<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
------------------
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to _______.
Commission File Number 0-19640
-----------------
VERTEL CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
California 95-3948704
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
21300 Victory Boulevard, Suite 1200, Woodland Hills, California 91367
(Address of principal executive offices) (Zip code)
(818) 227-1400
(Registrant's telephone number, including area code)
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 as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
Yes X No .
-- --
As of November 3, 1999 there were 25,484,138 shares of common stock outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
(unaudited)
Current assets:
Cash and cash equivalents..................................... $ 4,417 $ 19,495
Short-term investments........................................ 5,855 978
Trade accounts receivable (net of allowances of $691 as of
September 30, 1999 and $556 as of December 31, 1998).... 5,974 4,477
Prepaid expenses and other current assets..................... 627 540
-------- --------
Total current assets..................................... 16,873 25,490
Property and equipment, net........................................ 1,497 1,025
Investments........................................................ 1,437 1,437
Goodwill........................................................... 4,226 --
Other assets....................................................... 290 365
-------- --------
$ 24,323 $ 28,317
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 757 $ 426
Accrued wages and related liabilities......................... 1,613 1,351
Capital lease obligations..................................... 65 --
Accrued restructuring expenses................................ 141 224
Accrued taxes payable......................................... 933 1,087
Other accrued liabilities..................................... 2,265 1,942
Accrued acquisition liabilities............................... 91 --
Deferred revenue.............................................. 1,648 1,115
-------- --------
Total liabilities........................................ 7,513 6,145
-------- --------
Shareholders' equity:
Preferred stock, par value $.01, 2,000,000 shares authorized;
none issued and outstanding
Common stock, par value $.01, 50,000,000 shares authorized;
Shares issued and outstanding: 1999, 25,484,138;
1998, 24,954,545................................. 255 249
Additional paid-in capital.................................... 80,450 79,553
Accumulated deficit........................................... (63,727) (57,483)
Accumulated comprehensive deficit............................. (168) (147)
-------- --------
Total shareholders' equity............................... 16,810 22,172
-------- --------
$ 24,323 $ 28,317
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VERTEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended Nine Month Period Ended
--------------------------------- ---------------------------------
September 30, September 26, September 30, September 26,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net revenues:
License.................................. $ 2,618 $ 3,551 $ 9,382 $10,199
License - related party.................. -- -- -- 737
Service and other........................ 2,072 1,357 5,432 3,893
------- ------- ------- -------
Net revenues....................... 4,690 4,908 14,814 14,829
------- ------- ------- -------
Cost of revenues:
License.................................. 353 165 1,344 695
Service and other........................ 1,522 1,140 4,433 3,499
------- ------- ------- -------
Total cost of revenues............. 1,875 1,305 5,777 4,194
------- ------- ------- -------
Gross profit................................. 2,815 3,603 9,037 10,635
------- ------- ------- -------
Operating expenses:
Research and development................. 2,118 1,677 5,729 4,724
Sales and marketing...................... 2,547 1,655 6,306 4,605
General and administrative............... 1,078 724 3,233 2,058
Goodwill amortization.................... 238 -- 516 --
Restructuring benefit.................... (82) -- (82) --
------- ------- ------- -------
Total............................... 5,899 4,056 15,702 11,387
------- ------- ------- -------
Operating loss............................... (3,084) (453) (6,665) (752)
Other income, net............................ 79 1,526 471 2,189
------- ------- ------- -------
(Loss) income before provision for income
taxes.................................. (3,005) 1,073 (6,194) 1,437
Provision for income taxes................... 30 100 50 296
------- ------- ------- -------
Net (loss) income............................ (3,035) 973 (6,244) 1,141
Other comprehensive income (expense)......... (29) 446 (21) 425
------- ------- ------- -------
Comprehensive (loss) income.................. $(3,064) $ 1,419 $(6,265) $ 1,566
======= ======= ======= =======
Basic net (loss) income per common share..... $ (0.12) $0.04 $ (0.25) $0.05
======= ======= ======= =======
Diluted net (loss) income per common share... $ (0.12) $0.04 $ (0.25) $0.05
======= ======= ======= =======
Weighted average shares outstanding used in
net (loss) income per common share
calculations:
Basic.................................... 25,452 22,898 25,337 22,790
Diluted.................................. 25,452 23,783 25,337 24,329
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VERTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Month Period Ended
--------------------------------------------
September 30, September 26,
1999 1998
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income from continuing operations............... $ (6,244) $ 1,141
Adjustments to reconcile net loss from continuing
operations to net cash provided by (used for)
operating activities:
Depreciation and amortization............................ 1,577 763
Reserve for returns and bad debts........................ 135 49
Restructuring benefit.................................... (82) --
Non-cash stock based compensation........................ 208 --
Changes in operating assets and liabilities.............. (1,545) (265)
-------- -------
Net cash (used for) provided by operating activities..... (5,951) 1,688
-------- -------
Cash flows from investing activities:
Net purchases of short-term investments.................... (4,877) (978)
Purchases of property and equipment........................ (1,208) (763)
Cash paid for business acquisition , net of cash acquired (2,887) --
Change in other assets..................................... 128 (28)
-------- -------
Net cash used for investing activities................... (8,844) (1,769)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock..................... 314 322
Payments on short-term debt and capital lease obligations.. (576) --
Proceeds from repayment of notes receivable................ -- 25
-------- -------
Net cash (used for) provided by financing activities..... (262) 347
-------- -------
Net cash used by discontinued operations..................... -- (178)
-------- -------
Effect of exchange rate changes on cash...................... (21) (12)
-------- -------
Net (decrease) increase in cash and cash equivalents......... (15,078) 76
Cash and cash equivalents, beginning of period............... 19,495 6,252
-------- -------
Cash and cash equivalents, end of period..................... $ 4,417 $ 6,328
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. General
The consolidated financial statements include the accounts of Vertel
Corporation and its subsidiaries (the "Company"). All significant
intercompany balances and transactions have been eliminated in consolidation.
The interim consolidated financial statements are unaudited. In the opinion of
management, the interim financial statements include all adjustments, consisting
of only normal, recurring adjustments, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows. In the
fourth quarter of 1998, the Company adopted a calendar-year convention for its
fiscal year end and quarter ends. Accordingly, the fiscal year end for 1998 was
December 31, 1998. Prior to the fourth quarter of 1998, the Company's fiscal
year was the 52 or 53-week period ending on the Saturday nearest to December 31,
and the fiscal quarter ends ended on the thirteenth Saturday of the quarter
period. For simplicity of presentation, the Company has described the 13 weeks
ended September 26, 1998, and the 39 weeks ended September 26, 1998, as the
three months ended September 26, 1998 and as the nine months ended September 26,
1998, respectively.
It is suggested that these consolidated financial statements and the
accompanying notes be read in conjunction with the audited consolidated
financial statements and the accompanying notes for the year ended December 31,
1998 included in the Company's Annual Report on Form 10-K. The results of
operations for the three and nine month periods ended September 30, 1999 are not
necessarily indicative of results that may be expected for the full year.
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform to the 1999 consolidated financial statement presentation.
2. Statement of Cash Flows
Increases (decreases) in operating cash flows arising from changes in assets
and liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
Nine Month Period Ended
------------------------------------
September 30, September 26,
1999 1998
------------- -------------
<S> <C> <C>
Trade accounts receivable........................................... $(1,501) $ (196)
Prepaid expenses and other current assets........................... (26) (44)
Accounts payable.................................................... 128 (590)
Accrued wages and related liabilities............................... 81 40
Cash payments for restructuring expenses............................ (1) (1,263)
Other accrued liabilities........................................... 462 1,233
Accrued taxes payable............................................... (154) 113
Deferred revenue.................................................... (534) 442
------- -------
$(1,545) $ (265)
======= =======
</TABLE>
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
3. Acquisition of Expersoft Corporation
In March 1999, the Company acquired Expersoft Corporation ("Expersoft").
Expersoft develops and markets standards-based, high performance Common Object
Request Broker Architecture (CORBA) software technology. The acquisition price
was approximately $3,225,000 and consisted of cash of $3,000,000 and acquisition
costs of $225,000. At September 30, 1999 the Company had paid $3,134,000 of the
cash consideration and acquisition costs. The balance of $91,000 is expected to
be paid during the three month period ending December 31, 1999. The acquisition
was accounted for as a purchase. In connection with the purchase, the fair
value of assets acquired and obligations incurred were as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable, net......................................... $ 131
Costs and estimated earnings in an uncompleted contract.......... 385
Prepaid and other assets......................................... 113
Equipment, furniture, fixtures and leasehold improvements, net... 324
Cash paid for acquisition (net of $248,000 cash acquired)........ (408)
Accounts payable................................................. (203)
Accrued wages and related liabilities............................ (181)
Other accrued liabilities........................................ (641)
Capital lease obligations........................................ (498)
Short-term debt.................................................. (142)
Deferred revenue................................................. (1,053)
Accrued acquisition liabilities.................................. (2,569)
-------
Goodwill......................................................... $(4,742)
=======
The goodwill is being amortized using the straight-line method over its
estimated useful life of five years.
The operating results of Expersoft are included in the Company's consolidated
financial statements from the date of acquisition (effective March 12, 1999).
The unaudited pro forma consolidated information set forth below presents the
consolidated results of operations as if the acquisition had occurred at the
beginning of the periods presented.
These pro forma consolidated results have been prepared for
comparative purposes only and do not purport to be indicative of what would have
occurred if the acquisition had taken place at the beginning of the period
presented or the results that may occur in the future.
Pro forma consolidated results for the periods ended September 30,
1999 and September 26, 1998 are as follows (in thousands):
<CAPTION>
Three Month Period Ended Nine Month Period Ended
------------------------------------ -------------------------------------
September 30, September 26, September 30, September 26,
1999 1998 1999 1998
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues........................ $ 4,690 $ 5,703 $15,231 $16,925
Net (loss) income............... (3,035) 248 (6,544) (1,502)
(Loss) income per share
basic and diluted............. $ (0.12) $ 0.01 $ (0.26) $ (0.07)
Shares used in computation of
pro forma loss per share.....
Basic.................... 25,452 22,898 25,337 22,790
Diluted.................. 25,452 23,783 25,337 22,790
</TABLE>
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. Recent Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standard No. 133 "Accounting
for Derivative Instruments and Hedging Activities" was released. The statement
requires the recognition of all derivatives as either assets or liabilities in
the balance sheet and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the planned
use of the derivative and the resulting designation. The Company is required to
implement the statement in the first quarter of fiscal 2001. The Company has
not used derivative instruments and believes the impact of adoption of this
statement will not have a significant effect on the financial statements.
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
released Statement of Position ("SOP") 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method" when (1) there is vendor-
specific objective evidence (VSOE) of the fair values of all the undelivered
elements that are not accounted for by means of long-term contract accounting,
(2) VSOE of fair value does not exist for one or more of the delivered elements,
and (3) all revenue recognition criteria of SOP 97-2 (other than the requirement
for VSOE of the fair value of each delivered element) are satisfied. The
provisions of SOP 98-9 that extend the deferral of certain paragraphs of SOP 97-
2 became effective December 15, 1998. These paragraphs of SOP 97-2 and SOP 98-9
will be effective for the Company for transactions that are entered into
beginning in fiscal year 2000. Retroactive application is prohibited. The
Company does not believe that the requirements of SOP 98-9 will have any
material impact on the Company's revenue recognition policies.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
"Safe Harbor" Statements under the Private Securities Litigation
Reform Act of 1995: Except for the historical information presented, the matters
discussed in this Quarterly Report on Form 10-Q are forward looking statements
that involve risks and uncertainties, including the risks of timely and
successful development of products and technologies; successful introduction and
customer acceptance of new and enhanced products and technologies in existing
and new markets; the possible development and introduction of competitive
products and new and alternative technologies; loss of key customer, partner and
alliance relationships; pricing, currency and exchange risks; governmental and
regulatory developments affecting the Company and its customers; the ability to
identify, conclude, and integrate acquisitions on a timely basis; the ability to
attract and/or retain essential technical or other personnel; the length of the
Company's sales cycle, size and timing of license fees closed during the
quarter; the likely continued significant percentage of quarterly revenues
recorded in the last month of the quarter which makes forecasting difficult and
subject to a substantial risk of variance with actual results; economic
uncertainties associated with conducting business on a worldwide basis; the
Company's ability to control expenditures at a level consistent with revenues
and the other risks detailed from time to time in the Company's public
disclosure filings with the U.S. Securities and Exchange Commission (SEC).
Copies of the most recent Forms 10-K and 10-Q are available upon request from
Vertel's Investor Relations Department. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. The Company undertakes no obligation to
revise or publicly release the results of any revision to these forward-looking
statements. Without limiting the foregoing, the forward looking statements
herein also involve risks related to the Year 2000, as the Company's Year 2000
readiness program has been and continues to be based on Management's best
estimates of many of the factors involved. These estimates were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved, or that there will not be increased costs associated with the risks
related to the Year 2000 readiness program. Specific factors that might cause
differences between the estimates and actual results include, but are not
limited to, the availability and cost of personnel trained in these areas; the
ability to locate and correct all relevant computer code; timely responses to
Year 2000 issues and corrections by third-parties and suppliers; the ability to
implement interfaces between the new systems and the systems not being replaced;
and similar uncertainties. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the Year 2000 readiness
of third-parties and the interconnection of global businesses, the Company
cannot ensure its ability to
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
timely and cost-effectively resolve problems associated with the Year 2000 issue
that may affect its operations and business, or expose it to third-party
liability.
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and accompanying notes, included in Part I -
Item 1 of this Quarterly Report, and the audited consolidated financial
statements and accompanying notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1998 contained in the Company's Annual Report on Form 10-K.
Results of Operations
Net Revenues. Net revenues decreased $218,000 or 4% to $4,690,000 for the
three months ended September 30, 1999 (the "third quarter of 1999") compared to
$4,908,000 for the three month period ended September 26, 1998 (the "third
quarter of 1998"), and decreased $15,000, or 0.1%, to $14,814,000 for the three
quarters ended September 30, 1999 (the "first three quarters of 1999") as
compared to $14,829,000 for the three quarters ended September 26, 1998 (the
"first three quarters of 1998").
License revenues consist primarily of license fees and royalties derived from
the Company's software solutions and development platforms. License revenues
decreased $933,000 or 26% to $2,618,000 during the third quarter of 1999 from
$3,551,000 during the third quarter of 1998. The decrease in license revenues
during the third quarter of 1999 compared to the third quarter of 1998 was
primarily the result of lower demand in American and European markets for the
Company's telecommunications management network ("TMN") software products, and
approximately $800,000 of license revenue attributable to certain Background
Technology recognized in connection with the Company's sale of its CDPD and pACT
technologies during the third quarter of 1998. These decreases were partially
offset by license revenue from Expersoft ($492,000) which was acquired during
March 1999. License revenues for the first three quarters of 1999 ($9,382,000)
decreased $1,554,000 or 14%, compared to the first three quarters of 1998
($10,936,000). The decrease was primarily the result of a $1,000,000 licensing
fee arising out of a semi-exclusive licensing contract with a customer for
Vertel's Aeronautical Telecommunications Network (ATN) Router during the second
quarter of 1998, the licensing of Background Technology of approximately
$800,000 during the third quarter of 1998 noted above, revenues during the first
and second quarters of 1998 related to ATN and Company's CDPD product line
(approximately $550,000), a one-time licensing to a related party in the first
quarter of 1998 ($737,000), as well as the reduced demand for TMN products in
the third quarter of 1999 noted above. These decreases were partially offset by
$2,045,000 in Expersoft licensing revenues recognized in the first three
quarters of 1999.
Service and other revenues, which consist primarily of fees from professional
service projects, software maintenance, and custom software engineering,
increased $715,000 or 53% to $2,072,000 during the third quarter of 1999 from
$1,357,000 during the third quarter of 1998. The increase in service revenues
during the third quarter of 1999 compared to the third quarter of 1998 was
primarily the result of increased professional service revenue ($392,000) as
well as service revenue from Expersoft ($403,000). Service and other revenues
for the first three quarters of 1999 increased $1,539,000, or 40%, to $5,432,000
as compared to $3,893,000 for the first three quarters of 1998 and was due
primarily to increased revenues from professional service contracts ($813,000)
and service revenue from Expersoft ($968,000) which was partially offset by
lower custom software engineering services ($172,000) performed in the first
three quarters of 1999 compared to the first three quarters of 1998.
Sales to customers outside of the United States comprised approximately 50% of
net revenues in the third quarter of 1999 compared to approximately 36% in the
same period of 1998. For the first three quarters of 1999, sales to customers
outside the United States comprised approximately 46% of net revenues as
compared to approximately 40% in the same period of 1998. The Company has
historically reported a high percentage of sales to customers outside of the
United States and the Company expects to continue significant international
sales. Any economic turmoil in foreign markets could impact future sales in the
affected regions.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Sales to customers LG Information & Communications, Lucent Technologies and
Sprint Corp comprised approximately 17.9%, 12.9% and 10.3% of net revenues
respectively, in the third quarter of 1999. Sales to Sprint Corp comprise
approximately 10.4% of net revenues for the first three quarters of 1999. No
other single customer accounted for more than 10% of the Company's revenues for
the third quarter and first three quarters of 1999 and 1998.
Gross Profit. Cost of revenues consists primarily of professional
engineering services and warranty and technical support, all primarily comprised
of payroll and related costs, and royalties paid under software licensing
agreements. Gross margin decreased to 60% and 61% of net revenues for the third
quarter of 1999 and the first three quarters of 1999 respectively, as compared
to 73% and 72% for the same periods in 1998. The decrease in the third quarter
and the first three quarters of 1999 was primarily due to a higher percentage of
service and other revenues, which have a lower margin compared to license
revenues. Additionally, the first quarter of 1999 included a license
transaction of Expersoft valued at $402,000, of which $385,000 in costs and
estimated earnings had accrued to Expersoft prior to the acquisition as a result
of Expersoft completing substantially all of the related software development.
Research and Development. The Company has historically invested heavily in
research and development to expand its expertise in TMN-based software
solutions, TMN-based applications and technologies and to continue sustaining
support of its product offerings. Through its Expersoft acquisition, the
Company added CORBA technology to its network management solutions and intends
to develop embedded telecom specific implementations of this technology. The
major components of R&D expenses are engineering salaries, employee benefits and
associated overhead, fees to outside contractors, the cost of facilities and
depreciation of capital equipment, which consists primarily of computer and test
equipment. Costs related to R&D in certain cases are offset by customer
reimbursement of non-recurring engineering efforts.
Total R&D expenses increased $441,000, or 26%, to $2,118,000 in the third
quarter of 1999 from $1,677,000 in the third quarter of 1998. The increase in
R&D expenses during the third quarter of 1999 was primarily the result of the
addition of Expersoft's product development organization ($571,000), a non-
recurring expense for development software ($75,000) and a lower chargeback to
cost of revenues for non-recurring engineering services ($88,000). These
increases were partially offset by reduced payroll and consulting costs
($300,000) related to TMN product development. R&D expenses for the first three
quarters of 1999 increased $1,005,000, or 21%, over the first three quarters of
1998 primarily as a result of the addition of Expersoft's product development
organization ($1,153,000), the non-recurring expense for certain development
software noted above ($75,000) and a lower chargeback to cost of revenues for
non-recurring engineering services ($255,000). These increases were partially
offset by reduced payroll and consulting costs ($504,000) related to TMN product
development.
The Company expects to continue to make significant investments in the
development of new products and feature enhancements to existing product lines
but anticipates that expenditures are likely to be lower in future periods. In
October 1999, the Company announced a restructuring plan designed to reduce
operating costs, and has reduced the overall workforce by approximately 20%.
The TMN product development staff in Woodland Hills accounted for approximately
half of the headcount reduction. The Company intends to transition future TMN
product development to its Polish operations, which have a lower cost structure.
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel and associated costs related to selling and marketing activities,
including marketing programs such as trade shows and other promotional costs.
The Company believes that substantial sales and marketing expenditures are
essential to developing the opportunities for revenue growth and to sustaining
the Company's competitive position. Sales and marketing expenses are expected
to continue to comprise a significant percentage of the Company's total expenses
because of costs associated with supporting the worldwide sales and marketing
functions necessary to meet the needs of the Company's customer base and respond
to the opportunities in the TMN and CORBA marketplaces.
Sales and marketing expenses increased $892,000 or 54% to $2,547,000 in the
third quarter of 1999 from $1,655,000 in the third quarter of 1998. The
increase in the third quarter of 1999 was primarily due to increased personnel
and the associated payroll, commissions, recruiting, relocation and travel costs
($707,000), consulting expenses ($57,000) as well as the addition of Expersoft's
sales and marketing organization ($137,000). Sales and marketing expenses for
the first three quarters of 1999 increased $1,701,000, or 37%, over the first
three quarters of 1998 primarily as a result of increased personnel and the
associated payroll, commissions, recruiting, relocation and travel costs
($1,109,000), consulting expenses
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
($68,000), increased costs of trade shows ($87,000), public relations ($57,000),
advertising ($42,000) and the addition of Expersoft's sales and marketing
organization ($328,000).
General and Administrative. General and administrative expenses consist
primarily of salaries, rent and other related expenses of administrative,
executive and financial personnel as well as professional fees and investor
relations costs. General and administrative expenses increased $354,000 or 49%
to $1,078,000 in the third quarter of 1999 as compared to $724,000 in the third
quarter of 1998. The increase in the third quarter of 1999 was primarily the
result of the addition of the Expersoft general and administrative organization
($307,000) and increased professional and consulting fees primarily relating to
the Company's merger and acquisition activities ($92,000), partially offset by
lower recruiting fees ($39,000). General and administrative expenses for the
first three quarters of 1999 increased $1,175,000, or 57%, over the first three
quarters of 1998 to $3,233,000 as compared to $2,058,000. The increase for the
first three quarters of 1999 is primarily due to the addition of the Expersoft
general and administrative organization ($713,000), a non-recurring charge
related to the value of stock options granted to three former officers in
January 1999 ($192,000) and increased professional and consulting fees
($269,000).
Goodwill Amortization. Goodwill amortization for the third quarter of 1999
was $238,000 and $516,000 for the first three quarters of 1999, compared to zero
for the corresponding periods in 1998. The goodwill amortization is related to
the purchase of Expersoft in March of 1999 and is being amortized over five
years at approximately $238,000 per quarter.
Restructuring Benefit. The restructuring benefit for the third quarter and
first three quarters of 1999 ($82,000) resulted from the reversal of excess
restructuring reserves recorded in the 1997 financial statements. This resulted
because the Company negotiated more favorable lease exit terms than were
originally estimated. There were no restructuring benefits recorded for the
corresponding periods in 1998.
Loss from Continuing Operations. The Company incurred a loss from continuing
operations of $3,084,000 in the third quarter of 1999 compared to a loss from
continuing operations of $453,000 in the third quarter of 1998. The loss in the
third quarter of 1999 was due to higher operating expenses, lower margins and
lower license revenues as discussed above. Loss from continuing operations for
the first three quarters of 1999 was $6,665,000, as compared to a loss of
$752,000 for the corresponding period in 1998 and was due to a combination of
lower margins and higher operating expenses as discussed above.
Other Income, Net. Other income, net decreased $1,447,000 to $79,000 in the
third quarter of 1999 as compared to $1,526,000 for the third quarter of 1998.
Interest income increased by $41,000 for the third quarter of 1999 as a result
of the higher cash balances but this increase was more than offset by the non-
recurring gain on the sale of the Company's CDPD and pACT technologies as well
as the sale of a certain software library and the assignment of certain assets
and liabilities of the Company's ATN operations ($1,449,000) in the third
quarter of 1998. For the first three quarters of 1999, other income net
decreased $1,718,000 to $471,000 as compared to $2,189,000 for the first three
quarters of 1998. Interest income increased by $288,000 for the first three
quarters of 1999 primarily as a result of higher cash balances, but this
increase was more than offset by the non-recurring gain of approximately
$600,000 to reflect curtailment of a non-U.S. pension plan that previously
covered the Company's Irish employees recorded in the first three quarters of
1998, as well as the sale of technologies of $1,449,000 as described above.
Provision for Income Taxes. The Company recorded a provision for income
taxes of $30,000 in the third quarter of 1999 compared to $100,000 in the third
quarter of 1998. For the first three quarters of 1999 the company has recorded
a provision for income taxes of $50,000, primarily for non-U.S. taxes, as the
Company anticipates utilizing net operating losses to offset any pre-tax income.
The provision for income taxes for the first three quarters of 1998 was
$296,000, of which $196,000 represented an estimate for non-U.S. taxes
associated with the surplus assets refund upon curtailment of a non-U.S. pension
plan and $100,000 was primarily for U.S. taxes.
Restructuring. In October 1999, the Company announced a restructuring of its
operations intended to reduce costs and make the company more competitive.
During the fourth quarter of 1999, the company will reduce its workforce by 20%,
move some key functions, such as engineering of TMN products offshore, and
consolidate its U.S. engineering function to its San Diego facility.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
Net cash used by operating activities during the first three quarters of 1999
was $5,951,000 compared to $1,688,000 generated by operating activities in the
first three quarters of 1998. The negative cash flow from operations in the
first three quarters of 1999 was primarily the result of the operating loss from
continuing operations ($6,244,000), an increase in accounts receivable
($1,501,000), and a decrease in deferred revenue ($534,000). These amounts were
partially offset by an increase in accrued wages and related liabilities
($81,000), an increase in other accrued liabilities ($462,000), non-cash stock-
based compensation ($208,000) and non-cash depreciation and amortization
($1,577,000). The cash generated from operations in the first three quarters of
1998 was primarily the result of operating income from continuing operations
($1,141,000), non-cash depreciation and amortization ($763,000), an increase in
other accrued liabilities ($1,233,000), partially offset by cash payments for
restructuring expenses ($1,263,000) and an increase in accounts receivable
(196,000).
Net cash used by investing activities during the first three quarters of 1999
was $8,844,000 compared to $1,769,000 in the first three quarters of 1998. The
net cash used in the first three quarters of 1999 primarily comprised purchases
of short-term investments ($4,877,000), cash paid to date for the acquisition of
Expersoft ($2,887,000) and purchases of property and equipment ($1,208,000).
The net cash used in the first three quarters of 1998 primarily comprised
purchases of short-term investments ($978,000), and purchases of property and
equipment ($763,000).
Net cash used by financing activities in the first three quarters of 1999 was
$262,000 as compared to net cash generated by financing activities in the first
three quarters of 1998 of $347,000. The net cash used in the first three
quarters of 1999 was $576,000 for short-term debt and capital lease obligations
resulting from the Expersoft acquisition and this was partially offset by
$314,000 received from the exercise of common stock options. The net cash
generated in the first three quarters of 1998 is primarily comprised of $322,000
received from the exercise of common stock options.
The loss from operations during the nine months ended September 30, 1999 was
$6,665,000. The Company announced a restructuring plan in October 1999 intended
to reduce operating costs. The Company believes that cash and short-term
investment balances ($10,272,000 at September 30, 1999) will be sufficient to
meet the Company's liquidity requirements for the next twelve months. To the
extent that such amounts are insufficient to finance the Company's working
capital requirements, the Company will be required to raise additional funds
through public or private equity. From time to time, the Company may also
consider the acquisitions of, or evaluate investments in, certain products and
businesses complementary to the Company's business. Any such acquisitions or
investments may require additional capital resources. There can be no assurance
that such additional financing will be available, if needed, or, if available,
will be on terms satisfactory to the Company.
Year 2000 Issues
General. The Year 2000 issue is the result of computer programs using two
digits rather than four to define the applicable year. Such computer programs
and embedded computer chips may recognize a date using "00" as the year 1900 or
some other year, rather than the year 2000. This could result in system
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or to engage in
other normal business activities.
State of Readiness. In 1998, the Company initiated a company-wide Year 2000
readiness program ("Y2K Program"). The Company's Y2K Program is divided into
four major sections: (1) Company developed products, (2) internal information
processing ("IP") systems, (3) non-IP systems, and (4) third-party suppliers
and customers. The general phases common to all sections are: (1) inventorying
Year 2000 items; (2) assessing the Year 2000 compliance of items determined to
be material to the Company; and (3) repairing or replacing material items that
are determined not to be Year 2000 compliant.
The Company has completed the Year 2000 compliance review of all Company
developed products available for licensing and all Company developed products
for which it is providing support under maintenance contracts. The Company has
not tested the Year 2000 compliance of discontinued product lines and non-
supported products. Products that were not Year 2000 compliant were upgraded to
be Year 2000 compliant, or discontinued and replaced with Year 2000 compliant
products providing the same functionality. Where appropriate, customers under
maintenance contracts have been provided with the upgraded products or patches
to upgrade the Company's products to be Year 2000 compliant. The Company also
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
has Year 2000 websites (Vertel products at www.vertel.com/admin/y2k.htm and
Expersoft products at www.expersoft.com/y2k/y2ktest.htm) that provide Year 2000
product information. There can be no assurances, however, that the Company's
current products do not contain undetected year 2000 defects. The most
reasonably likely worst case scenarios caused by such a defect would include the
partial failure of a widely-sold Company product that is of mission-critical
importance to the Company's customers. Such a scenario could expose the Company
to litigation that could have a material adverse impact on the Company. Some
commentators have stated that a significant amount of litigation will arise out
of year 2000 compliance issues. However, because of the unprecedented nature of
such litigation, it is uncertain to what extent the Company could be affected by
it. In addition, to the extent that others, such as system integrators, make
use of the Company's software in developing solutions for third parties, the
Company may have no knowledge as to the Year 2000 readiness of those third party
products. It is possible that third parties could assert claims against the
Company or its customers concerning Year 2000 issues and regardless of their
merits or lack thereof, such claims could be material.
The Company has completed an evaluation of Year 2000 issues associated with
its internal IP computer systems and believes that they are Year 2000 compliant.
The Company has completed an evaluation of Year 2000 issues associated with its
non-IP systems and all significant non-IP systems are believed to be Year 2000
compliant. Accordingly, the Company does not believe that it will incur any
material costs or experience material disruptions in its business associated
with preparing its internal systems for the year 2000. However, there can be no
assurances that the Company will not experience serious unanticipated negative
consequences caused by undetected year 2000 defects in its internal systems,
including third party software and hardware products. The most reasonably
likely worst case scenarios would include: (i) corruption of data contained in
the Company's internal information systems, and (ii) failure of hardware,
software, or other information technology systems, causing an interruption or
failure of normal business operations. Such a scenario could have a material
adverse impact on the Company.
The Company relies on third party manufacturers for the proper functioning of
its information systems, software and products, and third party service
providers of utilities such as, but not limited to, electric power, water and
telecommunications services. The Company has completed an evaluation of the
possible effects on the Company's operations of the Year 2000 readiness of its
key suppliers and has representations that those suppliers have addressed the
Year 2000 issue. However, the failure of those suppliers to successfully
address Year 2000 issues could have a material impact on the Company's
operations and financial results. The potential impact and related costs cannot
be known with certainty at this time.
Most of the Company's customers are also addressing the Year 2000 issue.
While the Company believes that many of these companies have undertaken
extensive Year 2000 readiness programs to avoid business disruptions, the
Company has no guarantee that customers will not have disruptions and these may
adversely impact sales opportunities in the year 2000 and beyond. Several
customers have already announced that they will not install any new systems or
upgrade existing systems in the period October 1, 1999 through March 31, 2000.
Costs. The total cost associated with required modifications to become Year
2000 compliant through September 30, 1999 approximates $360,000. Approximately
$230,000 of that amount represents new equipment and software that has been
capitalized while the remainder has been expensed. The Company estimates that
expenditures in the fourth quarter will be less than $10,000. However, the
Company will incur additional expenditures in January 2000 in support of its
contingency plan. The extent of these costs, which will be expensed as
incurred, is not expected to exceed $25,000.
Risks. The implementation of new business systems and completion of the Y2K
Program has reduced the possibility of significant interruptions of normal
operations. However, an unanticipated or unsuccessfully corrected material Year
2000 problem could result in an interruption in, or a failure of, certain normal
business activities or operations. Such failures could materially and adversely
affect the Company's results of operations, liquidity and financial condition.
Due to the general uncertainty inherent in the Year 2000 problem resulting in
part from the uncertainty of the Year 2000 readiness of third-party suppliers
and customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company presently believes that its "worst-case scenario" would be a
regional failure of suppliers to supply utility services in Southern California
as that would materially impair the ability of the Company to supply services in
a timely manner to its customers. Due to the impossibility of knowing what
failures generally will result from the year 2000 date change (particularly
outside of countries such as the United States where year 2000 remediation has
progressed the furthest), and what effects such failures could have on third
party vendors, the Company is unable to assess the likelihood of a material
adverse impact on its results of operations, liquidity, or financial position
due to such year 2000 failures. The Company does not have a contingency plan to
address this issue, but has contingency plans in place to address its operating
systems and has staffing available to address the needs of its customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
(a) Quantitative Information About Market Risk.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company maintains an
investment policy that ensures the safety and preservation of its invested
funds by limiting default risk, market risk and investment risk. As of
September 30, 1999, the Company had $4,417,000 and $5,855,000 in cash and cash
equivalents and short-term investments, respectively, with a weighted average
variable rate of 4.26% and 5.01%, respectively.
The Company mitigates default risk by investing in high credit quality
securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor and by placing its portfolio under the management of
professional money managers who invest within specified parameters established
by the Board of Directors. The portfolio includes only marketable securities
with active secondary or resale markets to ensure portfolio liquidity and
maintains a prudent amount of diversification.
The Company currently has $65,000 of short-term debt and no long-term debt.
(b) Qualitative Information About Market Risk
While the Company's consolidated financial statements are prepared in
United States dollars, a portion of the Company's worldwide operations have a
functional currency other than the United States dollar. In particular, the
Company maintains operations in France, Germany, Japan, Korea, the
Netherlands, Poland and the United Kingdom, where the functional currencies
are: French Franc, Deutschemark, Yen, Won, Dutch Guilder, Zloty and British
Pound, respectively. Most of the Company's revenues are denominated in the
United States Dollar. Fluctuations in exchange rates may have a material
adverse effect on the Company's results of operations and could also result in
exchange losses. The impact of future exchange rate fluctuations cannot be
predicted adequately. To date, exchange fluctuations have not had a material
impact on the Company's earnings and the Company has not sought to hedge the
risks associated with fluctuations in exchange rates, but may undertake such
transactions in the future. The Company does not have a policy relating to
hedging. There can be no assurance that any hedging techniques implemented by
the Company would be successful or that the Company's results of operations
will not be materially adversely affected by exchange rate fluctuations.
(c) Euro Impact
In January 1999, eleven European countries, including France and Germany,
where the Company maintains operations, implemented a single currency (the
"Euro") to replace their separate currencies. While transactions may still be
consummated in the individual currencies of the member countries, the Company
will be required to, and is currently in the process of, implementing
modifications to its payroll and benefits systems as well as its contracts and
other obligations in order to accommodate the Euro. The Company does not
currently believe that it will incur a material financial expense in
connection with such modifications. The introduction of the Euro, presents
certain risks for the Company including, risks associated with its reduced
ability to adjust pricing of its products based on local currencies,
fluctuations in the Euro based on economic turmoil in countries other than
those in which the Company does business
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
and other risks normally associated with doing business in international
currencies, any of which could have an adverse effect on the Company's
business, financial condition and results of operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to, nor is their
property the subject of, any material pending legal proceeding. The Company
may, from time to time, become a party to various legal proceedings arising in
the normal course of its business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None.
<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.
VERTEL CORPORATION
(Registrant)
Date: November 9, 1999 /s/ Gordon L. Almquist
-------------------------
Gordon L. Almquist
Vice President, Finance and Administration,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule for the nine months ended September 30,
1999: filed electronically.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS AT SEPTEMBER 30, 1999 AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,417
<SECURITIES> 5,855
<RECEIVABLES> 5,974
<ALLOWANCES> 691
<INVENTORY> 0
<CURRENT-ASSETS> 16,873
<PP&E> 1,497<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,323<F2>
<CURRENT-LIABILITIES> 7,513
<BONDS> 0
0
0
<COMMON> 255
<OTHER-SE> 16,555
<TOTAL-LIABILITY-AND-EQUITY> 24,323
<SALES> 14,814
<TOTAL-REVENUES> 14,814
<CGS> 5,777
<TOTAL-COSTS> 5,777
<OTHER-EXPENSES> (471)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> (6,194)
<INCOME-TAX> 50
<INCOME-CONTINUING> (6,244)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,244)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.25)
<FN>
<F1>PP&E IS NET OF ACCUMULATED DEPRECIATION OF $5,819.
<F2>TOTAL ASSETS INCLUDE $290 OF OTHER ASSETS AND INVESTMENTS OF $1,437.
</FN>
</TABLE>
