<PAGE>
UNITED STATES
SECURITES 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, 1999
[_] 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 filled 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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filling
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 5, 1999 was 27,577,187.
<PAGE>
ALPNET, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Statements of Income--Three months ended June 30, 1999
and 1998 and Six months ended June 30, 1999 and 1998................ 3
Consolidated Balance Sheets--June 30, 1999 and December
31, 1998............................................................ 4
Consolidated Statements of Cash Flows--Six months ended
June 30, 1999 and 1998.............................................. 6
Notes to Consolidated Financial Statements--June 30, 1999............ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 12
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings.................................................... 23
Item 6. Exhibits and Reports on Form 8-K..................................... 23
SIGNATURES.................................................................... 24
- ----------
</TABLE>
2
<PAGE>
Item 1: Consolidated Financial Statements (Unaudited)
- ------ ---------------------------------------------
ALPNET, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
Thousands of dollars and shares 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales of services $12,516 $13,226 $24,978 $25,547
Operating expenses:
Cost of services sold 9,435 9,912 19,392 19,086
Selling, general and administrative
expenses 2,355 1,934 4,452 3,734
Development costs 30 170 78 294
Amortization of goodwill 94 89 191 186
------- ------- ------- -------
Total operating expenses 11,914 12,105 24,113 23,300
------- ------- ------- -------
Operating income 602 1,121 865 2,247
Interest expense, net 93 75 188 151
------- ------- ------- -------
Income before income taxes 509 1,046 677 2,096
Income taxes 152 320 216 560
------- ------- ------- -------
Net income $ 357 $ 726 $ 461 $ 1,536
======= ======= ======= =======
Income per share - basic $ .015 $ .031 $ .019 $ .065
======= ======= ======= =======
Income per share - assuming dilution $ .014 $ .027 $ .018 $ .058
======= ======= ======= =======
</TABLE>
See accompanying notes.
3
<PAGE>
ALPNET, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
June 30 December 31
Thousands of dollars 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,275 $ 1,499
Trade accounts receivable, less allowance of
$373 in 1999 and $424 in 1998 9,369 10,124
Work-in-process 3,427 1,675
Prepaid expenses and other 928 636
----------- ---------
Total current assets 14,999 13,934
Property, equipment and leasehold improvements:
Office facilities and leasehold improvements 242 258
Equipment 7,426 6,634
----------- ---------
7,668 6,892
Less accumulated depreciation and amortization 4,358 4,133
----------- ---------
Net property, equipment and leasehold improvements 3,310 2,759
Other assets:
Goodwill, less accumulated amortization of
$3,926 in 1999 and $4,025 in 1998 5,799 5,428
Other 296 302
----------- ---------
Total other assets 6,095 5,730
----------- ---------
Total assets $24,404 $22,423
=========== =========
</TABLE>
See accompanying notes.
4
<PAGE>
ALPNET, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)--continued
<TABLE>
<CAPTION>
June 30 December 31
Thousands of dollars and shares 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable to banks $ 3,224 $ 3,631
Accounts payable 4,440 2,671
Accrued payroll and related benefits 1,380 1,222
Other accrued expenses 1,288 2,110
Deferred revenue 148 189
Income taxes payable 855 724
Current portion of long-term debt 1,040 400
----------- --------
Total current liabilities 12,375 10,947
Long-term debt to affiliates 323 -
Long-term debt, less current portion 694 454
Commitments and contingencies - -
Shareholders' equity:
Convertible Preferred Stock, no par value;
authorized 2,000 shares; issued and
outstanding 87 shares in 1999 and 1998 242 242
Common Stock, no par value; authorized
40,000 shares; issued and outstanding
24,536 shares in 1999 and 24,287
shares in 1998 42,800 42,546
Accumulated deficit (29,502) (29,963)
Accumulated other comprehensive income (2,528) (1,803)
----------- --------
Total shareholders' equity 11,012 11,022
----------- --------
Total liabilities and shareholders' equity $ 24,404 $ 22,423
=========== ========
</TABLE>
See accompanying notes.
5
<PAGE>
ALPNET, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
Thousands of dollars 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net income $ 461 $ 1,536
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of property,
equipment and leasehold improvements 529 401
Amortization of goodwill 191 186
Other 96 22
Changes in operating assets and liabilities:
(net of effect of acquisition)
Trade accounts receivable 394 (1,256)
Work-in-process (1,607) (243)
Other operating assets and liabilities (371) (383)
Accounts payable and accrued expenses 1,130 939
Income tax payable 123 343
Deferred revenue (85) (554)
---------- -------
Net cash provided by operating activities 861 991
Investing activities:
Purchase of property, equipment and leasehold
improvements (1,270) (984)
Payment for acquisition (see note 2 on page 8) (98) -
---------- -------
Net cash used in investing activities (1,368) (984)
Financing activities:
Proceeds from notes payable to banks 3 664
Principal payments on notes payable to banks (571) (542)
Proceeds from long-term notes to affiliates 190 -
Proceeds from long-term debt 848 136
Principal payments on long-term debt (268) (178)
Proceeds from exercise of stock options 143 321
---------- -------
Net cash provided by financing activities 345 401
Effect of exchange rate changes on cash (62) 2
---------- -------
Net increase (decrease) in cash and cash equivalents (224) 410
Cash and cash equivalents at beginning of period 1,499 1,711
---------- -------
Cash and cash equivalents at end of period $ 1,275 $ 2,121
========== =======
Cash paid during the period for:
Interest $ 191 $ 153
Income taxes 92 219
</TABLE>
6
<PAGE>
ALPNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1999
1. BASIS OF PRESENTATION
ALPNET, Inc. (the "Company") is a United States publicly-owned
multinational corporation which was incorporated in the state of Utah in
1980. The Company provides services and solutions in the global information
services sector to businesses engaged in international trade. These
services include translation, software localization, information
development and content creation. ALPNET also provides a range of
information consultancy services which include information analysis,
development of information strategies, advice on information standards and
benchmarking and evaluation of available language products including
information and documentation management systems, authoring and translation
tools and publishing software and browsers. The principal markets for the
Company's services are North America, Europe and Asia.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the U.S.
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, 1998.
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.
7
<PAGE>
2. ACQUISITION
On June 30, 1999 the Company acquired the entire outstanding share capital
of EP Electronic Publishing Partners GmbH ("EP"), a German corporation
based in Nuremburg, Germany. EP designs and develops custom built computer
software systems for document, information, knowledge and translation
management. The acquisition cost of approximately $937,000 was paid as
follows:
<TABLE>
<S> <C>
Cash (funded from working capital) $ 98,000
8% unsecured note due in one year 320,000
8% unsecured notes due 1/3rd each in 36, 48 and 60 months,
convertible to common shares 133,000
49,518 shares of ALPNET, Inc. common stock 112,000
Assumption of net liabilities and acquisition costs 274,000
--------
Total $937,000
========
</TABLE>
The acquisition is accounted for using the purchase method and the
resulting goodwill is being amortized on the straight-line method over 12
years.
3. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130").
FAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net income or shareholders'
equity. FAS 130 requires the Company's foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income.
Accumulated other comprehensive income is entirely accumulated foreign
currency translation adjustments.
4. INCOME PER SHARE
The Company presents basic and diluted income per share on the face of the
consolidated statements of income. Basic income per share is computed by
dividing net income by the weighted average number of common shares
outstanding during the accounting period excluding any dilutive effects of
options and convertible securities. Diluted income per share includes the
potential dilution as a result of stock options and convertible securities.
The following table sets forth the computation of basic and diluted income
per share.
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
Thousands of dollars and shares 1999 1998 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
income per share - net income $357 $726 $461 $1,536
====================================
Denominator:
Denominator for basic income per
share - weighted-average shares 24,434 23,679 24,372 23,500
Effect of dilutive securities:
Convertible Preferred Stock 786 786 786 786
Employee stock options 788 2,475 871 2,279
------------------------------------
Dilutive potential common shares 1,574 3,261 1,657 3,065
------------------------------------
Denominator for diluted income per
share - adjusted weighted-average
shares and assumed conversions 26,008 26,940 26,029 26,565
====================================
Income per share - basic $.015 $.031 $.019 $.065
====================================
Income per share - assuming
dilution $.014 $.027 $.018 $.058
====================================
</TABLE>
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. COMMITMENTS AND CONTINGENCIES
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 1997 and 1996, $270,000
was expensed related to statutorily-required costs of termination and the
legal actions taken by specific employees. Approximately $16,000 remains
accrued at June 30, 1999.
The Company believes it has complied with all aspects of applicable French
labor regulations in terminating the employees and intends to defend its
actions vigorously. A preliminary judgement ruled in favor of the Company
but an appeal is pending. 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.
9
<PAGE>
On February 23, 1998, the Company was named as one of several defendants in
three civil actions. In these actions, each of the named plaintiffs, all of
whom are German nationals, seek to recover monetary damages, in amounts to
be proven at trial, including punitive damages, interest, and costs
allegedly sustained as a result of securities transactions the plaintiffs
entered into with several of the other named defendants. The Company is
vigorously defending the lawsuits. An estimate of the possible loss or
range of loss from these actions cannot be made. No expense has been
accrued in the financial statements for these actions; however, legal costs
have been expensed as incurred.
The Company has committed to purchase approximately $1.1 million of
software and related computer equipment during 1999 for a new enterprise
and knowledge management system, which it is developing, of which $793,000
was acquired under capital leases in the six-month period ended June 30,
1999.
7. GEOGRAPHICAL AND SEGMENT DATA
The Company operates in one segment, global information services. Within
this segment, the Company also evaluates its performance internally by
significant geographic regions.
The following selected financial data summarizes the Company's domestic and
foreign operations for financial reporting purposes. Allocations of
corporate and country overheads to domestic and foreign operations are
based upon the Company's policies for financial reporting consistently
applied during the periods. Intercompany sales are normally billed on a
margin-sharing basis. All intercompany sales are eliminated in determining
the totals. Since the Company's last annual report, financial data for the
United States and Canada have been combined under North America as these
two countries' operations are now under common management and are measured
internally as a single region.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
30 June 30 June
Thousands of dollars 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net external sales:
North America $ 5,587 $ 4,392 $ 9,818 $ 8,611
Europe 6,243 8,116 13,881 15,646
Asia 686 718 1,279 1,290
------- ------- ------- -------
$12,516 $13,226 $24,978 $25,547
======= ======= ======= =======
Intercompany sales:
North America $ 509 $ 404 $ 816 $ 698
Europe 3,006 1,913 4,587 3,652
Asia 1,265 809 1,832 1,387
------- ------- ------- -------
$ 4,780 $ 3,126 $ 7,235 $ 5,737
======= ======= ======= =======
Income before income taxes:
North America /(a)/ $ (264) $ (133) $ (582) $ (91)
Europe 414 1,043 707 1,892
Asia 359 136 552 295
------- ------- ------- -------
$ 509 $ 1,046 $ 677 $ 2,096
======= ======= ======= =======
</TABLE>
/(a)/ Includes corporate general and administrative expenses.
10
<PAGE>
8. NEW ACCOUNTING STANDARD
During 1998, Financial Accounting Standards No 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133") was issued which
requires the Company to record all derivative instruments as assets or
liabilities, measured at fair value. The Company will adopt FAS 133 in the
third quarter of 1999. It is not anticipated that the adoption of this
statement will have a material affect on the financial statements of the
Company.
9. SUBSEQUENT EVENTS
On July 30, 1999, the Company completed the acquisition of Technical
Publications Services (TPS) B.V., formerly Stork TPS. TPS is active in
industrial information consulting and translation services and in providing
high-end SGML publishing solutions to international corporations. The TPS
transaction is valued at approximately $6.6 million and was paid with 3
million unregistered, restricted shares of ALPNET common stock and the
assumption of $600,000 due from TPS to its former parent company. The
agreement provides that additional shares of ALPNET common stock (up to a
maximum of 1.8 million shares) will be issued if the Company's per share
price is less than $2.50 on July 30, 2000. The agreement also provides that
the former parent company will loan ALPNET $850,000 due in one year, with
interest at 5%. Approximately $600,000 of the proceeds of this loan was
used to pay the amount due to the former parent company and the remaining
$250,000 will be used for working capital for TPS. This loan was made on
July 30, 1999.
The Company has issued a series of convertible, unsecured loan notes to
several private investors, totaling $1,190,000. $190,000 was issued just
prior to June 30, 1999 and the balance has been issued subsequently. These
notes have a variable interest rate of two percent over a US prime rate and
are repayable in three equal installments 36, 48 and 60 months from the
date of issue. The outstanding principal is convertible, at the option of
the lender, at any time after issuance, prior to the payment of the note in
full, into restricted shares of common stock of the Company. The Conversion
price is the average market value of the Company's stock for the 5 trading
days prior to issuance. The lender has the right to have the common stock
obtained upon conversion registered under certain specified conditions. The
Company has the right to repay the notes prior to maturity. The proceeds of
the notes will be used to provide working capital for the Company and its
newly acquired subsidiaries and to fund development of the ALPNET Planet
system. Three of the notes, totaling $440,000, are held by affiliates of
the Company. The Company may continue to seek additional funds by issuing
similar notes depending on the Company's cash requirements and expansion
plans.
11
<PAGE>
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 accompanying unaudited Consolidated Financial
Statements and Notes thereto.
Results of Operations
The following paragraphs discuss the results of operations for the three
month periods ended June 30, 1999 and 1998 ("second quarter 1999 and 1998"
respectively) and the six month periods ended June 30, 1999 and 1998
("half-year 1999 and 1998" respectively).
Sales of services for the second quarter were $12.5 million for 1999
compared to $13.2 million for 1998 and the Company reported net income of
$357,000 in 1999 compared to net income of $726,000 in 1998. Sales of
services for the half-year were $25.0 million for 1999 compared with $25.5
million for 1998 and the Company reported net income of $ 461,000 in 1999
compared with $1.5 million in 1998.
Sales of services for the second quarter 1999 are the second highest ever
recorded by the Company and approximately 5% below second quarter 1998,
which was a record quarter. Margins are at approximately the same level in
both quarters. Margins had fallen in the second half of 1998 as a result of
extremely competitive trading conditions and consequently the restoration
of margins to previous levels is a positive development. While margins can
fluctuate with the mix of the Company's revenues, management has
aggressively sought to improve margins by eliminating ineffective
production and excess capacity as part of the Company's restructuring which
commenced in November 1998. This is explained more fully below.
Sales of services for the half-year 1999 show a slight decrease compared to
1998. Margins are approximately 3% lower in 1999 as a result of reduced
margins in the first quarter 1999 but the trend is positive. The half-year
1998 was a record half-year for the Company in terms of sales of services
and net income.
Also in the quarter and half-year 1999, the Company has added capabilities
to enable it to expand into the higher margin global information services
market. This includes the addition of management, technical and support
services in the area of information consulting services. Management
believes that this action will position the Company for a changing business
environment where there is a significant opportunity to leverage the
Company's translation and localization capabilities and client
relationships through providing additional higher value services.
The Company has now restored revenues in the first half-year 1999 to
approximately the same levels as 1998 and re-established profitable
operations. Management is committed to further improve sales and increase
profitability during the rest of the year.
12
<PAGE>
Sales of Services by Geographic Segment
The value of revenues, costs and net income reported in US dollars have
been impacted somewhat by the effects of fluctuations in foreign currencies
against the US dollar. This is described in more detail in the section
"Foreign Exchange Risk."
North America total sales were $5.6 million for the second quarter 1999
compared with $4.4 million in 1998 and were $9.8 million for the half-year
1999 compared with $8.6 million in 1998. Virtually all of the increase
occurred in the second quarter 1999. Sales in Canada increased 32% where
demand, especially in automotive and financial sectors, remains strong. In
the United States, sales were at approximately the same level as in 1998
but with a stronger second quarter. Management expects this general
restoration of growth to continue in the United States but the amount and
timing of actual orders is variable. Since the Company's reorganization,
North America is under common management which maximizes the region's sales
opportunities and production efficiency.
Total sales in Europe were $6.2 million in the second quarter 1999 compared
with $8.1 million in 1998. In the half-year 1999, sales of services in
Europe were $13.9 million (56% of total Company sales) compared with $15.6
million (61%) in 1998. The European operations have been unified under a
new management structure during the quarter which is aggressively
addressing the region's trading difficulties. Most of the decrease in sales
is attributable to continued difficult trading conditions in the UK,
especially in traditional translation services. Other European operations
are trading at approximately the same levels as 1998. The UK operation has
been extensively reorganized during the half-year with a reduction in the
number of offices from six to three. This reorganization is now complete
and management expects an improvement in sales during the remainder of
1999. The closure of the Company's production facility in Belgium is also
complete.
Asia's reported sales of services for the half-year 1999 were $1.3,
approximately the same level as 1998. The Company's presence in Asia has
been significantly expanded in recent years by opening offices in new
countries and expanding the capacities of existing offices. Despite the
recent economic trends in Asia, demand for translation and localization for
Asian markets from the business communities in the United States and Europe
remains at a relatively high level.
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. The Company
experiences fluctuations in quarterly sales and profitability levels
largely as a result of the increase or decrease in the number of such
projects. Management expects this trend to continue. Nevertheless, 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 for the half-year 1999 were $19.4 million, 78% of
sales, compared with $19.1 million, 75% of sales, in half-year 1998. Cost
of services sold as a percentage of sales of services has increased
primarily as a result of competition in the marketplace and the volume and
nature of direct production costs of large projects in each period. In
common with the entire industry, 1999 margins have been negatively affected
by downward price pressure from clients and competitors. Management
13
<PAGE>
expects competitive pricing pressures to continue in the foreseeable
future. The Company is continuing its efforts to control costs to offset
the effects of these pricing pressures. Management believes that margins
will improve as the impact of the restructuring and the focus on improved
processes and technology are fully established, as evidenced by the margin
improvement in the second quarter 1999. Actions being taken include the
development and implementation of a new enterprise and knowledge management
system, more effective utilization of technology on a broader range of
projects to improve the productivity of translators, and the development of
stronger partnerships with clients to enable the Company to provide higher-
margin, higher-value, information consultancy services to clients.
Other Costs and Expenses
Selling, general and administrative expenses were $4.4 million in the half-
year 1999, an increase of $718,000 over 1998. Management has extended its
sales and marketing efforts and capabilities in substantially all of the
Company's markets and has added capabilities, resources and support
services to enable it to expand its range of services in the higher value
line of information consultancy services. The Company believes that it can
leverage its translation and localization capabilities and major client
relationships by expanding into the broader field of global information
services. There has also been an increase in 1999 expenses compared with
1998 as the Company has organized its new operations group, at the
Corporate level, charged with directing the operations function of the
Company.
Development costs were $78,000 in the half-year 1999 compared to $294,000
in half-year 1998, a decrease of $216,000. The acquisition of EP Publishing
Partners gives the Company access to new technology that will substantially
enhance and compliment the Company's existing tools. In 1999, ongoing
development costs have been reduced and the Company expects to fund major
future development jointly with clients and partners.
Any fluctuations in the amount of goodwill amortization charged against
income result primarily from foreign currency exchange rate fluctuations
from period to period, but this was not a significant factor in either the
quarter or half-year 1999.
Net interest expense was $93,000 in the second quarter 1999, an increase of
$18,000 compared to 1998, and for the half-year 1999 was $188,000 an
increase of $37,000. The increase was due to higher average balances
outstanding under bank-lines of credit, and increases in long-term debt
used to finance certain equipment and software purchases.
The US parent company and each of its subsidiaries are separate legal and
taxable entities subject to domestic or foreign taxes pertaining to
operations in their respective jurisdictions. For tax purposes, the US
parent company, and certain 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.
14
<PAGE>
After the utilization of net operating loss carryforwards, income tax
expense was $152,000 in the second quarter 1999, compared with $320,000 in
1998, and for the half-year 1999 was $216,000, compared with $560,000 in
1998. 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. The US parent company has a net operating loss carryforward
for US Federal tax purposes but has no net operating loss carryforwards for
state income tax purposes.
Restructuring
In response to volatile global market conditions, the Company implemented a
reorganization of the Company's structure and operations in November 1998.
The plan included centralization of production operations, elimination of
production capacity including personnel, facilities and other support costs
and the re-organization of the sales function.
The total restructuring costs of $1,291,000, charged against income in
1998, comprised planned employee termination costs and lease cancellation
costs in four principal areas:
<TABLE>
<CAPTION>
Thousands of dollars No. of Employee Lease Total
(except employee no.'s) Employees Termination Cancellation
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
USA restructure 42 $212 $158 $ 370
Belgium production facility 16 106 50 156
Executive terminations 3 340 340
Europe restructure 21 235 190 425
------------------------------------------------------------------------------------------
Total 82 $893 $398 $1,291
------------------------------------------------------------------------------------------
</TABLE>
The operations in the USA and Belgium relate to offices established by the
Company and consequently have no attributable goodwill. The operations in
the UK and Spain were acquired by the Company in 1988 as part of the
purchase of Interlingua Group Ltd, a group of translation companies that
also included operations in Asia. The future prospects of both of the
restructured businesses have been enhanced by these actions. Management has
reviewed the future projected revenue from these businesses and concluded
that no impairment of goodwill has occurred.
15
<PAGE>
The restructuring costs summarized above represent costs paid during 1998,
1999 and accrued at June 30, 1999.
<TABLE>
<CAPTION>
Thousands of dollars No. of Employee Lease Total
Employees Termination Cancellation
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Total 82 $ 893 $ 398 $1,291
Paid Prior to March 31, 1999 65 (630) (94) (724)
-------------------------------------------------------------
Outstanding as of March 31, 1999 17 263 304 567
Paid in the second quarter 1999 16 (158) (106) (264)
-------------------------------------------------------------
Outstanding at June 30, 1999 1 $ 105 $ 198 $ 303
-------------------------------------------------------------
</TABLE>
Employee termination costs are payable according to the relevant local law
which often provides for payments to be made over a number of months. Lease
cancellation costs represent the full cost of terminating leases according
to the terms of the lease contracts less expected sub-lease income, if any.
Enterprise and Knowledge Management System
Based upon concepts developed in 1998, in 1999 management of the Company
has commenced the design, development and preparation for installation of
an enterprise and knowledge management system which will be installed
throughout the Company's operations and will provide for flexible and
informed analysis of operations, provide wide and timely dissemination of
information, facilitate rapid decision making and will allow all managers
to be focused on common goals for improved performance and profitability.
This enterprise system is known as ALPNET Planet.
ALPNET Planet will encompass all front and back office functions as well as
strategic management needs. It will also monitor and validate processes by
measuring how work is being performed against established policies and
procedures. Management expects the implementation of this system, upon its
completion, to have a significant, positive effect upon the operating
performance of the Company.
The most valuable component of ALPNET Planet will be its knowledge
management package which will capture and manage the Company's information,
knowledge and expertise. It will centralize and leverage all translation
memories, terminology databases and localization know-how in one highly
organized data warehouse.
ALPNET Planet will be developed, tested and prepared for installation
throughout 1999, with full implementation of all modules by the year 2000.
The Company will lease the major hardware and software components of the
system which will then be adapted by the Company according to its design
specifications.
16
<PAGE>
In conformity with the FASB Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use", the
Company will capitalize the costs to develop ALPNET Planet. Total costs of
the computer software, computer hardware and other costs of the Planet system
are expected to be approximately $2.35 million, approximately $1.1 million of
which represents purchased software and equipment and $1.25 million represents
costs of customization and development. The system costs will be amortized
over a 48-month period commencing in the year 2000 as each module of the
system becomes fully functional and ready for its intended use. Total ALPNET
Planet system costs of $313,000 have been capitalized for the second quarter
1999, and $943,000 for the half-year 1999.
Liquidity and Sources of Capital
In the half-year 1999, the Company had a positive cash flow from operations of
approximately $861,000 compared with positive cash flows from operations in
1998 of $991,000. In 1998, the Company's investing activities consisted
primarily of the acquisition of equipment needed to maintain or upgrade
production capability. In 1999, equipment acquisitions of $1,270,000 included
$943,000 of software and related equipment for ALPNET Planet. The cash
component of the acquisition of EP Electronic Publishing Partners GmbH was
$98,000. The acquisition is described more fully in note 2 to the financial
statements.
Financing activities for both half-years included fluctuations in the amounts
utilized under bank lines of credit to finance the Company's working capital
needs and changes in outstanding debt used to finance equipment purchases.
At June 30, 1999, the Company's cash and cash equivalents were approximately
$1.3 million, which represented a decrease of $200,000 during 1999. At June
30, 1999, the Company had working capital of approximately $2.6 million,
compared to working capital of approximately $3.0 million at December 31,
1998.
The Company's primary working capital requirements relate to the funding of
accounts receivable and work-in-process. The Company funds some of its
working capital needs with credit facilities with financial institutions in
the US, Canada, the UK, Germany, Spain and The Netherlands. Most of the
credit facilities are secured by accounts receivable and other assets of the
Company or its subsidiaries. As of June 30, 1999, the Company had unused
amounts under these credit facilities of approximately $1.2 million.
The Company's only significant commitments for capital expenditures are
approximately $900,000 for ALPNET Planet software and related computer
equipment which will be acquired primarily under capital leases during 1999.
$793,000 of software was acquired in the half-year 1999. 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 and other related software and computer equipment 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 with terms similar to the financing arrangements entered into
in recent years.
17
<PAGE>
In November 1998, the Company commenced implementation of an aggressive and
fundamental restructuring of the Company's organization and operations, as
discussed more fully in Management's Discussion and Analysis of Financial
Condition and Results of Operations. This restructuring had a negative effect
on cash flow of approximately $661,000 in the half-year 1999. Additional
negative cash flows related to this reorganization in the amount of
approximately $303,000 is estimated for the remainder of 1999.
During the half-year 1999, the Company issued a convertible loan note of
$190,000 to an affiliate of the Company and subsequently an additional $1.0
million of similar notes were issued, $250,000 of which were issued to
affiliates, as discussed more fully in note 9 to the financial statements.
The proceeds of the notes will be used to provide working capital for the
Company and its newly acquired subsidiaries and provide funding for the
development of the ALPNET Planet system. The Company may continue to seek
additional funds by issuing similar notes or other sources of funding in
accordance with the Company's cash requirements and expansion plans.
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.
Some of the financial institutions, 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 believes it has the ability to issue additional equity securities
if necessary. In certain past years, the Company has relied on major
shareholders of the Company to fund some obligations, but the Company
currently has no firm commitments from, nor are there any obligations of, any
such shareholders to provide any debt or equity funds to the Company.
It is more difficult to assess cash flows beyond 1999, 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.
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, 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 certain 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 income tax liabilities requiring
the significant expenditure of cash. The Company expects this general trend
to continue into the future for certain offices which 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.
18
<PAGE>
Substantially all of the Company's deferred tax assets at June 30, 1999 and
December 31, 1998 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.
Foreign Exchange Risk
The Company serves its customers from more than 15 countries. The majority of
the Company's operations are located outside the US and, consequently, the
Company is exposed to fluctuations of the dollar against the foreign
currencies of those countries in which the Company has a substantial presence.
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 years
presented. The principal currencies to which the Company is exposed are the
Canadian dollar, the British Pound, the German Mark and the Dutch Guilder.
Fluctuations against the dollar can produce significant differences in the
reported value of revenues and expenses.
The following table shows a comparison of sales of services in each of the
Company's significant geographic segments for the half-year 1999 and 1998,
along with the effect of foreign currency exchange rate fluctuations on sales
between periods.
<TABLE>
<CAPTION>
Increase (Decrease) in
Six Months Sales of Services due to Total
Ended June 30 Sales Currency Increase
Thousands of dollars 1999 1998 Volume Fluctuations (Decrease)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
North America $ 9,818 $ 8,611 $ 1,369 $(162) $ 1,207
Europe 13,881 15,646 (1,605) (160) (1,765)
Asia 1,279 1,290 (27) 16 (11)
----------------------------------------------------
Total Sales $24,978 $25,547 $ (263) $(306) $ (569)
====================================================
</TABLE>
The revenue mix of the Company's operations and the effect of foreign currency
exchange rate fluctuations on costs and expenses generally mitigate the
consolidated net income impact. For revenues in the US which are produced
outside of the US, any weakening of the US dollar against a particular
country's currency reduces the amount of net income reported in US dollars.
Conversely, the same weakening of the US dollar generates an offsetting
increase in the dollar value of profits arising from revenues within that
country. This natural currency effect reduces the net foreign exchange risk
to the Company.
Total sales for the half-year 1999 of $25.0 million were negatively affected
by $306,000 as a result of fluctuations in foreign currencies. Total
operating expenses and interest expense were positively affected by $213,000
resulting in a net negative impact on net income of $93,000 as a result of
fluctuations in foreign currency exchange rates. The Company does not
currently use any financial
19
<PAGE>
instruments to manage or hedge foreign exchange risk either for trading or
other purposes. The revenue mix and currency trends are monitored on an
ongoing basis to identify any changes that might significantly affect the
Company's net results.
The translation of foreign denominated assets and liabilities at year-end
exchange rates results in an unrealized foreign currency translation
adjustment recorded as a separate component of shareholders' equity and
reported as other comprehensive income. The foreign currency adjustment to
shareholders' equity for the half-year 1999 was an increase of $725,000
compared to a reduction of $4,000 in 1998. As of June 30, 1999, the
cumulative net effect to the Company of the equity adjustment from movements
in foreign currency exchange rates was a reduction of approximately $2.5
million in shareholders' equity. A significant portion of the cumulative
foreign currency adjustment relates to changes in the carrying value of
goodwill, which is denominated entirely in foreign currencies.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based upon recent assessments, the Company has determined that it will need to
modify or replace the operations administration system for one of the
Company's foreign subsidiaries. This system will be replaced in 1999 during
the first phase of the implementation of ALPNET Planet. As part of the
implementation of this new system, the entire accounting and information
systems of the Company will be replaced. The Company's proprietary translation
software system, TSS, has been Year 2000 compliant since its development in
the mid-80's.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing and implementation. The Company has
completed its assessment of all of its systems that could be significantly
affected by the Year 2000. The Company is primarily in the business of
providing services but those services are supported by the use of computer
hardware and software systems in the production of a substantial portion of
those services. The Company's vendors consist primarily of individual
translators and other service professionals who are not expected to be
materially impacted by the Year 2000 Issue. The Company is also dependent upon
third party suppliers for utility services and telecommunications
capabilities. The Company has its primary locations in geographically diverse
locations in North America, Europe and Asia. If one of the Company's locations
should be unable to operate due to the Year 2000 Issue affecting one of its
third party suppliers, the Company believes that replacement services can be
rendered from another of the Company's locations.
The Company has not yet completed a comprehensive study as to whether its
third party suppliers are Year 2000 compliant. It is in the process of
gathering information about the Year 2000 status of suppliers and will
continue to assess and monitor their compliance.
20
<PAGE>
Status
The Company has completed a full evaluation of all its systems and has
completed the remediation phase of its Year 2000 plan. The Company has
replaced all critical systems and hardware that is not Year 2000 compliant
with the exception of the systems that ALPNET Planet will replace. ALPNET
Planet, which is fully Year 2000 compliant, is expected to have replaced all
remaining non-compliant systems by October 31, 1999.
The Company has begun to test all equipment and software. The testing phase
will be completed no later than September 30, 1999 with the exception of
ALPNET Planet, which is being tested as it is developed and implemented.
During the period of testing the critical systems, any system or piece of
equipment that is found to be non-compliant will be retired and replaced. The
Company does not expect the cost to replace such equipment to be material.
Third Parties
The Company has queried its significant suppliers and subcontractors that do
not share information systems with the Company (external agents), but has not
received answers to all of its queries. To date, the Company is not aware of
any external agents with a Year 2000 Issue that would materially impact the
Company's results of operations, liquidity, or capital resources. However, the
Company has no means of ensuring that external agents will be Year 2000 ready.
The inability of external agents to complete their Year 2000 resolution
process in a timely fashion is not expected to materially impact the Company.
The Company believes that it could partially compensate for the failure of
external agents to comply by utilizing its operations in other geographic
locations to meet client requirements or by using alternate suppliers.
The company has contracted with Equant NV to provide a secure, Year 2000
compliant Wide Area Network to facilitate the exchange of electronic
information between all ALPNET offices. Parts of the network are currently
operational and the entire network will be operational by September 30, 1999.
Costs
The Company will utilize primarily internal resources to reprogram, replace,
test and implement the software and operating equipment for required Year 2000
modifications. The total costs of the Year 2000 project is estimated at
$200,000 of which $100,000 ($30,000 expensed and $70,000 capitalized for new
equipment) was incurred in the year ended December 31, 1998. Of the total
estimated remaining project costs, approximately $30,000 for replacement
equipment was paid in the second quarter and approximately $30,000 will be
paid in the third quarter for testing and monitoring of the new systems.
Approximately $40,000 is related to the replacement of the operations
administration system in the Company's UK subsidiary in the third quarter.
21
<PAGE>
Risks
Management of the Company believes it has an effective program in place to
address the Year 2000 Issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of its Year 2000 program. In the
event that the Company does not complete any additional phases, the Company's
ability to produce certain orders may be negatively impacted. More
importantly, disruptions resulting from Year 2000 Issues in the world economy
in geographies where the Company or its clients have significant operations
could adversely affect the Company. The Company may be unable to meet services
commitments due to computer systems failure. The amount of potential
liability, lost revenue and damages cannot be reasonably estimated at this
time.
Contingency Plans
The Company is currently in the process of determining what contingency plans,
if any, will be necessary to mitigate the impact of the Year 2000 issue.
Recent Acquisition
The ALPNET Planet system will be implemented at Electronic Publishing Partners
GmbH., ALPNET's recent acquisition, on the same schedule as the Company's
other offices. The Company is evaluating the Year 2000 status of the systems
that ALPNET Planet will not replace. When the evaluation is complete, a plan
will be put in place to address any remaining Year 2000 issues within
Electronic Publishing Partners GmbH.
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 markets 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, the Year 2000 Issue, 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), or 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.
22
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
Reference is made to "Item 3: Legal Proceedings" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, filed
on March 27, 1999.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) The following exhibits are included herein:
27 Financial Data Schedule
(b) On July 14, 1999, the Company filed a Form 8-K in respect of the
acquisition of EP Electronic Publishing Partners GmbH. The approximate
acquisition cost reported in the Form 8-K differs from the actual
acquisition cost reported in this Form 10-Q as a result of foreign
currency exchange differences and other adjustments. This difference
is not material and will be disclosed in a subsequent Form 8-K/A.
On August 11, 1999, the Company filed a Form 8-K in respect of the
acquisition of Technical Publications Services (TPS) B.V., formerly
Stork TPS .
23
<PAGE>
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 1999 /s/ Michael F. Eichner
-------------- ---------------------------------
Michael F. Eichner
Chairman of the Board
Date: 11 August 1999 /s/ John W. Wittwer
-------------- ---------------------------------
John W. Wittwer
Vice President Finance
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JAN-01-1999
<PERIOD-END> MAR-31-1999 JUN-30-1999
<CASH> 1,281 1,275
<SECURITIES> 0 0
<RECEIVABLES> 9,303 9,742
<ALLOWANCES> 443 373
<INVENTORY> 0 0
<CURRENT-ASSETS> 13,429 14,999
<PP&E> 7,336 7,668
<DEPRECIATION> 4,179 4,358
<TOTAL-ASSETS> 21,970 24,404
<CURRENT-LIABILITIES> 10,572 12,375
<BONDS> 500 1,017
0 0
242 242
<COMMON> 42,573 42,800
<OTHER-SE> (32,217) (32,030)
<TOTAL-LIABILITY-AND-EQUITY> 21,970 24,404
<SALES> 12,462 24,978
<TOTAL-REVENUES> 12,462 24,978
<CGS> 9,957 19,392
<TOTAL-COSTS> 9,957 19,392
<OTHER-EXPENSES> 145 269
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 95 188
<INCOME-PRETAX> 168 677
<INCOME-TAX> 64 216
<INCOME-CONTINUING> 104 461
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 104 461
<EPS-BASIC> 0.004 0.019
<EPS-DILUTED> 0.004 0.018
</TABLE>
