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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C. 20549
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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, 2000
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
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VERTEL CORPORATION
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3948704
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21300 Victory Boulevard, Suite 700, 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 ___
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As of July 31, 2000 there were 28,033,142 shares of common stock outstanding.
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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 2000 1999
------------- ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 10,707 $ 3,974
Short-term investments........................................ -- 5,677
Trade accounts receivable (net of allowances of $541 as of
June 30, 2000 and $486 as of December 31, 1999).......... 6,958 6,289
Prepaid expenses and other current assets..................... 1,308 519
-------- --------
Total current assets..................................... 18,973 16,459
Property and equipment, net........................................ 1,221 1,638
Investments........................................................ 1,437 1,437
Goodwill, net...................................................... 3,511 3,987
Other assets....................................................... 307 306
-------- --------
$ 25,449 $ 23,827
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 403 $ 931
Accrued wages and related liabilities......................... 1,804 1,672
Capital lease obligations..................................... -- 26
Accrued restructuring expenses................................ 48 439
Accrued taxes payable......................................... 598 483
Other accrued liabilities..................................... 1,862 1,773
Deferred revenue.............................................. 1,018 1,621
-------- --------
Total liabilities........................................ 5,733 6,945
-------- --------
Shareholders' equity:
Preferred stock, par value $.01, 2,000,000 shares authorized;
none issued and outstanding
Common stock, par value $.01, 100,000,000 shares authorized;
shares issued and outstanding: 2000, 28,025,137;
1999, 26,246,531................................. 280 262
Additional paid-in capital.................................... 85,890 82,049
Accumulated deficit........................................... (66,220) (65,242)
Accumulated comprehensive loss................................ (234) (187)
-------- --------
Total shareholders' equity............................... 19,716 16,882
-------- --------
$ 25,449 $ 23,827
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
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VERTEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Month Period Ended Six Month Period Ended
------------------------ ----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net revenues:
License.................................. $ 3,524 $ 3,602 $ 6,435 $ 6,764
Service and other........................ 1,757 2,000 3,857 3,360
------- ------- ------- -------
Net revenues....................... 5,281 5,602 10,292 10,124
------- ------- ------- -------
Cost of revenues:
License.................................. 255 421 478 991
Service and other........................ 1,361 1,497 2,775 2,911
------- ------- ------- -------
Total cost of revenues............. 1,616 1,918 3,253 3,902
------- ------- ------- -------
Gross profit................................. 3,665 3,684 7,039 6,222
------- ------- ------- -------
Operating expenses:
Research and development................. 1,389 2,180 2,842 3,843
Sales and marketing...................... 1,892 2,202 3,470 3,759
General and administrative............... 957 938 2,053 1,731
General and administrative - non-cash
stock compensation..................... 259 -- 518 192
Goodwill amortization.................... 238 238 476 278
------- ------- ------- -------
Total operating expenses............ 4,735 5,558 9,359 9,803
------- ------- ------- -------
Operating loss............................... (1,070) (1,874) (2,320) (3,581)
Other income, net............................ 1,173 143 1,423 392
------- ------- ------- -------
Income (loss) before provision for income
taxes.................................. 103 (1,731) (897) (3,189)
Provision for income taxes................... 40 20 80 20
------- ------- ------- -------
Net income (loss)............................ 63 (1,751) (977) (3,209)
Other comprehensive income (expense)......... (34) 38 (47) 8
------- ------- ------- -------
Comprehensive income (loss).................. $ 29 $(1,713) $(1,024) $(3,201)
======= ======= ======= =======
Basic net income (loss) per common share..... $ 0.00 ($0.07) ($0.04) ($0.13)
======= ======= ======= =======
Diluted net income (loss) per common share... $ 0.00 ($0.07) ($0.04) ($0.13)
======= ======= ======= =======
Weighted average shares outstanding used in
net income (loss) per common share
calculations:
Basic.................................... 27,853 25,354 27,422 25,280
Diluted.................................. 31,608 25,354 27,422 25,280
</TABLE>
See accompanying notes to consolidated financial statements.
3
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VERTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Month Period Ended
----------------------
June 30, June 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss from operations......................................... $ (977) $ (3,209)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Depreciation and amortization.................................. 1,264 940
Reserve for returns and bad debts.............................. 55 140
Non-cash stock compensation.................................... 518 192
Changes in operating assets and liabilities.................... (2,699) (2,947)
------- --------
Net cash used for operating activities......................... (1,839) (4,884)
------- --------
Cash flows from investing activities:
Net sales (purchases) of short-term investments.................. 5,677 (7,402)
Purchases of property and equipment.............................. (371) (656)
Cash paid for business acquisition, net of cash acquired......... -- (2,330)
Changes in other assets.......................................... (1) 91
------- --------
Net cash provided by (used for) investing activities........... 5,305 (10,297)
------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options.......................... 3,340 180
Payments on capital lease obligations............................ (26) (503)
------- --------
Net cash provided by (used for) financing activities........... 3,314 (323)
------- --------
Effect of exchange rate changes on cash............................ (47) 8
------- --------
Net increase (decrease) in cash and cash equivalents............... 6,733 (15,496)
Cash and cash equivalents, beginning of period..................... 3,974 19,495
------- --------
Cash and cash equivalents, end of period........................... $10,707 $ 3,999
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The consolidated financial statements include the accounts of Vertel
Corporation and its subsidiaries (the "Company"). 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.
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,
1999 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, 2000 are not
necessarily indicative of results that may be expected for the full year.
Certain reclassifications have been made to the 1999 consolidated financial
statements to conform to the 2000 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):
Six Month Period Ended
----------------------
June 30, June 30,
2000 1999
----------- -----------
Trade accounts receivable.................... $ (724) $(2,752)
Prepaid expenses and other current assets.... (789) (65)
Accounts payable............................. (528) 87
Accrued wages and related liabilities........ 132 308
Cash payments for restructuring expenses..... (391) (1)
Other accrued liabilities.................... 89 101
Accrued taxes payable........................ 115 (184)
Deferred revenue............................. (603) (441)
------- -------
$(2,699) $(2,947)
======= =======
Cash payments of $391,000 were made for restructuring expenses in the six
months ended June 30, 2000. These payments were primarily comprised of severance
and vacated facility costs.
3. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which the Company is required to
adopt beginning in fiscal year 2001. SFAS No. 133 will require the Company to
record all derivatives on the balance sheet at fair value. Changes in
derivative fair values will either be recognized in earnings as offsets to the
changes in fair value of related hedged assets, liabilities and firm
commitments, or, for forecasted transactions, deferred and recorded as a
component of other comprehensive income until the hedge transactions occur and
are recognized in earnings. The ineffective portion of a hedging derivative's
change in fair value will be immediately recognized in earnings. The Company
does not believe the effect of adopting SFAS No. 133 will be material to its
financial position.
5
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VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-9, which provides certain amendments
to SOP No. 97-2, and is effective for transactions entered into by the Company
beginning January 1, 2000. The Company's adoption of SOP No. 98-9 has not been
material to its financial position or its results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in the financial statements. The
Company has evaluated the provisions of SAB 101 and believes its impact on the
Company's revenue recognition policy is immaterial.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION AND SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. In addition, forward-looking statements may be made orally or in press
releases, conferences, reports, on the Company's web site or otherwise, in the
future by or on behalf of the Company. Statements that are not historical are
forward-looking. When used by or on behalf of the Company, the words "expect,"
"anticipate," "estimate," "believe," "intend," and similar expressions generally
identify forward-looking statements.
Forward-looking statements involve risks and uncertainties. These
uncertainties include factors that affect all businesses operating in a global
market, as well as matters specific to the Company and the markets it serves.
Particular risks and uncertainties facing the Company at the present include the
Company's financial ability to continue to invest in research and development
necessary for the development of new and existing products; the timely and
successful development of existing and new markets; the maturing nature of the
TMN product marketplace and the financial uncertainties associated with an
anticipated decline in TMN revenues as more fully described under "Results of
Operations--Net Revenues" below; the fact that some of our products are
relatively new and, although we see increasing market interest, it is difficult
to predict sales for new products such as e*ORB and Mediation Framework and the
ultimate adoption of these technologies is uncertain; the length of the
Company's sales cycle for most of its products, including e*ORB, making initial
license sales and future royalties difficult to forecast; additional difficulty
in predicting royalty revenue because that revenue is dependent on successful
development and deployment by our customers of our products; fluctuation from
quarter to quarter in revenue from our professional service unit as a result of
a limited number of large consulting contracts and whether the Company has large
contracts and the timing of such contracts; loss of key customer, partner and
alliance relationships and the possibility that the Company may not be able to
replace the loss of a significant customer; 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 further adds
to the difficulty of forecasting and leads to a substantial risk of variance
from actual results; the possible development and introduction of competitive
products and new and alternative technologies by the Company's competitors; the
increasing sales and marketing costs of attracting new and retaining existing
customers; 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; reliance on a small number
of customers for a large percentage of revenues; political and economic
uncertainties associated with conducting business on a worldwide basis; and the
Company's ability to control expenditures at a level consistent with revenues.
Additional risks inherent in the Company's business are listed under "Risk
Factors" in Part I, Item I of Vertel's Annual Report on From 10-K for the fiscal
year ended December 31, 1999 which is incorporated by reference.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
and its business, including factors that potentially could materially affect the
Company's financial results, may emerge from time to time. It is not possible
for management to predict all risk factors or to assess the impact of such risk
factors on the Company's business. The Company undertakes no obligation to
revise or publicly release the results of any revision to the forward-looking
statements.
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 for the year ended December 31, 1999 contained
in the Company's Annual Report on Form 10-K.
Results of Operations
Net Revenues. Net revenues decreased $321,000, or 6%, to $5,281,000 for the
three months ended June 30, 2000 (the "second quarter of 2000") compared to
$5,602,000 for the three month period ended June 30, 1999 (the "second quarter
of 1999"), and increased $168,000, or 2%, to $10,292,000 for the six months
ended June 30, 2000 (the "first half of 2000") as compared to $10,124,000 for
the six months ended June 30, 1999 (the "first half of 1999").
License revenues consist primarily of license fees and royalties derived from
the Company's software solutions and development platforms. License revenues
decreased $78,000, or 2%, to $3,524,000 during the second quarter of 2000 from
$3,602,000 during the second quarter of 1999. The decrease in license revenues
during the second quarter of 2000 compared to the second quarter of 1999 was
primarily the result of lower TMN product revenues (primarily in the European
markets) and lower revenues from CORBA products as a result of a substantial
portion of sales involving a single customer in the second quarter of 1999.
These decreases were substantially offset by a license transaction with the U.S.
Department of Defense ("DoD") for several products, the majority of which were
newer products including Vertel Mediation Framework, certain CORBA Services and
e*ORB. License revenues for the first half of 2000 decreased $329,000, or 5%,
to $6,435,000 as compared to $6,764,000 for the first half of 1999. The
decrease was primarily the result of lower revenues from CORBA products in the
first half of 2000, when compared with 1999, which was affected by a substantial
portion of sales involving single customers in each of the first two quarters of
1999 (which were not fully replaced) and lower TMN product revenues (primarily
in the European markets).
Management believes that the TMN product marketplace is maturing and
revenues associated with such products are anticipated to decline in future
quarters as service providers and network manufacturers look towards general
computing technologies, such as our next generation CORBA product (e*ORB), for
the next phase of integrated management solutions.
Service revenues, which consist primarily of fees from professional service
unit (PSU) projects, software maintenance, training and non-recurring
engineering services, decreased $243,000, or 12%, to $1,757,000 during the
second quarter of 2000 from $2,000,000 during the second quarter of 1999. The
decrease in service revenues during the second quarter of 2000 compared to the
second quarter of 1999 was the result of lower software maintenance ($291,000),
which was primarily due to non-renewals of maintenance contracts on certain
older or discontinued products, and lower non-recurring engineering services
revenues ($161,000). These decreases were partially offset by increased PSU
revenue ($209,000). Service revenues for the first half of 2000 increased
$497,000, or 15%, to $3,857,000 from $3,360,000 for the first half of 1999. The
revenue increase was primarily due to higher PSU revenue ($1,020,000), which was
partially offset by lower non-recurring engineering services ($282,000) and
lower software maintenance revenue ($215,000) due to non-renewals of maintenance
contracts on certain older or discontinued products.
Sales to customers outside of the U.S. comprised approximately 26% of net
revenues in the second quarter of 2000 compared to approximately 50% in the same
period of 1999. For the first half of 2000, sales to customers outside the U.S.
comprised approximately 24% of net revenues as compared to approximately 45% in
the same period of 1999. The Company has historically reported a high
percentage of sales to customers outside of the United States and the Company
expects that international sales will continue to be significant. However, the
Company's sales cycle is usually lengthy and results in quarterly fluctuations
between geographic markets. In addition, any political or economic turmoil in
foreign markets could impact future sales in the affected regions.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Sales to the DoD and Alcatel USA comprised approximately 35% and 14% of net
revenues, respectively, in the second quarter of 2000, and approximately 18% and
22% of net revenues, respectively, for the first half of 2000. Sales to 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 in either
the second quarter or first half of 2000 and 1999.
Management anticipates that revenues in both licensing and service segments
will continue to be difficult to predict for a number of reasons. The Company's
sales cycle for its products, including the new e*ORB product, is long, often
requiring six to nine months from initial contact to completion of a sale and
recording of revenue. Once a prospect becomes a customer, additional future
revenues remain difficult to predict and are dependent on the customer's timing
and success in developing and deploying products containing our software.
Several of our important products are new and we do not yet have a sales history
on which to base predictions for future revenues. If we have a customer that
contributes a large percentage of revenues during one period, it may be
difficult to replace those revenues in a future period.
Cost of Revenues - License. Cost of license revenues consists primarily of
royalty fees associated with third party software, the cost of user
documentation and the cost of reproduction and delivery of software. Cost of
license revenues was $255,000 and $421,000 for the second quarters of 2000 and
1999, respectively, representing 7% and 12% of license revenues, respectively.
The higher cost of license revenues for the second quarter of 1999 was the
result of a one-time payment of $150,000 required under a third party license
agreement related to the Company's Trader Service CORBA product which was
introduced during the second quarter of 1999. Cost of license revenues was
$478,000 and $991,000 for the first half of 2000 and 1999, respectively,
representing 7% and 15% of license revenues, respectively. The higher cost of
license revenues in the first half of 1999 was primarily the result of the
aforementioned one-time license payment of $150,000 during the second quarter of
1999 and the costs of an Expersoft license transaction in March 1999 (after the
acquisition) 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.
Cost of Revenues - Service. Cost of service revenues consists primarily of
costs associated with performing professional consulting services, software
maintenance and technical support to customers such as telephone support, and
costs associated with training services and non-recurring engineering services.
Cost of service revenues was $1,361,000 and $1,497,000 for the second quarters
of 2000 and 1999, respectively, representing 77% and 75% of service revenues,
respectively. The increased percentage in cost of service revenues in 2000 was
the result of a greater portion of PSU revenues within the service category
which have historically yielded lower profit margins than maintenance revenues.
Cost of service revenues was $2,775,000 and $2,911,000 for the first half of
2000 and 1999, respectively, representing 72% and 87% of service revenue,
respectively. The lower percentage in cost of service revenues during the first
half of 2000 was primarily due to increased PSU revenues and improved personnel
utilization. We expect to hire additional consulting personnel to expand our
capabilities in anticipation of additional consulting service contracts from
customers. To the extent that new consulting service contracts do not
materialize, our future profit margins from consulting services would be
adversely impacted.
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 is
developing 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 decreased $791,000, or 36%, to $1,389,000 in the second
quarter of 2000 from $2,180,000 in the second quarter of 1999. The decrease in
R&D expenses during the second quarter of 2000 was primarily the result of lower
payroll, consulting and related facilities costs ($940,000) due to the Company's
October 1999 workforce reduction. The lower costs were partially offset by a
lower chargeback to cost of revenues for non-recurring engineering services
($152,000). R&D expenses for the first half of 2000 decreased $1,001,000, or
26%, to $2,842,000 as compared to $3,843,000 for the first half of 1999,
primarily as a result of lower payroll, consulting and facilities costs
($1,172,000), also due to the Company's October 1999 workforce reduction, which
was partially offset by a lower chargeback to cost of revenues for non-recurring
engineering services ($263,000).
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
In October 1999, the Company announced a restructuring plan designed to reduce
operating costs, and reduced its overall workforce by approximately 20%. The
TMN product development staff in Woodland Hills, California accounted for
approximately half of the reduction in personnel. The Company has transitioned
TMN product development to its Poland operations, where its costs are lower.
The Company expects to continue to make investments at the current level in the
development of new products and feature enhancements to existing product lines
but changes in net revenues of future quarters could influence expenditures in
future periods. Since the restructuring, the Company's R&D expenditures are
concentrated in the areas of CORBA product development including the Company's
e*ORB product and related application services and the Vertel Mediation
Framework which is designed for the integration of telecom Operation Support
Systems and the underlying network equipment management systems.
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel and associated costs and selling and marketing programs such as trade
shows and other promotional costs. The Company believes that substantial sales
and marketing expenditures are essential to develop opportunities for revenue
growth and to sustain 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 opportunities in the CORBA, mediation and
TMN marketplaces.
Sales and marketing expenses decreased $310,000, or 14%, to $1,892,000 in the
second quarter of 2000 from $2,202,000 in the second quarter of 1999. The
decrease in the second quarter of 2000 was primarily due to decreased personnel
and the associated payroll, commissions, recruiting, relocation and travel costs
($317,000), lower third party sales commissions ($33,000) and lower facilities
costs ($28,000), which were partially offset by higher trade show and
promotional expenses ($103,000). Sales and marketing expenses for the first
half of 2000 decreased $289,000, or 8%, to $3,470,000 from $3,759,000 for the
first half of 1999 primarily as a result of decreased personnel and the
associated payroll, commissions, recruiting, relocation and travel costs
($323,000), lower consulting expenses ($47,000), and lower facilities ($30,000),
which were partially offset by higher trade show and promotional expenses
($127,000).
General and Administrative. General and administrative expenses consist
primarily of salaries, facilities costs and other related expenses for
administrative, executive and financial personnel as well as professional fees
and investor relations costs. General and administrative expenses increased
$19,000, or 2%, to $957,000 in the second quarter of 2000 as compared to
$938,000 in the second quarter of 1999. The increase in the second quarter of
2000 was primarily the result of higher consulting fees ($24,000), higher
investor relations costs ($17,000) and an increase in the allowance for bad
debts ($50,000), which were partially offset by lower personnel costs ($68,000).
General and administrative expenses for the first half of 2000 increased
$322,000, or 19%, to $2,053,000 from $1,731,000 for the first half of 1999. The
increase for the first half of 2000 was primarily due to increased professional
fees ($168,000) related to the Company's merger and acquisition activities, an
increase in the allowance for bad debts ($50,000) and higher investor relations
costs ($55,000), primarily due to the increased number of shareholders in 2000
as compared to 1999.
General and Administrative - Non-Cash Stock Compensation. Non-cash stock
compensation was $259,000 in the second quarter of 2000 as compared to zero in
the second quarter of 1999. For the first half of 2000, non-cash stock
compensation was $518,000 as compared to $192,000 for the first half of 1999.
The charge in the second quarter of 2000 and the first half of 2000 relates to
the value of certain stock options granted to non-employee directors which
vested during the second quarter and the first half, while the charge in the
first half of 1999 was a non-recurring charge related to the value of stock
options granted to three former officers in January of 1999.
Goodwill Amortization. Goodwill amortization for the second quarter of 2000
was $238,000, the same as the second quarter of 1999. Goodwill amortization for
the first half of 2000 was $476,000 compared to $278,000 for the first half of
1999. The goodwill results from the purchase of Expersoft in March of 1999 and
is being amortized over five years at approximately $238,000 per quarter. The
increase in the first half of 2000 represents the charge for the full period in
2000 as compared to a charge for a partial period in 1999 (from March 12, 1999
through June 30, 1999).
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Operating Loss. The Company reduced its operating loss to $1,070,000 in the
second quarter of 2000 from $1,874,000 in the second quarter of 1999. The
improvement was due primarily to higher gross profit margins, lower research and
development expenses and lower sales and marketing expenses, which were
partially offset by lower software maintenance revenues and higher general and
administrative non-cash stock compensation expenses, as discussed above. The
operating loss for the first half of 2000 was $2,320,000 as compared to an
operating loss of $3,581,000 for the corresponding period in 1999. The
improvement was due to higher professional service revenue, higher gross profit
margins on license revenues, lower research and development expenses and lower
sales and marketing expenses, which were partially offset by lower license
revenues, higher general and administrative expenses, higher general and
administrative non-cash stock compensation expenses, and higher goodwill
amortization expense, as discussed above.
Other Income, Net. Other income, net increased $1,030,000 to $1,173,000 in
the second quarter of 2000 as compared to $143,000 for the second quarter of
1999. Other income, net for the second quarter of 2000 consists primarily of a
non-recurring gain on the sale of the Company's remaining equity interest in
Systems Wizards, its former Italian distributor ($961,000), interest income
($175,000) and net sub-lease income ($28,000). For the first half of 2000,
other income, net increased $1,031,000 to $1,423,000 as compared to $392,000 for
the first half of 1999. Other income, net for the first half of 2000 consisted
primarily of a non-recurring gain on the sale of the Company's remaining equity
interest in Systems Wizards ($961,000), interest income ($332,000), net sub-
lease income ($68,000) and a gain on the early termination of a capital lease
($55,000). Other income, net for the second quarter of 1999 and the first half
of 1999 was primarily interest income.
Provision for Income Taxes. The Company recorded a provision for income
taxes of $40,000 in the second quarter of 2000 compared to $20,000 in the second
quarter of 1999. For the first half of 2000, the Company has recorded a
provision for income taxes of $80,000 compared to $20,000 for the first half of
1999. The income tax provisions are primarily for non-U.S. taxes as the Company
anticipates utilizing net operating losses to offset any pre-tax income.
Liquidity and Capital Resources
Net cash used for operating activities during the first half of 2000 was
$1,839,000 compared to $4,884,000 used by operating activities in the first half
of 1999. The negative cash flow from operations in the first half of 2000 was
primarily the result of the net loss ($977,000), an increase in prepaid expenses
and other current assets ($789,000), an increase in accounts receivable
($724,000), a decrease in deferred revenue ($603,000), a decrease in accounts
payable ($528,000) and payments for restructuring expense ($391,000). These
amounts were partially offset by an increase in accrued wages and related
liabilities ($132,000), an increase in accrued taxes payable ($115,000), non-
cash stock-based compensation ($518,000) and non-cash depreciation and
amortization ($1,264,000).
Net cash provided by investing activities during the first half of 2000 was
$5,305,000 compared to net cash used by investing activities of $10,297,000 in
the first half of 1999. The net cash provided by investing activities in the
first half of 2000 primarily resulted from net sales of short-term investments
($5,677,000), which was partially offset by purchases of property and equipment
($371,000).
Net cash provided by financing activities during the first half of 2000 was
$3,314,000 as compared to net cash used for financing activities in the first
half of 1999 of $323,000. The net cash provided during the first half of 2000
was due to the exercise of stock options under the Company's stock option plans
($3,340,000), which was partially offset by payments of capital lease
obligations ($26,000).
The Company believes that its cash balance of $10,707,000 at June 30, 2000
will be sufficient to meet its 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 its
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.
At June 30, 2000, the Company's long-term liquidity needs consisted
principally of operating lease commitments related to facilities and office
equipment.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
European Monetary Union
In January 1999, eleven European countries, including France, Germany and the
Netherlands, 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, and
fluctuations in the Euro based on economic turmoil in countries in the Union
other than those where the Company does business, increasing the 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.
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, 2000, the Company had $10,707,000 of cash and cash equivalents with a
weighted average variable rate of 6.44% and no short-term investments.
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 no short or 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. The
Company's foreign assets are not material.
11
<PAGE>
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
(a) The registrant's annual meeting of shareholders was held on May 18, 2000.
(b) The following Class II directors were elected at the meeting: Bruce W.
Brown and Ralph K. Ungermann.
Voting results for the election of all director nominees were as follows:
<TABLE>
<CAPTION>
In Favor Withold Broker Non-Votes
-------- ------- ----------------
<S> <C> <C> <C>
Bruce W. Brown 24,917,129 1,439,631 N/A
Ralph K. Ungermann 25,124,615 1,232,145 N/A
</TABLE>
The current term for Class I directors, including, Howard Oringer and Jack
P. Reily, will continue until the 2001 annual meeting of shareholders.
Jeffrey M. Drazan, a Class I director at the time of the annual meeting of
shareholders, resigned as a director effective June 21, 2000.
(c) The other matters voted upon at the meeting, and results of those votes,
were as follows:
(i) Proposal to approve the adoption of the Company's 2000 Stock Option
Plan covering 2,000,000 shares of Common Stock.
In Favor Opposed Abstain Broker Non-Votes
-------- ------- ------- ----------------
7,611,437 3,143,813 152,895 15,448,615
(ii) Proposal to authorize an amendment of the Company's Articles of
Incorporation to increase the number of authorized shares of Common
Stock from 50,000,000 to 100,000,000.
In Favor Opposed Abstain Broker Non-Votes
-------- ------- ------- ----------------
24,383,126 1,898,886 74,748 N/A
(iii) Proposal to ratify the appointment of Deloitte & Touche LLP as the
independent auditors for the Company for the fiscal year ending
December 31, 2000.
In Favor Opposed Abstain Broker Non-Votes
-------- ------- ------- ----------------
26,005,549 298,728 52,483 N/A
12
<PAGE>
PART II. OTHER INFORMATION (continued)
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibits required to be furnished are listed in the Exhibit List
following this Report
(b) REPORTS ON FORM 8-K
None.
13
<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 10, 2000 /s/ Gordon L. Almquist
-----------------------------------
Gordon L. Almquist
Vice President, Finance and Administration,
and Chief Financial Officer
(Principal Financial Officer)
14
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.3 (and 4.1) Amended and Restated Articles of Incorporation of the Registrant.
(4)
3.4 (and 4.2) Bylaws of the Registrant, as amended to date. (8)
3.5 Certificate of amendment to Company's articles of incorporation,
as filed with the California Secretary of State on April 7,
1998, changing the Company's name to Vertel Corporation. (9)
10.5 1991 Employee Stock Purchase Plan and form of subscription
agreement thereunder. (2)
10.6 Form of Indemnification Agreement. (1)
10.22 Lease Agreement between the Registrant and Moorpark Associates, a
California Limited Partnership, dated February 5, 1993. (3)
10.27 Lease Agreement between the Registrant and OMA El Segundo
Properties, a California general partnership, dated May 23,
1995. (5)
10.32 1996 Directors' Stock Option Plan and forms of option agreement
thereunder. (8)
10.45 Sublease Agreement dated May, 1996 between Value Behavioral Health
and Retix. (6)
10.46 Master Agreement between Retix and Internetworking Solutions dated
May 31, 1996. (6)
10.48 Lease Agreement between the Registrant and Nomura-Warner Center
Associates, L.P., dated November 26, 1996. (7)
10.55 Amended and Restated Articles of Incorporation of Sonoma Systems,
Inc., and related documents dated January 7, 1998. (8)
10.56 Sub-sublease between Retix and Sonoma Systems, Inc., dated
December 28, 1997. (8)
10.62 Consulting Agreement between the Company and Joe Stephan dated
January 5, 1999. (10)
10.63 Notice of Stock Option Grant and Stock Option Agreement between
the Company and Joe Stephan dated January 5, 1999. (10)
10.64 Consulting Agreement between the Company and Philip Mantle dated
January 5, 1999. (10)
10.65 Notice of Stock Option Grant and Stock Option Agreement between
the Company and Philip Mantle dated January 5, 1999. (10)
10.68 Form of Retention Agreement between the Company and each of its
officers. (10)
10.69 Employment Agreement between the Company and Bruce W. Brown dated
January 12, 1999. (11)
10.70 Employment Agreement between the Company and Gordon L. Almquist
dated January 12, 1999 (11)
10.72 Employment Agreement between the Company and Cyrus D. Irani dated
January 12, 1999. (11)
10.73 Employment Agreement between the Company and Richard L. Hamilton
dated January 18, 1999.(11)
10.75 Amended 1996 Directors' Stock Option Plan and form of option
agreement thereunder. (11)
10.76 Amended 1998 Stock Option Plan and form of option agreement
thereunder. (11)
10.77 Employment Agreement between the Company and Stephen J. McDaniel
dated November 1, 1999.(11)
10.78 Amendment No. 1, dated December 3, 1999 to the Employment
Agreement between the Company and Gordon L. Almquist. (11)
10.79 Amendment No. 1, dated December 3, 1999 to the Employment
Agreement between the Company and Richard L. Hamilton. (11)
10.80 Amendment No. 1, dated December 3, 1999 to the Employment
Agreement between the Company and Cyrus D. Irani. (11)
10.81 Vertel Corporation 2000 Stock Option Plan (12)
11.0 Statement re: Computation of per share earnings (12)
27.1 Financial Data Schedule. (12)
15
<PAGE>
EXHIBIT INDEX (CONTINUED)
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits" of the Registrants Registration
Statement on Form S-1 and Amendment No. 1 thereto (File No. 33-43544) which
became effective on December 9, 1991.
(2) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits," of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 26, 1992.
(3) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits," of the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 2, 1993.
(4) Incorporated by reference to identically numbered exhibit filed in response
to Item 6(a), "Exhibits," of the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended October 1, 1994.
(5) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits," of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 30, 1995.
(6) Incorporated by reference to identically numbered exhibit filed in response
to Item 6(a), "Exhibits," of the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996.
(7) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits," of the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 28, 1996.
(8) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits," of the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 27, 1997.
(9) Incorporated by reference from registrant's report on Form 8-K as filed
with the Securities and Exchange Commission on April 7, 1998.
(10) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits," of the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998.
(11) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits," of the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999.
(12) Filed herewith.
16
