<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 June 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)
California 95-3948704
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 August 9, 1999 there were 25,446,358 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>
June 30, December 31,
ASSETS 1999 1998
---------- -----------
<S> <C> <C>
(unaudited)
Current assets:
Cash and cash equivalents..................................... $ 3,999 $ 19,495
Short-term investments........................................ 8,380 978
Trade accounts receivable (net of allowances of $696 as of
June 30, 1999 and $556 as of December 31, 1998)......... 7,220 4,477
Prepaid expenses and other current assets..................... 666 540
-------- --------
Total current assets..................................... 20,265 25,490
Property and equipment, net........................................ 1,343 1,025
Investments........................................................ 1,437 1,437
Goodwill........................................................... 4,464 --
Other assets....................................................... 327 365
-------- --------
$ 27,836 $ 28,317
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 716 $ 426
Accrued wages and related liabilities......................... 1,840 1,351
Capital lease obligations..................................... 138 --
Accrued restructuring expenses................................ 223 224
Accrued taxes payable......................................... 903 1,087
Other accrued liabilities..................................... 1,904 1,942
Accrued acquisition liabilities............................... 647 --
Deferred revenue.............................................. 1,741 1,115
-------- --------
Total liabilities........................................ 8,112 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, 25,382,761;
1998, 24,954,545................................. 254 249
Additional paid-in capital.................................... 80,301 79,553
Accumulated deficit........................................... (60,692) (57,483)
Accumulated comprehensive deficit............................. (139) (147)
-------- --------
Total shareholders' equity............................... 19,724 22,172
-------- --------
$ 27,836 $ 28,317
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
VERTEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended Six Month Period Ended
------------------------------- -----------------------------
June 30, June 27, June 30, June 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues:
License.................................. $ 3,602 $ 3,670 $ 6,764 $ 6,648
License-related party.................... -- 33 -- 737
Service and other........................ 2,000 1,300 3,360 2,536
------- ------- ------- -------
Net revenues....................... 5,602 5,003 10,124 9,921
------- ------- ------- -------
Cost of revenues:
License.................................. 421 330 991 530
Service and other........................ 1,497 1,231 2,911 2,359
------- ------- ------- -------
Total cost of revenues............. 1,918 1,561 3,902 2,889
------- ------- ------- -------
Gross profit................................. 3,684 3,442 6,222 7,032
------- ------- ------- -------
Operating expenses:
Research and development................. 1,975 1,612 3,611 3,047
Sales and marketing...................... 2,202 1,463 3,759 2,950
General and administrative............... 1,381 677 2,433 1,334
------- ------- ------- -------
Total............................... 5,558 3,752 9,803 7,331
------- ------- ------- -------
Operating loss............................... (1,874) (310) (3,581) (299)
Other income, net............................ 143 202 392 663
------- ------- ------- -------
(Loss) income before provision for income
taxes.................................. (1,731) (108) (3,189) 364
Provision for income taxes................... 20 64 20 196
------- ------- ------- -------
Net (loss) income............................ (1,751) (172) (3,209) 168
Other comprehensive income (expense)......... 38 (52) 8 (21)
------- ------- ------- -------
Comprehensive (loss) income.................. $(1,713) $ (224) $(3,201) $ 147
======= ======= ======= =======
Basic net (loss) income per common share..... ($0.07) $ (0.01) $ (0.13) $ 0.01
======= ======= ======= =======
Diluted net (loss) income per common share... ($0.07) $ (0.01) $ (0.13) $ 0.01
======= ======= ======= =======
Weighted average shares outstanding used in
net (loss) income per common share
calculations:
Basic.................................... 25,354 22,923 25,280 22,736
Diluted.................................. 25,354 22,923 25,280 24,602
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
VERTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Month Period Ended
----------------------------------
June 30, June 27,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations................. $(3,209) $168
Adjustments to reconcile net loss from continuing operations
to net cash provided by (used for) operating activities:
Depreciation and amortization............................ 940 501
Reserve for returns and bad debts........................ 140 88
Non-cash stock based compensation........................ 192 --
Changes in operating assets and liabilities.............. (2,947) (223)
------- ------
Net cash (used for) provided by operating activities..... (4,884) 534
------- ------
Cash flows from investing activities:
Net purchases of short-term investments.................. (7,402) (4,691)
Purchases of property and equipment...................... (656) (445)
Cash paid for business acquisition, net of cash acquired. (2,330) --
Change in other assets................................... 91 40
------- -------
Net cash used for investing activities................... (10,297) (5,096)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock................... 180 249
Payments on short-term debt and capital lease obligations (503) --
------- ------
Net cash (used for) provided by financing activities..... (323) 249
------- ------
Net cash used by discontinued operations..................... -- (178)
------- ------
Effect of exchange rate changes on cash...................... 8 (21)
------- ------
Net decrease in cash and cash equivalents.................... (15,496) (4,512)
Cash and cash equivalents, beginning of period............... 19,495 6,252
------- ------
Cash and cash equivalents, end of period..................... $3,999 $1,740
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<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 June 27, 1998, and the 26 weeks ended June 27, 1998, as the three months
ended June 27, 1998 and as the six months ended June 27, 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 six month periods ended June 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>
Six Month Period Ended
------------------------
June 30, June 27,
1999 1998
------------ ----------
<S> <C> <C>
Trade accounts receivable.............................................................. $(2,752) $ (89)
Prepaid expenses and other current assets.............................................. (65) 32
Accounts payable....................................................................... 87 (245)
Accrued wages and related liabilities.................................................. 308 (38)
Cash payments for restructuring expenses............................................... (1) (1,112)
Other accrued liabilities.............................................................. 101 966
Accrued taxes payable.................................................................. (184) (9)
Deferred revenue....................................................................... (441) 272
------- -------
$(2,947) $ (223)
======= =======
</TABLE>
5
<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 June 30, 1999 the Company had paid $2,578,000 of the cash
consideration and acquisition costs. The balance of $647,000 is expected to be
paid during the three month period ending September 30, 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)
========
</TABLE>
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 unaudited 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.
Unaudited pro forma consolidated results for the periods ended June 30,
1999 and June 27, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Month Period Ended Six Month Period Ended
--------------------------------------- -----------------------------------------
June 30, June 27, June 30, June 27,
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Pro forma revenues.............. $ 5,602 $ 5,619 $10,541 $11,222
Pro forma net loss.............. 1,751 897 3,508 1,750
Pro forma loss per share basic
and diluted.................. $ 0.07 $ 0.04 $ 0.14 $ 0.08
Shares used in computation of
pro forma loss per share..... 25,354 22,923 25,280 22,736
</TABLE>
6
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. Recent Accounting Pronouncements
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. Without limiting the foregoing, the
forward looking statements herein also involve risks related to the Year 2000,
as the dates on which the Company believes the Year 2000 readiness program will
be completed are based on Management's best estimates, which 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 a delay in, or increased costs associated
with, the implementation of 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 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.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Results of Operations
Net Revenues. Net revenues increased $599,000 or 12% to $5,602,000 for the
three months ended June 30, 1999 (the "second quarter of 1999") compared to
$5,003,000 for the three month period ended June 27, 1998 (the "second quarter
of 1998"), and increased $203,000, or 2%, to $10,124,000 for the six months
ended June 30, 1999 (the "first half of 1999") as compared to $9,921,000 for the
six months ended June 27, 1998 (the "first half of 1998").
License revenues decreased $101,000 or 3% to $3,602,000 during the second
quarter of 1999 from $3,703,000 during the second quarter of 1998. The decrease
in license revenues during the second quarter of 1999 compared to the second
quarter of 1998 was primarily the result of a $1,000,000 licensing fee in the
second quarter of 1998 arising out of a semi-exclusive licensing contract with a
customer for Vertel's Aeronautical Telecommunications Network (ATN) Router
software (during 1998,the assets and liabilities of the Company's ATN operations
in Ireland were assigned to a subsidiary of Airtel ATN plc and the Company no
longer markets this product line), and revenues during the second quarter of
1998 related to Company's CDPD product line (approximately $300,000), which was
sold by the Company during the third quarter of 1998. The decreases were
substantially offset by license revenue from Expersoft ($1,102,000) which was
acquired during March 1999. License revenues for the first half of 1999
($6,764,000) decreased $620,000 or 8%, compared to the first half of 1998
($7,385,000). The decrease was primarily due to the 1998 ATN and CDPD revenues
as described above (approximately $1,550,000), as well as the one-time licensing
to a related party in 1998 ($737,000), all of which was partially offset by
$1,533,000 in Expersoft licensing revenues recognized in the first half of 1999.
License revenues consist primarily of license fees and royalties derived from
the Company's telecommunication management network ("TMN") software solutions
and development platforms and CORBA software products.
Service and other revenues, which consist primarily of fees from
professional service projects, software maintenance, and custom software
engineering, increased $700,000 or 54% to $2,000,000 during the second quarter
of 1999 from $1,300,000 during the second quarter of 1998. The increase in
service revenues during the second quarter of 1999 compared to the second
quarter of 1998 was principally the result of increased professional service
revenue ($314,000) as well as service revenue (primarily maintenance) from
Expersoft ($398,000). Service and other revenues for the first half of 1999
increased $824,000, or 32%, to $3,360,000 as compared to $2,536,000 for the
first half of 1998 and was due primarily to increased revenue from professional
service contracts, and service revenue from Expersoft ($565,000).
Sales to customers outside of the United States comprised approximately 50%
of net revenues in the second quarter of 1999 compared to approximately 58% in
the same period of 1998. For the first half of 1999 sales to customers outside
the United States comprised approximately 45% of net revenues as compared to
approximately 52% 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. However,
any economic turmoil in foreign markets could impact future sales in the
affected regions.
Sales to one customer (Sprint Corp) comprised approximately 18% of net
revenues in the second quarter of 1999 and approximately 11% of net revenues for
the first half of 1999. No other single customer accounted for more than 10% of
the Company's revenues for the second quarter and first half 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 66% and 61% of net revenues for the second
quarter of 1999 and the first half of 1999 respectively, as compared to 69% and
71% for the same periods in 1998. The decrease in the second quarter and the
first half of 1999 was primarily due to a higher percentage of service and other
revenues, which have a lower margin compared to license revenues. Additionally,
license margins for the first half of 1999 were adversely impacted as a result
of a certain license transaction of Expersoft (which occurred in the first
quarter of 1999) valued at
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
$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 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
carrier-grade CORBA products specifically designed to operate in an embedded
environment. 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 $363,000, or 23%, to $1,975,000 in the second
quarter of 1999 from $1,612,000 in the second quarter of 1998. The increase in
R&D expenses during the second quarter of 1999 was primarily the result of the
addition of Expersoft's product development organization ($523,000) and a lower
chargeback to cost of revenues for non-recurring engineering services ($43,000),
both of which were partially offset by reduced payroll and consulting costs
($201,000) related to TMN product development. R&D expenses for the first half
of 1999 increased $564,000, or 18%, over the first half of 1998 primarily as a
result of the addition of Expersoft's product development organization
($582,000) and a lower chargeback to cost of revenues for non-recurring
engineering services ($147,000), both of which were partially offset by reduced
payroll and consulting costs ($204,000) 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,
although such expenses may fluctuate from quarter to quarter both in absolute
dollars and as a percentage of revenue depending on the status of various
development projects, the level of non-recurring engineering services and the
amount of revenue.
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 $739,000 or 51% to $2,202,000 in the
second quarter of 1999 from $1,463,000 in the second quarter of 1998. The
increase in the second quarter of 1999 was primarily due to increased sales
personnel and the associated payroll, commissions, recruiting and relocation
costs ($426,000) as well as the addition of Expersoft's sales and marketing
organization ($189,000). Sales and marketing expenses for the first half of 1999
increased $809,000, or 28%, over the first half of 1998 primarily as a result of
increased sales personnel and the associated payroll, commissions, recruiting,
and relocation costs ($508,000), increased costs of trade shows ($71,000) and
the addition of Expersoft's sales and marketing organization ($191,000).
The Company has substantially completed the expansion of its sales and
marketing functions to support anticipated broader market adoption of TMN and
CORBA product technologies and expects that its dollar expenditures on sales and
marketing will increase at a lower rate in the second half of 1999 as a result
thereof.
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 amortization of goodwill,
professional fees, investor relations costs and insurance premiums. General and
administrative expenses increased $704,000
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
or 104% to $1,381,000 in the second quarter of 1999 as compared to $677,000 in
the second quarter of 1998. The increase in the second quarter of 1999 was
primarily the result of the addition of the Expersoft general and administrative
organization ($354,000), the amortization of the goodwill related to the
purchase of Expersoft ($238,000) and increased professional fees ($100,000). The
goodwill is being amortized over five years and will approximate $238,000 per
quarter. General and administrative expenses for the first half of 1999
increased $1,099,000, or 82%, over the first half of 1998 to $2,433,000 as
compared to $1,334,000. The increase for the first half of 1999 was primarily
due to the addition of the Expersoft general and administrative organization
($406,000), the amortization of the goodwill related to the purchase of
Expersoft ($278,000), a non-recurring charge related to the value of stock
options granted to three former officers in January 1999 ($192,000), and
increased professional fees ($130,000).
Operating Loss. The Company incurred an operating loss of $1,874,000 in
the second quarter of 1999 compared to an operating loss in the second quarter
of 1998 of $310,000. The operating loss in the second quarter of 1999 was
primarily due to higher operating expenses as discussed above. The operating
loss for the first half of 1999 was $3,581,000, as compared to $299,000 for the
corresponding period in 1998, and was due to lower margins and higher operating
expenses as discussed above.
Other Income, Net. Other income, net decreased $59,000 or 29% to $143,000
in the second quarter of 1999 as compared to $202,000 for the second quarter of
1998. The decrease was primarily the result of a non-recurring gain recorded
during the second quarter of 1998 of approximately $200,000 related to the
curtailment of a non-U.S. pension plan that previously covered the Company's
Irish employees, which was partially offset by an increase in interest income of
$95,000 for the second quarter of 1999 as a result of the higher cash balances.
For the first half of 1999, other income, net decreased $271,000, or 41%, to
$392,000 as compared to $663,000 for the first half of 1999. The decrease was
primarily the result of a non-recurring gain recorded during the first half of
1998 of approximately $600,000 related to the curtailment of a non-U.S. pension
plan that previously covered the Company's Irish employees, which was partially
offset by an increase in interest income of $247,000 for the first half of 1999
as a result of the higher cash balances during 1999.
Provision for Income Taxes. The Company recorded a provision for income
taxes of $20,000 in the second quarter of 1999. In the second quarter of 1998
the Company recorded a provision for taxes in the amount of $64,000. For the
first half of 1999 the company has recorded a provision for income taxes of
$20,000, 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 half of 1998 was $196,000, which primarily represented an estimate
for non-U.S. taxes associated with the surplus assets refund upon curtailment of
a non-U.S. pension plan.
Liquidity and Capital Resources
Net cash used by operating activities during the first half of 1999
was $4,884,000 compared to $534,000 generated by operating activities during the
first half of 1998. The negative cash flow from operations during the first
half of 1999 was primarily the result of the net loss ($3,209,000), an
increase in accounts receivable ($2,752,000), and a decrease in deferred revenue
($441,000). These amounts were partially offset by an increase in accrued wages
and related liabilities ($308,000), non-cash stock-based compensation ($192,000)
and non-cash depreciation and amortization ($940,000). The cash generated from
operations during the first half of 1998 was primarily the result of net income
($168,000), non-cash depreciation and amortization ($501,000), and an increase
in other accrued liabilities ($966,000). These amounts were partially offset by
cash payments for restructuring expenses ($1,112,000).
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Net cash used for investing activities during the first half of 1999
was $10,297,000 compared to $5,096,000 during the first half of 1998. The net
cash used during the first half of 1999 primarily comprised purchases of short-
term investments ($7,402,000), cash paid to date for the acquisition of
Expersoft ($2,330,000) and purchases of property and equipment ($656,000). The
net cash used during the first half of 1998 primarily comprised purchases of
short-term investments ($4,691,000), and purchases of property and equipment
($445,000).
Net cash used for financing activities during the first half of 1999 was
$323,000 as compared to net cash provided by financing activities during the
first half of 1998 of $249,000. The net cash used in the first half of 1999 was
a result of payments of $503,000 under short-term debt and capital lease
obligations related to Expersoft, which was partially offset by $180,000
received from the exercise of common stock options. The net cash provided during
the first half of 1998 was from the exercise of common stock options.
The Company believes that cash and short-term investment balances
($12,379,000 at June 30, 1999) will be sufficient to meet the Company's
liquidity requirements for the next twelve months. 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.
Year 2000 Issues
General. The Company continues to conduct a company-wide Year 2000
readiness program ("Y2K Program"). The Y2K Program is addressing the issue of
computer programs and embedded computer chips being unable to distinguish
between the year 1900 and the year 2000. Therefore, some computer hardware and
software will need to be modified prior to the Year 2000 in order to remain
functional. The Company anticipates that Year 2000 compliance will be
substantially complete by September 1999.
Y2000 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 review of all Company developed products for
Year 2000 compliance purposes. The Company believes that most (99%) of the
Company's products are Year 2000 compliant and that those that are not Year 2000
compliant will be upgraded to be Year 2000 compliant by September 1999, or
discontinued and replaced with Year 2000 compliant products providing the same
functionality. However, 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. In addition 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, and such claims could be material.
The Company has completed an evaluation of Year 2000 issues associated with
its internal IP computer systems. Most of the Company's computer systems are
already Year 2000 compliant. Other internal computer systems that have been
identified as non-compliant will be upgraded to be Year 2000 compliant by
September 1999.
The Company has completed an evaluation of Year 2000 issues associated with
its non-IP systems. All significant non-IP systems are Year 2000 compliant.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company has completed an evaluation of the possible effects on the
Company's operations of the Year 2000 readiness of its key suppliers. The
Company relies on third party manufacturers for the proper functioning of its
information systems, software and products. The failure of those manufacturers
to successfully address Year 2000 issues could have a material impact on the
Company's operations and financial results; however, the potential impact and
related costs cannot be known with certainty at this time.
Costs. The total cost associated with required modifications to become Year
2000 compliant is not expected to be material to the Company's financial
position. Through June 30, 1999, the Company has spent approximately $205,000 to
implement the Year 2000 compliance program. Approximately $100,000 of that
amount represents new equipment and software and has been capitalized while the
remainder has been expensed. The Company estimates that it may spend up to an
additional $160,000 for other replacements or upgrades and for communicating
with key suppliers and customers. Approximately $130,000 of that amount will
relate to new computer equipment and software and will be capitalized, and the
remainder will be expensed as incurred.
Risks. The failure to correct a 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. The Y2K Program is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem. The Company believes that, with the implementation of new business
systems and completion of the Y2K Program as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
The Company does not yet have a contingency plan to address the Year 2000
problem, but it is expected to create one by September 1999 if it appears that
the Company or its key suppliers and customers will not be Year 2000 compliant
and that such non-compliance is expected to have a material adverse impact on
the Company's operations.
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 June 30, 1999, the Company had $3,999,000 and $8,380,000 in cash and
cash equivalents and short-term investments, respectively, with a weighted
average variable rate of 5.25% and 4.96%, respectively.
12
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(continued)
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 $138,000 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 and the United
Kingdom, where the functional currencies are: French Francs, Deutschemarks, Yen,
Won and British Pounds, 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 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.
13
<PAGE>
PART II. OTHER INFORMATION (continued)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The registrant's annual meeting of shareholders was held on May 13,
1999.
(b) The following Class I directors were elected at the meeting:
Jeffrey Drazan and Howard Oringer. Voting results for the election of
all director nominees were as follows:
<TABLE>
<CAPTION>
In Favor Abstain Broker non-votes
---------- --------- ----------------
<S> <C> <C> <C>
Jeffrey Drazan 22,185,789 937,670 not applicable
Howard Oringer 22,185,789 937,670 not applicable
</TABLE>
The current term for Class II directors, including Bruce Brown and
Ralph Ungermann, will continue until the 2000 annual meeting of
shareholders.
( c ) The other matters voted upon at the meeting, and results of those
votes, were as follows:
(i) Proposal to amend the Company's 1998 Stock Option Plan to
increase the number of shares of common stock for issuance
thereunder by 2,500,000 to an aggregate of 7,700,000.
<TABLE>
<CAPTION>
In Favor Opposed Abstain Broker non-votes
-------------- ---------- ---------------- ----------------
<S> <C> <C> <C>
9,452,131 1,983,076 138,500 11,549,752
</TABLE>
(ii) Proposal to amend the Company's 1996 Director's Stock Option
Plan to increase the number of shares of Common Stock
reserved for issuance thereunder by 200,000 to an aggregate
of 560,000 shares.
<TABLE>
<CAPTION>
In Favor Opposed Abstain Broker non-votes
-------------- ---------- ---------------- ----------------
<S> <C> <C> <C>
10,224,897 1,200,035 148,775 11,549,752
</TABLE>
(iii) Proposal to approve the appointment of Deloitte and Touche
LLP as the independent auditors of the Company for the fiscal
year ending December 31, 1999.
<TABLE>
<CAPTION>
In Favor Opposed Abstain Broker non-votes
-------------- ---------- ---------------- ----------------
<S> <C> <C> <C>
22,789,780 299,529 34,150 0
</TABLE>
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
On April 1, 1999, the Company filed a Form 8-K to report the merger of
Expersoft Corporation, with a wholly owned subsidiary of the Company
pursuant to an Agreement and Plan of Merger and Reorganization dated
February 23, 1999 and amended March 12, 1999.
14
<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: August 9, 1999 /s/ Gordon L. Almquist
--------------------------------------------
Gordon L. Almquist
Vice President, Finance and Administration,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule for the six months ended June 30, 1999: filed
electronically.
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 1999 AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS 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>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,999
<SECURITIES> 8,380
<RECEIVABLES> 7,220
<ALLOWANCES> 696
<INVENTORY> 0
<CURRENT-ASSETS> 20,625
<PP&E> 1,343<F1>
<DEPRECIATION> 4,464
<TOTAL-ASSETS> 27,836<F2>
<CURRENT-LIABILITIES> 8,112
<BONDS> 0
0
0
<COMMON> 254
<OTHER-SE> 19,470
<TOTAL-LIABILITY-AND-EQUITY> 27,836
<SALES> 10,124
<TOTAL-REVENUES> 10,124
<CGS> 3,902
<TOTAL-COSTS> 3,902
<OTHER-EXPENSES> (392)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> (3,189)
<INCOME-TAX> 20
<INCOME-CONTINUING> (3,209)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,209)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
<FN>
<F1>PP&E IS NET OF ACCUMULATED DEPRECIATION OF $5,421.
<F2>TOTAL ASSETS INCLUDE $327 OF OTHER ASSETS AND INVESTMENTS OF $1,437.
</FN>
</TABLE>
