UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-10390
BERLITZ INTERNATIONAL, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 13-355-0016
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
400 ALEXANDER PARK, PRINCETON, NEW JERSEY 08540-6306
--------------------------------------------------------
(Address of principal executive offices)
(609) 514-9650
-------------------------------------
Registrant's telephone number, including area code
N/A
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the registrant's common stock, at the close
of business on August 11, 2000, were 9,546,536.
Page 1 of 32
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 1999
------------------ -----------------
<S> <C> <C>
Sales of services and products $ 119,463 $ 111,194
------------------ -----------------
Operating costs and expenses:
Cost of services and products sold 71,834 65,023
Selling, general and administrative 38,924 37,605
Amortization of publishing rights, excess of cost
over net assets acquired, and other intangibles 4,554 4,369
------------------ -----------------
Operating profit 4,151 4,197
Interest expense on long-term debt 10 20
Interest expense on convertible debentures
with related parties 1,994 2,004
Interest expense on notes to affiliates 641 648
Other expense, net 204 80
------------------ -----------------
Income before income taxes, minority interest in
loss (earnings) of subsidiary, and
extraordinary item 1,302 1,445
Income tax expense (2,038) (1,811)
Minority interest in (earnings) loss
of subsidiaries (71) 60
------------------ -----------------
Loss before extraordinary item (807) (306)
Extraordinary loss from extinguishment of debt - (4)
------------------ -----------------
Net loss $ (807) $ (310)
================== =================
Loss per share - basic and diluted:
Loss before extraordinary item $ (0.08) $ (0.03)
Extraordinary loss - (0.00)
------------------ -----------------
Loss per share $ (0.08) $ (0.03)
================= =================
Average number of shares outstanding (000's) 9,546 9,530
================== =================
</TABLE>
See accompanying Notes to the Consolidated Condensed Financial Statements.
2
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 1999
------------------ -----------------
<S> <C> <C>
Sales of services and products $ 232,007 $ 215,640
---------------- ---------------
Operating costs and expenses:
Cost of services and products sold 139,457 128,864
Selling, general and administrative 76,523 74,511
Amortization of publishing rights, excess of cost
over net assets acquired, and other intangibles 9,179 8,722
---------------- ---------------
Operating profit 6,848 3,543
Interest expense on long-term debt 33 1,873
Interest expense on convertible debentures
with related parties 3,989 2,435
Interest expense on notes to affiliates 1,296 1,236
Other expense (income), net 299 (885)
---------------- ---------------
Income (loss) before income taxes, minority interest in
loss (earnings) of subsidiary, and
extraordinary item 1,231 (1,116)
Income tax expense (3,773) (1,973)
Minority interest in (earnings) loss
of subsidiaries (242) 179
---------------- ---------------
Loss before extraordinary item and cumulative
effect of accounting change (2,784) (2,910)
Extraordinary loss from extinguishment of debt,
net of income tax benefit of $44 - (2,144)
Cumulative effect of accounting change, net of
income tax benefit of $2,900
and minority interest expense of $189 - (5,605)
---------------- ---------------
Net loss $ (2,784) $ (10,659)
================ ===============
Loss per share - basic and diluted:
Loss before extraordinary item and cumulative
effect of accounting change $ (0.29) $ (0.31)
Extraordinary loss - (0.22)
Cumulative effect of accounting change - (0.59)
---------------- ---------------
Loss per share $ (0.29) $ (1.12)
================ ===============
Average number of shares outstanding (000's) 9,546 9,530
================ ===============
</TABLE>
See accompanying Notes to the Consolidated Condensed Financial Statements.
3
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
2000 1999
---------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 38,757 $ 34,426
Accounts receivable, less allowance for
doubtful accounts of $3,902 and $3,102 48,104 54,185
Unbilled receivables 11,968 7,514
Inventories, net 10,222 10,405
Prepaid expenses and other current assets 9,499 8,628
--------------- --------------
TOTAL CURRENT ASSETS 118,550 115,158
Property and equipment, net of accumulated
depreciation of $27,591 and $26,100 49,135 47,749
Publishing rights, net of accumulated
amortization of $6,522 and $6,083 15,463 15,902
Excess of cost over net assets acquired and other intangibles,
net of accumulated amortization of $100,619 and $92,936 467,341 480,967
Other assets 37,162 37,244
-------------- --------------
TOTAL ASSETS $ 687,651 $ 697,020
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,232 $ 5,118
Accounts payable 10,372 12,026
Deferred revenues 61,516 57,266
Payrolls and commissions 16,984 16,458
Income taxes payable 1,584 971
Interest payable on convertible debentures 1,938 1,938
Accrued expenses and other current liabilities 18,488 19,495
-------------- --------------
TOTAL CURRENT LIABILITIES 112,114 113,272
Long-term debt 1,772 1,887
Convertible debentures with related parties 155,000 155,000
Notes payable to affiliates 50,000 50,000
Other liabilities 27,391 28,399
Minority interest 10,040 9,775
-------------- --------------
TOTAL LIABILITIES 356,317 358,333
-------------- --------------
SHAREHOLDERS' EQUITY:
Common stock 1,005 1,003
Additional paid-in capital 372,791 372,518
Accumulated deficit (11,294) (8,510)
Accumulated other comprehensive loss:
Cumulative translation adjustment (24,807) (19,963)
Treasury stock at cost (6,361) (6,361)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 331,334 338,687
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 687,651 $ 697,020
============== ==============
</TABLE>
See accompanying Notes to the Consolidated Condensed Financial Statements.
4
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------------------------
2000 1999
-------------------- -------------------
<S> <C> <C>
Net loss $ (807) $ (310)
Other comprehensive loss, net of tax:
Foreign currency items, including translation
adjustments, and the effects of certain
hedges and intercompany transactions (132) (1,766)
-------------------- -------------------
Comprehensive loss $ (939) $ (2,076)
==================== ===================
The tax expense allocated to each component of other comprehensive loss is as
follows:
Foreign currency items $ 509 $ 433
==================== ===================
SIX MONTHS ENDED JUNE 30,
----------------------------------------------
2000 1999
-------------------- -------------------
<S> <C> <C>
Net loss $ (2,784) $ (10,659)
Other comprehensive loss, net of tax:
Foreign currency items, including translation
adjustments, and the effects of certain
hedges and intercompany transactions (4,844) (8,031)
-------------------- -------------------
Comprehensive loss $ (7,628) $ (18,690)
==================== ===================
The tax expense allocated to each component of other comprehensive loss is as
follows:
Foreign currency items $ 785 $ 1,185
==================== ===================
</TABLE>
See accompanying Notes to the Consolidated Condensed Financial Statements.
5
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,784) $ (10,659)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 15,110 14,086
Cumulative effect of accounting change, net - 5,605
Extraordinary item, net - 1,072
Other (primarily provision for bad debts and foreign exchange
(gains) losses) 1,986 (648)
Changes in operating assets and liabilities 2,576 (3,061)
--------------- ---------------
Net cash provided by operating activities 16,888 6,395
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,494) (10,565)
Acquisition of businesses - (8,373)
Intangible expenditures (31) -
--------------- ---------------
Net cash used in investing activities (9,525) (18,938)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures - 155,000
Proceeds from issuance of note payable to affiliate - 50,000
Proceeds from termination of currency swap agreements 1,735 -
Net borrowings under revolving credit facility (4,000) 4,000
Repayment of long-term debt - (146,899)
Repayment of notes to affiliates - (42,366)
Payment of deferred finance costs - (2,782)
--------------- ---------------
Net cash (used in) provided by financing activities (2,265) 16,953
--------------- ---------------
Effect of exchange rate changes on cash and
temporary investments (767) (1,522)
--------------- ---------------
Net increase in cash and temporary investments 4,331 2,888
Cash and temporary investments, beginning of period 34,426 25,327
--------------- ---------------
Cash and temporary investments, end of period $ 38,757 $ 28,215
=============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 5,216 $ 3,084
=============== ==============
Income taxes $ 4,295 $ 2,898
=============== ==============
Cash refunds of income taxes $ 308 $ 417
=============== ==============
</TABLE>
See accompanying Notes to the Consolidated Condensed Financial Statements.
6
<PAGE>
BERLITZ INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. GENERAL
The Consolidated Condensed 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 1999 Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission.
Certain reclassifications have been made in prior years' financial
statements and notes to conform to the 2000 presentation.
2. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
Revolving credit facility $ - $ 4,000
Other 3,004 3,005
------------ ------------
Total 3,004 7,005
Less current maturities (1,232) (5,118)
------------ ------------
Long-term debt $ 1,772 $ 1,887
============ ============
On March 31, 1999, the Company entered into a $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 0.125% to 0.20%
will be charged on the available but unused amounts under the Revolving
Facility, depending on a specified leverage ratio. There are no
outstanding borrowings under the Revolving Facility at June 30, 2000.
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 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.
7
<PAGE>
3. CONVERTIBLE DEBENTURES WITH RELATED PARTIES
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: (i) $100,000 aggregate
principal amount (the "Apollo Debentures") to two affiliates of Apollo
Management IV, L.P. ("Apollo"), a private investment firm; and (ii)
$55,000 aggregate principal amount (the "Benesse Debentures") to
Benesse Holdings International, Inc. ("BHI"), the Company's majority
shareholder. The Convertible Debentures bear interest at 5% per annum,
payable semi-annually. Principal amounts outstanding under such
debentures are not due until 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 Debentures and Benesse Debentures each independently provide
for optional redemption by the Company, in whole but not in part, any
time three years and two months following the Issue Date. 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 must pay a redemption premium,
expressed as a percentage of outstanding principal, as follows: (i) 4%
for redemptions occurring in the fourth year after issue; (ii) 2% for
redemptions occurring in the fifth year after issue; and (iii) 0% for
redemptions occurring thereafter. All such redemptions are subject to
the holders' rights to first convert their Convertible Debentures 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,
seven-year fixed rate debt (the "Fixed Rate Debentures"). Such election
may only be made if the average closing price of the Company's common
stock during the 30 trading days immediately preceding the third
anniversary of the Issue Date does not exceed $33.05. Furthermore, BHI
may only effect an exchange if Apollo does so. Upon the determination,
by an independent financial institution, of fixed interest rates that
accurately price the Fixed Rate Debentures at par under specified
circumstances at the time of the exchange, Apollo and BHI shall
irrevocably decide whether to proceed with their exchanges. If only
Apollo proceeds with such an exchange, the Company, no later than 150
days from the third anniversary of the Issue Date, must either: (i)
redeem all of the Apollo Debentures at par; or (ii) deliver the Fixed
Rate Debentures to Apollo. If both Apollo and BHI proceed with their
exchanges, the Company, within the same 150 day period, must either:
(i) redeem both the Apollo Debentures and Benesse Debentures; or (ii)
deliver the Fixed Rate Debentures to both Apollo and BHI.
8
<PAGE>
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: (i) the applicable U.S. treasury rate + 5% (not to exceed 13%)
if only Apollo receives Fixed Rate Debentures; or (ii) the applicable
U.S. treasury rate + 7% (not to exceed 14%) if both Apollo and BHI
receive Fixed Rate Debentures. The Fixed Rate Debentures may be
redeemed by the Company after the third anniversary of their issuance
upon payment of the principal amounts outstanding under the Fixed Rate
Debentures and the following redemption premiums, expressed as a
percentage of the outstanding principal amount: (i) one half of the per
annum interest rate for redemptions occurring in the fourth year after
issue; (ii) one quarter of the per annum interest rate for redemptions
occurring in the fifth year after issue; and (iii) no premium for
redemptions occurring thereafter.
Prior to the third anniversary of the Issue Date, if BHI 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
BHI sells less than 80% of its shares, or if BHI 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: (i) prohibitions on certain mergers, consolidations and asset
transfers; (ii) forbearance from restrictions on rights of holders to
convert or exchange the Convertible Debentures; and (iii), in the case
of the Apollo Debentures, forbearance from amending certain
understandings between the Company, Berlitz Japan, Inc. and BHI .
The Investment Agreements include a number of other provisions,
including: (i) the granting of certain demand and piggyback
registration rights to the holders of the Convertible Debentures; (ii)
the granting of a certain number of board seats to Apollo on the
Company's Board of Directors; (iii) the granting of approval rights to
Apollo, at the Company's Board level, over certain transactions; and
(iv) certain restrictions on the transferability of the Apollo
Debentures. The Company expanded its Board of Directors from 10 seats
to 12 seats effective March 11, 1999, and granted two board seats to
Apollo.
4. NOTES PAYABLE TO 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
9
<PAGE>
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 incurred approximately $2,800 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 Company's
long-term debt under its 1997 credit agreement (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. For the six months ended June 30, 1999, the Company recorded an
extraordinary loss, net of tax benefit, of $2,144, 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. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On December 3, 1999, the Securities and Exchange Commission ("SEC")
issued its Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"), which provides its views on applying
generally accepted accounting principles to selected revenue
recognition issues. The Company adopted the provisions of SAB 101
effective January 1, 1999, and, as a result, changed its method of
accounting for deferred revenues on lessons paid for but not expected
to be taken due to a period of student inactivity. Through December
1998, such amounts had been recognized in income based on historical
experience by country, generally after a student had not attended a
class for at least 60 days (or six months in the case of a corporate
contract). Refunds subsequently issued were not material. Beginning in
1999, deferred revenues on lessons paid for but not expected to be
taken due to student inactivity (generally at least 60 days or six
months, as applicable) are recognized in income when the obligation to
issue a refund has expired. In certain countries where the refund
obligation effectively never expires under local law, such deferred
revenues are recognized into income no earlier than one year from the
date of enrollment. The cumulative effect of the accounting change
resulted in a charge to 1999 earnings of $5,605 (net of income tax
benefit of $2,900 and minority interest expense of $189).
The SEC is currently developing additional guidance with respect to SAB
101. Until such time as the SEC staff issues such guidance, it is
unclear what, if any, impact such guidance will have on the Company's
current revenue recognition accounting policies.
10
<PAGE>
7. OTHER EXPENSE (INCOME), NET
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Interest income on temporary investments $ (218) $ (166)
Foreign exchange losses (gains), net 224 (294)
Other non-operating taxes 2 111
Loss on disposal of fixed assets 188 103
Other investment (income) expense, net (53) 72
Other income, net 61 254
------------- --------------
Total other expense, net $ 204 $ 80
============= ==============
SIX MONTHS SIX MONTHS
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
Interest income on temporary investments $ (407) $ (257)
Foreign exchange losses (gains), net 282 (1,202)
Other non-operating taxes 87 231
Loss on disposal of fixed assets 296 122
Other investment (income) expense, net (55) 14
Other income, net 96 207
------------- -------------
Total other expense (income), net $ 299 $ (885)
============= =============
</TABLE>
8. EARNINGS (LOSS) PER SHARE
Basic and Diluted earnings (loss) per share ("EPS") computations for
"loss before extraordinary item and cumulative effect of accounting
change" are the same for the three and six months ended June 30, 2000,
and 1999. For the three months ended June 30, 2000, and 1999 they are
$(0.08) and $(0.03), respectively, and for the six months ended June
30, 2000 and 1999 they are $(0.29) and $(0.31), respectively.
9. OPERATING SEGMENTS
The Company's operations are principally conducted through two
segments: Language Services (consisting of the Instruction, ELS
Educational Services, Inc. ("ELS"), Publishing, Franchising, and Cross
Cultural sub-segments), and Berlitz GlobalNET. ELS formerly included
centers operating under the Berlitz on Campus ("BOC") brand name.
Effective January 1, 2000, the BOC centers were renamed ELS. 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 ELS
sub-segment provides intensive English education programs primarily in
a campus setting. 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
Cross Cultural sub-segment complements language study by providing
expatriates with detailed practical and cultural information about the
countries to which they are relocating.
11
<PAGE>
Berlitz GlobalNET helps customers prepare their products and services
for the world market faster and at less cost. Berlitz GlobalNET
provides high quality technical documentation translation, interpreting
and rapidly expanding offerings in eBusiness Globalization services
including Web localization and multilingual content management.
Language-related services are offered for the entire business cycle,
from globalization strategy and consulting to creating and translating
content, designing, implementing and maintaining multilingual Websites.
These services are based on the Company's skills in project management,
high quality translation, software localization, software quality
assurance and testing, and electronic publishing.
The Company evaluates operating segment performance based on EBITA,
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 necessarily indicative of operating income or cash flows
from operations as determined under U.S. GAAP.
The following tables present information about reported segment profit
or loss and segment assets, and reconcile reportable segment revenues,
profit or loss, and assets to the Company's consolidated totals:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Revenues from external customers:
Language Services:
Instruction $ 75,480 $ 69,875 $ 148,126 $ 136,360
ELS 14,903 12,403 26,803 24,876
Publishing 3,176 4,126 5,984 7,214
Franchising 442 469 765 709
Cross Cultural 748 645 1,462 1,232
Other - (1) - (1)
------------- ------------- ------------- -------------
Total Language Services 94,749 87,517 183,140 170,390
Berlitz GlobalNET 24,714 23,677 48,867 45,250
------------- ------------- ------------- -------------
Total external revenues 119,463 111,194 232,007 215,640
------------- ------------- ------------- -------------
Intersegment revenues:
Language Services:
Instruction 1 - 1 -
Publishing 3 - 13 -
Franchising 48 125 106 238
------------- ------------- ------------- -------------
Total Language Services 52 125 120 238
Berlitz GlobalNET (71) 35 5 44
------------- ------------- ------------- -------------
Total intersegment revenues (19) 160 125 282
------------- ------------- ------------- -------------
Total revenues for reportable segments 119,444 111,354 232,132 215,922
Elimination of intersegment revenues 19 (160) (125) (282)
------------- ------------- ------------- -------------
Total consolidated revenues $ 119,463 $ 111,194 $ 232,007 $ 215,640
============= ============= ============= =============
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME (LOSS) BEFORE TAXES, MINORITY INTEREST, AND
EXTRAORDINARY ITEM:
Segment EBITA:
Language Services:
Instruction $ 15,495 $ 14,788 $ 30,975 $ 26,754
ELS 495 123 413 (264)
Publishing 177 755 104 563
Franchising 185 124 244 86
Cross Cultural 107 85 364 238
Language Service overhead expenses and other (5,537) (5,423) (11,475) (10,560)
------------- ------------- ------------- -------------
Total Language Services 10,922 10,452 20,625 16,817
Berlitz GlobalNET 1,400 1,644 2,532 2,289
General corporate HQ expenses (3,617) (3,530) (7,130) (6,841)
------------- ------------- ------------- -------------
Total EBITA 8,705 8,566 16,027 12,265
------------- ------------- ------------- -------------
Amortization of publishing rights, excess of cost over net assets acquired,
and other intangibles:
Language Services:
Instruction (2,552) (2,525) (5,118) (5,070)
ELS (1,365) (1,348) (2,728) (2,695)
Publishing (100) (99) (200) (199)
Cross Cultural (2) (2) (5) (5)
------------- ------------- ------------- -------------
Total Language Services (4,019) (3,974) (8,051) (7,969)
Berlitz GlobalNET (535) (395) (1,128) (753)
------------- ------------- ------------- -------------
Total intangible amortization (4,554) (4,369) (9,179) (8,722)
------------- ------------- ------------- -------------
Total operating profit 4,151 4,197 6,848 3,543
Interest expense on long-term debt (10) (20) (33) (1,873)
Interest expense on Convertible Debentures (1,994) (2,004) (3,989) (2,435)
Interest expense to affiliates (641) (648) (1,296) (1,236)
Other (expense) income, net (204) (80) (299) 885
------------- ------------- ------------- -------------
Total consolidated income (loss) before taxes,
minority interest, and extraordinary item $ 1,302 $ 1,445 $ 1,231 $ (1,116)
============= ============= ============= =============
</TABLE>
ASSETS: JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
Language Services:
Instruction $ 433,617 $ 433,526
ELS 106,297 106,210
Publishing 21,918 23,122
Franchising 8,297 8,031
Cross Cultural 402 440
Other 767 1,069
----------- -----------
Total Language Services 571,298 572,398
Berlitz GlobalNET 97,281 102,684
General corporate 26,013 27,365
Eliminations of intersegment receivables (6,941) (5,427)
----------- -----------
Total consolidated assets $ 687,651 $ 697,020
=========== ===========
13
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
DEPRECIATION:
Language Services:
Instruction $ 1,244 $ 1,297 $ 2,507 $ 2,452
ELS 252 209 459 490
Publishing 555 417 1,050 841
Franchising 4 6 8 10
Language Services overhead and other 140 121 269 237
------------- -------------- ------------- --------------
Total Language Services 2,195 2,050 4,293 4,030
Berlitz GlobalNET 523 474 1,075 1,041
General corporate 278 122 563 293
------------- -------------- ------------- --------------
Total consolidated depreciation $ 2,996 $ 2,646 $ 5,931 $ 5,364
============= ============== ============= ==============
CAPITAL EXPENDITURES:
Language Services:
Instruction $ 4,604 $ 3,754 $ 6,323 $ 7,051
ELS 250 197 481 577
Publishing 219 881 592 1,370
Franchising - 25 - 30
------------- -------------- ------------- --------------
Total Language Services 5,073 4,857 7,396 9,028
Berlitz GlobalNET 782 475 1,810 666
General corporate 198 522 288 871
------------- -------------- ------------- --------------
Total consolidated capital
expenditures $ 6,053 $ 5,854 $ 9,494 $ 10,565
============= ============== ============= ==============
</TABLE>
The following tables present certain information about the geographic
areas in which the Company operates:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES FROM EXTERNAL CUSTOMERS:
United States $ 37,652 $ 36,195 $ 71,575 $ 68,731
Japan 22,380 16,667 42,587 32,372
Germany 9,732 10,576 20,374 21,355
Ireland 6,214 5,779 11,176 10,532
France 4,924 5,508 9,939 10,743
Brazil 5,155 3,955 9,243 6,865
Other foreign countries 33,406 32,514 67,113 65,042
------------- -------------- ------------- --------------
Total $ 119,463 $ 111,194 $ 232,007 $ 215,640
============= ============== ============= ==============
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING PROFIT:
EBITA :
United States $ 2,816 $ 3,903 $ 4,365 $ 5,604
Japan 3,156 1,335 6,130 1,979
Germany 711 1,121 2,118 2,299
Ireland 415 284 432 277
France 396 648 963 1,047
Brazil 1,269 617 2,098 903
Other foreign countries 4,822 5,412 9,594 9,262
General corporate expenses (4,880) (4,754) (9,673) (9,106)
------------- -------------- ------------- --------------
Total EBITA 8,705 8,566 16,027 12,265
------------- -------------- ------------- --------------
Amortization of publishing rights, Excess of cost over net assets
Acquired, and other intangibles:
United States (3,830) (3,664) (7,715) (7,287)
Japan (384) (326) (767) (660)
Germany (57) (63) (118) (129)
Ireland (10) (11) (21) (24)
France (61) (71) (125) (146)
Brazil (16) (16) (32) (32)
Other foreign countries (196) (218) (401) (444)
------------- -------------- ------------- --------------
Total intangible amortization (4,554) (4,369) (9,179) (8,722)
------------- -------------- ------------- --------------
Intercompany royalties:
United States 5,674 3,995 10,295 7,583
Japan (2,324) (956) (3,892) (1,522)
Germany (364) (400) (771) (815)
Ireland (310) (289) (557) (525)
France (320) (224) (571) (531)
Other foreign countries (2,356) (2,126) (4,504) (4,190)
------------- -------------- ------------- --------------
Total intercompany royalties - - - -
------------- -------------- ------------- --------------
Total operating profit $ 4,151 $ 4,197 $ 6,848 $ 3,543
============= ============== ============= ==============
</TABLE>
<TABLE>
<CAPTION>
LONG LIVED ASSETS: PROPERTY &
EQUIPMENT OTHER INTANGIBLE
NET ASSETS* ASSETS TOTAL
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
JUNE 30, 2000:
United States $ 9,571 $ 4,792 $ 385,628 $ 399,991
Japan 11,107 142 49,655 60,904
Germany 3,664 - 7,527 11,191
France 1,822 - 5,498 7,320
Brazil 3,589 - 3,625 7,214
Ireland 1,611 - 1,411 3,022
Other foreign countries 13,274 3,133 28,004 44,411
General corporate 4,497 14,458 1,456 20,411
------------- -------------- ------------- --------------
Total $ 49,135 $ 22,525 $ 482,804 $ 554,464
============= ============== ============= ==============
DECEMBER 31, 1999:
United States $ 10,202 $ 7,801 $ 397,674 $ 415,677
Japan 11,186 152 51,989 63,327
Germany 3,448 - 8,089 11,537
France 1,853 - 5,949 7,802
Brazil 2,843 - 2,492 5,335
Ireland 1,276 1 1,510 2,787
Other foreign countries 12,362 529 27,710 40,601
General corporate 4,579 13,910 1,456 19,945
------------- -------------- ------------- --------------
Total $ 47,749 $ 22,393 $ 496,869 $ 567,011
============= ============== ============= ==============
*Excludes financial instruments and deferred tax assets.
</TABLE>
15
<PAGE>
BERLITZ INTERNATIONAL, INC.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
Consolidated Condensed Financial Statements and notes thereto and with the
Company's audited Consolidated Financial Statements and notes thereto for the
fiscal year ended December 31, 1999. Certain statements contained within this
discussion constitute forward-looking statements. See "Special Note Regarding
Forward Looking Statements."
The Company's operations are principally conducted through two segments:
Language Services (consisting of the Instruction, ELS Educational Services, Inc.
("ELS"), Publishing, Franchising, and Cross Cultural sub-segments), and Berlitz
GlobalNET. ELS formerly included centers operating under the Berlitz on Campus
("BOC") brand name. Effective January 1, 2000, the BOC centers were renamed ELS.
Language Services is organized geographically into four operating divisions
(North America, Asia, Latin America and Europe) while Berlitz GlobalNET is
organized into three geographic divisions: the Americas (North America and Latin
America), Asia and Europe.
RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 2000, VS. JUNE 30, 1999
Sales for the quarter ended June 30, 2000, were $119.4 million, a 7.4% increase
from 1999 sales of $111.2 million. This increase is attributable to increases in
operating activity for Instruction, ELS and Berlitz GlobalNET that were
partially offset by unfavorable exchange rate fluctuations. Excluding the
effects of unfavorable exchange rate fluctuations of $2.7 million, sales
increased from the prior year by 9.8%. The following table compares revenues by
business segment for the second quarter.
<TABLE>
<CAPTION>
BUSINESS SEGMENT REVENUES: (Dollars in millions)
--------------------------
------------------------------------------------------------------------------
June 30, Growth (Decline) from Prior Year
--------------------------- -----------------------------------------------
2000 1999 Exchange Operations Total
(1)
----------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Language Services:
Instruction $ 75.5 $ 69.9 $ (1.4) $ 7.0 $ 5.6
ELS 14.9 12.4 - 2.5 2.5
Publishing 3.1 4.1 - (1.0) (1.0)
Franchising 0.5 0.6 - (0.1) (0.1)
Cross Cultural 0.7 0.6 - 0.1 0.1
Intercompany eliminations - (0.1) - 0.1 0.1
----------- ----------- ------------ -------------- ------------
Total Language Services 94.7 87.5 (1.4) 8.6 7.2
Berlitz GlobalNET 24.7 23.7 (1.3) 2.3 1.0
----------- ----------- ------------ -------------- ------------
Total $ 119.4 $ 111.2 $ (2.7)(2) $ 10.9 $ 8.2
=========== =========== ============ ============== ============
</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 ($2.7 million) primarily
resulted from a strengthened
16
<PAGE>
dollar against European currencies, most significantly the German mark and
the Irish punt, partially offset by a weaker dollar against the Japanese
yen.
Within Language Services, Instruction benefited from increases in both volume
and average revenue per lesson ("ARPL"). Total lesson volume increased 6.4% from
the prior year, reflecting improvements in all geographic regions.
Geographically, Instruction revenue and lesson volume was dispersed as follows:
<TABLE>
<CAPTION>
INSTRUCTION REVENUE: (Dollars in millions)
--------------------
--------------------------------------------------------------------------
June 30, Growth (Decline) from Prior Year
-------------------------- --------------------------------------------
2000 1999 Exchange Operations Total
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
North America $ 13.2 $ 12.5 $ - $ 0.7 $ 0.7
Asia 22.6 16.4 2.3 3.9 6.2 (1)
Latin America 13.8 12.9 (0.7) 1.6 0.9 (2)
Europe 25.9 28.1 (3.0) 0.8 (2.2) (3)
----------- ----------- ----------- ------------- ------------
Total revenue $ 75.5 $ 69.9 $ (1.4) $ 7.0 $ 5.6
=========== =========== =========== ============= ============
</TABLE>
------------------------
(1) Primarily reflects the effect of volume increases in Japan and a weaker US
dollar against the Japanese yen.
(2) Primarily reflects the effect of ARPL and volume increases in Brazil and
Mexico and an ARPL increase in Colombia.
(3) Primarily reflects a strengthened US dollar against European currencies, in
particular Germany.
<TABLE>
<CAPTION>
INSTRUCTION LESSON VOLUME: (Lessons in thousands)
--------------------------
--------------------------------------------------------------------------
June 30, Growth from Prior Year
---------------------------------- ------------------------------------
Number of
2000 1999 lessons Percentage
--------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C>
North America 297.8 288.3 9.5 3.3%
Asia 330.3 256.4 73.9 28.8% (1)
Latin America 377.1 366.5 10.6 2.9% (2)
Europe 649.0 642.9 6.1 0.9%
--------------- --------------- -------------- -----------------
Total lesson volume 1,654.2 1,554.1 100.1 6.4%
=============== =============== ============== =================
</TABLE>
------------------------
(1) Asia's volume has increased due primarily to the apparent positive effect
of special sales campaigns in Japan and expansion in new markets.
(2) Lesson volume increased in Latin America primarily due to strong sales in
Brazil and Mexico, partially offset by reduced volume in Venezuela as a
result of economic uncertainty.
For the second quarter of 2000, ARPL was $40.81, as compared to $39.88 in the
comparable prior year period. The increase reflected the favorable impact of
product mix and price increases ($1.82), partly offset by the effects of
unfavorable exchange rate fluctuations ($0.89). ARPL ranged from a high of
approximately $65.34 in Japan to a low of $15.27 in Hungary, reflecting effects
of foreign exchange rates and differences in the economic value of the services
provided or sold.
ELS second quarter revenues increased 20.2% from the prior year, primarily
attributable to the
17
<PAGE>
launch of a 20 hour Semi-Intensive Program, the brand merger of ELS and BOC and
the restructuring of operations resulting in the closing of five centers.
Publishing revenues declined 23.0% over the comparable prior year period, due
primarily to decreased licensing royalty revenue.
Berlitz GlobalNET sales for the quarter ended June 30, 2000, were $24.7 million,
up 9.7% from the comparable period in 1999, excluding the effect of unfavorable
exchange rate fluctuations of $1.3 million. The following table compares Berlitz
GlobalNET revenues by region for the first quarter:
<TABLE>
<CAPTION>
BERLITZ GLOBALNET REVENUE: (Dollars in millions)
--------------------------
--------------------------------------------------------------------------
June 30, Growth (Decline) from Prior Year
-------------------------- --------------------------------------------
2000 1999 Exchange Operations Total
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
America $ 10.9 $ 11.5 $ - $ (0.6) $ (0.6)
Asia 1.7 1.2 0.1 0.4 0.5
Europe 13.6 12.3 (1.5) 2.8 1.3 (1)
Intercompany eliminations (1.5) (1.3) 0.1 (0.3) (0.2)
----------- ----------- ----------- ------------- ------------
Total revenue $ 24.7 $ 23.7 $ (1.3) $ 2.3 $ 1.0
=========== =========== =========== ============= ============
</TABLE>
------------------------
(1) Growth in Europe was due primarily to an acquisition completed in the last
quarter of 1999 and strong volume in France and Ireland offset by a strong
US dollar against European currencies, primarily the Irish punt
The Company's total cost of services and products sold as a percentage of sales
was 60.1% in the second quarter of 2000, compared with 58.5% in the comparable
prior year period. The higher percentage was mainly attributable to higher
teacher salaries. Selling, general and administrative expenses as a percentage
of sales were 32.6% in the second quarter of 2000, compared with 33.8% in the
comparable prior year period. This improvement reflects an increase in business
volume over the prior year as well as reduced costs from the closure of five ELS
centers in the second half of 1999.
EBITA* for the 2000 first quarter was $8.7 million, or 7.3% of sales, compared
to $8.6 million, or 7.7% of sales, in the comparable prior year period. The
following table displays the comparative second quarter EBITA by business
segment:
--------------------------------------------------------------------------------
*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
necessarily indicative of operating income or cash flows from operations as
determined under U.S. GAAP.
18
<PAGE>
<TABLE>
<CAPTION>
BUSINESS SEGMENT EBITA: (Dollars in millions)
-----------------------
--------------------------------------------------------------------------
June 30, Growth (Decline) from Prior Year
------------------------ ----------------------------------------------
2000 1999 Exchange Operations Total
---------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Language Services:
Instruction $ 15.5 $ 14.8 $ (0.3)(1) $ 1.0 (2) $ 0.7
ELS 0.5 0.1 - 0.4 0.4 (3)
Publishing 0.2 0.8 - (0.6) (0.6) (4)
Franchising 0.2 0.1 - 0.1 0.1
Cross Cultural 0.1 0.1 - - -
Overhead and other (5.6) (5.4) 0.1 (0.3) (0.2)
---------- ---------- ------------ ------------- ------------
Total Language Services 10.9 10.5 (0.2) 0.6 0.4
Berlitz GlobalNET 1.4 1.6 (0.1) (0.1) (0.2) (5)
Corporate overhead and other (3.6) (3.5) - (0.1) (0.1) (6)
---------- ---------- ------------ ------------- ------------
Total $ 8.7 $ 8.6 $ (0.3) $ 0.4 $ 0.1
========== ========== ============ ============= ============
</TABLE>
EBITA MARGIN %: June 30,
---------------
------------------------------
2000 1999
------------ --------------
Language Services:
Instruction (7) 20.5% 21.2%
ELS (8) 3.3% 1.0%
Publishing 5.6% 18.3%
Franchising 37.8% 20.9%
Cross Cultural 14.3% 13.2%
Total Language Services 11.5% 11.9%
Berlitz GlobalNET (9) 5.7% 6.9%
Total 7.3% 7.7%
--------------------------
(1) The net unfavorable exchange impact in Instruction is primarily
attributable to European countries, in particular Germany, partially offset
by the strength of the Japanese yen.
(2) The increase in Instruction operating EBITA is due mainly to volume
increases in Japan and ARPL increases in Latin America, in particular
Colombia.
(3) The increase in ELS operating EBITA is due in part to improved volume and
decreased costs due primarily to the closure of five centers.
(4) Publishing EBITA decreased primarily due to a lack of licensing revenues.
(5) The decrease in EBITA for Berlitz GlobalNET is due in part to exchange and
to decreased margins in the U.S due in part to increased sales and
marketing costs.
(6) Corporate expenses rose due to increases in salary related operating costs.
(7) The decrease in Instruction's EBITA margin occurred primarily in the U.S.
due in part to increased sales costs and rent.
(8) See ELS discussion in footnote 3.
(9) See Berlitz GlobalNET discussion in footnote 5.
"Other expense, net" for the three months ended June 30, 2000 was $0.2 million,
compared with $0.1 million in the comparable prior year period, due to lower
foreign exchange gains in the current quarter.
19
<PAGE>
The Company recorded income tax expenses of $2.0 million in the second quarter
of 2000, compared with $1.8 million in the second quarter of 1999. The effective
tax rates in both 2000 and 1999 were above the U.S. Federal statutory tax rate
primarily as a result of nondeductible amortization charges.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000, VS. JUNE 30, 1999
Sales for the six months ended June 30, 2000, were $232.0 million, a 7.6%
increase from 1999 sales of $215.6 million. This increase is attributable to
increases in operating activity for Instruction, Berlitz GlobalNET and ELS that
were partially offset by unfavorable exchange rate fluctuations. Excluding the
effects of unfavorable exchange rate fluctuations of $5.9 million, sales
increased from the prior year by 10.4%. The following table compares revenues by
business segment for the first six months.
<TABLE>
<CAPTION>
BUSINESS SEGMENT REVENUES: (Dollars in millions)
--------------------------
------------------------------------------------------------------------------
June 30, Growth (Decline) from Prior Year
--------------------------- -----------------------------------------------
2000 1999 Exchange Operations Total
(1)
----------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Language Services:
Instruction $ 148.1 $ 136.4 $ (3.4) $ 15.1 $ 11.7
ELS 26.8 24.9 0.1 1.8 1.9
Publishing 6.0 7.2 (0.1) (1.1) (1.2)
Franchising 0.9 0.9 - - -
Cross Cultural 1.4 1.2 - 0.2 0.2
Intercompany eliminations (0.1) (0.2) - 0.1 0.1
----------- ----------- ------------ -------------- ------------
Total Language Services 183.1 170.4 (3.4) 16.1 12.7
Berlitz GlobalNET 48.9 45.2 (2.5) 6.2 3.7
----------- ----------- ------------ -------------- ------------
Total $ 232.0 $ 215.6 $ (5.9) (2) $ 22.3 $ 16.4
=========== =========== ============ ============== ============
</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 ($5.9 million) primarily
resulted from a strengthened dollar against European currencies, most
significantly the German mark and the Irish punt, partially offset by a
weaker dollar against the Japanese yen.
Within Language Services, Instruction benefited from increases in both volume
and average revenue per lesson ("ARPL"). Total lesson volume increased 7.6% from
the comparable prior year period, reflecting improvements in all geographic
regions. Geographically, Instruction revenue and lesson volume was dispersed as
follows:
<TABLE>
<CAPTION>
INSTRUCTION REVENUE: (Dollars in millions)
--------------------
--------------------------------------------------------------------------
June 30, Growth from Prior Year
-------------------------- --------------------------------------------
2000 1999 Exchange Operations Total
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
North America $ 25.2 $ 24.4 $ 0.1 $ 0.7 $ 0.8
Asia 43.2 32.1 4.1 7.0 11.1 (1)
Latin America 25.5 23.1 (0.9) 3.3 2.4 (2)
Europe 54.2 56.8 (6.7) 4.1 (2.6) (3)
----------- ----------- ----------- ------------- ------------
Total revenue $ 148.1 $ 136.4 $ (3.4) $ 15.1 $ 11.7
=========== =========== =========== ============= ============
</TABLE>
------------------------
20
<PAGE>
(1) Primarily reflects the effect of volume increases in Japan and a weaker US
dollar against the Japanese yen.
(2) The operations variance primarily reflects the effect of volume increases
in Brazil and Mexico and an ARPL increase in Mexico and Colombia.
(3) Primarily reflects a strengthened US dollar against European currencies, in
particular Germany, partially offset by improved volume in most countries,
in particular Germany.
<TABLE>
<CAPTION>
INSTRUCTION LESSON VOLUME: (Lessons in thousands)
--------------------------
--------------------------------------------------------------------------
June 30, Growth (Decline) from Prior Year
---------------------------------- ------------------------------------
Number of
2000 1999 lessons Percentage
--------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C>
North America 574.8 567.2 7.6 1.4%
Asia 634.4 500.3 134.1 26.8% (1)
Latin America 687.6 656.5 31.1 4.7% (2)
Europe 1,345.5 1,288.3 57.2 4.4% (3)
--------------- --------------- -------------- -----------------
Total lesson volume 3,242.3 3,012.3 230.0 7.6%
=============== =============== ============== =================
</TABLE>
------------------------
(1) Asia's volume has increased due primarily to the apparent positive effect
of special sales campaigns in Japan and expansion in new markets.
(2) Lesson volume increased in Latin America primarily due to strong sales in
Brazil and Mexico, partially offset by reduced volume in Venezuela as a
result of economic uncertainty.
(3) Europe's volume improvement is primarily due to Germany and Israel
For the first half of 2000, ARPL was $41.06, as compared to $40.42 in the
comparable prior year period. The increase reflected the favorable impact of
product mix and price increases ($1.70), partly offset by the effects of
unfavorable exchange rate fluctuations ($1.06). ARPL ranged from a high of
approximately $65.80 in Japan to a low of $15.50 in Hungary, reflecting effects
of foreign exchange rates and differences in the economic value of the services
provided or sold.
ELS's first half revenues increased 7.6% from the comparable prior year period.
This appears to be primarily attributable to the launch of a 20 hour
Semi-Intensive Program, as well as the brand merger of ELS Language Centers and
Berlitz on Campus Centers and the restructuring of operations resulting in the
closing of five centers.
Publishing revenues declined 16.9% from the comparable prior year period, due
primarily to decreased licensing royalty revenue.
Berlitz GlobalNET sales for the six months ended June 3, 2000, were $48.9
million, up 13.7% from the comparable period in 1999, excluding the effect of
unfavorable exchange rate fluctuations of $2.5 million. The following table
compares Berlitz GlobalNET revenues by region for the first six months:
21
<PAGE>
<TABLE>
<CAPTION>
BERLITZ GLOBALNET REVENUE: (Dollars in millions)
--------------------------
--------------------------------------------------------------------------
June 30, Growth (Decline) from Prior Year
-------------------------- --------------------------------------------
2000 1999 Exchange Operations Total
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
America $ 22.7 $ 20.4 $ - $ 2.3 $ 2.3 (1)
Asia 3.5 2.4 0.2 0.9 1.1
Europe 26.3 24.5 (2.9) 4.7 1.8 (2)
Intercompany eliminations (3.6) (2.1) 0.2 (1.7) (1.5)
----------- ----------- ----------- ------------- ------------
Total revenue $ 48.9 $ 45.2 $ (2.5) $ 6.2 $ 3.7
=========== =========== =========== ============= ============
</TABLE>
------------------------
(1) The sales increase in the US was due primarily to the very active
information technology segment and an increased focus on new customer
acquisition as well as activity from acquisitions in the Americas completed
during the second half of 1999.
(2) Growth in Europe was due primarily to an acquisition completed in the last
quarter of 1999 and strong volume in France and Ireland, offset by a strong
US dollar against European currencies, primarily the Irish punt.
The Company's total cost of services and products sold as a percentage of sales
was 60.1% in the first half of 2000, compared with 59.8% in the comparable prior
year period. The higher percentage was mainly attributable to higher teacher
salaries. Selling, general and administrative expenses as a percentage of sales
were 33.0% in the first half of 2000, compared with 34.5% in the comparable
prior year period. This improvement reflects an increase in business volume over
the prior year as well as reduced costs from the closure of five ELS centers.
EBITA for the 2000 first half was $16.0 million, or 6.9% of sales, compared to
$12.2 million, or 5.7% of sales, in the comparable period in 1999. The following
table displays the comparative first quarter EBITA by business segment:
22
<PAGE>
<TABLE>
<CAPTION>
BUSINESS SEGMENT EBITA: (Dollars in millions)
-----------------------
--------------------------------------------------------------------------
June 30, Growth (Decline) from Prior Year
------------------------ ----------------------------------------------
2000 1999 Exchange Operations Total
---------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Language Services:
Instruction $ 31.0 $ 26.8 $ (0.8)(1) $ 5.0 (2) $ 4.2
ELS 0.4 (0.3) - 0.7 0.7 (3)
Publishing 0.1 0.6 - (0.5) (0.5) (4)
Franchising 0.2 0.1 - 0.2 0.2
Cross Cultural 0.4 0.2 - 0.1 0.1
Overhead and other (11.5) (10.6) 0.4 (1.3) (0.9)
---------- ---------- ------------ ------------- ------------
Total Language Services 20.6 16.8 (0.4) 4.2 3.8
Berlitz GlobalNET 2.5 2.2 (0.1) 0.4 0.3 (5)
Corporate overhead and other (7.1) (6.8) - (0.3) (0.3) (6)
---------- ---------- ------------ ------------- ------------
Total $ 16.0 $ 12.2 $ (0.5) $ 4.3 $ 3.8
========== ========== ============ ============= ============
</TABLE>
EBITA MARGIN %: June 30,
---------------
------------------------------
2000 1999
------------ --------------
Language Services:
Instruction (7) 20.9% 19.6%
ELS (8) 1.5% (1.1)%
Publishing 1.7% 7.8%
Franchising 28.0% 9.1%
Cross Cultural 24.9% 19.3%
Total Language Services 11.3% 9.9%
Berlitz GlobalNET (9) 5.2% 5.1%
Total 6.9% 5.7%
------------------------
(1) The net unfavorable exchange impact in Instruction is primarily
attributable to European countries, in particular Germany, partially offset
by the strength of the Japanese yen.
(2) The increase in Instruction operating EBITA is due mainly to volume
increases in Japan and Germany.
(3) The increase in ELS operating EBITA is due in part to improved volume and
decreased costs due primarily to the closure of five centers.
(4) Publishing EBITA decreased primarily due to a lack of licensing revenues.
(5) The increase in EBITA for Berlitz GlobalNET is due in part to acquisitions
completed in the second half of 1999 and improved margins, particularly in
Japan.
(6) Corporate expenses rose due to increases in salary related operating costs.
(7) The increase in Instruction's EBITA margin is primarily due to volume
increases.
(8) See ELS discussion in footnote 3.
(9) See Berlitz GlobalNET discussion in footnote 5.
Interest expense on long-term debt and convertible debentures for the six months
ended June 30, 2000 decreased $0.3 million from the comparable prior year
period, due principally to a reduced effective interest rate. "Other expense
(income), net" for the six months ended June 30, 2000 was $0.3 million of
expense, compared with $0.9 million of income in the comparable prior year
period, due to lower foreign exchange gains in the first six months of 2000.
23
<PAGE>
The Company recorded income tax expenses of $3.8 million in the first half of
2000, compared with $2.0 million in the comparable period in 1999. The effective
tax rates in both 2000 and 1999 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 six months
ended June 30, 1999, the Company 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.
On December 3, 1999, the Securities and Exchange Commission ("SEC") issued its
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which provided its views on applying generally accepted accounting
principles to selected revenue recognition issues. The Company adopted the
provisions of SAB 101 effective January 1, 1999, and, as a result, changed its
method of accounting for deferred revenues on lessons paid for but not expected
to be taken. Through December 1998, such amounts had been recognized in income
based on historical experience by country; refunds subsequently issued were not
material. Beginning in 1999, deferred revenues on lessons paid for but not
expected to be taken were recognized in income when the obligation to issue a
refund had constructively expired. The cumulative effect of the accounting
change resulted in a charge to 1999 earnings of $5.6 million (net of income tax
benefit of $2.9 million and minority interest expense of $0.2 million). The SEC
is currently developing additional guidance with respect to SAB 101. Until such
time as the SEC staff issues such guidance, it is unclear what, if any, impact
such guidance will have on the Company's current revenue recognition accounting
policies.
LIQUIDITY AND CAPITAL RESOURCES
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 provided by operating activities was $16.9 million for the six months
ended June 30, 2000, compared with $6.4 million in the comparable prior year
period. This increase of $10.5 million primarily resulted from: (i) a decrease
in accounts receivable; (ii) an increased EBITA; and (iii) termination of the
Company's previous interest rate swap agreement.
Net cash used in investing activities totaled $9.5 million for the six months
ended June 30, 2000, down $9.4 million from the comparable prior year period.
This decrease primarily reflects less expenditures on business acquisitions over
the comparable prior year period.
Net cash used in financing activities for the six months ended June 30, 2000,
was $2.3 million,
24
<PAGE>
compared with net cash provided of $17.0 million in the comparable prior year
period. For 2000, the activity reflected the repayment of an amount outstanding
on the $25,000 revolving credit facility entered into on March 31, 1999 (the
"Revolving Facility", discussed below), partially offset by proceeds from the
sale of two currency swap agreements, whereas the 1999 activity primarily
reflected the excess of the net proceeds from the issuance of convertible
debentures and notes payable to an affiliate over the related extinguished debt.
Other items impacting the Company's liquidity and capital resources were as
follows:
o $1.0 million of "Accrued expenses and other current liabilities" at June
30, 2000, related to the ELS acquisition.
o On July 1, 1999, the Company entered into a license agreement with
Children's Television Workshop ("CTW"). CTW will create and produce, at its
expense, a television series, entitled "Sesame English", which will
initially consist of fifty-two 15-minute episodes and which will be
complemented by instruction curricula and materials developed by the
Company. The Company was also granted certain rights by CTW, including the
exclusive right to use certain Sesame Street and Sesame English names,
logos and characters in connection with language instructional products,
services and schools.
The license agreement with CTW, covers an initial term of five years, and
provides for payments by the Company to CTW of $4 million at inception and
an aggregate of $6 million in minimum guaranteed royalties paid in
installments over the initial term of the agreement. The $4 million paid at
inception may be applied against future royalties due in excess of the
minimum guarantee. Furthermore, in the event that the Company enters into
any sublicenses or other third-party arrangements with a sublicensee for
language instruction services in Japan, the minimum guaranteed royalties
will be reduced dollar for dollar, up to a maximum of $2 million from CTW's
share of payments from such Japanese sublicensees. If certain conditions
are met, the Company may extend the license agreement for another five
years in exchange for annual minimum guaranteed royalties equal to the
greater of $2 million, or an amount equal to 80% of the royalties earned by
CTW under the license agreement during the fifth year of the initial term.
o In June 1999, the Company acquired certain assets, operating subsidiaries
and key personnel of Language Management International, Inc., a
translations services company. The purchase price was $8.0 million, plus a
contingent payment based on gross revenues for the twelve months ending
June 30, 2000. As the revenue target was not achieved, no contingent
payment was made. At June 30, 2000, in connection with this acquisition,
the Company has recorded $10.5 million of goodwill related to this
purchase.
o On June 8, 1999, the Company's shareholders approved the Company's 1999
Long-Term Executive Incentive Compensation Plan (the "1999 LTIP"). 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 to be paid in 2002 are currently expected to range from a
minimum of $0.7 million to a maximum of $5.0 million.
25
<PAGE>
o On March 31, 1999, the Company entered into the $25 million 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 0.125% to 0.20% will be charged on the available but unused
amounts under the Revolving Facility, depending on a specified leverage
ratio. There were no outstanding borrowings under the Revolving Facility at
June 30, 2000.
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.
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 and the British pound. Credit loss from
counterparty nonperformance is not anticipated. The estimated fair value of
these swap agreements at June 30, 2000, representing the amount that could
be settled based on estimates obtained from a dealer, was a net liability
of approximately $2.3 million. Two previously held currency coupon swap
agreements denominated in the Swiss franc and the German mark were
terminated in the second quarter of 2000. Proceeds on termination were $1.7
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: (i) $100 million aggregate principal amount (the "Apollo
Debentures") to two affiliates of Apollo Management IV, L.P. ("Apollo"), a
private investment firm; and (ii) $55 million aggregate principal amount
(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
26
<PAGE>
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, and for general corporate purposes. The Company
incurred approximately $2.8 million in deferred finance costs associated
with the issuance of the Convertible Debentures and BHI Note.
At June 30, 2000, the Company's liquid assets of $38.8 million consisted of cash
and temporary investments. The Company does not currently have any material
commitments for capital expenditures and 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.
INFLATION
Historically, inflation has not had a material effect on the Company's overall
business. Management believes this is due to the fact that the Company's
business is a service business, which is not capital intensive. The Company has
historically adjusted prices to compensate for inflation.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, including information
appearing under the caption "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: (i) the Company's success
in selling new franchises; (ii) economic conditions in the regions of the world
in which the Company operates; (iii) 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; (iv) demand for the Company's products and services;
(v) the impact of competition; (vi) the effect of changing economic and
political conditions; (vii) the level of success and timing in implementing
corporate strategies and adopting new technologies; and (viii) 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 or achievements.
27
<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, 1999, the
percentage of total revenues denominated in currencies other than U.S. dollars
averaged 65%, 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 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 June 30, 2000, were as follows:
<TABLE>
<CAPTION>
INTEREST RECEIPTS FROM
INTEREST PAYMENT TO FINANCIAL INSTITUTION FINANCIAL INSTITUTION
-------------------------------------------- -------------------------
NOTIONAL FAIR VALUE
EFFECTIVE INTEREST AMOUNT INTEREST AT 6/30/00
---------- --------- ------- --------- ----------
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% $ (2,349)
1/4/99 12/31/02 British Pound 4,841 6.56% $ 7,974 6.27% $ 32
</TABLE>
The fair values of the currency swap agreements represent the amounts that could
be settled based on estimates obtained from a dealer. Future interest rates and
exchange rates will affect the value of these swaps.
On March 11, 1999 (the "Issue Date"), 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 Debentures and Benesse Debentures each independently provide for
optional redemption by the Company, in whole but not in part, anytime three
years and two months following the Issue Date. 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 must pay a redemption premium, expressed as a percentage of
outstanding principal, as follows: (i) 4% for redemptions occurring in the
fourth year after issue; (ii) 2% for redemptions occurring in the fifth
year after issue; and (iii) 0% for redemptions occurring thereafter. All
such redemptions are subject to the holders' rights to first convert their
Convertible Debentures 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, seven-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
28
<PAGE>
institution, of fixed interest rates that accurately price the Fixed Rate
Debentures at par under specified circumstances at the time of the
exchange, Apollo and BHI shall irrevocably decide whether to proceed with
their exchanges. If only Apollo proceeds with such an exchange, the
Company, no later than 150 days from the third anniversary of the Issue
Date, must either: (i) redeem all of the Apollo Debentures at par; or (ii)
deliver the Fixed Rate Debentures to Apollo. If both Apollo and BHI proceed
with their exchanges, the Company, within the same 150 day period, must
either: (i) redeem both the Apollo and Benesse Debentures; or (ii) 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: (i) the applicable U.S. treasury rate + 5% (not to exceed 13%) if only
Apollo receives Fixed Rate Debentures; or (ii) the applicable U.S. treasury
rate + 7% (not to exceed 14%) if both Apollo and BHI receive 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: (i) one half of the
per annum interest rate for redemptions occurring in the fourth year after
issue; (ii) one quarter of the per annum interest rate for redemptions
occurring in the fifth year after issue; and (iii) no premium for
redemptions occurring thereafter.
o Prior to the third anniversary of the Issue Date, if BHI 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 BHI sells less than 80% of its
shares, or if BHI 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 value of the Convertible Debentures was last estimated at December
31, 1999. As of that date, the Convertible Debentures had an estimated fair
value of $145.2 million. The estimate was based on current interest rates
and the Company's stock price volatility. The Company does not believe that
this estimate has changed materially at June 30, 2000.
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 intention 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 major financial institutions only;
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
29
<PAGE>
d) the Company provides status updates regarding its derivatives, including
market value updates, to its Board of Directors on a regular basis.
30
<PAGE>
BERLITZ INTERNATIONAL, INC.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on June 6, 2000. At that
meeting, the following people were elected to serve as directors: James Kahl,
Edward G. Nelson, Robert L. Purdum and Antony P. Ressler. Hiromasa Yokoi, who
was named in the Company's Proxy Statement as a nominee for re-election as a
Director, declined his nomination prior to the election. Each of the remaining
four nominees received 8,697,781 votes in favor of their election and 38,532
votes against their election. The following individuals continue to serve as
directors: Soichiro Fukutake, Laurence M. Berg, Takuro Isoda and James Lewis.
At the meeting, the shareholders also ratified the selection of Deloitte &
Touche LLP as independent public accountants for the Company for the fiscal year
2000 by a vote of 8,735,765 for ratification to 100 shares against, with 448
shares abstaining.
ITEM 5. OTHER MATTERS
On July 21, 2000, the Company announced that Henry D. James, who had previously
announced his retirement, would remain as Chief Financial Officer, that Robert
Minsky would not succeed Mr. James, as had been previously announced, and would
leave the Company and its Board of Directors, effective July 21, 2000.
The Company also announced on July 21 that as part of an effort to streamline
its language services operation, it was eliminating the position of Chief
Operating Officer for language services and, accordingly, that Makoto Obara
would leave the Company and its Board of Directors, effective July 21, 2000.
At the meeting of the Board of Directors held on June 6, 2000, the Board voted
to reduce the number of Directors from 12 to 11. The resignations of Mr. Obara
and Mr. Minsky, and Mr. Yokoi's withdrawal as a nominee for election have
created three vacancies. At the next regular meeting of the Board of Directors,
scheduled to occur on September 7, 2000, the Board will consider nominations to
fill the existing vacancies. If elected, the new Directors will serve until the
next annual meeting of the shareholders of the Company, and until any successors
are elected and qualified.
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 six month period ended June
30, 2000.
31
<PAGE>
(B) REPORTS ON FORM 8-K
A report on Form 8-K, dated June 6, 2000, was filed during the quarter ended
June 30, 2000, to announce the election of new directors at the Company's annual
meeting of shareholders.
SIGNATURES
Pursuant to the requirements of the Exchange Act the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BERLITZ INTERNATIONAL, INC.
---------------------------
(Registrant)
Date: August 14, 2000 By: /s/ HENRY D. JAMES
----------------------------
Henry D. James
Executive Vice President and
Chief Financial Officer
