UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 10, 2000, were 9,546,536.
Page 1 of 23
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 1999
------------ -------------------
<S> <C> <C>
Sales of services and products $ 128,660 $ 119,357
------------ ------------------
Operating costs and expenses:
Cost of services and products sold 76,850 71,449
Selling, general and administrative 40,245 37,588
Amortization of publishing rights, excess of cost
over net assets acquired, and other intangibles 4,588 4,635
------------ -----------------
Operating profit 6,977 5,685
Interest expense on long-term debt 7 66
Interest expense on convertible debentures
with related parties 1,996 1,995
Interest expense on notes to affiliates 658 656
Other (income) expense, net (672) 472
------------ ------------------
Income before income taxes, minority interest in
earnings of subsidiary, and
extraordinary item 4,988 2,496
Income tax expense 3,865 3,533
Minority interest in earnings
of subsidiaries 86 57
------------ ------------------
Income (loss) before extraordinary item 1,037 (1,094)
Extraordinary loss from extinguishment of debt - (9)
------------ ------------------
Net income (loss) $ 1,037 $ (1,103)
============ ==================
Income (loss) per share - basic and diluted:
Income (loss) before extraordinary item $ 0.11 $ (0.12)
Extraordinary loss - (0.00)
------------ ------------------
Income (loss) per share $ 0.11 $(0.12)
============ ==================
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 NINE MONTHS ENDED SEPTEMBER 30
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 1999
------------------ ------------------
<S> <C> <C>
Sales of services and products $ 360,667 $ 334,998
------------------ ------------------
Operating costs and expenses:
Cost of services and products sold 216,307 200,313
Selling, general and administrative 116,768 112,100
Amortization of publishing rights, excess of cost
over net assets acquired, and other intangibles 13,767 13,357
------------------ -----------------
Operating profit 13,825 9,228
Interest expense on long-term debt 40 1,939
Interest expense on convertible debentures
with related parties 5,985 4,430
Interest expense on notes to affiliates 1,954 1,892
Other income, net (373) (413)
------------------ -----------------
Income before income taxes, minority interest in
earnings (loss) of subsidiary, and
extraordinary item 6,219 1,380
Income tax expense 7,638 5,506
Minority interest in earnings (loss)
of subsidiaries 328 (122)
------------------ -----------------
Loss before extraordinary item and cumulative
effect of accounting change (1,747) (4,004)
Extraordinary loss from extinguishment of debt,
net of income tax benefit of $44 - (2,153)
Cumulative effect of accounting change, net of
income tax benefit of $2,900
and minority interest expense of $189 - (5,605)
------------------ -----------------
Net loss $ (1,747) $ (11,762)
================== =================
Loss per share - basic and diluted:
Loss before extraordinary item and cumulative
effect of accounting change $ (0.18) $ (0.42)
Extraordinary loss - (0.23)
Cumulative effect of accounting change - (0.58)
------------------ -----------------
Loss per share $ (0.18) $ (1.23)
================== =================
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)
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and temporary investments $ 39,397 $ 34,426
Accounts receivable, less allowance for
doubtful accounts of $4,067 and $3,102 51,190 54,185
Unbilled receivables 14,398 7,514
Inventories, net 10,134 10,405
Prepaid expenses and other current assets 8,984 8,628
--------------- ---------------
TOTAL CURRENT ASSETS 124,103 115,158
Property and equipment, net of accumulated
depreciation of $27,711 and $26,100 49,264 47,749
Publishing rights, net of accumulated
amortization of $6,742 and $6,083 15,243 15,902
Excess of cost over net assets acquired and other intangibles,
net of accumulated amortization of $104,260 and $92,936 461,978 480,967
Other assets 38,261 37,244
--------------- ---------------
TOTAL ASSETS $ 688,849 $ 697,020
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,184 $ 5,118
Accounts payable 11,004 12,026
Deferred revenues 61,211 57,266
Payrolls and commissions 18,627 16,458
Income taxes payable 3,669 971
Due to affiliates 658 -
Interest payable on convertible debentures - 1,938
Accrued expenses and other current liabilities 21,311 19,495
--------------- ---------------
TOTAL CURRENT LIABILITIES 117,664 113,272
Long-term debt 1,472 1,887
Convertible debentures with related parties 155,000 155,000
Notes payable to affiliates 50,000 50,000
Other liabilities 26,563 28,399
Minority interest 10,130 9,775
--------------- ---------------
TOTAL LIABILITIES 360,829 358,333
--------------- ---------------
SHAREHOLDERS' EQUITY:
Common stock 1,005 1,003
Additional paid-in capital 372,791 372,518
Accumulated deficit (10,257) (8,510)
Accumulated other comprehensive loss:
Cumulative translation adjustment (29,158) (19,963)
Treasury stock at cost (6,361) (6,361)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 328,020 338,687
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 688,849 $ 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 SEPTEMBER 30,
--------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Net income (loss) $ 1,037 $ (1,103)
Other comprehensive (loss) income, net of tax:
Foreign currency items, including translation
adjustments, and the effects of certain
hedges and intercompany transactions (4,351) 4,574
--------------- --------------
Comprehensive (loss) income $ (3,314) $ 3,471
=============== ==============
</TABLE>
The tax expense allocated to each component of other comprehensive loss is as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Foreign currency items $ 234 $ 433
=============== ==============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Net loss $ (1,747) $ (11,762)
Other comprehensive loss, net of tax:
Foreign currency items, including translation
adjustments, and the effects of certain
hedges and intercompany transactions (9,195) (3,457)
--------------- --------------
Comprehensive loss $ (10,942) $ (15,219)
=============== ==============
The tax expense allocated to each component of
other comprehensive loss is as follows:
Foreign currency items $ 1,019 $ 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 NINE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,747) $ (11,762)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 22,820 21,688
Cumulative effect of accounting change, net - 5,605
Extraordinary item, net - 1,072
Other (primarily provision for bad debts and foreign exchange
(gains) losses) 2,302 670
Changes in operating assets and liabilities 1,294 (3,733)
--------------- ----------------
Net cash provided by operating activities 24,669 13,540
--------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14,142) (15,051)
Acquisition of businesses (1,638) (11,259)
Other (33) -
--------------- --------------
Net cash used in investing activities (15,813) (26,310)
--------------- ---------------
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 -
(Repayments) borrowings under revolving credit facility (4,000) 4,000
Proceeds from long term debt - 849
Repayment of long-term debt - (147,113)
Repayment of notes to affiliates - (42,366)
Payment of deferred finance costs - (2,782)
--------------- ----------------
Net cash (used in) provided by financing activities (2,265) 17,588
--------------- -----------------
Effect of exchange rate changes on cash and
temporary investments (1,620) (841)
--------------- ----------------
Net increase in cash and temporary investments 4,971 3,977
Cash and temporary investments, beginning of period 34,426 25,327
--------------- ---------------
Cash and temporary investments, end of period $ 39,397 $ 29,304
=============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 9,100 $ 8,076
=============== ===============
Income taxes $ 6,176 $ 6,451
=============== ================
Cash refunds of income taxes $ 169 $ 669
=============== ================
</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. OTHER (INCOME) EXPENSE, NET
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Interest income on temporary investments $ (364) $ (173)
Foreign exchange (gains) losses, net (420) 251
Other non-operating taxes 91 81
Loss on disposal of fixed assets 65 239
Other investment (income) expense, net (41) 39
Other (income) expense, net (3) 35
--------------- ------------------
Total other (income) expense, net $ (672) $ 472
=============== ==================
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Interest income on temporary investments $ (771) $ (430)
Foreign exchange gains, net (138) (951)
Other non-operating taxes 178 312
Loss on disposal of fixed assets 361 361
Other investment (income) expense, net (96) 53
Other expense, net 93 242
--------------- ------------------
Total other income, net $ (373) $ (413)
=============== ===================
</TABLE>
3. OPERATING SEGMENTS
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
7
<PAGE>
the Company's consolidated totals:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES:
Revenues from external customers:
Language Services:
<S> <C> <C> <C> <C>
Instruction $ 74,696 $ 68,694 $ 222,822 $ 205,054
ELS 23,191 20,072 49,993 44,948
Publishing 2,533 3,033 8,517 10,247
Franchising 479 306 1,243 1,015
Cross Cultural 789 725 2,251 1,957
Other (1) 1 1 -
------------- ------------- ------------- -------------
Total Language Services 101,687 92,831 284,827 263,221
Berlitz GlobalNET 26,973 26,526 75,840 71,777
------------- ------------- ------------- -------------
Total external revenues 128,660 119,357 360,667 334,998
------------- ------------- ------------- -------------
Intersegment revenues:
Language Services:
Instruction - - 1 -
Publishing 1 - 14 -
Franchising 102 35 209 274
------------- ------------- ------------- -------------
Total Language Services 103 35 224 274
Berlitz GlobalNET 86 102 91 146
------------- ------------- ------------- -------------
Total intersegment revenues 189 137 315 420
------------- ------------- ------------- -------------
Total revenues for reportable segments 128,849 119,494 360,982 335,418
Elimination of intersegment revenues (189) (137) (315) (420)
------------- ------------- ------------- -------------
Total consolidated revenues $ 128,660 $ 119,357 $ 360,667 $ 334,998
============= ============= ============= =============
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
INCOME BEFORE INCOME TAXES, MINORITY INTEREST, AND
EXTRAORDINARY ITEM:
Segment EBITA:
Language Services:
<S> <C> <C> <C> <C>
Instruction $ 15,535 $ 12,797 $ 46,510 $ 39,551
ELS 3,145 2,946 3,557 2,682
Publishing (217) 35 (112) 598
Franchising 242 124 486 210
Cross Cultural 274 165 637 403
Overhead expenses and other (5,599) (4,837) (17,073) (15, 396)
------------- ------------- ------------- -------------
Total Language Services 13,380 11,230 34,005 28,048
Berlitz GlobalNET 2,305 2,192 4,837 4,481
Corporate overhead and other (4,120) (3,102) (11,250) (9,944)
------------- ------------- ------------- -------------
Total EBITA 11,565 10,320 27,592 22,585
------------- ------------- ------------- -------------
Amortization of publishing rights, excess of cost over net assets acquired,
and other intangibles:
Language Services:
Instruction 2,543 2,567 7,661 7,638
ELS 1,363 1,356 4,091 4,051
Publishing 99 100 299 299
Cross Cultural 3 3 8 8
------------- ------------- ------------- -------------
Total Language Services 4,008 4,026 12,059 11,996
Berlitz GlobalNET 580 609 1,708 1,361
------------- ------------- ------------- -------------
Total intangible amortization 4,588 4,635 13,767 13,357
------------- ------------- ------------- -------------
Total operating profit 6,977 5,685 13,825 9,228
Interest expense on long-term debt 7 66 40 1,939
Interest expense on Convertible Debentures 1,996 1,995 5,985 4,430
Interest expense to affiliates 658 656 1,954 1,892
Other (income) expense, net (672) 472 (373) (413)
------------- ------------- ------------- -------------
Total consolidated income before taxes, minority
interest, and extraordinary item $ 4,988 $ 2,496 $ 6,219 $ 1,380
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
ASSETS: SEPTEMBER DECEMBER 31,
30,
2000 1999
--------------- --------------
<S> <C> <C>
Language Services:
Instruction $ 427,192 $ 433,526
ELS 105,218 106,210
Publishing 22,215 23,122
Franchising 8,596 8,031
Cross Cultural 394 440
Other 713 1,069
--------------- --------------
Total Language Services 564,328 572,398
Berlitz GlobalNET 104,800 102,684
Corporate 26,628 27,365
Eliminations of intersegment receivables (6,907) (5,427)
--------------- --------------
Total consolidated assets $ 688,849 $ 697,020
=============== ==============
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
DEPRECIATION:
<S> <C> <C> <C> <C>
Language Services:
Instruction $ 1,319 $ 1,300 $ 3,827 $ 3,752
ELS 246 251 704 741
Publishing 493 469 1,543 1,310
Franchising 4 4 12 14
Overhead and other 137 121 406 358
------------- -------------- ------------- --------------
Total Language Services 2,199 2,145 6,492 6,175
Berlitz GlobalNET 577 612 1,652 1,653
Corporate 346 210 909 503
------------- -------------- ------------- --------------
Total consolidated depreciation $ 3,122 $ 2,967 $ 9,053 $ 8,331
============= ============== ============= ==============
CAPITAL EXPENDITURES:
Language Services:
Instruction $ 3,570 $ 3,293 $ 9,893 $ 10,344
ELS 286 96 767 673
Publishing 226 521 818 1,891
Franchising - 2 - 32
Overhead and other - - - -
------------- -------------- ------------- --------------
Total Language Services 4,082 3,912 11,478 12,940
Berlitz GlobalNET 393 235 2,203 901
Corporate 173 339 461 1,210
------------- -------------- ------------- --------------
Total consolidated capital
expenditures $ 4,648 $ 4,486 $ 14,142 $ 15,051
============= ============== ============= ==============
</TABLE>
The following tables present certain information about the geographic areas in
which the Company operates:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES FROM EXTERNAL CUSTOMERS:
<S> <C> <C> <C> <C>
United States $ 47,211 $ 42,678 $ 118,783 $ 111,408
Japan 22,507 19,401 65,094 51,773
Germany 9,948 10,116 30,322 31,471
Ireland 6,968 7,266 18,143 17,798
France 4,624 4,863 14,563 15,606
Brazil 4,957 3,814 14,199 10,679
Other foreign countries 32,445 31,219 99,563 96,263
------------- -------------- ------------- --------------
Total $ 128,660 $ 119,357 $ 360,667 $ 334,998
============= ============== ============= ==============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
---------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
OPERATING PROFIT:
EBITA :
<S> <C> <C> <C> <C>
United States $ 6,229 $ 5,417 $ 10,597 $ 11,019
Japan 3,047 3,026 9,182 5,005
Germany 1,351 786 3,464 3,088
Ireland 705 753 1,137 1,030
France 402 325 1,366 1,373
Brazil 974 465 3,072 1,369
Other foreign countries 4,155 3,679 12,809 12,939
Corporate overhead and other (5,298) (4,131) (14,035) (13,238)
------------- -------------- ------------- --------------
Total EBITA 11,565 10,320 27,592 22,585
------------- -------------- ------------- --------------
Amortization of publishing rights,
Excess of cost over net assets
Acquired, and other intangibles:
United States 3,781 3,895 11,496 11,182
Japan 381 357 1,148 1,017
Germany 57 66 175 195
Ireland 10 12 31 36
France 59 70 184 216
Brazil 47 16 79 48
Other foreign countries 253 219 654 663
------------- -------------- ------------- --------------
Total intangible amortization 4,588 4,635 13,767 13,357
------------- -------------- ------------- --------------
Intercompany royalties.:
United States (5,155) (5,031) (15,450) (12,614)
Japan 2,039 2,469 5,931 3,992
Germany 354 369 1,125 1,184
Ireland 346 363 904 888
France 245 243 816 775
Other foreign countries 2,171 1,587 6,674 5775
------------- -------------- ------------- --------------
Total intercompany royalties - - - -
------------- -------------- ------------- --------------
Total operating profit $ 6,977 $ 5,685 $ 13,825 $ 9,228
============= ============== ============= ==============
</TABLE>
<TABLE>
<CAPTION>
LONG LIVED ASSETS: PROPERTY &
EQUIPMENT OTHER INTANGIBLE
NET ASSETS* ASSETS TOTAL
------------- -------------- ------------- --------------
SEPTEMBER 30, 2000:
<S> <C> <C> <C> <C>
United States $ 9,564 $ 7,714 $ 381,264 $ 398,542
Japan 11,388 149 48,170 59,707
Germany 3,445 - 6,899 10,344
France 1,768 - 7,519 9,287
Brazil 4,065 - 3,557 7,622
Ireland 1,435 - 1,300 2,735
Other foreign countries 13,409 148 27,056 40,613
Corporate 4,190 14,794 1,456 20,440
------------- -------------- ------------- --------------
Total $ 49,264 $ 22,805 $ 477,221 $ 549,290
============= ============== ============= ==============
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
Corporate 4,579 13,910 1,456 19,945
------------- -------------- ------------- --------------
Total $ 47,749 $ 22,393 $ 496,869 $ 567,011
============= ============== ============= ==============
</TABLE>
*Excludes financial instruments and deferred tax assets.
11
<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
unaudited 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."
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000, VS. SEPTEMBER 30,
1999
The Company's total sales for the quarter ended September 30, 2000, were $128.7
million, a 7.8% increase from sales of $119.3 million in the prior year period.
Excluding the effects of unfavorable exchange rate fluctuations of $4.3 million,
sales increased from the same period in the prior year by 11.5%. The following
table compares revenues by business segment for the third quarter:
<TABLE>
<CAPTION>
BUSINESS SEGMENT REVENUES:
-------------------------- (Dollars in millions)
------------------------------------------------------------------------------
September 30, Growth (Decline) from Prior Year
--------------------------- -----------------------------------------------
2000 1999 Exchange Operations Total
(1)
----------- ----------- ------------ -------------- ------------
Language Services:
<S> <C> <C> <C> <C> <C>
Instruction $ 74.7 $ 68.7 $ (2.6) $ 8.6 $ 6.0
ELS 23.2 20.1 - 3.1 3.1
Publishing 2.5 3.0 - (0.5) (0.5)
Franchising 0.5 0.3 - 0.2 0.2
Cross Cultural 0.8 0.7 - 0.1 0.1
Intercompany eliminations - - - - -
----------- ----------- ------------ -------------- ------------
Total Language Services 101.7 92.8 (2.6) 11.5 8.9
Berlitz GlobalNET 27.0 26.5 (1.7) 2.2 0.5
----------- ----------- ------------ -------------- ------------
Total $ 128.7 $ 119.3 $ (4.3) (2) $ 13.7 $ 9.4
=========== =========== ============ ============== ============
</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 ($4.3 million) primarily resulted
from a strengthened US dollar against the European currency ("Euro"),
partially offset by a weaker U.S. 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 8.7% from
the prior year period, reflecting improvements in all geographic regions.
Geographically, Instruction revenue and lesson volume were dispersed as follows:
12
<PAGE>
<TABLE>
<CAPTION>
INSTRUCTION REVENUE:
-------------------- (Dollars in millions)
--------------------------------------------------------------------------
September 30, Growth (Decline) from Prior Year
-------------------------- --------------------------------------------
2000 1999 Exchange Operations Total
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
North America $ 13.7 $ 12.4 $ - $ 1.3 $ 1.3 (1)
Asia 23.2 19.3 1.0 2.9 3.9 (2)
Latin America 13.9 12.5 (0.3) 1.7 1.4 (3)
Europe 23.9 24.5 (3.3) 2.7 (0.6) (4)
----------- ----------- ----------- ------------- ------------
Total revenue $ 74.7 $ 68.7 $ (2.6) $ 8.6 $ 6.0
=========== =========== =========== ============= ============
</TABLE>
----------
(1) Primarily reflects the effect of ARPL and volume increases in the U.S. due
in part to the early introduction of price increases and the positive
effect of relaunched programs.
(2) Primarily reflects the effect of volume increases in Japan and a weaker
U.S. dollar against the Japanese yen.
(3) Primarily reflects the effect of ARPL and volume increases in Brazil and
Mexico and an ARPL increase in Colombia.
(4) Primarily reflects the effect of ARPL and volume increases in Germany and a
strengthened U.S. dollar against the Euro.
<TABLE>
<CAPTION>
INSTRUCTION LESSON VOLUME:
-------------------------- (Lessons in thousands)
--------------------------------------------------------------------------
September 30, Growth from Prior Year
---------------------------------- ------------------------------------
Number of
2000 1999 lessons Percentage
--------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
North America 294.0 273.2 20.8 7.6% (1)
Asia 363.4 291.0 72.5 24.9% (2)
Latin America 382.0 359.2 22.7 6.3% (3)
Europe 545.3 534.8 10.5 2.0%
--------------- --------------- -------------- -----------------
Total lesson volume 1,584.7 1,458.2 126.5 8.7%
=============== =============== ============== =================
</TABLE>
-------------------------------------
(1) North America volume increased due in part to the positive effect of
relaunched programs.
(2) Asia volume increased due in part to the positive effect of special sales
campaigns in Japan and expansion into new markets.
(3) Latin America volume increased primarily due to strong sales in Brazil and
Mexico, partially offset by reduced volume in Venezuela as a result of
economic uncertainty.
For the third quarter of 2000, ARPL of $41.15 remained flat as compared with
$41.14 in the comparable prior year period. This reflects the favorable impact
of product mix and price increases ($1.36), offset by the effects of unfavorable
exchange rate fluctuations ($1.35). ARPL ranged from a high of approximately
$63.47 in Japan to a low of $14.91 in Thailand, reflecting effects of foreign
exchange rates and differences in the economic value of the services provided or
sold.
ELS third quarter revenues increased 15.5% from the prior year period, primarily
attributable to the launch of a new program, the brand merger of ELS and Berlitz
on Campus ("BOC") and the restructuring of operations resulting in the closing
of seven centers (five in 1999 and two in the third quarter of 2000).
13
<PAGE>
Publishing revenues declined 16.5% over the comparable prior year period, due
primarily to decreased licensing revenue.
Berlitz GlobalNET sales for the quarter ended September 30, 2000, were $27.0
million, up 8.3% from the comparable period in 1999, excluding the effect of
unfavorable exchange rate fluctuations of $1.7 million. The following table
compares Berlitz GlobalNET revenues by region for the third quarter:
<TABLE>
<CAPTION>
BERLITZ GLOBALNET REVENUE:
-------------------------- (Dollars in millions)
--------------------------------------------------------------------------
September 30, Growth (Decline) from Prior Year
-------------------------- --------------------------------------------
2000 1999 Exchange Operations Total
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Americas $ 12.4 $ 11.8 $ - $ 0.6 $ 0.6
Asia 2.0 1.8 0.1 0.1 0.2
Europe 15.0 14.5 (2.0) 2.5 0.5 (1)
Intercompany eliminations (2.4) (1.6) 0.2 (1.0) (0.8)
----------- ----------- ----------- ------------- ------------
Total revenue $ 27.0 $ 26.5 $ (1.7) $ 2.2 $ 0.5
=========== =========== =========== ============= ============
</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
U.S. dollar against the Euro.
The Company's total cost of services and products sold as a percentage of sales
was 59.7% in the third quarter of 2000, compared with 59.9% in the comparable
prior year period. Selling, general and administrative expenses as a percentage
of sales were 31.3% in the third quarter of 2000, compared with 31.5% in the
comparable prior year period.
EBITA* for the third quarter of 2000 was $11.6 million, or 9.0% of sales,
compared to $10.3 million, or 8.6% of sales, in the comparable prior year
period. The following table displays the comparative third 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.
14
<PAGE>
<TABLE>
<CAPTION>
BUSINESS SEGMENT EBITA:
----------------------- (Dollars in millions)
--------------------------------------------------------------------------
September 30, Growth (Decline) from Prior Year
------------------------ ----------------------------------------------
2000 1999 Exchange Operations Total
---------- ---------- ------------ ------------- ------------
Language Services:
<S> <C> <C> <C> <C> <C> <C> <C>
Instruction $ 15.5 $ 12.8 $ (0.5)(1) $ 3.2 (2) $ 2.7
ELS 3.1 2.9 - 0.2 0.2 (3)
Publishing (0.2) - - (0.2) (0.2) (4)
Franchising 0.2 0.1 - 0.1 0.1
Cross Cultural 0.3 0.2 - 0.1 0.1
Overhead and other (5.5) (4.8) 0.3 (1.0) (0.7)
---------- ---------- ------------ ------------- ------------
Total Language Services 13.4 11.2 (0.2) 2.4 2.2
Berlitz GlobalNET 2.3 2.2 (0.2) 0.3 0.1 (5)
Corporate overhead and other (4.1) (3.1) - (1.0) (1.0) (6)
---------- ---------- ------------ ------------- ------------
Total $ 11.6 $ 10.3 $ (0.4) $ 1.7 $ 1.3
========== ========== ============ ============= ============
</TABLE>
EBITA MARGIN %: September 30,
---------------
------------------------------
2000 1999
------------ --------------
Language Services:
Instruction (7) 20.8% 18.6%
ELS (8) 13.6% 14.7%
Publishing (8.6)% 1.2%
Franchising 41.7% 36.4%
Cross Cultural 34.7% 22.8%
Total Language Services 13.2% 12.1%
Berlitz GlobalNET (9) 8.5% 8.2%
Total 9.0% 8.6%
----------
(1) The net unfavorable exchange impact in Instruction is primarily
attributable to the weakened Euro, partially offset by the strength of the
Japanese yen.
(2) The increase in Instruction EBITA is due mainly to volume and ARPL
increases in Germany and the U.S., and in part to lower salary related
costs, including teacher costs.
(3) The increase in ELS EBITA is due in part to improved volume and decreased
costs due primarily to the closure of seven centers.
(4) Publishing EBITA decreased primarily due to decreased licensing revenues.
(5) The increase in EBITA for Berlitz GlobalNET is due primarily to an
acquisition completed in the last quarter of 1999, strong volume in France
and Ireland, and in part, lower salary related costs including translator
costs, offset by a strong U.S. dollar against the Euro.
(6) Corporate expenses rose primarily due to cost accruals related to the
departure of certain employees.
(7) See footnote 2, above.
(8) The decrease in the ELS margin is primarily due to increased commissions to
sales agents.
(9) See footnote 5, above.
The Company recorded income tax expenses of $3.9 million in the third quarter of
2000, compared with $3.5 million in the third quarter of 1999. The effective tax
rates in both 2000 and 1999 were above the U.S. Federal statutory tax rate
15
<PAGE>
primarily as a result of nondeductible amortization charges.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000, VS. SEPTEMBER 30,
1999
The Company's total sales for the nine months ended September 30, 2000, were
$360.6 million, a 7.7% increase from sales of $335.0 million in the prior year
period. Excluding the effects of unfavorable exchange rate fluctuations of $10.4
million, sales increased from the prior year period by 10.7%. The following
table compares revenues by business segment for the nine months:
<TABLE>
<CAPTION>
BUSINESS SEGMENT REVENUES:
-------------------------- (Dollars in millions)
------------------------------------------------------------------------------
September 30, Growth (Decline) from Prior Year
--------------------------- -----------------------------------------------
2000 1999 Exchange Operations Total
(1)
----------- ----------- ------------ -------------- ------------
Language Services:
<S> <C> <C> <C> <C> <C>
Instruction $ 222.8 $ 205.1 $ (6.0) $ 23.7 $ 17.7
ELS 50.0 44.9 0.1 5.0 5.1
Publishing 8.5 10.2 (0.1) (1.6) (1.7)
Franchising 1.2 1.0 - 0.2 0.2
Cross Cultural 2.3 2.0 - 0.3 0.3
Intercompany eliminations - - - - -
----------- ----------- ------------ -------------- ------------
Total Language Services 284.8 263.2 (6.0) 27.6 21.6
Berlitz GlobalNET 75.8 71.8 (4.4) 8.4 4.0
----------- ----------- ------------ -------------- ------------
Total $ 360.6 $ 335.0 $ (10.4) (2) $ 36.0 $ 25.6
=========== =========== ============ ============== ============
</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 ($10.4 million) primarily
resulted from a strengthened U.S. dollar against the Euro, partially offset
by a weaker U.S. dollar against the Japanese yen.
Within Language Services, Instruction benefited from increases in both volume
and ARPL. Total lesson volume increased 8.0% from the comparable prior year
period, reflecting improvements in all geographic regions. Geographically,
Instruction revenue and lesson volume were dispersed as follows:
16
<PAGE>
<TABLE>
<CAPTION>
INSTRUCTION REVENUE:
-------------------- (Dollars in millions)
--------------------------------------------------------------------------
September 30, Growth from Prior Year
-------------------------- --------------------------------------------
2000 1999 Exchange Operations Total
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
North America $ 38.8 $ 36.7 $ 0.1 $ 2.0 $ 2.1
Asia 66.5 51.5 5.1 9.9 15.0 (1)
Latin America 39.4 35.6 (1.1) 4.9 3.8 (2)
Europe 78.1 81.3 (10.1) 6.9 (3.2) (3)
----------- ----------- ----------- ------------- ------------
Total revenue $ 222.8 $ 205.1 $ (6.0) $ 23.7 $ 17.7
=========== =========== =========== ============= ============
</TABLE>
----------
(1) Primarily reflects the effect of volume increases in Japan and a weaker
U.S. dollar against the Japanese yen.
(2) The operations variance primarily reflects the effect of volume and ARPL
increases in Brazil and Mexico and an ARPL increase in Colombia.
(3) Primarily reflects a strengthened U.S. dollar against the Euro, partially
offset by improved volume and ARPL increases primarily in Germany and
Israel.
<TABLE>
<CAPTION>
INSTRUCTION LESSON VOLUME:
-------------------------- (Lessons in thousands)
--------------------------------------------------------------------------
September 30, Growth (Decline) from Prior Year
---------------------------------- ------------------------------------
Number of
2000 1999 lessons Percentage
--------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
North America 868.9 840.4 28.5 3.4% (1)
Asia 997.8 791.2 206.6 26.1% (2)
Latin America 1,069.6 1,015.7 53.9 5.3% (3)
Europe 1,890.7 1,823.1 67.6 3.7% (4)
--------------- --------------- -------------- -----------------
Total lesson volume 4,827.0 4,470.4 356.6 8.0%
=============== =============== ============== =================
</TABLE>
----------
(1) North America volume increased due in part to the positive effect of
relaunched programs.
(2) Asia volume increased due in part to the positive effect of special sales
campaigns in Japan and expansion into new markets.
(3) Latin America volume increased primarily due to strong sales in Brazil and
Mexico, partially offset by reduced volume in Venezuela as a result of
economic uncertainty.
(4) Europe's improvement is primarily due to increased volume in Germany and
Israel.
For the first nine months of 2000, ARPL was $41.09, as compared to $40.66 in the
comparable prior year period. The increase reflected the favorable impact of
product mix and price increases ($1.59), partly offset by the effects of
unfavorable exchange rate fluctuations ($1.16). ARPL ranged from a high of
approximately $64.96 in Japan to a low of $15.31 in Thailand, reflecting effects
of foreign exchange rates and differences in the economic value of the services
provided or sold.
ELS's first nine months revenues increased 11.2% from the comparable prior year
period. This is primarily attributable to the launch of a new program, as well
as the brand merger of ELS and BOC and the restructuring of operations resulting
in the closing of seven centers (five in 1999 and two in the third quarter of
2000).
17
<PAGE>
Publishing revenues declined 16.7% from the comparable prior year period, due
primarily to decreased licensing revenue.
Berlitz GlobalNET sales for the nine months ended September 30, 2000, were $75.8
million, up 11.7% from the comparable period in 1999, excluding the effect of
unfavorable exchange rate fluctuations of $4.4 million. The following table
compares Berlitz GlobalNET revenues by region for the first nine months:
<TABLE>
<CAPTION>
BERLITZ GLOBALNET REVENUE:
-------------------------- (Dollars in millions)
--------------------------------------------------------------------------
September 30, Growth (Decline) from Prior Year
-------------------------- --------------------------------------------
2000 1999 Exchange Operations Total
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Americas $ 35.1 $ 32.3 $ - $ 2.8 $ 2.8 (1)
Asia 5.5 4.2 0.3 1.0 1.3
Europe 41.3 39.1 (5.1) 7.3 2.2 (2)
Intercompany eliminations (6.1) (3.8) 0.4 (2.7) (2.3)
----------- ----------- ----------- ------------- ------------
Total revenue $ 75.8 $ 71.8 $ (4.4) $ 8.4 $ 4.0
=========== =========== =========== ============= ============
</TABLE>
----------
(1) The sales increase in the U.S. 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
U.S. dollar against the Euro.
The Company's total cost of services and products sold as a percentage of sales
was 60.0% in the first nine months of 2000, compared with 59.8% in the
comparable prior year period. Selling, general and administrative expenses as a
percentage of sales were 32.4% in the first nine months of 2000, compared with
33.5% 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 several ELS centers.
EBITA for the first nine months of 2000 was $27.6 million, or 7.7% of sales,
compared to $22.6 million, or 6.7% of sales, in the comparable period in 1999.
The following table displays the comparative EBITA by business segment:
18
<PAGE>
<TABLE>
<CAPTION>
BUSINESS SEGMENT EBITA:
----------------------- (Dollars in millions)
--------------------------------------------------------------------------
September 30, Growth (Decline) from Prior Year
------------------------ ----------------------------------------------
2000 1999 Exchange Operations Total
---------- ---------- ------------ ------------- ------------
Language Services:
<S> <C> <C> <C> <C> <C> <C> <C>
Instruction $ 46.5 $ 39.5 $ (1.2)(1) $ 8.2 (2) $ 7.0
ELS 3.6 2.7 - 0.9 0.9 (3)
Publishing (0.1) 0.6 - (0.7) (0.7) (4)
Franchising 0.5 0.2 - 0.3 0.3
Cross Cultural 0.6 0.4 - 0.2 0.2
Overhead and other (17.1) (15.4) 0.6 (2.3) (1.7)
---------- ---------- ------------ ------------- ------------
Total Language Services 34.0 28.0 (0.6) 6.6 6.0
Berlitz GlobalNET 4.8 4.5 (0.4) 0.7 0.3 (5)
Corporate overhead and other (11.2) (9.9) - (1.3) (1.3) (6)
---------- ---------- ------------ ------------- ------------
Total $ 27.6 $ 22.6 $ (1.0) $ 6.0 $ 5.0
========== ========== ============ ============= ============
</TABLE>
EBITA MARGIN %:
--------------- September 30,
------------------------------
2000 1999
------------ --------------
Language Services:
Instruction (7) 20.9% 19.3%
ELS (8) 7.1% 6.0%
Publishing (1.3)% 5.8%
Franchising 33.5% 16.3%
Cross Cultural 28.3% 20.6%
Total Language Services 11.9% 10.7%
Berlitz GlobalNET (9) 6.4% 6.2%
Total 7.7% 6.7%
----------
(1) The net unfavorable exchange impact in Instruction is primarily
attributable to the weakened Euro, partially offset by the strength of the
Japanese yen.
(2) The increase in Instruction EBITA is due mainly to volume increases in
Japan and Germany.
(3) The increase in ELS EBITA is due in part to improved volume and decreased
costs, due primarily to the closure of seven centers.
(4) Publishing EBITA decreased primarily due to decreased licensing revenues.
(5) The increase in EBITA for Berlitz GlobalNET is due in part to acquisitions
completed in the second half of 1999, strong volume in France and Ireland,
and in part, lower salary related costs, including translator costs,
partially offset by a strong U.S. dollar against the Euro.
(6) Corporate expenses rose primarily due to cost accruals related to the
departure of certain employees.
(7) The increase in Instruction's EBITA margin is attributable to Asia and
Europe where revenue increases combined with cost decreases, primarily
salary related.
(8) See footnote 3, above.
(9) See footnote 5, above.
The Company recorded income tax expenses of $7.6 million in the first nine
months of 2000, compared with $5.5 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
19
<PAGE>
nondeductible amortization charges.
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.
At September 30, 2000, the Company's liquid assets of $39.4 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 138, "Accounting for Derivative
Instruments and Hedging Activities," which amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 was previously
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," which
deferred the effective date of SFAS No. 133 to fiscal years commencing after
June 15, 2000. The Company has appointed a team to implement these standards on
a worldwide basis. The Company has identified certain freestanding derivatives
as defined by SFAS No. 133. Completion of the Company's implementation plan and
determination of the impact of adopting these standards is expected by the end
of the fourth quarter of 2000. Since the impact is dependent upon market
fluctuations and the notional value of such contracts at the time of adoption,
it is not fully determinable what the impact of adopting these standards will
be. However, the Company currently does not anticipate material changes to any
of its existing hedging strategies as a result of such adoption. The Company
will adopt SFAS No. 138 concurrently with SFAS No. 133 on January 1, 2001, as
required.
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
20
<PAGE>
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.
21
<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%, including the Japanese yen, German mark, Irish punt, Brazilian
real, Mexican peso, British pound and French and Swiss francs. To hedge the
Company's net investments in certain foreign subsidiaries, the Company maintains
currency swap agreements with a financial institution. 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 September 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 9/30/00
---------- --------- ------- --------- ----------
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% $ (1,716)
1/4/99 12/31/02 British Pound 4,841 6.56% $ 7,974 6.27% $ 69
</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.
22
<PAGE>
BERLITZ INTERNATIONAL, INC.
PART II. OTHER INFORMATION
ITEM 5. OTHER MATTERS
At the regularly scheduled meeting of the Company's Board of Directors held on
September 7, 2000, the Board elected Henry D. James, Ryoichi Tanaka and Hiroshi
Kitada as directors. On October 12, 2000, Mr. James resigned as Chief Financial
Officer and as a director on the Board of Directors.
The remaining new directors will serve until the next annual meeting of the
shareholders of the Company, and until any successors are elected and qualified.
The position of Chief Financial Officer is vacant as of this time.
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.
-----------
10 Form of Executive Retirement Plan for James R. Kahl, effective
as of March 7, 2000
27 Financial Data Schedule, for the nine month period ended
September 30, 2000.
SIGNATURES
Pursuant to the requirements of the Exchange Act the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BERLITZ INTERNATIONAL, INC.
---------------------------
(Registrant)
Date: November 14, 2000 By: /s/ Ronald Stark
----------------------------------
Ronald Stark
Vice President, Finance
23
