UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 1997
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 issuer as specified in its charter)
New York 13-3550016
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
400 Alexander Park, Princeton, New Jersey 08540
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (609) 514-9650
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED:
Common Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title and class)
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 than 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Based on the average bid and ask price at March 23, 1998, the aggregate market
value of the voting stock held by non-affiliates of the registrant was
$69,336,263.
The number of shares of the Registrant's common stock outstanding as of March
23, 1998 was 9,529,788.
DOCUMENTS INCORPORATED BY REFERENCE : None
Page 1 of 90 Pages
Exhibit Index Appears on Page 82
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Berlitz International, Inc. (the "Company" or "Berlitz") is the world's premier
language services firm, with market leading positions in language instruction
and translation services. The Company also publishes the well-known Berlitz
travel guides, foreign language phrase books, dictionaries and a variety of
other related products. Since its founding, the Company has established a highly
recognized brand name and superior reputation throughout the world as a result
of the Company's tradition of teaching excellence.
The Company, through its predecessors, was founded 120 years ago and completed
its initial public offering in 1989. Since February 1993, Benesse Corporation
(formerly Fukutake Publishing Co., Ltd.) ("Benesse") has beneficially owned a
majority of the Company's common stock and it currently holds approximately 7.0
million shares, or 73.3% of the shares outstanding. Public shareholders of the
Company hold the remaining outstanding common stock. Since 1990, Benesse has
also owned a 20% interest in Berlitz Japan, Inc., ("Berlitz Japan"), the
Company's Japanese subsidiary.
Berlitz is the only company to operate a language services business on a
worldwide basis. This worldwide presence enables Berlitz to provide a full range
of language services to multi-national customers and to take advantage of new
business opportunities. Its operations are conducted through three business
segments (Language Instruction, Translation Services, and Publishing), each of
which is currently organized geographically into five operating divisions: North
America, Western Europe, Central/Eastern Europe, Asia and Latin America. At
least 88% of total Asia sales, operating profits, assets and employees in 1997
are attributable to the operations in Japan. Country and division managers
determine pricing, teacher/translator and administrative salaries, leasing of
facilities, local advertising and sales promotions, and other administrative
matters, within guidelines established at the Company's corporate headquarters.
The country managers are evaluated and provided incentives based on profit
performance of their particular areas while division managers are provided
incentives based on profit performance of both their particular areas and the
Company as a whole. Business segment and geographic area information is
incorporated herein in the Notes to Consolidated Financial Statements within
Item 8, Financial Statements and Supplementary Data, under Note 15.
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LANGUAGE INSTRUCTION
As of December 31, 1997, the Company owned and operated 334 Berlitz language
centers in 39 countries using the Berlitz Method(R), hereinafter described, and
the Company's proprietary instruction material, to provide instruction in
virtually all spoken languages. With an additional 14 franchised Berlitz
language center locations, the Company has a presence in 42 countries.
Approximately 5.5 million language lessons were given by Company-owned centers
in 1997, the most frequently taught languages being English, Spanish, French and
German. Revenues from Language Instruction accounted for approximately 75%, 75%
and 77% of total Company revenues in 1997, 1996 and 1995, respectively.
The following tables set forth, by geographic division, the number of Berlitz
language centers and the number of lessons given over the last five years
(excluding franchised locations):
NUMBER OF CENTERS AT DECEMBER 31,
- --------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
North America 71 70 72 72 72
Western Europe 57 57 55 56 60
Central/Eastern Europe 87 86 84 81 76
Asia 53 52 52 53 57
Latin America 66 60 60 58 57
-- -- -- -- --
Total 334 325 323 320 322
=== === === === ===
NUMBER OF LESSONS (IN THOUSANDS)
- --------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
North America 1,150 1,095 1,050 1,064 1,091
Western Europe 924 896 897 835 876
Central/Eastern Europe 1,251 1,160 1,084 1,017 920
Asia 1,040 939 935 946 844
Latin America 1,183 1,049 981 911 857
----- ----- --- --- ---
Total 5,548 5,139 4,947 4,773 4,588
===== ===== ===== ===== =====
A lesson consists of a single 45-minute session (regardless of the number of
students). In 1997, the United States, Japan, and Germany accounted for
approximately 18%, 16% and 11% of lessons given and 27%, 20% and 11% of Language
Instruction sales, respectively.
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At December 31, 1997, all of the Berlitz language centers operated by the
Company and its subsidiaries were wholly-owned, except for joint venture
operations in Korea and Taiwan. The following table sets forth, by geographic
division, the number of Berlitz language centers in each of the countries in
which the Company and its subsidiaries owned and operated centers as of December
31, 1997:
NORTH AMERICA WESTERN EUROPE
- ------------- --------------
Belgium 11
United States 63 Denmark 2
Canada 8 Finland 1
Total 71 France 16
== Holland 2
Ireland 1
LATIN AMERICA Italy 5
- ------------- Norway 1
Argentina 5 Portugal 1
Brazil 17 Spain 11
Chile 5 Sweden 1
Colombia 7 United Kingdom 5
Mexico 18 Total 57
Peru 1 ==
Puerto Rico 4
Uruguay 1
Venezuela 8
Total 66 CENTRAL/EASTERN
== ---------------
EUROPE
------
Austria 7
Czech Republic 5
Germany 49
Greece 1
Hungary 3
ASIA Israel 4
---- Poland 7
Hong Kong 1 Slovak Republic 1
Japan 47 Slovenia 1
Korea 1 Switzerland 9
Singapore 1 Total 87
Taiwan 1 ==
Thailand 2
Total 53
==
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In 1997, excluding franchises, 12 Berlitz language centers were added and 3 were
removed, bringing the worldwide total to 334. Capital expenditures incurred in
connection with opening a new language center in 1997 ranged from $60,000 to
$363,000.
On August 28, 1997, the Company completed its acquisition of ELS Educational
Services, Inc. ("ELS"), a privately held provider of intensive English language
instruction. At December 31, 1997, ELS operated 25 ELS-owned language centers in
the U.S. and one in the United Kingdom. In addition, there were 50 ELS
franchises in Asia, the Middle East, Latin America and Canada. These ELS centers
are in addition to the Berlitz locations noted in the tables above and under
Franchising Activities on page 9.
BERLITZ METHOD(R). At the heart of Language Instruction is the Berlitz
Method(R), a proven technique that enables students to acquire a working
knowledge of a foreign language in a short period of time. Through the exclusive
use of the target language in the classroom, students learn to think and speak
naturally in the new language, without translation. With its primary objective
to develop conversational comprehension and speaking skills, the Berlitz
Method(R) combines the use of live instruction with proprietary written,
audio-visual, and CD-ROM support materials to ensure a fast, effective, and
enjoyable learning experience.
Berlitz instructors generally teach in their national language and are required
to complete a seven to ten-day initial training course in the Berlitz Method(R),
followed by periodic refresher courses. Upon successful completion of the
initial training course, instructors work either full-time or part-time. The
Berlitz Method(R) does not require that an instructor be proficient in any
language other than the language being taught. This feature of the Berlitz
Method(R) greatly increases the number of potential instructors and tends to
lower instructor costs.
The Company's centralized management and ownership of the majority of its
language centers permits standardization of instructional method and materials.
This standardization also allows a client to begin a Berlitz course in one
location and complete it anywhere in the worldwide network of Berlitz language
centers. Through application of uniform standards to instructor training,
development and usage of materials, and classroom instruction, the Company seeks
to achieve consistent and predictable performance results.
LANGUAGE INSTRUCTION PROGRAMS. The Company offers several types of language
instruction programs, which vary in cost, length and intensity of study.
Approximately 45% of all tuition revenues in 1997 were from private lessons
(excluding Total Immersion(R)). Private instruction is typically provided in
blocks of three or more 45-minute lessons, with a short break after each lesson.
Total Immersion(R) courses, an intensive form of private instruction, accounted
for approximately 5% of tuition revenues in 1997. Total Immersion(R) programs
last a full day and generally continue for two to six weeks. The Company also
offers semi-private lessons designed for two to three clients, as well as group
instruction, where classes include four or more students. Group classes
generally meet over a period of weeks. Semi-private and group programs, together
represented 50% of tuition revenues in 1997.
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A majority of the Company's clients are from the corporate segment of the market
and are enrolled for business or professional reasons. Consequently, the
Company's business is influenced by the level of international trade and
economic activity. In addition to individuals seeking work-related language
skills, Berlitz clients also include travelers and high school and university
students developing course- related language skills.
Included in the Language Instruction business are specialty areas that in the
aggregate accounted for approximately 11% of the Company's revenues in 1997.
Three such businesses, ELS, Berlitz on Campus(R) - Language Institute For
English and Berlitz Study Abroad(R), combine intensive language instruction with
first-hand exposure to the cultural environment of the country where the target
language is spoken. A fourth specialty program, Berlitz Jr.(R), provides
complete language instruction programs to children in public and private schools
throughout the world. A fifth business, Berlitz Cross Cultural, which typically
provides cross-cultural training on a fee basis to corporate employees,
complements language study by providing expatriates with detailed practical and
cultural information about the countries to which they are relocating.
MARKETING AND PRICING POLICY. The Company directs its marketing efforts toward
individuals, businesses and governments. The Company utilizes newspaper,
magazine and yellow page advertising in addition to direct contacts. Local
marketing efforts are coordinated on a divisional and country-by- country basis.
Center directors, district managers and regional managers are responsible for
sales development with existing and new clients. In addition, sales forces are
maintained in the Company's major markets to supplement other marketing methods.
Tuition, which is payable in advance by most individual clients and some
corporate clients, includes a registration fee, a charge for printed and
recorded course materials, and a per lesson fee. The per lesson fee varies
depending on the language being taught, type and quantity of lessons, and
country. Total Immersion(R) courses are more expensive than standard individual
instruction, while semi-private and group instruction are less expensive.
The Company generally negotiates fees with its corporate clients based on
anticipated volume. Concentration on the intensive, individualized segment of
the market has enabled the Company to maintain a pricing structure consistent
with a premium service.
COMPETITION. The language instruction industry is fragmented, varying
significantly among different geographic locations. In addition to the Company,
providers of language instruction generally include individual tutors, small
language schools operated by individuals and public institutions, and franchises
of large language instruction companies. The smaller operations typically offer
large group instruction and self-teaching materials for home study. Rather than
compete with these smaller operators, the Company concentrates on its leading
position in the higher-priced, business-oriented segment of the language
instruction market through its offering of intensive and individualized
instruction. No competitors in this market offer language instruction through
wholly-owned operations on a worldwide basis. However, the Company does have a
number of competitors organized on a franchise basis which, although not as
geographically diverse as the Company, compete with it internationally. The
Company also faces significant competition in a number of local
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markets.
TRANSLATION SERVICES
Berlitz Translations Services provides high quality technical documentation
translation, software localization (i.e. the translation of software-related
products), software quality assurance ("SQA") testing, interpretation,
electronic publishing, and other foreign language-related services. Translations
Services represented approximately 21%, 21% and 18% of total Company revenues in
1997, 1996 and 1995, respectively, and is expected to contribute favorably to
corporate revenues over the next few years as a result of growing demand for
software related services and technical documentation translation, and a
continued focus on larger customer accounts. The Translations Services' recent
growth has been fueled by software localization, which combines Berlitz's
translations and project management expertise with the technological ability to
provide software engineering. In addition, the Company has increased its product
offerings to include software testing of localized products, multimedia
localizations (CD-ROM) and Internet related offerings such as web site
localization.
Berlitz Translations' sales focus is on large, complex projects in multiple
languages for global markets. Translations Services' customer base is primarily
in the following sectors: information technology, automotive / manufacturing,
telecommunications, and medical technology / pharmaceutical.
The Company has an international network of full-scale production and technology
centers. Materials are electronically transferred between locations to utilize
specialized in-country translations and production facilities in order to
produce the highest quality products and reduce costs. The Company has developed
an international network of contract translators who provide a broad range of
technical and linguistic resources, with an internal qualification program to
assure a high level of linguistic expertise. The Company has also developed a
production process that incorporates several editing phases designed to maximize
the accuracy of its translations. The staff at dedicated production facilities
generally consist of production managers, project managers, translators,
editors, desktop publishing ("DTP") specialists, software engineers, and
software testers. Managers and editors are generally full-time staff members,
while the translator and DTP staffs are comprised of both full-time employees
and freelance workers. Freelance translators provide the specialized skills that
are necessary for technical translations at a more cost effective rate than that
of full-time employees.
COMPETITION. In the translation services market, providers compete on the basis
of expertise, quality, price and job turnaround time. Although currently
fragmented, the market is consolidating and the Company believes that in the
near future, there will be fewer, but larger, competitors. The Company does not
believe that any one competitor accounts for a significant portion of the entire
commercial translation market.
PUBLISHING
The Company publishes pocket-size travel guides, language phrase books,
bilingual dictionaries, children's language products, self-teaching language
audio and language reference products. It is also
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involved in several licensing arrangements for products that use Berlitz
materials and for which the Company receives royalties. The Company has recently
instituted a new prototype language center that is designed, in part, to create
an attractive retail store that the Company expects will facilitate greater
sales of Company-published materials. The Publishing business accounted for
approximately 3%, 4% and 5% of total Company revenues in 1997, 1996 and 1995,
respectively. Approximately 35%, 43% and 48% of Publishing segment sales in
1997, 1996 and 1995, respectively, were in Europe.
In 1996, the Company initiated the relocation of most of its U.S. publishing
operations and all editorial and production functions of its U.K. Publishing
operations to the Company's new Princeton headquarters. Such relocation was
completed in 1997.
BERLITZ BOOKS AND GUIDES. Pocket-size, smaller format travel guides include
full-color pictures, maps, brief histories, points of interest, food and
shopping information and a practical A to Z section. There are a total of 94
titles in this format published in English, plus more than 200 titles in more
than 11 other languages. For these multiple-language titles, the Company employs
manufacturing techniques utilizing the same graphics and layouts to reduce
manufacturing costs.
The Company's phrase books include common expressions, words and phrases most
often used by travelers. These appear in color-coded sections covering such
topics as accommodations, eating, sightseeing, shopping, transportation and
medical reference. There are a total of 115 phrase books published in 14
languages, of which 31 are for English-speaking travelers. Additional
travel-related language products include Cassette Packs and Compact Disc Packs,
which consist of a 90-minute cassette tape or a 75-minute compact disc ("CD")
and phrase book packaged and sold together. Retail distribution for the books
and audio products is generally handled by an exclusive distribution agreement
with an established book trade distributor for each major country in which the
products are sold (e.g., the U.K., France, Germany, U.S. and Canada).
BERLITZ SELF-TEACHING. The audio cassette and CD products produced by the
Company are intended for the self-instruction language market and draw on the
experience gained through operating language centers. In addition to a general
language instruction curriculum, these products include products for children
and courses for business people.
In the U.S., the high-end audio cassette and CD products are marketed through
in-flight airline magazine space advertising, as well as through credit card and
travel club statement inserts. In addition to the audio cassette and CD
products, the Company is presently involved in several licensing arrangements
for products that use published Berlitz materials as the basis of alternate
media products (such as hand-held electronic reference products and CD-ROM
computer software) for which the Company receives royalties.
The Company's Publishing segment plan includes the relaunching of existing
product lines and the creation of new products that will compete in today's
market place. For example, Berlitz publishes illustrated book and audiotape
language learning products for children under the brand name BERLITZ KIDS(TM).
In 1998, Berlitz will begin distribution of an all-new series of technologically
and pedagogically advanced self-teaching language instruction products that will
supercede the
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Company's current THINK & TALK(R) series, under the names BERLITZ TODAY and
BERLITZ THINK & TALK(R). In addition, the Company plans to take advantage of
Asian and Latin American markets for distribution of its products.
COMPETITION. The market for the Company's publications and self-teaching
language products is sensitive to factors that influence the level of
international travel, tourism and business. There is intense competition in
nearly all markets in which the Company sells its published products. The
Company's market share and Berlitz brand name recognition levels vary
considerably depending on market and product line.
FRANCHISING ACTIVITIES
In 1996, the Company began selling Berlitz language center franchises to
independent franchisees in certain countries to expand the reach of its language
services business. The following tables show the number and location by country
of Berlitz franchise units operating at December 31, 1997, as well as locations
for which franchise units have been granted as of December 31, 1997 but which
have not yet opened:
FRANCHISE UNITS OPEN FRANCHISE UNITS
-------------------- ---------------
NOT YET OPENED
--------------
Argentina 1
Austria 1
Brazil 1
Chile 1
Costa Rica 1
Dominican Republic 1 1
Egypt 2
France 1
Germany 2
Guatemala 1
Indonesia 1 2
Japan 3
Kuwait 1
Mexico 1 1
United Arab Emirates 2
United Kingdom 1
USA 3
Total 14 14
== ==
Franchisees are granted franchises to operate Berlitz language centers in a
specific territory, the size of which depends on demographic and geographic
factors. Such sites are selected to improve the Company's geographic reach
beyond areas in which the Company and other franchisees operate. Franchisees pay
Berlitz an application fee of $5,000, an initial franchise fee of $25,000
($45,000 in Asia), 10% (7.5% in Europe) of the language center's gross revenues
in royalties, and 2% of gross revenues for advertising participation.
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The Company actively monitors the operations and lesson quality of its
franchisees, and has developed an extensive confidential operations manual,
which together with the Company's Berlitz Method(R), forms the core of the
Berlitz franchise system. All franchisees are required to complete a two-week
training program at the Company's Princeton headquarters and the Company also
offers two additional weeks of on-site teacher training. Franchisees participate
in the Berlitz Language Center Management System ("LCMS"), a management
information system tied to Berlitz's headquarters, and are subject to periodic
financial audit and quality inspection.
EMPLOYEES
As of December 31, 1997, the Company employed 5,884 full-time employee and
employee equivalents. Due to the nature of its businesses, the Company retains a
large number of teachers and translators on a part-time or freelance basis.
Full-time employee equivalents are calculated by aggregating all part-time hours
(excluding freelance translators) and dividing these by the average number of
hours worked by a full-time employee.
The Company is party to collective bargaining agreements in Canada, Denmark,
France, Austria, Germany, Italy and Japan. The Company believes it has
satisfactory employee relations in the countries in which it operates. Certain
countries in which the Company operates impose obligations on the Company with
respect to employee benefits. None of these obligations materially inhibit the
Company's ability to operate its business.
TRADEMARKS AND TRADENAMES
The material trademarks used by the Company and its subsidiaries are BERLITZ(R),
TOTAL IMMERSION(R) (including foreign language variations used in certain
foreign markets), BERLITZ METHOD(R), BERLITZ JR.(R), BERLITZ STUDY ABROAD(R),
BERLITZ ON CAMPUS(R), L.I.F.E.(R), BERLITZ KIDS(TM), ELS(R), ELS LANGUAGE
CENTERS(R), ELS INTERNATIONAL(R), and WE TEACH ENGLISH TO THE WORLD(R). The
Company or its subsidiaries hold registrations for these trademarks, where
possible, in all countries in which (i) material use is made of the trademarks
by the Company or its subsidiaries, and (ii) failure to hold such a registration
is reasonably likely to have a material adverse effect on the Company or its
subsidiaries. The duration of the registrations varies from country to country.
However, all registrations are renewable upon a showing of use. The effect of
the registrations is to enhance the Company's ability to prevent certain uses of
the trademarks by competitors and other third parties. In certain countries, the
registrations create a presumption of exclusive ownership of the trademarks.
REGULATORY ISSUES
Although the Company is not generally regulated as an educational institution in
the jurisdictions in which it does business, it is subject to general business
regulation and taxation. The Company's foreign operations are subject to the
effects of changes in the economic and regulatory environments of the countries
in which the Company operates. In certain countries and states of the U.S., laws
and regulations restrict the operation of language schools.
The Uniform Offering Circular ("UFOC") of Berlitz Franchising Corporation, a
wholly owned subsidiary of the Company, has been registered with various states
as required. An "internationalized" version of the UFOC has been prepared and
has been modified to comply with foreign law requirements where applicable. The
Company intends to have ELS apply for registration as a franchisor under the
California Franchise Investment Law.
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ITEM 2. PROPERTIES
The Company has its headquarters in Princeton, New Jersey and maintains
facilities throughout the world. Except for nine facilities in Brazil, Chile,
France, Hungary, Mexico, Spain and Venezuela, all of the Company's facilities
are leased. Total annual rental expense for the twelve months ended December 31,
1997, principally for leased facilities, was $27,066,000. No one facility is
material to the operation of the Company. A typical Berlitz language center has
private classrooms designed for individual instruction, as well as some larger
rooms suitable for group instruction.
The following tables set forth, as of December 31, 1997, by geographic region,
the number of facilities maintained in each region, the use of the Company's
facility, whether owned or leased, and the aggregate square footage:
OWNED FACILITIES
----------------
Number of Aggregate
Region Facilities Use Square Footage
------ ---------- --- --------------
Western Europe 2 Center 3,397
Central/Eastern Europe 2 Center 4,387
Latin America 5 Center 17,451
- ----------------
Total 9 Total 25,235
= ================
LEASED FACILITIES
-----------------
Number of Aggregate
Region Facilities Use Square Footage
------ ---------- --- --------------
North America (1) 110 (2) 522,823
Western Europe 70 (2) 256,853
Central/Eastern Europe 90 (2) 245,087
Asia 60 (2) 162,059
Latin America 65 (2) 258,077
------ -------
Total 395 1,444,899
=== =========
(1) The acquisition of ELS Educational Services, Inc. in August 1997 added 28
additional facilities with an aggregate square footage of 236,740.
(2) Principally language centers. Also includes administrative offices and
Translations Services production and technology centers.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to several actions arising out of the ordinary course of
its business. Management believes that none of these actions, individually or in
the aggregate, will have a material adverse effect on the financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of security holders during the fourth
quarter of 1997.
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Pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General
Instruction G(3) to Form 10- K, the following information is included in Part I
of this Form 10-K.
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The following table sets forth certain information concerning the Executive
Officers and Directors of the Company as of March 1, 1998.
NAME, AGE, POSITION WITH
REGISTRANT
Soichiro Fukutake, 52
Chairman of the Board;
Director (A) (E)
Mr. Fukutake has served as Chairman of the Board of the Company since February
1993. Mr. Fukutake joined Benesse in 1973, and since May 1986 has served as its
President and Representative Director. He also serves on the Board of Directors
of a number of companies, private foundations and associations in Japan. Mr.
Fukutake became a Director of the Company in February 1993. His term will expire
in 1999.
Hiromasa Yokoi, 58
Vice Chairman of the Board,
Chief Executive Officer and
President; Director (A) (E)
Mr. Yokoi was elected Vice Chairman of the Board and Chief Executive Officer of
the Company in February 1993 and additionally was elected President effective on
August 31, 1993. Mr. Yokoi has served as a director of Benesse since June 1992
and Director for Berlitz and North American Sector since April 1994. Prior to
that, he served as General Manager of the Overseas Operations Division (formerly
the International Division) of Benesse from October 1990 to March 1994 and as
General Manager of the President's Office of Benesse from July 1990 to September
1990. Mr. Yokoi currently is also a Director of La Petite Academy and serves on
its compensation committee. Mr. Yokoi has served as a Director of the Company
since January 1991. His term will expire in 1998.
Susumu Kojima, 55
Executive Vice President,
Asia Division;
Director (A)
Mr. Kojima has served as Executive Vice President, Asia Division of the Company
since January 1, 1996. Prior thereto, he served as Executive Vice President,
Corporate Planning from September 1993 to December 1995, and as Senior Vice
President, Corporate Planning of the Company from February 1993 to September
1993. Mr. Kojima has served as a Director of Benesse since March 1993. Prior to
that, he was Joint General Manager of the Business Development Department of The
Industrial Bank of Japan, Limited ("I.B.J.") from June 1991
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to February 1993. Between November 1987 and June 1991, he served as Senior
Deputy General Manager, Industrial Research Department of I.B.J. after having
served as Chief Representative of I.B.J.'s Washington Representative Office from
September 1983. Mr. Kojima was elected as a Director of the Company in February
1993. His term will expire in 1999.
Robert Minsky, 53
Executive Vice President,
Corporate Planning and
Marketing;
Director (A)
Mr. Minsky has served as Executive Vice President, Corporate Planning and
Marketing of the Company since August 1, 1997. Prior thereto, he served as
Executive Vice President and Chief Operating Officer, Translations and
Publishing of the Company from January 1, 1995 to December 31, 1997, as
Executive Vice President, Translations of the Company from October 1, 1993 to
January 1995, and as Chief Financial Officer of the Company from November 1990
to January 1995. From November 1990 to October 1993, he also served as Vice
President. Mr. Minsky has served as a Director of the Company since April 1991.
His term will expire in 1999.
Manuel Fernandez, 61
Executive Vice President and
Chief Operating Officer,
Worldwide Language
Instruction;
Director (A)
Mr. Fernandez has served as Executive Vice President and Chief Operating
Officer, Worldwide Language Instruction of the Company since January 1, 1995.
Prior thereto, he was Executive Vice President, Language Services of the Company
from September 1993 to January 1995, and Vice President, European Operations of
the Company from October 1989 to September 1993. He previously served as Vice
President, European Operations for Berlitz Languages from January 1983 to
October 1989. Mr. Fernandez was first employed by Berlitz Languages in 1963 and
served in various positions until becoming Vice President in 1983. Mr. Fernandez
has served as a Director of the Company since July 1993. His term will expire in
1999.
Henry D. James, 60
Executive Vice President and
Chief Financial Officer;
Director
Mr. James has served as Executive Vice President and Chief Financial Officer of
the Company since November 21, 1995, and as its Vice President and Chief
Financial Officer from January 1, 1995 to November 1995. He previously served as
Vice President and Controller of the Company and its predecessor, Berlitz
Languages, since 1981. Mr. James joined Berlitz Languages in 1977 and served as
Controller with that company prior to 1981. Mr. James has served as a Director
of the Company since November 21, 1995. His term will expire in 1998.
Edward G. Nelson, 66
Director (B)(C)(D)(E)
Since January 1985, Mr. Nelson has served as Chairman and President of Nelson
Capital Corporation. From 1983 to 1985, he
13
<PAGE>
was Chairman and Chief Executive Officer of Commerce Union Corporation. He also
serves on the Board of Directors of ClinTrials, Inc., Osborn Communications
Corporation, Central Parking System and Advocat, Inc. He is a trustee of
Vanderbilt University. Mr. Nelson became a Director of the Company in February
1993. His term will expire in 1998.
Robert L. Purdum, 62
Director (B)(C)(D)(E)
Mr. Purdum is the retired Chairman of the Board of Armco, Inc. and currently is
an independent consultant and partner with American Industrial Partners, a
private investment company located in New York and San Francisco. During his
Armco career, he served in various positions since first joining Armco in 1962,
including Chairman and Chief Executive Officer (November 1990 to December 1993),
President and Chief Executive Officer (April 1990 to November 1990), President
(October 1986 to April 1990), Chief Operating Officer (February 1985 to October
1986) and Chief Executive Officer-Steel Group (November 1982 to February 1985).
Mr. Purdum also serves on the Board of Directors of Holophane Corporation since
1994. In addition, he is a member of the Board of Trustees of Kettering
University. Mr. Purdum has served as a Director of the Company since August
1994. His term will expire in 1998.
Aritoshi Soejima, 71
Director (B)(C)(D)
Mr. Soejima served as Senior Counselor of Benesse from December 1980 until his
appointment as a member of the Disinterested Directors and Compensation
Committees of the Company. From 1950 to 1981, Mr. Soejima served in various
positions with the Japanese government (including the Ministry of Finance) and
multilateral financial institutions (including the World Bank and International
Monetary Fund). Mr. Soejima also currently serves as Director and Counselor of
Capital International Company, Ltd. and as special advisor to the Board of
Directors of the Nippon Fire & Marine Insurance Company, Ltd.. In addition, he
serves, until his retirement on March 24, 1998, as Chairman of Osaka, Tokyo Bay,
Nagoya Hilton Company, Ltd. Further, Mr. Soejima serves on the Board of
Directors of a number of companies, private foundations and associations in
Japan. Mr. Soejima became a Director of the Company in February 1993. Mr.
Soejima will retire from the Board effective upon the election of his successor
at the Annual Meeting of Shareholders to be held June 2, 1998.
Kazuo Yamakawa, 58
Director
Mr. Yamakawa has served as a Director of Benesse and has supervised its General
Administration and Accounting
14
<PAGE>
Departments since June 1995. He also has served as General Manager of Benesse's
Accounting Department since January 1996. Since joining Benesse in April 1995,
he served as Counselor until June 1995. Prior to that, Mr. Yamakawa served in
various positions with The Shokochukin Bank, including Director (April 1993 to
March 1995), General Manager of its Tokyo branch (April 1993 to March 1995),
General Manager of its International Department (October 1991 to March 1993) and
General Manager of its New York Branch (April 1988 to September 1991). Mr.
Yamakawa became a Director of the Company in May 1996. His term will expire in
1998.
Robert C. Hendon, Jr., 60
Vice President, General
Counsel and Secretary
Mr. Hendon has served as Vice President, Legal Department of the Company since
January 1, 1995 and as Secretary and General Counsel of the Company since April
1992. Prior thereto, he was first an associate then a partner at the law firm of
Waller Lansden Dortch & Davis from 1964 until April 1992.
Anthony Tedesco, 55
Senior Vice President,
Worldwide Language
Instruction
Mr. Tedesco has served as Senior Vice President, Worldwide Language Instruction
of the Company since October 1, 1997. Prior thereto, he served as Vice
President, North American Division of the Company from October 1994 to October
1997, as Vice President, East Asian Division of the Company from July 1993 to
October 1994, and as Vice President, North American Division of the Company from
October 1989 to July 1993. Prior thereto, Mr. Tedesco served as Vice President,
North American Division of Berlitz Languages since his initial employment in
1983.
Ellen Adler, 42
Vice President, Worldwide
Publishing
Ms. Adler's appointment as Vice President, Worldwide Publishing of the Company
on October 1, 1997 was approved by the Company's Board of Directors effective
January 1, 1998. Prior thereto, she served in various positions with the Company
including Managing Director, North America Publishing (January 1996 to September
1997), Publisher, North and South America (January 1994 to December 1995),
Director of Berlitz Publishing, Inc. (July 1989 to December 1993), and Director
of Operations, USA (November 1988 to July 1989).
Jose Alvarino, 58
Vice President
Mr. Alvarino has been Vice President, Latin American Division of the Company
since October 1989. Prior thereto, he served in the same capacity with Berlitz
Languages from 1985 until October 1989. Mr. Alvarino was first employed by
Berlitz
15
<PAGE>
Languages in 1970 and served in various positions from that time until being
appointed Vice President in 1985.
Mark Harris, 44
Vice President
Mr. Harris' appointment as Vice President, North America Division of the Company
on October 1, 1997 was approved by the Company's Board of Directors effective
January 1, 1998. Prior thereto, he served as in various positions with the
Company, including Managing Director of Berlitz on Campus (September 1993 to
September 1997) and Berlitz Regional Manager, New Business Development/Far East
(May 1987 through August 1993). Mr. Harris was first employed by Berlitz
Languages in 1978.
Brian Kelly, 50
Vice President
Mr. Kelly has served as Vice President, Western Europe Division of the Company
since January 1, 1996 and as General Manager, Translations Services Europe since
January 1993. Prior to that, he was Managing Director of Softrans International
Ltd. of which the Company acquired a 51% holding in December 1991 and fully
acquired in 1994. Mr. Kelly founded Softrans in 1984 and prior to that held
senior management positions with Apple Computer and Data General.
James Lewis, 40
Vice President, Worldwide
Translations
Mr. Lewis has served as Vice President, Worldwide Translations of the Company
since September, 1, 1997. Previously, he most recently served as in a number of
executive-level positions with Globalink, Inc. (including President and Director
(September 1995 to August 1997), and Vice President, Worldwide Sales and
Marketing (July 1995 to September 1995)), MAXM Systems Corporation (Vice
President, Marketing from 1994 to 1995), and Landmark Systems Corporation (Vice
President, International Operations, from 1992 to 1994). Prior thereto, Mr.
Lewis held positions with Peter Norton Computing, Inc. Ashton-Tate, Corp. and
PSS, Inc.
Wolfgang Wiedeler, 52
Vice President
Mr. Wiedeler has served as Vice President, Central/Eastern Europe Division of
the Company since January 1, 1996 and as Vice President, Language Instruction
European Division of the Company from September 1993 to December 1995. From May
1992 to September 1993 he was Vice President, Central/Eastern European
Operations. Prior thereto, he served as Divisional Manager of German-speaking
countries since October 1989. Prior thereto he served in the same capacity for
Berlitz Languages from his initial employment in 1984.
16
<PAGE>
(A) member of the Executive Committee of the Board of Directors
(B) member of the Audit Committee
(C) member of the Compensation Committee
member of the Disinterested Directors Committee
member of the Nominating Committee
The Company's Disinterested Directors Committee evaluates all significant
transactions between the Company and Benesse. There is no family relationship
between any of the Directors or Executive Officers of the Company.
Mr. Takuro Isoda has been nominated by the Nominating Committee of the Board of
Directors to succeed Mr. Soejima as a Director of the Company. Mr. Isoda has
served as Chairman of Nippon Investment & Finance Co. Ltd. since June 1994, and
previously served as its President from January 1990 to May 1994. Prior thereto,
Mr. Isoda served in various positions with Daiwa Securities since first joining
that company in 1959, including, most recently, Chairman & CEO of Daiwa
Securities of America, Inc., New York (January 1985 to January 1990), and Senior
Managing Director of Daiwa Securities Co., Ltd., Tokyo (December 1988 to January
1990). Mr. Isoda currently serves on the boards of the New Business Conference,
Tokyo (as Director and Chairman of the International Business Committee); The
Japan Academic Society for Venture and Entrepreneur, Tokyo; and Americans for
Indian Opportunity, New Mexico (as International Advisor).
SIGNIFICANT EMPLOYEES OF THE REGISTRANT
The following table sets forth certain information concerning certain
significant employees of the Company as of March 1, 1998.
Perry Akins, 57
President, ELS Educational
Services, Inc.
Mr. Akins has served as President of ELS Educational Services, Inc. and its
predecessor from 1977 through the present, and has been associated with ELS
since 1966.
Frank Garton, 51
Vice President
Mr. Garton has served as Vice President, Franchising of the Company since March
1995. Prior to that, he was Director of Worldwide Franchise Sales and Corporate
Development for King Bear Enterprises from 1987 to 1995. From 1978 to 1987, Mr.
Garton was President and Chief Executive Officer of Regeneration, Inc., an
automotive components manufacturing company with internationally franchised
manufacturing processes.
Isao Hisai, 45
Executive Vice President of
Berlitz Japan
Mr. Hisai has served as Executive Vice President of Berlitz Japan since
September 1996. He previously served as Vice President, Finance of the Company
from February 1993 until September 1996. From October 1992 until February 1993,
Mr. Hisai was employed in Benesse's Overseas Operation
17
<PAGE>
Department, and from April 1988 until October 1992, he served as Manager,
Finance and Accounting Department of Benesse.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock ("Common Stock") is traded on the New York Stock
Exchange ("NYSE") under the symbol BTZ. Holders of shares of Common Stock are
entitled to receive such dividends as may from time to time be declared by the
Board of Directors; however, such dividends are subject to restrictions set
forth in the Company's August 28, 1997 credit agreement (the "Bank Facility").
As a result, the Company does not expect to pay dividends during the term of
such debt facilities. See Item 7, Management's Discussion and Analysis,
Liquidity and Capital Resources, for further discussion. Holders of Common Stock
are entitled to one vote per share on all matters submitted to the vote of such
holders, including the election of directors. There were 84 holders of record of
Common Stock as of March 17, 1998.
The sales prices per share of Common Stock as reported by the NYSE for each
quarter during the period from January 1, 1996 until December 31, 1997 ranged as
follows:
PRICE PER SHARE
---------------
HIGH LOW
---- ---
First Quarter 1997 $22 3/8 $18 5/8
Second Quarter 1997 $25 1/4 $22 3/8
Third Quarter 1997 $26 3/4 $24 9/16
Fourth Quarter 1997 $27 5/16 $25 1/2
First Quarter 1996 $17 1/8 $15 3/4
Second Quarter 1996 $21 3/4 $15 7/8
Third Quarter 1996 $23 5/8 $20 3/8
Fourth Quarter 1996 $22 3/4 $18 7/8
No common stock dividends for 1996 or 1997 were declared or paid.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
BERLITZ INTERNATIONAL, INC.
FIVE-YEAR FINANCIAL SUMMARY
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pre-
Post-Merger Post-Merger(1) Merger (1)
----------- ------------- -----------
Period from Period from
February 1, January 1,
Year Ended 1993 to 1993 to
Year Ended December 31, December 31, Dec. 31,
-----------------------
Jan. 31,
1997 1996 1995 1994 1993 (2) 1993 1993
---- ---- ---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
- ----------------------
Sales of services and
products sold (3) $ 397,209 $ 369,622 $ 354,509 $ 303,287 $ 274,508 $ 254,728 $ 19,780
--------- --------- --------- --------- --------- --------- --------
Cost and expenses:
Cost of services and
products sold (3) 236,521 222,313 216,443 182,922 171,933 158,282 13,651
Selling, general and
administrative (3) 123,444 113,695 105,039 91,703 83,500 76,781 6,719
Amortization of publishing rights,
excess of cost over net assets
acquired and other intangibles 14,183 12,746 13,425 12,750 12,423 11,551 872
Merger-related restructuring
costs (4) - - - - 4,808 4,808 -
Other (income) expense, net 10,008 8,054 8,826 8,070 5,630 5,925 (295)
------ ----- ----- ----- ----- ----- ----
Total costs and expenses 384,156 356,808 343,733 295,445 278,294 257,347 20,947
------- ------- ------- ------- ------- ------- ------
Income (loss) before income taxes,
minority interest, extraordinary item
and cumulative effect of change
in accounting principle $ 13,053 $ 12,814 $ 10,776 $ 7,842 $ (3,786) $ (2,619) $(1,167)
========= ======== ========= ========= ======== ========= =======
Minority interest-income/(expense) $ (613) $ (1,503) $ (1,106) $ (738) $ 3,860 $ 3,692 $ 168
========= ======== ========= ========= ======== ========= =======
Extraordinary loss(5) $ (6,285) $ - $ - $ - $ - $ - $ -
========= ======== ========= ========= ======== ========= =======
Cumulative effect of change in
accounting principle $ - $ - $ - $ - $ 3,172 $ - $ 3,172
========= ======== ========= ========= ======== ========= =======
Net income (loss) $ (934) $ 3,803 $ 2,270 $ 909 $ (2,018) $ (3,556) $ 1,538
======== ======== ========= ========= ======== ========= =======
Earnings (loss) per share (both basic and diluted):
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle $ 0.56 $ 0.40 $ 0.23 $ 0.09 $ (0.35) $ (0.09)
Extraordinary loss (0.66) - - - - -
Cumulative effect of change in
accounting principle - - - - - 0.17
Earnings (loss) per share $ (0.10) $ 0.40 $ 0.23 $ 0.09 $ (0.35) $ 0.08
======== ======== ========= ========= ========= ========
Average number of shares (000) 9,550 9,569 10,033 10,033 10,031 19,024
===== ===== ====== ====== ====== ======
Balance sheet data (at year end):
- --------------------------------
Total assets(5) $ 661,515 $ 561,245 $ 576,930 $ 582,005 $570,472
Long-term debt(5) $ 142,369 $ 56,353 $ 67,081 $ 78,420 $105,775
Shareholders' equity $ 346,978 $ 357,407 $ 370,416 $ 367,235 $364,953
Other data:
Language lessons given
during year (000) 5,548 5,139 4,947 4,773 4,588
Company-operated language
centers at year end 334 325 323 320 322
Growth (decline) in same center
sales from year to year (6) 7.5% 6.0% 3.0% 6.3% (5.9)%
</TABLE>
19
<PAGE>
(1) In February 1993, Benesse Corporation (formerly Fukutake Publishing
Co., Ltd.) ("Benesse") acquired, through a merger of the Company with
an indirect wholly-owned U.S. subsidiary of Benesse (the "Merger"),
approximately 6.7 million shares of the common stock, par value $.10
per share ("Common") of the Company. Benesse currently owns
approximately 7.0 million shares of Common, while public shareholders
hold the remaining 2.5 million outstanding Common shares.
(2) Income statement data give effect to the combination of the results of
the Company for the 1993 Pre-Merger and Post-Merger periods.
(3) In 1993, under the purchase method of accounting, the Post-Merger sales
and expenses of facilities closed in connection with the Merger were
reclassified to "Merger-related restructuring costs" on the income
statement (33%) and "Excess of cost over net assets acquired" on the
balance sheet (67%).
(4) Principally represents 33% of severance payments, language center
closing costs, and costs of reorganizing Translations and certain
Language Instruction divisions.
(5) On August 28, 1997 (the "Closing Date"), the Company completed its
acquisition of ELS Educational Services, Inc. ("ELS"), a privately held
provider of intensive English language instruction, in a stock
acquisition for a cash purchase price of $95.0 million (the "ELS
Acquisition"), subject to certain post-closing adjustments specified in
the related stock purchase agreement. Such post-closing adjustments
aggregated $1.3 million and were paid to the sellers in January 1998.
The Company also incurred various transaction-related expenditures.
Consequently, total assets at December 31, 1997 includes $103 million
in intangibles related to the ELS acquisition.
Financing for the transaction, and simultaneous refinancing of the
Company's existing Senior Notes, Term Loan, and related prepayment
penalties and costs, was provided through a bank loan facility (the
"Bank Facility") consisting of term loans and a revolving credit
facility, as amended, aggregating $190 million. In connection with this
refinancing, the Company incurred an extraordinary charge, net of
taxes, of $6.3 million, consisting of prepayment penalties on the
Senior Notes and the write-off of unamortized deferred financing costs.
At December 31, 1997, $160 million, including $17.7 million in current
maturities, was outstanding under the Bank Facility.
(6) Indicates year-over-year increase (decrease), excluding the impact of
foreign currency rate fluctuations, in sales by language centers which
were operating during the entirety of both years being compared.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements and Notes thereto
contained elsewhere in this Annual Report on Form 10-K. Certain statements
contained within this discussion constitute forward looking statements. See
"Special Note Regarding Forward Looking Statements."
GENERAL OVERVIEW
The Company's operations are conducted primarily through the following business
segments: Language Instruction, Translation Services, and Publishing. The
Company's sales grew from $354.5 million in 1995 to $397.2 million in 1997, a
compound annual growth rate of 5.9%, and its earnings per share (both basic and
diluted), before extraordinary items, rose from $0.23 to $0.56 in the same
three-year period, favorably impacted by higher operating profits.
The following table shows the Company's income and expense data as a percentage
of sales:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
Sales of Services and Products 100.0% 100.0% 100.0%
----- ----- -----
Costs of services and products sold (1) 59.5 60.1 61.1
Selling, general and administrative (2) 31.1 30.8 29.6
Amortization of publishing rights
excess of cost over net assets acquired,
and other intangibles 3.6 3.4 3.8
Interest expense on long-term debt 2.1 2.1 2.4
Interest expense to affiliate 0.5 0.5 0.4
Other (income), net (0.1) (0.3) (0.3)
---- ---- ----
Total costs and expenses 96.7 96.6 97.0
---- ---- ----
Income before income taxes, minority
interest in earnings of subsidiary, and
extraordinary item 3.3 3.4 3.0
Income tax expense 1.8 2.0 2.1
Minority interest 0.2 0.4 0.3
--- --- ---
Income before extraordinary item 1.3 1.0 0.6
Extraordinary loss from early extinguishment
of debt, net of tax benefit (1.6) - -
---- --- ---
Net (loss) income (0.3)% 1.0% 0.6%
===== === ===
21
<PAGE>
(1) Consists primarily of teachers', translators', and certain
administrative salaries, as well as cost of materials, rent,
maintenance, depreciation and other center operating expenses.
(2) Consists primarily of administrative salaries, marketing and
advertising expenses, and other headquarters related expenses.
The Company's recent growth is attributable to a number of factors, including
the purchase of a significant new subsidiary. On August 28, 1997 (the "Closing
Date"), the Company completed its acquisition of ELS Educational Services, Inc.
("ELS"), a privately held provider of intensive English language instruction, in
a stock acquisition for a cash purchase price of $95.0 million (the "ELS
Acquisition"), subject to certain post-closing adjustments specified in the
related stock purchase agreement. Such post-closing adjustments aggregated $1.3
million and were paid to the sellers in January 1998. The Company also incurred
various transaction-related expenditures. Financing for the transaction, and
simultaneous refinancing of the Company's existing Senior Notes, Term Loan, and
related prepayment penalties and costs, was provided through a bank loan
facility (the "Bank Facility") consisting of term loans and a revolving credit
facility aggregating $165 million at the Closing Date. ELS contributed $19.9
million in post acquisition revenues for the year ended December 31, 1997.
The Company's operations have also benefited in recent years from a number of
global trends which have increased the demand for the Company's services. For
example, the opening of Central and Eastern Europe to capitalism and the recent
economic growth experienced in Latin America have contributed to increased
international business activity and the use of English worldwide as a business
language. Another example is the market for software localization and technical
translations services, an area in which the Company's Translations segment is a
global leader. This market has increased rapidly as software programs have
proliferated and have been translated into numerous language versions, and as
the Company's customers have increasingly outsourced the software localization
process.
Internal actions have also helped the Company grow. For example, in Language
Instruction, the Company continued to expand several niche programs, including
cross-cultural services, Berlitz Jr(R), Berlitz on Campus(R) and Berlitz Study
Abroad(R), enabling it to operate even more effectively as a "one-stop" language
service provider. To complement its live instruction, the Company has
increasingly used technology, such as CD-ROM, video and audio tools, to enhance
its traditional teaching programs while reducing teaching costs. The Company has
also increased its emphasis on more profitable semi-private and group lessons,
and has increased the number of Company-owned language center locations, adding
27 new Berlitz language centers and deleting 13 over the three-year period ended
December 31, 1997. To further increase its market presence, the Company has
utilized franchising and joint ventures in emerging and secondary markets. From
commencement of its operations through December 31, 1997, the Company's
franchising business segment has granted 28 Berlitz franchises, 14 of which have
opened as of December 1997.
22
<PAGE>
In the Translations segment, there has been a continued focus on large corporate
accounts, development of new customers, superior customer satisfaction, and the
expansion of services, including a continuing commitment to the information
technology industry, software localization, and software testing services. As
Translations Services grows, the Company will seek to continue improving the
profitability of the segment through (i) increasing productivity through the use
of more advanced computer-aided translation tools and communications technology;
(ii) continuing to centralize certain non-linguistic functions, such as software
engineering, software quality assurance and desktop publishing; (iii) increasing
the percentage of multi-year projects which reduce the Company's project
start-up costs; (iv) expanding on-line translation capabilities to customers;
and (iv) hiring, training and retaining the highest quality industry talent
available in the industry.
The publishing segment's recent performance has been lackluster, having been
hurt in 1997 by a number of factors. These included: significant transition
problems related to the move of editorial and production functions from the
United Kingdom to the United States; the absence of new products and
out-of-stock situations for certain products; a challenging competitive
environment; and limitations of inventory management systems. However, certain
positive events toward the end of 1997 have set the stage for a turnaround. For
example, a new Publishing organization structure has been established with new
executive and senior management. An integrated inventory control system is
expected to go live in early 1998. New analytical tools have been developed and
a new business plan has been articulated to customers and partners in all key
markets.
Geographically, the majority of the Company's subsidiaries are located outside
the United States, with operations conducted in their respective local
currencies. For the three years ended December 31, 1997, the percentage of total
revenues denominated in currencies other than U.S. dollars averaged 72%, in
foreign currencies including the Japanese yen, the German mark, the Irish punt,
the British pound and the French and Swiss francs. As a result, changes in
exchange rates affected the comparisons of the Company's earnings from period to
period, benefiting 1995's financial results when the U.S. dollar weakened
against most foreign currencies, while adversely affecting 1996's and 1997's
financial results when the dollar generally strengthened. The following table
shows the impact of foreign currency rate fluctuations on the annual growth rate
of sales and EBITA(1) during the periods presented:
PERCENTAGE GROWTH (DECLINE)
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
Sales:
Operations (2) 14.0% 9.0% 10.3%
Exchange (6.5) (4.7) 6.6
----- ----- ---
Total 7.5% 4.3% 16.9%
==== ==== =====
EBITA:
Operations (2) 17.8% 7.8% 10.6%
Exchange (7.0) (6.0) 4.6
----- ----- ---
Total 10.8% 1.8% 15.2%
===== ==== =====
23
<PAGE>
(1) EBITA as used herein is defined as sales less cost of services and
products sold, and selling, general and administrative expenses. It is
calculated using amounts determined in accordance with U.S. generally
accepted accounting principles ("U.S. GAAP"). EBITA is not a defined
term under U.S. GAAP and is not indicative of operating income or cash
flows from operations as determined under U.S. GAAP.
(2) 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 compared.
For the year ended December 31, 1997, Japan contributed $61.9 million, or 15.6%,
toward total Company revenues, while the rest of the Asia division contributed
$5.4 million, or 1.4%, towards sales. Furthermore, in the North America
division, approximately half of ELS/Berlitz on Campus' annual proforma revenue
for the year ended December 31, 1997 originated from the Far East. Due to this
geographic presence in Asia, the Company is exposed to the economic turmoil
affecting the Asian region at the end of 1997, and management is therefore
proactively focusing on action steps designed to mitigate any future impact.
These include implementing cost control measures, maximizing economies of scale,
and intensifying emphasis on revenues generation from the Company's other
geographic divisions. Furthermore, to combat the effects of the Asian turmoil on
its sales of franchises in Asia's emerging markets, the Company is focusing its
franchise efforts in 1998 on what it believes to be strong emerging markets in
the Middle East, Central/Eastern Europe, Western Europe and Russia.
The year to year comparison of the results of operations are discussed in
further detail in the sections which follow.
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
Sales for the twelve months ended December 31, 1997 were $397.2 million, 7.5%
above the same period in the prior year. This improvement was due to increases
from operating activity in the Instruction and Translation business segments,
including the post acquisition results of an acquired business, partially offset
by unfavorable exchange rate fluctuations of $24.4 million (largely the result
of a strengthened dollar against the Japanese yen, the German mark, and almost
all other European currencies.) Excluding the effect of exchange rate
fluctuations and new business acquisitions, revenues increased from the prior
year by 8.7%.
Language Instruction sales for the twelve months ended December 31, 1997 were
$298.3 million, 8.0% above the same period in 1996. This improvement was
primarily due to volume and average revenue per lesson ("ARPL") increases in
most countries and $19.9 million in post-acquisition results for ELS, partially
offset by unfavorable exchange rate fluctuations of $20.7 million. Excluding the
unfavorable exchange rate fluctuations and ELS acquisition, revenues increased
8.3% from the prior year.
On a geographic basis, Language Instruction revenue increases in Latin America
and North America were partially offset by decreases in the other geographic
divisions. North America's sales growth, excluding ELS post-acquisition results
of $19.9 million, was $5.1 million, or 8.1%, and primarily resulted from volume
and ARPL improvements and the performance of Berlitz on Campus. The increase in
Latin American revenues ($6.9 million, or 16.7%) was primarily attributable to
volume
24
<PAGE>
increases in all countries and ARPL improvements in Mexico. Asia's sales decline
($5.1 million, or 7.3%) reflected unfavorable exchange rate fluctuations ($6.9
million), partially offset by the positive effects of special sales campaigns in
Japan, the startup of operations in Singapore, and volume increases in Hong
Kong. Central/Eastern Europe's decrease ($2.9 million, or 4.7%) was also due to
unfavorable exchange rate fluctuations ($9.0 million, principally versus the
German mark, the Swiss franc, the Austrian schilling and Polish zloty). This was
partially offset by lesson volume increases in Germany and Poland, by ARPL
increases in most countries within the division, and by particularly strong
growth in Poland. The sales decline in Western Europe ($1.8 million, or 4.2%)
was attributable to unfavorable exchange fluctuations ($4.7 million), primarily
for France, Belgium and Spain, partially offset by volume improvements in most
countries within the division, particularly France, whose improvements reflected
increased volume from corporate clients.
During the twelve-month period ended December 31, 1997, the number of lessons
given was approximately 5.5 million, 7.9% above the same period in the prior
year, reflecting increases in all divisions. Lesson volume in North America
increased 5.0% from the prior year, resulting from improving economic conditions
and aggressive sales strategies. Lesson volume in Asia rose 10.7% from 1996,
mainly reflecting a 9.1% improvement in Japan due to special sales and
advertising campaigns, as well as the startup of operations in Singapore. Lesson
volume in Latin America increased by 12.7% from prior year, primarily reflecting
growth in all countries due to expanding economic conditions in most countries,
as well as the startup of operations in Peru. Lesson volume in Central/Eastern
Europe increased 7.8% over the prior year, primarily reflecting an increase in
Poland due to the opening of two new language centers toward the latter part of
1996, and a recovery by Germany from its 1997 first quarter lesson volume
shortfall. Lesson volume in Western Europe improved by 3.1% from 1996, primarily
due to increases in most countries, in particular France, which has shown an
increase in sales to certain corporate clients. These increases have more than
offset decreased volume in certain other countries within the division,
such as in Italy due to a stagnant economy.
In 1997, ARPL was $41.71 as compared to $44.91 in the comparable prior-year
period. The decline reflected the effect of unfavorable exchange rate
fluctuations of $3.33, as well as reduced pricing under special sales campaigns
in Japan. ARPL ranged from a high of approximately $60.86 in Brazil to a low of
$17.03 in Hungary, reflecting effects of foreign exchange rates and differences
in the economic value of the service.
During the twelve months ended December 31, 1997, the Company opened a center in
Taiwan and eleven wholly-owned Berlitz language centers in Brazil, Chile,
Colombia, France, Ireland, Israel, Mexico, Peru, Poland, the United States and
Uruguay. Additionally, twelve Berlitz franchises were opened in 1997 in Austria,
Brazil, Costa Rica, Indonesia, Japan (3), Mexico, the United Kingdom and the
United States (3). Same center sales (i.e. sales by centers which were operating
during the entirety of both years being compared) grew by 7.5% over 1996,
excluding the impact of foreign currency rate fluctuations.
Translation segment sales were $84.2 million for the twelve-month period ended
December 31, 1997, an increase of $7.2 million, or 9.4%, from the same period in
1996. Excluding the unfavorable effects of exchange rate fluctuations of $3.9
million, sales grew $11.1 million, or 14.4%. The operations
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growth was primarily due to increases in Ireland, the U.S., Canada and
Singapore. Ireland's sales increase is the result of continued growing demand
for software-related services. The North America (U.S. and Canada) revenue
increase resulted from the continued expansion of business from the existing
client base, the continued development of documentation and translation and
interpretation services, and the acquisition of new accounts. Singapore's
revenue increase is a direct result of the expanding demand for Asian language
services. These increases were partially offset by a decrease in revenue in
Germany and Japan resulting from reorganization efforts, and by decreases in
certain Western European countries due to the cyclical effects of projects from
a major customer.
Publishing segment sales were $13.6 million for the twelve months ended December
31, 1997, $1.8 million or 11.8% below 1996, primarily reflecting a decrease in
volume and a delay in the release of certain titles. Exchange rate fluctuations
were not significant.
The Company's cost of services and products sold as a percentage of sales was
59.5% for the year ended December 31, 1997, compared to 60.1% in the same prior
year period. This change from the prior year primarily reflected lower salary
expenses as a percentage of sales. Selling, general and administrative expenses
as a percentage of sales were 31.1% for the twelve months ended December 31,
1997, compared with 30.8% for 1996. This increase was affected primarily by
higher administrative salary percentages, due in part to changes in allocations
of responsibilities under matrix management, partially offset by lower
advertising expenses.
EBITA for the twelve month period ended December 31, 1997 was $37.2 million, or
9.4% of sales, compared to $33.6 million, or 9.1% of sales, in the same prior
year period, primarily reflecting EBITA improvements in the Instruction and
Translation business segments, partially offset by an increase in non-segment
related corporate expenses.
Instruction segment EBITA, excluding franchising activity, for the twelve months
ended December 31, 1997 was $50.5 million, or 16.9% of segment sales, compared
to $45.1 million, or 16.3% of segment sales, in the same prior year period. This
improvement was largely due to increased lesson volume, improvements in ARPL,
and general efforts to reduce expenses.
Translation segment EBITA for the twelve months ended December 31, 1997 was $7.7
million, or 9.2% of segment sales, compared to $5.1 million, or 6.6% of segment
sales, in the prior year. The 1997 EBITA results reflect the positive effects of
a favorable product mix, expansion of software- related services, continued
growth in traditional documentation translation and interpretation services, and
by the reduction of certain general office and administrative expenses. These
positive results were partially offset by weaknesses in certain Western European
countries and Japan. Thailand results were negatively impacted by certain
one-time charges. In addition, 1996 results were negatively impacted by certain
low margin contracts and non-recurring costs, primarily in Germany.
Publishing segment EBITA for the twelve months ended December 31, 1997 was $0.6
million, or 4.4% of segment sales, compared with $1.4 million, or 9.1% of
segment sales, in the prior year. The EBITA margin decline was due primarily to
a decrease in volume.
An EBITA loss of $0.7 million was recorded for franchising activity for the
twelve months ended
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December 31, 1997, compared with an EBITA loss $0.8 million in the prior year.
These results reflect the start-up nature of this operation.
Non-segment related corporate expenses included in EBITA were $20.8 million for
the twelve months ended December 31, 1997, compared with $17.2 million in the
same prior year period. This increase was primarily due to higher expenses in
1997 for administrative salaries and related costs, including expenses
associated with the Company's New Long-Term Executive Incentive Compensation
Plan (the "New LTIP").
Amortization of intangibles increased $1.4 million, or 11.3%, over 1996, as a
result of higher intangible assets arising out of the acquisition of ELS.
Additionally, interest expense on long-term debt rose $0.9 million, or 11.5%,
due to higher borrowings outstanding under the Company's refinanced August 1997
credit facility. Other income, net for the twelve months ended December 31, 1997
decreased $0.8 million, or 57.3%, from the prior year due primarily to lower
foreign exchange gains and the absence of gains from the termination of a
currency coupon swap agreement that provided income in 1996.
The Company recorded an income tax expense of $7.1 million, or an effective rate
of 54.3%, during the current period. This compared to an income tax expense of
$7.5 million, or an effective rate of 58.6%, in the comparable prior year
period. The effective tax rates in both 1997 and 1996 were above the U.S.
Federal statutory tax rate largely as a result of nondeductible amortization
charges. In addition, 1997's tax provision benefited from a restructuring of the
Company's German subsidiaries.
Due to the early extinguishment of debt outstanding prior to the ELS
acquisition, the Company incurred an extraordinary charge, net of taxes, of $6.3
million for the twelve months ended December 31, 1997, consisting of prepayment
penalties on its Senior Notes and the write-off of unamortized deferred
financing costs. The Company's refinanced debt had an effective interest rate of
approximately 7.0% at December 31, 1997, compared with an effective interest
rate of 9.79% on the Senior Notes.
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Sales for the twelve months ended December 31, 1996 were $369.6 million, 4.3%
above the same period in the prior year. This improvement was due to increases
from operating activity in the Instruction and Translation business segments,
partially offset by unfavorable exchange rate fluctuations of $16.8 million
(largely the result of a strengthened dollar against the Japanese yen, the
German mark, and certain other European currencies.) Excluding the effect of
exchange rate fluctuations, revenues increased from the prior year by 9.0%.
Language Instruction sales for the twelve months ended December 31, 1996 were
$276.2 million, 1.2% above the same period in 1995, reflecting volume and ARPL
increases, partially offset by unfavorable exchange rate fluctuations of $15.1
million. Excluding such unfavorable exchange rate fluctuations, revenues
increased 6.8 % from the prior year.
Geographically, all divisions exhibited increases except Asia. North America's
sales increase ($5.1
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million, or 8.9%) was primarily due to volume increases and strong performance
from specialty programs such as Berlitz on Campus(R) and cross cultural
programs. The increase in Latin American revenues ($4.5 million, or 12.3%) was
primarily attributable to volume increases in Brazil and a higher ARPL in
Mexico, which more than offset weakness in Venezuela. The improvement in
Central/Eastern European revenues ($2.7 million, or 4.6%) mainly reflects
increases in lesson volume and ARPL, experienced in most countries in the
division, partially offset by the unfavorable effects of exchange rate
fluctuations ($3.5 million, or 5.9%), more than half of which is due to the
strengthening of the U.S. dollar against the German mark. Asia's sales decline
($9.0 million, or 11.5%) resulted primarily when favorable volume and price
fluctuations were more than offset by unfavorable exchange rate fluctuations
($10.9 million) due to a stronger dollar versus the Japanese yen. Western
Europe's results increased $0.1 million from the prior year, reflecting a number
of factors, including volume increases in Denmark and Belgium and an improved
ARPL in France and Italy, all of which were partially offset by volume declines
in France and unfavorable exchange rate fluctuations ($0.8 million, or 1.9%)
arising primarily from the strengthening of the U.S. dollar against the French
and Belgium francs.
During the twelve-month period ended December 31, 1996, the number of lessons
given was approximately 5.1 million, 3.9% above the same period in the prior
year. Lesson volume in North America improved by 4.3% over the prior year.
Lesson volume in Asia rose only 0.4% from 1995, reflecting the negative effects
of a continuing flat economy in Japan, and declines in Thailand. Lesson volume
in Latin America rose by 7.0% from prior year, primarily due to increases in
Brazil and Colombia (reflecting strong economic conditions), and increases in
Venezuela despite economic turmoil, offset by a 4.2% drop in Mexico, which is
recovering from the 1994/1995 devaluation of the Mexican peso. Central/Eastern
Europe lesson volume increased by 7.0% over 1995, reflecting strong demand for
the Company's services in Poland, Israel, and Slovenia. Lesson volume in Western
Europe remained flat with 1995, primarily as improvements in Denmark and Belgium
were offset by declines in France.
For the twelve months ended December 31, 1996, ARPL was $44.91 as compared to
$46.70 in the comparable prior-year period. The decline reflected the effect of
unfavorable exchange rate fluctuations. ARPL ranged from a high of approximately
$70.75 in Japan to a low of $16.61 in the Slovak Republic, reflecting effects of
foreign exchange rates and differences in the economic value of the service.
The Company opened new wholly-owned language centers during 1996 in Korea,
Singapore, Colombia, the Czech Republic, Greece and Poland. In addition, two
franchises were opened in Argentina and the Dominican Republic. Same center
sales (i.e. sales by centers which were operating during the entirety of both
years being compared) grew by 6.0% over 1995, excluding the impact of foreign
currency rate fluctuations.
Translation segment sales were $77.0 million for the twelve-month period ended
December 31, 1996, an increase of $13.0 million, or 20.3%, from the same period
in 1995. Most of this growth occurred in Ireland and the United States. The U.S.
sales increase was attributed primarily to increased volume from certain key
clients and to the success of new services. Ireland's revenue increase resulted
from the development of new customers and the expansion of software related
services to new and existing
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clients. In addition, sales increases in certain Western European countries also
reflected the expansion of software-related services. Revenue growth is expected
to continue since the Company has established a foundation as a world leader in
documentation translation and software related services.
Publishing segment sales were $15.4 million for the twelve months ended December
31, 1996, $1.7 million or 10.1% below 1995, reflecting a reduction in revenues
from licensing activities and a general slowdown in the travel publishing
segment.
Other sales, consisting of franchising activity for 1996 and revenues from a
tradename license contract for 1996 and 1995, were $1.0 million in 1996 compared
with $0.5 million in the prior year.
The Company's cost of services and products sold as a percentage of sales was
60.1% for the year ended December 31,1996, compared to 61.1% in the same prior
year period. This decline was primarily due to a) a continued percentage
reduction in teacher costs; b) a decline in Publishing's cost of materials; and
c) an overall percentage decrease in rent and premises upkeep due to
renegotiated language center leases, partially offset by expanded translation
facilities.
Selling, general and administrative expenses as a percentage of sales were 30.8%
for the twelve months ended December 31, 1996, compared with 29.6% for 1995.
This increase was affected primarily by higher franchise related expenses and a
percentage increase in administrative salaries, including the impact in 1996 of
$1.6 million expense related to the Company's Supplemental Executive Retirement
Plan ("SERP") and New LTIP.
EBITA for the year was $33.6 million, or 9.1% of sales in 1996, compared to
$33.0 million, or 9.3% of sales, in the same prior year period. The percentage
decline in 1996 primarily reflected margin decreases in the Translation and
Publishing segments, as well as the impact of SERP related expense.
Instruction segment EBITA, excluding franchising activity, for the twelve months
ended December 31, 1996 was $45.1 million, or 16.3% of segment sales, compared
to $39.9 million, or 14.6% of segment sales, in the comparable prior year
period. This improvement was largely due to percentage reductions in teacher
costs, rent and premises upkeep, and advertising, partially offset by higher
franchise related expenses and administrative salaries.
Translation segment EBITA for the twelve-month period ended December 31, 1996
was $5.1 million, or 6.6% of segment sales, compared to $5.5 million, or 8.6% of
segment sales, in the prior year. The 1996 results were hurt by costs associated
with the significant expansion of Asian production resources, certain lower
margin contracts and certain non-recurring costs. Exchange rate fluctuations
were not material.
Publishing segment EBITA was $1.4 million in 1996, compared to EBITA of $1.9
million in the prior year. Results in 1996 were negatively impacted by costs
associated with the relocation of Publishing's editorial and production
functions from the United Kingdom to the United States, as well as by the loss
of licensing revenues. Exchange rate fluctuations were not material.
An EBITA loss from franchising activity of $0.8 million was recorded for 1996,
due to the
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developmental stage nature of these operations.
Included in total EBITA were net non-segment related corporate and divisional
expenses of $17.2 million for the twelve months ended December 31, 1996,
compared with $14.3 million in the same prior year period. This increase was
primarily attributable to a reallocation of resources under the new matrix
management structure in 1996, and to expenses associated with the SERP and
corporate training programs.
Amortization of publishing rights, excess of cost over net assets acquired and
other intangibles decreased by $0.7 million, or 5.1%, from the prior twelve
month period, primarily due to the effects of translating into U.S. dollars the
excess of cost over net assets acquired related to the Company's foreign
subsidiaries.
Interest expense on long-term debt for the twelve months ended December 31, 1996
decreased by $1.0 million, or 11.7%, from the comparable prior year period,
primarily due to scheduled principal repayments and a lower average interest
rate on a portion of the Company's long-term debt.
Interest expense to affiliates for the year ended December 31, 1996 increased by
$0.4 million, or 28.6%, from the prior twelve month period, due to a $6.0
million increase in notes payable to the Company's majority shareholder (see
"Liquidity and Capital Resources").
Other income, net for the twelve months ended December 31, 1996 increased by
$0.2 million, or 13.6%, from the prior year, primarily as a favorable $2.1
million fluctuation in foreign exchange gains (principally reflecting the
impacts of certain Japanese yen, Swiss franc, U.S. dollar and British pound
denominated intercompany transactions) more than offset: a) a decline in
interest income on temporary investments due to lower average cash balances, b)
a lower gain on the Company's German mark floating rate coupon swap which was
settled in January 1996; c) the absence of non-recurring joint venture-related
income, which reduced expenses in 1995, and d) a favorable fluctuation in losses
on disposal of fixed assets, which was significantly increased in 1995 due to
certain Japanese language centers relocations.
Minority interest in subsidiary earnings increased $0.4 million, or 35.9%, from
the prior year due to higher net income in the Company's Japanese subsidiary.
The Company recorded an income tax expense of $7.5 million, or an effective rate
of 58.6%, during the current twelve-month period. This compared to an income tax
expense of $7.4 million, or an effective rate of 68.7%, in the prior year's
period. The effective tax rates in both 1996 and 1995 were above the U.S.
Federal statutory tax rate primarily as a result of nondeductible amortization
charges.
Net income for the twelve months ended December 31, 1996 was $3.8 million, or
$0.40 per share, compared to net income of $2.3 million, or $0.23 per share, in
the comparable prior year's period. This improvement of $1.5 million resulted
primarily from a higher operating profit and a reduced effective tax rate in
1996.
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LIQUIDITY AND CAPITAL RESOURCES
Historically, the primary source of the Company's liquidity has been the cash
provided by operations, and capital expenditures, working capital requirements
and acquisitions (except ELS) have been funded from internally generated cash.
Although each geographic area exhibits different patterns of lesson volume over
the course of the year, the Company's sales are generally not seasonal in the
aggregate.
Net cash provided by operating activities was $13.5 million, $25.4 million and
$16.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively. In comparing 1997 with 1996, the decline of $11.9 million was due
to a number of factors, including a $5.8 million prepayment penalty on the
Company's Senior Notes, higher accounts receivable primarily related to two
Translations segment major customers subject to special contractual
arrangements, higher income tax payments, including $2.5 million tax payment
associated with the October 1996 Internal Revenue Service ("IRS") deficiency
notice, hereinafter discussed, and higher interest payments on long-term debt.
The decrease was partially offset by the timing of payments for certain accrued
liabilities, most notably payrolls and commissions. In comparing 1996 with 1995,
the increase of $8.9 million was primarily attributable to a number of factors,
including increased receivables collections, an increase in the prepayment of
fees by the Company's customers, and lower interest payments on long-term debt.
Net cash used in investing activities totaled $105.5 million, $13.1 million and
$7.9 million in 1997, 1996 and 1995, respectively. Included in 1997 were ELS
acquisition-related payments of $90.9 million, including various transaction
costs and net of cash acquired of $6.1 million. The balance of net cash used
largely consisted of capital expenditures, aggregating $14.6 million, $13.0
million and $8.0 million in 1997, 1996 and 1995, respectively. Such capital
expenditures were primarily for the opening of new facilities and the
refurbishing of existing facilities, and, in 1995, for the relocation and
consolidation of certain centers in Japan. Capital expenditures have increased
over the three-year period due to growth related expansion in the Instruction
and Translations segments and the inclusion in 1996 of $3.2 million related to
the April 1996 relocation of the Company's corporate headquarters to its new
facility in Princeton, New Jersey.
Net cash provided by financing activities totaled $94.9 million in 1997,
compared with net cash used of $11.0 million and $9.4 million in 1996 and 1995,
respectively. 1997's results primarily reflected net proceeds from the Company's
refinancing of its long-term debt in conjunction with the ELS acquisition, while
prior years' activity primarily reflected repayments of long-term debt.
Other items impacting the Company's liquidity and capital resources are as
follows:
* In October 1996, the IRS issued a deficiency notice to the Company relating
to its 1989, 1990, 1992 and 1993 Federal tax returns. Such notice proposed
adjustments of approximately $9.3 million, plus accrued interest. In
connection with this notice, the Company made a payment of $2.5 million to
the IRS during the 1997 second quarter. The Company is contesting the
deficiency notice and intends to fund any remaining deficiency that may
ultimately result through its cash resources. The Company believes that it
has adequate cash resources to pay any such deficiency and to pursue its
business plan.
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* Reported within accrued expenses at December 31, 1997 were $4.3 million
related to the ELS acquisition, including a $1.3 million post-closing
purchase price adjustment. The purchase price adjustment was paid on
January 13, 1998.
* On November 14, 1997, the Company acquired 126,225 shares of its Common
from MCC Proceeds, Inc., as Trustee for the Maxwell Macmillan Realization
Trust. The negotiated purchase price was $23.5125 per share, or $3.0
million, which was below the market price at the date of negotiation. This
transaction was funded from cash generated by operations. The repurchased
shares were placed into treasury and reserved for future uses permitted
under the Bank Facility.
* The revolving credit commitment under the Bank Facility was increased from
$45 million to $55 million, via amendment, on October 28, 1997, and to $70
million, via amendment, on March 23, 1998. At March 23, 1998, the Company
had $44 million outstanding under this revolving credit facility.
* On March 28, 1997, the Company signed a nationwide interpreter service
contract with the Department of Justice, Executive Office for Immigration
Review ("EOIR") for the next two years, with three annual renewal options
at the election of EOIR. The contract award is subject to applicable
government procurement laws, including EOIR's right to initiate
recompetition for a portion (less than 5%) of the EOIR contract; to elect
not to exercise its annual renewal rights under the EOIR contract for the
contract year beginning May 1, 1999; and any contract Protest rights of
third persons.
* The Company's SERP provides retirement income / disability retirement
benefits, retiree medical benefits and death benefits to certain designated
executives and their designated beneficiaries. The Company intends to fund
the SERP through a combination of funds generated from operations and life
insurance policies on the participants.
* Pursuant to a covenant under the Bank Facility, the Company is party to
currency coupon swap agreements with a financial institution to hedge the
Company's net investments in certain foreign subsidiaries and to help
manage the effect of foreign currency fluctuations on the Company's ability
to repay its U.S. dollar debt. These agreements require the Company, in
exchange for U.S. dollar receipts, to periodically make foreign currency
payments, denominated in the Japanese yen, the Swiss franc, the Canadian
dollar, the British pound, and the German mark. Credit loss from
counterparty nonperformance is not anticipated. The estimated fair value of
these swap agreements at December 31, 1997, representing the amount that
could be settled based on estimates obtained from a dealer, was a net asset
of approximately $0.3 million.
* In connection with another covenant under the Bank Facility, the Company is
party to a five-year interest rate swap agreement which provides for
quarterly exchanges of interest on an amortizing "notional" (theoretical)
amount, originally set at $66.0 million and currently at $62.3 million at
December 31, 1997. This notional amount amortizes proportionately with the
scheduled principal payments under the Bank Facility. In exchange for U.S.
dollar denominated interest receipts based on variable LIBOR, the Company
must make U.S. dollar denominated interest payments based
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* on a fixed rate of 6.30%. Credit loss from counterparty non-performance is
not anticipated. The estimated fair value of this interest rate swap at
December 31, 1997, representing the amount that could be settled based on
estimates obtained from a dealer, was a net liability of approximately $0.7
million.
* Certain financial covenants contained in the Bank Facility restrict the
ability of the Company to pay dividends and the Company does not expect to
pay dividends during the term of the Bank Facility. Further pursuant to the
Bank Facility, principal and interest repayment of indebtedness to Benesse,
having a balance at December 31, 1997 of $39.4 million, are deferred until
all obligations under the Bank Facility are satisfied.
* Included within cash and temporary investments at December 31, 1997 are
$3.5 million in restricted funds set aside in a escrow account pursuant to
the Bank Facility. Such funds may be used to pay rent, interest, taxes,
dividends or long-term debt principal at any time after January 1, 1998.
At December 31, 1997, the Company's liquid assets of $26.7 million consisted of
cash and temporary investments. The Company does not currently have any material
commitments for capital expenditures. In the future, the Company anticipates
capital expenditures to continue to increase compared with historical trends in
connection with the refurbishment of the Company's language centers, the
expansion of the Company's Translations segment, and technological expansion.
The Company plans to meet its debt service requirements and future working
capital needs through funds generated from operations
THE YEAR 2000 ISSUE
Recognizing the need to ensure operations will not be adversely affected by Year
2000 software failures, the Company has started a comprehensive process to
address any possible exposure. Two committees have been formed to assess key
financial and operational systems and to develop a detailed action strategy.
These committees are currently in the process of gathering worldwide hardware
and software inventories and vendor compliance standards. It is anticipated that
such information gathering will be completed by the end of April 1998, at which
time detailed divisional implementation plans will be initiated. The Company
expects to be Year 2000 compliant by September 29, 1999.
Since it is in the midst of its information gathering stage, the Company is not
yet able to estimate the cost for Year 2000 compliance with respect to its
information systems, production systems, products, customers and suppliers.
However, management does not currently believe that such incremental costs will
have material adverse effect on the Company's future consolidated results, due
to the nature of the Company's services, the diversity of its customer base and
due to normally planned hardware and software upgrades/replacements with Year
2000 compliant products in the ordinary course of business.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
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Certain statements in this Annual Report on Form 10-K, including information
appearing under the captions "Business", "Legal Proceedings", and "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 future continuation of the EOIR contract; the outcome
of future negotiations and/or litigation pertaining to the deficiency assessed
by the IRS; the Company's success in selling new franchises; the economic
conditions in the Asian region; the Year 2000 issues, including the success with
which the Company's customers and suppliers address their Year 2000 exposures;
as well as more general factors affecting future cashflows and their effects on
the Company's ability to meet its debt service requirements and future working
capital needs, including fluctuations in foreign currency exchange rates; demand
for the Company's products and services; the impact of competition; the effect
of changing economic and political conditions; the level of success and timing
in implementing corporate strategies and new technologies; changes in
governmental and tax laws and regulations, tax audits and other factors (known
or unknown) which may affect the Company. As a result, no assurance can be given
as to future results, levels of activity and achievements.
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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements, Supplementary Data and
Financial Statement Schedule are filed as part of this Annual Report on Form
10-K:
PAGE
----
REPORT OF INDEPENDENT AUDITORS 36
STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED
FINANCIAL STATEMENTS 37
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Operations, years ended
December 31, 1997, 1996 and 1995 38
Consolidated Balance Sheets, December 31, 1997 and 1996 39
Consolidated Statements of Shareholders' Equity, years ended
December 31, 1997, 1996 and 1995 40
Consolidated Statements of Cash Flows, years ended
December 31, 1997, 1996 and 1995 41
Notes to Consolidated Financial Statements 42
FINANCIAL STATEMENT SCHEDULE:
Schedule II. Valuation and Qualifying Accounts 66
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements
or the Notes thereto.
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REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
of Berlitz International, Inc.:
We have audited the accompanying consolidated balance sheets of Berlitz
International, Inc. and its subsidiaries as of December 31, 1997 and 1996 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the years ended December 31, 1997, 1996 and 1995. Our audits also
included the financial statement schedule listed in the Index at Item 8 for the
years ended December 31, 1997, 1996 and 1995. These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Berlitz International, Inc. and its
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for the years ended December 31, 1997, 1996 and
1995, in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedule for the years ended December 31, 1997,
1996 and 1995, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
New York, New York
February 25, 1998
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STATEMENT OF MANAGEMENT'S RESPONSIBILITY
FOR CONSOLIDATED FINANCIAL STATEMENTS
To the Shareholders of Berlitz International, Inc.:
Management of Berlitz International, Inc. has prepared and is responsible for
the accompanying Consolidated Financial Statements and related information.
These financial statements, which include amounts based on judgments of
management, have been prepared in conformity with generally accepted accounting
principles. Financial data included in other sections of this Annual Report on
Form 10-K are consistent with that in the Consolidated Financial Statements.
Management believes that the Company's internal control systems are designed to
provide reasonable assurance, at reasonable cost, that the financial records are
reliable for preparing financial statements and maintaining accountability for
assets and that, in all material respects, assets are safeguarded against loss
from unauthorized use or disposition. These systems are augmented by written
policies, an organizational structure providing division of responsibilities,
qualified personnel throughout the organization, and a program of internal
audits.
The Board of Directors, through its Audit Committee consisting of outside
Directors of the Company, is responsible for reviewing and monitoring the
Company's financial reporting and accounting practices. Deloitte & Touche LLP
and the Company's internal auditors each have full and free access to the Audit
Committee, and meet with it regularly, with and without management.
/s/ HENRY D. JAMES
- ------------------
Henry D. James
Executive Vice President and Chief Financial Officer
37
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales of services and products $ 397,209 $ 369,622 $ 354,509
------------- ------------ ------------
Costs and expenses:
Cost of services and products sold 236,521 222,313 216,443
Selling, general and administrative 123,444 113,695 105,039
Amortization of publishing rights, excess
of cost over net assets acquired, and
other intangibles 14,183 12,746 13,425
Interest expense on long-term debt 8,523 7,647 8,658
Interest expense to affiliates 2,100 1,848 1,437
Other income, net (615) (1,441) (1,269)
----- ------- -------
Total costs and expenses 384,156 356,808 343,733
------- ------- -------
Income before income taxes, minority
interest in earnings of subsidiary, and
extraordinary item 13,053 12,814 10,776
Income tax expense 7,089 7,508 7,400
Minority interest in earnings
of subsidiary 613 1,503 1,106
--- ----- -----
Income before extraordinary item 5,351 3,803 2,270
Extraordinary loss from early extinguishment
of debt, net of income tax benefit of $1,949 6,285 - -
----- ----- -----
Net (loss) income $ (934) $ 3,803 $ 2,270
============= ============ ============
(Loss) earnings per share - basic and diluted:
Income before extraordinary item $ 0.56 $ 0.40 $ 0.23
Extraordinary loss (0.66) - -
----- ----- -----
(Loss) earnings per share $ (0.10) $ 0.40 $ 0.23
============= ============ ============
Average number of shares (000) 9,550 9,569 10,033
===== ===== ======
</TABLE>
See accompanying notes to the consolidated financial statements.
38
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 26,665 $ 25,781
Accounts receivable, less allowance for doubtful accounts
of $2,415 and $1,914 50,622 36,048
Unbilled receivables 3,538 3,807
Inventories, net 9,159 10,260
Prepaid expenses and other current assets 8,323 6,815
----- -----
Total current assets 98,307 82,711
Property and equipment, net 32,098 29,363
Publishing rights, net of accumulated
amortization of $4,324 and $3,504 17,661 18,864
Excess of cost over net assets acquired and other intangibles, net of
accumulated amortization of $57,893 and $46,049 498,506 417,611
Other assets 14,943 12,696
------ ------
Total assets $ 661,515 $ 561,245
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 17,712 $ 10,741
Accounts payable 9,990 5,943
Deferred revenues 36,071 34,748
Payrolls and commissions 17,988 10,227
Income taxes payable 573 4,207
Accrued expenses and other current liabilities 15,505 11,713
------ ------
Total current liabilities 97,839 77,579
Long-term debt 142,369 56,353
Notes payable to affiliates 39,423 38,294
Deferred taxes and other liabilities 24,964 22,348
Minority interest 9,942 9,264
----- -----
Total liabilities 314,537 203,838
------- -------
Shareholders' Equity:
Common stock
$.10 par value - 40,000,000 shares authorized;
10,033,013 shares issued 1,003 1,003
Additional paid-in capital 372,518 368,658
Retained earnings 2,492 3,426
Cumulative translation adjustment (22,674) (10,037)
Treasury stock at cost; 503,225 and 627,000 shares (6,361) (5,643)
------- -------
Total shareholders' equity 346,978 357,407
------- -------
Total liabilities and shareholders' equity $ 661,515 $ 561,245
============ ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
39
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED CUMULATIVE TOTAL
COMMON PAID-IN EARNINGS TRANSLATION TREASURY SHAREHOLDERS'
STOCK CAPITAL (DEFICIT) ADJUSTMENT STOCK EQUITY
----- ------- --------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 1,003 $ 368,658 $ (2,647) $ 221 $ - 367,235
Net income 2,270 2,270
Translation adjustment and other,
including the effects of certain
hedges and intercompany
transactions 414 414
Allocated income taxes 497 497
------- ------- ------- ------- ------- -------
Balance at December 31, 1995 1,003 368,658 (377) 1,132 - 370,416
Net income 3,803 3,803
Translation adjustment and other,
including the effects of certain
hedges and intercompany
transactions (10,266) (10,266)
Allocated income taxes (559) (559)
Transfers from CTA related to
liquidation of foreign subsidiaries (344) (344)
Purchase of treasury stock (5,643) (5,643)
------- ------- ------- ------- ------- -------
Balance at December 31, 1996 1,003 368,658 3,426 (10,037) (5,643) 357,407
Net loss (934) (934)
Translation adjustment and other,
including the effects of certain
hedges and intercompany
transactions (12,364) (12,364)
Allocated income taxes (273) (273)
Sale of treasury stock 3,860 2,250 6,110
Purchase of treasury stock (2,968) (2,968)
------- ------- ------- ------- ------- -------
Balance at December 31, 1997 $ 1,003 $ 372,518 $ 2,492 $ (22,674) $ (6,361) $ 346,978
========== ========== ========= ========= ========= ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
40
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net (loss) income $ (934) $ 3,803 $ 2,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 8,564 7,972 7,099
Amortization of publishing rights, excess of cost over
net assets acquired, and other intangibles 14,183 12,746 13,425
Minority interest in earnings of subsidiary 613 1,503 1,106
Deferred income tax benefits (442) (172) (1,405)
Deferred tax benefit on extraordinary items (1,785) - -
Provision for bad debts 1,129 1,168 349
Foreign exchange (gains) losses, net (27) (1,005) 1,131
Gains on currency coupon swap agreements - (399) (1,151)
Equity in losses (gains) of joint ventures 50 187 (13)
Losses on disposal of fixed assets 100 70 622
Changes in operating assets and liabilities:
(Increase) in accounts and unbilled receivables (15,570) (3,900) (10,504)
(Increase) decrease in inventories 444 (1,039) (154)
(Increase) decrease in prepaid expenses and other assets 97 (1,130) (1,256)
Increase (decrease) in deferred revenues 2,225 1,732 (650)
Increase (decrease) in accounts payable and
other current liabilities 3,567 (772) 1,125
Increase in due to affiliates 2,102 1,862 1,416
Increase (decrease) in income taxes payable (3,555) 2,178 3,893
Increase (decrease) in other liabilities 2,787 630 (752)
----- --- ----
Net cash provided by operating activities 13,548 25,434 16,551
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14,617) (13,034) (8,035)
Acquisitions of businesses, net of cash acquired (90,868) - (15)
Refunds from (investments in) joint ventures - (72) 177
-------- ------- ------
Net cash used in investing activities (105,485) (13,106) (7,873)
-------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable to affiliates - 6,000 -
Proceeds from bank long-term debt 120,000 - -
Payment of long-term debt (70,978) (11,366) (9,325)
Payments to acquire treasury stock (2,968) (5,643) -
Proceeds from sale of treasury stock 6,110 - -
Net borrowings under revolving credit facility 44,000 - -
Payment of deferred financing costs (1,272) - (107)
------ ------ ----
Net cash provided by (used in) financing activities 94,892 (11,009) (9,432)
------ ------- ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Effect of exchange rate changes
on cash and temporary investments (2,071) (940) (9)
------ ---- --
Net increase (decrease) in cash and
temporary investments 884 379 (763)
Cash and temporary investments at beginning of period 25,781 25,402 26,165
------ ------ ------
Cash and temporary investments at end of period $ 26,665 $ 25,781 $ 25,402
========== ============== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 7,877 $ 6,835 $ 7,736
========== ============== =============
Income taxes $ 10,834 $ 6,640 $ 6,556
========== ============== =============
Cash refunds of income taxes $ 493 $ 1,298 $ 1,371
========== ============== =============
Noncash investing activities:
Accounts payable for capital expenditures in Japan $ - $ - $ 456
========== ============== =============
</TABLE>
See accompanying notes to the consolidated financial statements.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Nature of Operations - Berlitz International, Inc. (the
"Company") is a New York corporation organized in 1989. Its
operations are conducted on a worldwide basis through three
business segments: Language Instruction, Translation Services
and Publishing. Approximately 68% of its 1997 revenues are
denominated in currencies other than the U.S. dollar.
In February 1993, Benesse Corporation (formerly Fukutake
Publishing Co., Ltd.) ("Benesse") acquired, through a merger
of the Company with an indirect wholly-owned U.S. subsidiary
of Benesse (the "Merger"), approximately 6.7 million shares of
the common stock, par value $.10 per share ("Common") of the
Company. Benesse currently holds approximately 7.0 million
shares, or 73.3%, of the outstanding Common. Public
shareholders of the Company hold the remaining outstanding
Common.
Since 1990, Benesse has also owned a 20% minority interest in
the equity of the Company's Japanese subsidiary, Berlitz
Japan, Inc. ("Berlitz-Japan").
b) Principles of Consolidation - The Consolidated Financial
Statements include those of the Company and its subsidiaries.
The effects of all significant intercompany transactions have
been eliminated.
c) Foreign Currency Translation - Generally, balance sheet
amounts have been translated using exchange rates in effect at
the balance sheet dates and the translation adjustment has
been included in the cumulative translation adjustment, a
separate component of shareholders' equity, with the exception
of hyperinflationary countries. Income statement amounts have
been translated using the average exchange rates in effect for
each period. Revaluation gains and losses on certain
intercompany accounts in all countries and translation gains
and losses in hyperinflationary countries have been included
in "Other income, net". Revaluation gains and losses on
intercompany balances for which settlement is not anticipated
in the foreseeable future are included in the cumulative
translation adjustment.
d) Revenue Recognition and Unbilled Receivables - Revenues are
recognized in the Instruction and Publishing business segments
when services are rendered to the customer or when products
are shipped, as applicable. Translation Services contracts are
accounted for under the percentage of completion method of
accounting, whereby sales and costs are recognized as work on
contracts progresses. Changes in estimates for sales, costs
and profits are recognized in the period in which they are
determinable.
42
<PAGE>
Unbilled receivables represent the difference between revenue
recognized for financial reporting purposes and amounts
contractually permitted to be billed to customers. Unbilled
amounts will be invoiced in subsequent periods upon reaching
certain milestones.
e) Inventories - Inventories, which consist primarily of finished
goods, are valued at the lower of average cost or market.
f) Deferred Financing Costs - Direct costs relating to the
indebtedness incurred in connection with the Merger, the
Benesse borrowings, and the Bank Facility (see Notes 8 and 11)
have been capitalized and are being amortized by the interest
method over the terms of the related debt.
g) Property and Equipment - Property and equipment is stated at
cost and depreciated over its estimated useful life or the
life of any applicable leases (whichever is shorter), using
principally accelerated methods.
h) Publishing Rights - Publishing rights are associated with the
Company's proprietary language instruction print materials and
travel related titles. They are being amortized on a
straight-line basis over 25 years. The carrying value of
publishing rights is evaluated periodically to determine if
there has been a loss in value by considering the impacts of
expected future revision dates. Publishing rights will be
written off if and when it has been determined that an
impairment in value has occurred.
i) Excess of Cost Over Net Assets Acquired and Other Intangibles
- Except as disclosed in Note 2, the excess of cost over net
assets acquired is being amortized on a straight- line basis
over 40 years, while other intangibles are being amortized
primarily on a straight-line basis over 40 years. Their
carrying values are evaluated periodically to determine if
there has been a loss in value, by reviewing current and
estimated future revenues and cash flows, and the interrelated
impact on the values of the Company's trademark and franchise
rights. The excess of cost over net assets acquired and other
intangibles will be written off if and when it has been
determined that an impairment in value has occurred.
j) Deferred Revenues - Deferred revenues primarily arise from the
prepayment of fees for classroom instruction and are
recognized as income as lessons are given. The Company
recognizes in income deferred revenues for lessons paid for
and not expected to be taken based upon historical experience
by country.
k) Income Taxes - The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been
included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are
determined based on
43
<PAGE>
the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates expected to
apply to taxable income in the periods in which the
differences are expected to reverse.
Cash and Temporary Investments - The Company considers all
highly liquid instruments purchased with an original maturity
of three months or less to be temporary investments.
Included within cash and temporary investments at December 31,
1997 are $3.5 million in restricted funds set aside in a
escrow account pursuant to the Bank Facility (see Note 8).
Such funds may be used to pay rent, interest, taxes, dividends
or long-term debt principal at any time after January 1, 1998.
m) Investment in Joint Ventures - Investments in joint ventures
are carried on the equity basis of accounting and the
Company's share of the net profits and losses of such
investments is reflected in "Other income, net" in the
Consolidated Statements of Operations.
n) Financial Instruments - The fair values of the Company's
long-term debt and notes payable to affiliates are estimated
based on the interest rates currently available for borrowings
with similar terms and maturities. The fair values of the
Company's currency coupon swap agreements represent the
amounts that could be settled based on estimates obtained from
a dealer.
The carrying amounts reported in the balance sheets for cash
and temporary investments, accounts receivable and payable,
accrued expenses and other current liabilities, accrued income
taxes and short-term borrowings approximate fair value due to
the short-term nature of these instruments.
o) Derivative Financial Instruments - Those currency coupon swap
agreements which have been designated by the Company as hedges
of its investments in certain foreign subsidiaries are
considered effective as hedges to the extent that quarterly
changes in the fair value of the agreements do not exceed the
quarterly effect of exchange rate changes on the underlying
net investment. When these agreements are effective, realized
and unrealized gains and losses are excluded from the
Company's Consolidated Statements of Operations, and included,
net of deferred taxes, in the cumulative translation
adjustment of shareholders' equity. If the change in any
fiscal quarter in an agreement's fair value exceeds the
exchange rate fluctuation's effect on the underlying
investment, such excess is recognized in the Consolidated
Statement of Operations within "Foreign exchange (gains)
losses, net". If, as a result of the Company's periodic
evaluation, it can no longer be established that an agreement
will prospectively be effective, the hedge accounting
described above is discontinued and all subsequent changes in
the agreement's fair value are recognized within the
Consolidated Statement of Operations.
44
<PAGE>
p) Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
q) Reclassifications - Certain reclassifications have been made
in prior years' financial statements and notes to conform with
the 1997 presentation.
2. ELS ACQUISITION
On August 28, 1997 (the "Closing Date"), the Company completed its
acquisition of ELS Educational Services, Inc. ("ELS"), a privately held
provider of intensive English language instruction, in a stock
acquisition for a cash purchase price of $95.0 million (the "ELS
Acquisition"), subject to certain post-closing adjustments specified in
the related stock purchase agreement. The Company also incurred various
transaction-related expenditures and accrued expenses.
The ELS Acquisition was accounted for by the purchase method of accounting,
which contemplates an allocation of the acquisition cost to the acquired
company's assets and liabilities based upon their fair value. A summary of the
purchase price allocation as of December 31, 1997 follows:
Acquisition cost (including post-closing cash
adjustment of $1,340 paid in January 1998,
and transaction expenditures) $ 98,200
Net assets and liabilities acquired:
Cash $ 6,099
Intangible asset - tradenames 3,000
Intangible asset - sales agent network 31,700
Other net assets and liabilities (10,890)
-------
Total net assets acquired 29,909
------
Excess of cost over net assets acquired $ 68,291
= ======
The ELS tradename and sales-agent-network intangible assets are being
amortized on a straight-line basis over their estimated useful lives of
5 years and 14 years, respectively. The excess of ELS purchase price
over net assets acquired is being amortized on a straight-line basis
over 30 years.
The results of operations of ELS subsequent to the Closing Date are
included in the Company's Consolidated Statement of Operations. The
following table presents selected unaudited pro forma information
assuming that the ELS Acquisition (and the simultaneous refinancing of
the Company's long-term debt; see Note 8) had occurred on January 1 of
each period presented, and is not indicative of the results of
operations which would actually have occurred had the transaction taken
place on the dates indicated or of the results which may occur in the
future.
45
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
TWELVE MONTHS TWELVE MONTHS
ENDED ENDED
DEC. 31,1997 DEC. 31, 1996
------------ -------------
<S> <C> <C>
Sales of services and products $ 446,373 $ 432,260
Income before income taxes, minority
interest in earnings of subsidiary,
and extraordinary item 11,846 9,694
Income before extraordinary item 4,566 1,775
Extraordinary loss (6,721) (7,510)
Net loss $ (2,155) $ (5,735)
= ====== = ======
Basic and Diluted earnings (loss) per share:
Income before extraordinary loss $ 0.48 $ 0.18
Extraordinary loss (0.70) (0.78)
----- -----
Loss per share $ (0.22) $ (0.60)
= ===== = =====
</TABLE>
The primary differences between the unaudited pro forma income
statement data and the amounts as reported are as follows:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
TWELVE MONTHS TWELVE MONTHS
ENDED ENDED
DEC. 31, 1997 DEC. 31, 1996
------------- -------------
<S> <C> <C>
Pre-acquisition ELS revenues $ 49,164 $ 62,638
Pre-acquisition ELS income before taxes 2,524 2,567
Decrease in ELS administrative expenses
not recurring after Berlitz acquisition 2,413 3,000
Increase in amortization of intangibles and
excess of cost over net assets acquired (3,333) (5,000)
Increase in interest expense on
long-term debt (2,811) (3,687)
Decrease in income tax expense 422 1,092
Increase in extraordinary loss, net of tax $ (436) $ (7,510)
================== ================
</TABLE>
3. EARNINGS PER SHARE
The Company has adopted provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"), which simplifies the
standards for computing earnings per share ("EPS"). SFAS 128 replaces the
standards for computing and presenting EPS found in Accounting Principles Board
Opinion No. 15, "Earnings Per Share" ("APB 15"). SFAS 128 requires dual
presentation of Basic (which replaces APB 15's Primary EPS) and Diluted EPS on
the face of the income statement for all entities with complex capital
structures, and provides guidance on other computational changes. SFAS 128 is
effective for financial statements for the year ended December 31, 1997,
including interim periods to be presented therein.
46
<PAGE>
A reconciliation between Basic and Diluted EPS computations for "income
before extraordinary item" as of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER
OF SHARES PER-SHARE
INCOME OUTSTANDING AMOUNT
------ ----------- ------
<S> <C> <C> <C>
Basic EPS:
Income before extraordinary item $ 5,351 9,550 $ 0.56
Effect of dilutive securities:
Stock options 14
Diluted EPS:
Income before extraordinary item $ 5,351 9,564 $ 0.56
============= ===== ==============
</TABLE>
There is no difference between Basic and Diluted EPS computations for the years
ended December 31, 1996 and 1995 since no dilutive securities were outstanding
prior to June 30, 1997.
4 PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Buildings and leasehold improvements $ 19,063 $ 17,938
Furniture, fixtures and equipment 29,036 25,318
Land 1,364 1,382
----- -----
49,463 44,638
Less: accumulated depreciation
and amortization 17,365 15,275
------ ------
Total $ 32,098 $ 29,363
============= ============
</TABLE>
EXCESS OF COST OVER NET ASSETS
ACQUIRED, AND OTHER INTANGIBLES
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Excess of cost over net assets acquired $ 220,310 $ 164,149
Tradenames and trademarks 299,998 296,847
ELS sales agent network 31,700 -
Other 4,391 2,664
----- -----
556,399 463,660
Less: accumulated amortization (57,893) (46,049)
------------- ------------
Total $ 498,506 $ 417,611
============= ============
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
6. OTHER INCOME, NET
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income on temporary investments $ (875) $ (728) $ (1,278)
Foreign exchange (gains) losses, net (27) (1,005) 1,131
Gains on currency coupon swap agreement - (399) (1,151)
Equity in (gains) losses of joint ventures 50 187 (13)
Joint venture-related income - - (1,299)
Other non-operating taxes 415 586 669
Term Loan administration fee 83 150 150
Losses on disposal of fixed assets 100 70 622
Other interest income, net (235) (67) (242)
Other (income) expense, net (126) (235) 142
----- ----- ---
Total other income, net $ (615) $ (1,441) $ (1,269)
============ ============= =============
</TABLE>
7. INCOME TAXES
The components of the deferred tax liability at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Inventory $ 67 $ 827
Property and equipment depreciation - 122
Deferred revenue 1,702 1,836
Unrealized hedging losses 142 243
Accrued expenses 1,970 2,871
Foreign tax credits 4,193 -
Net operating losses 6,000 12,965
----- ------
Total deferred tax assets 14,074 18,864
------ ------
Deferred tax liabilities:
Joint ventures (320) (368)
Property and equipment depreciation (44) -
Unrealized hedging gains (252) (80)
Publishing rights amortization (5,882) (7,853)
Other intangibles amortization (46) (92)
------ ------
Total deferred tax liabilities (6,544) (8,393)
------ ------
Net deferred tax assets 7,530 10,471
Valuation allowance (8,141) (13,036)
------ ------
Net deferred tax liability $ (611) $ (2,565)
=========== ==============
</TABLE>
48
<PAGE>
As a result of the Merger, $2,186 of the valuation allowance will be
allocated to reduce goodwill and other intangibles in future periods if
realization of net operating losses or foreign tax credits becomes more
likely than not.
The Company's effective tax rate for 1997 was 54.3%, compared with
58.6% and 68.7% in 1996 and 1995, respectively.
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
U.S. U.S. STATE
FEDERAL FOREIGN* AND LOCAL TOTAL
------- -------- --------- -----
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Current $ 1,016 $ 6,123 $ 392 $ 7,531
Deferred (57) (512) 127 (442)
--- ---- --- ----
Total $ 959 $ 5,611 $ 519 $ 7,089
============= ============= ============ ===========
Year ended December 31, 1996:
Current $ 1,945 $ 5,364 $ 371 $ 7,680
Deferred (182) (7) 17 (172)
---- -- -- ----
Total $ 1,763 $ 5,357 $ 388 $ 7,508
============= ============= ============ ===========
Year ended December 31, 1995:
Current $ 272 $ 8,062 $ 471 $ 8,805
Deferred (1,180) 116 (341) (1,405)
------ --- ---- ------
Total $ (908) $ 8,178 $ 130 $ 7,400
============= ============= ============ ============
* Pre-tax income from foreign operations of the Company was $17,730, $22,429, and $20,232 for the twelve months ended
December 31, 1997, 1996 and 1995, respectively.
</TABLE>
The provision (benefit) for deferred taxes is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Accrued liabilities $ 1,002 $ 88 $ (76)
Foreign exchange (46) 232 410
Benefit of net operating loss (248) (313) (228)
Amortization of intangibles (1,971) (199) (1,536)
Inventory 760 69 -
Other, net 61 (49) 25
------------ ---------- ---------
Total $ (442) $ (172) $ (1,405)
============ ========== =========
</TABLE>
49
<PAGE>
The difference between the effective income tax and the U.S. Federal
statutory tax rate is explained as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
U.S. Federal statutory tax rate 35.0% 35.0% 35.0%
Foreign income taxes, net of Federal
income tax benefits (17.6) (34.5) 3.3
U.S. state and local income taxes,
net of Federal income taxes 2.6 2.0 3.0
Net domestic and foreign losses 7.5 12.4 3.9
Amortization and writeoff of intangibles 33.6 34.8 30.5
Other, net (6.8) 8.9 (7.0)
---- --- ----
Total 54.3% 58.6% 68.7%
==== ==== ====
</TABLE>
The Company has net operating loss carryforwards that relate to a
number of foreign and state jurisdictions that will expire on various
dates.
At December 31, 1997, accumulated earnings of foreign subsidiaries of
$38,731 are intended to be permanently reinvested outside the U.S. and
no tax has been provided for the remittance of these earnings. However,
it is estimated that foreign withholding taxes of $2,216 may be payable
if such earnings were distributed. These taxes, if ultimately paid, may
be recoverable as foreign tax credits in the U.S. The determination of
deferred U.S. tax liability for the undistributed earnings of
international subsidiaries is not practicable.
8 Long-term Debt
Long-term Debt consists of the following:
December 31,
1997 1996
---- ----
Term Loan $ 115,750 $ 10,500
Revolving Credit Facility 44,000 -
Senior Notes - 56,000
Other 331 594
--- ---
Total Debt 160,081 67,094
Less current maturities 17,712 10,741
------ ------
Long-term Debt $ 142,369 $ 56,353
============== ==============
Annual maturities of long-term debt outstanding as of December 31, 1997
are as follows: 1998, $17,712; 1999, $19,369; 2000, $20,500; 2001,
$22,000; 2002, $80,500.
50
<PAGE>
On August 28, 1997, in connection with the ELS Acquisition, the Company
refinanced its then existing indebtedness through borrowings under a
new bank facility (the "Bank Facility"), consisting of term loans of
$120 million and a revolving credit facility of $45 million. The
revolving credit facility (against which the Company borrowed $44
million during 1997) was subsequently increased to $55 million on
October 28, 1997 and to $70 million on March 23, 1998. The term loans
provide for quarterly amortization, beginning December 31, 1997 and
ending September 30, 2002, and mature as follows: Year 1, $17,000; Year
2, $19,000; Year 3, $20,000; Year 4, $22,000; Year 5, $22,000, plus a
balloon at maturity of $20,000. There are no scheduled repayments
required under the revolving credit facility prior to its expiration on
September 30, 2002, at which time all outstanding balances are due. The
Bank Facility is secured by the capital stock of certain Company
subsidiaries, and is subject to mandatory prepayment equal to a portion
of the proceeds from certain asset sales or equity offerings in excess
of specified amounts.
Outstanding borrowings under the Bank Facility bear interest at
variable rates based on, at the option of the Company, (i)
NationsBank's alternate base rate (essentially equivalent to the 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 .375% to .875%; such margin is dependent on
a specified leverage ratio of the Company. In addition, a commitment
fee ranging from .125% to .25% is charged on the available but unused
amounts under the revolving credit facility, depending on a specified
leverage ratio. The average interest rate on outstanding borrowings
under the Bank Facility for the period ending December 31, 1997 was
6.99%. The average interest rates on the Term Loan and Senior Notes for
the eight months ended August 28, 1997 (the date of refinancing) were
7.7% and 9.79%, respectively.
The Bank Facility contains certain covenants, including (i) limitations
on the ability of the Company and its subsidiaries to incur
indebtedness and guarantee obligations, to prepay indebtedness, to
redeem or repurchase capital stock or subordinated debt, to enter into,
grant or suffer to exist liens or sale-leaseback transactions, to make
loans or investments, to enter into mergers, acquisitions or sales of
assets, to change the nature of the business conducted, to amend
material agreements, to enter into agreements restricting the ability
of the Company and its subsidiaries to grant or to suffer to exist
liens, to enter into transactions with affiliates or to limit the
ability of subsidiaries to pay dividends or make loans to the Company,
(ii) limitations on the payment of dividends by the Company on its
capital stock, (iii) a requirement that the Company maintain foreign
currency hedge agreements to fix the rate of exchange between the U.S.
dollar and such foreign currencies, and (iv) a requirement that the
Company maintain interest rate hedge agreements covering at least 25%
of the outstanding borrowings. The Bank Facility also contains
financial covenants requiring the Company to maintain certain levels of
liquidity and net worth and imposes limitations on capital
expenditures, cash flow and total debt. As of December 31, 1997, the
Company was in compliance with all Bank Facility covenants.
51
<PAGE>
The Company used a portion of the proceeds from the Bank Facility to
repay its pre-existing Term Loan and Senior Notes. As a result of this
early extinguishment of debt, the Company incurred an extraordinary
charge, net of taxes, of $6.3 million, consisting of prepayment
penalties on the Senior Notes and the write-off of unamortized deferred
financing costs.
9. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company's operations are primarily conducted from leased
facilities, many of which are less than 2,500 square feet, which are
under operating leases that generally expire within five years.
Rent expense, principally for language centers, amounted to $27,066,
$26,020 and $25,443, for the years ended December 31, 1997, 1996 and
1995, respectively. Certain leases are subject to escalation clauses
and/or renewal options.
The minimum rental commitments under noncancellable operating leases
with a remaining term of more than one year at December 31, 1997 are as
follows: 1998-$13,547; 1999-$10,012; 2000-$7,803; 2001-$6,737;
2002-$5,433 and an aggregate of $23,812 thereafter.
LEGAL PROCEEDINGS
The Company is party to several actions arising out of the ordinary
course of its business. Management believes that none of these actions,
individually or in the aggregate, will have a material adverse effect
on the financial condition or results of operations of the Company.
IRS DEFICIENCY NOTICE
In October 1996, the Internal Revenue Service issued a deficiency
notice to the Company relating to its 1989, 1990, 1992 and 1993 U.S.
Federal tax returns. The Company is contesting the deficiency notice
and believes that any liability that may ultimately result is
adequately provided for at December 31, 1997. During the twelve months
ended December 31, 1997, the Company made a payment of $2.5 million to
the IRS in connection with this notice.
SEVERANCE AGREEMENTS
The Company has severance agreements with five key employees which
generally provide for termination payments of one times annual base
salary, plus a portion of the Company's bonus plan awards. The
agreements also provide for the continuation of certain benefits. The
maximum contingent liability under such agreements is approximately
$1,900.
52
<PAGE>
10. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES
a) CURRENCY COUPON SWAP AGREEMENTS
Pursuant to covenants in its various long-term debt agreements, the
Company maintains currency coupon swap agreements with a financial
institution to hedge the Company's net investments in certain foreign
subsidiaries and to help manage the effect of foreign currency
fluctuations on the Company's ability to repay its U.S. dollar debt.
These agreements require the Company to periodically exchange foreign
currency-denominated interest payments for U.S. dollar-denominated
interest receipts. Credit loss from counterparty nonperformance is not
anticipated.
Significant terms of agreements outstanding during 1997 were as
follows:
<TABLE>
<CAPTION>
INTEREST PAYMENTS TO INTEREST RECEIPTS FROM
FINANCIAL INSTITUTION FINANCIAL INSTITUTION
--------------------- ---------------------
EFFECTIVE NOTIONAL INTEREST NOTIONAL INTEREST
DATE MATURITY AMOUNT (000'S) RATE AMOUNT (000'S) RATE
---- -------- -------------- ---- -------------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/93 12/31/98 Japanese Yen 2,335,500 9.71% $ 22,500 9.79%
12/31/93 12/31/98 Swiss Franc 11,475 9.89% $ 7,500 9.79%
12/31/93 12/31/98 British Pound 5,133 10.43% $ 7,550 9.79%
12/31/93 12/31/98 Canadian Dollar 5,596 10.43% $ 4,300 9.79%
3/29/96 12/31/98 German Mark 60,165 4.78% $ 35,000 5.31%
12/15/97 12/31/98 Japanese Yen 7,796,967 5.50% $ 60,606 6.27%
12/15/97 12/31/98 German Mark 45,507 6.12% $ 25,518 6.27%
1/1/99 12/30/02 Japanese Yen 12,311,005 5.50% $ 95,694 6.27%
1/1/99 12/31/02 German Mark 99,546 6.12% $ 55,821 6.27%
1/4/99 12/31/02 Swiss Franc 16,131 5.72% $ 11,164 6.27%
1/4/99 12/31/02 British Pound 4,841 6.56% $ 7,974 6.27%
</TABLE>
The Company marks coupon swaps to market. When these agreements are
effective as hedges, realized and unrealized gains and losses are
excluded from the Company's Consolidated
53
<PAGE>
Statements of Operations, and included, net of deferred taxes, in the
cumulative translation adjustment of shareholders' equity.
During the second half of 1995, a German mark floating rate coupon swap
agreement became ineffective as a hedge of the Company's net investment
in its German subsidiaries, and consequently the Company recognized a
foreign exchange gain of $1,151 in its Consolidated Statement of
Operations within "Other income, net". On January 23, 1996, the Company
exchanged this swap for a fixed interest rate coupon-only currency swap
of equal fair value. The Company recognized a gain of $399 during the
first quarter of 1996, representing the change in fair value of the
original swap from December 31, 1995 to the date of the exchange.
b) Interest rate swap agreement
Pursuant to a covenant requirement under the Bank Facility, the Company
entered into a five-year interest rate swap agreement which provides
for quarterly exchanges of interest on an amortizing "notional" (i.e.
theoretical) amount, originally set at $66.0 million and currently at
$62.3 million at December 31, 1997. In exchange for U.S. dollar
denominated interest receipts based on variable LIBOR, the Company must
make U.S. dollar denominated interest payments based on a fixed rate of
6.30%. The notional amount amortizes proportionately with the scheduled
principal payments under the Bank Facility. Credit loss from
counterparty non-performance is not anticipated. The Company accounts
for these interest rate swap transactions under the accrual method of
accounting, whereby: a) each net receipt/payment is recognized in
earnings during the period to which the receipt/payment relates, as a
yield adjustment to "Interest expense on long-term debt"; b) gains and
losses on terminated agreements are amortized over the underlying debt
obligations remaining life as a yield adjustment; and c) there is no
recognition on the balance sheet for the derivative's fair value.
c) Concentration of credit risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and temporary
investments and accounts receivable.
The Company maintains cash and temporary investments with various high
credit qualified financial institutions. The majority of these
financial institutions are located outside of the U.S. and the
Company's policy is designed to limit exposure to any one of these
foreign institutions. The Company maintains U.S. concentration
accounts, consisting of overnight investments, with up to three major
U.S. banks. During 1997 and 1996, balances in these accounts averaged
40% and 31% of worldwide cash. As part of its cash management process,
the Company performs periodic evaluations of the relative credit
standing of all financial institutions in which it maintains cash and
temporary investments.
Credit risk with respect to Language Instruction accounts receivable is
generally diversified due to the large number of entities comprising
the Company's customer base and their dispersion across many different
industries and countries. In the Translations segment, receivables are
generally spread among a diversified client base, except for a
concentration of receivables with two major customers subject to
special contractual arrangements. One of these is a U.S. governmental
agency and the other a corporation with whom the Company has been doing
business for over 10 years. Receivables from these two major customers
aggregated $13.8 million and $3.8 million at December 31, 1997 and
1996, respectively. Subsequent collections of these December 1997
balances have aggregated $8.1 million through March 24, 1998. The
Publishing segment also sells to a substantial client base, although
several of its larger receivables are from its distributors. Such
receivables from Publishing's distributors comprised approximately 5%
and 8% of the Company's total accounts receivable balance before
allowances at December 31, 1997 and 1996, respectively.
d) Fair values of financial instruments
The carrying amounts and estimated fair values of the Company's
financial instruments at December 31, 1997 and 1996 were as follows:
54
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---- ----
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Assets:
Cash and temporary investments $ 26,665 $ 26,665 $ 25,781 $ 25,781
Currency coupon swap agreements 719 719 228 228
Liabilities:
Long-term debt, including
current maturities 160,081 160,081 67,094 71,652
Notes payable to affiliates 39,423 34,101 38,294 32,926
Currency coupon swap agreements 406 406 694 694
Interest rate swap agreement - 680 - -
</TABLE>
For cash and temporary investments and short-term borrowings, the
carrying amount approximates fair value due to their short maturities.
The fair values of long-term debt and notes payable to affiliates are
estimated based on the interest rates currently available for
borrowings with similar terms and maturities. The fair values of the
coupon swap agreements and the interest rate swap agreement represent
the amounts that could be settled based on estimates obtained from a
dealer. The value of these swaps will be affected by future interest
rates and exchange rates.
11. RELATED PARTY TRANSACTIONS
a) Treasury shares
On April 29, 1997, the Company and Fukutake Holdings (America), Inc.
("FHAI"), a wholly owned subsidiary of Benesse Corporation ("Benesse"),
signed a definitive contract whereby the Company agreed to sell to FHAI
250,000 shares of the Company's Common at $24.44 per share, the average
market price for the ten days ended on April 29, 1997. This
transaction, which was approved by the Disinterested Directors
Committee of the Company's Board of Directors, was closed on May 12,
1997. The Company used 250,000 of its treasury shares to complete this
transaction, which was a private placement exempt from registration
under the Securities Act of 1933. The proceeds of the sale were used
for general corporate purposes.
Following this private placement, Benesse beneficially owned 6,985,338
shares, which represents 73.3%, of the 9,529,788 shares of Common
outstanding at December 31, 1997.
The issuance of the treasury shares under this private placement was
accounted for using the cost method, whereby the excess sale price per
share over the $9 cost per share was allocated to additional
paid-in-capital.
55
<PAGE>
b) Long-term borrowings
In September 1994, the Company borrowed $20,000 from a U.S. subsidiary
of Benesse, as evidenced by a subordinated promissory note (the "U.S.
Note") bearing interest at a rate of 6.93% per annum. Berlitz-Japan
also borrowed (Y)1.0 billion (approximately $10,145 at inception) from
Benesse as evidenced by an interest-free subordinated promissory note
(the "Japan Note"). A portion of the proceeds of these notes were used
to settle certain long-term debt obligations arising from the Merger.
In March 1996, the Company received the proceeds of an additional
$6,000 subordinated promissory note payable to a U.S. subsidiary of
Benesse and bearing interest at a rate of the six-month LIBOR plus 1%
per annum, adjusted semi-annually; the effective rate on this note was
6.81% at December 31, 1997. These notes are collectively referred to as
the Benesse Notes.
The Benesse Notes rank PARI PASSU with one another and are subordinate
in rights of payment to debt under the Bank Facility, including the
currency coupon swap agreements. They mature on the earlier of June 30,
2003 or twelve months from the date that all payment obligations under
the Bank Facility have been satisfied. To the extent that interest
payments are not permitted while any amounts remain outstanding under
the Bank Facility, such accrued interest will roll over semi-annually
into the note principal.
Payment obligations under the U.S. Note are guaranteed by the Company
and its significant U.S. subsidiaries, subject to senior guarantees of
the Bank Facility. The Company and its significant U.S. subsidiaries
have also executed a guarantee of payment obligations under the Japan
Note, effective as of the day following the date upon which all payment
obligations under the Bank Facility are satisfied.
The Benesse Notes contain certain covenants, including prohibitions on
the incurrence of other debt, liens, loans, mergers or consolidations
and amendments to the Bank Facility without consent.
c) Other
The Company and Benesse maintain a joint Directors and Officers ("D&O")
insurance policy covering acts by directors and officers of both
Benesse and the Company. Consequently, the premiums on the D&O policy
are allocated 60% to Benesse and 40% to the Company, except
56
<PAGE>
for, in 1997, the premium for entity coverage which benefited Berlitz
only and was allocated 100% to Berlitz, resulting in a total D&O
allocation of 57% to Benesse and 43% to the Company for 1997. Since May
1995, the Company has maintained a stand-alone Employment Practices
Liability ("EPL") insurance policy covering the Company, its officers
and directors (including the Benesse directors who are also directors
of the Company). Consequently, the premium on the EPL policy is
allocated 30% to Benesse and 70% to the Company.
The Company and Benesse participated in certain other joint business
arrangements in the ordinary course of business, none of which had a
material effect on the financial statements.
Management believes that the Company has entered into all such
agreements on terms no less favorable than it would have received in
arms-length transactions with independent third parties. Each of the
transactions with Benesse entered into after the Merger was approved by
the Disinterested Directors Committee.
12. STOCK OPTION AND INCENTIVE PLANS
The Company's 1993 Short-Term Executive Incentive Compensation Plan
(the "Short-Term Plan"), provides for potential cash awards to officers
and other key employees if certain financial goals and individual
discretionary performance measures are met for the applicable calendar
year. Approximately $1,417, $811 and $1,328 was paid for 1997, 1996 and
1995, respectively, pursuant to the Short-Term Plan.
ELS' 1997 Executive Incentive Plan provided for cash awards to officers
and key employees of ELS if certain financial goals have been met, as
well as a special bonus upon successful sale of ELS. Approximately
$2,010 was paid for 1997 in connection with this plan.
In September 1996, the Company adopted the New Long-Term Executive
Incentive Compensation Plan (the "New LTIP") and, subject to
shareholder approval which was received in 1997, the 1996 Stock Option
Plan (the "1996 Stock Option Plan") (collectively, the "Plans"). The
Plans replaced the Company's then existing Long Term Executive
Incentive Compensation Plan (the "Old LTIP"), which was initially
adopted in 1994.
The New LTIP provides for potential cash awards in 1999 to key
executive employees and the Chairman of the Board of the Company if
certain financial goals are met for the year ended December 31, 1998.
Such awards may not exceed $5.0 million in the aggregate. The Company
is not required to establish any fund or segregate any assets for
payments under the New LTIP. For the twelve months ended December 31,
1997 and 1996, the Company recorded expenses of $1,289 and $318,
respectively, related to the New LTIP.
The 1996 Stock Option Plan, as amended (the "Plan") authorizes the
issuance of options to directors and key employees of the Company. The
total number of shares for which options may be granted is 377,000. The
Company has reserved 377,000 of its treasury shares for use under the
Plan, which was approved by the Company's shareholders on June 3, 1997.
57
<PAGE>
The Company granted 327,200 options under the Plan on June 30, 1997
(the "June 1997 Options") at an exercise price of $24.9375, equal to
the closing price of the Company's common stock on the New York Stock
Exchange on the date of grant. Included within the 327,200 options are
100,250 options for Soichiro Fukutake, Chairman of the Board of
Directors, of which 50,000 have been granted (the "Relinquishment
Options") in exchange for the complete relinquishment by Mr. Fukutake
of all benefits under the Company's Supplemental Executive Retirement
Plan ("SERP"). The Company granted an additional 46,120 options under
the Plan on December 9, 1997 (the "December 1997 Options") at an
exercise price of $26.5625, equal to the closing price of the Company's
common stock on the New York Stock Exchange on the date of grant.
The June 1997 Options may not be exercised prior to January 1, 1999. On
such date, they become fully exercisable until their normal expiration
on June 29, 2004, except for the Relinquishment Options, which expire
on December 31, 1999. Unexercised June 1997 Options expire earlier upon
the grantee's termination of service with the Company, unless a
grantee's service terminates by reason of death, disability, retirement
after age 60, or termination by the Company other than for cause.
The December 1997 Options may not be exercised prior to December 9,
2000. On such date, they become fully exercisable until their normal
expiration on December 9, 2004. Unexercised December 1997 Options, for
a majority of the grants, expire earlier upon the grantee's termination
of service with the Company, unless a grantee's service terminates by
reason of death, disability, retirement after age 60, or termination by
the Company other than for cause.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123"), issued in October 1995,
establishes financial accounting and reporting standards for
stock-based employee compensation plans. As permitted by SFAS 123, the
Company continues to apply APB Opinion No. 25, "Accounting for Stock
Issued to Employees", and related Interpretations in accounting for its
stock-based employee compensation plans. Accordingly, no compensation
expense has been recognized for the grants under the Plan. Had
compensation expense been determined based on the fair value of awards
at their grant date, as contemplated by SFAS 123, the pro forma effects
on net income and earnings per share for the year-to-date period ended
December 31, 1997 would have been a decrease of $554 and $0.06,
respectively.
The fair value of each option grant during 1997, as set forth in the
following table, is estimated on the date of grant using the
Black-Scholes option pricing model, with the following assumptions:
<TABLE>
<CAPTION>
JUNE 1997 GRANT - JUNE 1997 GRANT DECEMBER 1997
RELINQUISHMENT OPTIONS - ALL OTHER GRANT
---------------------- OPTIONS -----
-------
<S> <C> <C> <C>
Weighted average assumptions
used to estimate fair value:
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 22.00% 22.00% 21.00%
Risk free interest rate 5.79% 6.08% 5.88%
Expected lives in years 1.5 4.25 5.0
Fair value of each option $3.71 $7.37 $8.43
granted
</TABLE>
58
<PAGE>
The Company has two other stock plans: the 1989 Stock Option and
Incentive Plan (the "1989 Plan") and the Non-Employee Directors' Stock
Plan (the "Directors' Plan"). The 1989 Plan authorizes the issuance of
various stock incentives to officers and key employees and the related
issuance of up to 2,000,000 shares of common stock. The Directors' Plan
provides non-employee Directors of the Company the opportunity to elect
to receive a portion of their annual retainer fees in the form of
common stock of the Company, or to defer receipt of a portion of such
fees and have the deferred amounts treated as if invested in common
stock. There has been no activity related to these plans during 1995,
1996 or 1997, and there are no related incentives or shares outstanding
at December 31, 1997.
13. THRIFT AND RETIREMENT PLANS
The Berlitz International, Inc. Retirement Savings Plan (the "Berlitz
Plan") is a defined contribution benefit plan covering substantially
all of the Company's full-time domestic employees (except ELS
employees). The retirement portion of the Berlitz Plan provides for the
Company to make regular contributions based on salaries of eligible
employees. The thrift portion of the Berlitz Plan, in which employee
participation is elective, provides for Company matching contributions
of up to 3% of salary. Payments upon retirement or termination of
employment are based on vested amounts credited to individual accounts.
In addition, certain foreign operations have other defined contribution
benefit plans.
ELS maintains a separate retirement savings plan (which includes a
Contributory 401(k) provision). All full-time ELS employees are
eligible to participate in this plan on January 1 or July 1 upon
attainment of age 21 and completion of 500 hours of service within a
six-month period. Contributions to the profit sharing portion of this
plan are made in such amounts, if any, as determined by executive
management of ELS. The Contributory 401(k) provision for ELS employees
is in an amount equal to the lesser of (a) 50% of the employee's salary
reduction contributions or (b) 3% of the employee's annual
compensation.
Total expense with respect to all benefit plans, excluding the SERP,
was $1,399, $1,632 and $1,704 for the years ended December 31, 1997,
1996, and 1995, respectively.
Effective January 1, 1996, the Company established the SERP, a defined
benefit plan which provides retirement income / disability retirement
benefits, retiree medical benefits and death benefits to certain
designated executives and their designated beneficiaries. As previously
discussed (see Note 12), the Chairman of the Board of Directors
relinquished rights to all benefits under the SERP in exchange for the
Relinquishment Options. Monthly benefits will be available to any
59
<PAGE>
participant who retires at age 60 or above, with at least 5 years of
service with the Company.
The retirement income/disability retirement benefits are based on a
percentage of an average monthly salary (calculated on the base salary
and short-term bonuses paid over the last 36 months of employment) and
will be paid to the retired participant for life, with 50% of such
benefit paid to the participant's surviving spouse for life upon the
retired participant's death. Such percentage for initial participants
as of January 1, 1996 is 30%. For future participants, such percentage
will be 2% (or such other percentage as the Board of Directors may
determine) multiplied by years of service, not to exceed 30%. The
Company will also provide each retired participant and their surviving
spouse with medical coverage for both of their lives. If a participant
with at least 5 years of service dies before retirement, the
participant's designated beneficiary will receive, in lieu of the
above-mentioned benefits, a one-time payment equal to the participant's
base salary projected to age 65 at a 4% annual increase.
Awards under the SERP are not subject to deduction for Social Security
or other offset amounts, except to the extent of any disability
benefits payable under the Company's long-term disability insurance
policy. In the case of Chairman of the Board, who does not receive a
salary from the Company, the SERP benefits had been based on an imputed
salary determined by the Company's Board of Directors. The Company
intends to fund the SERP through a combination of funds generated from
operations and life insurance policies on the participants.
The following table sets forth the funded status of the medical
coverage portion of the SERP, reconciled with amounts recognized in the
Company's financial statements at December 31.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ - $ -
Active plan participants 1,205 1,435
----- -----
1,205 1,435
Plan assets at fair value - -
----- -----
Accumulated postretirement benefit obligation
in excess of plan assets 1,205 1,435
Prior service cost not yet recognized in net
periodic postretirement benefit cost (840) (999)
Unrecognized actuarial gain 374 -
--- ---
Accrued postretirement benefit cost $ 739 $ 436
=========== ===========
</TABLE>
Net periodic postretirement benefit cost for the year ended December
31, 1997 and 1996 included the following components:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Service cost - benefits earned during the period $ 107 $ 196
Interest cost on accumulated postretirement
benefit obligation 72 81
Amortization of prior service cost 159 159
Actuarial gains (35) -
---- -
Net periodic postretirement benefit cost $ 303 $ 436
=========== ===========
</TABLE>
60
<PAGE>
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation for 1996 was a beginning
rate of 14% leveling to an ultimate rate of 6% over 15 years. For 1997,
a beginning rate of 13.8% leveling to an ultimate rate of 5% over 10
years was used. The weighted average discount rate used in determining
the accumulated postretirement benefit obligation for both years was
7%. If the health care cost trend rate assumption were increased by 1%,
the accumulated postretirement benefit obligation as of January 1, 1997
would increase by $168 and the service cost for benefits earned during
the period ending December 31, 1997 would increase by $20.
Net periodic pension cost of the retirement income portion of the SERP
is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Service cost on benefits earned during the period $ 415 $ 407
Interest cost on projected benefit obligation 220 188
Net amortization and deferral 179 179
--- ---
Net periodic pension cost $ 814 $ 774
=========== ===========
</TABLE>
The actuarial present value of benefit obligations and funded status
for the SERP at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Benefit obligations:
Vested benefits $ 2,726 $ 1,767
Nonvested benefits 66 603
-- ---
Accumulated benefit obligation 2,792 2,370
Projected compensation increases 783 818
--- ---
Projected benefit obligation 3,575 3,188
Plan assets at fair value - -
----- -----
Projected benefit obligation in excess of plan assets 3,575 3,188
Unrecognized prior service cost (2,324) (2,503)
Unrecognized actuarial gain 338 89
Adjustment required to recognize minimum liability 1,203 1,596
----- -----
Net pension liability $ 2,792 $ 2,370
=========== ===========
</TABLE>
Assumptions used in developing the projected benefit obligation as of
December 31, 1997 and 1996 were as follows:
Discount rate (annual compounding) 7.0%
Annual rate of increase in compensation 4.0%
The assumed interest rate at the beginning of each year is the same as
the discount rate at the end of each prior year. Net pension income is
determined using assumptions as of the beginning of each year. Funded
status is determined using assumptions as of the end of each period.
61
<PAGE>
14. TREASURY STOCK
On November 14, 1997, the Company acquired 126,225 shares of its Common
from MCC Proceeds, Inc., as Trustee for the Maxwell Macmillan
Realization Trust. The negotiated purchase price was $23.5125 per
share, or $3.0 million, which was below the market price at the date of
negotiation. The transaction was funded from cash generated by
operations. The repurchased shares were placed into treasury and
reserved for future uses permitted under the Bank Facility.
On April 4, 1996, the Company consummated the purchase of 627,000
shares of its common stock from Maxwell Communication Corporation plc
(In Administration) at a price of $9 per share. Such shares were placed
into treasury. As previously discussed, 250,000 of these shares were
subsequently sold to FHAI, 377,000 shares were subsequently reserved
for use under the 1996 Stock Option Plan, and the balance are reserved
for future uses.
15. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company's operations principally are conducted through the
following business segments: Language Instruction, Translation
Services, and Publishing. Franchising activity in 1997 and 1996 and
general corporate licensing activity in 1996 and 1995 are included
within Other sales in the following presentation. Intersegment and
intergeographical sales are not significant.
Capital expenditures and depreciation and amortization for franchising
are not significant.
General corporate identifiable assets consist of, as applicable,
deferred finance costs, an intangible required to recognize minimum
liability under the retirement portion of the SERP, currency coupon
swap agreements, cash values of officer life insurance and annuity
contracts, and property and equipment. Depreciation and amortization
relates to property and equipment, excess of cost over net assets
acquired, other intangibles and publishing rights.
62
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
BUSINESS SEGMENTS 1997 1996 1995
----------------- ---- ---- ----
<S> <C> <C> <C>
Sales of services and products:
Language Instruction $ 298,348 $ 276,167 $ 272,764
Translation Services 84,192 76,991 64,036
Publishing 13,634 15,451 17,180
Other 1,035 1,013 529
----- ----- ---
Total $ 397,209 $ 369,622 $ 354,509
============= ============== ==============
Operating profit (loss):
Language Instruction $ 38,273 $ 34,330 $ 28,577
Translation Services 6,158 3,508 3,836
Publishing 197 1,014 1,499
Franchising activity (725) (834) -
Divisional expenses (7,969) (6,713) (4,556)
------- ------- -------
Total operating segments 35,934 31,305 29,356
General corporate (12,873) (10,437) (9,754)
-------- -------- -------
Total $ 23,061 $ 20,868 $ 19,602
============= ============== ==============
Capital expenditures:
Language Instruction $ 9,098 $ 5,693 $ 5,188
Translation Services 2,167 3,903 1,659
Publishing 2,771 1,289 853
----- ----- ---
Subtotal 14,036 10,885 7,700
General corporate and divisional 581 2,149 335
--- ----- ---
Total $ 14,617 $ 13,034 $ 8,035
============= ============== ==============
Depreciation and amortization:
Language Instruction $ 16,869 $ 15,395 $ 15,900
Translation Services 3,595 3,391 2,826
Publishing 1,124 1,450 1,551
----- ----- -----
Subtotal 21,588 20,236 20,277
General corporate and divisional 1,159 482 247
----- --- ---
Total $ 22,747 $ 20,718 $ 20,524
============= ============== ==============
DECEMBER 31,
-----------
1997 1996 1995
---- ---- ----
Identifiable assets:
Language Instruction $ 547,740 $ 451,178 $ 473,432
Translation Services 82,563 77,945 76,368
Publishing 20,916 22,415 22,717
Franchising 3,637 2,974 -
----- ----- -----
Subtotal 654,856 554,512 572,517
General corporate 6,659 6,733 4,413
----- ----- -----
Total $ 661,515 $ 561,245 $ 576,930
============= ============== ==============
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
GEOGRAPHIC AREAS
----------------
<S> <C> <C> <C>
Sales of services and products:
North America $ 133,843 $ 105,476 $ 96,191
Western Europe 84,371 82,869 76,198
Central/Eastern Europe 61,999 66,037 63,000
Asia 67,291 72,922 81,652
Latin America 49,705 42,318 37,468
------ ------ ------
Total $ 397,209 $ 369,622 $ 354,509
============= ============== ==============
Operating profit (loss):
North America $ 16,553 $ 11,362 $ 13,121
Western Europe 4,106 5,974 6,031
Central/Eastern Europe 4,519 3,329 3,071
Asia 4,951 6,254 4,265
Latin America 9,753 8,013 6,901
Business segment corporate expenses (3,948) (3,627) (4,033)
------- ------- -------
Total operating segments 35,934 31,305 29,356
General corporate expenses (12,873) (10,437) (9,754)
------- ------- -------
Total $ 23,061 $ 20,868 $ 19,602
============= ============== ==============
</TABLE>
Amortization of publishing rights, excess of cost over net assets
acquired and other intangibles, included in operating profit (loss) in
the years ended December 31, 1997, 1996 and 1995 amounted to $11,171,
$9,282, and $9,344 for North America; $857, $1,148, and $1,196 for
Western Europe; $482, $484, and $688 for Central/Eastern Europe;
$1,296, $1,446, and $1,762 for Asia; and $377, $387, and $435 for Latin
America.
Profit (expense), resulting from an intersegment allocation to
compensate North America for use of its intangibles, and included in
operating profit (loss) in each of the years ended December 31, 1997,
1996 and 1995 amounted to $6,071 for North America; $(1,505) for
Western Europe; $(1,408) for Central/Eastern Europe; $(2,188) for Asia;
and $(970) for Latin America.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Identifiable assets:
North America $ 491,872 $ 374,540 $ 377,254
Western Europe 45,856 57,699 56,985
Central/Eastern Europe 30,124 34,392 39,319
Asia 66,348 68,680 78,458
Latin America 27,315 25,934 24,914
------ ------ ------
Total $ 661,515 $ 561,245 $ 576,930
============= ============= =============
</TABLE>
64
<PAGE>
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31 YEAR
-------- ------- ------- ------ ----
<S> <C> <C> <C> <C> <C>
1997:
Sales of services and products $ 89,252 $ 95,894 $ 104,436 $ 107,627 $ 397,209
Operating profit 3,073 7,702 6,816 5,470 23,061
Income before income taxes,
minority interest and extraordinary
item 565 5,847 4,310 2,331 13,053
Net income before extraordinary
item 168 1,949 828 2,406 5,351
Net income (loss) 168 1,949 (5,457) 2,406 (934)
Basic and diluted earnings
(loss) per share $ 0.02 $ 0.20 $ (0.57) $ 0.25 $ (0.10)
========== ============ ============ ============ ==========
1996:
Sales of services and products $ 90,076 $ 92,130 $ 94,373 $ 93,043 $ 369,622
Operating profit 3,910 5,876 5,022 6,060 20,868
Income before income taxes
and minority interest 1,476 3,404 2,670 5,264 12,814
Net income 204 1,006 439 2,154 3,803
Basic and diluted earnings per share $ 0.02 $ 0.11 $ 0.05 $ 0.23 $ 0.40
========== ============ ============ ============ ==========
</TABLE>
65
<PAGE>
BERLITZ INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
SCHEDULE II
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND AT END OF
OF YEAR EXPENSES DEDUCTIONS (1) OTHER (2) OF YEAR
------- -------- -------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Allowances for doubtful accounts:
Year Ended December 31, 1997 $ 1,914 $ 1,129 $ (465) $ (163) $ 2,415
============ =============== =============== ============== =============
Year Ended December 31, 1996 $ 1,468 $ 1,168 $ (698) $ (24) $ 1,914
============ =============== =============== ============== =============
Year Ended December 31, 1995 $ 1,912 $ 349 $ (814) $ 21 $ 1,468
============ =============== =============== ============== =============
</TABLE>
(1) Principally represents net losses incurred in the ordinary course of
business and chargeable against the allowance.
(2) Principally represents foreign currency translation.
66
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 401 of Regulation S-K with respect to Directors
and Executive Officers of the Company is set forth in Part I of this Form 10-K.
The information required by Item 405 of Regulation S-K with respect to Directors
and Executive Officers of the Company is set forth in Item 12 to this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following Summary Compensation Table sets forth the compensation awarded to,
earned by or paid to the Chief Executive Officer ("CEO") and certain executive
officers (collectively, the "Named Executive Officers") during the fiscal years
ended December 31, 1997, 1996 and 1995 for services rendered in all capacities
to the Company and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION (3)
--------------------------------------
OTHER AWARDS OF
NAME AND ANNUAL OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SARS COMPENSATION
($) ($) ($) (2) (#) ($)(4)
- ------------------ ---- ------ ----- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Hiromasa Yokoi 1997 499,052 202,200 65,730 46,220 10,390
Vice Chairman of the Board, 1996 480,000 84,000 60,469 None 9,750
CEO and President 1995 444,800 180,000 55,200 None 9,750
Manuel Fernandez 1997 251,908 65,000 23,671 20,300 10,400
Executive Vice President and 1996 240,000 40,900 990 None 9,750
Chief Operating Officer, 1995 224,800 51,000 1,312 None 9,750
Worldwide Language Instruction
Robert Minsky 1997 240,000 35,000 926 20,300 10,400
Executive Vice President and 1996 240,000 10,000 874 None 9,750
Chief Operating Officer, 1995 227,900 80,000 None None 9,750
Translations and Publishing
Susumu Kojima 1997 229,500 - 65,000 18,320 None
Executive Vice President, 1996 225,000 8,700 65,000 None None
Asia Division 1995 210,000 25,200 42,000 None 9,750
Henry D. James (1) 1997 218,335 75,300 826 20,300 10,334
Executive Vice President and 1996 210,000 32,000 771 None 9,750
Chief Financial Officer 1995 182,300 51,000 None None 9,750
</TABLE>
67
<PAGE>
(1) Mr. James' 1996 percentage increase in base salary was due in part to
the additional responsibilities he assumed as a result of his promotion
to Executive Vice President.
(2) Other Annual Compensation for Mr. Yokoi and Mr. Kojima primarily
represents monthly housing allowances. For Mr. Fernandez, this column
includes relocation expense reimbursements of $22,600 in 1997.
(3) The column designated by the SEC to report Long-Term Incentive Plan
Payouts has been excluded because no payouts have been made in 1995,
1996 or 1997 under the Company's long-term incentive plans, as
discussed in the Compensation Committee report under "Long- Term
Executive Incentive Compensation Plan".
The column designated by the SEC to report Restricted Stock Awards has
been excluded because the Company made no awards of restricted stock to
the Named Executive Officers during any portion of fiscal years 1995,
1996 or 1997. There were no Common restricted shares outstanding at
December 31, 1997.
(4) The amounts reported in this column for the fiscal year 1996 include a
contribution of $4,500 made by the Company for the account of each
Named Executive Officer pursuant to the thrift portion (the "401(k)
Plan") of the Berlitz Retirement Savings Plan (the "Retirement Savings
Plan"). The amounts reported also include a contribution of $5,250 made
by the Company for the account of each Named Executive Officer pursuant
to the retirement portion (the "Pension Plan") of the Retirement
Savings Plan.
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<PAGE>
PENSION PLAN TABLE
The Company's Supplemental Executive Retirement Plan ("SERP"), effective January
1, 1996, is a defined benefit plan which provides retirement income/disability
retirement benefits, retiree medical benefits and death benefits to the Chairman
of the Board(1), certain designated executives and their designated
beneficiaries. The following table shows the estimated annual retirement
income/disability retirement benefits (assuming payments made on the normal life
annuity) payable upon retirement at age 60 to a participant in specified
compensation and years of service classifications.
YEARS OF SERVICE
----------------------------------------------------
INITIAL
PARTICIPANT
(HEREINAFTER
DEFINED) ALL OTHER PARTICIPANTS
COMPENSATION 5 OR MORE 5 10 15 OR MORE
------------ ---------- -------- --------- ---------
$100,000 $ 30,000 $ 10,000 $ 20,000 $ 30,000
150,000 45,000 15,000 30,000 45,000
200,000 60,000 20,000 40,000 60,000
250,000 75,000 25,000 50,000 75,000
300,000 90,000 30,000 60,000 90,000
400,000 120,000 40,000 80,000 120,000
550,000 165,000 55,000 110,000 165,000
750,000 225,000 75,000 150,000 225,000
Under the SERP, monthly benefits are available to any participant who retires at
age 60 or above, with at least 5 years of service with the Company. The
retirement income/disability retirement benefits are based on a percentage of an
average monthly salary (calculated on the base salary and short-term bonuses
paid over the last 36 months of employment(2)) and will be paid to the retired
participant for life, with 50% of such benefit paid to the participant's
surviving spouse for life upon the retired participant's death. Such percentage
for participants designated as of January 1, 1996 ("Initial Participants") is
30%. For future participants, such percentage will be 2% (or such other
percentage as the Board of Directors may determine) multiplied by years of
service, not to exceed 30%. The Company will also provide each retired
participant and their surviving spouse with medical coverage for both of their
lives. If a participant with at least 5 years of service dies before retirement,
the participant's designated beneficiary will receive, in lieu of the
above-mentioned benefits, a one-time payment equal to the participant's base
salary projected to age 65 at a 4% annual increase. Awards under the SERP are
not subject to deduction for Social Security or other offset amounts, except to
the extent of any disability benefits payable under the Company's long-term
disability insurance policy. The Company intends to fund the SERP through a
combination of funds generated from operations and life insurance policies on
the participants.
The Named Executive Officers, all of whom are Initial Participants, will each
have at least 5 years of service at age 60. The compensation covered under the
SERP for each of the Named Executive Officers is shown under the "Salary" and
"Bonus" columns of the Summary Compensation Table.
- ---------------
1 The Chairman relinquished all benefits under the SERP in exchange for the
grant of 50,000 options on June 30, 1997 under the Company's 1996 Stock Option
Plan.
2 In the case of the Chairman of the Board, who does not receive a salary from
the Company, the SERP benefits were based
69
<PAGE>
on an imputed salary determined by the Company's Board of Directors.
OPTION/SAR GRANTS IN FISCAL YEAR 1997
The following awards were made pursuant to the 1996 Stock Option Plan
(hereinafter defined). See the "Compensation Committee Report" for a further
description.
<TABLE>
<CAPTION>
Name Grant Number of % of Total Exercise Expiration Grant Date
---- Date Securities Options Price ($/Sh) Date Present
Underlying granted to Value ($)
Options Employees in (1)
Granted Fiscal Year
(#)
------------- ------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Hiromasa Yokoi 6/30/97 45,720 12.24% $24.9375 6/29/04 $336,956
12/31/97 500 0.13 26.5625 12/29/04 4,215
Manuel Fernandez 6/30/97 19,800 5.30 24.9375 6/29/04 145,926
12/31/97 500 0.13 26.5625 12/29/04 4,215
Robert Minsky 6/30/97 19,800 5.30 24.9375 6/29/04 145,926
12/31/97 500 0.13 26.5625 12/29/04 4,215
Susumu Kojima 6/30/97 17,820 4.77 24.9375 6/29/04 131,333
12/31/97 500 0.13 26.5625 12/29/04 4,215
Henry D. James 6/30/97 17,820 4.77 24.9375 6/29/04 131,333
12/31/97 2,480 0.66 26.5625 12/29/04 20,906
</TABLE>
(1) The fair value of each option grant during 1997, as set forth in the
following table, is estimated on the date of grant using the Black-Scholes
option pricing model, with the following assumptions:
June 1997 Grant December 1997 Grant
--------------- -------------------
Weighted average assumptions
used to estimate fair value:
Dividend yield 0.00% 0.00%
Expected volatility 22.00% 21.00%
Risk free interest rate 6.08% 5.88%
Expected lives in years 4.25 5.0
Fair value of each option $7.37 $8.43
granted
1997 BOARD OF DIRECTORS MEETINGS, COMMITTEES AND FEES
During 1997, the Board of Directors of the Company met in person four times,
participated in two telephonic meetings and took two actions by unanimous
written consent.
In 1997, the Board of Directors had standing Executive, Audit, Disinterested
Directors, and Compensation Committees, as well as a Special ELS Acquisition
Committee. Effective December 9, 1997, the Company created a standing Nominating
Committee.
The Executive Committee, during the intervals between meetings of the Board of
Directors, may, with certain exceptions, exercise the powers of the Board of
Directors. The Executive Committee did not meet during 1997.
The Audit Committee recommends to the Board of Directors the engagement of the
independent auditors of the Company and reviews with the independent auditors
the scope and results of the Company's audits. The Audit Committee reviews the
terms of all agreements between the Company and its affiliates. The Audit
Committee meets with management and with the Company's internal auditors and
independent auditors to review matters relating to the quality of financial
reporting and internal accounting control, including the nature, extent and
results of their audits, and otherwise maintains communications between the
Company's independent auditors and the Board of Directors. The Audit Committee
met three times during 1997.
70
<PAGE>
The Disinterested Directors Committee reviews and monitors all matters affecting
the relationship between the Company and Benesse Corporation ("Benesse") and its
affiliates. During 1997, the Disinterested Directors Committee met in person two
times, participated in one telephonic meeting, and took action by unanimous
written consent 2 times.
The Compensation Committee reviews performance of corporate officers,
establishes overall employee compensation policies and recommends to the Board
of Directors major compensation programs. The Compensation Committee also
reviews and approves salary arrangements and other remuneration for executive
officers of the Company and is responsible for review of certain employee
benefit plans. The Compensation Committee oversees and approves grants of stock
options and other stock-based awards pursuant to the 1989 and 1996 Stock Option
Plans (individually, the "1989 Stock Option Plan" and the "1996 Stock Option
Plan", and collectively, the "Stock Option Plans") and the Company's
Non-Employee Directors Stock Plan (the "Directors' Stock Plan"). The Committee
also administers the 1993 Short-Term Executive Incentive Compensation Plan (the
"Short-Term Incentive Plan"), and the 1996 New Long-Term Executive Incentive
Compensation Plan (the " New LTIP"), which replaced the 1993 Long-Term Executive
Incentive Compensation Plan (the "Old LTIP"), and approves awards and
discretionary bonuses under these plans. No member of the Compensation Committee
is eligible to participate in the Stock Option Plans or the Short-Term Incentive
Plan, except for a special grant on December 9, 1997 of 500 options to each
Director. During 1997, the Compensation Committee met two times and participated
in telephonic meetings one time.
The Special ELS Acquisition Committee was formed for the purpose of
independently reviewing and monitoring all matters related to the acquisition of
ELS Educational Services, Inc. and the related refinancing of the Company's
long-term debt. During 1997, the Special ELS Acquisition Committee participated
in two telephonic meetings.
The Nominating Committee was formed to nominate Directors and to consider
possible successors to senior executives.
The Company's standard retainer payable to each director who is not an employee
of the Company or any of its affiliates was increased from $30,000 per annum in
1997 to $35,000 per annum in 1998, plus expenses, with an additional $2,000 for
each Committee meeting attended in person and $1,000 for each meeting
participated in by telephone. No fees are paid for actions taken by unanimous
written consent. Only those directors who are also full-time employees of the
Company or any of its affiliates are eligible to participate in the health
benefit plan maintained by the Company. Directors employed by the Company or any
of its affiliates receive no compensation in consideration of their duties as
directors. The outside directors earned an aggregate of approximately $143,000
as cash compensation for their services during 1997.
The Company has entered into indemnification agreements with each director
pursuant to which the Company agreed to pay any amount such director becomes
obligated to pay as a result of any claims made against such director because of
any alleged act, omission, neglect or breach of duty which he commits while
acting in his capacity as a director and solely because of his being a director,
subject to limitations imposed by the New York Business Corporation Law
("NYBCL").
71
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
The Company has a severance agreement with Robert Minsky which provides that if
Mr. Minsky is terminated other than for cause, he is to be paid one year's
severance at his then current annual base salary plus a prorated amount of the
award under the Company's Short- Term Incentive Plan to which he would have been
entitled for such year and the continuation of certain other benefits.
The Company is a party to indemnification agreements with each director and
executive officer pursuant to which the Company agrees to pay, subject to
limitations imposed by the NYBCL, any amount such director or executive officer
becomes obligated to pay as a result of any claims made against such director or
executive officer because of any alleged act or omission or neglect or breach of
duty which he commits while acting in his capacity as a director or executive
officer, as the case may be.
COMPENSATION COMMITTEE REPORT FOR FISCAL YEAR 1997
The Compensation Committee of the Board of Directors reviews and determines the
compensation of the Company's executive officers. It also reviews and approves
any employment, severance or similar agreements for executive officers. The
Committee determines the amount, if any, of the Company's contributions pursuant
to the Retirement Savings Plan, and oversees and approves grants of stock
options and other stock-based awards pursuant to the Stock Option Plans and the
Directors' Stock Plan. The Committee also administers the Short-Term Incentive
Plan and the New LTIP (which has replaced the Old LTIP) and approves awards and
discretionary bonuses under each of such plans.
The Company seeks to compensate executive officers at levels competitive with
other companies with similar annual revenues and to provide incentives for
superior individual and corporate performance. Salaries are set to correspond to
the mid-range of salaries paid by competitive companies. In setting
compensation, the Company compares itself with companies with similar annual
revenues rather
72
<PAGE>
than with industry peers because the Company is the only publicly-held language
instruction company.
The key components of executive officer compensation are base salary, cash
bonuses, and awards pursuant to incentive-based plans. The Committee attempts to
combine these components in such a way to attract, motivate and retain key
executives critical to the long-term success of the Company. A discussion of the
various components of executive compensation for the fiscal year 1997 follows.
BASE SALARY
Each executive officer receives a base salary, with the potential for annual
salary increases based largely on merit from prior annual performance.
The proposed annual compensation of Company employees was discussed at
Compensation Committee meetings held in 1997 and 1996. Base salary
recommendations were made by management of the Company for the Committee to
approve. After review and consideration by the Committee of management's
recommendations, the Committee approved base salary adjustments for executive
officers considering individual and Company performance. Such adjustments
averaged 3.3% for each of 1997 and 1998. The criteria used to evaluate Company
performance were sales and earnings figures, and return on equity. The Committee
believes that all such criteria were accorded equal weight.
BONUSES
In 1993, the Committee approved the Short-Term Incentive Plan, commencing with
the 1993 calendar year, pursuant to which each executive officer is eligible for
an annual bonus based upon the officer's present employment position, individual
performance, and, through 1994, the total Company's performance compared to
earnings goals. In 1995, the Committee amended the Short-Term Incentive Plan so
that Division Vice Presidents would receive 1995 and subsequent years' awards
based on 60% of divisional performance and 40% of total Company performance. The
Committee believes that individual performance and Company performance are given
approximately equal weight. The Short-Term Incentive Plan also permits the
Committee to award discretionary cash awards to employees, who may or may not be
participants under the Short-Term Incentive Plan, subject to those terms and
conditions as the Committee shall determine in its sole discretion.
At its February 1998 meeting, the Committee approved, after discussion, 1997
bonuses for executive officers under the Short-Term Incentive Plan. Such bonuses
that accrued for 1997 ranged up to 41% of each executive officer's base salary.
The Committee also approved a discretionary special bonus proposal for certain
executive officers, recommended by management based upon exceptional individual
performance. Such special bonuses that accrued for 1997 for such executive
officers ranged from 2.6% to 10% of their total salary.
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<PAGE>
STOCK OPTIONS AND RESTRICTED STOCK
The 1989 Stock Option Plan provides for the award of stock options, restricted
stock and other stock-based awards to senior management of the Company. Grants
under this plan are intended to provide executives with the promise of
longer-term rewards which appreciate in value with favorable future performance
of the Company. In determining grants of stock options and restricted stock, the
Compensation Committee reviews individual performance and Company performance.
The criteria used to evaluate Company performance include sales and earnings
figures, and return on equity. The Committee believes that all such criteria are
accorded equal weight. The Committee did not approve, and the Company did not
make, any grants of stock options, restricted stock, or any other stock-based
award under the 1989 Stock Option Plan in 1996, and there are no outstanding
option grants under this plan.
In September 1996, the Company adopted, subject to shareholder approval which
was obtained in 1997, the 1996 Stock Option Plan, which, together with the New
LTIP (hereinafter discussed), replaced the Company's then existing Old LTIP. The
1996 Stock Option Plan authorizes the issuance of options to directors and key
executive employees of the Company. The total number of shares for which options
may be granted is 377,000. The Company granted 327,200 of these options on June
30, 1997 at an exercise price of $24.9375 and 49,120 options on December 9, 1997
at an exercise price of $26.5625. Such exercise prices were based on the closing
market price of the Company's Common on the New York Stock Exchange on the date
of grant.
LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLANS
In 1993, the Committee approved the Old LTIP, effective January 1, 1994,
pursuant to which the Chairman of the Board, officers and certain key employees
were eligible to receive, for each performance unit granted to the individual by
the Committee, cash awards based on Company performance and common stock price
results over a five year period ending on December 31, 1998. The plan was
instituted to, among other things, provide executives with a direct economic
interest in meeting long-term business objectives. Performance units were
granted by the Committee to each participant in its discretion. Criteria used to
evaluate Company performance were earnings and sales figures. For each
performance unit granted by the Committee, each participant was to receive a
cash award based on Company performance during 1998 and the Company's common
stock price on December 31, 1998. The Old LTIP also contained provisions
governing such awards in the event of a change of control of the Company or a
"going private" transaction with Benesse or its affiliates.
In September 1996, the Committee adopted the New LTIP, which together with the
1996 Stock Option Plan, replaced the Old LTIP. The New LTIP provides for
potential cash awards in 1999 to key executive employees and the Chairman of the
Board of the Company if certain sales and earnings goals are met for the year
ended December 31, 1998. Common stock price does not impact potential awards,
which may not exceed $5.0 million in the aggregate. While the New LTIP's minimum
threshold for potential awards is lower than under the Old LTIP, the Old LTIP
did not contain a limitation on maximum awards.
OTHER COMPENSATION
The executive officers also are eligible to participate in the Pension Plan. The
Pension Plan provides for the Company to make regular contributions based on
salaries of eligible employees. During 1997, pursuant to the plan documents, the
Company continued to contribute 3.5% of eligible employees' respective base
salary to the Pension Plan. During 1997, the Company also continued to provide
matching contributions under the 401(k) Plan to all domestic employees up to a
maximum of 3% of the employee's salary.
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CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Hiromasa Yokoi's base salary for 1997 was $499,000, and he also earned a
bonus of $202,200 for 1997 under the Short-Term Incentive Plan. The Compensation
Committee approved and ratified the compensation paid to Mr. Yokoi for fiscal
year 1997 based on Mr. Yokoi's business experience and familiarity with the
Company, and his responsibilities to guide, among other things, the Company's
daily affairs and the Company's long-term strategic plan in a global
marketplace. The Company's 1997 performance was taken into consideration in
determining Mr. Yokoi's 1997 compensation package. The Committee believes that
Mr. Yokoi's 1997 compensation package was in line with compensation packages of
chief executive officers of other companies with similar annual revenues.
TAX LEGISLATION
The Committee has reviewed regulations issued by the U.S. Internal Revenue
Service which limit deductions for certain compensation in excess of $1 million
annually paid to executive officers of public companies. Based on present levels
of compensation, the Company does not anticipate the loss of deductibility for
any compensation paid over the next year.
COMPENSATION COMMITTEE MEMBERSHIP
During 1997, the Compensation Committee consisted of Edward G. Nelson, Robert L.
Purdum and Aritoshi Soejima. All of the views expressed by the Compensation
Committee in 1997 may not have been the views of each member of the Compensation
Committee individually. However, all decisions affecting compensation were
approved by all of the members of the Compensation Committee.
Compensation Committee for Fiscal Year 1997
Edward G. Nelson
Robert L. Purdum
Aritoshi Soejima
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As discussed above, during 1997 and at March 1, 1998, the Compensation Committee
consisted of Edward G. Nelson, Robert L. Purdum and Aritoshi Soejima. None of
these committee members were officers of the Company or any of its subsidiaries
during 1997 or any previous year.
Aritoshi Soejima previously served as an advisor to Benesse. He resigned such
position prior to his appointment as a Disinterested Director and a member of
the Compensation Committee.
PERFORMANCE GRAPHS
The following graphs set forth the Company's total shareholder return as
compared to the S&P 400 Industrial Index and a peer group index (described
below) over a five-year period, beginning on December 31, 1992, and ending on
December 31, 1997. The total shareholder return assumes $100 invested at the
beginning of the period in the Company's common stock, the S&P 400 Industrial
Index and the peer group index. It also assumes reinvestment of all dividends.
As the Company is the only publicly-held language instruction company, there are
no directly comparable companies. Therefore, the Company has created a peer
group index of selected publicly-held companies in the educational services and
educational publishing industries. The companies included in this peer group
are: ITT Educational Services, Inc. (a leading proprietary provider of technical
post secondary degree programs in the U.S.); Education Management Corporation
(among the largest providers of proprietary post-secondary education in the U.S.
offering degree and non-degree programs in the areas of design, media arts,
culinary arts, fashion and paralegal studies); and three educational publishing
companies: Houghton Mifflin, John Wiley & Sons and McGraw-Hill, Inc. While none
of these companies are directly comparable to the Company, the Company believes
they come under either the same broad rubric of education-related activities as
the Company.
ITT Educational Services, Inc. has been publicly traded since December 1994, and
Education Management Corporation has been publicly traded since October 1996.
For purposes of creating the peer group index, these two companies have been
given a market capitalization weighting of zero for those periods prior to their
initial public trading dates.
ITT Educational Services, Inc. and Education Management Corporation replace
Flightsafety International and National Education Corporation, two companies
which were included in the Company's peer group in prior years, but which are no
longer publicly traded in 1997.
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1992 1993 1994 1995 1996 1997
Berlitz $ 100 $ 63(1) $ 59 $ 75 $ 93 $ 121
S & P 400 Index $ 100 $ 106 $ 108 $ 142 $ 171 $ 221
Peer Group Index $ 100 $ 111 $ 107 $ 137 $ 141 $ 225
(1) As a result of the Merger (hereinafter defined), each share of the Company's
common stock outstanding prior to the Merger ("Old Common") was converted into
the right to receive i) $19.50, ii) 0.165 share of new common stock of the
Company ("Common"), iii) $1.48, representing the net proceeds from the
disposition of the Company's claims on promissory notes from Maxwell
Communications and certain of its affiliates (the "Maxwell Notes"), and iv)
$0.01, representing consideration paid for the redemption of each right under a
shareholders rights agreement (the "Rights Agreement"). Immediately following
the Merger, 10,033,013 shares of Common were outstanding. Prior to the Merger,
19,075,584 shares of Old Common were outstanding.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number and percentage of outstanding shares
of Common beneficially owned as of March 2, 1998 by each director, nominee, the
Company's chief executive officer during the fiscal year ended December 31,
1997, the four most highly compensated executive officers of the Company at
December 31, 1997 and all officers and directors as a group who served at
December 31, 1997. If not mentioned by name, no individual in the categories
described above beneficially owned any shares of Common as of March 2, 1998. No
security set forth in the third column of the following table reflects an amount
as to which the beneficial owner has joint voting or investment power.
UPDATE
AMOUNT AND
NATURE OF
NAME OF BENEFICIAL PERCENT
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP OF CLASS
-------------- ---------------- --------- --------
Common Soichiro Fukutake 6,985,338(1) 73.30%
Common Manuel Fernandez 8,745 *
Common Robert Minsky 2,857 *
Common Henry D. James 7,672 *
Common Edward G. Nelson 1,500(2) *
Common Robert L. Purdum 2,000 *
All Officers and
Directors as a Group
Common (15 in number) 7,027,746 73.75%
To the best of registrant's knowledge, there are no events of delinquent filing
requiring disclosure under Item 405 of Regulation S-K.
(1) Soichiro Fukutake is the President, Representative Director and
principal shareholder of Benesse Corporation, which is the beneficial
owner of 6,985,338 shares of Common. See "Security Ownership of Certain
Beneficial Owners."
(2) An additional 1,000 shares of Common, for which Mr. Nelson has
disclaimed ownership, are owned by Mr. Nelson's wife.
* Less than 1%
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the ownership by each person or group known by
the Company to own beneficially more than 5% of Common:
NAME AND ADDRESS OF PERCENT
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP OF CLASS
-------------- ---------------- --------- --------
Common Benesse Corporation (1) 6,985,338 73.30%
3-17-17 Minamigata
Okayama-shi 700, Japan
Common Dimensional Fund Advisors, Inc (2) 508,672 5.34%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
(1) Fukutake Publishing Co., Ltd. changed its name to Benesse Corporation
on April 1, 1995. As of March 2, 1998, 6,972,138 shares of Common are
held by a wholly owned subsidiary of Benesse and 13,200 shares of
Common are held directly by Benesse. Soichiro Fukutake is the
President, Representative Director and principal shareholder of
Benesse.
(2) This information is taken from the Schedule 13G, dated February 9,
1998, filed by Dimensional Fund Advisors, Inc. ("Dimensional") with the
Securities and Exchange Commission. Dimensional, a registered
investment advisor, is deemed to have beneficial ownership of these
508,672 shares of Common at December 31, 1997, all of which are held in
portfolios of DFA Investment Dimensions Group, Inc., a registered
open-end investment company, or in series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Kazuo Yamakawa currently serves as the Benesse nominee on the Board of
Directors of the Company pursuant to the acquisition by Benesse in January 1991
of a 20% interest in Berlitz Japan, Inc. ("Berlitz-Japan"), a subsidiary of the
Company.
On December 9, 1992, the Company and Benesse entered into a merger agreement
pursuant to which Benesse agreed to acquire, through a merger of the Company
with an indirect wholly owned U.S. subsidiary of Benesse (the "Merger"),
approximately 6.7 million shares of the Common. Additionally, on April 29, 1997,
the Company agreed to sell to Fukutake Holdings (America), Inc., a wholly owned
subsidiary of Benesse, 250,000 shares of the Company's Common at $24.44 per
share, the average market price for the ten days ended on April 29, 1997. This
private placement exempt from
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registration under the Securities Act of 1933 was closed on May 12, 1997.
Following this private placement, Benesse beneficially owned 6,985,338 shares,
which represents 73.3%, of the 9,529,788 shares of Common outstanding at
December 31, 1997. Public shareholders of the Company held the remaining
outstanding Common. Mr. Soichiro Fukutake is the President, Representative
Director and principal shareholder of Benesse.
In September 1994, the Company borrowed $20.0 million from a U.S. subsidiary of
Benesse, as evidenced by a subordinated promissory note (the "U.S. Note")
bearing interest at a rate of 6.93% per annum. Berlitz-Japan also borrowed
(Y)1.0 billion (approximately $10.1 million) from Benesse as evidenced by an
interest-free subordinated promissory note (the "Japan Note"). In March 1996,
the Company received the proceeds of an additional $6.0 million subordinated
promissory note payable to a U.S. subsidiary of Benesse (the "FHAI Note"),
bearing interest at a rate of the six month LIBOR plus 1% per annum, reset
semi-annually. Such notes, (collectively, the "Benesse Notes") mature on the
earlier of June 30, 2003 or twelve months from the date that all payment
obligations under the Company's August 28, 1997 credit agreement (the "Bank
Facility") have been satisfied. To the extent that interest payments on the U.S.
or FHAI Notes are not permitted while any amounts remain outstanding under the
Bank Facility, such accrued interest will roll over semiannually into the note
principal. The Company recorded $2.1 million in interest expense on the Benesse
Notes in 1997.
The Benesse Notes rank PARI PASSU with one another and are subordinate in rights
of payment to debt under the Bank Facility, including the currency coupon swap
agreements. Payment obligations under the U.S. Note are guaranteed by the
Company and its significant U.S. subsidiaries, subject to senior guarantees of
the Bank Facility. The Company and its significant U.S. subsidiaries have also
executed a guarantee of payment obligations under the Japan Note, effective as
of the day following the date upon which all payment obligations under the Bank
Facility are satisfied.
The Company and Benesse maintain a joint Directors and Officers ("D&O")
insurance policy covering acts by directors and officers of both Benesse and the
Company. Consequently, the premium on the D&O policy is allocated 60% to Benesse
and 40% to the Company, except for, in 1997, the premium for entity coverage
which benefited the Company only and was allocated 100% to the Company,
resulting in a total D&O allocation of 57% to Benesse and 43% to the Company for
1997. Since May 1995, the Company has also maintained a stand-alone Employment
Practices Liability ("EPL") insurance policy covering the Company, its officers
and directors (including the Benesse directors who are also directors of the
Company). The premium on the EPL policy is allocated 30% to Benesse and 70% to
the Company.
The Company and Benesse participated in certain other joint business
arrangements during 1997, in the ordinary course of business, including the
following:
(a) Pursuant to extended industrial block contracts dated July 24, 1997 and
August 6, 1996, Berlitz-Japan provided lessons to Benesse at its standard
rate for prepaid industrial lessons which was approximately 20% below the
rate charged for individual instruction. Revenues under these contracts
aggregated 27,950,000 Yen (approximately $231,000 at an average 1997
exchange rate of (Y)121.13).
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(b) The Company's subsidiary, Berlitz Franchising Corporation, entered into a
standard franchise agreement dated July 30, 1997 with the Okayama Language
Center, Inc., a corporation formed by Benesse and the Okayama Institute of
Languages, the latter being controlled by Mr. Fukutake's sister-in-law.
(c) On June 30, 1997, the Company granted 100,250 stock options to Mr. Fukutake
at an exercise price of $24.9375, equal to the closing price of the
Company's common stock on the New York Stock Exchange on the date of grant.
50,000 of these options had been granted in exchange for the complete
relinquishment by Mr. Fukutake of all benefits under the Company's
Supplemental Executive Retirement Plan ("SERP").
(d) Pursuant to a services agreement, Benesse periodically offered its
customers language and homestay programs arranged and operated by the
Company's specialty instruction program, Berlitz Study Abroad(R). Benesse
also periodically offered its customers language study and homestay
programs arranged and operated by Berlitz on Campus(TM), another of the
Company's specialty instruction programs. The Company and Benesse also
participated in certain other joint business arrangements in the ordinary
course of business, none of which had a material effect on the financial
statements.
Management believes that the Company has entered into all such agreements on
terms no less favorable than it would have received in an arms-length
transaction with independent third parties. Each of the transactions with
Benesse entered into after the Merger was approved by the Disinterested
Directors Committee.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Index to Financial Statements and Financial Statement Schedules
1. FINANCIAL STATEMENTS
2. FINANCIAL STATEMENT SCHEDULES
The Financial Statements and the Financial Statement Schedules included
in the Annual Report on Form 10-K are listed in Item 8 on page 35.
3. EXHIBITS
All Exhibits listed below are filed with this Annual Report on Form
10-K unless specifically stated to be incorporated by reference to
other documents previously filed with the Commission.
EXHIBIT NO.
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
December 9, 1992, among the registrant, Benesse Corporation
(formerly Fukutake Publishing Co., Ltd.) and BAC, Inc. Exhibit 1
to the registrant's Form 8-K, dated December 9, 1992, is
incorporated by reference herein.
3.1 Restated Certificate of Incorporation of the registrant filed with
the State of New York on December 11, 1989. Exhibit 3.4 to
Registration Statement No. 33-31589 is incorporated by reference
herein.
3.2 Certificate of Merger of BAC, Inc. into the registrant (including
amendments to the registrant's Certificate of Incorporation),
filed with the State of New York on February 8, 1993. Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 is incorporated by reference herein.
4.1 Specimen Certificate of Old Common Stock with Legend. Exhibit 4.3
to the Company's Form 10-K for the fiscal year ended December 31,
1991 is incorporated by reference herein.
4.2 Specimen Certificate of Common Stock. Exhibit 4.1 to Registration
Statement No. 33-56566 is incorporated by reference herein.
10.1 Credit Agreement, dated as of January 29, 1993, among the
registrant, the several lenders
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from time to time party thereto and Chemical Bank as Agent.
Exhibit 10.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 is incorporated by reference
herein.
10.2 First Amendment, dated as of September 21, 1994, to the Credit
Agreement, dated as of January 29, 1993, among the registrant, the
several lenders from time to time parties thereto and Chemical
Bank as Agent. Exhibit 99.6 to the Company's Form 8-K, dated
September 21, 1994, is incorporated by reference herein.
10.3 Second Amendment and Consent, dated as of September 21, 1994, to
the Credit Agreement, dated as of January 29, 1993, among the
registrant, the lenders from time to time parties thereto and
Chemical Bank. Exhibit 99.7 to the Company's Form 8-K, dated
September 21, 1994, is incorporated by reference herein.
10.4 Form of Third Amendment, dated as of April 28, 1995, to the Credit
Agreement, dated as of January 29, 1993, among the registrant, the
lenders from time to time parties thereto and Chemical Bank.
Exhibit 10.4 to the Company's Form 10K for the fiscal year ended
December 31, 1995 is incorporated by reference herein.
10.5 Form of Consent, dated as of April 28, 1995, to the Credit
Agreement, dated as of January 29, 1993, among the registrant, the
lenders from time to time parties thereto and Chemical Bank.
Exhibit 10.5 to the Company's Form 10K for the fiscal year ended
December 31, 1995 is incorporated by reference herein.
10.6 Form of Fourth Amendment, dated as of March 18, 1996, to the
Credit Agreement, dated as of January 29, 1993, among the
registrant, the lenders from time to time parties thereto and
Chemical Bank. Exhibit 10.6 to the Company's Form 10K for the
fiscal year ended December 31, 1995 is incorporated by reference
herein.
10.7 Form of Senior Note Agreement, dated as of January 29, 1993, among
the registrant and each institutional lender party thereto.
Exhibit 10.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 is incorporated by reference
herein.
10.8 Second Amendment, dated as of September 21, 1994, to the Senior
Note Agreements, dated as of January 29, 1993, among the
registrant and each institutional lender party thereto. Exhibit
99.10 to the Company's Form 8-K, dated September 21, 1994, is
incorporated by reference herein.
10.9 Third Amendment, dated as of September 21, 1994, to the Senior
Note Agreements, dated as of January 29, 1993 among the registrant
and each institutional lender party thereto. Exhibit 99.11 to the
Company's Form 8-K, dated September 21, 1994, is incorporated by
reference herein.
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10.10 Form of Fourth Amendment, dated as of April 28, 1995, to the
Senior Note Agreements, dated as of January 29, 1993 among the
registrant and each institutional lender party thereto. Exhibit
10.10 to the Company's Form 10K for the fiscal year ended December
31, 1995 is incorporated by reference herein.
10.11 Form of Consent, dated as of April 28, 1995, to the Senior Note
Agreements, dated as of January 29, 1993 among the registrant and
each institutional lender party thereto. Exhibit 10.11 to the
Company's Form 10K for the fiscal year ended December 31, 1995 is
incorporated by reference herein.
10.12 Form of Fifth Amendment, dated as of March 18, 1996, to the Senior
Note Agreements, dated as of January 29, 1993, among the
registrant and each institutional lender party thereto. Exhibit
10.12 to the Company's Form 10K for the fiscal year ended December
31, 1995 is incorporated by reference herein.
10.13 (Y)1 billion (Japanese yen) Subordinated Non-Negotiable Promissory
Note, dated as of September 21, 1994, between the Berlitz Schools
of Languages (Japan), Inc. (as Borrower) and Benesse Corporation
(formerly Fukutake Publishing Co., Ltd.) (as Lender). Exhibit 99.2
to the Company's Form 8-K, dated September 21, 1994, is
incorporated by reference herein.
10.14 US $20,000,000 Subordinated Non-Negotiable Promissory Note, dated
as of September 21, 1994, among the registrant (as Borrower) and
Fukutake Holdings (America) (as Lender). Exhibit 99.3 to the
Company's Form 8-K, dated September 21, 1994, is incorporated by
reference herein.
10.15 Spring Guaranty Letter, dated as of September 21, 1994, from the
registrant to Benesse Corporation (formerly Fukutake Publishing
Co., Ltd). Exhibit 99.4 to the Company's Form 8-K, dated September
21, 1994, is incorporated by reference herein.
10.16 Subsidiaries Guaranty, dated as of September 21, 1994, by Berlitz
Financial Corporation, Berlitz Investment Corporation, Berlitz
Languages, Inc. and Berlitz Publishing Company, Inc. in favor of
Fukutake Holdings (America), Inc. Exhibit 99.5 to the Company's
Form 8-K, dated September 21, 1994, is incorporated by reference
herein.
10.17 Subordination Agreement, dated as of September 21, 1994, among
Benesse Corporation (formerly Fukutake Publishing Co., Ltd.), The
Berlitz Schools of Languages (Japan), Inc. and Chemical Bank.
Exhibit 99.8 to the Company's Form 8-K, dated September 21, 1994,
is incorporated by reference herein.
10.18 First Amendment, dated as of September 21, 1994, to the
Subordination Agreement, dated as of January 29, 1993, among
Benesse Corporation (formerly Fukutake Publishing Co., Ltd.),
Fukutake Holdings (America), Inc., the registrant and Chemical
Bank pursuant to the Master Collateral and Intercreditor
Agreement, dated as of January 29, 1993. Exhibit
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99.9 to the Company's Form 8-K, dated September 21, 1994, is
incorporated by reference herein.
10.19 Form of US$6,000,000 Subordinated Non-Negotiable Promissory Note,
dated as of March 25, 1996, among the registrant (as Borrower) and
Fukutake Holdings (America), Inc. (as Lender). Exhibit 10.19 to
the Company's Form 10K for the fiscal year ended December 31, 1995
is incorporated by reference herein.
10.20 Agreement among the registrant, Berlitz Financial Corporation, The
Berlitz School of Language (Japan) Inc., The Berlitz Schools of
Languages Limited and Maxwell Communication Corporation plc, dated
January 8, 1993. Exhibit 1 to the Company's Form, 8-K, dated
January 7, 1993, is incorporated by reference herein.
10.21 Agreement among the registrant, Berlitz Financial Corporation,
Macmillan, Inc. and Macmillan School Publishing Holding Company,
Inc., dated January 8,1993. Exhibit 2 to the Company's Form 8-K,
dated January 7, 1993 is incorporated by reference herein.
10.22 1989 Stock Option and Incentive Plan. Exhibit 10.13 to
Registration Statement No. 33- 31589 is incorporated by reference
herein.
10.23 Berlitz International, Inc. Non-Employee Directors' Stock Plan.
Exhibit 10.17 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 is incorporated by reference
herein.
10.24 Form of Berlitz International, Inc. 1996 Stock Option Plan.
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the nine months ended September 30, 1996 is incorporated by
reference herein.
10.25 Berlitz International, Inc., Retirement Savings Plan, effective as
of January 1, 1992. Exhibit 10.31 to Registration Statement No.
33-56566 is incorporated by reference herein.
10.26 1996 New Long-Term Executive Incentive Compensation Plan. Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the nine
months ended September 30, 1996 is incorporated by reference
herein.
10.27 1993 Short-Term Executive Incentive Compensation Plan. Exhibit 2
to the Company's Form 8-K, dated December 2, 1993 is incorporated
by reference herein.
10.28 Supplemental Executive Retirement Plan, effective as of January 1,
1996. Exhibit 10.33 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 is incorporated by reference
herein.
10.29 Form of Indemnity Agreement between the Registrant and Macmillan,
Inc. dated October 11, 1989. Exhibit 10.16 to Registration
Statement No. 33-31589 is incorporated by
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reference herein.
10.30 Shareholders' Agreement among Berlitz Languages, Inc., Benesse
Corporation (formerly Fukutake Publishing Co., Ltd.) and the
registrant, dated as of November 8, 1990. Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990 is incorporated by reference herein.
10.31 Amendment No. 1 to Shareholders' Agreement among Berlitz
Languages, Inc., Benesse Corporation (formerly Fukutake Publishing
Co., Ltd.) and the registrant, dated as of November 8, 1990.
Exhibit 10.18 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 is incorporated by reference
herein. Exhibit 10.21 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 is incorporated by
reference herein.
10.32 Stock Purchase Agreement, dated as of November 8, 1990, between
Berlitz Languages, Inc., the registrant and Benesse Corporation
(formerly Fukutake Publishing Co., Ltd.) Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990 is incorporated by reference herein.
10.33 Form of Indemnification Agreement between the registrant and each
of Robert Maxwell, Kevin Maxwell, Martin E. Maleska and David H.
Shaffer. Exhibit 10.20 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990 is incorporated by
reference herein.
10.34 Form of Amended and Restated Indemnification Agreement between the
registrant and each of Elio Boccitto, John Brademas, Rozanne L.
Ridgway, Joe M. Rodgers, Robert Minsky and Rudy G. Perpich.
Exhibit 10.24 to Registration Statement No. 33-56566 is
incorporated by reference herein.
10.35 Amended and Restated Indemnification Agreement between the
registrant and Hiromasa Yokoi. Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1992 is incorporated by reference herein.
10.36 Form of Indemnification Agreement between the registrant and each
of Soichiro Fukutake, Owen Bradford Butler, Susumu Kojima, Saburo
Nagai, Edward G. Nelson, Makoto Sato and Aritoshi Soejima. Exhibit
10.26 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 is incorporated by reference herein.
10.37 Form of Indemnification Agreement between the registrant and each
of Jose Alvarino, Manuel Fernandez, Paul Gendler, Robert C.
Hendon, Jr., Henry James, Jacques Meon, Michael Mulligan, Kim
Sonne, Anthony Tedesco and Wolfgang Wiedeler. Exhibit 10.24 to
Registration Statement No. 33-56566 is incorporated by reference
herein.
10.38* Indemnification Agreement between the Company and each of Ellen
Adler, Perry Akins,
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Mark Harris, Brian Kelly, James Lewis, Lionel Mellet and Kazuo
Yamakawa.
10.39 Employment Agreement dated April 1, 1992 between the registrant
and Robert C. Hendon, Jr. Exhibit 10.30 to Registration Statement
No. 33-56566 is incorporated by reference herein.
10.40 Employment Agreement, dated October 1, 1993, between the
registrant and Robert Minsky. Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993 is
incorporated by reference herein.
10.41* Employment Agreement, dated March 13, 1995, between the Company
and Frank Garton.
10.42* Employment Agreement, dated June 25, 1997, between the Company and
James Lewis.
10.43* Amended and Restated Employment Agreement, dated November 1, 1986,
and Amendment No. 1 thereto, dated October 1, 1988, between the
Company (as successor to ELS Educational Services, Inc.) and Perry
S. Akins.
10.44 Stock Purchase Agreement between Fukutake Holdings (America), Inc.
and Berlitz International, Inc., dated April 29, 1997. Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997 is incorporated by reference herein.
10.45 1996 Stock Option Plan, as amended. Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
is incorporated by reference herein.
10.46 Credit Agreement, dated as of August 28, 1997, among Berlitz
International, Inc., NationsBank N.A. (as Agent and as Lender) and
the Lenders party thereto from time to time. Exhibit 2 to the
Company's Current Report on Form 8-K dated August 28, 1997 is
incorporated by reference herein.
10.47 Amendment No. 1, dated September 12, 1997, to Credit Agreement,
dated as of August 28, 1997 among Berlitz, NationsBank N.A. (as
Agent and as Lender) and the Lenders party thereto from time to
time. Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 is incorporated by
reference herein.
10.48 Amendment No. 2, dated October 28, 1997, to Credit Agreement,
dated as of August 28, 1997 among Berlitz, NationsBank N.A. (as
Agent and as Lender) and the Lenders party thereto from time to
time. Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 is incorporated by
reference herein.
10.49* Amendment No. 3, dated March 23, 1998, to Credit Agreement, dated
as of August 28, 1997 among Berlitz, NationsBank N.A. (as Agent
and as Lender) and the Lenders party
87
<PAGE>
thereto from time to time.
10.50 Stock Purchase Agreement, dated November 14, 1997, between MCC
Proceeds, Inc. and Berlitz International, Inc. Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 is incorporated by reference herein.
10.51 Stock Purchase Agreement, dated as of July 23, 1997, between ELS
Educational Services, Inc., Roger O. Walther S.P. Trust, Wendy
Walther, Christine Walther Tripp, Edward Walther, Anne Dunning,
John Dunning, and Berlitz International, Inc. Exhibit 1 to the
Company's Current Report on Form 8-K dated July 23, 1997 is
incorporated by reference herein.
21* List of subsidiaries of the registrant.
27* Financial Data Schedule.
*Filed herewith.
88
<PAGE>
B. Reports on Form 8-K:
A Form 8-K/A was filed on November 12, 1997, amending the Form 8-K filed on
September 11, 1997 to provide financial statements of the business acquired
and certain pro forma financial information.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
As of the date of the filing of this Annual Report on Form 10-K no proxy
materials have been furnished to security holders. Copies of all proxy
materials will be sent to the Commission in compliance with its rules.
89
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Berlitz International, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
BERLITZ INTERNATIONAL, INC.
By: /s/ HIROMASA YOKOI
----------------------
Hiromasa Yokoi
Vice Chairman of the Board,
Chief Executive Officer and President
Dated: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ SOICHIRO FUKUTAKE Chairman of the Board March 31, 1998
- ----------------------
Soichiro Fukutake
/s/ HIROMASA YOKOI Vice Chairman of the Board, March 31, 1998
- -------------------
Hiromasa Yokoi Chief Executive Officer,
and President
(Principal Executive Officer)
/s/ SUSUMU KOJIMA Executive Vice President, March 31, 1998
- ------------------ and Director
Susumu Kojima
/s/ ROBERT MINSKY Executive Vice President, Corporate March 31, 1998
- ------------------ Planning and Marketing, and Director
Robert Minsky
/s/ MANUEL FERNANDEZ Executive Vice President, Chief March 31, 1998
- --------------------- Operating Officer-Worldwide Language
Manuel Fernandez Instruction, and Director
/s/ HENRY D. JAMES Executive Vice President, March 31, 1998
- ------------------- Chief Financial Officer, and Director
Henry D. James (Principal Financial Officer)
/s/ EDWARD G. NELSON Director March 31, 1998
- ---------------------
Edward G. Nelson
/s/ ROBERT L. PURDUM Director March 31, 1998
- ---------------------
Robert L. Purdum
/s/ ARITOSHI SOEJIMA Director March 31, 1998
- ---------------------
Aritoshi Soejima
/s/ KAZUO YAMAKAWA Director March 31, 1998
- -------------------
Kazuo Yamakawa
90
EXHIBIT 10.38
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT (the "Agreement") dated as of
February 25, 1998, between BERLITZ INTERNATIONAL, INC., a New York corporation
(the "Company"), and [ ] (the "Indemnified Party").
WHEREAS, the Indemnified Party is currently serving as a
director of the Company and the Company wishes to indemnify the Indemnified
Party to the fullest extent permitted by the certificate of incorporation of the
Company (the "Certificate of Incorporation"), the by-laws of the Company (the
"By-laws") and the New York Business Corporation Law ("NYBCL"), effective as of
January 1, 1998 (the "Effective Date"), the date on which the indemnified party
was initially elected an executive officer of the Company.
NOW, THEREFORE, in consideration of the foregoing and of the
mutual covenants herein contained, the parties hereto agree as of the effective
date as follows:
1. To the extent not prohibited by law, the Company shall pay
on behalf of the Indemnified Party an indemnification amount representing an
amount which he is or becomes legally obligated to pay, because he is or was
made, or threatened to be made, a party to any threatened, pending or completed
action, suit or proceeding (a "Proceeding"), whether civil, criminal,
administrative or investigative, including, without limitation, an action by or
in the right of the Company to procure a judgment in its favor, by reason of the
fact that the Indemnified Party is or was a director or an officer of the
Company, or is or was serving in any capacity at the request of the Company for
any other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, against judgments, fines, penalties, excise taxes, amounts
paid in settlement and costs, charges and expenses (including attorneys' fees
and disbursements). The Indemnified Party serving in any capacity of (a) another
corporation of which a majority of the shares entitled to vote in the election
of its directors is held, directly or indirectly, by the Company or (b) any
employee benefit plan of the Company or any corporation referred to in clause
(a) above shall be deemed to be doing so at the request of the Company.
2. Notwithstanding the foregoing, the Company shall not be
liable under this Agreement to make any payment in connection with any claim
made against the Indemnified Party:
(a) for which the Indemnified Party has received
payment under a valid and collectible insurance policy, except in respect of any
excess beyond the amount of payment under such insurance;
(b) if a judgment or other final adjudication adverse
to the Indemnified Party establishes that he was personally gaining in fact a
financial profit or other advantage to which he was not legally entitled; or
(c) if a judgment or other final adjudication adverse
to the Indemnified Party establishes that his acts were committed in bad faith
or were the result of active and deliberate dishonesty and, in either case, were
material to the cause of action so adjudicated.
3. The Company shall reimburse or advance to the Indemnified
Party the funds
<PAGE>
necessary for payment of expenses, including attorneys' fees and disbursements,
incurred in connection with any Proceeding, in advance of the final disposition
of such Proceeding; provided, however, that such expenses incurred by or on
behalf of the Indemnified Party may be paid in advance of the final disposition
of a Proceeding only upon receipt by the Company of an undertaking, by or on
behalf of such Indemnified Party, to repay any such amount so advanced if it
shall ultimately be determined by final judicial decision from which there is no
further right of appeal that such Indemnified Party is not entitled to be
indemnified for such expenses.
4. The Company shall pay all claims, or reimburse or advance
all expenses, under this Agreement, within 30 days after a written request
therefor has been received by the Company.
5. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of the Indemnified Party, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
6. In the event any Proceeding is brought against the
Indemnified Party, the Indemnified Party shall as soon as practicable notify the
Company in writing of the commencement thereof, and the Company shall be
entitled to participate therein and, to the extent that the Company may wish,
assume the defense thereof and after notice in writing to the Indemnified Party
from the Company of its election to assume the defense thereof, the Company
shall not be liable under this Agreement for any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the defense
thereof.
<PAGE>
7. The rights to indemnification and reimbursement or
advancement of expenses provided by, or granted pursuant to, this Agreement
shall be enforceable by the Indemnified Party in any court of competent
jurisdiction. The burden or proving that such indemnification or reimbursement
or advancement of expenses is not appropriate shall be on the Company. Neither
the failure of the Company (including its Board of Directors (the "Board"), its
independent legal counsel and its shareholders) to have made a determination
prior to the commencement of such action that such indemnification or
reimbursement or advancement of expenses is proper in the circumstances nor an
actual determination by the Company (including its Board, its independent legal
counsel and its shareholders) that the Indemnified Party is not entitled to such
indemnification or reimbursement or advancement of expenses shall constitute a
defense to the action or create a presumption that the Indemnified Party is not
so entitled. The Indemnified Party shall also be indemnified for any expenses
incurred in connection with successfully establishing his right to such
indemnification or reimbursement or advancement of expenses, in whole or in
part, in any such Proceeding.
8. The Indemnified Party may elect to have the right to
indemnification or reimbursement or advancement of expenses interpreted on the
basis of the applicable law in effect at the time of the occurrence of the event
or events giving rise to the applicable Proceeding, to the extent permitted by
law, or on the basis of the applicable law in effect at the time such
indemnification or reimbursement or advancement of expenses is sought. Such
election shall be made, by a notice in writing to the Company, at the time
indemnification or reimbursement or advancement of expenses is sought; provided,
however, that if no such notice is given, the right
<PAGE>
of indemnification or reimbursement or advancement of expenses shall be
determined by the law in effect at the time indemnification or reimbursement or
advancement of expenses is sought.
9. The rights to indemnification and reimbursement or
advancement of expenses provided by, or granted pursuant to, this Agreement
shall not be deemed exclusive of any other rights to which the Indemnified Party
may have or hereafter be entitled under any statute, the Certificate of
Incorporation or the By-laws, any other agreement, any vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
10. The Company shall maintain an insurance policy or policies
providing directors' and officers' liability insurance to the extent such
insurance is reasonably available at a reasonable cost.
11. All notices required or permitted to be given pursuant to
this Agreement shall be given in writing, shall be transmitted by personal
delivery, by registered or certified mail, return receipt requested, postage
prepaid, or by telecopier or other electronic means and shall be addressed as
follows:
if to the Company, to:
Berlitz International, Inc.
400 Alexander Park
Princeton, NJ 08540
Attention: Robert C. Hendon, Jr., Esq.
Facsimile: (609) 514-9670
if to the Indemnified Party, to:
[ ]
c/o Berlitz International, Inc.
400 Alexander Park
Princeton, NJ 08540
<PAGE>
Either party hereto may designate a new address to which notices required or
permitted to be given pursuant to this Agreement shall thereafter be transmitted
by giving notice to that effect to the other party. Each notice shall be deemed
to have been given, delivered, received and to have become effective for all
purposes at the time it shall have been (a) delivered to the addressee as
indicated by the return receipt (if transmitted by mail or personal delivery),
the affidavit of the messenger (if transmitted by personal delivery) or the
answer back or call back (if transmitted by telecopier or other electronic
means), or (b) presented for delivery to the addressee as so indicated during
normal business hours, if such delivery shall have been refused for any reason.
12. This Agreement shall be governed by, and be construed and
enforced in accordance with, the laws of the State of New York applicable to
contracts made and to be performed in such state, without giving effect to the
principles of conflicts of laws that might indicate the applicability of any
other law.
13. This Agreement shall be binding upon all successors and
assigns of the Company (including any transferee of all or substantially all of
its assets and any successor by merger or operation of law). The rights to
indemnification and reimbursement or advancement of expenses provided by, or
granted pursuant to, this Agreement shall continue as to the Indemnified Party
who has ceased to be an officer of the Company and shall inure to the benefit of
his executors, administrators, legatees and distributees.
14. If any provision or provisions of this Agreement shall be
invalidated on any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify the Indemnified Party to the fullest extent
permitted by all remaining provisions of this Agreement that shall not have been
invalidated, and to the fullest extent permitted by applicable law.
15. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and signed as of the day and year first written
above.
BERLITZ INTERNATIONAL, INC.
By:
Hiromasa Yokoi
[ ] Vice Chairman,
Chief Executive officer and
President
EXHIBIT 10.41
March 13, 1995
Mr. Frank Garton
42 Caleb-Brester Road
East Setauket, NY 11733
Dear Mr. Garton:
This letter agreement (the "Agreement") will constitute the agreement
relating to your employment as Vice President - Franchising of Berlitz
International, Inc. (the "Company").
1. Employment. Your employment under this Agreement shall commence
March 20, 1995. You agree that you shall devote your full business time,
attention, energy and skills to serve as Vice President - Franchising of the
Company. You shall render your services to the Company in Princeton, New Jersey.
2. Compensation. You will receive an annual salary of $160,000 payable
$6,154 every other week commencing on March 31, 1995, and you will be eligible
to participate in the Company's Short-Term Executive Incentive Compensation Plan
and Long-Term Incentive Plan (collectively the "Plans). You will be reimbursed
for reasonable expenses incurred in moving your residence to Princeton, New
Jersey from Long Island to the extent provided under the Company's moving
expense policy. You shall also participate in all of the Company's employee
benefit plans, policies and programs provided to its executives including, but
not limited to, health and life insurance policies, disability programs, pension
plans, 401(k) plans, and the Company's vacation program, in each instance as the
same may be modified by the Company from time to time.
3. Termination.
(a) Death. In the event of your death, your employment and the
obligations of the Company under this Agreement shall cease and terminate, but
the amount of any compensation accrued and due and payable hereunder calculated
through to the last day of the month in which your death occurs shall be paid to
your heirs and legal representatives.
(b) Disability. In the event you become substantially unable
<PAGE>
to perform your duties hereunder as a result of illness or other disability
which renders you unfit or incapable of performing such duties, and such
disability or incapacity continues for 120 consecutive days or a period of 180
days in any twelve month period, the Company shall have the right to terminate
your employment. In such event, the obligations of the Company under this
Agreement shall cease, provided that the Company gives you not less than thirty
days prior written notice specifying the termination date. Upon such
termination, you shall be paid the amount of any compensation accrued and due
and payable to you hereunder through the date of such termination.
(c) Without Cause.
In the event you are involuntarily terminated without Cause at
any time, the Company agrees to pay you a severance payment equal to one year's
salary at the rate in effect on the date of your termination. Your severance
payment shall be paid in 26 equal installments commencing on the next regular
pay period after your termination. The period during which you are entitled to
payment is defined as your "Severance Period". As a condition to your receiving
such severance payment, you agree to deliver a general release of the Company
containing substantially the terms set forth in Exhibit 1 hereto.
In addition, if you are involuntarily terminated without
Cause, to the extent such continued participation is permissible under the
general terms and conditions of such plans or programs, you shall also have the
right to continue to participate in all health insurance, life insurance,
pension, 401(k), and disability plans or programs of the Company, for the
earlier of the period ending on (A) the termination of your Severance Period or
(B) the date on which you obtain new employment in a comparable position.
(d) With Cause. In the event you are terminated with Cause (as
hereinafter defined) at any time, all obligations of the Company under this
Agreement shall cease and terminate on the last day of the month in which your
termination with Cause occurs.
4. Definitions. As used throughout this Agreement, "Cause" shall mean
(i) serious and repeated willful misconduct in respect of your duties under this
Agreement which has resulted in material, economic damages to the Company, and,
to the extent such misconduct is susceptible to being cured, such misconduct
continues for thirty days following written notice to you detailing such
misconduct, all as determined by the President or Board of Directors of the
Company, (ii) the final, unappealable conviction in a court of law of any crime
or offense (A) for which you are imprisoned for a term of six months or more of
(B) that involves the commission of fraud or theft against, or embezzlement
from, the Company, or (iii) chronic alcoholism or abuse of controlled
substances.
<PAGE>
5. Indemnification. To the extent permitted or required by the laws of
the State of New York or the By-Laws of the Company, the Company shall indemnify
and provide reasonable advances for expenses to you, in accordance with the
terms of such laws, if you are made a party, or threatened to be made a party,
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that you
are, or were, an officer or director of the Company or any subsidiary or
affiliate of the Company, in which capacity you are, or were, serving at the
Company's best interest, against expenses (including reasonable attorneys'
fees), judgments, fines and amounts in settlement actually and reasonably
incurred by you in connection with such action, suit or proceeding.
6. Enforcement. The Company agrees to pay reasonable legal fees and
expenses incurred by you in enforcing or defending any of your rights under this
Agreement, provided that you prevail in such enforcement or defense.
7. Confidentiality. Following termination of employment, you shall keep
secret and retain in strictest confidence, and shall not use for the benefit of
yourself or others, except in connection with the business and affairs of the
Company, all confidential matters of the Company, including, without limitation,
"know-how", trade secrets, consultant contracts, customer lists, subscription
lists, pricing policies, operational methods, market plans or strategies,
language development techniques or plans, business acquisition plans, new
personnel acquisition plans, designs and design projects, research projects and
other business affairs of the Company learned by you heretofore or hereafter,
and shall not disclose them to anyone outside the company, except as required in
the course of performing duties hereunder or with the Company's express written
consent. All memoranda, notes, lists, records and other documents (and all
copies thereof) made or compiled by you or made available to you concerning the
business of the Company shall remain the Company's property and shall be
delivered to the Company promptly upon your termination.
8. Governing Law. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of New York.
9. Entire Agreement. This Agreement sets forth the entire agreement and
understanding of the parties relating to the subject matter hereof, and
supersedes all prior agreements, arrangements and understandings, written or
oral, relating to the subject matter hereof. No representation, promise of
inducement has been made by either party that is not embodied in this Agreement,
and neither party shall be bound by, or liable for, any alleged representation,
promise or inducement not so set forth.
10. Assignment. This Agreement, and your rights and obligations
hereunder, may not be assigned by you.
11. Amendments. This Agreement may be amended, modified, superseded,
cancelled, renewed or extended, and the terms or covenants hereof may be waived,
only by a written instrument executed by both of the parties hereto.
<PAGE>
12. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
Sincerely,
BERLITZ INTERNATIONAL, INC.
By : __________________________________
Name: Hiromasa Yokoi
Title: Chief Executive Officer
Executive Vice President
Vice Chairman
Accepted and Agreed to:
By:____________________
FRANK GARTON
EXHIBIT 10.42
June 25, 1997
Mr. James Lewis
981 Old Holly Drive
Great Falls, VA 22066
Dear Mr. Lewis:
This letter (the "Agreement") will constitute the agreement relating to
your employment as Vice President, Worldwide Translations of Berlitz
International, Inc. (the "Company").
1. Employment. Your employment under this Agreement shall commence on
September 2, 1997. You agree that you shall devote your full business time,
attention, energy and skills to serve as Vice President, Worldwide Translations.
You shall render your services to the Company in Princeton, New Jersey.
2. Compensation. You will receive an annual salary of $225,000 payable
$8,654 every other week, and you will be eligible to participate in the
Company's Short-Term Incentive Plan and Long-Term Incentive Plan (collectively
the "Plans).
The Short Term Incentive Plan (STI) shall be payable in March, 1998 and
calculated as though you were employed by Berlitz for the entire year of 1997.
As a Vice President, you will also be eligible for the successor plan to the
current Long Term Incentive Plan (LTI) which is expected to be initiated on
1/1/99. (The current plan ends on 12/31/98). Also, at the discretion of the CEO
and the Compensation Committee, you will be granted an as yet unspecified number
of Berlitz stock options after you have been with the company for one year.
You will be reimbursed for reasonable expenses incurred in moving your
residence to Princeton, New Jersey from Virginia to the extent provided under
the Company's moving expense policy. You shall also participate in all of the
Company's employee benefit plans, policies and programs provided to its
executives including, but not limited to, health and life insurance policies,
disability programs, pension plans, 401(k) plans, and the Company's vacation
program, in each instance as the same may be modified by the Company from time
to time.
3. Termination.
(a) Death. In the event of your death, your employment and the
obligations of the Company under this Agreement shall cease and terminate, but
the amount of any compensation accrued and due and payable hereunder calculated
through to the last day of the month in which your death occurs shall be paid to
your heirs and legal representatives.
<PAGE>
(b) Disability. In the event you become substantially unable
to perform your duties hereunder as a result of illness or other disability
which renders you unfit or incapable of performing such duties, and such
disability or incapacity continues for 120 consecutive days or a period of 180
days in any twelve month period, the Company shall have the right to terminate
your employment. In such event, the obligations of the Company under this
Agreement shall cease, provided that the Company gives you not less than thirty
days prior written notice specifying the termination date. Upon such
termination, you shall be paid the amount of any compensation accrued and due
and payable to you hereunder through the date of such termination.
(c) Without Cause. In the event you are involuntarily
terminated Without Cause you will be paid all compensation accrued including
Short Term Incentive bonuses on a prorated basis and the Company agrees to pay
you a severance payment equal to 15 months salary at the rate in effect on the
date of your termination. Involuntary termination means any termination by the
Company other than for cause as described below. In addition, any reduction in
base compensation, bonus opportunity, or a demotion, may at your option, be
deemed a termination Without Cause for purpose of this paragraph. Your severance
payment shall be paid in 32 installments commencing on the next regular pay
period after your termination. The period during which you are entitled to
payment is defined as your "Severance Period". As a condition to your receiving
such severance payment, you agree to deliver a general release of the Company
containing substantially the terms set forth in Exhibit 1 hereto.
(d) Non-Promotion. In the event you do not attain the position
of Executive Vice President, Worldwide Translation, reporting to the CEO on or
before September 1, 1999 and you choose to leave the Company, you will be paid
all compensation accrued, including incentive bonuses on a prorated basis, and
the Company agrees to pay you a severance payment equal to 15 months salary at
the rate in effect on the date of your termination. Your severance payment shall
be paid in 32 installments commencing on the next regular pay period after your
termination. The period during which you are entitled to payment is defined as
your "Severance Period". As a condition to your receiving such severance
payment, you agree to deliver a general release of the Company containing
substantially the terms set forth in Exhibit 1 hereto.
(e) Relocation. In the event of termination Without Cause or
Non-Promotion as defined above, you will receive a one time lump payment for
relocation equal to the amount paid by the Company to move you from Virginia to
New Jersey. This one time payment will be made within 30 days of the date of
your termination.
(f) With Cause. In the event you are terminated with Cause (as
hereinafter defined) at any time, all obligations of the Company under this
Agreement shall cease and terminate on the last day of the month in which your
termination with Cause occurs.
<PAGE>
4. Definitions. As used throughout this Agreement, "Cause" shall mean
(i) serious and repeated willful misconduct in respect of your duties under this
Agreement which has resulted in material, economic damages to the Company, and,
to the extent such misconduct is susceptible to being cured, such misconduct
continues for thirty days following written notice to you detailing such
misconduct, all as determined by the President or Board of Directors of the
Company, (ii) the final, unappealable conviction in a court of law of any crime
or offense (A) for which you are imprisoned for a term of six months or more of
(B) that involves the commission of fraud or theft against, or embezzlement
from, the Company, or (iii) chronic alcoholism or abuse of controlled
substances.
5. Indemnification. To the extent permitted or required by the laws of
the State of New York or the By-Laws of the Company, the Company shall indemnify
and provide reasonable advances for expenses to you, in accordance with the
terms of such laws, if you are made a party, or threatened to be made a party,
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that you
are, or were, an officer or director of the Company or any subsidiary or
affiliate of the Company, in which capacity you are, or were, serving at the
Company's best interest, against expenses (including reasonable attorneys'
fees), judgments, fines and amounts in settlement actually and reasonably
incurred by you in connection with such action, suit or proceeding.
6. Confidentiality. Following termination of employment, you shall keep
secret and retain in strictest confidence, and shall not use for the benefit of
yourself or others, except in connection with the business and affairs of the
Company, all confidential matters of the Company, including, without limitation,
"know-how", trade secrets, consultant contracts, customer lists, subscription
lists, pricing policies, operational methods, market plans or strategies,
language development techniques or plans, business acquisition plans, new
personnel acquisition plans, designs and design projects, research projects and
other business affairs of the Company learned by you heretofore or hereafter,
and shall not disclose them to anyone outside the company, except as required in
the course of performing duties hereunder or with the Company's express written
consent. All memoranda, notes, lists, records and other documents (and all
copies thereof) made or compiled by you or made available to you concerning the
business of the Company shall remain the Company's property and shall be
delivered to the Company promptly upon your termination.
7. Governing Law. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of New York.
8. Entire Agreement. This Agreement along with Personnel manuals and
documents referred to in this letter, sets forth the entire agreement and
understanding of the parties relating to the subject matter hereof, and
supersedes all prior agreements, arrangements and understandings, written or
oral, relating to the subject matter hereof. No representation, promise of
inducement has been made by either party that is not embodied in this Agreement,
and neither party shall be bound by, or liable for, any alleged representation,
promise or inducement not so set forth.
9. Assignment. This Agreement, and your rights and obligations
hereunder, may not be assigned by you.
10. Amendments. This Agreement may be amended, modified, superseded,
cancelled, renewed or extended, and the terms or covenants hereof may be waived,
only by a written instrument executed by both of the parties hereto.
11. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
Sincerely,
BERLITZ INTERNATIONAL, INC.
By:_______________________________
Name: DAVID A. HORN
Title: VICE PRESIDENT,
WORLDWIDE HUMAN RESOURCES
Accepted and Agreed to:
By:___________________
JAMES LEWIS
EXHIBIT 10.43
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is made as of November 1, 1986,
between ELS EDUCATION SERVICES, INC., a Delaware corporation formerly known as
Washington Educational Research Associates, Inc. ("Employer") and PERRY S. AKINS
("Employee"), with reference to the following facts:
A. Employer and Employee are parties to that certain Employment Agreement dated
as of May 31, 1985, pursuant to which Employee has been employed as the
President and Chief Executive Officer of Employer.
B. AIFS, Inc., as Delaware corporation ("AIFS"), is acquiring all of the issued
and outstanding shares of capital stock of Employer pursuant to the terms of
that certain Stock Purchase Agreement among AIFS, Employer, and certain
stockholders of the Company dated as of October 15, 1986 (the Stock Purchase
Agreement").
C. It is a condition to AIFS's obligations under the Stock Purchase Agreement
that Employee enter into an Employment Agreement with Employer.
D. Employer and Employee desire to amend and restate Employee's existing
employment agreement with Employer, and to satisfy AIFS's condition regarding an
employment agreement with Employee pursuant to the terms of the Stock Purchase
Agreement and, in order to do so, enter into this Amended and Restated
Employment Agreement.
NOW, THEREFORE, in consideration of the foregoing facts and the mutual
covenants and conditions set forth herein, the parties hereto hereby agree as
follows:
1. EMPLOYMENT. Employer hereby employs Employee, and Employee hereby agrees to
serve, as President and Chief Executive Officer of Employer, or in such other
executive position as shall be assigned to Employee by Employer's Board of
Directors. Employee agrees to perform such services as are customary to such
offices and as shall from time to time be assigned to him by the Board of
Directors of Employer. Employer shall also report to the President of AIFS and
Employee shall not be required to relocate outside of Los Angeles County,
California.
2. TERM OF EMPLOYMENT. The employment here under shall be for the period which
shall commence on the date hereof and shall end on September 30, 1991 (the "Term
of Employment"), unless earlier terminated (I) upon the death of Employee, (ii)
at the option of Employer in the event of the inability of Employee to perform
his duties hereunder, whether by
<PAGE>
reason of injury (physical or mental), illness or otherwise, incapacitating
Employee for a continuous period exceeding one hundred eighty (180) days, or
(iii) upon the discharge of Employee's failure to execute his sole opinion of
Employer's Board of Directors.
Employer shall give Employee (a) ninety (90) days' prior written notice of a
termination pursuant to clause (ii) of this Section 2 and (b) two (2) year's
prior written notice (or two (2) years compensation, including salary and bonus
payable hereunder, in lieu of notice) of a termination pursuant to clause (iii)
of this Section 2.
3. COMPENSATION.
(a) Salary. As compensation for Employee's services hereunder
commencing on November 1, 1986 and during the Term of Employment, Employer shall
pay Employee and annual salary of One Hundred Fifty-Two Thousand Two Hundred
Fifty-Six Dollars ($152,256.00), which shall be payable in equal installments to
conform with the regular payroll dates for salaried personnel of Employer.
Employee's salary hereunder shall also be subject to increases in accordance
with Employer's executive personnel.
(b) Bonuses. Employer shall pay Employee and annual bonus during the
Term of Employment as follows:
(i) Fifty-Five thousand Dollars ($55,000.00) on the first
(1st) day of August of each of the years 1987 and 1998 for an aggregate annual
bonus of One Hundred Ten Thousand Dollars (110,000.00).
(ii) Each year commencing with AIFS's fiscal year beginning
October 1, 1988, Employee shall participate in AIFS's then current executive
bonus program, which bonus program currently awarded bonuses to certain
executive officers of AIFS as a group not exceeding, in the aggregated,
approximately eleven percent (11%) of the consolidated pretax earnings of AIFS.
Employee's participation in such bonus program shall be determined annually at
such time and in such manner as the determination of other AIFS's executives'
participation in such bonus program, or successor thereto, is made.
(c) Other Benefits. Employee shall be entitled to participate in
benefit programs generally available to its other executive level employees,
including insurance and medical plans, profit sharing and/or 401 (k) plan,
automobile, and vacations, sick leave and holidays, including accruals existing
as of the date hereof of the foregoing. Employer shall also pay Employee's
membership expenses in the Los Angeles Athletic Club and the Marina City Club.
Nothing hereunder shall preclude a reduction of such benefits for all or
substantially all of the employees of Employer or persons in comparable
executive positions with Employer, or AIFS. Employee agrees to reimburse
Employer for Employee's personal use of any automobile furnished by
<PAGE>
Employer in accordance with Employer's policies in effect from time to time.
(d) Payment Upon Early Termination.
(i) In the event of voluntary termination of employment by
Employee, Employee or his estate; however, any salary payments earned by not yet
made shall be made by Employer to Employee or this estate at the regularly
scheduled payment dates.
(ii) If Employee's employment hereunder is terminated for any
reason by Employer (other than disability pursuant to Section 2 (ii) hereof or
for reasons of fraud or other high crimes committed by Employee), Employee shall
be entitled to two (2) years' prior written notice or two (2) years compensation
in lieu of notice as provided in Section 2 hereof. Such compensation shall
include Employee's annual salary at the rate then in effect and the bonus
payable under Section 3 (b) hereof, which amounts shall be paid to Employee on
the regularly scheduled payment dates therefor. Such annual bonus shall equal
(i) Fifty-Five Thousand Dollars ($55,000.00) per year if the termination occurs
at any time on or prior to September 30, 1989, or (ii) the same percentage
interest in the AIFS executive bonus program then in effect awarded to Employee
during the year prior to Employee's termination occurs at any time after
September 30, 1989.
(iii) In the event of Employee's death during the term of this
Agreement, Employer shall pay to Employee's estate a lump sum payment equal to
six 96) months' salary payable under Section 3 (a) hereof within ninety (90)
days after the date of Employee's death.
(iv) Upon and after termination of Employee's employment
hereunder or whatever reason, Employees shall be entitled to such benefits to
which he has become entitled under the terms of any plan or program referred to
in this Section 3.
4. REIMBURSEMENT OF EXPENSES. Employee shall be entitled to be reimbursed for
reasonable business related expenses incurred in connection with his services to
Employer pursuant to and during the term of this Agreement in accordance with
Employer's policies then in effect.
5. ASSIGNMENT. This Agreement and the rights and obligations of Employer and
Employee hereunder shall be binding upon the successors and assigns of Employer
and the heirs and representatives of Employee and shall similarly be binding up
and inure to the benefit of any person, firm or corporation, succeeding to the
business of Employer whether by purchase of the stock of Employer or any
affiliate; purchase of all or substantially all of the assets of Employer or an
affiliate; or any merger, consolidation similar combination.
6. GOVERNING LAW; CAPTIONS. This Agreement contains the entire agreement between
the parties with respect to the subject matter of this Agreement and shall be
governed by
<PAGE>
the laws of the State of California. It may not be changed orally, but only be
an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought. Section headings are for
convenience of reference only and shall not be considered a part of this
Agreement.
7. PRIOR AGREEMENTS. This Agreement supersedes and terminates all prior
agreements between the parties relating to the subject matter herein addressed.
8. NOTICES. Any notices or other communications required or permitted hereunder
shall be in writing and shall be deemed effective when delivered in person or,
if mailed, three (3) days after the date of deposit in the mails, postage
prepaid, in the case of Employee, addressed to him at the address set forth
below, and, in the case of Employer, addressed to it at its offices at 5761
Buckingham Parkway, Culver City, California, 90230, with a coy to Mr. Wilton D.
Cole, Chairman of the Board, at 2251 El Camino Miraval, Tucson, Arizona 85718,
and Precedent, AIFS, Inc., 3661 Buchanan Street, San Francisco, California
94183, or such other address as shall have been specified in writing by wither
party to the other.
9. COVENANT NOT TO COMPETE. (a) during the Term of Employment and for the
period, if any, thereafter during which Employee receives compensation from
Employer under Section 3 (d) hereof, Employee will not, within any jurisdiction
in which Employer or an affiliate of Employer is duly qualified to do business,
or within any marketing area in which Employer or any affiliate of Employer is
doing a substantial amount of business, directly or indirectly own, manage,
operate, control, be employed by or participate in the ownership, management,
operation or control of, or be connected in any manner with any business of the
type and character engaged in and competitive with that conducted by Employer.
For these purposes, Employee's ownership of securities of a public company not
in excess of 1% of any class of such securities shall not be considered to be
competition with Employer.
(b) It is the desire and intent of the parties that the provisions of
this Section 9 shall be enforced to the fullest extent permissible under the
laws and public policies applied in each jurisdiction in which enforcement is
sought. If any particular provisions or portion of this Section 9 shall be
adjudicated to be invalid or unenforceable, this Section 9 shall be deemed
amended to delete therefrom such provision or portion adjudicated to be invalid
or unenforceable, such amendment to apply only with respect to the operation of
this Section 9 in the particular jurisdiction in which such adjudication is
made.
(c) Employee has agreed to the provisions of this Section 9 in
consideration for, among other things, the purchase by AIFS of Employee's common
stock ownership interest in Employer pursuant to that certain Stock Purchase
Agreement dated as of October 15, 1986 among AIFS, Employer, Employee and
certain other stockholders named therein.
<PAGE>
10. GUARANTY. By execution of this Agreement, AIFS guarantees performance and
payment by Employer to Employee hereunder, agrees to include Employee in the
AIFS executive bonus program as contemplated hereby, and agrees to make
available to Employee certain other benefits available to employees of AIFS on a
consolidated basis.
IN WITNESS WHEREOF, Employer and Employee have executed this Agreement,
effective as of the day and year first above written.
"Employer" "Employee"
ELS EDUCATIONAL SERVICES, INC.
------------------------------
Perry S. Akins
By: _______________________________
David A. Robinson,
Executive Vice President Address of Mr. Akins:
and Secretary
956 Jacon Way
Pacific Palisades, Ca. 90272
AIFS, Inc.
By: _______________________________
Roger O. Walther,
President and Chief Executive Officer
By: _______________________________
Its: Secretary
<PAGE>
AMENDMENT NUMBER ONE
TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDEMENT NUMBER ONE TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT is made
as of October 1, 1988, between ELS EDUCATIONAL SERVICES, INC. a Delaware
corporation (Employer"), and PERRY S. AKINS ("Employee"), with reference to the
following facts:
A. Employer and Employee are parties to that certain Amended and
Restated Employment Agreement dated as of November 1, 1986 (the "Employment
Agreement"), pursuant to which Employee has been employed as the President and
Chief Executive Officer of Employer.
B. AIFS, Inc., a Delaware corporation ("AIFS"), the owner of all of the
issued and outstanding shares of capital stock of Employer, has guaranteed
certain obligations of Employer under the Employment Agreement, as well as
providing that Employee is to participate in the AIFS executive bonus program
and making available certain other benefits available to employees of AIFS on a
consolidated basis.
C. Employer, Employee and AIFS desire to amend the Employment Agreement
as set forth herein.
NOW, THEREFORE, in consideration of the foregoing facts and the mutual
covenants and conditions set forth herein, the parties hereto hereby agree as
follows:
1. Section 2 of the Employment Agreement is hereby amended to read in
its entirety as follows:
2. TERM OF EMPLOYMENT. The employment hereunder the
("Term of Employment") shall be continuous from the date of
this Agreement, unless earlier terminated (i) upon the death
of Employee, (ii) at the option of Employer, in the event of
the inability of Employee to perform his duties hereunder,
whether by reason of injury (physical or mental), illness or
otherwise, incapacitating Employee for a continuous period
exceeding one hundred eighty (180) days, (iii) upon the
discharge of Employees for cause, including willful breach of
this Agreement, willful misconduct, gross negligence, fraud,
or other acts involving illegal conduct or moral turpitude ,
(iv) upon voluntary termination by Employee on six (6) months
written notice to Employer, or (v) without cause upon three
(3) years' prior written notice by Employer to Employee.
2. The first sentence of Section 3 (d) (ii) of the Employment Agreement
is hereby
<PAGE>
amended to read in its entirety as follows:
"If Employee's employment hereunder is terminated for any reason by
Employer (other than disability pursuant to Section 2 (ii) hereof or for reasons
for fraud or other high crimes committed by Employee), Employee shall be
entitled to three (3) years prior written notice or three (3) years'
compensation in lieu of notice as provided in Section 2 hereof."
3. Effect on Employment Agreement. Except as otherwise specifically set
forth herein, the terms, conditions and provisions of the Employment Agreement
shall continue unmodified and in full force and effect, including without
limitation the obligations of AIFS under Section 10 of the Employment Agreement.
IN WITNESS WHEREOF, the undersigned have executed this AMENDMENT NUMBER
ONE TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT as of the date first above
written.
"Employer" "Employee"
ELS EDUCATIONAL SERVICES, INC.
--------------------------------
Perry S. Akins
By: _____________________________
David A. Robinson,
Executive Vice President "AIFS"
and Secretary
AIFS, Inc.
By: _______________________________ By: ____________________________
William K. Brown, Roger O. Walther,
Vice President and President and Chief Executive
Treasurer Officer
By: ____________________________
Its: Secretary
EXHIBIT 10.49
AMENDMENT NO. 3 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 3 TO CREDIT AGREEMENT (this "Amendment Agreement")
is made and entered into effective as of the 23d day of March, 1998, by and
between BERLITZ INTERNATIONAL, INC, a New York corporation (the "Borrower"),
EACH OF THE GUARANTORS SIGNATORY HERETO (the "Guarantors"), NATIONSBANK,
NATIONAL ASSOCIATION, a national banking association organized and existing
under the laws of the United States, as agent for the Lenders ("Agent") under
the Credit Agreement (as defined below), and the Lenders. Unless the context
otherwise requires, all terms used herein without definition shall have the
definitions provided therefor in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, the Agent, the Lenders and the Borrower have entered into that
certain Credit Agreement dated as of August 28, 1997, as amended by that certain
Amendment No. 1 to Credit Agreement and Amendment No. 1 to Pledge Agreement
dated as of September 12, 1997, and as further amended by that certain Amendment
No. 2 to Credit Agreement dated as of October 28, 1997 (as hereby and from time
to time amended, supplemented or replaced, the "Credit Agreement"), pursuant to
which the Lenders have agreed to make and have made certain revolving and term
credit facilities available to the Borrower; and
WHEREAS, the parties hereto desire to amend the Credit Agreement in the
manner herein set forth effective as of the date hereof;
NOW, THEREFORE, the parties hereby agree as follows:
1. Definitions. The term "Credit Agreement" or "Agreement" (as the case
may be) as used herein and in the Loan Documents shall mean the Credit Agreement
as hereby amended and modified, and as further amended, modified or supplemented
from time to time as permitted thereby.
2. Amendments. Subject to the conditions hereof, the Credit Agreement
is hereby amended, effective as of the date hereof, as follows:
(a) The following definition is added to the Credit Agreement
in its proper alphabetical position in Section 1.1 of the Credit Agreement:
<PAGE>
"Indemnification Percentage" means, with respect to each
Lender at any time, a fraction, (i) the numerator of which shall be the
sum of such Lender's (A) Revolving Credit Commitment and (B) Term Loan
Commitment, and (ii) the denominator of which shall be the sum of (X)
the Total Revolving Credit Commitment and (Y) the Total Term Loan
Commitment; provided that the Indemnification Percentage of each Lender
shall be increased or decreased to reflect any assignments to or by
such Lender effected in accordance with Section 13.1 hereof.
(b) The definition of "Applicable Commitment Percentage" is hereby deleted in
its entirety and the following is inserted in replacement thereof:
"Applicable Commitment Percentage" means, with respect to each Lender
at any time, (i) with respect to the Revolving Credit Facility, any
Revolving Loan, the Letter of Credit Facility and any Letter of Credit
or Reimbursement Obligation thereunder, a fraction, the numerator of
which shall be such Lender's Revolving Credit Commitment set forth on
Exhibit A and the denominator of which shall be the Total Revolving
Credit Commitment, which Applicable Commitment Percentage for each
Lender as of March 23, 1998, after the effectiveness of Amendment No. 3
to Credit Agreement, is as set forth in Exhibit A, and (ii) with
respect to the Term Loan Facility and any Term Loans, a fraction, the
numerator of which shall be such Lender's Term Loan Commitment set
forth on Exhibit A and the denominator of which shall be the Total Term
Loan Commitment, which Applicable Commitment Percentage for each Lender
as of March 23, 1998, after the effectiveness of Amendment No. 3 to
Credit Agreement, is as set forth in Exhibit A; provided that the
Applicable Commitment Percentage of each Lender shall be increased or
decreased to reflect any assignments to or by such Lender effected in
accordance with Section 13.1 hereof.
C. The definition of "Total Revolving Credit Commitment" is hereby
deleted in its entirety and the following is inserted in replacement thereof:
"Total Revolving Credit Commitment" means a principal amount
equal to $70,000,000, as reduced from time to time in accordance with Section
3.7 hereof.
(d) Section 12.5 of the Credit Agreement is hereby deleted in its
entirety and replaced by the following:
12.5 INDEMNIFICATION. The Lenders agree to indemnify
the Agent (to the extent not reimbursed under Section 13.9
hereof, but without limiting the obligations of the Borrower
under such Section) ratably in accordance with their
respective Indemnification Percentages for any and all
liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses (including attorneys'fees),
<PAGE>
or disbursements of any kind and nature whatsoever that may be
imposed on, incurred by or asserted against the Agent
(including by any Lender) in any way relating to or arising
out of any Loan Document or the transactions contemplated
thereby or any action taken or omitted by the Agent under any
Loan Document; provided that no Lender shall be liable for any
of the foregoing to the extent they arise from the gross
negligence or willful misconduct of the Person to be
indemnified. Without limitation of the foregoing, each Lender
agrees to reimburse the Agent promptly upon demand for its
ratable share of any costs or expenses payable by the Borrower
under Section 13.5, to the extent that the Agent is not
promptly reimbursed for such costs and expenses by the
Borrower.
The agreements contained in this Section 12.5 shall survive
payment in full of the Loans and all other amounts payable
under this Agreement.
(e) Exhibit A to the Credit Agreement is hereby amended and
restated in its entirety as set forth on Annex I attached
hereto and incorporated herein by reference.
3. Guarantors. Each Guarantor hereby (i) consents and agrees to the
amendments to the Credit Agreement set forth herein and (ii) confirms its joint
and several guarantee of payment of all the Obligations pursuant to the
Subsidiary Guaranty.
4. Representations and Warranties. The Borrower hereby certifies that:
(a) The representations and warranties made by the Borrower in
Article VIII of the Credit Agreement are true and correct in all material
respects on and as of the date hereof, with the same effect as though such
representations and warranties were made on the date hereof, except to the
extent that such representations and warranties expressly relate to an earlier
date.
(b) No event has occurred and no condition exists which, upon
the consummation of the transaction contemplated hereby, will constitute a
Default or an Event of Default on the part of the Borrower under the Credit
Agreement or any other Loan Document either immediately or with the lapse of
time or the giving of notice, or both.
5. Entire Agreement. This Amendment Agreement sets forth the entire
understanding and agreement of the parties hereto in relation to the subject
matter hereof and supersedes any prior negotiations and agreements among the
parties relative to such subject matter. No promise, condition, representation
or warranty, express or implied, not herein set forth shall bind any party
hereto, and not one of them has relied on any such promise, condition,
representation or warranty. Each of the parties hereto acknowledges that, except
as
<PAGE>
otherwise expressly stated herein, no representations, warranties or
commitments, express or implied, have been made by any party to the other. None
of the terms or conditions of this Amendment Agreement may be changed, modified,
waived or canceled orally or otherwise, except by writing, signed by all the
parties hereto, specifying such change, modification, waiver or cancellation of
such terms or conditions, or of any preceding or succeeding breach thereof.
6. Full Force and Effect of Agreement. Except as hereby specifically
amended, modified or supplemented, the Credit Agreement and all of the other
Loan Documents are hereby confirmed and ratified in all respects and shall
remain in full force and effect according to their respective terms.
7. Counterparts. This Amendment Agreement may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
8. Governing Law. This Agreement shall in all respects be governed by,
and construed in accordance with, the laws of the state of New York.
9. Enforceability. Should any one or more of the provisions of this
Amendment Agreement be determined to be illegal or unenforceable as to one or
more of the parties hereto, all other provisions nevertheless shall remain
effective and binding on the parties hereto.
10. Credit Agreement. All references in any of the Loan Documents to
the "Credit Agreement" shall mean the Credit Agreement as amended hereby and all
references to the "Total Revolving Credit Commitment" in any of the Loan
Documents shall mean the Total Revolving Credit Commitment as amended hereby.
11. Successors and Assigns. This Amendment Agreement shall be binding
upon and inure to the benefit of each of the Borrower, the Lenders and the Agent
and their respective successors, assigns and legal representatives; provided,
however, that the Borrower, without the prior consent of the Agent, may not
assign any rights, powers, duties or obligations hereunder.
12. Expenses. Borrower agrees to pay to the Agent and the Lenders all
reasonable out-of-pocket expenses incurred or arising in connection with the
negotiation and preparation of this Amendment Agreement.
[SIGNATURE PAGES FOLLOW.]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3
to Credit Agreement to be duly executed by their duly authorized officers, all
as of the day and year first above written.
BORROWER:
BERLITZ INTERNATIONAL, INC.
By: __________________________________
Name: ________________________________
Title: _________________________________
GUARANTORS:
BERLITZ LANGUAGES, INC.
By: __________________________________
Name: ________________________________
Title: _________________________________
BERLITZ INVESTMENT CORPORATION
By: __________________________________
Name: ________________________________
Title: _________________________________
BERLITZ PUBLISHING COMPANY, INC.
By: __________________________________
Name: ________________________________
Title: _________________________________
BERLITZ DO BRASIL, INC.
By: __________________________________
Name: ________________________________
Title: _________________________________
ELS EDUCATIONAL SERVICES, INC.
By: __________________________________
Name: ________________________________
Title: _________________________________
<PAGE>
AGENT AND LENDERS:
NATIONSBANK, NATIONAL ASSOCIATION,
as Agent for the Lenders and as a Lender
By: __________________________________
Name: ________________________________
Title: _________________________________
THE BANK OF TOKYO-MITSUBISHI, LTD., NEW
YORK BRANCH
By: __________________________________
Name: ________________________________
Title: _________________________________
BANQUE PARIBAS
By: __________________________________
Name: ________________________________
Title: _________________________________
THE CHUGOKU BANK, LIMITED
By: __________________________________
Name: ________________________________
Title: _________________________________
CORESTATES BANK, N.A.
By: __________________________________
Name: ________________________________
Title: _________________________________
<PAGE>
CREDIT AGRICOLE INDOSUEZ
By: __________________________________
Name: ________________________________
Title: _________________________________
THE DAI-ICHI KANGYO BANK, LIMITED
By: __________________________________
Name: ________________________________
Title: _________________________________
FLEET BANK, N.A.
By: __________________________________
Name: ________________________________
Title: _________________________________
THE LONG-TERM CREDIT BANK
OF JAPAN, LTD.
By: __________________________________
Name: ________________________________
Title: _________________________________
PNC BANK, NATIONAL ASSOCIATION
By: __________________________________
Name: ________________________________
Title: _________________________________
THE SAKURA BANK, LIMITED
By: __________________________________
Name: ________________________________
Title: _________________________________
<PAGE>
SUMMIT BANK
By: __________________________________
Name: ________________________________
Title: _________________________________
THE SUMITOMO BANK, LIMITED
By: __________________________________
Name: ________________________________
Title: _________________________________
THE BANK OF NOVA SCOTIA
By: __________________________________
Name: ________________________________
Title: _________________________________
<PAGE>
ANNEX I
EXHIBIT A
APPLICABLE COMMITMENT PERCENTAGES
<TABLE>
<CAPTION>
LENDER TRANCHE A TRANCHE B APPLICABLE REVOLVING APPLICABLE
TERM LOAN TERM LOAN COMMITMENT CREDIT COMMITMENT
COMMITMENT COMMITMENT PERCENTAGE COMMITMENT PERCENTAGE
(TERM LOAN (REVOLVING
FACILITY) CREDIT FACILITY)
<S> <C> <C> <C> <C> <C>
NationsBank, National $2,607,142.83 $9,907,142.87 10.428571429% $8,306,623.40 11.86660485714%
Association
Fleet Bank, N.A. $2,321,428.57 $8,821,428.57 9.285714286% $7,678,051.96 10.96864565714%
Summit Bank $2,321,428.57 $8,821,428.57 9.285714286% $6,392,597.40 9.13228200000%
The Long-Term Credit $2,321,428.57 $8,821,428.57 9.285714286% $6,392,597.40 9.13228200000%
Bank of Japan, Ltd.
The Chugoku Bank, $1,714,285.72 $6,514,285.71 6.857142857% $5,056,883.11 7.22411872857%
Limited
Corestates Bank, N.A. $1,714,285.72 $6,514,285.71 6.857142857% $5,056,883.11 7.22411872857%
The Sumitomo Bank, $1,714,285.72 $6,514,285.71 6.857142857% $3,771,428.57 5.38775510000%
Limited
PNC Bank, National $1,714,285.72 $6,514,285.71 6.857142857% $6,342,337.67 9.06048238571%
Association
The Bank of Nova Scotia $1,428,571.43 $5,428,571.43 5.714285714% $3,142,857.14 4.48979591429%
The Bank of $1,428,571.43 $5,428,571.43 5.714285714% $3,142,857.14 4.48979591429%
Tokyo-Mitsubishi, Ltd.
Banque Paribas $1,428,571.43 $5,428,571.43 5.714285714% $3,142,857.14 4.48979591429%
Credit Agricole $1,428,571.43 $5,428,571.43 5.714285714% $4,428,311.68 6.32615954286%
Indosuez
The Dai-Ichi Kangyo $1,428,571.43 $5,428,571.43 5.714285714% $4,002,857.14 5.71836734286%
Bank, Limited
The Sakura Bank, $1,428,571.43 $5,428,571.43 5.714285714% $3,142,857.14 4.48979591429%
Limited
</TABLE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE REGISTRANT
Country Subsidiary Name Jurisdiction of Incorporation
- ------- --------------- -----------------------------
United States Berlitz Do Brasil, Inc. New York
Berlitz Investment Corp. Delaware
Berlitz Languages, Inc. New York
Berlitz Publishing Company, Inc. Delaware
ELS Educational Services, Inc. Delaware
Berlitz Franchising Corporation Delaware
Canada Berlitz Canada, Inc. Canada
ELS Language Centres -
Canada Limited Canada
Argentina The Berlitz Schools of
Languages de Argentina, S.A. Argentina
Brazil Berlitz Centro de Idiomas, Ltda. Brazil
Chile Berlitz Escuelas de Idiomas Ltda. Chile
Colombia Instituto de Idiomas Colombia,
SA Colombia
Mexico Berlitz Mexico, S.A. de C.V. Mexico
Peru Berlitz Centers Del Peru S.A. Peru
Uruguay Berlitz Uruguay S.A. Uruguay
Venezuela Centro de Idiomas Berlitz de
Venezuela, C.A. Venezuela
Hong Kong Berlitz Languages Limited Hong Kong
Japan Berlitz Japan, Inc. Japan
Korea Berlitz Korea Co. Ltd. Korea
Singapore Berlitz Singapore Pte Ltd. Singapore
Taiwan Berlitz International
(Taiwan) Co. Ltd. Taiwan
Thailand Berlitz Thailand Limited Thailand
Princeton Holding Limited Thailand
Berlitz Bangkok Limited Thailand
Belgium The Berlitz Schools of
Languages of Benelux, SA Belgium
Denmark Berlitz International Danmark AS Denmark
Berlitz International
Scandanavia A/S Denmark
Finland Oy Berlitz Ab Finland
France Berlitz France, S.A.S. France
Netherlands Berlitz Schools of Languages B.V. Netherlands
Ireland Berlitz (Ireland) Limited Ireland
Italy Berlitz Translations, S.r.l. Italy
Berlitz Italy S.r.l. Italy
Norway Berlitz A/S Norway
Spain Escuelas de Idiomas Berlitz
de Espana, S.A. Spain
Sweden Berlitz International Sweden
Aktiebolag Sweden
United Kingdom Berlitz (U.K.) Limited United Kingdom
Berlitz Publishing Company
Limited U.K.
Austria Berlitz Sprachshulen GmhH Austria
Czech Republic Berlitz Schools of Languages,
spol. sr.o. Czech Republic
Germany Berlitz International, GmbH Germany
Greece Berlitz Hellas, E.P.E. Greece
Hungary Berlitz Nyelviskola Korla
Felelossegu Tarsasag Hungary
Israel Berlitz (Israel) Ltd. Israel
Poland Berlitz Poland Sp. zo.o Poland
Slovakia Berlitz Jazykova Skola, spol.
sr.o. Slovakia
Slovenia Berlitz tujijeziki d.o.o.
Ljubljana Slovenia
Switzerland Editions Berlitz, S.A. Switzerland
The Berlitz Schools of
Languages, S.A. Switzerland
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<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORM 10-K OF BERLITZ
INTERNATIONAL, INC. FOR THE YEAR ENDED DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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<PERIOD-END> DEC-31-1997
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<COMMON> 1,003
0
0
<OTHER-SE> 345,975
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<TOTAL-REVENUES> 397,209
<CGS> 0
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