353) (4,339)
----------- -----------
Total operating (loss) profit (739) 3,250
Interest expense on long-term debt (1,853) (2,849)
Interest expense on Convertible Debentures (431) -
Interest expense to affiliates (588) (542)
Other income, net 965 438
----------- -----------
Total consolidated (loss) income before taxes, minority
interest, and extraordinary item $ (2,646) $ 297
=========== ===========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Assets:
Language Services:
Instruction $ 428,867 $ 426,641
ELS/BOC 107,601 111,980
Publishing 24,936 23,982
Franchising 6,724 6,640
Other 383 427
----------- -----------
Total Language Services 568,511 569,670
Berlitz GlobalNET 83,325 84,794
General corporate 15,964 13,495
Eliminations of intersegment receivables (4,966) (4,498)
=========== ===========
Total consolidated assets $ 662,834 $ 663,461
=========== ===========
Three Months ended March 31,
1999 1998
---- ----
Depreciation:
Language Services:
Instruction $ 1,155 $ 1,126
ELS/BOC 281 232
Publishing 425 214
Franchising 5 10
Language Service overhead and other 114 95
----------- -----------
Total Language Services 1,980 1,677
Berlitz GlobalNET 568 514
General corporate 171 125
----------- -----------
Total consolidated depreciation $ 2,719 $ 2,316
=========== ===========
Three Months ended March 31,
1999 1998
---- ----
Capital Expenditures:
Language Services:
Instruction $ 3,297 $ 2,589
ELS/BOC 380 186
Publishing 489 591
Franchising 5 -
----------- -----------
Total Language Services 4,171 3,366
Berlitz GlobalNET 191 306
General corporate 349 199
----------- -----------
Total consolidated capital expenditures $ 4,711 $ 3,871
=========== ===========
</TABLE>
13
<PAGE>
The following tables present certain information about the geographic
areas in which the Company operates:
<TABLE>
<CAPTION>
Three Months ended March 31,
1999 1998
---- ----
<S> <C> <C>
Revenues from external customers:
United States $ 34,320 $ 38,174
Japan 15,813 14,428
Germany 11,103 9,932
Ireland 6,399 8,014
Brazil 2,910 4,914
Other foreign countries 33,817 29,194
----------- -----------
Total $ 104,362 $ 104,656
=========== ===========
Operating (loss) profit:
EBITA :
United States $ 1,643 $ 3,040
Japan 535 962
Germany 1,244 1,346
Ireland (1) 437
Brazil 266 540
Other foreign countries 4,225 4,942
General corporate expenses (4,298) (3,678)
----------- -----------
Total EBITA 3,614 7,589
----------- -----------
Amortization of publishing rights,
excess of cost over net assets
acquired, and other intangibles:
United States (3,623) (3,594)
Japan (334) (306)
Germany (66) (64)
Ireland (13) (36)
Brazil (16) (16)
Other foreign countries (301) (323)
----------- -----------
Total intangible amortization (4,353) (4,339)
----------- -----------
Intercompany royalties:
United States 3,588 3,299
Japan (566) (481)
Germany (416) (375)
Ireland (236) (345)
Other foreign countries (2,370) (2,098)
----------- -----------
Total intercompany royalties - -
----------- -----------
Total operating (loss) profit $ (739) $ 3,250
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Long lived assets: Property &
Equipment Other Intangible
net Assets* Assets Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
March 31, 1999:
United States $ 9,266 $ 7,561 $ 397,286 $ 414,113
Japan 7,958 38 46,018 54,014
Germany 2,772 - 8,571 11,343
Brazil 2,817 - 2,129 4,946
Ireland 1,271 10 1,132 2,413
Other foreign countries 12,224 191 36,416 48,831
General corporate 4,719 5,004 1,596 11,319
----------- ----------- ----------- -----------
Total $ 41,027 $ 12,804 $ 493,148 $ 546,979
=========== =========== =========== ===========
December 31, 1998:
United States $ 8,414 $ 7,335 $ 402,507 $ 418,256
Japan 8,685 97 49,165 57,947
Germany 3,008 - 9,443 12,451
Brazil 3,250 - 2,145 5,395
Ireland 1,562 151 1,793 3,506
Other foreign countries 12,316 192 36,365 48,873
General corporate 3,909 2,557 1,596 8,062
----------- ----------- ----------- -----------
Total $ 41,144 $ 10,332 $ 503,014 $ 554,490
=========== =========== =========== ===========
</TABLE>
*Excludes financial instruments and deferred tax assets.
15
<PAGE>
BERLITZ INTERNATIONAL, INC.
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
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, 1998. Certain statements contained within this discussion
constitute forward-looking statements. See "Special Note Regarding Forward
Looking Statements."
As of January 1, 1999, the Company reorganized into two separate autonomous
business segments: (i) Language Services, including Language Instruction,
Publishing, Franchising, Cross Cultural and ELS/BOC (i.e., ELS Educational
Services, Inc. ("ELS") and Berlitz on Campus ("BOC"), both of which provide
intensive English programs); and (ii) Berlitz GlobalNET (formerly Translation
Services). Language Services is organized geographically into four operating
divisions (North America, Asia, Latin America and Europe) while Berlitz
GlobalNET is consolidated into three geographic divisions: the Americas (North
and Latin Americas), Asia and Europe. The lines-of- business orientation is
expected to increase operational efficiency on a global basis.
Results of Operations - Quarter Ended March 31, 1999 vs. March 31, 1998
Sales for the quarter ended March 31, 1999 were $104.4 million, 0.3% below the
prior year. This decline was primarily due to reduced intensive English program
revenues and unfavorable exchange rate fluctuations, offset by increases in
operating activity for Language Instruction and Berlitz GlobalNET. Excluding the
effects of unfavorable exchange rate fluctuations of $0.7 million, sales
increased from the prior year by 0.4%. The following table compares revenues by
business segment for the first quarter.
<TABLE>
<CAPTION>
Business Segment Revenues: (Dollars in millions)
------------------------------------------------------------------------------
March 31, Growth (Decline) from Prior Year
--------------------------- -----------------------------------------------
1999 1998 Exchange Operations (1) Total
----------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Language Services:
Instruction $ 66.4 $ 65.1 $ (1.0) $ 2.3 $ 1.3
ELS/BOC 12.5 15.1 - (2.6) (2.6)
Publishing 3.1 3.6 - (0.5) (0.5)
Franchising 0.2 0.2 - - -
Other 0.6 0.6 - - -
----------- ----------- ------------ -------------- ------------
Total Language Services 82.8 84.6 (1.0) (0.8) (1.8)
Berlitz GlobalNET 21.6 20.1 0.3 1.2 1.5
----------- ----------- ------------ -------------- ------------
Total $ 104.4 $ 104.7 $ (0.7) (2) $ 0.4 $ (0.3)
=========== =========== ============ ============== ============
</TABLE>
- ----------------------------------
(1) Adjusted to eliminate fluctuations in foreign currency from year-to-year by
assuming a constant exchange rate over two years, using as the base the
first year of the periods being presented.
(2) The unfavorable exchange rate fluctuations ($0.7 million) primarily resulted
from a strengthened dollar against the Latin American currencies (most
significantly the Brazilian real and Mexican peso), offset by a weaker
dollar against the Japanese yen and most European currencies.
16
<PAGE>
Within Language Services, Language Instruction sales for the 1999 first quarter
rose 2.0% from the prior year, and excluding unfavorable exchange rate
fluctuations, were 3.4% higher than in 1998. This improvement was primarily due
to average revenue per lesson ("ARPL") increases in most countries. Total lesson
volume increased 0.3% from the prior year, primarily as strength in Europe was
offset by weakness in Asia. Geographically, Language Instruction revenue and
lesson volume was dispersed as follows:
<TABLE>
<CAPTION>
Language Instruction Revenues: (Dollars in millions)
------------------------------------------------------------------------------
March 31, Growth (Decline) from Prior Year
--------------------------- -----------------------------------------------
1999 1998 Exchange Operations Total
----------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
North America $ 11.8 $ 11.7 $ (0.1) $ 0.2 $ 0.1
Asia 15.6 14.7 1.2 (0.3) 0.9 (1)
Latin America 10.2 12.1 (2.7) 0.8 (1.9) (2)
Europe 28.8 26.6 0.6 1.6 2.2 (3)
----------- ----------- ------------ -------------- ------------
Total revenue $ 66.4 $ 65.1 $ (1.0) $ 2.3 $ 1.3
=========== =========== ============ ============== ============
</TABLE>
- -------------------------------------
(1) Primarily reflects the effect of a weaker US dollar against the Japanese
yen, which was partially offset by reduced lesson volume in Japan due to the
continued local economic conditions.
(2) Primarily reflects the effect of a stronger dollar against the Brazilian
real and Mexican peso, partially offset by volume and ARPL increases in
Mexico.
(3) Primarily reflect improved volume and ARPL in most countries (in particular
Belgium, France, Germany, Israel, Italy, and Poland), as well as favorable
exchange rate fluctuations in Germany and France.
<TABLE>
<CAPTION>
Language Instruction Lesson Volume: (Lessons in thousands)
--------------------------------------------------------------------------
March 31, Growth (Decline) from Prior Year
---------------------------------- ------------------------------------
Number of Percentage
1999 1998 lessons
--------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C>
North America 278.9 282.7 (3.8) (1.3)% (1)
Asia 243.9 254.9 (11.0) (4.3)% (2)
Latin America 290.0 288.4 1.6 0.6% (3)
Europe 645.4 627.9 17.5 2.8% (4)
--------------- --------------- -------------- -----------------
Total revenue 1,458.2 1,453.9 4.3 0.3%
=============== =============== ============== =================
</TABLE>
- -------------------------------------
(1) North America's volume decline primarily reflects sluggishness in
institutional business due to fewer foreign expatriations and more reliance
by U.S. corporations on the domestic economy.
(2) Asia's volume has decreased due to the continued economic recession in Japan
and Hong Kong.
(3) Lesson volume increased in Latin America primarily due to strong sales in
Mexico, which is partially offset by reduced volume in Brazil as a result
of the economic uncertainty caused by the devaluation of the Brazilian Real.
(4) Europe's volume improvement reflects continued demand for Berlitz services,
with the largest increases generated by Israel, France, Germany, Poland,
Portugal, and Italy.
17
<PAGE>
For the first quarter of 1999, ARPL was $41.01, as compared to $40.51 in the
comparable prior-year period. The increase reflected the favorable impact of
product mix and price increases ($1.11), partly offset by the effects of
unfavorable exchange rate fluctuations ($0.61). ARPL ranged from a high of
approximately $59.99 in Japan to a low of $10.67 in Portugal, reflecting effects
of foreign exchange rates and differences in the economic value of the service.
Within Language Services, ELS' revenues declined 21.9% from the prior year,
while BOC's revenues remained flat. Both ELS and BOC continue to be affected by
weakened Asian student enrollments due to the economic conditions in the Far
East. In addition, as a result of temporary transition problems associated with
the relocation of the ELS headquarters from Los Angeles to Princeton in the
latter part of 1998, ELS' overseas sales agents did not sell the ELS programs as
aggressively in the latter months of 1998. This impacted student arrivals during
the first quarter of 1999. ELS has since taken a number of actions to resolve
these problems, including filling vacant sales positions and articulating its
new business plan to its agents. Consequently, ELS is beginning to see
indications of improvement in its sales relationships and effectiveness.
Publishing revenues declined 13.5%, due primarily to shortfalls in direct
response sales. Franchising revenues remained flat with the prior year. The
Company opened five ELS franchises in the first quarter of 1999, four of which
are located in Taiwan, and the other in Indonesia.
Berlitz GlobalNET sales, excluding the favorable effects of exchange rate
fluctuations, rose 6.2% from 1998. Geographically, sales are above prior year in
all regions. The following table compares Berlitz GlobalNET revenues by region
for the first quarter:
<TABLE>
<CAPTION>
Berlitz GlobalNET Revenue: (Dollars in millions)
------------------------------------------------------------------------------
March 31, Growth (Decline) from Prior Year
--------------------------- -----------------------------------------------
1999 1998 Exchange Operations Total
----------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
America $ 8.9 $ 8.8 $ - $ 0.1 $ 0.1
Asia 1.2 1.1 - 0.1 0.1
Europe 12.3 11.5 0.3 0.5 0.8 (1)
Inter-company eliminations (0.8) (1.3) - 0.5 0.5
----------- ----------- ------------ -------------- ------------
Total revenue $ 21.6 $ 20.1 $ 0.3 $ 1.2 $ 1.5
=========== =========== ============ ============== =============
</TABLE>
(1) The sales increase in Europe is attributable to volume increases in Norway
and Denmark, and sales from acquisitions made in France and Poland in the
second and fourth quarters of 1998, respectively. These increases were
partially offset by sales decline in Ireland, due in part to delays by a
client in the start up of certain major projects.
The Company's cost of services and products sold as a percentage of sales was
62.0% in the 1999 first quarter, compared to 60.4% in the same prior year
period. The higher percentage is mainly attributable to increased balances for
teacher salaries, GlobalNET production costs, rent expense, and depreciation.
Selling, general and administrative expenses as a percentage of sales were 34.5%
in the 1999 first quarter, compared with 32.3% in the comparable prior year
period. The increase is due to higher administrative salaries and related costs.
18
<PAGE>
EBITA* for the 1999 first quarter was $3.6 million, or 3.5% of sales, compared
to $7.6 million, or 7.3% of sales, in the same prior year period. The following
table displays the comparative first quarter EBITA by business segment:
<TABLE>
<CAPTION>
Business Segment EBITA: (Dollars in millions)
------------------------------------------------------------------------------
March 31, Growth (Decline) from Prior Year
--------------------------- -----------------------------------------------
1999 1998 Exchange Operations Total
----------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Language Services:
Instruction $ 11.9 $ 12.7 $ (0.5) (1) $ (0.3) (2) $ (0.8)
ELS/BOC (0.4) 0.9 - (1.3) (1.3) (3)
Publishing (0.2) 0.5 - (0.7) (0.7) (4)
Franchising - - - - -
Overhead & Other (5.0) (4.6) 0.1 (0.5) (0.4) (5)
----------- ----------- ------------ -------------- ------------
Total Language Services 6.3 9.5 (0.4) (2.8) (3.2)
Berlitz GlobalNET 0.6 1.0 - (0.4) (0.4) (6)
Corporate and other (3.3) (2.9) - (0.4) (0.4) (7)
----------- ----------- ------------ -------------- ------------
Total $ 3.6 $ 7.6 $ (0.4) $ (3.6) $ (4.0)
=========== =========== ============ ============== ============
</TABLE>
EBITA Margin %: March 31,
-----------------------------
1999 1998
------------- --------------
Language Services:
Instruction 17.9% 19.5% (8)
ELS/BOC (3.1)% 6.1% (9)
Publishing (6.2)% 15.0%
Franchising (10.7)% (12.0)%
Total Language Services 7.6% 11.3%
Berlitz GlobalNET 3.0% 4.9%
Total 3.5% 7.3%
--------------------------------
(1) The net unfavorable exchange impact in Instruction is attributable to the
Latin American countries.
(2) The decline in Instruction operating EBITA is due mainly to the U.S. and
Japan. In the U.S., the growth in rent and certain other fixed costs
outpaced the growth in sales. The decline in Japan primarily is due to
increases in rent and salary expenses. The decreases in these countries were
partially offset by EBITA increases in Mexico, England, and Italy.
(Footnotes are continued on next page)
- --------------------------------------------------------------------------------
*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.
19
<PAGE>
(3) Although ELS reduced its overall costs from the prior year, ELS/BOC's EBITA
has decreased because the percentage decline in ELS' revenues outpaced the
percentage decline of certain costs (most notably commissions, teachers'
salaries and rent expense). In addition, an ELS joint venture consummated in
October 1998 generated an EBITA loss in the 1999 first quarter due to its
start-up nature. BOC's EBITA remained flat with the prior year.
(4) The decrease in Publishing EBITA reflects the impact of Publishing's sales
decline, as well as increases in depreciation, salaries, and advertising.
(5) Language Service's overhead costs increased over prior year due to fixed
employee costs and rent expense.
(6) The decline in EBITA for Berlitz GlobalNET is due to decreases in Europe,
primarily Ireland, where EBITA is $0.5 million below prior year due largely
to lower sales. The decline in Europe is partially offset by activity in
France and Poland from acquisitions made in the second and fourth quarters
of 1998. In the Americas, EBITA increased $0.2 million due to improved
margins; in addition, the prior year experienced unusual charges for
doubtful accounts.
(7) Corporate expenses rose due to increases in salary-related costs.
(8) The reduction in 1999's EBITA Margin occurred primarily as rent and salary
related costs grew faster than revenues.
(9) See ELS/BOC discussion in footnote 3.
Interest expense on long-term debt for the three months ended March 31, 1999
decreased $1.0 million from the comparable prior year period, due to lower
average interest rates and principal balances outstanding, as well as the
extinguishment of debt in mid-March 1999. Interest expense on the new
Convertible Debentures was $0.4 million for the first quarter of 1999. Other
income, net for the three months ended March 31, 1999 increased by $0.5 million
over the prior year, primarily due to higher foreign exchange gains.
The Company recorded income tax expenses of $0.2 million in first quarters of
both 1999 and 1998. The effective tax rates in both 1999 and 1998 were above the
U.S. Federal statutory tax rate primarily as a result of nondeductible
amortization charges.
On March 11, 1999, in connection with the issuance of the Convertible Debentures
and an affiliate note, the Company extinguished the long-term debt under its
1997 credit agreement (the "Bank Facility"). The Company also terminated its
interest rate swap agreement, which hedged the floating rate Bank Facility, for
a cash payment of approximately $1.1 million. Consequently, in the first quarter
of 1999, the Company has recorded an extraordinary loss, net of tax benefit, of
approximately $2.1 million, consisting of the interest rate swap's fair market
value and existing unamortized deferred finance costs at the time of
extinguishment of the underlying debt.
Financial Condition
Historically, the primary source of the Company's liquidity has been the cash
provided by operations; 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 used in operating activities was $6.7 million for the three months
ended March 31, 1999, compared with net cash provided of $7.6 million in the
comparable prior period. This
20
<PAGE>
decline of $14.3 million primarily resulted from: (i) an increase in accounts
receivable; (ii) a reduced EBITA; (iii) the payment of year-end bonus, long-term
incentive plan, and non-recurring ELS vacation/sick pay accruals; (iv) a payment
to terminate the Company's interest rate swap; and (v) a smaller increase in
deferred revenues.
Net cash used in investing activities totaled $4.7 million for the quarter ended
March 31, 1999, down $0.5 million from the comparable prior year period. This
decrease reflects the absence of acquisitions of businesses in the 1999 first
quarter, for which 1998 included the January payment of a $1.3 million
post-close purchase price adjustment related to the ELS acquisition. 1999's
first quarter capital expenditures increased $0.8 million over the prior year.
Net cash provided by financing activities for the quarter ended March 31, 1999
was $16.4 million, $16.8 million higher than in the prior year. This change
primarily reflected the excess of the (i) net proceeds from the issuance of
convertible debentures and notes payable to an affiliate over (ii) the related
extinguished debt.
Other items impacting the Company's liquidity and capital resources are as
follows:
o Reported within accrued expenses at March 31, 1999 were $1.7 million
related to the ELS acquisition.
o On April 27, 1999, the Compensation Committee of the Company's Board of
Directors approved the Company's 1999 Long-Term Executive Incentive
Compensation Plan (the "1999 LTIP"), subject to shareholder approval at the
Company's June 8, 1999 annual shareholders' meeting. The 1999 LTIP provides
for potential cash awards to be paid to senior management in 2002 if
certain revenue, earnings and cash flow targets are achieved for the three
year period from 1999 to 2001. The 1999 LTIP is intended to be an unfunded
plan, and the Company is not required to establish any fund or segregate
any assets. Based on limitations contained within the 1999 LTIP, total
awards are currently expected to range from a minimum of $0 to a maximum of
$7.2 million.
o On March 31, 1999, the Company entered into a new $25 million revolving
credit facility (the "Revolving Facility"), which expires in February 2002.
At the option of the Company, outstanding borrowings under the Revolving
Facility bear interest at variable rates equal to either (i) a base rate
approximating the U.S. prime rate or (ii) the rate offered by certain
reference banks to prime banks in the interbank Eurodollar market, fully
adjusted for reserves plus a margin ranging from 0.375% to 0.5%; such
margin is dependent on a specified leverage ratio of the Company. In
addition, a commitment fee ranging from .125% to .20% will be charged on
the available but unused amounts under the revolving credit facility,
depending on a specified leverage ratio. There were no outstanding
borrowings under the Revolving Facility at March 31, 1999.
o The Company's Supplemental Executive Retirement Plan ("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.
21
<PAGE>
o The Company is party to currency coupon swap agreements with a financial
institution to hedge the Company's net investments in certain foreign
subsidiaries. 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, 1999, representing the amount that could be settled
based on estimates obtained from a dealer, was a net liability of
approximately $1.0 million.
o On March 11, 1999, the Company's shareholders approved the issuance of,
and the Company issued, $155 million aggregate principal amount of 12-year
convertible debentures (the "Convertible Debentures") in a private
placement, pursuant to definitive investment agreements (the "Investment
Agreements") dated as of October 2, 1998. Such debentures were issued as
follows: a) $100 million aggregate principal (the "Apollo Debentures") to
two affiliates of Apollo Management IV, L.P. ("Apollo"), a private
investment firm; and b) $55 million aggregate principal (the "Benesse
Debentures") to Benesse Holding International, Inc. ("BHI"), the Company's
majority shareholder. The Convertible Debentures bear interest at 5% per
annum, payable semi-annually. Principal amounts outstanding under such
debentures are not due until March 2011, and the Company is not required to
establish a bond sinking fund for repayment of this principal. The
Convertible Debentures are convertible at any time into shares of the
Company's common stock at a conversion price of $33.05 per share, subject
to anti-dilution related adjustments.
In a separate transaction on March 11, 1999, BHI loaned $50 million to the
Company, evidenced by a 12-year fixed rate subordinated promissory note
(the "BHI Note"). Such note bears interest for the first five years at 5.2%
per annum, and, thereafter, at a renegotiated fixed rate approximating
LIBOR plus a margin based on the Company's then existing leverage. Interest
is payable semiannually in cash while principal repayment is deferred until
maturity. In the event of a change in control, the BHI Note provides for
redemption by the Company, at the option of BHI, at price equal to 101% of
the note's principal amount.
The Company used the proceeds from the sale of the Convertible Debentures,
as well as proceeds from the BHI Note issuance, to repay in full all
outstanding indebtedness pursuant to the Bank Facility and existing notes
payable to Benesse, and for general corporate purposes. The Company accrued
approximately $3.5 million in deferred finance costs associated with the
issuance of the Convertible Debentures and BHI Note.
At March 31, 1999, the Company's liquid assets of $29.1 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 GlobalNET
segment, and technological expansion. The Company plans to meet its debt service
requirements and future working capital needs through funds generated from
operations.
22
<PAGE>
The Year 2000 Issue
Introduction
The Year 2000 issue is the result of certain computerized systems' use of a two
rather than four digit year (e.g., 95 vs. 1995). As a result of the ambiguous
century in such systems, the introduction of twenty-first century dates may
cause systems to function abnormally or not at all.
Recognizing the need to ensure operations will not be adversely affected by Year
2000 failures, the Company established a committee to address any possible
exposure. This committee is responsible for carrying out the Company's awareness
program, assessing key financial and operational systems, for assessing external
relationships with customers and vendors, and for developing and implementing
detailed divisional action plans.
The Company has divided the Year 2000 issue into three areas: (i)
Infrastructure; (ii) Internal Use Financial and Operational Software; and (iii)
Key Third Party Customer and Vendor Relationships. For each area, the committee
is responsible for carrying out the following steps: Inventory, Assessment,
Remediation and Testing, and Contingency Plan Development and Implementation.
The infrastructure area contains all hardware, embedded systems, and software,
except financial and operational software. Non-compliant internal use
financial software is currently being replaced in conjunction with the
deployment of PeopleSoft systems. Such PeopleSoft systems are warranted to be
Year 2000 compliant and have been successfully tested as such. Key third party
relationships include external interfaces between the Company and its suppliers,
service providers, and customers that are deemed material to the continued
operation of the Company.
State of Readiness
Overall, the Company's Year 2000 project is currently proceeding on schedule and
is expected to be fully completed according to the original schedule by
September 29, 1999.
As of April 1998, the committee had completed a worldwide systems inventory and
assessment for the infrastructure and internal use financial and operational
systems areas. To minimize complicating factors, the Company chose to replace
rather than upgrade most non-compliant systems without commercially available
remediation paths at the time of assessment. The Company is employing both
internal and external resources in its remediation efforts.
Remediation and testing of systems began in July 1998 and is scheduled to
continue through September 29, 1999. Testing is scheduled to occur in line with
remediation efforts; as systems are upgraded or replaced, compliance testing of
the system will begin. Based on current progress, the Company reasonably expects
that all internal remediation efforts in this area will be completed on or
before the scheduled completion date. Further, the Company believes it is
unlikely that its efforts to remediate non-compliant financial and operational
software would extend beyond the scheduled completion date.
23
<PAGE>
The Company has conducted a formal communications program with all key vendors
and customers to identify and assess their states of readiness. Based on the
results of this process, the committee is assessing the likelihood of a failure
in a third party's own Year 2000 remediation program and the resulting impact to
the Company. Communications with key third parties are continuing to minimize
the exposure to the Company and its ability to conduct normal business. The
Company completed its initial assessment of external vendor relationships in
November 1998.
Due to the fact that many third parties' programs are not yet fully completed,
the Company expects communications to continue through September 1999. Third
parties that do not provide convincing evidence that they will successfully
achieve compliance by September 1999 will be subject to replacement.
Risk
The Company expects to achieve internal compliance and does not believe that any
reasonably likely risk of material failure exists. Based on management estimates
and the uncertainty surrounding the Company's ability to guarantee the
compliance of third parties, the Company expects that the most likely worst case
is that some third parties fail to successfully and completely remediate all
Year 2000 issues. Third party failures could range from the loss of a utility or
service such as electricity or telecommunications to a loss of revenue due to a
customer's inability to conduct normal business based on the failure of the
customer's or vendor's own systems or those of its own critical third party
relationships.
Third parties deemed material to the Company fall primarily into the following
categories: banks, accounting bureaus, telecommunications providers, utilities,
and customers. Although management estimates that it is reasonably likely that
some third parties may experience failures, the Company does not believe that
the aggregate effect of such failures will have a material effect on the
Company's consolidated future results. This estimate is based on the nature of
the Company's services, its widespread geographic dispersion, and the diversity
of its customer base.
Although third party failures are beyond the reasonable control of the Company,
the Company is making every effort to reduce any negative effect by closely
communicating with third parties to follow the progress of their remediation
programs and minimize the risks associated with a third party's failure to
achieve compliance.
Contingency Plans
To further minimize any risk associated with any internal or third party failure
to achieve compliance, the Company is continuing the development of contingency
plans as necessary for those critical systems and third party relationships that
have the potential to materially interrupt the Company's ability to conduct
normal business. Based on management assessments, decisions to implement
contingency plans related to the remediation and deployment of internally
developed software have been effected as necessary. All contingency plans deemed
necessary are expected to be fully implemented by the end of the third quarter
of 1999.
Costs to Address the Year 2000 Issue
The Company currently estimates the cost for Year 2000 compliance with respect
to its information and production systems to be approximately $4.9 million,
consisting of: $3.6 million
24
<PAGE>
for replacements of financial accounting and operational systems with the
remainder dedicated to infrastructure and third party relationship remediation.
Recent Accounting Pronouncements
During June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. The accounting for gains or losses resulting from changes in the
values of those derivatives would depend on the use of the derivative and
whether it qualifies for hedge accounting. Based on the Company's current
activities, the new standard is not expected to have a material impact on the
Company's financial position or results of operations. SFAS 133 will be
effective for the calendar year beginning January 1, 2000.
On September 28, 1998, the Securities and Exchange Commission ("SEC") issued a
press release stating that it "will formulate and augment new and existing
accounting rules and interpretations covering revenue recognition, restructuring
reserves, materiality and disclosure" for all publicly-traded companies. Until
such time as the SEC staff issues such interpretative guidelines, it is unclear
what, if any, impact such interpretative guidelines will have on the Company's
current accounting policy. However, the potential changes in accounting practice
being considered by the SEC staff could have a material impact on the manner in
which the Company recognizes revenue.
Special Note Regarding Forward Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, including information
appearing under the captions "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). The Company desires to take advantage of certain "Safe Harbor"
provisions of the Reform Act and is including this special note to enable the
Company to do so. Forward-Looking Statements involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such Forward-Looking Statements. Such risks,
uncertainties and other factors include, among others: the Company's success in
selling new franchises; the economic conditions in the Asian region; the Year
2000 issues, including the success with which the Company's customers and
suppliers address their Year 2000 exposures; as well as more general factors
affecting future cash flows and their effects on the Company's ability to meet
its debt service requirements and future working capital needs, including
fluctuations in foreign currency exchange rates; demand for the Company's
products and services; the impact of competition; the effect of changing
economic and political conditions; the level of success and timing in
implementing corporate strategies and new technologies; changes in governmental
and tax laws 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.
25
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's major market risk exposure is foreign currency fluctuations.
Geographically, the majority of the Company's subsidiaries are located outside
the United States, with operations conducted in their respective local
currencies. For example, for the three years ended December 31, 1998, the
percentage of total revenues denominated in currencies other than U.S. dollars
averaged 68%, in foreign currencies including the Japanese yen, German mark,
Irish punt, Brazilian real, Mexican peso, British pound and French and Swiss
francs. As discussed under "Management's Discussion and Analysis - Liquidity and
Capital Resources", the Company maintains currency coupon swap agreements with a
financial institution to hedge the Company's net investments in certain foreign
subsidiaries. These agreements require the Company to exchange foreign
currency-denominated interest payments for U.S. dollar-denominated interest
receipts on a semi-annual basis. Significant terms of currency swap agreements
outstanding at March 31, 1999 were as follows:
<TABLE>
<CAPTION>
Interest Receipts from
Interest Payment to Financial Institution Financial Institution
-------------------------------------------- -------------------------
Notional Fair Value
Effective Interest Amount Interest at 3/31/99
Date Maturity Notional Amount (000's) Rate (000's) Rate (000's)
---- -------- ------------------------------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1/1/99 12/30/02 Japanese Yen 12,311,005 5.50% $ 95,694 6.27% $ (980)
1/1/99 12/31/02 German Mark 99,546 6.12% $ 55,821 6.27% $ (32)
1/4/99 12/31/02 Swiss Franc 16,131 5.72% $ 11,164 6.27% $ 113
1/4/99 12/31/02 British Pound 4,841 6.56% $ 7,974 6.27% $ (51)
</TABLE>
The fair values of the coupon swap agreements 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.
On March 11, 1999, the Company issued the Convertible Debentures, consisting of
the Apollo and Benesse Debentures (see Management's Discussion and Analysis -
Liquidity and Capital Resources).
o The Apollo and Benesse Debentures each independently provide for optional
redemption by the Company, in whole but not in part, anytime after 3 years
and 2 months. If the average closing price of the Company's common stock
for the 30 trading days following the third anniversary of the Issue Date
exceeds $39.66 per share, the Company may redeem at par. Otherwise, if the
Convertible Debentures are redeemed, the Company shall pay a redemption
premium, expressed as a percentage of outstanding principal, as follows: a)
4% for redemptions occurring in the fourth year after issue; b) 2% for
redemptions occurring in the fifth year after issue; and c) 0% for
redemptions occurring thereafter. All such redemptions are subject to the
holders' rights to first convert into common stock of the Company.
o The Convertible Debentures also allow Apollo and BHI to elect to exchange
their convertible debentures, in whole, into non-convertible, 7-year fixed
rate debt (the "Fixed Rate Debentures"). Such election may only be made if
the average closing price of the Company's common stock during the 30
trading days immediately preceding the third anniversary of the Issue Date
does not exceed $33.05. Furthermore, BHI may only effect an exchange if
Apollo does so. Upon the determination, by an independent financial
institution, of fixed interest rates that accurately price the Fixed Rate
26
<PAGE>
Debentures at par under specified circumstances at the time of the
exchange, Apollo and BHI shall irrevocably decide whether to proceed with
their exchanges. If only Apollo proceeds with such an exchange, the
Company, no later than 150 days from the third anniversary of the Issue
Date, must either a) redeem all of the Apollo Debentures at par, or b)
deliver the Fixed Rate Debentures to Apollo. If both Apollo and BHI proceed
with their exchanges, the Company, within the same 150 day period, shall
either a) redeem both the Apollo and Benesse Debentures, or b) deliver the
Fixed Rate Debentures to both Apollo and BHI.
o Principal amounts outstanding under the Fixed Rate Debentures would not be
payable until maturity, while interest payments would be made
semi-annually. The Fixed Rate Debentures interest rate is subject to a cap
of a) the applicable U.S. treasury rate + 5% (not to exceed 13%) if only
Apollo receives Fixed Rate Debentures, or b) the applicable U.S. treasury
rate + 7% (not to exceed 14%) if both Apollo and BHI receives Fixed Rate
Debentures. The Fixed Rate Debentures may be redeemed by the Company after
the third anniversary of their issue upon payment of principal amounts of
the Fixed Rate Debentures and the following redemption premiums, expressed
as a percentage of the outstanding principal amount: a) one half of the per
annum interest rate for redemptions occurring in the fourth year after
issue; b) one quarter of the per annum interest rate for redemptions
occurring in the fifth year after issue; and c) no premium for redemptions
occurring thereafter.
o Prior to the third anniversary of the Issue Date, if Benesse sells 80% or
more of the shares of Berlitz common stock owned directly or indirectly by
it on the Issue Date, the Company shall be required to make an offer to
repurchase for cash: i) the Apollo Debentures at a value equal to 110% of
the principal amount then outstanding; and ii) the Benesse Debentures at a
value equal to 101% of the principal amount then outstanding. In addition,
if at any time on or after the Issue Date a change of control, as defined
in the Investment Agreements, occurs but Benesse sells less than 80% of its
shares, or if Benesse sells 80% of its shares on or after the third
anniversary of the Issue Date, the Company shall be required to make an
offer to repurchase for cash the Convertible Debentures (but not the Fixed
Rate Debentures) at a value equal to 101% of the principal amount of the
Convertible Debentures.
o The fair values of the Convertible Debentures at March 31, 1999 was $142.6
million, estimated based on current interest rates and the Company's stock
price volatility.
The Company's derivatives are for non-trading purposes. The Company historically
has only entered into derivative contracts as required by its lenders and it has
no present intentions to change this policy. Furthermore, the Company employed
the following procedures to monitor and minimize the market and credit risk
associated with its current derivative contracts entered into pursuant to its
Bank Facility:
a) bids and proposals were obtained from only major financial institutions;
b) prior to entering into its derivative contracts, the Company conferred with
independent advisors to assess the reasonableness of the contracts and
obtained Board of Director approval;
c) the Company entered into simple agreements; and
d) the Company provides status updates regarding its derivatives, including
market value updates, to its Board of Directors on a regular basis.
27
<PAGE>
BERLITZ INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders was held on March 11, 1999 to approve the
issuance of convertible debentures as follows: a) $100 million aggregate
principal (the "Apollo Debentures") to two affiliates of Apollo Management IV,
L.P., a private investment firm; and b) $55 million aggregate principal (the
"Benesse Debentures") to Benesse Holding International, Inc., the Company's
majority shareholder. Votes representing 8,491,576 shares were cast for, 356
shares were cast against, and 181 shares abstained from voting on the approval
of the issuance of the Apollo Debentures. Votes representing 8,490,994 shares
were cast for, 443 shares were cast against, and 676 shares abstained from
voting on the approval of the issuance of the Benesse Debentures.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
All exhibits listed below are filed with this Quarterly Report on Form 10-Q.
Exhibit No.
- -----------
27 Financial Data Schedule, for the quarterly period ended March 31,
1999.
(b) Reports on Form 8-K
A Form 8-K dated March 11, 1999 was filed during the quarter ended March 31,
1999 to report the completion of the issuance of convertible debentures and a
subordinated promissory note.
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 17, 1999 By: /s/ HENRY D. JAMES
------------------
Henry D. James
Executive Vice President and
Chief Financial Officer
28
<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, 1999 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-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 29,125
<SECURITIES> 0
<RECEIVABLES> 50,822
<ALLOWANCES> 2,278
<INVENTORY> 10,785
<CURRENT-ASSETS> 105,656
<PP&E> 65,751
<DEPRECIATION> 24,724
<TOTAL-ASSETS> 662,834
<CURRENT-LIABILITIES> 82,745
<BONDS> 2,224
<COMMON> 1,003
0
0
<OTHER-SE> 342,920
<TOTAL-LIABILITY-AND-EQUITY> 662,834
<SALES> 0
<TOTAL-REVENUES> 104,362
<CGS> 0
<TOTAL-COSTS> 64,717
<OTHER-EXPENSES> 4,353
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,853
<INCOME-PRETAX> (2,646)
<INCOME-TAX> 162
<INCOME-CONTINUING> (2,689)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,140)
<CHANGES> 0
<NET-INCOME> (4,829)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
