UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-15512.
ALPNET, INC.
(Exact name of registrant as specified in its charter)
Utah 87-0356708
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4460 South Highland Drive, Suite #100
Salt Lake City, Utah 84124-3543
(Address of principal executive offices) (Zip Code)
(801) 273-6600
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of the registrant's no par value Common Stock
as of August 11, 1997 was 18,536,696.
ALPNET, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Statements of Operations--Three months ended June 30, 1997
and 1996, and Six months ended June 30, 1997 and 1996 . . . . . .
Consolidated Balance Sheets--June 30, 1997 and December 31, 1996 .
Consolidated Statements of Cash Flows--Six months ended June 30, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements--June 30, 1997 . . . .
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . .
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
ALPNET, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
Thousands of dollars and shares 1997 1996 1997 1996
<S> <C> <C> <C> <C>
SALES OF SERVICES $10,447 $9,025 $19,214 $15,513
OPERATING EXPENSES:
Cost of services sold 7,897 6,728 15,318 11,891
Selling, general and administrative
expenses 1,594 1,374 3,208 2,460
Development costs 95 32 203 82
Amortization of goodwill 99 89 197 179
Total operating expenses 9,685 8,223 18,926 14,612
OPERATING INCOME 762 802 288 901
Interest expense, net 83 28 140 61
Income before income taxes 679 774 148 840
Income taxes 60 112 105 148
NET INCOME $ 619 $ 662 $ 43 $ 692
NET INCOME PER SHARE $ .024 $ .026 $ .002 $ .027
Weighted average shares of Common
Stock and Common Stock equivalents
outstanding 25,283 25,679 21,656 25,611
See accompanying notes.
</TABLE>
<TABLE>
ALPNET, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
<CAPTION>
June 30 December 31
Thousands of dollars 1997 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,366 $ 1,034
Trade accounts receivable, less allowance of
$247 in 1997 and $219 in 1996 7,625 6,529
Work-in-process 609 487
Prepaid expenses and other 716 949
Total current assets 10,316 8,999
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS:
Office facilities and leasehold
improvements 309 318
Equipment 5,103 4,789
5,412 5,107
Less accumulated depreciation and
amortization 3,630 3,236
Net property, equipment and leasehold
improvements 1,782 1,871
OTHER ASSETS:
Goodwill, less accumulated amortization
of $3,277 in 1997 and $3,380 in 1996 5,970 6,087
Other 282 310
Total other assets 6,252 6,397
TOTAL ASSETS $18,350 $17,267
See accompanying notes.
</TABLE>
<TABLE>
ALPNET, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)--continued
<CAPTION>
June 30 December 31
Thousands of dollars and shares 1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable to banks $ 2,617 $ 1,959
Accounts payable 2,562 2,225
Accrued payroll and related benefits 767 922
Other accrued expenses 1,302 897
Deferred revenue 247 391
Income taxes payable 146 53
Current portion of long-term debt 287 203
Total current liabilities 7,928 6,650
Long-term debt, less current portion 523 262
Commitments and contingencies (note 6)
SHAREHOLDERS' EQUITY:
Convertible Preferred Stock, no par value;
authorized 2,000 shares; issued and
outstanding 615 shares in 1997 and 719
shares in 1996 1,808 2,095
Common Stock, no par value; authorized
40,000 shares; issued and outstanding
18,537 shares in 1997 and 17,883 shares
in 1996 40,516 40,228
Accumulated deficit (30,690) (30,733)
Equity adjustment from foreign currency translation (1,735) (1,235)
Total shareholders' equity 9,899 10,355
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $18,350 $17,267
See accompanying notes.
</TABLE>
<TABLE>
ALPNET, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Six Months Ended June 30
Thousands of dollars 1997 1996
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 43 $ 692
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of property,
equipment and leasehold improvements 327 194
Amortization of goodwill 197 179
Other 32 24
Changes in operating assets and liabilities, net of effect
of acquisition:
Trade accounts receivable (1,117) (1,674)
Accounts payable and accrued expenses 729 853
Other 23 (219)
Net cash provided by operating activities 234 49
INVESTING ACTIVITIES:
Purchase of property, equipment and
leasehold improvements (269) (398)
Payment for acquisition, net of cash acquired (508) -
Net cash used in investing activities (777) (398)
FINANCING ACTIVITIES:
Proceeds from notes payable to banks 718 330
Principal payments on notes payable to banks (20) (54)
Proceeds from long-term debt 423 20
Principal payments on long-term debt (210) (52)
Proceeds from exercise of stock options 1 21
Net cash provided by financing activities 912 265
Effect of exchange rate changes on cash (37) (5)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 332 (89)
Cash and cash equivalents at beginning of period 1,034 1,033
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,366 $ 944
CASH PAID DURING THE PERIOD FOR:
Interest $ 137 $ 62
Income taxes 42 128
See accompanying notes.
</TABLE>
ALPNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1997
1. BASIS OF PRESENTATION
ALPNET, Inc. (the "Company") is a United States publicly-owned corporation
with multinational operations. The Company provides language translation,
product localization, and multilingual publishing services to businesses
engaged in international trade. The principal markets for the Company's
services are North America, Western Europe, and Asia.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information
and footnote disclosures required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the
periods presented are not necessarily indicative of the results that may be
expected for the respective complete years. For further information, refer
to the Consolidated Financial Statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
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 liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
2. ACQUISITION
In January 1997, the Company acquired all of the outstanding stock of
CompuType Ltd., a U.K.-based provider of specialty desktop publishing and
pre-press services, in a transaction accounted for as a purchase. The
acquisition cost of approximately $550,000 was paid in cash, and exceeded the
fair values of the net assets acquired by approximately $400,000, which
excess was recorded as goodwill and is being amortized on the straight-line
method over 12 years. The acquisition was financed primarily by (1) a
200,000 pound (approximately $330,000) unsecured term loan with the Company's
U.K. bank, repayable over 5 years, bearing interest at approximately 9%; and
(2) an increase of 100,000 pounds (approximately $170,000) in the Company's
credit facility with this bank. CompuType's results of operations have been
included with the Company's consolidated financial results from February 1997
forward. CompuType's 1997 sales, included in consolidated sales of services
for the period ended June 30, 1997, were approximately $730,000.
3. BORROWINGS
In addition to the loans described in note 2, the following changes in
borrowings have occurred since December 31, 1996.
The Company obtained a line of credit with a U.S. financial institution in
January 1997 which has a maximum limit of $500,000, bears interest at
approximately 9% and is collateralized by U.S.-based accounts receivable. At
June 30, 1997, approximately $470,000 was borrowed under this credit
facility. In May 1997, the Company's secured credit facility with a German
bank was increased from a maximum limit of DM 600,000 (approximately
$340,000) to a maximum limit of DM 750,000 (approximately $430,000). In July
1997, the Company obtained a mortgage with a bank in Spain, secured by the
Company's office facility in Barcelona. The mortgage is for approximately
$150,000, is repayable over ten years and bears interest at approximately 8%.
4. EQUITY TRANSACTIONS
In March 1997, the Company issued 652,035 shares of Common Stock upon
conversion of 47,647 shares of series B Convertible Preferred Stock and
56,566 shares of series C Convertible Preferred Stock. Each share of
Preferred Stock was convertible at the option of the holder into three shares
of the Company's Common Stock for series B and nine shares of the Company's
Common Stock for series C.
5. INCOME TAXES
The Company files a consolidated U.S. Federal income tax return which
includes all domestic operations. Tax returns for states within the U.S. and
for foreign subsidiaries are filed in accordance with applicable laws.
Fluctuations in the amount of income taxes arise primarily from the varying
combinations of income and losses of the Company's subsidiaries in the
various domestic and foreign tax jurisdictions, including the utilization of
net operating loss carryforwards in many of these jurisdictions.
6. CONTINGENT LIABILITY
In 1997, the Company's French subsidiary terminated certain of its employees,
some of whom initiated immediate legal actions in the French legal system
which handles employment-related matters. Subsequently, other former
employees also initiated similar actions. In 1996, approximately $50,000 of
statutorily-required costs related to the 1997 terminations were expensed. In
1997, an additional $75,000 was expensed related to the legal actions taken
by specific employees.
The Company believes it complied with all aspects of applicable French labor
regulations in terminating the employees and intends to defend its actions
vigorously. While the ultimate outcome of this matter cannot be determined,
management, based on the opinion of its French legal counsel, does not expect
that the outcome of the legal actions will have a material adverse effect on
the Company's results of operations or financial position.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis should be read in conjunction
with the Consolidated Financial Statements and notes thereto.
FOREIGN OPERATIONS
The Company serves its customers from 33 wholly-owned offices in 13 countries.
The operations of the Company are predominantly located outside the U.S. and the
Company is subject to the effects of foreign currency exchange rate
fluctuations. For all of the Company's foreign subsidiaries, the functional
currency has been determined to be the local currency. Accordingly, assets and
liabilities are translated at year-end exchange rates, and operating statement
items are translated at weighted-average exchange rates prevailing during the
period. The resultant cumulative foreign currency adjustments to the assets and
liabilities are recorded as a separate component of shareholders' equity. The
foreign currency equity adjustment for the first six months of 1997 was negative
$500,000 compared to a negative adjustment of $160,000 for the first six months
of 1996. Generally, when the major foreign currencies affecting the Company
weaken as compared to the U.S. dollar, the shareholders' equity adjustment is
negative since the net assets denominated in foreign currencies are translated
into fewer U.S. dollars. This occurred in both 1997 and 1996. As of June 30,
1997, the cumulative net effect to the Company of the equity adjustment from
movements in foreign currency exchange rates was a reduction of $1.7 million in
shareholders' equity. A significant portion of the cumulative foreign currency
adjustment relates to changes in the recorded amount of goodwill.
In the first six months of 1997, the Company recorded a net benefit of $99,000
for gains on foreign exchange transactions. Substantially all of this benefit
was recorded in the U.K., and a majority of the U.K. gain resulted from a
weakening of the UK pound from December 31, 1996 to June 30, 1997. Because the
Company's U.K. subsidiary had a large amount of US$ denominated receivables
outstanding as of December 31, 1996, the Company recorded an unrealized loss on
these receivables in 1996. The strengthening of the US$ against the UK pound in
1997 has meant that most of that loss was not realized. In the first six months
of 1996, exchange gains and losses resulting from foreign currency transactions
included in the determination of net income were not material.
Because most of the Company's operations are located outside the U.S. and its
foreign operations' financial results must be translated into U.S. dollars, the
Company's actual and reported financial results and financial condition are
susceptible to movements in foreign currency exchange rates. The Company has
relatively few long-term monetary assets and liabilities denominated in
currencies other than the U.S. dollar, and therefore does not have any ongoing
hedging programs in place to manage currency risk.
RESULTS OF OPERATIONS
The following paragraphs discuss results of operations for the three- and six-
month periods ended June 30, 1997 as compared with the three- and six-month
periods ended June 30, 1996, including the significant effects of fluctuating
foreign currency exchange rates.
The Company reported net income of $619,000 for the three months ended June 30,
1997, compared to net income of $662,000 for the three months ended June 30,
1996. If foreign currency exchange rates for 1997 had remained unchanged from
1996, the Company would have reported net income of approximately $589,000
instead of $619,000.
The Company reported net income of $43,000 for the six months ended June 30,
1997 compared to $692,000 for the six months ended June 30, 1996. If foreign
currency exchange rates for 1997 had remained unchanged from 1996, the Company
would have reported a net loss of approximately $35,000 instead of net income of
$43,000.
Sales of services were $10.4 million for the three months ended June 30, 1997,
compared to $9.0 million for the three months ended June 30, 1996. The $1.4
million increase in reported sales for 1997 consisted of an increase in sales
volume of $1.6 million and a decrease of $200,000 due to fluctuating currency
exchange rates.
Sales of services were $19.2 million for the six months ended June 30, 1997
compared to $15.5 million for the six months ended June 30, 1996. The $3.7
million increase in reported sales from the first half of 1996 to the first half
of 1997 consisted of an increase in sales volume of $4.0 million and a decrease
of $300,000 due to fluctuating currency exchange rates. The increases in sales
volume in 1997 over 1996 are due to increases in sales in nearly all markets in
which the Company has a presence, but most particularly in the Company's North
American and German offices. Contributions from new offices, especially in the
Netherlands and Japan, also boosted sales in 1997 over 1996, as did sales
attributable to CompuType, a U.K. company acquired in January 1997.
The increase in sales volume is a result of generally expanding needs for
language-related services in an increasingly global marketplace where more and
more businesses are entering foreign markets and becoming involved in worldwide
trade. An example of this is the software industry which has significant and
increasing needs for product localization services such as those provided by the
Company. Also having a beneficial effect on sales levels is the Company's use
of online services (including the Internet) both as a marketing tool and as a
means to communicate and interact with clients.
The Company competes on the basis of capability, quality, service and
geographical proximity to clients and potential clients. The Company has opened
several new offices and expanded existing offices in recent years in order to
increase its market share in what management believes has been and will continue
to be a growth industry. The intense price competition which the Company
encountered in prior years continues to limit the prices the Company can charge
in the marketplace. The industry pricing situation has not changed materially
in 1997 compared to 1996.
The following table shows a comparison of sales of services in each of the
Company's significant geographic areas for the six months ended June 30, 1997
and 1996, along with the effect of foreign currency exchange rate fluctuations
on sales between periods. Intercompany sales are normally billed on a margin-
sharing basis. All intercompany sales are eliminated in determining the totals.
<TABLE>
<CAPTION>
Thousands of dollars
Increase (Decrease) in
Six Months Sales of Services due to Total
Ended June 30 Sales Currency Increase
1997 1996 Volume Fluctuations (Decrease)
<S> <C> <C> <C> <C> <C>
United States $ 3,806 $ 2,062 $1,744 $ - $1,744
Canada 2,854 2,055 815 (16) 799
Europe 14,343 12,928 1,766 (351) 1,415
Asia 1,970 1,514 550 (94) 456
Eliminations (3,759) (3,046) (903) 190 (713)
Total Sales $19,214 $15,513 $3,972 $(271) $3,701
</TABLE>
As shown in the above table, every major geographical region reported increased
sales in the first six months of 1997 over the first six months in 1996.
Significant changes in sales levels in the major geographic regions are
discussed in the following paragraphs.
SALES OF SERVICES BY GEOGRAPHIC AREA
U.S. sales increased $1.7 million or 85% in 1997 over 1996. Historically, U.S.
sales from period to period have fluctuated more widely than in other
geographical areas due to industry conditions which have often been less
predictable than those found in some of the Company's foreign markets. Such
conditions have been characterized by the relative inexperience of many U.S.
companies in translation and localization of language, as it relates to
international business, and clients which were not sophisticated in the nuances
of marketing to foreign countries and thus unaware of the importance of related
language issues. These factors, along with the unpredictable timing and the
nonrecurring nature of many large translation projects for U.S. companies, have
resulted in an order stream which has varied from period to period, but which
has improved dramatically during the past two years.
U.S. sales rose from 1996 to 1997, due largely to an increase in the number and
size of projects for existing and new clients, especially software localization
services for companies in the computer hardware, software development and
computer-based training industries. Much of this increase is due to aggressive
sales and marketing efforts initiated by the Company in late 1995 and early
1996. Management expectations for the U.S. are for a general continuation of
growth in sales, especially to the computer and computer-based training
industries, but the predictability and timing of actual orders from clients is
uncertain and the high growth rate of 85% achieved in the first half of 1997 is
unlikely to be sustained throughout the year.
Canada's reported sales for 1997 represent an increase over 1996 of 39%, which
is related to actual increases in sales volume with virtually no effect from
fluctuating foreign currency exchange rates. The increase in sales in Canada is
due primarily to ongoing aggressive marketing and sales efforts and the
procurement of new large long-term contracts. These increases in sales have
occurred despite continuing economic and political challenges in Canada.
Nevertheless, due primarily to several new large multi-year contracts, which
were negotiated in 1996, but which did not begin until 1997, management believes
it is likely that 1997 revenues in Canada will continue to exceed 1996 levels.
In 1997, sales in Europe of $14.3 million represent approximately 62% of the
Company's consolidated sales and grew by $1.4 million over 1996 sales levels, or
by 11% year over year (14% absent the effects of fluctuating foreign currency
exchange rates). Most of the increase in European sales is the result of a 23%
growth rate in Germany (38% absent the effects of foreign currency exchange rate
fluctuations) and higher sales in the Netherlands, which had minimal sales in
1996. The U.K. and Germany accounted for 84% of Europe's total sales in 1997,
compared to 87% in 1996.
U.K. sales declined 2% in 1997 compared to 1996, primarily due to an unusually
strong second quarter performance in 1996 and to decreased 1997 sales to the
Company's largest client which reduced the number and size of purchase orders
from historical levels. This decrease was tempered by the sales of CompuType
(see note 2 to the Consolidated Financial Statements). Primarily because of the
acquisition of CompuType, management believes it is likely that reported second
half 1997 sales in the U.K. will increase over 1996 levels, but this will depend
on many factors which are subject to constant change. In particular, sales in
this country are greatly dependent upon the number and size of orders from large
clients.
In Germany, a high rate of growth was achieved in 1997 compared to the first
half of 1996. The Company's sales in Germany were unusually low in early 1996
due largely to a sluggish economy, evidenced by the unemployment rate which
increased to a post WWII high. Despite the ongoing effects of the economic
slowdown, sales were strong in 1997 as management increased its sales and
marketing efforts, including certain sales of lower-margin services, to more
effectively utilize capacity. While management is expecting revenue growth to
continue in 1997, the uncertain economic conditions in Germany could have a
dampening effect on the Company's ability to increase sales.
The Company opened offices in the Netherlands and in Ireland in late 1995 and in
Belgium in late 1996 and closed its Switzerland office in late 1996. The
Belgium office is a high volume, high quality production facility servicing the
needs of other ALPNET offices. The new European offices, along with the
investments made in human and equipment resources in existing offices in recent
years, are expected to help the Company increase its revenues in Europe as
demand for language services in this region continues to expand.
Sales in Asia of $2.0 million in 1997 grew by 30% over 1996 levels (36% absent
the effects of foreign currency exchange rate fluctuations). The Company
significantly expanded its Asian presence in late 1995 by adding an office in
The People's Republic of China, and in early 1996 an office in Tokyo was opened.
Also, the Company's offices in Singapore and Korea were expanded significantly
during the later half of 1996. Since its opening, the China office has
functioned only as a production facility for sales made in other offices of the
Company, but China is expected to begin to sell to local companies in the future
and contribute to the growth of sales in Asia in coming years. The Company's
Tokyo office has also served primarily as a production facility for sales made
elsewhere in the Company, and has therefore helped other offices sell to new and
existing clients that have needs for Japanese language services. This office
started to sell to local Japanese clients in 1997, which is expected to help
further accelerate sales growth in Asia in 1997.
In general, the Asian capacity developed in 1996 was underutilized in the first
quarter of 1997 and contributed to the operating loss sustained in that quarter.
Underutilization also occurred in the second quarter of 1997, but was less
pronounced than earlier in the year. Management does not expect this
underutilization situation to continue in the long term, due to increases in
customer orders for work to be produced into the major Asian languages. The
Company closed its Hong Kong office in May 1997 as a result of continuing losses
and declining strategic importance. Sales of this office were not material in
either 1997 or in 1996, but a provision of approximately $50,000 was recorded in
the first quarter of 1997 to recognize the costs of closing the office. Other
Asian offices are now producing most of the Chinese work historically done by
the Hong Kong office.
Management expects the increased demand for Asian language services to continue
as many Asian countries are experiencing very high economic growth rates and
interest in Asia from the business communities in the U.S., Europe and elsewhere
remains high.
The Company's business can be impacted dramatically by changes in the strength
of the economies of the countries in which it has a presence, and results of
operations are highly influenced by general economic trends. Moreover, sales
and profitability are increasingly affected by the number and size of larger and
more complex multi-language projects. During 1996 and thus far in 1997, the
Company experienced significant fluctuations in quarterly sales and
profitability levels largely as a result of the increasing number of such
projects. Management expects this trend to continue. The Company expects to be
able to capture increased sales in an expanding market which is expected to
result in overall long-term sales growth.
COST OF SERVICES SOLD
Cost of services sold as a percentage of sales of services has fluctuated
primarily as a result of competition in the marketplace and the volume and
nature of direct production costs of project sales in each year, especially
large projects covering several accounting periods. In the first six months of
1997 (especially in the first quarter) margins were negatively affected by
underutilization of capacity, especially in Asia, and to a lesser extent by a
higher proportion of low margin work in certain geographic areas. Management
expects competitive pricing pressures to continue in the foreseeable future, and
perhaps even intensify as a possible result of several recent mergers of small
and mid-sized translation companies. The Company is continuing its efforts to
contain costs to offset the effects of these pricing pressures. These efforts
include more effective utilization of the Company's proprietary software on
medium- to small-sized projects to improve the productivity of translators, and
the development of stronger "partnerships" with clients to enable the Company to
provide higher margin solution-based services to clients.
OTHER COSTS AND EXPENSES
Selling, general and administrative expenses increased 30% for the first six
months of 1997 over the first six months of 1996, and 16% for the three months
ended June 30, 1997 over the three months ended June 30, 1996. These increases
are due to several factors, including the overall growth of existing offices and
the opening of new offices; increased marketing and sales efforts in
substantially all of the Company's markets; certain costs recorded in the first
quarter of 1997 related to reorganizing and closing some of the Company's
underperforming offices; and to a lesser extent, the effect of increased
corporate overhead costs related to the Company's growth.
Development costs were $203,000 for the first half of 1997 compared to $82,000
for the first half of 1996. Development costs are related to the upgrading and
expansion of the Company's proprietary language translation software developed
in the early years of the Company's existence, as well as efforts related to the
development and expansion of the Company's online language service product
offering. The Company has enhanced certain features of its software and made it
compatible with more of the ever-increasing types and versions of software being
developed by the software industry which are being used by clients and potential
clients. The Company expects development costs for the remainder of 1997 to
continue higher than 1996 levels, primarily because of the ongoing need to
ensure the Company's technology is compatible with the software commonly used by
businesses.
Fluctuations in the amount of goodwill amortization resulted from foreign
currency exchange rate fluctuations from year to year and from the Company's
acquisition of CompuType in January 1997, which increased goodwill amortization
by about $3,000 per month.
Net interest expense of $140,000 for the first six months of 1997 was 130%
higher than for the same period in 1996. There was also a large increase for
the second quarter of 1997 compared to the second quarter of 1996. These
increases are due primarily to higher average balances outstanding under
revolving lines of credit, caused by growth in sales and related accounts
receivable; increases in long-term debt used to finance certain equipment
purchases; and a term loan obtained in January 1997 to finance a portion of the
CompuType acquisition. Interest expense for the remainder of 1997 is expected
to continue to outpace 1996 levels as the Company expects borrowings under
revolving lines of credit to increase as sales grow, and the Company plans to
continue to use long-term debt to finance certain equipment purchases. Also,
any investments beyond modest requirements related to sales growth could require
additional debt or equity financing which would impact future levels of interest
expense.
The U.S. parent company and each of its subsidiaries are separate legal and
taxable entities subject to the domestic or foreign taxes pertaining to
operations in their respective jurisdictions. For tax purposes, the U.S. parent
company, and most of its subsidiaries, have unused net operating losses from
prior years which can be utilized to reduce future years' taxable income of the
respective entities. The availability of these net operating losses is governed
by applicable domestic and foreign tax rules and regulations, some of which
limit the utilization of such losses due to minimum tax requirements and other
provisions. Income tax expense as presented in the Consolidated Financial
Statements represents the combined income tax expense and income tax credits of
all of the entities of the Company.
After consideration of the effect of the utilization of net operating loss
carryforwards, income tax expense was $105,000 for the first six months of 1997
($60,000 for the second quarter), compared to $148,000 for the first six months
of 1996 ($112,000 for the second quarter). Fluctuations in the amount of income
taxes arise primarily from the varying combinations of income and losses of the
Company's subsidiaries in the various domestic and foreign tax jurisdictions,
including the utilization of net operating loss carryforwards in many of those
jurisdictions. The U.S. parent company has a net operating loss carryforward
for U.S. Federal tax purposes but has no net operating loss carryforwards for
state income tax purposes.
LIQUIDITY AND SOURCES OF CAPITAL
In the first half of 1997, the Company had a positive cash flow from operations
of approximately $230,000 compared with a positive cash flow from operations in
the first half of 1996 of approximately $50,000. In 1997, the Company's
investing activities consisted of the acquisition of CompuType (see note 2 to
the Consolidated Financial Statements) and the acquisition of equipment needed
to maintain or upgrade production capability. In 1996, investing activities
consisted of the acquisition of equipment.
Financing activities for both periods included fluctuations in the amounts
utilized under bank lines of credit used to finance the Company's working
capital needs, and changes in outstanding debt used to finance equipment
purchases. Additionally, in 1997 the Company obtained a long-term unsecured
loan for approximately $330,000 used to finance a portion of the CompuType
acquisition. In 1997, the Company's non-cash financing activities include the
conversion by a shareholder of certain of the Company's Preferred Stock to
Common Stock, as described in more detail in note 4 to the Consolidated
Financial Statements.
As of June 30, 1997, the Company's cash and cash equivalents were approximately
$1.4 million, representing an increase of approximately $300,000 during the
first half of 1997. At June 30, 1997, the Company had working capital of
approximately $2.4 million compared to $2.3 million at December 31, 1996.
The Company's primary working capital requirements relate to the funding of
accounts receivable. The Company funds some of its working capital needs with
various lines of credit with financial institutions in the U.S., Canada, the
U.K., Germany and Spain. Most of the lines of credit are secured by accounts
receivable and other assets of the Company or its subsidiaries. As of June 30,
1997, the Company had unused amounts under these lines of credit of
approximately $580,000. Additionally, in July 1997, the Company obtained a
mortgage with a bank in Spain for approximately $150,000 (see note 3 to the
Consolidated Financial Statements).
Provided the Company remains profitable, the Company believes the available
amounts under lines of credit combined with current working capital are
sufficient to fund the Company's operations at current levels and enable the
Company to grow at a modest level, without the need to seek significant new
sources of capital. Most of the Company's credit facilities are subject to
annual renewals and the Company expects them to be renewed on substantially the
same terms as those which currently exist. In addition, the Company expects to
be able to increase the maximum amounts which can be borrowed under credit
facilities if the Company's sales increase and if the Company can remain
profitable over the long term. Some of the banks which have loaned funds to the
Company's subsidiaries under the credit facilities referred to above, have
placed certain limits on the flow of cash outside the respective countries.
Such limitations have not been an undue burden to the Company in the past, nor
are they expected to be unduly burdensome in the foreseeable future.
The Company has no present significant commitments for capital expenditures,
which generally consist of computer equipment and related peripheral hardware
and software. Capital expenditures in future periods are expected to vary
according to the overall growth of the Company. The Company plans to acquire
and place additional translation services workstations in its offices in
connection with future orders from customers, as such orders are received. The
Company expects to finance a certain portion of future equipment costs through
bank and/or leasing sources, similar to the financing arrangements entered into
in recent periods.
As described in more detail in note 2 to the Consolidated Financial Statements,
in January 1997 the Company acquired a U.K.-based business for cash of
approximately $550,000, most of which was financed. While there are no current
commitments or plans, the Company may pursue other acquisitions worldwide or
open additional offices in strategic locations, as client demands dictate and
opportunities arise. The costs to open most offices have generally not been
substantial and have been primarily related to the procurement of computers and
other translation-related equipment and, in certain instances, for office
premises. The Tokyo office, opened in early 1996, was an exception to this
general situation, due both to the larger size of that office and the high cost
of doing business in Japan. The costs of any additional offices to be opened in
the future can also be expected to vary based on size and location and could
require certain amounts of cash beyond the amount that can be generated through
operations, depending on profitability.
As of December 31, 1996, the Company closed its Switzerland office and in May
1997 closed its Hong Kong office. In addition, a restructuring of the Paris
office took place in early 1997. These office closures and the restructuring
have had or will have a negative effect on cash flow of approximately $200,000.
No other significant office closures or restructurings are currently planned.
The Company believes it has the ability to issue additional debt or equity
securities if necessary, but does not currently have any firm plans to do so.
In past years, the Company has relied on major shareholders of the Company to
fund certain obligations, but the Company has no firm commitments from, nor are
there any obligations of, any such shareholders to provide any debt or equity
funds to the Company. In order for the Company to fund investments beyond
modest growth in operations, such as for significantly new or expanded services
or product lines, additional debt or equity funds will likely be required.
Management believes that current working capital together with available lines
of credit will enable the Company to meet its financial obligations during 1997.
It is more difficult to assess cash flows beyond 1997 and the ability of the
Company to meet its commitments without additional sources of capital is
directly related to the Company's operations providing a positive cash flow.
Should the Company's operations fail to provide adequate funds to enable it to
meet its future financial obligations, management has the option, because of the
Company's organizational structure, to cut costs by selectively eliminating
operations which are not contributing to the Company financially, as was done by
closing the Switzerland and Hong Kong offices.
Inflation has not been a significant factor in the Company's operations.
Competition, however, has been and is expected to remain a major factor. To the
extent permitted by competition and general economic and market conditions, the
Company will pass on increased costs from inflation and operations to clients by
increasing prices.
Due to prior years' operating losses, the Company and many of its subsidiaries
have net operating loss carryforwards available to offset future taxable income
in the various countries in which the Company operates. As a result, the
Company historically has not had significant income tax liabilities requiring
the expenditure of cash. Due to currently available net operating loss
carryforwards, the Company expects this general trend to continue through 1997
and for several years into the future, for those offices acquired many years ago
which have sustained large losses in previous years. The levels of net
operating losses available to offset future taxable income are generally much
lower for the new offices opened in recent years.
Substantially all of the Company's deferred tax assets at June 30, 1997 were
comprised of net operating loss carryforwards for which the Company has provided
allowances. The ability of the Company to utilize these loss carryforwards in
the future is dependent on profitable operations in the various countries in
which loss carryforwards exist, and the specific rules and regulations governing
the utilization of such losses, including the dates by which the losses must be
used.
CAUTIONARY STATEMENT
The statements in this Management's Discussion and Analysis that are not based
on historical data are forward looking, including for example, information about
future sales growth in various countries in future periods; expected changes in
the levels of various expenses, including income taxes; the Company's plans for
future investments in new offices, services, or products; and financing plans
and expectations.
Forward looking statements contained in this Management's Discussion and
Analysis involve numerous risks and uncertainties that could cause actual
results to be materially different from estimated or expected results. Such
risks and uncertainties include, among many others, fluctuating foreign currency
exchange rates, changing levels of demand for the Company's services, the effect
of constantly changing general economic and political conditions in all of the
various countries in which the Company has operations, the impact of competitive
services and pricing, uncertainties caused by clients (including the timing of
projects and changes in the scope of services requested), and other risks and
uncertainties that may be disclosed from time to time in future public
statements or in documents filed with the Securities and Exchange Commission.
As a result, no assurance can be given as to future results.
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
11 Statement Re: Computation of Per Share Earnings
21 Subsidiaries of Registrant
27 Financial Data Schedule
(b) The Company has filed the following reports on Form 8-K during the
three months ended June 30, 1997.
Date of
Report Item Reported
05/07/97 ALPNET Announces First Quarter 1997 Results
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALPNET, INC.
Registrant
Date: 11 August 1997 /s/ Michael F. Eichner
Michael F. Eichner
Chairman of the Board
Date: 11 August 1997 /s/ D. Kerry Stubbs
D. Kerry Stubbs
Chief Financial Officer
E X H I B I T 1 1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
(Thousands of dollars and shares) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net income $619 $662 $43 $692
Weighted average shares of
Common Stock outstanding 18,537 16,387 18,282 16,293
Shares of Common Stock issuable upon
conversion of Convertible Preferred Stock 5,535 7,423 2,768 7,423
Shares of Common Stock issuable upon
exercise of employee stock options 1,211 1,869 606 1,895
Total shares of Common Stock and
Common Stock equivalents 25,283 25,679 21,656 25,611
Net income per share $.024 $.026 $.002 $.027
<FN>
(1) Primary and fully diluted per share earnings are substantially the same for each period presented.
(2) Common Stock equivalents were anti-dilutive in the first quarter of 1997.
</FN>
</TABLE>
E X H I B I T 2 1
LIST OF SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION> Date of
Place of Incorporation
Name Incorporation or Acquisition
<S> <C> <C>
Automated Language Processing Systems, Ltd. Canada November 17, 1986
a.l.p. Services, Inc. Utah, USA November 25, 1987
A.L.P. SERVICES SARL France November 30, 1987
INTERDOC SARL France November 30, 1987
Automated Language Processing Services, Ltd. England December 2, 1987
ALPNET GmbH Germany January 11, 1988
ALPNET Canada Inc. Canada January 15, 1988
Dr. W.D. Haehl GmbH Germany January 29, 1988
Interlingua Group Ltd. England March 31, 1988
ALPNET U.K. Ltd. England March 31, 1988
Interlingua S.L. Spain March 31, 1988
ALPNET Singapore Pte. Ltd. Singapore March 31, 1988
ALPNET Ireland Ltd. Ireland August 18, 1995
AOLI Network Technology Ltd. China December 12, 1995
ALPNET Netherlands BV The Netherlands February 12, 1996
ALPNET Belgium NV Belgium September 16, 1996
Computype Limited England January 31, 1997
<FN>
Notes: (1) All subsidiaries are wholly-owned.
(2) The Company's Korean and Japanese operations are branches of ALPNET, Inc.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1366
<SECURITIES> 0
<RECEIVABLES> 7872
<ALLOWANCES> 247
<INVENTORY> 0
<CURRENT-ASSETS> 10316
<PP&E> 5412
<DEPRECIATION> 3630
<TOTAL-ASSETS> 18350
<CURRENT-LIABILITIES> 7928
<BONDS> 523
0
1808
<COMMON> 40516
<OTHER-SE> (32425)
<TOTAL-LIABILITY-AND-EQUITY> 18350
<SALES> 19214
<TOTAL-REVENUES> 19214
<CGS> 15318
<TOTAL-COSTS> 15318
<OTHER-EXPENSES> 400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140
<INCOME-PRETAX> 148
<INCOME-TAX> 105
<INCOME-CONTINUING> 43
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43
<EPS-PRIMARY> .002
<EPS-DILUTED> .002
</TABLE>
