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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-10390
BERLITZ INTERNATIONAL, INC.
(Exact name of 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 10, 2000, the aggregate market
value of the voting stock held by non-affiliates of the registrant was
$35,763,284.
The number of shares of the Registrant's common stock outstanding as of March
10, 2000 was 9,529,788.
DOCUMENTS INCORPORATED BY REFERENCE : None
Page 1 of 95 Pages
Exhibit Index Appears on Page 87
<PAGE>
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 over 120 years ago and
completed its initial public offering in 1989. Since February 1993, Benesse
Corporation ("Benesse") has beneficially owned a majority of the Company's
common stock and it currently holds approximately 7.2 million shares, or 75.7%
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. The Company is organized (effective as of January 1,
1999) into two separate business segments: Language Services (which consists of
the Instruction, ELS/BOC, Publishing, Franchising, and Cross Cultural
sub-segments) and Berlitz GlobalNET (formerly known as Translation Services).
Language Services is organized geographically into four operating divisions
(North America, Asia, Latin America and Europe) while Berlitz GlobalNET is
organized into three geographic divisions: Americas (North America and Latin
America), Asia, and Europe. Business segment and geographic area information is
provided in the Notes to Consolidated Financial Statements within Item 8,
Financial Statements and Supplementary Data, under Note 18.
2
<PAGE>
Language Services
General.
As of December 31, 1999, the Company operated 338 Berlitz language centers in 39
countries and Puerto Rico using the Berlitz Method(R), hereinafter described,
and the Company's proprietary instruction material, to provide instruction in
virtually all spoken languages. All of these operations were wholly-owned by the
Company, except for Japan (which is subject to Benesse's 20% interest in Berlitz
Japan) and joint venture operations in Korea and Taiwan. Approximately 6.0
million Language Instruction lessons were given by these Berlitz language
centers in 1999, the most frequently taught languages being English, Spanish,
French and German. A lesson consists of a single 45-minute session (regardless
of the number of students).
In addition to lessons given at Berlitz language centers, the Company provides
intensive English language instruction programs at 40 additional locations,
primarily U.S. college campuses and similar educational settings, through ELS
Educational Services, Inc. ("ELS"), a wholly-owned subsidiary acquired in August
1997, and the Company's Berlitz on Campus ("BOC") division (which were merged in
January 2000). Together with an additional 89 franchised Berlitz and ELS
centers, the Company has a presence in 56 countries and Puerto Rico.
The following table sets forth the number of language facilities in each of the
countries in which the Company and its subsidiaries or franchisees operated
centers as of December 31, 1999:
<TABLE>
<CAPTION>
Berlitz
Language ELS/BOC
Centers facilities
(Company Berlitz (Company ELS
operated) Franchises operated) Franchises Total
---------------- ------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
North America
-------------
United States 61 6 37 - 104
Canada 8 - - 1 9
---------------- ------------- --------------- -------------- ------------
Subtotal 69 6 37 1 113
---------------- ------------- --------------- -------------- ------------
Asia
----
Australia - - - 1 1
China - - - 1 1
Hong Kong 1 - - - 1
Indonesia - 1 - 3 4
Japan 47 2 2 1 52
Korea 1 - - 5 6
Malaysia 1 - - 4 5
Singapore 1 - - - 1
Taiwan 1 - - 16 17
Thailand 2 - - - 2
---------------- ------------- --------------- -------------- ------------
Subtotal 54 3 2 31 90
---------------- ------------- --------------- -------------- ------------
Latin America
-------------
Argentina 5 1 - - 6
Brazil 18 1 - 1 20
Chile 5 1 - - 6
Colombia 9 - - 5 14
Costa Rica - 2 - - 2
Dominican Republic - 1 - - 1
Guatemala - 1 - - 1
Mexico 20 4 - - 24
Panama - - - 1 1
Peru 2 - - - 2
Puerto Rico 4 - - - 4
Uruguay 1 - - - 1
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Venezuela 8 - - - 8
---------------- ------------- --------------- -------------- ------------
Subtotal 72 11 - 7 90
---------------- ------------- --------------- -------------- ------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Berlitz
Language ELS/BOC
Centers facilities
(Company Berlitz (Company ELS
operated) Franchises operated) Franchises Total
---------------- ------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Europe
------
Austria 7 3 - - 10
Belgium 10 - - - 10
Croatia - 1 - - 1
Czech Republic 5 - - - 5
Denmark 2 - - - 2
Egypt - 2 - 1 3
Finland 1 - - - 1
France 17 1 - - 18
Germany 46 2 - - 48
Greece 1 - - - 1
Holland 2 - - - 2
Hungary 3 - - - 3
Ireland 1 - - 1
Israel 6 - - - 6
Italy 6 1 - - 7
Jordan - - - 2 2
Kuwait - 1 - 1 2
Malta - 1 - - 1
Norway 1 - - - 1
Oman - - - 1 1
Poland 8 - - - 8
Portugal 1 - - - 1
Qatar - - - 1 1
Saudi Arabia - 1 - 3 4
Slovak Republic 1 1 - - 2
Slovenia 1 - - - 1
Spain 10 - - - 10
Sweden 1 - - - 1
Switzerland 8 - - - 8
Turkey - 1 - - 1
United Arab Emirates - 2 - 3 5
United Kingdom 5 1 1 - 7
---------------- ------------- --------------- -------------- ------------
Subtotal 143 18 1 12 174
---------------- ------------- --------------- -------------- ------------
Total 338 38 40 51 467
================ ============= =============== ============== ============
</TABLE>
5
<PAGE>
Instruction Sub-segment
The following tables set forth, by geographic area, the number of
Company-operated Berlitz language centers and the number of lessons given by
these centers over the last five years:
<TABLE>
<CAPTION>
Number of Centers at December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
North America 69 71 71 70 72
Asia 54 54 53 52 52
Latin America 72 67 66 60 60
Europe 143 140 144 143 139
------- ------- ------- ------- -------
Total 338 332 334 325 323
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Number of Lessons (in thousands)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
North America 1,090 1,157 1,150 1,095 1,050
Asia 1,107 1,040 1,040 939 935
Latin America 1,312 1,301 1,183 1,049 981
Europe 2,461 2,328 2,175 2,056 1,981
------- ------- ------- ------- -------
Total 5,970 5,826 5,548 5,139 4,947
======= ======= ======= ======= =======
</TABLE>
In 1999, the United States, Japan, and Germany accounted for approximately 16%,
15% and 12% of lessons given and 15%, 24% and 14% of Language Instruction sales,
respectively. Revenues from Language Instruction accounted for approximately
62%, 61% and 66% of total Company revenues in 1999, 1998 and 1997, respectively.
6
<PAGE>
Berlitz Method(R). At the heart of 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.
Instruction Programs. The Company offers several types of language instruction
programs which vary in cost, length and intensity of study. Approximately 48% of
all tuition revenues in 1999 were from private lessons (excluding Total
Immersion(R) courses). 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 1999. 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 47% of tuition revenues in 1999.
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.
The Instruction business subsegment also includes specialty areas that, in the
aggregate, accounted for approximately 1% of the Company's revenues in 1999. One
such business, Berlitz Study Abroad(R), combines intensive language instruction
with first-hand exposure to the cultural environment of the country where the
target language is spoken. Another specialty area, Berlitz Jr.(R), provides
complete language instruction programs to children in public and private schools
throughout the world.
7
<PAGE>
Marketing and Pricing Policy. The Company markets its Berlitz language courses
to individuals, businesses and governments. The Company utilizes newspaper,
magazine and yellow page advertising, in addition to direct contacts, to promote
the Berlitz program and centers. 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
franchisees 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 markets.
ELS/BOC Sub-segment
The ELS/BOC business sub-segment provides English language instruction through
intensive on-campus programs designed to appeal to international students and
professionals who require English proficiency for academic, personal or career
development purposes. These programs, which are offered under the ELS
Educational Services name (and, until January 2000, through the "Berlitz on
Campus" program), prepare students to take the Test of English as a Foreign
Language ("TOEFL") examination, and for other situations where an intensive,
extended course of study is required. Intensive instruction is typically
provided in blocks of twenty or thirty hours of instruction per week for a four
week period. The average student studies for approximately 2 1/2 months.
Approximately 89% of ELS/BOC revenues in 1999 were from intensive lessons and
related services. Approximately 10% of ELS/BOC revenues were derived from
programs such as summer youth programs for younger students that combine
language instruction with leisure and social activities; specially designed
programs for corporate clients; and private instruction. Royalties from ELS
franchises comprise approximately 1% of ELS/BOC revenue.
8
<PAGE>
Marketing and Pricing Policy. ELS/BOC devotes significant resources toward
promoting its various programs to prospective students, both within the U.S. and
overseas. In-house sales and marketing personnel focus their efforts on
establishing and maintaining relationships with a worldwide network of external
sales agents that provide students to the ELS program. These agents in turn
receive commissions from ELS/BOC. Center personnel are responsible for sales
development with existing and new clients.
ELS uses a combination of brochure, cooperative advertising, professional
publications, trade shows, yellow pages and other promotional activities to
promote its services.
Tuition, accommodation fees and other related program fees are payable in
advance by most students. ELS offers a variety of discounted pricing options
based on the length of course that a student takes.
Competition. The intensive English instruction industry is fragmented and varies
significantly among geographic regions. In addition to the Company, providers of
intensive English instruction include individual tutors, language schools of
varying size that are operated by individuals, as well as those operated by
other companies and institutions such as colleges and universities.
Publishing Sub-segment
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 involved in several licensing
arrangements for products that use Berlitz content and trademarks and for which
the Company receives royalties. The Publishing business accounted for
approximately 3% of total Company revenues in each of 1999, 1998 and 1997.
Approximately 35%, 41% and 35% of Publishing sales in 1999, 1998 and 1997,
respectively, were in Europe.
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. 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. 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 distributors appointed by Berlitz; by
independent sales representatives; and, increasingly, by direct selling efforts,
including e-commerce.
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 items for children and
courses for business people.
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 and/or Berlitz trademarks as the basis for publishing or
software products (such as CD-ROM computer software) for which
9
<PAGE>
the Company receives royalties.
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 vary considerably
depending on market and product line.
Franchising Sub-segment
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.
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
initially pay Berlitz an application fee of $5,000, and a franchise fee of
$25,000 ($45,000 in Asia). Thereafter, franchisees pay Berlitz 10% (7.5% in
Europe) of the language center's gross revenues in royalties, and 2% of gross
revenues for advertising participation. The Franchising business accounted for
approximately 0.3% of total Company revenues in each of 1999, 1998 and 1997.
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, a management information
system tied to Berlitz's headquarters, and are subject to periodic financial
audit and quality inspection.
Cross Cultural Sub-segment
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. The cross cultural business accounted for
approximately 0.5% of total Company revenues in each of 1999, 1998 and 1997.
Berlitz GlobalNET
Berlitz GlobalNET (formerly Translations Services) helps customers prepare their
products and services for the world market faster and at less cost. Berlitz
GlobalNET provides high quality technical documentation translation,
interpreting and rapidly expanding offerings in eBusiness Globalization services
including Web localization and multilingual content management. Language-related
services are offered for the entire business cycle, from globalization strategy
and consulting, to creating and translating content, designing, implementing and
maintaining multilingual Websites. These services are based on the company's
skills in project management, high quality translation, software localization,
software quality assurance and testing, and electronic publishing.
10
<PAGE>
Berlitz GlobalNET represented approximately 21%, 19% and 21% of total Company
revenues in 1999, 1998 and 1997, respectively. Berlitz GlobalNET's contribution
to corporate revenues is expected to increase over the next few years as
globalization and the Internet create an increased demand for multilingual
digital content, and the Company strengthens its services in this area. A
continued focus on key customer relationships, with new and expanded
document/content management and Internet-related services, will be supported
with full eBusiness capabilities to deliver integration between translation
services and customer systems. These technologies will optimize internal
operational efficiency as well as providing the fast, hands-off turnaround
customers require.
Berlitz GlobalNET's sales focus is on large, complex projects in multiple
languages for global markets, particularly, but not exclusively, where Web
publishing and eBusiness are the delivery media. Its customer base is primarily
in the following sectors: information technology, automotive, manufacturing,
engineering, telecommunications, medical technology, pharmaceuticals, and
publishing.
The Company has an international network of full-scale production and technology
centers. Materials are electronically transferred between locations to utilize
specialized in-country translation 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, and a production process that
incorporates several editing phases designed to maximize the accuracy of its
translations. The Company has also developed a consulting and systems
integration capability, to deliver strategic planning and solutions to its
customers. 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 includes 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. The translation services industry is being transformed into a
Globalization Services sector, with suppliers increasing the value they add to
customer engagements. The historic fragmentation of the market is beginning to
disappear as a few large suppliers consolidate at the top of the market. In
addition, a number of technology-focused new entrants have recently appeared.
Berlitz GlobalNET has taken steps to build its technology base and services for
the new market environment, and expects to remain the largest company in the
sector.
Employees
As of December 31, 1999, the Company employed 5,718 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 inhibits the
Company's ability to operate its business.
Trademarks and Tradenames
11
<PAGE>
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), BERLITZ KIDS(TM), BERLITZITTM, 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 and
ELS Educational Services, Inc., each a wholly owned subsidiary of the Company,
have 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.
12
<PAGE>
ITEM 2. Properties
The Company has its headquarters in Princeton, New Jersey and maintains
facilities throughout the world. The majority of the Company's facilities
(including the Company's headquarters) are leased. Total annual rental expense
for the twelve months ended December 31, 1999, principally for leased
facilities, was $35.1 million. 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. ELS and Berlitz on Campus locations typically consist of classroom
and administrative space that is rented at various colleges and universities.
The following tables set forth, the number of facilities maintained in each
geographic region, the primary use of the Company's facility, whether owned or
leased, and the aggregate square footage, all as of December 31, 1999. No
properties are subject to material encumbrances.
OWNED FACILITIES
<TABLE>
<CAPTION>
Other (principally
Language Translation headquarters and
instruction services administrative) Total
---------- --------- ---------- -------- ---------- --------- ---------- ---------
Number Number Number Number
of Square of Square of Square of Square
facilities footage facilities footage facilities footage facilities footage
---------- --------- ---------- -------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Region
- ------
Europe 6 11,883 1 3,229 - - 7 15,112
Latin America 5 19,396 - - - - 5 19,396
---------- --------- ---------- -------- ---------- --------- ---------- ---------
Total 11 31,279 1 3,229 - - 12 34,508
========== ========= ========== ======== ========== ========= ========== =========
</TABLE>
LEASED FACILITIES
<TABLE>
<CAPTION>
Other (principally
Language Translation headquarters and
instruction services administrative) Total
---------- --------- ---------- -------- ---------- --------- ---------- ---------
Number Number Number Number
of Square of Square of Square of Square
facilities footage facilities footage facilities footage facilities footage
---------- --------- ---------- -------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Region
- ------
North America 107 462,394 15 43,157 5 108,192 127 613,743
Asia 64 161,615 3 10,562 7 12,933 74 185,110
Latin America 69 289,124 3 5,533 4 16,441 76 311,098
Europe 150 420,516 16 79,957 13 25,559 179 526,032
---------- --------- ---------- -------- ---------- --------- ---------- ---------
Total 390 1,333,649 37 139,209 29 163,125 456 1,635,983
========== ========= ========== ======== ========== ========= ========== =========
</TABLE>
13
<PAGE>
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,
results of operations, or cashflows 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 1999.
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, 2000.
<TABLE>
<CAPTION>
Name, Age, Position with
Registrant Business Experience
- ---------- -------------------
<S> <C>
Soichiro Fukutake, 54 Mr. Fukutake has served as Chairman of the Board of the Company since
Chairman of the Board; February 1993. Mr. Fukutake joined Benesse in 1973, and since May 1986
Director (A) (E) 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 2001.
Hiromasa Yokoi, 60 Mr. Yokoi was elected Vice Chairman of the Board and Chief Executive
Vice Chairman of the Board, Chief Officer of the Company in February 1993 and additionally was elected
Executive Officer and President; President effective on August 31, 1993. Mr. Yokoi has served as a
Director (A) (E) director of Benesse since June 1992 and its 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 has served as a Director of the Company since
January 1991. His term will expire in 2000.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
James Lewis, 42 Mr. Lewis has served as Executive Vice President and Chief Operating
Executive Vice President and Chief Officer, Berlitz GlobalNET, since January 1, 1999, prior to which he was
Operating Officer, Berlitz Vice President, Worldwide Translations since September 1, 1997.
GlobalNET; Previously, Mr. Lewis served in a number of executive level positions
Director with Globalink, Inc., including President and Director (1995 to 1997) and
Vice President, Worldwide Sales and Marketing (1995); Vice President,
Marketing of MAXM Systems Corporation (1994 to 1995); and Vice President,
International Operations, Landmark Systems Corporation (1992 to 1994).
During the period of 1983 to 1992, Mr. Lewis held a number of management
positions with Ashton-Tate Corporation, and Peter Norton Computing. Mr.
Lewis has served as a Director of the Company since March 2, 1999. His
term will expire in 2000.
Mako Obara, 55 Mr. Obara joined Berlitz International, Inc. as Executive Vice President
Executive Vice President on January 1, 1999, and was elected Chief Operating Officer, Worldwide
and Chief Operating Officer, Language Services effective March 31, 1999. From March 1998 to January
Worldwide Language Services; 1999, Mr. Obara served as President and Chief Executive Officer of
Director Benesse Holdings International, Inc. From 1985 to February 1998, Mr.
Obara served as Vice President of Citibank/Citicorp, Private Banking
(1992 to 1998); Vice President and Senior Banker, Citicorp Venture
Capital (1989 to 1991); Vice President and Senior Banker, World
Corporation Group of Citibank/Citicorp (1987 to 1989); and Vice President
and Executive Director, Citibank/Citicorp Mexico (1985 to 1987). From
1978 to 1985, Mr. Obara held positions of Section Manager and Deputy
General Manager with the Mitsubishi Corporation. He currently serves on
the Board of Directors of Technology Educational Network, and Benesse
Holdings International, Inc. Mr. Obara has served as a Director of the
Company since March 2, 1999. His term will expire in 2001.
Henry D. James, 62 Mr. James has served as Executive Vice President and Chief Financial
Executive Vice President and Officer of the Company since November 21, 1995, and as its Vice President
Chief Financial Officer; and Chief Financial Officer from January 1, 1995 to November 1995. He
Director 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
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
the Company since November 21, 1995. His term will expire in 2000.
Robert Minsky, 55 Mr. Minsky has served as Executive Vice President, Corporate Planning and
Executive Vice President, Marketing of the Company since August 1, 1997. Prior thereto, he served
Corporate Planning and Marketing; as Executive Vice President and Chief Operating Officer, Translations and
Director (A) 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 2001.
Laurence M. Berg, 33; Mr. Berg has been associated with Apollo Advisors, L.P. ("Apollo") since
Director 1992 and a partner since 1995, which, together with its affiliates
(including Apollo Management IV, L.P.), act as managing general partner
of Apollo Investment Fund, L.P., AIF II, L.P., Apollo Investment Fund
III, L.P. and Apollo Investment Fund IV, L.P. which are private
securities investment funds. Prior thereto, Mr. Berg was a member of the
Mergers and Acquisitions Department of Drexel Burnham Lambert
Incorporated. Mr. Berg is a director of Continental Graphics Holdings,
Inc.; and Rent-A-Center, Inc. Mr. Berg received his MBA from the Harvard
Business School and received his BS in economics from the University of
Pennsylvania's Wharton School of Business. Mr. Berg has served as a
Director of the Company since March 11, 1999, in connection with the
Company's issuance of convertible debentures to two affiliates of Apollo.
His term will expire in 2001.
Takuro Isoda, 64 Since July, 1999, Mr. Isoda has been the President of Isoda & Associates,
Director Inc., of Tokyo and President of Rich Capital, Inc, of Osaka. He has been
(B)(C)(D) a Senior Advisor for Nippon Investment & Finance Co. Ltd. since July
1998, and was its Chairman from June 1994 and its President from January
1990 to May 1994. Prior to that, Mr. Isoda served in various positions
with Daiwa Securities since first joining the 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
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
1988 to January 1990). Mr. Isoda is Vice Chairman and a Director of the
New Business Conference, Tokyo, and a Director of the Japan Academic
Society for Ventures and Entrepreneurs, each of which is a non-profit
governmental policy advisory and new venture support group. He also
serves as a Director of atJapan.com Kabushiki Kaisha, Tokyo, VHC
Kabushiki Kaisha, Tokyo, Inter.Office, Co., Ltd. Tokyo, Effetto Holding,
Inc., Tokyo, and J-bridge.com. Mr. Isoda is an Advisor to Webster
Communications Corporation Plc., Wiltshire, UK, ILC, Inc., Hiroshima,
Liquid Audio Japan, Ltd., Tokyo, Harvey Labo, Inc., Tokyo,
Imagawa-Misawaya Securities Co., Ltd., Tokyo, Rich Kabushiki Kaisha,
Osaka and Big Sons, Ltd., Osaka. He also serves as an Advisor to
Americans for Indian Opportunity, New Mexico, a non-profit organization.
He is the Statutory Auditor for Just Co., of Omiya-shi, Saitama
Prefecture, Japan and Asteric, Inc. of Tokyo. Mr. Isoda has served as a
Director of the Company since June 1998. His term will expire in 2000.
Edward G. Nelson, 68 Since January 1985, Mr. Nelson has served as Chairman and President of
Director Nelson Capital Corporation. From 1983 to 1985, he was Chairman and Chief
(B)(C)(D)(E) Executive Officer of Commerce Union Corporation. He also serves on the
Board of Directors of ClinTrials Research, Inc., 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 2000.
Robert L. Purdum, 64 Mr. Purdum is the retired Chairman of the Board of Armco, Inc. and
Director (B)(C)(D)(E) currently is a 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 has also served
on the Board of Directors of Holophane Corporation since 1994. Mr. Purdum
has served as a Director of the Company since August 1994. His term will
expire in 2000.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Antony P. Ressler, 39; Mr. Ressler co-founded Apollo Advisors, L.P. ("Apollo") in 1990. Mr.
Director Ressler also founded Ares Management, L.P. in 1997, the general partner
of the Ares Funds, including Ares Leveraged Investment Funds I, II and
III private securities investment funds focused primarily on debt and
mezzanine/equity investments. Prior to 1990, Mr. Ressler served as a
Senior Vice President in the High Yield Bond Department of Drexel Burham
Lambert Incorporated, with responsibility for the New Issue/Syndicate
Desk. Mr. Ressler serves on several boards of directors including: Allied
Waste Industries, Inc.; Prandium Inc.; and Vail Resorts, Inc., as well as
on the Supervisory Board of Directors of Buhrmann NV. Mr. Ressler is on
the Board of Directors of LAAMP/LEARN, one of the largest public school
reform movements in the U.S., a member of the Board of Advisors of the
UCLA Medical Center, a member of the Executive Committee of the Board of
Directors of the Jonsson Comprehensive Cancer Center at UCLA and a member
of the Board of Trustees of the Center for Early Education. Mr. Ressler
is also one of the founding members of the Board of the Painted Turtle
Camp, the Southern California chapter of The Hole in the Wall Gang Camps
created to serve children dealing with chronic and life threatening
illnesses by creating memorable, old-fashioned camping experiences. Mr.
Ressler received his B.S.F.S. from Georgetown University's School of
Foreign Service and received his MBA from Columbia University's Graduate
School of Business. Mr. Ressler has served as a Director of the Company
since March 11, 1999 in connection with the Company's issuance of
convertible debentures to two affiliates of Apollo. His term will expire
in 2000.
Naoto Sugiyama, 41 Mr. Sugiyama has served as General Manager of Benesse's Finance
Director Department since January 1998. He has served in various other positions
with Benesse since first joining in January 1993, including Deputy
General Manager of Account Department (January 1997 to December 1997),
Senior Manager of Account Department (January 1995 to December 1996) and
Manager of Account Department (January 1993 to December 1994). From 1981
to 1992, Mr. Sugiyama served in various positions with The Sanwa Bank,
Ltd., including Senior Manager of its Capital Market Department (April
1992 to December 1992) and Senior Manager of its Brussels Branch (April
1991 to March 1992). Mr. Sugiyama has served as a Director of the Company
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
since June 1999, and will be retiring from the Board of the Company
effective March 7, 2000.
Ellen Adler, 44 Ms. Adler has served as Vice President, Worldwide Publishing of the
Vice President, Worldwide Publishing Company since October 1, 1997. 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, 60 Mr. Alvarino has been Vice President, Latin America Languages Services,
Vice President since January 1, 1999, prior to which he was 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 Languages in
1970 and served in various positions from that time until being appointed
Vice President in 1985.
Mark Harris, 46 Mr. Harris has served as Vice President, North America Language Services,
Vice President since January 1, 1999, prior to which he was Vice President, North
America Division of the Company since October 1, 1997. Prior thereto, he
served 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, 53 Mr. Kelly has served as Vice President, Berlitz GlobalNET Europe since
Vice President January 1, 1999 and as Vice President, Western Europe Division of the
Company from January 1996 until January 1, 1999 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% ownership interest in December 1991 and the remaining 49%
in 1994. Mr. Kelly founded Softrans in 1984 and prior to that held senior
management positions with Apple Computer and Data General.
Susumu Kojima, 57 Since 1993, Mr. Kojima has served in several positions with
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Vice President, Berlitz, including: Vice President, Asia Language Services (since March 2,
Asia Language Services 1999); Executive Vice President, Asia Division (January 1, 1996 to March 1,
1999); Executive Vice President, Corporate Planning, (September 1993 to
December 1995); and Senior Vice President, Corporate Planning (February
1993 to September 1993). Mr. Kojima also served as a Director of Benesse
from March 1993 until June 1998. Prior to March 1993, he was Joint
General Manager of the Business Development Department of The Industrial
Bank of Japan, Limited ("I.B.J.") from June 1991 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 served as a Director of the Company from
February 1993 until his retirement from the Board on March 2, 1999.
Wolfgang Wiedeler, 55 Mr. Wiedeler has been Vice President, Europe Language Services, since
Vice President January 1, 1999, prior to which he was Vice President, Central/Eastern
Europe Division of the Company since January 1, 1995, and 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.
</TABLE>
(A) member of the Executive Committee of the Board of Directors
(B) member of the Audit Committee
(C) member of the Compensation Committee
(D) member of the Disinterested Directors Committee
(E) 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.
James Kahl, 58, has been selected as Mr. Sugiyama's successor on the Company's
Board of Directors effective March 7, 2000. Mr. Kahl was Chairman of the Board,
Chief Executive Officer and President of La Petite Academy, a provider of
preschool and childcare services from 1993 until December 31, 1999. From 1991
until 1993, he was a Senior Vice President of Knott's Berry Farm. From 1983
until 1991, he held a number of senior executive positions at
20
<PAGE>
Marriott Corporation, including Senior Vice President of Administration, Chief
Financial Officer, and Senior Vice President, Operations. From 1964 until 1982,
he held a variety of positions at Arthur Andersen & Co., including Managing
Partner. Mr. Kahl also serves on the board of Directors of La Petite Academy.
Robert C. Hendon, Jr., 62, who retired from the Company effective December 31,
1999, had served as Vice President, Legal Department of the Company from January
1, 1995 and as Secretary and General Counsel of the Company since April 1992.
Paul H. Weinstein, 49, was appointed as General Counsel and Secretary of the
Company effective January 1, 2000. Mr. Weinstein joined Berlitz as Associate
General Counsel in 1995, and was named Deputy General Counsel in January, 1999.
Before joining Berlitz, he practiced law privately (1994 to1995), served as
Counsel to the Motion Picture Association of America (1991 to 1994), as Vice
President of Legal and Business Affairs of LJN Toys, Ltd. (1987 to 1991) and as
Counsel at MGM/UA Home Entertainment Group, Inc. (1982 to1987).
On March 20, 2000, the Company announced the retirement of Mr. Yokoi as Vice
Chairman, Chief Executive Officer and President effective June 30, 2000. Mr.
Yokoi will continue to serve on the Company's Board of Directors for the next
two years. Also retiring at the same time as Mr. Yokoi will be Mr. James. Mr.
Kahl will assume the post of Vice Chairman effective July 1, 2000, while Mr.
Minsky will assume the responsibilities of Executive Vice President and Chief
Financial Officer. The Company also announced a restructuring into two
subsidiary companies effective July 1, 2000: Berlitz Language Services and
Berlitz GlobalNET. Mr. Obara will serve as President and Chief Executive Officer
for Berlitz Language Services, while Mr. Lewis will serve as President and Chief
Executive Officer for Berlitz GlobalNET.
Significant Employees of the Registrant
The following table sets forth certain information concerning certain
significant employees of the Company as of March 1, 2000.
<TABLE>
<CAPTION>
<S> <C>
Frank Garton, 53 Mr. Garton has served as Vice President, Franchising of the Company since
Vice President 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.
</TABLE>
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, the Company does not have any present intention to
commence paying dividends. 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 66 holders of record of Common Stock as of
March 13, 2000 (one of which was Cede & Company, at which 1.9 million shares
were held by brokers in street name.)
21
<PAGE>
The sales prices per share of Common Stock as reported by the NYSE for each
quarter during the period from January 1, 1998 until December 31, 1999 ranged as
follows:
Price per Share
---------------
High Low
---- ---
First Quarter 1999 $29 $22 1/2
Second Quarter 1999 $22 15/16 $17 13/16
Third Quarter 1999 $21 1/16 $18
Fourth Quarter 1999 $21 1/8 $16 7/16
First Quarter 1998 $27 3/8 $25 1/2
Second Quarter 1998 $28 7/16 $27
Third Quarter 1998 $28 1/8 $26 5/16
Fourth Quarter 1998 $30 5/8 $25 1/2
No Common Stock dividends were declared or paid for 1999 or 1998.
On April 29, 1997, the Company and Benesse Holdings International, Inc. ("BHI"),
the Company's majority shareholder, signed a definitive contract whereby the
Company agreed to sell to BHI 250,000 shares of the Company's Common Stock for
$6,110,000, or $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. Since this offering was made to a single shareholder who is the
majority shareholder of the Company, the transaction was deemed to be a private
placement exempt from registration under Section 4(2) of the Securities Act of
1933. The proceeds of the sale were used for general corporate purposes.
On March 11, 1999, the Company issued $155 million aggregate principal amount
12-year convertible debentures (the "Convertible Debentures") in a private
placement to two affiliates of Apollo Management IV, L.P. ("Apollo"), a private
investment firm and to BHI. This transaction was deemed to be a private
placement exempt from registration under Section 4(2) of the Securities Act of
1933. Principal amounts outstanding under such debentures are not due until
March 2011. The Convertible Debentures are convertible at any time into shares
of the Company's common stock at a conversion price of $33.05 per share, subject
to anti-dilution related adjustments. The Company used the proceeds from the
sale of the Convertible Debentures to a) repay in full existing long term
indebtedness, and b) for general corporate purposes.
22
<PAGE>
ITEM 6. Selected Financial Data
BERLITZ INTERNATIONAL, INC.
FIVE-YEAR FINANCIAL SUMMARY
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
- ---------------------
Sales of services and
products sold $ 446,181 $ 436,303 $ 397,209 $ 369,622 $ 354,509
---------- ---------- ---------- ---------- ----------
Cost and expenses:
Cost of services and
products sold 267,176 253,842 235,020 222,313 216,443
Selling, general and
administrative 148,803 142,147 124,945 113,695 105,039
Amortization of publishing rights,
excess of cost over net assets
acquired and other intangibles 18,024 17,265 14,183 12,746 13,425
Other expense, net 10,456 15,370 10,008 8,054 8,826
---------- ---------- ---------- ---------- ----------
Total costs and expenses 444,459 428,624 384,156 356,808 343,733
---------- ---------- ---------- ---------- ----------
Income before income taxes, minority
interest, extraordinary item and
cumulative effect of accounting
change $ 1,722 $ 7,679 $ 13,053 $ 12,814 $ 10,776
========== ========== ========== ========== ==========
Minority interest income/(expense) $ 668 $ 68 $ (613) $ (1,503) $ (1,106)
========== ========== ========== ========== ==========
(Loss) income before extraordinary item
and cumulative effect of accounting
change $ (5,325) $ 2,082 $ 5,351 $ 3,803 $ 2,270
Extraordinary loss (1)(2) (2,154) - (6,285) - -
Cumulative effect of accounting change
(3) (5,605) - - - -
---------- ---------- ---------- ---------- ----------
Net (loss) income $ (13,084) $ 2,082 $ (934) $ 3,803 $ 2,270
========== ========== ========== ========== ==========
Earnings (loss) per share (both basic and
diluted):
(Loss) income before extraordinary item
and cumulative effect of accounting
change $ (0.56) $ 0.22 $ 0.56 $ 0.40 $ 0.23
Extraordinary loss (0.22) - (0.66) - -
Cumulative effect of accounting change (0.59) - - - -
---------- ---------- ---------- ---------- ----------
Earnings (loss) per share $ (1.37) $ 0.22 $ (0.10) $ 0.40 $ 0.23
========== ========== ========== ========== ==========
Average number of shares (000) 9,530 9,530 9,550 9,569 10,033
========== ========== ========== ========== ==========
Balance sheet data (at year end):
- ---------------------------------
Total assets(1) $ 697,020 $ 663,461 $ 661,515 $ 561,245 $ 576,930
Long-term debt (including convertible
debentures) (1)(2) $ 156,887 $ 129,387 $ 142,369 $ 56,353 $ 67,081
Shareholders' equity $ 338,687 $ 354,986 $ 346,978 $ 357,407 $ 370,416
Other data:
- ----------
Dividends declared $ - $ - $ - $ - $ -
========== ========== ========== ========== ==========
Language lessons given
during year (000) 5,992 5,826 5,548 5,139 4,947
Company-operated language
centers at year end 338 332 334 325 323
Growth in same center
sales from year to year (4) 0.0% 4.8% 7.5% 6.0% 3.0%
</TABLE>
23
<PAGE>
(1) Included in the increase in total assets from December 31, 1996 to
December 31, 1997 was $103 million in intangibles related to the
Company's August 28, 1997 acquisition of ELS Educational Services, Inc.
("ELS"), a privately held provider of intensive English language
instruction. Financing for this acquisition, 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"). In connection with this
refinancing, the Company incurred in 1997 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.
Long-term debt increased from 1996 to 1997 due to amounts outstanding
under the Bank Facility at December 31, 1997.
(2) On March 11, 1999, the Company issued $155 million aggregate principal
amount 12-year convertible debentures (the "Convertible Debentures") in
a private placement to two affiliates of Apollo Management IV, L.P.
("Apollo"), a private investment firm and to Benesse Holding
International, Inc. ("BHI"), the Company's majority shareholder.
Principal amounts outstanding under such debentures are not due until
March 2011. The Convertible Debentures are convertible at any time into
shares of the Company's common stock at a conversion price of $33.05
per share, subject to anti-dilution related adjustments.
Simultaneously with this transaction, the Company extinguished all
outstanding indebtedness pursuant to the Bank Facility and terminated
its interest rate swap agreement, which hedged the floating rate Bank
Facility. Consequently, in 1999, the Company recorded an extraordinary
loss, net of tax benefit, of approximately $2.2 million, consisting of
the interest rate swap's fair market value and existing unamortized
deferred finance costs at the time of extinguishment of the underlying
debt.
(3) On December 3, 1999, the Securities and Exchange Commission ("SEC")
issued its Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101") to provide its views on applying
generally accepted accounting principles to selected revenue
recognition issues. The Company adopted the provisions of SAB 101
effective January 1, 1999 and changed its method of recognizing income
from deferred revenues on lessons paid for but not expected to be
taken.
(4) Indicates year-over-year increase, excluding the impact of foreign
currency rate fluctuations, in sales by Language Instruction centers
which were operating during the entirety of both years being compared.
24
<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
As of January 1, 1999, the Company reorganized into two separate autonomous
business segments: (i) Language Services, consisting of the Instruction, ELS/BOC
(i.e., ELS Educational Services, Inc. ("ELS") and Berlitz on Campus ("BOC"),
Publishing, Franchising, and Cross Cultural sub-segments; and (ii) Berlitz
GlobalNET (formerly known as Translation Services). These are strategic business
units that offer different products and services and are managed separately by
senior management due to different technology and marketing strategies.
Within Language Services, the Instruction sub-segment (through the use of
proprietary methods and materials) provides predominantly live language
education in virtually all spoken languages. The ELS/BOC sub-segment provides
intensive on-campus English education programs. The Publishing sub-segment
offers a wide range of publishing products such as dictionaries, phrase books,
travel guides and self-study language materials, including CD-ROMs and
audiocassettes. The Franchising sub-segment sells Berlitz language center
franchises to independent franchisees in certain locations. The Cross Cultural
sub-segment complements language study by providing expatriates with detailed
practical and cultural information about the countries to which they are
relocating.
Berlitz GlobalNET provides high quality technical documentation translation,
interpreting and rapidly expanding offerings in eBusiness Globalization services
including Web localization and multilingual content management. Language-related
services are offered for the entire business cycle, from globalization strategy
and consulting, to creating and translating content, designing, implementing and
maintaining multilingual Websites.
Language Services is organized geographically into four operating divisions
(North America, Asia, Latin America and Europe) while Berlitz GlobalNET is
organized into three geographic divisions: the Americas (North America and Latin
America), Asia and Europe.
The Company's sales grew from $397.2 million in 1997 to $446.2 million in 1999,
a compounded annual growth rate of 6.0%. This growth was primarily attributable
to a full period of revenues in 1999 for ELS (which was purchased in August
1997) and to increased volume in certain geographic regions, partially offset by
unfavorable exchange rate fluctuations. Earnings before extraordinary items and
the cumulative effect of an accounting change dropped from earnings of $5.4
million ($0.56 basic and diluted earnings per share) to a loss of $5.3 million
($0.56 basic and diluted loss per share) in the same three-year period. Earnings
were adversely affected by a number of factors, including: a) reduced margins
for ELS/BOC, whose sales were hurt by economic conditions in Asia and Latin
America as well as by certain organizational changes; b) lower operating profits
for Berlitz GlobalNET arising from tighter margins on interpretation services
with the U.S. government, investment in sales and technology resources, and
integration costs associated with 1999 acquisitions; c) increases in salary and
related costs and other administrative costs; and d) higher amortization of
goodwill arising from acquisitions. The factors impacting sales and earnings are
discussed in greater detail in the pages that follow.
The following table shows the Company's income and expense data as a percentage
of sales:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales of Services and Products 100.0% 100.0% 100.0%
-------------------------------
Costs of services and products sold (1) 59.9 58.1 59.2
Selling, general and administrative (2) 33.4 32.6 31.5
Amortization of publishing rights, excess of cost over net assets
acquired, and other intangible assets and other intangibles 4.0 4.0 3.6
Interest expense on long-term debt 0.4 2.5 2.1
Interest expense on convertible debentures 1.4 - -
Interest expense to affiliate 0.6 0.5 0.5
Other (income) expense, net (0.1) 0.5 (0.2)
-------------------------------
Total costs and expenses 99.6 98.2 96.7
-------------------------------
Income before income taxes, minority interest in earnings of
subsidiary, extraordinary item and the cumulative effect of 0.4 1.8 3.3
accounting change
Income tax expense (1.7) (1.3) (1.8)
Minority interest income (expense) 0.1 - (0.2)
-------------------------------
(Loss) income before extraordinary item and cumulative effect of
accounting change (1.2) 0.5 1.3
Extraordinary loss from extinguishment of debt, net of tax benefit (0.5) - (1.6)
Cumulative effect of accounting change (1.2) - -
-------------------------------
Net (loss) income (2.9)% 0.5% (0.3)%
===============================
(Footnotes on next page)
</TABLE>
25
<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 revenue growth has occurred through both expansion of
existing business and through acquisitions. For example, in August 1997, the
Company purchased ELS, a privately held provider of intensive English language
instruction, for $96.3 million plus various transaction-related expenses. ELS
contributed $43.2 million, $53.4 million and $19.9 million, respectively, in
post acquisition revenues for the years ended December 31, 1999, 1998 and 1997.
In 1998, the Company made two translation-related services acquisitions in
Europe and, in 1999, the Company acquired three translation services companies
which, among other things, strengthened Berlitz GlobalNET's presence in two new
geographical areas. The 1999 acquisitions were of: Language Management
International, Inc., which gives Berlitz skilled localization professionals and
managers in the United States, Latin America and Singapore; Astratec, the
leading translation/localization vendor in Brazil; and Multilingual Technology
Ltd in the United Kingdom. Through December 31, 1999, the Company's
cumulative-to-date cash used in investing activities in connection with these
five translations services acquisitions was approximately $12.3 million.
The Company's operations also benefit from a number of global trends: the
globalization of many sectors of the world economy, the rapid expansion of the
Internet, and the increasing number of Internet/Web users whose native language
is not English. Globalization increases the demand for cross-language
communication within and between companies, driving the market for corporate
language training, while the Company's Berlitz GlobalNET division is a leader in
the market for services to support the language aspects of globalization,
Internet publishing and eBusiness.
Internal actions over the three year period have also helped the Company grow.
For example, in Instruction, the Company continued to expand several niche
programs, including cross-cultural services, Berlitz Jr(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.
To further increase its market presence, the Company has utilized franchising
and joint ventures in emerging and secondary markets.
In the Berlitz GlobalNET segment, there has been a continued focus on large
corporate relationships, development of new customer accounts, superior customer
satisfaction, and the expansion of services, including rapidly expanding
offerings in eBusiness Globalization services including Web localization and
multilingual content management. Language-related services are offered for the
entire business cycle, from globalization strategy and consulting, to creating
and translating content, designing, implementing and maintaining multilingual
26
<PAGE>
Websites. As Berlitz GlobalNET grows, the Company will seek to continue
improving the profitability of the segment through (i) the deployment of the
latest technology, including the use of the Internet, to optimize internal
operational efficiency; (ii) increasing productivity through the use of more
advanced computer-aided translation tools; (iii) continuing to centralize
certain non-linguistic functions, such as software engineering, software quality
assurance and desktop publishing; and (iv) hiring, training and retaining the
highest quality talent available in the industry.
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, 1999, the percentage of total
revenues denominated in currencies other than U.S. dollars averaged 65%,
including the Japanese yen, German mark, Irish punt, Brazilian real, Mexican
peso, British pound, and French and Swiss francs. As a result, changes in
exchange rates affected the comparisons of the Company's earnings from period to
period, adversely affecting 1997's through 1999'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)
From Prior Year
Year Ended December 31,
1999 1998 1997
--------- --------- ---------
Sales:
Operations (2) 4.2% 14.2% 14.0%
Exchange (1.9) (4.4) (6.5)
--------- --------- ---------
Total 2.3% 9.8% 7.5%
========= ========= =========
EBITA:
Operations (2) (22.4)% 15.7% 17.8%
Exchange (2.7) (7.5) (7.0)
--------- --------- ---------
Total (25.1)% 8.2% 10.8%
========= ========= =========
(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 exchange rates
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.
The year to year comparison of the results of operations are discussed in
further detail in the sections which follow.
Year ended December 31, 1999 vs. Year ended December 31, 1998
Sales for the twelve months ended December 31, 1999 were $446.2 million, 2.3%
above the prior year. The sales growth was primarily due to activity generated
from the Instruction and Berlitz GlobalNET business units, which was partially
offset by reduced sales volume from ELS/BOC programs, and unfavorable foreign
exchange rate fluctuations. Excluding the effects of unfavorable exchange rate
fluctuations of $8.4 million, sales increased
27
<PAGE>
from the prior year by 4.2%. The following table compares revenues by business
segment.
28
<PAGE>
<TABLE>
<CAPTION>
Business Segment Revenues: (Dollars in millions)
- ------------------------- ------------------------------------------------------------------------------
December 31, Growth (Decline) from Prior Year
--------------------------- -----------------------------------------------
1999 1998 Exchange (2) Operations (1) Total
----------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Language Services:
Instruction $ 277.1 $ 267.9 $ (6.5) $ 15.7 $ 9.2
ELS/BOC 56.3 65.7 0.1 (9.5) (9.4)
Publishing 12.9 14.8 (0.1) (1.8) (1.9)
Franchising 1.8 1.8 - - -
Other 2.7 1.9 (0.1) 0.9 0.8
----------- ----------- ------------ -------------- ------------
Total Language Services 350.8 352.1 (6.6) 5.3 (1.3)
Berlitz GlobalNET 95.4 84.3 (1.8) 12.9 11.1
Eliminations - (0.1) - 0.1 0.1
----------- ----------- ------------ -------------- ------------
Total $ 446.2 $ 436.3 $ (8.4) $ 18.3 $ 9.9
=========== =========== ============ ============== ============
</TABLE>
- ----------------------------------
(1) Adjusted to eliminate fluctuations in foreign currency exchange rates from
year-to-year by assuming a constant exchange rate over two years, using as
the base the first year of the periods being presented.
(2) The unfavorable exchange rate fluctuation ($8.4 million) primarily resulted
from a strengthened dollar against the Latin American currencies (most
significantly the Brazilian real) and all European currencies, offset by a
weaker dollar against the Japanese yen.
Within Language Services, Instruction sales for 1999 rose 3.4% from the prior
year and, excluding unfavorable exchange rate fluctuations, were 5.8% higher
than in 1998. This improvement was primarily due to volume and average revenue
per lesson ("ARPL") increases in most countries. Total Instruction lesson volume
increased 2.5% from the prior year, primarily as strength in Mexico, Germany,
Israel, and France was offset by weakness in the USA, Venezuela and Argentina.
Geographically, Instruction revenue and lesson volume were dispersed as follows:
<TABLE>
<CAPTION>
Instruction Revenue: (Dollars in millions)
- ------------------- ------------------------------------------------------------------------------
December 31, Growth (Decline) from Prior Year
--------------------------- -----------------------------------------------
1999 1998 Exchange Operations Total
----------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
North America $ 47.9 $ 49.9 $ - $ (2.0) $ (2.0) (1)
Asia 73.1 59.9 9.3 3.9 13.2 (2)
Latin America 45.8 52.3 (10.3) 3.8 (6.5) (3)
Europe 110.3 105.8 (5.5) 10.0 4.5 (4)
----------- ----------- ------------ -------------- ------------
Total revenue $ 277.1 $ 267.9 $ (6.5) $ 15.7 $ 9.2
=========== =========== ============ ============== ============
(Footnotes on next page)
</TABLE>
29
<PAGE>
(1) Decline was due to lesson volume shortfalls in the USA.
(2) Primarily reflected the effect of a weaker US dollar against the Japanese
yen, and increased volume from Korea and Japan.
(3) Primarily reflected the effect of a stronger dollar against all Latin
America currencies (primarily the Brazilian real), partially offset by
volume and ARPL increases in Mexico.
(4) Primarily reflected improved volume and ARPL in most countries (in
particular Belgium, France, Germany, Israel, and Poland), as well as
unfavorable exchange rate fluctuations in France, Germany, Israel and
Poland.
<TABLE>
<CAPTION>
Instruction Lesson Volume: (Lessons in thousands)
- ------------------------- --------------------------------------------------------------------------
December 31, Growth (Decline) from Prior Year
---------------------------------- ------------------------------------
Number of
1999 1998 lessons Percentage
--------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C>
North America 1,090.3 1,157.0 (66.7) (5.8)% (1)
Asia 1,106.9 1,039.8 67.1 6.5% (2)
Latin America 1,311.5 1,300.6 10.9 0.8% (3)
Europe 2,460.9 2,328.9 132.0 5.7% (4)
--------------- --------------- -------------- -----------------
Total lesson volume 5,969.6 5,826.3 143.3 2.5%
=============== =============== ============== =================
</TABLE>
- -------------------------------------
(1) North America's volume decline primarily reflected reduced institutional
training volume due to mergers and acquisitions in the petroleum and
financial service sectors, resulting in reduced lesson demand due to
downsizing, a decrease in expatriations, and the freezing of training
budgets by these companies.
(2) Almost two thirds of Asia's increase is due to the inclusion in 1999 data of
volume from the Korea joint venture, which in 1998 was not consolidated into
operating results due to a minority interest ownership at that time. The
remaining increase is attributable to special program promotions in Japan
and growth in Malaysia.
(3) Overall lesson volume increased in Latin America primarily due to strong
sales and growth in Mexico and Peru. However, lesson volume was down in
Venezuela, Argentina, Chile and Colombia due to uncertain economies in these
countries.
(4) Europe's volume improvement reflected continued growth in the region, with
the largest increases generated by Germany, Israel, France, and Poland. Two
new school openings in Israel and one in France and Poland helped contribute
to the improved volume in those countries.
In 1999, ARPL was $40.84, as compared to $40.87 in 1998. The decrease reflected
the effects of unfavorable exchange rate fluctuations (i.e., $1.08), partially
offset by the favorable impact of product mix and price increases (i.e., $1.05).
ARPL ranged from a high of approximately $62.58 in Japan to a low of $15.08 in
Thailand, reflecting the effects of foreign exchange rates and differences in
the economic value of the services provided.
Within Language Services, ELS/BOC revenues declined 14.3% from the prior year.
ELS/BOC
30
<PAGE>
was affected by weakened Asian student enrollments due to the economic
conditions in the Far East. Enrollments from Latin America were also down due to
economic instability in Venezuela and Brazil, and the increased strength of the
dollar over the currencies in these countries. Aggressive pricing and agent
commission structures by competitors also adversely affected results. In
addition, due to organization changes and the relocation of the ELS headquarters
from Los Angeles to Princeton in the latter part of 1998, many overseas sales
agents did not sell the ELS programs aggressively in the latter months of 1998
and early part of 1999 due to perceived uncertainties about the future of ELS
programs. This adversely affected student arrivals during 1999. ELS/BOC has
taken actions to address these matters, including filling vacant sales positions
and articulating its new business plan to its agents, monitoring and reducing
overhead expenses, undertaking significant sales and promotional activities to
inform new and existing sales agents about the new consolidated ELS Language
Centers network and initiating a website project to support agent sales, direct
marketing and relationship marketing efforts.
Publishing revenues declined $1.9 million, or 12.5%, from the prior year due to
the cancellation of direct response sale programs in the second half of 1999,
and a large sale to a German distributor in 1998 which benefited the 1998
results. Franchising revenues were flat with the prior year. ELS added a net of
2 franchises and Berlitz added 9 franchises during 1999.
Berlitz GlobalNET sales increased 13.2% over 1998, and, excluding the
unfavorable effects of exchange rate fluctuations, rose 15.4% from 1998.
Geographically, sales were above prior year in all regions. The following table
compares Berlitz GlobalNET revenues by region:
<TABLE>
<CAPTION>
Berlitz GlobalNET Revenue: (Dollars in millions)
- -------------------------- --------------------------------------------------------------------------
December 31, Growth (Decline) from Prior Year
-------------------------- --------------------------------------------
1999 1998 Exchange Operations Total
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Americas $ 43.7 $ 40.8 $ (0.1) $ 3.0 $ 2.9 (1)
Asia 6.0 4.3 0.5 1.2 1.7 (2)
Europe 50.6 43.5 (2.4) 9.5 7.1 (3)
Inter-company eliminations (4.9) (4.3) 0.2 (0.8) (0.6)
----------- ----------- ----------- ------------- ------------
Total revenue $ 95.4 $ 84.3 $ (1.8) $ 12.9 $ 11.1
=========== =========== =========== ============= ============
</TABLE>
(1) Sales were higher than prior year in the Americas due to results from
businesses acquired in June and August of 1999, and continued strength in
traditional business.
(2) The sales increase in Asia reflected volume increases in Japan, and an
acquired business in Singapore.
(3) The sales increase in Europe reflected volume increases in Norway, Ireland
and Denmark, and sales from acquisitions made in France and Poland in the
second and fourth quarters of 1998, respectively.
The total Company's cost of services and products sold as a percentage of sales
was 59.9% in
31
<PAGE>
1999, compared to 58.1% in the prior period. The higher percentage was mainly
attributable to a decline in GlobalNET production margins, higher teacher
salaries, and higher rent expense. Selling, general and administrative expenses
as a percentage of sales were 33.4% in 1999, compared with 32.6% in the prior
year. The increase was due primarily to higher administrative salaries.
The total Company's EBITA for 1999 was $30.2 million, or 6.8% of sales, compared
to $40.3 million, or 9.2% of sales, in the prior year . The following table
displays the comparative EBITA by business segment:
<TABLE>
<CAPTION>
Business Segment EBITA: (Dollars in millions)
- ----------------------- ---------------------------------------------------------------------------
December 31, Growth (Decline) from Prior Year
-------------------------- ---------------------------------------------
1999 1998 Exchange Operations Total
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Language Services:
Instruction $ 55.0 $ 56.7 $ (1.3) $ (0.4) (2) $ (1.7)
ELS/BOC 2.3 6.2 - (3.9) (3) (3.9)
Publishing 0.7 1.3 - (0.6) (4) (0.6)
Franchising 0.4 - - 0.4 0.4
Overhead & Other (20.1) (18.7) 0.5 (1.9) (5) (1.4)
----------- ----------- ----------- ------------ -------------
Total Language Services 38.3 45.5 (0.8) (6.4) (7.2)
Berlitz GlobalNET 6.0 8.3 (0.3) (2.0) (6) (2.3)
Corporate and other (14.1) (13.5) - (0.6) (7) (0.6)
----------- ----------- ----------- ------------ -------------
Total $ 30.2 $ 40.3 $ (1.1) (1) $ (9.0) $ (10.1)
=========== =========== =========== ============ =============
</TABLE>
<TABLE>
<CAPTION>
EBITA Margin %: December 31,
--------------- -------------------------
1999 1998
---------- ----------
<S> <C> <C>
Language Services:
Instruction (8) 19.8% 21.2%
ELS/BOC (3) 4.1% 9.5%
Publishing (4) 5.3% 9.0%
Franchising 25.5% 2.1%
Total Language Services 10.9% 12.9%
Berlitz GlobalNET (6) 6.3% 9.8%
Total 6.8% 9.2%
---------------
</TABLE>
(1) The net unfavorable foreign exchange impact was attributable mainly to the
Latin American countries.
(Footnotes continued on next page)
32
<PAGE>
(2) The decline in Instruction operating EBITA was due mainly to weakness in the
U.S., Poland, and certain Latin American countries. In the U.S., growth in
teacher salaries, rent and certain other fixed costs, coupled with a lesson
volume decline, led to lower EBITA and EBITA margins. In Latin America,
economic uncertainty in Argentina, Brazil, Colombia and Venezuela led to
EBITA declines in these countries. In Poland, the EBITA was negatively
affected by new legislation on teachers' social security. The decreases in
these countries were partially offset by EBITA increases primarily in
Mexico, Japan and most European countries; notably, France, UK, Denmark, and
Spain.
(3) Despite reductions in its overall costs from the prior year, ELS/BOC's EBITA
and EBITA margin decreased because the percentage decline in ELS' revenues
outpaced the percentage decline of certain costs (most notably teachers'
salaries, advertising and certain fixed expenses). In addition, an ELS joint
venture in Japan, which commenced operations in October 1998 and opened a
second center in April of 1999, generated an EBITA loss of $1.1 million in
1999 due to its start-up nature.
(4) Publishing's 1998 EBITA and EBITA margin benefited from certain items
(including a large sale to a German distributor and a bad debt recovery)
which were absent in 1999. Increases in amortization of prepublication costs
also negatively impacted 1999 EBITA.
(5) Language Services' overhead cost increase over prior year was attributable
to fixed employee costs, advertising and travel expenses.
(6) The decline in EBITA for Berlitz GlobalNET was due mainly to decreases in
the Americas, Ireland and UK, arising from tighter margins on interpretation
services with U.S. government, investment in sales and technology resources,
and integration costs associated with current year acquisitions. These
declines were partially offset by increased production in Norway, and
increased activity in France and Poland from acquisitions made in the second
and fourth quarters of 1998, respectively.
(7) Corporate expenses rose due to increases in salary and related costs, and
other sundry expenses.
(8) The reduction in Instruction's 1999 EBITA Margin occurred primarily as
teacher costs, rent and salary related costs grew faster than revenues.
As a result of the March 1999 issuance of Convertible Debentures and an
affiliate note, and the related extinguishment of existing long-term debt, the
Company's combined interest expense on long-term debt and convertible debentures
for 1999 decreased $2.5 million from the prior year. This decrease was due
principally to a reduced effective interest rate.
"Other income, net" for 1999 increased by $2.7 million over the prior year,
primarily due to foreign exchange gains.
The Company recorded income tax expense of $7.7 million and $5.7 million in 1999
and 1998, respectively. The effective tax rates in both 1999 and 1998 were above
the U.S. Federal statutory tax rate, primarily as a result of nondeductible
amortization charges.
In connection with March 1999 extinguishment of long-term debt, the Company also
terminated its interest rate swap agreement, which hedged the floating rate Bank
Facility, for a cash payment of approximately $1.1 million. Consequently, in
1999, the Company has recorded an extraordinary loss, net of tax benefit, of
approximately $2.2 million, consisting of the interest rate swap's fair market
value and existing unamortized deferred finance costs at the time of
extinguishment of the underlying debt.
33
<PAGE>
On December 3, 1999, the Securities and Exchange Commission ("SEC") issued its
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which provided its views on applying generally accepted accounting
principles to selected revenue recognition issues. The Company adopted the
provisions of SAB 101 effective January 1, 1999, and, as a result, changed its
method of accounting for deferred revenues on lessons paid for but not expected
to be taken. Through December 1998, such amounts had been recognized in income
based on historical experience by country; refunds subsequently issued were not
material. Beginning in 1999, deferred revenues on lessons paid for but not
expected to be taken were recognized in income when the obligation to issue a
refund has constructively expired. The cumulative effect of the accounting
change resulted in a charge to 1999 earnings of $5.6 million (net of income tax
benefit of $2.9 million and minority interest expense of $0.2 million).
Year Ended December 31, 1998 vs. Year Ended December 31, 1997
Sales for the twelve months ended December 31, 1998 were $436.3 million, 9.8%
above the prior year. This improvement was due to increases from operating
activity in all business segments, as well as a full year of results for ELS
(which was purchased on August 28, 1997), partially offset by unfavorable
exchange rate fluctuations. Excluding the results of ELS and the effects of
exchange rate fluctuations, sales increased from the prior year by 6.1%. The
following table compares revenues by business segment.
<TABLE>
<CAPTION>
Business Segment Revenues: (Dollars in millions)
- -------------------------- ------------------------------------------------------------------------------
December 31, Growth (Decline) from Prior Year
--------------------------- -----------------------------------------------
1998 1997 Exchange (2) Operations (1) Total
----------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Language Services:
Instruction $ 267.9 $ 260.4 $ (14.1) $ 21.6 $ 7.5
ELS/BOC 65.7 36.4 - 29.3 29.3
Publishing 14.8 13.6 (0.1) 1.3 1.2
Franchising 1.8 1.0 - 0.8 0.8
Other 1.9 2.0 - (0.1) (0.1)
----------- ----------- ------------ -------------- ------------
Total Language Services 352.1 313.4 (14.2) 52.9 38.7
Berlitz GlobalNET 84.3 83.8 (3.3) 3.8 0.5
Eliminations (0.1) - - (0.1) (0.1)
----------- ----------- ------------ -------------- ------------
Total $ 436.3 $ 397.2 $ (17.5) $ 56.6 $ 39.1
=========== =========== ============ ============== ============
</TABLE>
- ---------------------------------
(1) Adjusted to eliminate fluctuations in foreign currency exchange rates from
year-to-year by assuming a constant exchange rate over two years, using as
the base the first year of the periods being presented.
(2) The unfavorable exchange rate fluctuation ($17.5 million) primarily resulted
from a strengthened dollar against virtually all foreign currencies (most
significantly the Japanese yen, Mexican peso, Irish punt, Brazilian real,
Colombian peso and German mark).
Within Language Services, Instruction sales for 1998 rose 2.9% from the prior
year and, excluding unfavorable exchange rate fluctuations, were 8.3% higher
than in 1998. This improvement was primarily due to volume and ARPL increases.
Total lesson volume increased 5.0% from the prior year.
34
<PAGE>
Geographically, Instruction revenue and lesson volume were dispersed as follows:
<TABLE>
<CAPTION>
Instruction Revenue: (Dollars in millions)
- ------------------- --------------------------------------------------------------------------
December 31, Growth (Decline) from Prior Year
-------------------------- --------------------------------------------
1998 1997 Exchange Operations Total
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
North America $ 49.9 $ 48.4 $ (0.4) $ 1.9 $ 1.5
Asia 59.9 64.2 (5.3) 1.0 (4.3)(1)
Latin America 52.3 49.0 (5.5) 8.8 3.3 (2)
Europe 105.8 98.8 (2.9) 9.9 7.0 (3)
----------- ----------- ----------- ------------- ------------
Total revenue $ 267.9 $ 260.4 $ (14.1) $ 21.6 $ 7.5
=========== =========== =========== ============= ============
</TABLE>
- -------------------------------------
(1) Primarily reflected the effect of a stronger US dollar against the Japanese
yen.
(2) Primarily reflected volume and ARPL increases in Mexico, Brazil, Venezuela
and Colombia, partially offset by the effect of a stronger dollar against
all Latin America currencies.
(3) Primarily reflected improved volume and ARPL in most countries in
central/eastern Europe (in particular Germany, Poland and Israel) and volume
increases in France and Italy, partially offset by unfavorable exchange rate
fluctuations in Germany, Israel and Poland and by volume decreases in
England and Belgium.
<TABLE>
<CAPTION>
Instruction Lesson Volume: (Lessons in thousands)
- ------------------------- --------------------------------------------------------------------------
December 31, Growth (Decline) from Prior Year
---------------------------------- ------------------------------------
Number of
1998 1997 lessons Percentage
--------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C>
North America 1,157.0 1,150.0 7.0 0.6%
Asia 1,039.8 1,039.8 - 0.0% (1)
Latin America 1,300.6 1,183.4 117.2 9.9% (2)
Europe 2,328.9 2,174.5 154.4 7.1% (3)
--------------- --------------- --------------
Total lesson volume 5,826.3 5,547.7 278.6 5.0%
=============== =============== ==============
</TABLE>
- -------------------------------------
(1) Asia's volume remained flat despite the current economic recession,
primarily reflecting the positive effects of special sales campaigns in
Japan and expansion in new Asian markets.
(2) Lesson volume increased in Latin America primarily due to strong growth in
Mexico, Peru and Venezuela. Brazil's lesson volume for 1998 rose 4% from
1997, although volume slowed in the fourth quarter of 1998 due to local
economic conditions.
(3) Europe's volume improvement reflected growth in Germany, Poland, and Israel,
as well as increases in lessons given to corporate clients in France and
Italy. The increase is partially offset by a 24.1% decrease in lesson volume
in England due in part to a decline in activity from overseas students
applying for the Berlitz Study Abroad program.
35
<PAGE>
In 1998, ARPL was $40.87, as compared to $41.71 in 1997. The decline reflected
the effects of unfavorable exchange rate fluctuations of $2.17, and was
negatively affected by changes in the client and lesson product mix in France,
Singapore, Hong Kong and Spain. Excluding the effects of exchange rate
fluctuations, the ARPL increased 3.2% over prior year. ARPL ranged from a high
of approximately $58.89 in Brazil to a low of $13.77 in Thailand, reflecting
effects of foreign exchange rates and differences in the economic value of the
service.
Within Language Services, ELS/BOC revenues in 1998 included twelve months of ELS
results totaling $53.4 million, as compared to only post-acquisition revenues of
$19.9 million for ELS in 1997. Excluding the results of ELS, sales declined,
primarily due to reductions in business originating from the Far East
(principally Korea and Japan).
Publishing revenues for 1998 increased $1.2 million, or 8.5%, from 1997. The
increase was due to a large sale of German market versions of Think and Talk(R).
Additionally, strong increases in trade bookstore sales in several key markets
were offset by a decline in the direct response business in North America.
Exchange rate fluctuations were not significant.
During the twelve months ended December 31, 1998, the Company opened a branch in
China and six Company-owned language centers in Italy, Japan, Malaysia, Mexico
and the United States. Same center sales (i.e., sales by centers which were
operating during the entirety of both years being compared) grew by 4.8% over
1997, excluding the impact of foreign currency rate fluctuations. In addition,
the Company opened 16 Berlitz franchises during 1998 in Austria, Chile, Croatia,
Egypt, France, Germany, Guatemala, Kuwait, Malta, Mexico, Slovakia, Turkey, the
United Arab Emirates, and the U.S., and two ELS franchises in Costa Rica and
Panama.
Berlitz GlobalNET sales, excluding the unfavorable effects of exchange rate
fluctuations, rose 4.5% from 1997. The Asia crisis impacted revenue on certain
key accounts as customers changed product release decisions away from the Asian
languages. This shortfall, estimated at approximately $10.0 million, was offset
by increased volume from new accounts in the U.S., new business in certain
emerging markets, and increased volume as a result of an acquisition in France
consummated in June 1998. The following table compares Berlitz GlobalNET
revenues by region:
<TABLE>
<CAPTION>
Berlitz GlobalNET Revenue: (Dollars in millions)
- -------------------------- --------------------------------------------------------------------------
December 31, Growth (Decline) from Prior Year
-------------------------- --------------------------------------------
1998 1997 Exchange Operations Total
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
America $ 40.8 $ 38.6 $ (0.3) $ 2.5 $ 2.2
Asia 4.3 4.8 (0.5) - (0.5)
Europe 43.5 44.6 (2.5) 1.4 (1.1)
Inter-company eliminations (4.3) (4.2) - (0.1) (0.1)
----------- ----------- ----------- ------------- ------------
Total revenue $ 84.3 $ 83.8 $ (3.3) $ 3.8 $ 0.5
=========== =========== =========== ============= ============
</TABLE>
The total Company's cost of service and products sold as a percentage of sales
for the twelve months ended December 31, 1998 was 58.1%, compared to 59.2% for
1997. The change
36
<PAGE>
reflects the effects of improved margins in Berlitz GlobalNET and Publishing.
Selling, general and administrative expenses as a percentage of sales were 32.6%
in 1998, compared with 31.5% in the prior year. The increase reflects higher
administrative salary percentages.
The total Company's EBITA for 1998 was $40.3 million, or 9.2% of sales, compared
to $37.2 million, or 9.4% of sales, in the prior year. The following table
displays the comparative EBITA by business segment:
<TABLE>
<CAPTION>
Business Segment EBITA: (Dollars in millions)
- ----------------------- ---------------------------------------------------------------------------
December 31, Growth (Decline) from Prior Year
-------------------------- ---------------------------------------------
1998 1997 Exchange Operations Total
----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Language Services:
Instruction $ 56.7 $ 56.0 $ (3.3) $ 4.0 (2) $ 0.7
ELS/BOC 6.2 5.1 - 1.1 (3) 1.1
Publishing 1.3 0.6 - 0.7 (4) 0.7
Franchising - (0.7) - 0.7 (5) 0.7
Overhead & Other (18.7) (18.6) 0.8 (0.9) (7) (0.1)
----------- ----------- ------------- ------------ ------------
Total Language Services 45.5 42.4 (2.5) 5.6 3.1
Berlitz GlobalNET 8.3 7.7 (0.3) 0.9 (6) 0.6
Corporate and other (13.5) (12.9) - (0.6) (7) (0.6)
----------- ----------- ------------- ------------ ------------
Total $ 40.3 $ 37.2 $ (2.8) (1) $ 5.9 $ 3.1
=========== =========== ============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
EBITA Margin %: December 31,
--------------- -------------------------
1999 1998
---------- ----------
<S> <C> <C>
Language Services:
Instruction 21.2% 21.5%
ELS/BOC 9.5% 14.0%
Publishing 9.0% 4.4%
Franchising 2.1% N/A
Total Language Services 12.9% 13.5%
Berlitz GlobalNET 9.8% 9.2%
Total 9.2% 9.4%
---------------
</TABLE>
(1) The net unfavorable foreign exchange impact was attributable mainly to the
Latin American countries and Japan.
(2) The increase in Instruction operating EBITA was primarily due to activity in
Latin America and Europe, which exhibited operating EBITA increases of $3.4
million and $3.7 million, respectively, mainly due to lesson and price
increases in Germany, Mexico, Brazil and Venezuela, and sales increases in
Italy and France. However, the local economies created challenges for Asia,
which, despite flat lesson volume, exhibited a 1998 full year operating
EBITA decline of $2.4 million. This decline was largely due to higher
administrative salaries and rent expense in Japan.
37
(Footnotes continued on next page)
<PAGE>
(3) EBITA in 1998 included twelve months of ELS results totaling $4.7 million,
as compared to only post-acquisition EBITA for ELS of $1.8 million in 1997.
Both ELS and Berlitz on Campus ("BOC") experienced reduced enrollments in
1998 of approximately 27%, primarily due to the economic turmoil in Asia.
Consequently, the Company reported EBITA for BOC in 1998 which was $1.8
million lower than in 1997. The Company has implemented certain
restructuring and cost control measures designed to position ELS/BOC for
improved margins.
(4) Publishing segment EBITA and EBITA margins for 1998 increased from 1997 due
in part to the volume increase in the German market.
(5) EBITA for franchising activity was breakeven in 1998, compared with an EBITA
loss of $0.7 million in the prior year. These results still reflected the
start-up nature of this operation, as the Company was not yet collecting
significant royalty income.
(6) Despite the Asian economic situation, a significant portion of the EBITA
improvement was recognized in the Asian countries due to reorganization
efforts and improved production efficiencies. In addition, Germany, the U.S.
and certain western European countries experienced improved operating
margins. These positive results were partially offset by lower margins and
sales volume in Ireland.
As a result of economic turmoil in Asia, GlobalNET experienced lower
sales backorder in North America on Asian projects, as existing clients
delayed and/or cancelled production of certain Asian projects until the
uncertainty of the market stabilized. Japan also faced a weak market which
resulted in lower sales volume. However, previous reorganization efforts
positioned Japan and Singapore for growth and, despite the challenging
economies, improved Asia's GlobalNET EBITA over the prior year.
(7) Corporate expenses rose primarily due to increases in administrative
salaries.
Amortization of intangibles increased $3.1 million, or 21.7%, over 1997, as a
result of higher intangible assets arising from the acquisition of ELS.
Additionally, interest expense on long-term debt in 1998 rose $2.4 million, or
28.5%, from 1997, due to higher borrowings outstanding under the Company's
refinanced August 1997 credit facility. "Other expense, net" for the twelve
months ended December 31, 1998 increased by $2.8 million over the prior year,
due largely to higher foreign exchange losses, losses on disposal of fixed
assets, and non-operating taxes.
The Company recorded income tax expense of $5.7 million, or an effective rate of
73.8%, in 1998, compared with income tax expense of $7.1 million, or an
effective rate of 54.3%, in 1997. The effective tax rates in both 1998 and 1997
were above the U.S. Federal statutory tax rate, primarily as a result of
nondeductible amortization charges.
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 the acquisition of 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.
38
<PAGE>
Net cash provided by operating activities was $24.3 million, $34.4 million and
$13.5 million for the years ended December 31, 1999, 1998 and 1997,
respectively. In comparing 1999 with 1998, the decline of $10.1 million resulted
from a reduced EBITA; an increase in accounts receivable; payments made pursuant
to the long-term incentive plan; a payment to terminate the Company's interest
rate swap; the payment of $4 million to Children's Television Workshop,
discussed below. In comparing 1998 with 1997, the increase of $20.9 million
primarily resulted from increased receivable collections, offset by higher
inventory expenditures, and higher payment of year-end bonuses. In addition,
cash-flow in 1997 was reduced by a $5.8 million prepayment penalty on the
Company's Senior Notes.
Net cash used in investing activities totaled $31.5 million, $22.9 million and
$105.5 million in 1999, 1998 and 1997, 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. Included in 1999 and 1998 were
acquisitions of businesses of $11.1 million and $3.9 million, respectively,
which relate mainly to worldwide acquisitions made for the GlobalNET segment.
The balance of net cash used largely consisted of capital expenditures,
aggregating $20.3 million, $18.9 million and $14.6 million in 1999, 1998 and
1997, respectively. Such capital expenditures were primarily for the opening of
new facilities and the refurbishing of existing facilities. Capital expenditures
have increased over the three-year period due to growth related expansion in the
Language Service and GlobalNET segments.
Net cash provided by financing activities totaled $17.3 million and $94.9
million, respectively, in 1999 and 1997, compared with net cash used in
financing activities of $13.6 million in 1998. The change in 1999 primarily
reflected the excess of the net proceeds from the issuance of convertible
debentures and notes payable to an affiliate over the related extinguished debt.
The activity for 1998 primarily reflected repayments of long-term debt. The
results in 1997 primarily reflected net proceeds from the Company's refinancing
of its long-term debt in conjunction with the ELS acquisition.
Other items impacting the Company's liquidity and capital resources are as
follows:
o $1.2 million of "Accrued expenses and other current liabilities" at
December 31, 1999 related to the ELS acquisition.
o On July 1, 1999, Berlitz entered into a license agreement with Children's
Television Workshop ("CTW"). CTW will create and produce, at its expense, a
television series, entitled "Sesame English", which will initially consist
of 52 15-minute episodes and which will be complemented by instruction
curricula and materials developed by Berlitz. Berlitz was also granted
certain rights by CTW, including the exclusive right to use certain Sesame
Street and Sesame English names, logos and characters in connection with
language instructional products, services and schools.
The license agreement with CTW, covers an initial term of five years, and
provides for payments to CTW of $4 million at inception and an aggregate of
$6 million in minimum guaranteed royalties paid in installments over the
initial term of the agreement. The $4 million paid at inception may be
applied against future royalties due in excess of the minimum guarantee.
39
<PAGE>
Furthermore, in the event that Berlitz enters into any sublicenses or other
third-party arrangements with a sublicensee for language instruction
services in Japan, the minimum guaranteed royalties will be reduced dollar
for dollar, up to a maximum of $2 million from CTW's share of payments from
such Japanese sublicensees. If certain conditions are met, Berlitz may
extend the license agreement for another five years in exchange for annual
minimum guaranteed royalties equal to the greater of $2 million, or an
amount equal to 80% of the royalties earned by CTW under the license
agreement during the fifth year of the initial term.
o As part of its CTW and general marketing efforts, Berlitz is in the process
of pursuing opportunities to expand the use of the Internet for the
marketing and distribution of its products and services.
o In June 1999, the Company acquired certain assets, operating subsidiaries
and key personnel of Language Management International, Inc., a
translations services company. The purchase price was $8.0 million, plus a
contingent payment based on gross revenues for the twelve months ending
June 30, 2000. The Company also incurred various transaction-related
expenditures and accrued expenses. At December 31, 1999, in connection with
this acquisition, the Company recorded $11.6 million of goodwill and
accrued $3.5 million in current liabilities for transaction-related
expenses and contingencies.
o On June 8, 1999, the Company's shareholders approved the Company's 1999
Long-Term Executive Incentive Compensation Plan (the "1999 LTIP"). The 1999
LTIP provides for potential cash awards to be paid to senior management in
2002 if certain revenue, earnings and cash flow targets are achieved for
the three year period from 1999 to 2001. The 1999 LTIP is intended to be an
unfunded plan, and the Company is not required to establish any fund or
segregate any assets. Based on limitations contained within the 1999 LTIP,
total awards are currently expected to range from a minimum of $0.7 million
to a maximum of $5.0 million.
o On March 31, 1999, the Company entered into a new $25 million revolving
credit facility which expires in February 2002. At the option of the
Company, outstanding borrowings under the revolving credit facility bear
interest at variable rates equal to either (i) a base rate approximating
the U.S. prime rate or (ii) the rate offered by certain reference banks to
prime banks in the interbank Eurodollar market, fully adjusted for reserves
plus a margin ranging from 0.375% to 0.5%; such margin is dependent on a
specified leverage ratio of the Company. In addition, a commitment fee
ranging from 0.125% to 0.20% will be charged on the available but unused
amounts under the revolving credit facility, depending on a specified
leverage ratio. There were $4.0 million of outstanding borrowings under the
revolving credit facility at December 31, 1999. On January 24, 2000, the
total outstanding balance of $4 million was paid in full.
o The Company's Supplemental Executive Retirement Plan ("SERP") provides
retirement income/disability retirement benefits, retiree medical benefits
and death benefits to certain designated executives and their designated
beneficiaries. The Company intends to fund the SERP through a combination
of funds generated from operations and life insurance policies on the
participants.
40
<PAGE>
o The Company is party to currency coupon swap agreements with a financial
institution to hedge the Company's net investments in certain foreign
subsidiaries. These agreements require the Company, in exchange for U.S.
dollar receipts, to periodically make foreign currency payments,
denominated in the Japanese yen, the Swiss franc, the 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, 1999, representing the amount that could be settled based on estimates
obtained from a dealer, was a net liability of approximately $2.8 million.
o On March 11, 1999, the Company's shareholders approved the issuance of, and
the Company issued, $155 million aggregate principal amount 12-year
convertible debentures (the "Convertible Debentures") in a private
placement, pursuant to definitive investment agreements (the "Investment
Agreements") dated as of October 2, 1998. Such debentures were issued as
follows: a) $100 million aggregate principal amount (the "Apollo
Debentures") to two affiliates of Apollo Management IV, L.P. ("Apollo"), a
private investment firm; and b) $55 million aggregate principal amount (the
"Benesse Debentures") to Benesse Holding International, Inc. ("BHI"), the
Company's majority shareholder. The Convertible Debentures bear interest at
5% per annum, payable semi-annually. Principal amounts outstanding under
such debentures are not due until March 2011, and the Company is not
required to establish a bond sinking fund for repayment of this principal.
The Convertible Debentures are convertible at any time into shares of the
Company's common stock at a conversion price of $33.05 per share, subject
to anti-dilution related adjustments.
In a separate transaction on March 11, 1999, BHI loaned $50 million to the
Company, evidenced by a 12-year fixed rate subordinated promissory note
(the "BHI Note"). Such note bears interest for the first five years at 5.2%
per annum, and, thereafter, at a renegotiated fixed rate approximating
LIBOR plus a margin based on the Company's then existing leverage. Interest
is payable semiannually in cash while principal repayment is deferred until
maturity. In the event of a change in control, the BHI Note provides for
redemption by the Company, at the option of BHI, at price equal to 101% of
the note's principal amount.
The Company used the proceeds from the sale of the Convertible Debentures,
as well as proceeds from the BHI Note issuance, to repay in full all
outstanding indebtedness pursuant to the Bank Facility and existing notes
payable to Benesse, and for general corporate purposes. The Company
incurred approximately $2.8 million in deferred finance costs associated
with the issuance of the Convertible Debentures and BHI Note.
At December 31, 1999, the Company's liquid assets of $34.4 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 be in line with recent historical trends due
to the refurbishment of the Company's language centers, the expansion of the
Company's GlobalNET segment, and technological expansion. The Company plans to
meet its debt service requirements and future working capital needs through
funds generated from operations.
41
<PAGE>
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The cost for Year
2000 compliance with respect to the Company's information and production systems
was approximately $4.9 million, consisting of: $3.6 million for replacements of
financial accounting and operational systems with the remainder dedicated to
infrastructure and third party relationship remediation. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products and services, its internal systems, or the products and services of
third parties. The Company will continue to monitor its mission critical
computer applications and those of its suppliers and vendors throughout the year
2000 to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
Recent Accounting Pronouncements
During June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. The accounting for gains or losses resulting from changes in the
values of those derivatives would depend on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 will be effective for the
calendar year beginning January 1, 2001. Based on the Company's current
activities, the new standard is not expected to have a material impact on the
Company's financial position or results of operations.
43
<PAGE>
Inflation
Historically, inflation has not had a material effect on the Company's overall
business. Management believes this is due to the fact that the Company's
business is a service business which is not capital intensive. The Company has
historically adjusted prices to compensate for inflation.
Special Note Regarding Forward Looking Statements
Certain statements in this 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, 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company's major market risk exposure is foreign currency fluctuations.
Geographically, the majority of the Company's subsidiaries are located outside
the United States, with operations conducted in their respective local
currencies. For example, for the three years ended December 31, 1999, the
percentage of total revenues denominated in currencies other than U.S. dollars
averaged 65%, in foreign currencies including the Japanese yen, German mark,
Irish punt, Brazilian real, Mexican peso, British pound and French and Swiss
francs. As discussed under "Management's Discussion and Analysis - Liquidity and
Capital Resources", the Company maintains currency 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 exchange foreign currency-denominated interest payments for U.S.
dollar-denominated interest receipts on a semi-annual basis. Significant terms
of currency swap agreements continuing to remain outstanding after December 31,
1999 were as follows:
44
<PAGE>
<TABLE>
<CAPTION>
Interest Receipts from
Interest Payment to Financial Institution Financial Institution
-------------------------------------------- --------------------------
Notional Fair Value
Effective Interest Amount Interest at 12/31/99
Date Maturity Notional Amount (000's) Rate (000's) Rate (000's)
---- -------- ------------------------------ ---- -------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1/1/99 12/30/02 Japanese Yen 12,311,005 5.50% $ 95,694 6.27% $ (3,620)
1/1/99 12/31/02 German Mark 99,546 6.12% $ 55,821 6.27% $ 614
1/4/99 12/31/02 Swiss Franc 16,131 5.72% $ 11,164 6.27% $ 215
1/4/99 12/31/02 British Pound 4,841 6.56% $ 7,974 6.27% $ (34)
</TABLE>
The fair values of the coupon swap agreements represent the amounts that could
be settled based on estimates obtained from a dealer. The value of these swaps
will be affected by future interest rates and exchange rates.
Throughout fiscal 1998 and until March 11, 1999, another major market risk
exposure of the Company was the impact of changing interest rates on its
variable rate Bank Facility, which at its August 28, 1997 inception, consisted
of term loans of $120 million and a revolving credit facility, as amended, of
$70 million. The term loans provided for quarterly amortization, beginning
December 31, 1997 and ending September 30, 2002, and matured as follows: Year 1,
$17 million; Year 2, $19 million; Year 3, $20 million; Year 4, $22 million; Year
5, $22 million, plus a balloon at maturity of $20 million. There were no
scheduled repayments required under the revolving credit facility prior to its
expiration on September 30, 2002, at which time all outstanding balances were
due.
Outstanding borrowings under the Bank Facility bore 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 was
dependent on a specified leverage ratio of the Company. In addition, a
commitment fee ranging from .125% to .25% was charged on the available but
unused amounts under the revolving credit facility, depending on a specified
leverage ratio. Pursuant to a covenant under the Bank Facility, the Company
entered into an interest rate swap agreement which fixed the base interest rate
for a portion of the Bank Facility at 6.30% (see Management's Discussion and
Analysis - Liquidity and Capital Resources). The average interest rate on
outstanding borrowings under the Bank Facility for the period ending December
31, 1998 was 6.72%. The carrying value of the Bank Facility approximated its
estimated fair value, based on interest rates currently available for borrowings
with similar terms and maturities.
On March 11, 1999, in connection with the Company's issuance of convertible
debentures (see Management's Discussion and Analysis - Liquidity and Capital
Resources), the Company terminated the Bank Facility and repaid all outstanding
amounts in full. The Company also terminated the related interest rate swap
agreement through a cash payment by the Company of $1.1 million, representing
the swap agreement's fair value at the time of termination based on quotes
obtained from a dealer.
For additional information relating to the financial instruments, see Note 13 to
the Consolidated Financial Statements.
45
<PAGE>
The Company's derivatives are for non-trading purposes. The Company historically
has only entered into derivative contracts as required by its lenders and it has
no present intentions to change this policy. Furthermore, the Company employed
the following procedures to monitor and minimize the market and credit risk
associated with its current derivative contracts entered into pursuant to the
Bank Facility:
a) bids and proposals were obtained from only major financial institutions;
b) prior to entering into its derivative contracts, the Company conferred with
independent advisors to assess the reasonableness of the contracts and
obtained Board of Director approval;
c) the Company entered into simple agreements; and
d) the Company provides status updates regarding its derivatives, including
market value updates, to its Board of Directors on a regular basis.
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 47
Statement of Management's Responsibility for Consolidated
Financial Statements 48
Consolidated Financial Statements:
Consolidated Statements of Operations, years ended
December 31, 1999, 1998 and 1997 49
Consolidated Balance Sheets, December 31, 1999 and 1998 50
Consolidated Statements of Comprehensive (Loss) Income, years
ended December 31, 1999, 1998, and 1997 51
Consolidated Statements of Shareholders' Equity, years ended
December 31, 1999, 1998 and 1997 52
Consolidated Statements of Cash Flows, years ended
December 31, 1999, 1998 and 1997 53
Notes to Consolidated Financial Statements 54
Financial Statement Schedule:
Schedule II. Valuation and Qualifying Accounts 85
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.
46
<PAGE>
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, 1999 and 1998, and
the related consolidated statements of operations, comprehensive (loss) income,
shareholders' equity, and cash flows for the years ended December 31, 1999, 1998
and 1997. Our audits also included the financial statement schedule listed in
the Index at Item 8 for the years ended December 31, 1999, 1998 and 1997. 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, 1999 and 1998 and the results of their
operations and their cash flows for the years ended December 31, 1999, 1998 and
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedule for the years ended December 31, 1999,
1998 and 1997, 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.
As discussed in Note 1(k) to the consolidated financial statements, effective
January 1, 1999 the Company changed its method of accounting for the recognition
in income of deferred revenues in accordance with Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements".
/s/ DELOITTE & TOUCHE LLP
- -------------------------
New York, New York
February 28, 2000
47
<PAGE>
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
48
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Sales of services and products $ 446,181 $ 436,303 $ 397,209
-------------- -------------- -------------
Costs and expenses:
Cost of services and products sold 267,176 253,842 235,020
Selling, general and administrative 148,803 142,147 124,945
Amortization of publishing rights, excess
of cost over net assets acquired, and
other intangibles 18,024 17,265 14,183
Interest expense on long-term debt 2,005 10,956 8,523
Interest expense on Convertible Debentures
with related parties 6,424 - -
Interest expense on notes to affiliates 2,547 2,226 2,100
Other (income) expense, net (520) 2,188 (615)
-------------- -------------- -------------
Total costs and expenses 444,459 428,624 384,156
-------------- -------------- -------------
Income before income taxes, minority interest in
loss (earnings) of subsidiary, extraordinary
item, and cumulative effect of accounting
change 1,722 7,679 13,053
Income tax (expense) (7,715) (5,665) (7,089)
Minority interest in loss (earnings)
of subsidiary 668 68 (613)
-------------- -------------- -------------
(Loss) income before extraordinary item and
cumulative effect of accounting change (5,325) 2,082 5,351
Extraordinary loss from extinguishment of debt,
net of income tax benefits of $44 and $1,949 (2,154) - (6,285)
Cumulative effect of accounting change, net of
income tax benefit of $2,900
and minority interest expense of $189 (5,605) - -
-------------- -------------- -------------
Net (loss) income $ (13,084) $ 2,082 $ (934)
============== ============== =============
(Loss) earnings per share - basic and diluted:
(Loss) income before extraordinary item
and cumulative effect of accounting change $ (0.56) $ 0.22 $ 0.56
Extraordinary loss (0.22) - (0.66)
Cumulative effect of accounting change (0.59) - -
-------------- -------------- -------------
(Loss) earnings per share $ (1.37) $ 0.22 $ (0.10)
============== ============== =============
Average number of shares (000) 9,530 9,530 9,550
============== ============== =============
</TABLE>
See accompanying notes to the consolidated financial statements.
49
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and temporary investments $ 34,426 $ 25,327
Accounts receivable, less allowance for doubtful accounts
of $3,102 and $2,295 54,185 46,650
Unbilled receivables 7,514 6,873
Inventories, net 10,405 11,606
Prepaid expenses and other current assets 8,628 7,965
------------ ------------
Total current assets 115,158 98,421
Property and equipment, net 47,749 41,144
Publishing rights, net of accumulated
amortization of $6,083 and $5,203 15,902 16,782
Excess of cost over net assets acquired and other intangibles, net of
accumulated amortization of $92,936 and $75,573 480,967 486,232
Other assets 37,244 20,882
------------ ------------
Total assets $ 697,020 $ 663,461
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 5,118 $ 20,135
Accounts payable 12,026 11,280
Deferred revenues 57,266 41,603
Payrolls and commissions 16,458 15,079
Income taxes payable 971 365
Interest payable on convertible debentures 1,938 -
Accrued expenses and other current liabilities 19,495 17,255
------------ ------------
Total current liabilities 113,272 105,717
Long-term debt 1,887 129,387
Convertible Debentures with related parties 155,000 -
Notes payable to affiliates 50,000 42,755
Other liabilities 28,399 20,333
Minority interest 9,775 10,283
------------ ------------
Total liabilities 358,333 308,475
------------ ------------
Commitments and Contingencies (Note 12)
Shareholders' Equity:
Common stock
$.10 par value - 40,000,000 shares authorized;
10,049,761 shares issued 1,003 1,003
Additional paid-in capital 372,518 372,518
(Accumulated deficit) retained earnings (8,510) 4,574
Accumulated other comprehensive loss:
Cumulative translation adjustment (19,963) (16,748)
Treasury stock at cost; 503,225 shares (6,361) (6,361)
------------ ------------
Total shareholders' equity 338,687 354,986
------------ ------------
Total liabilities and shareholders' equity $ 697,020 $ 663,461
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
50
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Net (loss) income $ (13,084) $ 2,082 $ (934)
Other comprehensive (loss) income, net of tax:
Foreign currency items, including translation
adjustments, and the effects of certain
hedges and intercompany transactions (3,215) 5,926 (12,637)
-------------- -------------- -------------
Comprehensive (loss) income $ (16,299) $ 8,008 $ (13,571)
============== ============== =============
The tax (expense) benefit allocated to each component of other comprehensive
income (loss) is as follows:
Foreign currency items $ (12) $ 889 $ (273)
============== ============== =============
</TABLE>
See accompanying notes to the consolidated financial statements.
51
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Loss:
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, 1997 $ 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
Net income 2,082 2,082
Translation adjustment and other,
including the effects of certain
hedges and intercompany
transactions 5,037 5,037
Allocated income taxes 889 889
---------- ---------- --------- ---------- ---------- ----------
Balance at December 31, 1998 1,003 372,518 4,574 (16,748) (6,361) 354,986
Net loss (13,084) (13,084)
Translation adjustment and other,
including the effects of certain
hedges and intercompany
transactions (3,203) (3,203)
Allocated income taxes (12) (12)
---------- ---------- --------- ---------- ---------- ----------
Balance at December 31, 1999 $ 1,003 $ 372,518 $ (8,510) $ (19,963) $ (6,361) $ 338,687
========== ========== ========= ========== ========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
52
<PAGE>
BERLITZ INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (13,084) $ 2,082 $ (934)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation 11,396 9,791 8,564
Amortization of publishing rights, excess of cost over
net assets acquired, and other intangibles 18,024 17,265 14,183
Cumulative effect of accounting change, net 5,605 - -
Extraordinary items, net 1,072 - 595
Minority interest in (loss) earnings of subsidiary (668) (68) 613
Deferred income tax provision (benefits) 1,594 739 (442)
Provision for bad debts 1,828 728 1,129
Foreign exchange (gains) losses, net (1,225) 1,101 (27)
Equity in losses of joint ventures 65 136 50
Losses on disposal of fixed assets 371 578 100
Changes in operating assets and liabilities:
(Increase) decrease in accounts and unbilled
receivables (12,545) 2,393 (15,570)
Decrease (increase) in inventories 592 (2,401) 444
(Increase) decrease in prepaid expenses and
other assets (14,984) (202) (2,283)
Increase in deferred revenues 7,368 2,842 2,225
Increase (decrease) in accounts payable and
other current liabilities 7,281 (2,231) 3,567
Increase in due to affiliates 25 2,177 2,102
Increase (decrease) in income taxes payable 3,502 (190) (3,555)
Increase (decrease) in other liabilities 8,071 (329) 2,787
-------------- -------------- -------------
Net cash provided by operating activities 24,288 34,411 13,548
-------------- -------------- -------------
Cash flows from investing activities:
Capital expenditures (20,334) (18,949) (14,617)
Acquisitions of businesses, net of cash acquired (11,127) (3,905) (90,868)
-------------- -------------- -------------
Net cash used in investing activities (31,461) (22,854) (105,485)
-------------- -------------- -------------
Cash flows from financing activities:
Proceeds from issuance of convertible debentures 155,000
Proceeds of notes payable to affiliates 50,000 - -
Repayment of notes payable to affiliates (42,366)
Proceeds from bank long-term debt 905 - 120,000
Payment of long-term debt (147,477) (17,713) (70,978)
Payments to acquire treasury stock - - (2,968)
Proceeds from sale of treasury stock - - 6,110
Net borrowings under revolving credit facility 4,000 4,000 44,000
Proceeds from minority shareholder in joint venture - 361 -
Payment of deferred financing costs (2,782) (233) (1,272)
-------------- -------------- -------------
Net cash provide by (used in) financing activities 17,280 (13,585) 94,892
-------------- -------------- -------------
Effect of exchange rate changes
on cash and temporary investments (1,008) 690 (2,071)
-------------- -------------- -------------
Net increase (decrease) in cash and
temporary investments 9,099 (1,338) 884
Cash and temporary investments at beginning of period 25,327 26,665 25,781
-------------- -------------- -------------
Cash and temporary investments at end of period $ 34,426 $ 25,327 $ 26,665
============== ============== =============
Supplemental disclosures of cash flow information:
Cash payments for:
Interest $ 8,393 $ 10,525 $ 7,877
============== ============== =============
Income taxes $ 7,007 $ 8,345 $ 10,834
============== ============== =============
Cash refunds of income taxes $ 998 $ 842 $ 493
============== ============== =============
Noncash activities:
Installment agreement payable for internal use
software:
Operating activity (prepaid maintenance
contract) $ - $ 1,455 $ -
============== ============== =============
Investing activity (capitalized software) $ - $ 1,014 $ -
============== ============== =============
Obligation under capital lease (investing activity) $ - $ 127 $ -
============== ============== =============
</TABLE>
See accompanying notes to the consolidated financial statements.
53
<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" or "Berlitz") is a New York corporation organized in
1989. Its operations are conducted on a worldwide basis
through two business segments: Language Services (which
includes the Instruction, ELS/BOC, Publishing, Franchising,
Cross Cultural and Berlitz Kids sub-segments) and Berlitz
GlobalNET (formerly known as Translation Services).
Approximately 66% of its 1999 revenues are denominated in
currencies other than the U.S. dollar.
In February 1993, Benesse Corporation ("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 beneficially owns
7,213,138, or 75.7%, 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) expense, 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
generally recognized in the Instruction and Publishing
business segments when services are rendered to the customer
or when products are shipped, as applicable. Berlitz GlobalNET
contracts are accounted for under the percentage of completion
54
<PAGE>
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. 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. Cost
is determined using the weighted average cost method.
f) Deferred Financing Costs - Direct costs relating to
indebtedness are capitalized and amortized by the interest
method over the terms of the related debt. In 1999, the
Company incurred approximately $2,800 in deferred financing
costs associated with the issuance of the Convertible
Debentures and BHI Note (see Notes 9 and 10). Such costs will
be amortized over the 12-year life of the Convertible
Debentures and BHI Note.
g) Long-lived Assets - In accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to be Disposed
Of" ("SFAS 121"), long-lived assets (excluding financial
instruments and deferred tax assets) and certain identifiable
intangibles to be held and used are reviewed by the Company
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Such circumstances include, but are not limited
to, a significant decrease in the market value of an asset, a
significant change in the extent or manner in which an asset
is used or a significant physical change in an asset, a
significant adverse change in legal factors or in the business
climate that could affect the value of an asset or an adverse
action or assessment by a regulator, and the impact of
expected future revision dates on publishing rights.
If a review for recoverability is necessary, the Company
estimates the future cash flows expected to result from the
use of the asset. In performing these estimates, the Company
groups its assets at the lowest level for which there are
identifiable cashflows. If the sum of the expected future cash
flows (undiscounted and without interest charges) is less than
the carrying amount of the asset, an impairment loss is
recognized. Otherwise, an impairment loss is not recognized.
Any impairment loss recognized is measured as excess of
carrying amount of the asset over the fair value of the asset.
The fair value of an asset is the amount at which the asset
could be bought or sold in a current transaction between
willing parties, that is, other than in a forced or
liquidation sale.
Along with other long-lived assets, the Company applies the
standards of SFAS 121 to its publishing rights, excess of cost
over net assets acquired, and other intangibles.
55
<PAGE>
h) 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 straight-line methods.
i) 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.
j) 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.
k) Deferred Revenues - Deferred revenues primarily arise from the
prepayment of fees for classroom instruction and are
recognized in income as lessons are given.
On December 3, 1999, the Securities and Exchange Commission
("SEC") issued its Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"), which
provides its views on applying generally accepted accounting
principles to selected revenue recognition issues. The Company
adopted the provisions of SAB 101 effective January 1, 1999,
and, as a result, changed its method of accounting for
deferred revenues on lessons paid for but not expected to be
taken due to a period of student inactivity. Through December
1998, such amounts had been recognized in income based on
historical experience by country, generally after a student
had not attended a class for at least 60 days (or six months
in the case of a corporate contract). Refunds subsequently
issued were not material. Beginning in 1999, deferred revenues
on lessons paid for but not expected to be taken due to
student inactivity (generally at least 60 days or six months,
as applicable) are recognized in income when the obligation to
issue a refund has expired. In certain countries where the
refund obligation effectively never expires under local law,
such deferred revenues are recognized into income after one
year of student inactivity. The cumulative effect of the
accounting change resulted in a charge to 1999 earnings of
$5,605 (net of income tax benefit of $2,900and minority
interest expense of $189). On a proforma basis, the Company's
reported net income for 1998 and 1997 would have been reduced
by $100 ($0.01 per diluted share) and $0 ($0.00 per diluted
share), respectively.
l) Income Taxes - The Company recognizes 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 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.
56
<PAGE>
m) 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.
n) 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) expense, net" in
the Consolidated Statements of Operations.
o) 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, and income
taxes payable approximate fair value due to the short-term
nature of these instruments.
p) 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 offset, but do not
exceed, the quarterly effect of exchange rate changes on the
underlying net investments. When these agreements are
effective, realized and unrealized gains and losses (including
realized gains and losses on terminations of effective hedges)
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 the "Foreign
exchange (gains) losses, net" component of "Other (income)
expense, 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 (as well as realized gains and
losses on subsequent terminations of such ineffective hedges)
are recognized within the Consolidated Statement of
Operations.
During June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). The new standard requires companies to record
derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS 133 will be effective for
the calendar year beginning January 1, 2001. Based on the
Company's current activities, the new standard is not expected
to have a material impact on the Company's financial position
or results of operations.
57
<PAGE>
q) Internal-Use Software - On March 4, 1998, the American
Institute of Certified Public Accountants issued its Statement
of Position ("SOP") 98-1, which provides guidance on
accounting for the costs of computer software developed or
obtained for internal use. The Company has elected to apply
this SOP to all costs incurred on and after January 1, 1998.
Consequently, $330 of incremental internal-use software costs
had been capitalized for the twelve months ended December 31,
1998.
r) Franchises - Revenue from sales of franchises is recognized
when all material services and conditions relating to the sale
have been substantially performed, which may occur prior to
commencement of operations. Payments received on franchise
sales that have not been recognized as revenue are treated as
deferred revenues in the consolidated balance sheet. Direct
(incremental) costs related to such deferred revenues are
deferred until the revenue is recognized.
s) 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.
t) Reclassifications - Certain reclassifications have been made
in prior years' financial statements and notes to conform with
the 1999 presentation.
2. Acquisition of Businesses
The Company records acquisitions under the purchase method of
accounting, which contemplates an allocation of the acquisition cost to
the acquired company's assets and liabilities based on their estimated
fair values. The results of operations of the acquired companies are
included in the consolidated results of Berlitz from their respective
acquisition dates.
In June 1999, the Company acquired certain assets and operating
subsidiaries of Language Management International, Inc., a translations
services company. The purchase price was $8,000, plus a contingent
payment based on gross revenues for the twelve months ending June 30,
2000. The Company also incurred various transaction-related
expenditures and accrued expenses. Through December 31, 1999, the
Company's cumulative cash used in investing activities in connection
with this acquisition was approximately $9,100. In addition, at
December 31, 1999, the Company's accounts reflected $11,600 in excess
cost over net assets acquired (amortizable over 20 years) and $3,500 of
accrued current liabilities for transaction-related expenses and
contingencies.
The Company made several other acquisitions during 1999, none of which
were material.
In June 1998, the Company paid $2,007 to purchase the assets of a major
corporation's translations division in France, and recorded $1,519 in
excess cost over net assets acquired. In October 1998, the Company
purchased DeltaSoft, a software translations company in Poland, for
$558 (net of cash acquired), plus future payments (not to exceed $500)
that are contingent upon achieving certain revenue targets. In
connection with its
58
<PAGE>
acquisition of DeltaSoft, the Company recorded $780 in excess cost over
net assets acquired.
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 $95,000 (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. In January 1998,
in connection with the ELS Acquisition, the Company paid $1,340 related
to certain post-closing purchase price adjustments.
A summary of the purchase price allocation for the ELS acquisition
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 assets and (liabilities), net (9,402)
---------
Total net assets acquired 31,397
---------
Excess of cost over net assets acquired $ 66,803
=========
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 Statements 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.
Pro forma
Twelve Months
ended
Dec. 31,1997
------------------
Sales of services and products $ 446,373
Income before income taxes, minority
interest in earnings of subsidiary, and
extraordinary item 11,846
Income before extraordinary item 4,566
Extraordinary loss (6,721)
Net loss $ (2,155)
==================
Basic and Diluted earnings (loss) per
share:
Income before extraordinary loss $ 0.48
Extraordinary loss (0.70)
------------------
Loss per share $ (0.22)
==================
59
<PAGE>
The primary differences between the unaudited pro forma income
statement data and the amounts as reported are as follows:
Pro forma
Twelve Months
ended
Dec. 31, 1997
------------------
Pre-acquisition ELS revenues $ 49,164
Pre-acquisition ELS income before taxes 2,524
Decrease in ELS administrative expenses
not recurring after Berlitz acquisition 2,413
Increase in amortization of intangibles and
excess of cost over net assets acquired (3,333)
Increase in interest expense on
long-term debt (2,811)
Decrease in income tax expense 422
Increase in extraordinary loss, net of tax $ (436)
==================
3. Earnings Per Share
A reconciliation between Basic and Diluted earnings per share ("EPS")
computations for "(loss) income before extraordinary item and
cumulative effect of accounting change" as of December 31, 1999, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
average
number
of shares Per-share
Income outstanding amount
------------- ------------- -------------
<S> <C> <C> <C>
Year ended December 31, 1999:
-----------------------------
Basic EPS:
Loss before extraordinary item
and cumulative effect of accounting
change $ (5,325) 9,530 $ (0.56)
Effect of dilutive securities: - - -
------------- ------------- -------------
Diluted EPS:
Loss before extraordinary item
and cumulative effect of accounting
change $ (5,325) 9,530 $ (0.56)
============= ============= =============
Year ended December 31, 1998:
Basic EPS:
Income before extraordinary item $ 2,082 9,530 $ 0.22
Effect of dilutive securities:
Stock options - 32 -
Diluted EPS:
Income before extraordinary item $ 2,082 9,562 $ 0.22
============= ============== =============
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Weighted
average
number
of shares Per-share
Income outstanding amount
------------- ------------- -------------
<S> <C> <C> <C>
Year ended December 31, 1997:
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
============= ============== =============
<CAPTION>
4. Property and Equipment, net
December 31,
---------------------------------
Useful Lives 1999 1998
------------ ------------- -------------
(Years)
<S> <C> <C> <C>
Buildings and leasehold improvements 7 to 30 $ 30,243 $ 26,727
Furniture, fixtures and equipment 5 to 7 36,380 35,494
Internal use software 3 5,879 3,101
Land 1,347 1,352
------------- -------------
73,849 66,674
Less: accumulated depreciation
and amortization (26,100) (25,530)
------------- -------------
Total $ 47,749 $ 41,144
============= =============
5. Excess of Cost over Net Assets
Acquired, and Other Intangibles
December 31,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Excess of cost over net assets acquired $ 238,727 $ 225,315
Tradenames and trademarks 300,018 299,998
ELS sales agent network 31,700 31,700
Other 3,458 4,792
------------- -------------
573,903 561,805
Less: accumulated amortization (92,936) (75,573)
------------- -------------
Total $ 480,967 $ 486,232
============= =============
</TABLE>
61
<PAGE>
6. Other (Income) Expense, net
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Interest income on temporary investments $ (624) $ (750) $ (875)
Foreign exchange (gains) losses, net (1,225) 1,101 (27)
Equity in losses of joint ventures 65 136 50
Other non-operating taxes 730 794 415
Term Loan administration fee - 35 83
Losses and other costs of disposal of fixed
assets 371 826 100
Other interest expense (income), net 47 (173) (235)
Other expense (income), net 116 219 (126)
------------- ------------- -------------
Total other (income) expense, net $ (520) $ 2,188 $ (615)
============= ============= =============
</TABLE>
7. Income Taxes
The components of the deferred tax asset at December 31, 1999 and 1998
were as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Deferred tax assets:
Property and equipment depreciation $ 405 $ 262
Deferred revenue 2,305 2,206
Unrealized hedging losses 1,279 1,084
Accrued expenses 6,022 1,665
Foreign tax credits 303 3,105
Other tax credits 1,385 1,216
Net operating losses 3,130 3,635
------------- -------------
Total deferred tax assets 14,829 13,173
------------- -------------
Deferred tax liabilities:
Inventory (768) (564)
Joint ventures (100) (244)
Unrealized hedging gains (313) -
Publishing rights amortization (5,371) (5,624)
Other intangibles amortization (1,598) (975)
------------- -------------
Total deferred tax liabilities (8,150) (7,407)
------------- -------------
Net deferred tax assets 6,679 5,766
Valuation allowance (3,690) (4,444)
------------- -------------
Net deferred tax asset $ 2,989 $ 1,322
============= =============
</TABLE>
The valuation allowance relates primarily to tax benefits for net
operating losses, foreign tax credits, and accrued expenses for which
the realization of such benefits is considered unlikely.
The Company's effective tax rate for 1999 was 447.8%, compared with
73.8% and 54.3% in 1998 and 1997, respectively.
62
<PAGE>
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, 1999:
Current $ (427) $ 6,334 $ 214 $ 6,121
Deferred 818 999 (223) 1,594
-------------- -------------- -------------- -------------
Total $ 391 $ 7,333 $ (9) $ 7,715
============== ============== ============== =============
Year ended December 31, 1998:
Current $ (1,594) $ 5,833 $ 687 $ 4,926
Deferred 495 145 99 739
-------------- -------------- -------------- -------------
Total $ (1,099) $ 5,978 $ 786 $ 5,665
============== ============== ============== =============
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
============== ============== ============== =============
</TABLE>
* Pre-tax income from foreign operations of the Company was $17,163,
$17,451, and $17,730 for the years ended December 31, 1999, 1998 and
1997, respectively.
The provision (benefit) for deferred taxes is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Accrued liabilities $ (1,012) $ 1,340 $ 1,002
Foreign exchange 24 (351) (46)
Benefit of net operating loss 1,432 (672) (248)
Amortization of intangibles 369 717 (1,971)
Inventory 204 631 760
Tax credits 946 (546) -
Fixed assets (223) (305) -
Other, net (146) (75) 61
------------- ------------- -------------
Total $ 1,594 $ 739 $ (442)
============= ============= =============
</TABLE>
63
<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,
1999 1998 1997
------------- ------------- -------------
<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 3.0 (9.7) (17.6)
U.S. state and local income taxes,
net of Federal income taxes 4.2 6.6 2.6
Net domestic and foreign losses 129.7 9.3 7.5
Amortization of intangibles 262.5 54.9 33.6
Takedown of reserves (29.0) (22.7) -
Other, net 42.4 0.4 (6.8)
------------- ------------- -------------
Total 447.8% 73.8% 54.3%
============= ============= =============
</TABLE>
The Company has net operating loss carryforwards that relate to a
number of foreign and state jurisdictions that will generally expire on
various dates.
At December 31, 1999, accumulated earnings of foreign subsidiaries of
$36,835 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 $2,008 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:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Term Loan $ - $ 98,250
Revolving credit facility 4,000 48,000
Other 3,005 3,272
-------------- --------------
Total debt 7,005 149,522
Less current maturities (5,118) (20,135)
-------------- --------------
Long-term debt $ 1,887 $ 129,387
============== ==============
</TABLE>
Annual maturities of long-term debt outstanding as of December 31, 1999
are as follows: 2000, $5,118; 2001, $1,112; 2002, $147; 2003, $107: and
2004, $521.
As discussed in Notes 9 and 10, on March 11, 1999, the Company issued
Convertible Debentures, as well as a promissory note to Benesse
Holdings International, Inc. ("BHI"), and used a portion of the
resulting proceeds to repay in full all outstanding indebtedness under
the Term Loan and revolving credit facility (collectively, the "Bank
Facility"). The existing Bank Facility was then terminated.
64
<PAGE>
On March 31, 1999, the Company entered into a new $25,000 revolving
credit facility (the "Revolving Facility"), which expires in February
2002. At the option of the Company, outstanding borrowings under the
Revolving Facility bear interest at variable rates equal to either (i)
a base rate approximating the U.S. prime rate; or (ii) the rate offered
by certain reference banks to prime banks in the interbank Eurodollar
market, fully adjusted for reserves plus a margin ranging from 0.375%
to 0.5%; (such margin is dependent on a specified leverage ratio of the
Company.) In addition, a commitment fee ranging from .125% to .20% will
be charged on the available but unused amounts under the revolving
credit facility, depending on a specified leverage ratio. There were
$4,000 in outstanding borrowings under the Revolving Facility at
December 31, 1999. The average interest rate on outstanding borrowings
under the revolving facility for the period ending December 31, 1999
was approximately 5.9%.
The Revolving Facility is subject to standard affirmative covenants,
including financial and other informational reporting, compliance with
laws, maintenance of insurance, maintenance of properties, payment of
taxes, and preservation of corporate existence. The Revolving Facility
also includes limitations on the ability of the Company and its
subsidiaries to: (i) enter into mergers, acquisitions or sales of
assets; (ii) incur, create or permit to exist liens; (iii) incur
indebtedness and guarantee obligations; (iv) make loans or investments;
(v) enter into transactions with affiliates; (vi) prepay subordinated
indebtedness; and (vii) change the nature of the business conducted.
Financial covenants included within the Revolving Facility require the
Company to maintain certain levels of cash flow and impose limitations
on total and senior debt.
9. Convertible Debentures with Related Parties
On March 11, 1999 (the "Issue Date"), the Company's shareholders
approved the issuance of, and the Company issued, $155,000 aggregate
principal amount 12-year convertible debentures (the "Convertible
Debentures") in a private placement, pursuant to definitive investment
agreements (the "Investment Agreements") dated as of October 2, 1998.
The Convertible Debentures were issued as follows: a) $100,000
aggregate principal amount (the "Apollo Debentures") to two affiliates
of Apollo Management IV, L.P. ("Apollo"), a private investment firm;
and b) $55,000 aggregate principal amount (the "Benesse Debentures") to
Benesse Holdings International, Inc ("BHI"), the Company's majority
shareholder. The Convertible Debentures bear interest at 5% per annum,
payable semi-annually. Principal amounts outstanding under such
debentures are not due until March 2011, and the Company is not
required to establish a bond sinking fund for repayment of this
principal.
The Convertible Debentures are convertible at any time into shares of
the Company's common stock at a conversion price of $33.05 per share,
subject to anti-dilution related adjustments to offset the effects of
stock dividends and other changes in equity. The Company will, at all
times, reserve out of its authorized but unissued common stock the full
number of shares then issuable upon conversion of all outstanding
Convertible Debentures.
65
<PAGE>
The Apollo and Benesse Debentures each independently provide for
optional redemption by the Company, in whole but not in part, anytime
following 60 trading days after the third anniversary of the Issue
Date. If the average closing price of the Company's common stock for
the 30 trading days following the third anniversary of the Issue Date
exceeds $39.66 per share, the Company may redeem at par. Otherwise, if
the Convertible Debentures are redeemed, the Company shall pay a
redemption premium, expressed as a percentage of outstanding principal,
as follows: a) 4% for redemptions occurring in the fourth year after
issue; b) 2% for redemptions occurring in the fifth year after issue;
and c) 0% for redemptions occurring thereafter. All such redemptions
are subject to the holders' rights to first convert into common stock
of the Company.
The Convertible Debentures also allow Apollo and BHI to elect to
exchange their convertible debentures, in whole, into non-convertible,
7-year fixed rate debt (the "Fixed Rate Debentures"). Such election may
only be made if the average closing price of the Company's common stock
during the 30 trading days immediately preceding the third anniversary
of the Issue Date does not exceed $33.05. Furthermore, BHI may only
effect an exchange if Apollo does so. Upon the determination, by an
independent financial institution, of fixed interest rates that
accurately price the Fixed Rate Debentures at par under specified
circumstances at the time of the exchange, Apollo and BHI shall
irrevocably decide whether to proceed with their exchanges. If only
Apollo proceeds with such an exchange, the Company, no later than 150
days from the third anniversary of the Issue Date, must either a)
redeem all of the Apollo Debentures at par; or b) deliver the Fixed
Rate Debentures to Apollo. If both Apollo and BHI proceed with their
exchanges, the Company, within the same 150 day period, shall either a)
redeem both the Apollo and Benesse Debentures; or b) deliver the Fixed
Rate Debentures to both Apollo and BHI.
Principal amounts outstanding under the Fixed Rate Debentures would not
be payable until maturity, while interest payments would be made
semi-annually. The Fixed Rate Debentures' interest rate is subject to a
cap of a) the applicable U.S. treasury rate + 5% (not to exceed 13%) if
only Apollo receives Fixed Rate Debentures, or b) the applicable U.S.
treasury rate + 7% (not to exceed 14%) if both Apollo and BHI receive
Fixed Rate Debentures. The Fixed Rate Debentures may be redeemed by the
Company after the third anniversary of their issue upon payment of
principal amounts of the Fixed Rate Debentures and the following
redemption premiums, expressed as a percentage of the outstanding
principal amount: a) one half of the per annum interest rate for
redemptions occurring in the fourth year after issue; b) one quarter of
the per annum interest rate for redemptions occurring in the fifth year
after issue; and c) no premium for redemptions occurring thereafter.
Prior to the third anniversary of the Issue Date, if Benesse sells 80%
or more of the shares of Berlitz common stock owned directly or
indirectly by it on the Issue Date, the Company shall be required to
make an offer to repurchase for cash: i) the Apollo Debentures at a
value equal to 110% of the principal amount then outstanding; and ii)
the Benesse Debentures at a value equal to 101% of the principal amount
then outstanding. In addition, if at any time on or after the Issue
Date, a change of control, as defined in the Investment Agreements,
occurs but Benesse sells less than 80% of its shares, or if Benesse
sells 80% of its shares on or after the third anniversary of the Issue
Date, the Company shall be required to make an offer to repurchase for
cash the Convertible Debentures (but not the
66
<PAGE>
Fixed Rate Debentures) at a value equal to 101% of the principal amount
of the Convertible Debentures.
The Convertible Debentures are subject to standard affirmative
covenants, including financial and other informational reporting,
compliance with laws, maintenance of insurance, maintenance of
properties, payment of taxes, and preservation of corporate existence.
Negative covenants that the Convertible Debentures are subject to
include: prohibitions on certain mergers, consolidations and asset
transfers; forbearance from restrictions on rights of holders to
convert or exchange the Convertible Debentures; and, in the case of the
Apollo Debentures, forbearance from amending certain understandings
between the Company, Berlitz Japan, Inc. and Benesse.
The Investment Agreements include a number of other provisions,
including: a) the granting of certain demand and piggyback registration
rights to the holders of the Convertible Debentures; b) the granting of
a certain number of board seats to Apollo on the Company's Board of
Directors; c) the granting of approval rights to Apollo, at the
Company's Board level, over certain transactions; and d) certain
restrictions on the transferability of the Apollo Debentures. The
Company expanded its Board of Directors from 10 seats to 12 seats
effective March 11, 1999 and appointed two representatives of Apollo to
the Board.
10. Notes Payable to Affiliates
On March 11, 1999, BHI loaned $50,000 to the Company, evidenced by a
12-year fixed rate subordinated promissory note (the "BHI Note"). The
BHI Note bears interest for the first five years at 5.2% per annum,
and, thereafter, at a renegotiated fixed rate approximating LIBOR plus
a margin based on the Company's then existing leverage. Interest is
payable semiannually in cash, while principal repayment is deferred
until maturity. The BHI Note includes standard covenants similar to
those included in the Benesse Debentures. In the event of a change in
control, the BHI Note provides for redemption by the Company, at the
option of BHI, at a price equal to 101% of the note's principal amount.
The Company used a portion of the proceeds from the issuance of the BHI
Note and Convertible Debentures to repay in full its existing notes
payable to affiliates, which had arisen as follows:
o 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
67
<PAGE>
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.
o 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 6.34% at December 31, 1998.
11. Extraordinary Losses
On March 11, 1999, in connection with the issuance of the Convertible
Debentures and BHI Notes and the extinguishment of the Bank Facility,
the Company terminated its interest rate swap agreement, which hedged
the floating rate Bank Facility, for a cash payment of approximately
$1,100. As a consequence of the debt extinguishment, the Company has
recorded an extraordinary loss, net of tax benefit, of $2,154,
consisting primarily of the interest rate swap's fair market value and
existing unamortized deferred finance costs at the time of
extinguishment of the underlying debt.
In August 1997, in connection with the ELS Acquisition, the Company
refinanced and repaid its then existing indebtedness through borrowings
under a new bank facility. As a result of this early extinguishment of
debt, the Company incurred an extraordinary charge, net of taxes, of
$6,285 during 1997, consisting of prepayment penalties on the senior
notes and the write-off of unamortized deferred financing costs.
12. 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 $35,100,
$32,324 and $27,066, for the years ended December 31, 1999, 1998 and
1997, 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, 1999 are as
follows: 2000-$16,654; 2001-$13,979; 2002-$11,137; 2003-$10,767;
2004-$9,727; and an aggregate of $22,825 thereafter.
Legal Proceedings
68
<PAGE>
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, results of operations, or cashflows of the
Company.
Severance Agreements
The Company has severance agreements with four 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
$1,600.
Consulting agreements
The Company has consulting agreements with two officers who retired
from the Company in 1999. In the aggregate, the future liability under
these agreements at December 31, 1999 is approximately $225, which will
be amortized over the remaining lives of the related agreements.
License agreement
On July 1, 1999, Berlitz entered into a license agreement (the
"Agreement") with Children's Television Workshop ("CTW"). Pursuant to
this license agreement, CTW has agreed to create and produce, at its
expense, a television series, entitled "Sesame English", which will
initially consist of 52 15-minute episodes which will be complemented
by instruction curricula and materials developed by Berlitz. In
addition, Berlitz was granted certain rights by CTW, including the
exclusive right to use certain Sesame Street and Sesame English names,
logos and characters in connection with language instructional
products, services and schools.
The Agreement, covering an initial term of five years, provides for
payments to CTW of $4,000 at inception and an aggregate of $6,000 in
minimum guaranteed royalties paid in installments over the initial term
of the agreement. The $4,000 payment at inception may be applied
against future royalties due in excess of the minimum guarantee. In the
event that Berlitz enters into any sublicenses or other third-party
arrangements with a sublicensee for language instruction services in
Japan, such minimum guaranteed royalties shall be reduced dollar for
dollar, up to a maximum of $2,000, from CTW's share of payments from
such Japanese sublicensees. If certain conditions are met, Berlitz may
extend the Agreement for another five years in exchange for annual
minimum guaranteed royalties equal to the greater of $2,000, or an
amount equal to 80% of the royalties earned by CTW during the fifth
year of the initial term. Berlitz has recorded the commitment of $6,000
within "Other liabilities", and a deferred asset of $10,000 within
"Other assets".
As part of its CTW and general marketing efforts, Berlitz is in the
process of pursuing opportunities to expand the use of the Internet for
the marketing and distribution of its products and services.
69
<PAGE>
13. 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 1999 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>
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 fair value. When these agreements are
effective as hedges, 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.
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 in 1997 which
provided for quarterly exchanges of interest on an amortizing
"notional" (i.e., theoretical) amount originally set at $66,000. In
exchange for U.S. dollar denominated interest receipts based on
variable LIBOR, the Company would make U.S. dollar denominated interest
payments based on a fixed rate of 6.30%. The notional amount amortized
proportionately with the scheduled principal payments under the Bank
Facility. This interest rate swap agreement was terminated on March 11,
1999 (see Note 11).
The Company accounted for these interest rate swap transactions under
the accrual method of accounting, whereby: a) each net receipt/payment
was recognized in earnings during the period to which the
receipt/payment related, as a yield adjustment to "Interest expense on
long-term debt"; and b) there was no recognition on the balance sheet
for the derivative's fair value.
70
<PAGE>
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 1999 and 1998, balances in these accounts averaged
28% and 35% 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. For Berlitz GlobalNET, 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 $6,500 and $9,500 at December 31, 1999 and 1998,
respectively. Subsequent collections of the December 1999 balances have
aggregated $5,000 through March 15, 2000. Publishing 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 4% and 6% of the Company's total accounts
receivable balance before allowances at December 31, 1999 and 1998,
respectively.
d) Fair values of financial instruments
The carrying amounts and estimated fair values of the Company's
financial instruments at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and temporary investments $ 34,426 $ 34,426 $ 25,327 $ 25,327
Currency coupon swap agreements 829 829 - -
Liabilities:
Long-term debt, including
current maturities 7,005 7,005 149,522 149,522
Convertible Debentures 155,000 145,235 - -
Notes payable to affiliates 50,000 30,505 42,755 35,623
Currency coupon swap agreements 3,654 3,654 3,098 3,098
Interest rate swap agreement - - - 1,713
</TABLE>
71
<PAGE>
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
Convertible Debentures are estimated based on current interest rates
and the Company's stock price volatility. 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.
14. Other Related Party Transactions
a) Treasury shares
On April 29, 1997, the Company and BHI, a wholly owned subsidiary of
Benesse , signed a definitive contract whereby the Company agreed to
sell to BHI 250,000 shares of the Company's Common for $6,110, or
$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 Section 4(2) of the Securities Act of
1933. The proceeds of the sale were used for general corporate
purposes.
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.
b) 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. The premiums on the D&O policy are allocated
60% to Benesse and 40% to the Company. However, for 1997, the premium
for entity coverage 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. The Company maintains 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.
72
<PAGE>
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 of the Company's Board of
Directors.
15. 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 $320, $1,590 and $1,417 was paid for 1999, 1998 and
1997, respectively, pursuant to the Short-Term Plan.
The Company's 1996 New Long-Term Executive Incentive Compensation Plan
(the "1996 LTIP") provided for potential cash awards in 1999 to key
executive employees and the Chairman of the Board of the Company if
certain financial goals were met for the year ended December 31, 1998.
For the twelve months ended December 31, 1999, 1998 and 1997, the
Company recorded expenses of $55, $1,193 and $1,289, respectively,
related to the 1996 LTIP. In March 1999, the Company paid $2,855 in
awards under the 1996 LTIP.
In June 1999, the Company's shareholders approved the adoption of the
Berlitz 1999 Long-Term Executive Incentive Compensation Plan (the "1999
LTIP"). The 1999 LTIP provides for potential cash awards (currently
expected to range from $695 to $5,000 in the aggregate) to be paid to
senior management in 2002 if certain revenue, earnings and cash flow
targets are achieved for the three-year period from 1999 to 2001. The
1999 LTIP is intended to be an unfunded plan, and the Company is not
required to establish any fund or segregate any assets for payments
under it. In 1999, the Company recorded $695 in expense related to the
1999 LTIP.
The Company's 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 503,225. The Company has reserved 503,225 of its treasury
shares for use under the Plan.
<TABLE>
<CAPTION>
Stock option activity is as follows:
Number of shares Exercise price
---------------- --------------
<S> <C> <C>
Options outstanding at January 1, 1997 - -
Granted:
June 30, 1997 (the "June 1997 Options") 327,200 $24.9375
December 9, 1997 46,190 $26.5625
Exercised - -
---------------- --------------
Options outstanding at December 31, 1997 373,390 $24.9375 - $26.5625
Granted:
December 4, 1998 25,740 $30.00
Withdrawals (1,200) $26.5625
Exercised - -
---------------- --------------
Options outstanding at December 31, 1998 397,930 $24.9375 - $30.00
Granted: January 11, 1999 20,000 $28.3125
Expired Relinquishment Options (50,000) $24.9375
Exercised
---------------- --------------
Options outstanding at December 31, 1999 367,930 $24.9375 - $30.00
================ ==============
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Options exercisable at December 31, 1999 288,000 $24.9375 - $26.5625
================ ==============
Options exercisable at December 31, 1998 10,800 $26.5625
================ ==============
Options exercisable at December 31, 1997 12,000 $26.5625
================ ==============
</TABLE>
In general, options granted under the Plan expire on the seventh
anniversary of the grant date and may not be exercised prior to the
third anniversary of the grant date, at which time they become fully
exercisable. Unexercised 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.
Included within the June 1997 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 June 1997 Options
were not exercisableprior to January 1, 1999. On such date, they became
fully exercisable until their normal expiration on June 29, 2004,
except for the Relinquishment Options, which expired on December 31,
1999.
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 since their
exercise prices have been equal to the closing price of the Company's
common stock on the New York Stock Exchange on the date of grant. 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 for the year-to-date periods ended December 31, 1999,
1998 and 1997 would have been decreases of $142, $1,032 and $554,
respectively. This would have resulted in pro forma decreases in
earnings per share for the year-to-date periods ended December 31,
1999, 1998 and 1997 of $0.01, $0.11 and $0.06, respectively.
The fair value of each option grant during 1999, 1998 and 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:
74
<PAGE>
<TABLE>
<CAPTION>
June 1997 June 1997 December December January 1999
Grant - Grant - 1997 Grant 1998 Grant Grant
Relinquish- All other
ment options
Options
--------- --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Weighted average assumptions used to
estimate fair value:
Dividend yield 0.00% 0.00% 0.00% 0.00% 0.00%
Expected volatility 22.00% 22.00% 21.00% 20.00% 20.00%
Risk free interest rate 5.79% 6.08% 5.88% 4.31% 4.76%
Expected lives in years 1.5 4.25 5.0 5.0 5.0
Fair value of each option granted $3.71 $7.37 $8.43 $8.29 $8.11
</TABLE>
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 was no activity related to these plans during 1997, 1998
or 1999, and there are no related incentives or shares outstanding at
December 31, 1999.
16. Thrift and Retirement Plans
The Berlitz International, Inc. Retirement Savings Plan (the "Berlitz
Plan") is a defined contribution 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 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
reaching age 21 and completing of 1000 hours of service within a
twelve-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 and
a defined benefit plan for Berlitz-Japan, was $1,812, $1,521 and $978
for the years ended December 31, 1999, 1998, and 1997, 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 15), 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
participant who retires at age 60 or above, with at least 5 years of
service with the Company.
75
<PAGE>
The retirement income/disability retirement benefits ("Pension
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,
generally 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, generally not to exceed 30%. The
Company will also provide each retired participant and their surviving
spouse with medical coverage ("Medical Benefits") 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 maintained on the participants.
In 1999, the Company's Board of Directors approved increases in the
retirement benefit percentage to 40% for certain participants based on
current market factors.
In 1998, the Company established an irrevocable grantor trust (the
"Trust") and contributed life insurance policies and annuity contracts
on the SERP participants to the Trust. Subject to the claims of the
Company's general creditors in the event of the Company's insolvency,
the Trust's principal and income shall be held therein until paid to
the SERP participants in such manner and at such times as specified in
the SERP. It is the intention of the Company that the Trust constitutes
an unfunded arrangement and does not affect the status of the SERP as
an unfunded plan. Included within "Other assets" at December 31, 1999
is $3,395 held in the Trust.
The following tables set forth certain information for the SERP:
<TABLE>
<CAPTION>
Pension Benefits Medical Benefits
---------------- ----------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Benefit obligation at beginning of $ 5,069 $ 3,575 $ 3,188 $ 1,006 $ 1,205 $ 1,435
year
Service cost 552 506 415 118 75 107
Interest cost 324 290 220 76 57 72
Net benefit payments (93) - - (26) (16) (13)
Actuarial loss (gain) (115) 698 (248) 38 (315) (396)
-------- -------- -------- -------- -------- --------
Benefit obligation at end of year 5,737 5,069 3,575 1,212 1,006 1,205
Plan asset at fair value - - - - - -
-------- -------- -------- -------- -------- --------
Funded status (5,737) (5,069) (3,575) (1,212) (1,006) (1,205)
Unrecognized prior service cost 1,967 2,146 2,324 522 681 840
Unrecognized actuarial loss (gain) 245 360 (337) (536) (610) (361)
-------- -------- -------- -------- -------- --------
Net amount recognized $ (3,525) $ (2,563) $ (1,588) $ (1,226) $ (935) $ (726)
======== ======== ======== ======== ======== ========
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits Medical Benefits
---------------- ----------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Amounts recognized in the
consolidated balance sheet:
Accrued benefit liability $ (4,981) $ (4,177) $ (2,791) $ (1,226) $ (935) $ (726)
Intangible asset 1,456 1,614 1,203 - - -
-------- -------- -------- -------- -------- --------
Net amount recognized $ (3,525) $ (2,563) $ (1,588) $ (1,226) $ (935) $ (726)
======== ======== ======== ======== ======== ========
Weighted average assumptions as
of December 31:
Discount rate 7.5% 6.5% 7.0% 7.5% 6.5% 7.0%
Rate of compensation increases 4.0% 4.0% 4.0% n/a n/a n/a
Assumed health care cost trend used
in measuring the accumulated
postretirement benefit obligation:
Beginning rate: n/a n/a n/a 12.0% 12.9% 13.8%
Leveling to an ultimate rate of: n/a n/a n/a 5.0% 5.0% 5.0%
Over: n/a n/a n/a 9 Years 10 years 10 years
</TABLE>
The components of net periodic benefit costs recognized for the years
ended December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Medical Benefits
---------------- ----------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 552 $ 506 $ 415 $ 118 $ 75 $ 107
Interest cost 324 290 220 76 57 72
Amortization of prior service cost 179 179 179 159 159 159
Actuarial gains - - - (35) (66) (35)
-------- -------- -------- -------- -------- --------
Net periodic postretirement
benefit cost $ 1,055 $ 975 $ 814 $ 318 $ 225 $ 303
======== ======== ======== ======== ======== ========
</TABLE>
Assumed health care cost trends rates can have a significant effect on
amounts reported for the Medical Plan. A one-percentage-point change in
the assumed health care cost trend rates would have the following
effects:
<TABLE>
<CAPTION>
1% Point 1% Point
Increase Decrease
----------------- -----------------
<S> <C> <C>
Effect on total of service and interest cost components $30 $(25)
for the period ending December 31, 1999
Effect on accumulated postretirement benefit obligation 188 (158)
as of December 31, 1999
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Berlitz-Japan also maintains a defined benefit plan, for which certain
information is set forth in the following tables:
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Benefit obligation at beginning of year $ 8,745 $ 7,552 $ 7,866
Service cost 819 745 816
Interest cost 338 276 291
Net benefit payments (463) (974) (490)
Actuarial (gain) (330) - -
Foreign currency exchange rate changes 1,009 1,146 (931)
-------- -------- --------
Benefit obligation at end of year 10,118 8,745 7,552
Plan asset at fair value 7,060 5,895 5,167
-------- -------- --------
Funded status (3,058) (2,850) (2,385)
Unrecognized prior service cost 2,250 2,210 2,080
Unrecognized actuarial (gain) (412) (234) (203)
-------- -------- --------
Net amount recognized $ (1,220) $ (874) $ (508)
======== ======== ========
Reconciliation of fair value of plan assets:
Balance at beginning of period $ 5,895 $ 5,167 $ 4,685
Return on plan assets 124 184 208
Employer contributions 801 745 802
Benefits paid (463) (974) (490)
Foreign currency exchange rate changes 703 773 (38)
-------- -------- --------
Balance at end of period $ 7,060 $ 5,895 $ 5,167
======== ======== ========
Amounts recognized in the consolidated balance sheet:
Accrued benefit liability $ (2,208) $ (3,034) $ (2,385)
Intangible asset 988 2,160 1,877
-------- -------- --------
Net amount recognized $ (1,220) $ (874) $ (508)
======== ======== ========
Weighted average assumptions as of December 31:
Discount rate 4.5% 4.0% 4.0%
Expected long-term rate of return on plan assets 3.4% 3.6% 4.0%
Rate of compensation increases 0.0% 0.0% 0.0%
</TABLE>
The components of net periodic benefit costs recognized for the years
ended December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost $ 819 $ 745 $ 816
Interest cost 338 276 291
Expected return on assets (207) (184) (208)
Amortization of prior service cost 185 160 172
-------- -------- --------
Net periodic postretirement benefit cost $ 1,135 $ 997 $ 1,071
======== ======== ========
</TABLE>
17. 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.
78
<PAGE>
18. Operating Segments
Effective January 1, 1999, the Company's operations are principally
conducted through two segments: Language Services (consisting of the
Instruction, ELS/BOC (i.e., ELS Educational Services, Inc. ("ELS") and
Berlitz on Campus ("BOC")), Publishing, Franchising, and Cross Cultural
sub-segments), and Berlitz GlobalNET (formerly Translation Services).
These are strategic business units that offer different products and
services and are managed separately by senior management due to
different technology and marketing strategies.
Within Language Services, the Instruction sub-segment (through the use
of proprietary methods and materials) provides predominantly live
language education in virtually all spoken languages. The ELS/BOC
sub-segment provides intensive English education programs. The
Publishing sub-segment offers a wide range of publishing products such
as dictionaries, phrase books, travel guides and self-study language
materials, including CD-ROMs and audiocassettes. The Franchising
sub-segment sells Berlitz language center franchises to independent
franchisees in certain locations. The Cross Cultural sub-segment
complements language study by providing expatriates with detailed
practical and cultural information about the countries to which they
are relocating.
Berlitz GlobalNET provides high quality technical documentation
translation, interpreting and rapidly expanding offerings in eBusiness
Globalization services including Web localization and multilingual
content management. Language-related services are offered for the
entire business cycle, from globalization strategy and consulting, to
creating and translating content, designing, implementing and
maintaining multilingual Websites.
The Company evaluates operating segment performance based on EBITA,
defined as sales of services and products, less costs of services and
products sold and selling, general and administrative expenses. EBITA
includes depreciation and similar non-cash charges, but excludes
amortization of publishing rights, excess of cost over net assets
acquired, and other intangibles.
The following tables present information about reported segment profit
or loss and segment assets, and reconcile reportable segment revenues,
profit or loss, and assets to the Company's consolidated totals. The
prior years information in these tables has been restated to reflect
the change to two operating segments, effective January 1, 1999.
79
<PAGE>
<TABLE>
<CAPTION>
Twelve Months ended December 31,
------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Revenues from external customers:
Language Services:
Instruction $ 277,081 $ 267,923 $ 260,389
ELS/BOC 56,285 65,683 36,367
Publishing 12,936 14,787 13,634
Franchising 1,439 1,270 1,039
Cross Cultural 2,470 2,404 1,959
Other 620 - 49
------------- ------------- -------------
Total Language Services 350,831 352,067 313,437
Berlitz GlobalNET 95,350 84,236 83,772
------------- ------------- -------------
Total external revenues 446,181 436,303 397,209
------------- ------------- -------------
Intersegment revenues:
Language Services:
Instruction (2) 19 6
Franchising 319 516 908
------------- ------------- -------------
Total Language Services 317 535 914
Berlitz GlobalNET 11 20 3
------------- ------------- -------------
Total intersegment revenues 328 555 917
------------- ------------- -------------
Total revenues for reportable segments 446,509 436,858 398,126
Elimination of intersegment revenues (328) (555) (917)
------------- ------------- -------------
Total consolidated revenues $ 446,181 $ 436,303 $ 397,209
============= ============= =============
Income before taxes, minority interest,
extraordinary item, and cumulative effect change:
Operating Profit:
Segment EBITA:
Language Services:
Instruction $ 54,950 $ 56,732 $ 56,024
ELS/BOC 2,300 6,229 5,096
Publishing 681 1,334 600
Franchising 449 37 (725)
Cross Cultural 523 574 465
Language Service overhead expenses and other (20,594) (19,381) (19,005)
------------- ------------- -------------
Total Language Services 38,309 45,525 42,455
Berlitz GlobalNET 6,022 8,260 7,660
General corporate HQ expenses (14,129) (13,471) (12,871)
------------- ------------- -------------
Total EBITA 30,202 40,314 37,244
------------- ------------- -------------
Amortization of publishing rights, excess of cost over
net assets acquired, and other intangibles:
Language Services:
Instruction (10,236) (10,127) (10,289)
ELS/BOC (5,417) (5,393) (1,935)
Publishing (399) (398) (402)
Cross Cultural (11) (11) (11)
------------- ------------- -------------
Total Language Services (16,063) (15,929) (12,637)
Berlitz GlobalNET (1,961) (1,336) (1,546)
------------- ------------- -------------
Total intangible amortization (18,024) (17,265) (14,183)
------------- ------------- -------------
Total operating profit 12,178 23,049 23,061
Interest expense on long-term debt (2,005) (10,956) (8,523)
Interest expense on Convertible Debentures (6,424 - -
Interest expense to affiliates (2,547) (2,226) (2,100)
Other income (expense), net 520 (2,188) 615
------------- ------------- -------------
Total consolidated income before taxes,
minority interest, extraordinary item, and
cumulative effect change $ 1,722 $ 7,679 $ 13,053
============= ============= =============
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
Assets: December 31,
------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Language Services:
Instruction $ 433,526 $ 409,613 $ 423,183
ELS/BOC 106,210 111,980 120,694
Publishing 23,122 23,982 21,410
Franchising 8,031 6,553 4,649
Other 1,509 18,092 1,023
------------- ------------- -------------
Total Language Services 572,398 570,220 570,959
Berlitz GlobalNET 102,684 85,183 82,256
General corporate 27,365 12,556 9,288
Eliminations of intersegment receivables (5,427) (4,498) (988)
------------- ------------- -------------
Total consolidated assets $ 697,020 $ 663,461 $ 661,515
============= ============= =============
Twelve Months ended December 31,
------------------------------------------------
1999 1998 1997
---- ---- ----
Depreciation:
Language Services:
Instruction $ 5,005 $ 4,431 $ 4,032
ELS/BOC 1,032 958 577
Publishing 1,855 1,244 722
Franchising 19 11 8
Language Service overhead and other 476 469 670
------------- ------------- -------------
Total Language Services 8,387 7,113 6,009
Berlitz GlobalNET 2,014 2,141 2,044
General corporate 995 537 511
------------- ------------- -------------
Total consolidated depreciation $ 11,396 $ 9,791 $ 8,564
============= ============= =============
Capital expenditures:
Language Services:
Instruction $ 14,249 $ 10,492 $ 8,689
ELS/BOC 935 904 406
Publishing 2,135 2,472 2,771
Franchising 32 4 3
------------- ------------- -------------
Total Language Services 17,351 13,872 11,869
Berlitz GlobalNET 1,859 3,125 2,167
General corporate 1,124 1,952 581
------------- ------------- -------------
Total consolidated capital expenditures $ 20,334 $ 18,949 $ 14,617
============= ============= =============
</TABLE>
The following tables present certain information about the geographic
areas in which the Company operates:
<TABLE>
<CAPTION>
Twelve Months ended December
------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues from external customers:
United States $ 144,153 $ 158,676 $ 126,172
Japan 72,256 58,290 61,892
Germany 41,982 41,497 37,324
Ireland 23,307 23,186 28,066
France 20,788 17,754 14,459
Brazil 14,264 21,007 20,823
Other foreign countries 129,431 115,893 108,473
------------- ------------- -------------
Total $ 446,181 $ 436,303 $ 397,209
============= ============= =============
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
Twelve Months ended December
------------------------------------------------
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Operating profit:
EBITA :
United States $ 13,092 $ 20,676 $ 18,356
Japan 8,127 6,105 8,943
Germany 4,918 5,738 3,488
Ireland 1,162 1,955 2,989
France 2,154 1,296 1,090
Brazil 1,433 3,192 3,121
Other foreign countries 17,645 18,401 15,984
General corporate expenses (18,329) (17,049) (16,727)
------------- ------------- -------------
Total EBITA 30,202 40,314 37,244
------------- ------------- -------------
Amortization of publishing rights, excess of cost over
net assets acquired, and other intangibles:
United States (15,072) (14,352) (10,891)
Japan (1,411) (1,196) (1,294)
Germany (259) (259) (269)
Ireland (47) (74) (347)
France (282) (221) (159)
Brazil (64) (64) (64)
Other foreign countries (889) (1,099) (1,159)
------------- ------------- -------------
Total intangible amortization (18,024) (17,265) (14,183)
------------- ------------- -------------
Intercompany royalties:
United States 19,189 17,285 17,449
Japan (6,618) (4,253) (5,684)
Germany (1,579) (1,508) (1,386)
Ireland (1,163) (1,148) (1,399)
France (1,022) (1,184) (919)
Other foreign countries (8,807) (9,192) (8,061)
------------- ------------- -------------
Total intercompany royalties - - -
------------- ------------- -------------
Total operating profit $ 12,178 $ 23,049 $ 23,061
============= ============= =============
82
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Long lived assets: Property &
Equipment Other Intangible
net Assets* Assets Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
December 31, 1999:
United States $ 10,202 $ 7,801 $ 397,674 $ 415,677
Japan 11,186 152 51,989 63,327
Germany 3,448 - 8,089 11,537
France 1,853 - 5,949 7,802
Brazil 2,843 - 2,492 5,335
Ireland 1,276 1 1,510 2,787
Other foreign countries 12,362 529 27,710 40,601
General corporate and HQ 4,579 13,910 1,456 19,945
------------- ------------- ------------- -------------
Total $ 47,749 $ 22,393 $ 496,869 $ 567,011
============= ============= ============= =============
December 31, 1998:
United States $ 8,414 $ 7,335 $ 402,507 $ 418,256
Japan 8,685 97 49,165 57,947
Germany 3,008 - 9,443 12,451
France 1,783 - 7,192 8,975
Brazil 3,250 - 2,145 5,395
Ireland 1,562 151 1,793 3,506
Other foreign countries 10,533 192 29,173 39,898
General corporate 3,909 2,557 1,596 8,062
------------- ------------- ------------- -------------
Total $ 41,144 $ 10,332 $ 503,014 $ 554,490
============= ============= ============= =============
December 31, 1997:
United States $ 6,363 $ 5,250 $ 421,766 $ 433,379
Japan 5,806 - 43,925 49,731
Germany 2,823 - 9,020 11,843
France 1,511 - 5,385 6,896
Brazil 2,219 - 2,208 4,427
Ireland 2,003 33 1,796 3,832
Other foreign countries 9,477 216 30,471 40,164
General corporate 1,896 1,727 1,596 5,219
------------- ------------- ------------- -------------
Total $ 32,098 $ 7,226 $ 516,167 $ 555,491
============= ============= ============= =============
</TABLE>
*Excludes financial instruments and deferred tax assets.
83
<PAGE>
19. Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
March 31 June 30 Sept 30 Dec 31 Year
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1999:
Sales of services and products $ 104,447 $ 111,194 $ 119,357 $ 111,183 $ 446,181
Operating profit (loss) (654) 4,197 5,685 2,950 12,178
(Loss) income before income taxes,
minority interest, extraordinary
item and cumulative effect change (2,561) 1,445 2,496 342 1,722
Extraordinary item (2,140) (4) (9) (1) (2,154)
Cumulative effect change (5,605) - - (5,605)
Net (loss) (10,349) (310) (1,103) (1,322) (13,084)
Basic and diluted loss
per share $ (1.08) $ (0.03) $ (0.12) $ (0.14) $ (1.37)
============= ============= ============= ============ ============
1998:
Sales of services and products $ 104,656 $ 107,509 $ 114,396 $ 109,742 $ 436,303
Operating profit 3,250 6,322 8,246 5,231 23,049
Income before income taxes,
and minority interest 297 2,216 4,461 705 7,679
Net income 23 700 923 436 2,082
Basic and diluted earnings
per share $ 0.00 $ 0.07 $ 0.10 $ 0.05 $ 0.22
============= ============= ============= ============ ============
</TABLE>
84
<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, 1999 $ 2,295 $ 1,828 $ (884) $ (137) $ 3,102
============ =============== ================ =============== =============
Year Ended December 31, 1998 $ 2,415 $ 728 $ (888) $ 40 $ 2,295
============ =============== ================ =============== =============
Year Ended December 31, 1997 $ 1,914 $ 1,129 $ (465) $ (163) $ 2,415
============ =============== ================ =============== =============
</TABLE>
(1) Principally represents net losses incurred in the ordinary course of
business and chargeable against the allowance.
(2) Principally represents foreign currency translation.
85
<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 incorporated herein by reference to the
section entitled "Security Ownership of Management and Others" in the 2000 Proxy
Statement.
ITEM 11. Executive Compensation
The information required by this item is incorporated herein by reference to the
section entitled "Executive Compensation and Related Information" in the 2000
Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference to the
section "Security Ownership of Management and Others" in the 2000 Proxy
Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the
section entitled "Certain Relationships and Related Transactions" in the 2000
Proxy Statement.
86
<PAGE>
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 44.
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.
3.3 Amended and Restated By-laws of the registrant, adopted May 11,
1993. Exhibit 1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993 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.
87
<PAGE>
10.1 Credit Agreement, dated as of January 29, 1993, among the
registrant, the several lenders 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 10-K 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 10-K 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 10-K 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.
88
<PAGE>
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 10-K 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 10-K 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 10-K 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.
89
<PAGE>
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 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 10-K 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, 1996 is incorporated by reference
herein.
90
<PAGE>
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 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.
91
<PAGE>
10.38 Indemnification Agreement between the Company and each of Ellen
Adler, Perry Akins, Mark Harris, Brian Kelly, James Lewis, Lionel
Mellet and Kazuo Yamakawa. Exhibit 10.38 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 is
incorporated by reference herein.
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. Exhibit 10.41 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 is incorporated by
reference herein.
10.42 Employment Agreement, dated June 25, 1997, between the Company and
James Lewis. Exhibit 10.42 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 is incorporated by
reference herein.
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. Exhibit 10.43 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 is incorporated by
reference herein.
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.
92
<PAGE>
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 thereto from time to time.
Exhibit 10.49 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 is incorporated by reference herein.
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.
10.52 Form of Purchase Agreement (for $100 million 5% Convertible
Exchangeable Subordinated Debentures due 2010, Series A), dated as
of October 2, 1998, between Berlitz International, Inc., Apollo
Investment Fund IV, L.P. and Apollo Overseas Partners, IV, L.P..
Exhibit 1 of the Company's Form 8-K dated October 6, 1998 is
incorporated by reference herein.
10.53 Form of Purchase Agreement (for $55 million 5% Convertible
Exchangeable Subordinated Debentures due 2010, Series B), dated as
of October 2, 1998, between Berlitz International, Inc., and
Benesse Holdings International, Inc. Exhibit 2 of the Company's
Form 8-K dated October 6, 1998 is incorporated by reference
herein.
10.54 Form of Registration Rights Agreement, dated as of October 2,
1998, between Berlitz International, Inc., and Apollo Management
IV, L.P. on behalf of Apollo Investment Fund IV, L.P. and Apollo
Overseas Partners, IV, L.P. Exhibit 3 of the Company's Form 8-K
dated October 6, 1998 is incorporated by reference herein.
10.55 Form of Registration Rights Agreement, dated as of October 2,
1998, between Berlitz International, Inc., and Benesse Holdings
International, Inc. Exhibit 4 of the Company's Form 8-K dated
October 6, 1998 is incorporated by reference herein.
93
<PAGE>
10.56 Form of Investors Agreement between Berlitz International, Inc.,
and Apollo Management IV, L.P. on behalf of Apollo Investment Fund
IV, L.P. and Apollo Overseas Partners, IV, L.P. Exhibit 5 of the
Company's Form 8-K dated October 6, 1998 is incorporated by
reference herein.
10.57 Form of Voting Agreement, dated as of October 2, 1998, between
Benesse Corporation, and Apollo Management IV, L.P. on behalf of
Apollo Investment Fund IV, L.P. and Apollo Overseas Partners, IV,
L.P. Exhibit 6 of the Company's Form 8-K dated October 6, 1998 is
incorporated by reference herein.
10.58 Form of $50 million Subordinated Promissory Note from Berlitz
International, Inc. to Benesse Holdings International, Inc.
Exhibit 8 of the Company's Form 8-K dated October 6, 1998 is
incorporated by reference herein, except that initial interest
rate, as defined in that Exhibit, has changed to 5.2% per annum
from 5.9% per annum.
10.59 Form of Indemnification Agreement between the Company and each of
Laurence Berg, Takuro Isoda, Mako Obara, and Antony Ressler.
Exhibit 10.59 of the Company's Form 10-K for the year ended
December 31, 1998 is incorporated by reference herein.
10.60* Amendment No. 1 to Berlitz International, Inc. Supplemental
Executive Retirement Plan.
10.61* Form of Amendment No. 1 to the Credit Agreement dated as of March
31, 1999 between the registrant, Bank of America, N.A., and the
Lenders party thereto from time to time.
21* List of subsidiaries of the registrant.
23* Consent of Independent Auditors.
27* Financial Data Schedule.
*Filed herewith.
B. Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
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.
94
<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 27, 2000
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 27, 2000
- ----------------------
Soichiro Fukutake
/s/ HIROMASA YOKOI Vice Chairman of the Board, March 27, 2000
- ---------------------- Chief Executive Officer,
Hiromasa Yokoi and President
(Principal Executive Officer)
/s/ JAMES LEWIS Executive Vice President, Chief March 27, 2000
- ---------------------- Operating Officer, Berlitz GlobalNET,
James Lewis and Director
/s/ MAKO OBARA Executive Vice President, Chief March 27, 2000
- ---------------------- Operating Officer, Worldwide Language
Mako Obara Services, and Director
/s/ ROBERT MINSKY Executive Vice President, Corporate March 27, 2000
- ---------------------- Planning and Marketing, and Director
Robert Minsky
/s/ HENRY D. JAMES Executive Vice President, March 27, 2000
- ---------------------- Chief Financial Officer, and Director
Henry D. James (Principal Financial Officer)
/s/ LAURENCE BERG Director March 27, 2000
- ----------------------
Laurence Berg
/s/ TAKURO ISODA Director March 27, 2000
- ----------------------
Takuro Isoda
/s/ JAMES KAHL Director March 27, 2000
- ----------------------
James Kahl
/s/ EDWARD G. NELSON Director March 27, 2000
- ----------------------
Edward G. Nelson
/s/ ROBERT L. PURDUM Director March 27, 2000
- ----------------------
Robert L. Purdum
/s/ ANTONY RESSLER Director March 27, 2000
- ----------------------
Antony Ressler
Exhibit 10.60
AMENDMENT NO. 1 TO BERLITZ INTERNATIONAL, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT
PLAN
This Amendment No. 1 (the "Amendment") to the Berlitz International, Inc.
(the "Company") Supplemental Executive Retirement Plan (the "Plan") is adopted
effective as of December 7, 1999, the date on which the Amendment was approved
by the Compensation Committee and Board of Directors of the Company. Terms used
in this Amendment shall have the same meaning as set forth in the original Plan.
The Amendment is as follows:
1. Effective on their retirements which is anticipated to occur in 1999 or
2000, the Applicable Percentages with respect to the Participants named
in Schedule 1 to this Amendment shall be forty percent (40%).
2. Section 3.2.2. of the Plan is hereby amended by deleting the period at
the end of each sentence and adding the following: ", except as
otherwise specifically provided in an Amendment to the Plan."
3. Except as amended by this Amendment No. 1, the Plan shall remain in full
force and effect.
IN WITNESS WHEREOF, the Company has caused this Amendment No. 1 to the BERLITZ
INTERNATIONAL, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN to be executed by its
duly authorized officers and its corporate seal to be hereunto affiixed on this
7th day of December, 1999.
BERLITZ INTERNATIONAL, INC.
BY: /s/ HIROMASA YOKOI
------------------
Hiromasa Yokoi
Vice Chairman, Chief Executive Officer and President
BY: /s/ DAVID A HORN
----------------
David Horn
Vice President, Human Resources
SCHEDULE 1
Individuals designated to receive increased Applicable Percentage of 40% upon
retirement:
Hiromasa Yokoi, Vice Chairman, Chief Executive Officer and President
Henry D. James, Executive Vice President and Chief Financial Officer
Robert C. Hendon, Jr., Vice President, General Counsel and Secretary
David Horn, Vice President, Worldwide Human Resources and Training
Exhibit 10.61
AMENDMENT NO. 1 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 1 TO CREDIT AGREEMENT (this "Amendment Agreement") is made
and entered into effective as of the 10th day of February, 2000 by and between
Berlitz International, Inc., a New York Corporation (the "Borrower"), each of
the guarantors signatory hereto (the "Guarantors"), Bank of America, NA, a
national banking association organized and existing under the laws of the United
States, successor in interest to NationsBank, NA, 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.
WITNESSETH:
WHEREAS, the Agent, the Lenders and the Borrower have entered into that certain
Credit Agreement dated as of March 31, 1999 (as hereby and from time to time
amended, modified, supplemented, amended and restated or replaced, the "Credit
Agreement"), pursuant to which the Lenders have agreed to make and have made
certain revolving 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 definition of "Applicable Margin" set forth in Section 1.1 is hereby
amended by inserting at the end of such definition the following:
Notwithstanding the foregoing, for the periods ending December 31, 1999 and
March 31, 2000, the Applicable Margin shall be equal to the Applicable Margin
determined as set forth in the table above plus 0.25%.
b) Section 8.1 (a) and 8.1 (b) of the Credit Agreement are hereby deleted
in their entirety and replaced by the following:
(A) CONSOLIDATED SENIOR LEVERAGE RATIO. Permit for each of the
Four-Quarter Periods ending December 31, 1999 and March 31, 2000 the
Consolidated
<PAGE>
Senior Leverage Ratio to be greater than 1.50 to 1.00 and at any other
time the Consolidated Senior Leverage Ratio at the end of each
Four-Quarter Period to be greater than 2.50 to 1.00.
(B) CONSOLIDATED TOTAL LEVERAGE RATIO. Permit for each of the
Four-Quarter Periods ending December 31, 1999 and March 31, 2000 the
Consolidated Total Leverage Ratio to be greater than 6.00 to 1.00 and at
any other time the Consolidated Total Leverage Ratio at the end of each
Four-Quarter Period to be greater than 5.00 to 1.00.
3. Guarantors. Each Guarantor hereby consents and agrees to the amendments
to the Credit Agreement set forth herein, and 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) Except as previously disclosed in writing to the Lenders or as consented
to and waived herein, the representations and warranties made by the
Borrower in Article VI of the Credit Agreement are true and correct and
as of the date hereof, except that the financial statements referred to
in Section 6.6 (a) (solely for the purpose of any cross reference and
warranty contained in such Section 6.6 (a) or to the financial
statements described therein contained in any other provisions of
section 6.6 or elsewhere in Article VI) shall be those most recently
furnished to each Lender pursuant to Sections 7.1 (a) and (b).
(b) There has been no material change in the condition, financial or
otherwise, of the Borrower or its Subsidiaries since the date of the
most recent financial reports of the Borrower received by each Lender
under Section 7.1 of the Credit Agreement.
(c) The business and properties of the Borrower and its Subsidiaries are
not, and since the date of the most recent financial reports of the
Borrower received by each Lender under Section 7.1 of the Credit
Agreement have not been, adversely affected in any substantial way as
the result of any fire, explosion, earthquake, accident, strike,
lockout, combination of workmen, flood, embargo, riot, activities of
armed forces, war or acts of God or the public enemy, or cancellation or
loss of any major contracts; and
(d) No event has occurred and no condition exists which, upon the
effectiveness of the amendments contemplated hereby, will constitute a
Default or an Event of Default on the part of any Credit Party 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. Conditions Precedent. The effectiveness of the Amendment Agreement is
subject to the receipt by the Agent of six counterparts of the Amendment
Agreement duly executed by all signatories hereto.
6. Entire Agreement. This Amendment Agreement sets forth the entire
understanding and agreement of the parties hereto in relation to the
subject matter hereof and
<PAGE>
supersedes any prior negotiations and agreements among the parties
relative to such subject matter. None of the terms or conditions of this
Amendment Agreement may be changed, modified, waived or cancelled orally
or otherwise, except in accordance with terms of the Credit Agreement.
7. 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.
8. 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.
9. Reimbursement. The Borrower agrees to reimburse the Agent and the
Lenders for all costs and out-of-pocket expenses, including attorneys'
fees, incurred in connection with the preparation, execution, and
delivery of this Amendment Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
Credit Agreement to be duly executed by their duly authorized officers, all as
of the day and year first written above.
Exhibit 21
List of Subsidiaries of the Registrant
--------------------------------------
Jurisdiction of
Country Subsidiary Name Incorporation
- ------- --------------- -------------
United States Berlitz Investment Corp. Delaware
Berlitz Languages (United States), Inc. New York
Berlitz Publishing Company, Inc. Delaware
ELS Educational Services, Inc. Delaware
Berlitz GlobalNET, Inc. New York
The Corporate Word, Inc. Pennsylvania
Berlitz Franchising Corporation Delaware
Canada Berlitz Canada, Inc. Canada
Argentina The Berlitz Schools of Languages de Argentina
Argentina, S.A.
Brazil Berlitz Centro de Idiomas, S.A. Brazil
Berlitz Global Services, Ltda. Brazil
Chile Berlitz Escuelas de Idiomas S.A. Chile
Colombia Berlitz Colombia, SA Colombia
Mexico Berlitz de 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
ELS Japan, Inc. Japan
Korea Berlitz Korea Co., Ltd. Korea
Malaysia Berlitz (Malaysia) Sdn. Bhd. Malaysia
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 Belgium
Benelux, SA
Denmark Berlitz International Danmark A/S Denmark
Berlitz International Scandanavia A/S Denmark
Finland Oy Berlitz Ab Finland
France Berlitz France, S.A.S. France
Berlitz Traduction France France
Netherlands Berlitz Schools of Languages B.V. Netherlands
Ireland Berlitz (Ireland) Limited Ireland
Italy Berlitz Translations, S.r.l. Italy
Berlitz Language Centers, 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 United Kingdom
Berlitz GlobalNET (U.K.) Limited United Kingdom
Equipe Consortium Limited United Kingdom
Austria Berlitz Austria GmhH Austria
Czech Republic Berlitz Schools of Languages, spol. sr.o. Czech Republic
Germany Berlitz Deutschland GmbH Germany
Greece Berlitz Hellas, E.P.E. Greece
Hungary Berlitz Hungary Nyelviskola Korla Hungary
Felelossegu Tarsasag
Israel Berlitz (Israel) Ltd. Israel
<PAGE>
Jurisdiction of
Country Subsidiary Name Incorporation
- ------- --------------- -------------
Poland Berlitz Poland Sp. zo.o Poland
Slovakia Berlitz Slovakia sr.o. Slovakia
Slovenia Berlitz Slovenija d.o.o. Slovenia
Switzerland Editions Berlitz, S.A. Switzerland
The Berlitz Schools of Languages, A.G. Switzerland
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
Shareholders and Board of Directors
Berlitz International, Inc.
400 Alexander Park
Princeton, NJ 08540
We consent to the incorporation by reference in Registration Statement No.
333-69199 of Berlitz International, Inc. on Form S-8 of our report dated
February 28, 2000, appearing in this Annual Report on Form 10-K of Berlitz
International, Inc. for the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K OF
BERLITZ INTERNATIONAL, INC. FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 34,426
<SECURITIES> 0
<RECEIVABLES> 57,287
<ALLOWANCES> 3,102
<INVENTORY> 10,405
<CURRENT-ASSETS> 115,158
<PP&E> 73,849
<DEPRECIATION> 26,100
<TOTAL-ASSETS> 697,020
<CURRENT-LIABILITIES> 113,272
<BONDS> 0
<COMMON> 1,003
0
0
<OTHER-SE> 337,684
<TOTAL-LIABILITY-AND-EQUITY> 697,020
<SALES> 0
<TOTAL-REVENUES> 446,181
<CGS> 0
<TOTAL-COSTS> 267,176
<OTHER-EXPENSES> 18,024
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,976
<INCOME-PRETAX> 1,722
<INCOME-TAX> 7,715
<INCOME-CONTINUING> (5,325)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,154)
<CHANGES> (5,605)
<NET-INCOME> (13,084)
<EPS-BASIC> (1.37)
<EPS-DILUTED> (1.37)
</TABLE>
