UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 11, 2000, were 9,529,788.
Page 1 of 26
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED
MARCH 31 (Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
Sales of services and products $ 112,544 $ 104,447
------------- -------------
Operating costs and expenses:
Cost of services and products sold 67,623 63,841
Selling, general and administrative 37,599 36,907
Amortization of publishing rights, excess of cost
over net assets acquired, and other intangibles 4,625 4,353
------------- -------------
Operating profit (loss) 2,697 (654)
Interest expense on long-term debt 23 1,853
Interest expense on convertible debentures
with related parties 1,995 431
Interest expense on notes to affiliates 655 588
Other expense (income), net 95 (965)
------------- -------------
Loss before income taxes, minority interest in
(earnings) loss of subsidiary, and
extraordinary item (71) (2,561)
Income tax expense (1,735) (162)
Minority interest in (earnings) loss
of subsidiaries (171) 119
------------- -------------
Loss before extraordinary item and cumulative
effect of accounting change (1,977) (2,604)
Extraordinary loss from extinguishment of debt,
net of income tax benefit of $44 - (2,140)
Cumulative effect of accounting change, net of
income tax benefit of $2,900
and minority interest expense of $189 - (5,605)
------------- -------------
Net loss $ (1,977) $ (10,349)
============= =============
Loss per share - basic and diluted:
Loss before extraordinary item and cumulative
effect of accounting change $ (0.21) $ (0.27)
Extraordinary loss - (0.22)
Cumulative effect of accounting change - (0.59)
------------- -------------
Loss per share $ (0.21) $ (1.08)
============= =============
Average number of shares outstanding (000's) 9,530 9,530
============= =============
</TABLE>
See accompanying Notes to the Consolidated Condensed Financial Statements.
2
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 33,649 $ 34,426
Accounts receivable, less allowance for
doubtful accounts of $4,046 and $3,102 46,676 54,185
Unbilled receivables 9,479 7,514
Inventories, net 9,881 10,405
Prepaid expenses and other current assets 9,193 8,628
------------ ------------
Total current assets 108,878 115,158
Property and equipment, net of accumulated
depreciation of $26,797 and $26,100 47,202 47,749
Publishing rights, net of accumulated
amortization of $6,303 and $6,083 15,682 15,902
Excess of cost over net assets acquired and other intangibles,
net of accumulated amortization of $96,385 and $92,936 472,124 480,967
Other assets 38,648 37,244
------------ ------------
Total assets $ 682,534 $ 697,020
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,319 $ 5,118
Accounts payable 11,610 12,026
Deferred revenues 56,345 57,266
Payrolls and commissions 15,543 16,458
Income taxes payable 1,318 971
Due to affiliates 641 -
Interest payable on convertible debentures - 1,938
Accrued expenses and other current liabilities 18,549 19,495
------------ ------------
Total current liabilities 105,325 113,272
Long-term debt 1,915 1,887
Convertible debentures with related parties 155,000 155,000
Notes payable to affiliates 50,000 50,000
Other liabilities 28,325 28,399
Minority interest 9,971 9,775
------------ ------------
Total liabilities 350,536 358,333
------------ ------------
Shareholders' equity:
Common stock 1,003 1,003
Additional paid-in capital 372,518 372,518
Accumulated deficit (10,487) (8,510)
Accumulated other comprehensive loss:
Cumulative translation adjustment (24,675) (19,963)
Treasury stock at cost (6,361) (6,361)
------------ ------------
Total shareholders' equity 331,998 338,687
------------ ------------
Total liabilities and shareholders' equity $ 682,534 $ 697,020
============ ============
</TABLE>
See accompanying Notes to the Consolidated Condensed Financial Statements.
3
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net loss $ (1,977) $ (10,349)
Other comprehensive loss, net of tax:
Foreign currency items, including translation
adjustments, and the effects of certain
hedges and intercompany transactions (4,712) (6,265)
---------- ----------
Comprehensive loss $ (6,689) $ (16,614)
========== ==========
The tax expense allocated to each component of other comprehensive loss is as follows:
Foreign currency items $ 276 $ 752
========== ==========
</TABLE>
See accompanying Notes to the Consolidated Condensed Financial Statements.
4
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,977) $ (10,349)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,560 7,072
Cumulative effect of accounting change, net - 5,605
Other (primarily provision for bad debts and foreign exchange
(gains) losses) 979 (798)
Changes in operating assets and liabilities 729 (8,202)
------------ ------------
Net cash provided by (used in) operating activities 7,291 (6,672)
------------ ------------
Cash flows from investing activities:
Capital expenditures (3,441) (4,711)
Acquisitions of businesses (154) -
------------ ------------
Net cash used in investing activities (3,595) (4,711)
Cash flows from financing activities:
Proceeds from issuance of convertible debentures - 155,000
Proceeds from issuance of note payable to affiliate - 50,000
Net borrowings under revolving credit facility (4,000) -
Repayment of long-term debt - (146,268)
Repayment of notes to affiliates - (42,366)
Payment of deferred finance costs - (16)
------------ ------------
Net cash (used in) provided by financing activities (4,000) 16,350
------------ ------------
Effect of exchange rate changes on cash and
temporary investments (473) (1,169)
------------ ------------
Net (decrease) increase in cash and temporary investments (777) 3,798
Cash and temporary investments, beginning of period 34,426 25,327
------------ ------------
Cash and temporary investments, end of period $ 33,649 $ 29,125
============ ============
Supplemental disclosures of cash flow information:
Cash payments for:
Interest $ 3,913 $ 2,271
============ ============
Income taxes $ 1,822 $ 1,323
============ ============
Cash refunds of income taxes $ 107 $ 83
============ ============
</TABLE>
See accompanying Notes to the Consolidated Condensed Financial Statements.
5
<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 with the 2000 presentation.
2. Long-Term Debt
Long-term debt consists of the following:
March 31, December 31,
2000 1999
------------------ ------------------
Revolving credit facility $ - $ 4,000
Other 3,234 3,005
------------------ ------------------
Total 3,234 7,005
Less current maturities (1,319) (5,118)
------------------ ------------------
Long-term debt $ 1,915 $ 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
credit facility, depending on a specified leverage ratio. There are no
outstanding borrowings under the Revolving Facility at March 31, 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.
6
<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: a) $100,000 aggregate principal
amount (the "Apollo Debentures") to two affiliates of Apollo Management
IV, L.P. ("Apollo"), a private investment firm; and b) $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 and Benesse Debentures each independently provide for
optional redemption by the Company, in whole but not in part, any time
3 years and 2 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: a) 4% for redemptions
occurring in the fourth year after issue; b) 2% for redemptions
occurring in the fifth year after issue; and c) 0% for redemptions
occurring thereafter. All such redemptions are subject to the holders'
rights to first convert 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,
7-year fixed rate debt (the "Fixed Rate Debentures"). Such election may
only be made if the average closing price of the Company's common stock
during the 30 trading days immediately preceding the third anniversary
of the Issue Date does not exceed $33.05. Furthermore, BHI may only
effect an exchange if Apollo does so. Upon the determination, by an
independent financial institution, of fixed interest rates that
accurately price the Fixed Rate Debentures at par under specified
circumstances at the time of the exchange, Apollo and BHI shall
irrevocably decide whether to proceed with their exchanges. If only
Apollo proceeds with such an exchange, the Company, no later than 150
days from the third anniversary of the Issue Date, must either a)
redeem all of the Apollo Debentures at par, or b) deliver the Fixed
Rate Debentures to Apollo. If both Apollo and BHI proceed with their
exchanges, the Company, within the same 150 day period, must either a)
redeem both the Apollo and Benesse Debentures, or b) deliver the Fixed
Rate Debentures to both Apollo and BHI.
7
<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 a) the applicable U.S. treasury rate + 5% (not to exceed 13%) if
only Apollo receives Fixed Rate Debentures, or b) the applicable U.S.
treasury rate + 7% (not to exceed 14%) if both Apollo and BHI 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: a) one half of the per annum interest
rate for redemptions occurring in the fourth year after issue; b) one
quarter of the per annum interest rate for redemptions occurring in the
fifth year after issue; and c) no premium for redemptions occurring
thereafter.
Prior to the third anniversary of the Issue Date, if 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: prohibitions on certain mergers, consolidations and asset
transfers; forbearance from restrictions on rights of holders to
convert or exchange the Convertible Debentures; and, in the case of the
Apollo Debentures, forbearance from amending certain understandings
between the Company, Berlitz Japan, Inc. and BHI .
The Investment Agreements include a number of other provisions,
including: a) the granting of certain demand and piggyback registration
rights to the holders of the Convertible Debentures; b) the granting of
a certain number of board seats to Apollo on the Company's Board of
Directors; c) the granting of approval rights to Apollo, at the
Company's Board level, over certain transactions; and d) certain
restrictions on the transferability of the Apollo Debentures. The
Company expanded its Board of Directors from 10 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 the first five years at 5.2% per annum, and,
thereafter, at a renegotiated fixed rate
8
<PAGE>
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. In the first quarter of 1999, the Company recorded an
extraordinary loss, net of tax benefit, of $2,140, consisting of the
interest rate swap's fair market value and existing unamortized
deferred finance costs at the time of extinguishment of the underlying
debt.
6. 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 after one year of student
inactivity. 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).
9
<PAGE>
7. Other Expense (Income), net
<TABLE>
<CAPTION>
Three months Three months
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Interest income on temporary investments $ (189) $ (91)
Foreign exchange losses (gains), net 58 (908)
Other non-operating taxes 85 120
Loss on disposal of fixed assets 108 19
Other investment expense (income), net 63 (57)
Other income, net (30) (48)
-------------- --------------
Total other expense (income), net $ 95 $ (965)
============== ==============
</TABLE>
8. Earnings (Loss) Per Share
Reconciliations between Basic and Diluted earnings (loss) per share
("EPS") computations for "loss before extraordinary item and cumulative
effect of accounting change" for the three months ended March 31, 2000,
and 1999 are as follows:
<TABLE>
<CAPTION>
Weighted
average
number
(Loss) of shares Per-share
Income outstanding amount
------------- ------------- -------------
<S> <C> <C> <C>
Three months ending March 31, 2000:
Basic EPS:
Loss before extraordinary item and
cumulative effect of accounting
change $ (1,977) 9,530 $ (0.21)
Effect of dilutive securities:
Stock options - - -
------------- ------------- -------------
Diluted EPS:
Loss before extraordinary item and
cumulative effect of accounting
change $ (1,977) 9,530 $ (0.21)
============= ============= =============
Three months ending March 31, 1999:
Basic EPS:
Loss before extraordinary item and
cumulative effect of accounting
change $ (2,604) 9,530 $ (0.27)
Effect of dilutive securities:
Stock options - - -
------------- ------------- -------------
Diluted EPS:
Loss before extraordinary item and
cumulative effect of accounting
change $ (2,604) 9,530 $ (0.27)
============= ============= =============
</TABLE>
9. Stock Option and Incentive Plans
In June 1999, the Company's shareholders approved the adoption of the
Berlitz 1999 Long-Term Executive Incentive Compensation Plan (the "1999
LTIP"). The 1999 LTIP provides for potential cash awards (currently
expected to range from $695 to $5,000 in the aggregate) 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 for payments
under it. For the three months ended March 31, 2000, the Company
recorded $54 in expense related to the 1999 LTIP.
10
<PAGE>
10. Commitments
On July 1, 1999, Berlitz entered into a license agreement (the
"Agreement") with Children's Television Workshop ("CTW"). Pursuant to
this license agreement, CTW has agreed to create and produce, at its
expense, a television series, entitled "Sesame English", which will
initially consist of fifty-two 15-minute episodes which will be
complemented by instruction curricula and materials developed by
Berlitz. In addition, Berlitz was 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 Agreement, covering an initial term of five years, provides for
payments to CTW of $4,000 at inception and an aggregate of $6,000 in
minimum guaranteed royalties paid in installments over the initial term
of the agreement. The $4,000 payment at inception may be applied
against future royalties due in excess of the minimum guarantee. In the
event that Berlitz enters into any sublicenses or other third-party
arrangements with a sublicensee for language instruction services in
Japan, such minimum guaranteed royalties shall be reduced dollar for
dollar, up to a maximum of $2,000, from CTW's share of payments from
such Japanese sublicensees. If certain conditions are met, Berlitz may
extend the Agreement for another five years in exchange for annual
minimum guaranteed royalties equal to the greater of $2,000, or an
amount equal to 80% of the royalties earned by CTW during the fifth
year of the initial term. Of the commitment of $6,000, $5,750 is
recorded within "Other liabilities" and the current portion of $250 is
recorded within "Accrued expenses and other current liabilities". The
deferred asset of $10,000 is recorded within "Other assets".
11. Operating Segments
The Company's operations are principally conducted through two
segments: Language Services (consisting of the Instruction, ELS (i.e.,
ELS Educational Services, Inc.("ELS")) , Publishing, Franchising, and
Cross Cultural sub-segments), and Berlitz GlobalNET (formerly
Translation Services). ELS formerly included centers operating under
the BOC (i.e., 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. 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.
Berlitz GlobalNET provides high quality technical documentation
translation, software
11
<PAGE>
localization (i.e., the translation of software-related products),
software quality assurance testing, interpretation services, electronic
publishing services, and other foreign language-related services.
The Company evaluates operating segment performance based on EBITA,
defined as sales of services and products, less costs of services and
products sold and selling, general and administrative expenses. EBITA
includes depreciation and similar non-cash charges, but excludes
amortization of publishing rights, excess of cost over net assets
acquired, and other intangibles.
The following tables present information about reported segment profit
or loss and segment assets, and reconcile reportable segment revenues,
profit or loss, and assets to the Company's consolidated totals:
<TABLE>
<CAPTION>
Three Months ended March 31,
2000 1999
---- ----
<S> <C> <C>
Revenues:
Revenues from external customers:
Language Services:
Instruction $ 72,645 $ 66,485
ELS 11,900 12,472
Publishing 2,809 3,088
Franchising 322 241
Cross Cultural 714 587
Other - (1)
-------------- --------------
Total Language Services 88,390 82,872
Berlitz GlobalNET 24,154 21,575
-------------- --------------
Total external revenues 112,544 104,447
-------------- --------------
Intersegment revenues:
Language Services:
Publishing 9 -
Franchising 59 113
-------------- --------------
Total Language Services 68 113
Berlitz GlobalNET 77 9
-------------- --------------
Total intersegment revenues 145 122
-------------- --------------
Total revenues for reportable segments 112,689 104,569
Elimination of intersegment revenues (145) (122)
-------------- --------------
Total consolidated revenues $ 112,544 $ 104,447
============== ==============
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Three Months ended March 31,
2000 1999
---- ----
<S> <C> <C>
Loss before taxes, minority interest, extraordinary item and
cumulative effect of accounting change:
Operating profit (loss):
Segment EBITA:
Language Services:
Instruction $ 15,480 $ 11,966
ELS (82) (387)
Publishing (73) (192)
Franchising 59 (38)
Cross Cultural 256 153
Language Service overhead expenses and other (5,937) (5,136)
-------------- --------------
Total Language Services 9,703 6,366
Berlitz GlobalNET 1,132 645
General corporate HQ expenses (3,513) (3,312)
-------------- --------------
Total EBITA 7,322 3,699
-------------- --------------
Amortization of publishing rights, excess of cost over
net assets acquired, and other intangibles:
Language Services:
Instruction (2,351) (2,330)
ELS (1,578) (1,562)
Publishing (100) (100)
Cross Cultural (3) (3)
-------------- --------------
Total Language Services (4,032) (3,995)
Berlitz GlobalNET (593) (358)
-------------- --------------
Total intangible amortization (4,625) (4,353)
-------------- --------------
Total operating profit (loss) 2,697 (654)
Interest expense on long-term debt (23) (1,853)
Interest expense on convertible debentures (1,995) (431)
Interest expense to affiliates (655) (588)
Other (expense) income, net (95) 965
-------------- --------------
Total consolidated loss before taxes, minority interest,
extraordinary item and cumulative effect of accounting change $ (71) $ (2,561)
============== ==============
<CAPTION>
Assets: March 31, December 31,
2000 1999
-------------- --------------
Language Services:
Instruction $ 427,029 $ 433,526
ELS 105,432 106,210
Publishing 22,031 23,122
Franchising 8,323 8,031
Cross Cultural 403 440
Other 750 1,069
-------------- --------------
Total Language Services 563,968 572,398
Berlitz GlobalNET 96,264 102,684
General corporate 27,774 27,365
Eliminations of intersegment receivables (5,472) (5,427)
-------------- --------------
Total consolidated assets $ 682,534 $ 697,020
============== ==============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Three Months ended March 31,
2000 1999
---- ----
<S> <C> <C>
Depreciation:
Language Services:
Instruction $ 1,262 $ 1,155
ELS 206 281
Publishing 495 425
Franchising 4 5
Cross Cultural 2 2
Language Service overhead and other 129 112
-------------- --------------
Total Language Services 2,098 1,980
Berlitz GlobalNET 552 568
General corporate 285 171
-------------- --------------
Total consolidated depreciation $ 2,935 $ 2,719
============== ==============
<CAPTION>
Three Months ended March 31,
2000 1999
---- ----
<S> <C> <C>
Capital Expenditures:
Language Services:
Instruction $ 1,719 $ 3,297
ELS 231 380
Publishing 373 489
Franchising - 5
-------------- --------------
Total Language Services 2,323 4,171
Berlitz GlobalNET 1,028 191
General corporate 90 349
-------------- --------------
Total consolidated capital expenditures $ 3,441 $ 4,711
============== ==============
The following tables present certain information about the geographic
areas in which the Company operates:
<CAPTION>
Three Months ended March 31,
2000 1999
---- ----
<S> <C> <C>
Revenues from external customers:
United States $ 33,924 $ 32,536
Japan 20,206 15,704
Germany 10,641 10,778
Ireland 4,962 4,753
France 5,015 5,235
Brazil 4,089 2,910
Other foreign countries 33,707 32,531
-------------- --------------
Total $ 112,544 $ 104,447
============== ==============
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Operating profit (loss):
EBITA :
United States $ 1,557 $ 1,704
Japan 2,969 638
Germany 1,406 1,163
Ireland 17 (1)
France 568 400
Brazil 829 266
Other foreign countries 4,769 3,880
General corporate expenses (4,793) (4,351)
-------------- --------------
Total EBITA 7,322 3,699
-------------- --------------
Amortization of publishing rights, excess of cost over net
assets acquired, and other intangibles:
United States (3,885) (3,623)
Japan (383) (334)
Germany (61) (66)
Ireland (11) (13)
France (64) (75)
Brazil (16) (16)
Other foreign countries (205) (226)
-------------- --------------
Total intangible amortization (4,625) (4,353)
-------------- --------------
Intercompany royalties:
United States 4,622 3,588
Japan (1,568) (566)
Germany (407) (416)
Ireland (247) (236)
France (251) (308)
Other foreign countries (2,149) (2,062)
-------------- --------------
Total intercompany royalties - -
-------------- --------------
Total operating profit (loss) $ 2,697 $ (654)
============== ==============
<CAPTION>
Long lived assets: Property &
Equipment Other Intangible
Net Assets* Assets Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
March 31, 2000:
United States $ 10,176 $ 8,097 $ 393,865 $ 412,138
Japan 10,597 418 49,938 60,953
Germany 3,301 - 7,658 10,959
France 1,868 - 5,614 7,482
Brazil 3,226 - 2,491 5,717
Ireland 1,611 - 1,434 3,045
Other foreign countries 11,874 489 25,350 37,713
General corporate 4,549 14,104 1,456 20,109
----------- ----------- ----------- -----------
Total $ 47,202 $ 23,108 $ 487,806 $ 558,116
=========== =========== =========== ===========
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
=========== =========== =========== ===========
</TABLE>
*Excludes financial instruments and deferred tax assets.
15
<PAGE>
BERLITZ INTERNATIONAL, INC.
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
Consolidated 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 (i.e., ELS Educational
Services, Inc. ("ELS")), Publishing, Franchising, and Cross Cultural
sub-segments), and Berlitz GlobalNET (formerly Translation Services). ELS
formerly included centers operating under the BOC (i.e., 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 March 31, 2000, vs. March 31, 1999
Sales for the quarter ended March 31, 2000, were $112.5 million, a 7.8% increase
from 1999 sales of $104.4 million. This increase is attributable to increases in
operating activity for Language Instruction and Berlitz GlobalNET that were
partially offset by unfavorable exchange rate fluctuations. Excluding the
effects of unfavorable exchange rate fluctuations of $3.3 million, sales
increased from the prior year by 10.9%. The following table compares revenues by
business segment for the first quarter.
<TABLE>
<CAPTION>
Business Segment Revenues: (Dollars in millions)
---------------------------------------------------------------------------
March 31, Growth (Decline) from Prior Year
------------------------- --------------------------------------------
2000 1999 Exchange Operations Total
(1)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Language Services:
Instruction $ 72.6 $ 66.5 $ (2.0) $ 8.1 $ 6.1
ELS 11.9 12.5 - (0.6) (0.6)
Publishing 2.8 3.1 - (0.3) (0.3)
Franchising 0.4 0.3 - 0.1 0.1
Cross Cultural 0.7 0.5 - 0.2 0.2
Intercompany eliminations (0.1) (0.1) - - -
--------- --------- --------- --------- ---------
Total Language Services 88.3 82.8 (2.0) 7.5 5.5
Berlitz GlobalNET 24.2 21.6 (1.3) 3.9 2.6
--------- --------- --------- --------- ---------
Total $ 112.5 $ 104.4 $ (3.3) (2) $ 11.4 $ 8.1
========= ========= ========= ========= =========
</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 ($3.3 million) primarily resulted
from a strengthened dollar against European currencies (most significantly
the German mark and the Irish punt),
16
<PAGE>
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 8.9% from
the prior year, reflecting improvements in all geographic regions except North
America, where lesson volume remained flat. Geographically, Instruction revenue
and lesson volume was dispersed as follows:
<TABLE>
<CAPTION>
Language Instruction Revenue: (Dollars in millions)
---------------------------------------------------------------------------
March 31, Growth (Decline) from Prior Year
------------------------- --------------------------------------------
2000 1999 Exchange Operations Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
North America $ 11.9 $ 11.9 $ - $ - $ -
Asia 20.6 15.7 1.8 3.1 4.9 (1)
Latin America 11.8 10.2 (0.1) 1.7 1.6 (2)
Europe 28.3 28.7 (3.7) 3.3 (0.4) (3)
--------- --------- --------- --------- ---------
Total revenue $ 72.6 $ 66.5 $ (2.0) $ 8.1 $ 6.1
========= ========= ========= ========= =========
</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 Mexico and
Brazil and an ARPL increase in 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 and Israel).
<TABLE>
<CAPTION>
Language Instruction Lesson Volume: (Lessons in thousands)
-----------------------------------------------------------------------
March 31, Growth (Decline) from Prior Year
--------------------------------- ---------------------------------
Number of
2000 1999 lessons Percentage
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
North America 277.1 278.9 (1.8) (0.1)%
Asia 304.1 243.9 60.2 24.7% (1)
Latin America 310.5 290.0 20.5 7.1% (2)
Europe 696.4 645.4 51.0 7.9% (3)
-------------- -------------- ------------- --------------
Total lesson volume 1,588.1 1,458.2 129.9 8.9%
=============== =============== ============== ===============
</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
Mexico and Brazil, 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 quarter of 2000, ARPL was $41.31, as compared to $41.01 in the
comparable prior-year period. The increase reflected the favorable impact of
product mix and price increases ($1.54), partly offset by the effects of
unfavorable exchange rate fluctuations ($1.24). ARPL ranged from a high of
approximately $66.29 in Japan to a low of $15.44 in Thailand, reflecting effects
of foreign exchange rates and differences in the economic value of the
17
<PAGE>
services provided or sold.
ELS/BOC first quarter revenues declined 4.6% from the prior year, primarily
attributable to 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 8.7%, due primarily to decreased licensing royalty
revenue. Franchising revenues increased 7.6% over the comparable period in the
prior year.
Berlitz GlobalNET sales for the quarter ended March 31, 2000 were $24.2 million,
up 18.4% 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)
---------------------------------------------------------------------------
March 31, Growth (Decline) from Prior Year
------------------------- --------------------------------------------
2000 1999 Exchange Operations Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
America $ 11.8 $ 8.9 $ - $ 2.9 $ 2.9 (1)
Asia 1.8 1.2 0.1 0.5 0.6
Europe 12.7 12.3 (1.5) 1.9 0.4 (2)
Intercompany eliminations (2.1) (0.8) 0.1 (1.4) (1.3)
--------- --------- --------- --------- ---------
Total revenue $ 24.2 $ 21.6 $ (1.3) $ 3.9 $ 2.6
========= ========= ========= ========= =========
</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 cost of services and products sold, and selling, general and
administrative expenses for the 2000 first quarter were $105.2 million, an
increase of $4.5 million, or 4.4%, from the prior year. As a percentage of sales
these combined costs dropped to 93.5% in 2000 from 96.5% in 1999. 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 quarter was $7.3 million, or 6.5% of sales, compared
to $3.7 million, or 3.5% of sales, in the same prior year period. The following
table displays the comparative first 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)
---------------------------------------------------------------------------
March 31, Growth (Decline) from Prior Year
------------------------- --------------------------------------------
2000 1999 Exchange Operations Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Language Services:
Instruction $ 15.5 $ 12.0 $ (0.4)(1) $ 3.9 (2) $ 3.5
ELS (0.1) (0.4) - 0.3 0.3 (3)
Publishing (0.1) (0.2) - 0.1 0.1
Franchising 0.1 - - 0.1 0.1
Cross Cultural 0.3 0.2 - 0.1 0.1
Overhead & Other (6.0) (5.2) 0.2 (1.0) (0.8)(4)
--------- --------- --------- --------- ---------
Total Language Services 9.7 6.4 (0.2) 3.5 3.3
Berlitz GlobalNET 1.1 0.6 - 0.5 0.5 (5)
Corporate and other (3.5) (3.3) - (0.2) (0.2)(6)
--------- --------- --------- --------- ---------
Total $ 7.3 $ 3.7 $ (0.2) $ 3.8 $ 3.6
========= ========= ========= ========= =========
<CAPTION>
EBITA Margin %: March 31,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Language Services:
Instruction (7) 21.3% 18.0%
ELS (8) (0.7)% (3.1)%
Publishing (2.6)% (6.2)%
Franchising 15.5% (10.7)%
Cross Cultural 35.9% 26.1%
Total Language Services 11.0% 7.7%
Berlitz GlobalNET 4.7% 3.0%
Total 6.5% 3.5%
</TABLE>
- -------------------------------------
(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) Overall costs for ELS decreased from the prior year due primarily to the
closure of five centers.
(4) Language Service's overhead costs increased over prior year due to
non-salary related operating expenses.
(5) The increase in EBITA for Berlitz GlobalNET is due to improved margins in
Europe and Asia.
(6) Corporate expenses rose due to increases in non-salary related operating
costs.
(7) The increase in Instruction's 2000 EBITA margin occurred primarily due to
volume increases.
(8) See ELS discussion in footnote 3.
Interest expense on long-term debt and convertible debentures for the three
months ended March 31, 2000, decreased $0.3 million from the prior year, due
principally to a reduced effective interest rate. "Other expense (income), net"
for the three months ended March 31, 2000 was $0.1 million of expense, compared
with $1.0 million of income in the prior year, due to lower foreign exchange
gains in the current quarter.
19
<PAGE>
The Company recorded income tax expenses of $1.7 million in the first quarter of
2000, compared with $0.2 million 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 first quarter
of 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).
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 $7.3 million for the three months
that ended March 31, 2000, compared with net cash used of $6.7 million in the
comparable prior period. This increase of $14.0 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 $3.6 million for the quarter ended
March 31, 2000, was down $1.1 million from the comparable prior year period.
This decrease primarily reflects lower capital expenditures over the prior year.
Net cash used in financing activities for the quarter ended March 31, 2000, was
$4.0 million, compared with net cash provided of $16.4 million in the comparable
prior year period. For 2000, the activity reflected the repayment of an amount
outstanding on the new $25,000 revolving credit facility entered into on March
31, 1999 ("the Revolving Facility"), whereas the 1999 activity primarily
reflected the excess of the net proceeds from the issuance of convertible
20
<PAGE>
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 $1.1 million of "Accrued expenses and other current liabilities" at March
31, 2000, related to the ELS acquisition.
o On July 1, 1999, Berlitz 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 Berlitz. Berlitz 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 Berlitz 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, Berlitz 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. The Company also incurred various transaction-related
expenditures and accrued expenses. At March 31, 2000, in connection with
this acquisition, the Company recorded $11.6 million of goodwill and
accrued $2.4 million in current liabilities for transaction-related
expenses and contingencies.
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.
o On March 31, 1999, the Company entered into a new $25 million revolving
credit facility (the "Revolving Facility"), which expires in February 2002.
At the option of the Company, outstanding borrowings under the Revolving
Facility bear interest at variable rates equal to
21
<PAGE>
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
credit facility, depending on a specified leverage ratio. There were no
outstanding borrowings under the Revolving Facility at March 31, 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, the Swiss franc, the Canadian dollar, the
British pound, and the German mark. Credit loss from counterparty
nonperformance is not anticipated. The estimated fair value of these swap
agreements at March 31, 2000, representing the amount that could be settled
based on estimates obtained from a dealer, was a net liability of
approximately $2.0 million.
o On March 11, 1999, the Company's shareholders approved the issuance of, and
the Company issued, $155 million aggregate principal amount of 12-year
convertible debentures (the "Convertible Debentures") in a private
placement, pursuant to definitive investment agreements (the "Investment
Agreements") dated as of October 2, 1998. Such debentures were issued as
follows: a) $100 million aggregate principal amount (the "Apollo
Debentures") to two affiliates of Apollo Management IV, L.P. ("Apollo"), a
private investment firm; and b) $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 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
22
<PAGE>
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 March 31, 2000, the Company's liquid assets of $33.6 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: the Company's success in
selling new franchises; the economic conditions in the Asian region; more
general factors affecting future cash flows and their effects on the Company's
ability to meet its debt service requirements and future working capital needs,
including fluctuations in foreign currency exchange rates; demand for the
Company's products and services; the impact of competition; the effect of
changing economic and political conditions; the level of success and timing in
implementing corporate strategies and adopting new technologies; changes in
governmental and tax laws and regulations, tax audits and other factors (known
or unknown) which may affect the Company. As a result, no assurance can be given
as to future results, levels of activity or achievements.
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
23
<PAGE>
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 March 31, 2000, were as follows:
<TABLE>
<CAPTION>
Interest Receipts from
Interest Payment to Financial Institution Financial Institution
----------------------------------------- ---------------------
Notional Fair Value
Effective Interest Amount Interest at 3/31/00
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% $ (3,460)
1/1/99 12/31/02 German Mark 99,546 6.12% $ 55,821 6.27% $ 1,123
1/4/99 12/31/02 Swiss Franc 16,131 5.72% $ 11,164 6.27% $ 319
1/4/99 12/31/02 British Pound 4,841 6.56% $ 7,974 6.27% $ (21)
</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 and Benesse Debentures each independently provide for optional
redemption by the Company, in whole but not in part, anytime 3 years and 2
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: a) 4% for redemptions occurring in the
fourth year after issue; b) 2% for redemptions occurring in the fifth year
after issue; and c) 0% for redemptions occurring thereafter. All such
redemptions are subject to the holders' rights to first convert 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, 7-year fixed
rate debt (the "Fixed Rate Debentures"). Such election may only be made if
the average closing price of the Company's common stock during the 30
trading days immediately preceding the third anniversary of the Issue Date
does not exceed $33.05. Furthermore, BHI may only effect an exchange if
Apollo does so. Upon the determination, by an independent financial
institution, of fixed interest rates that accurately price the Fixed Rate
Debentures at par under specified circumstances at the time of the
exchange, Apollo and BHI shall irrevocably decide whether to proceed with
their exchanges. If only Apollo proceeds with such an exchange, the
Company, no later than 150 days from the third anniversary of the Issue
Date, must either a) redeem all of the Apollo Debentures at par, or b)
deliver the Fixed Rate Debentures to Apollo. If both Apollo and BHI proceed
with their exchanges, the Company, within the same 150 day period, must
either a) redeem both the Apollo and
24
<PAGE>
Benesse Debentures, or b) deliver the Fixed Rate Debentures to both Apollo
and BHI.
o Principal amounts outstanding under the Fixed Rate Debentures would not be
payable until maturity, while interest payments would be made
semi-annually. The Fixed Rate Debentures interest rate is subject to a cap
of a) the applicable U.S. treasury rate + 5% (not to exceed 13%) if only
Apollo receives Fixed Rate Debentures, or b) the applicable U.S. treasury
rate + 7% (not to exceed 14%) if both Apollo and BHI receives Fixed Rate
Debentures. The Fixed Rate Debentures may be redeemed by the Company after
the third anniversary of their issue upon payment of principal amounts of
the Fixed Rate Debentures and the following redemption premiums, expressed
as a percentage of the outstanding principal amount: a) one half of the per
annum interest rate for redemptions occurring in the fourth year after
issue; b) one quarter of the per annum interest rate for redemptions
occurring in the fifth year after issue; and c) no premium for redemptions
occurring thereafter.
o Prior to the third anniversary of the Issue Date, if 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 March 31, 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
d) the Company provides status updates regarding its derivatives, including
market value updates, to its Board of Directors on a regular basis.
25
<PAGE>
BERLITZ INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
All exhibits listed below are filed with this Quarterly Report on Form 10-Q.
Exhibit No.
27 Financial Data Schedule, for the quarterly period ended March 31, 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: May 12, 2000 By: /s/ HENRY D. JAMES
-------------------
Henry D. James
Executive Vice President and
Chief Financial Officer
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q OF
BERLITZ INTERNATIONAL, INC. FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 33,649
<SECURITIES> 0
<RECEIVABLES> 50,722
<ALLOWANCES> 4,046
<INVENTORY> 9,881
<CURRENT-ASSETS> 108,878
<PP&E> 73,999
<DEPRECIATION> 26,797
<TOTAL-ASSETS> 682,534
<CURRENT-LIABILITIES> 105,325
<BONDS> 0
<COMMON> 1,003
0
0
<OTHER-SE> 330,995
<TOTAL-LIABILITY-AND-EQUITY> 682,534
<SALES> 0
<TOTAL-REVENUES> 112,544
<CGS> 0
<TOTAL-COSTS> 67,623
<OTHER-EXPENSES> 4,625
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,673
<INCOME-PRETAX> (71)
<INCOME-TAX> 1,735
<INCOME-CONTINUING> (1,977)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,977)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
