<PAGE>
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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 March 31, 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
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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 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 April 30, 1999 there were 25,144,167 shares of common stock outstanding.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
--------- ------------
<S> <C> <C>
(unaudited)
Current assets:
Cash and cash equivalents..................................... $ 10,041 $ 19,495
Short-term investments........................................ 7,768 978
Trade accounts receivable (net of allowances of $621 as of
March 31, 1999 and $556 as of December 31, 1998)........ 4,452 3,883
Prepaid expenses and other current assets..................... 1,211 1,134
-------- --------
Total current assets..................................... 23,472 25,490
Property and equipment, net........................................ 1,325 1,025
Investments........................................................ 1,437 1,437
Goodwill........................................................... 4,702 --
Other assets....................................................... 384 365
-------- --------
$ 31,320 $ 28,317
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt................................................ $ 142 $ --
Accounts payable............................................... 815 426
Accrued wages and related liabilities.......................... 1,433 1,351
Capital lease obligations...................................... 215 --
Accrued restructuring expenses................................. 224 224
Accrued taxes payable.......................................... 926 1,087
Other accrued liabilities...................................... 2,101 1,942
Accrued acquisition liabilities................................ 2,569 --
Deferred revenue............................................... 1,882 1,115
-------- --------
Total liabilities.......................................... 10,307 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, 25,128,362;
1998, 24,954,545......................................... 251 249
Additional paid-in capital.................................... 79,880 79,553
Accumulated deficit........................................... (58,941) (57,483)
Accumulated comprehensive deficit............................. (177) (147)
-------- --------
Total shareholders' equity................................ 21,013 22,172
-------- --------
$ 31,320 $ 28,317
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
v
<PAGE>
VERTEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended
--------------------------------------------
March 31, March 28,
1999 1998
----------------- ------------------
<S> <C> <C>
Net revenues:
License.............................................................. $ 3,162 $ 2,953
License - related party.............................................. -- 704
Service and other.................................................... 1,360 1,261
------- -------
Net revenues................................................... 4,522 4,918
------- -------
Cost of revenues:
License.............................................................. 570 200
Service and other.................................................... 1,414 1,128
------- -------
Total cost of revenues......................................... 1,984 1,328
------- -------
Gross profit............................................................. 2,538 3,590
------- -------
Operating expenses:
Research and development............................................. 1,636 1,435
Sales and marketing.................................................. 1,557 1,487
General and administrative........................................... 1,052 657
------- -------
Total........................................................... 4,245 3,579
------- -------
Operating (loss) income.................................................. (1,707) 11
Other income, net........................................................ 249 461
------- -------
(Loss) income before provision for income taxes.......................... (1,458) 472
Provision for income taxes............................................... -- 132
------- -------
Net (loss) income........................................................ (1,458) 340
Other comprehensive loss................................................. (30) (31)
------- -------
Comprehensive (loss) income.............................................. $(1,488) $ 309
======= =======
Basic net (loss) income per common share................................. $(0.06) $0.02
======= =======
Diluted net (loss) income per common share............................... $(0.06) $0.01
======= =======
Weighted average shares outstanding used in net (loss) income per common
share calculations:
Basic................................................................ 25,016 22,548
Diluted.............................................................. 25,016 23,289
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VERTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended
--------------------------------
March 31, March 28,
1999 1998
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations..................... $ (1,458) $ 340
Adjustments to reconcile net loss from continuing operations
to net cash provided by (used for) operating activities:
Depreciation and amortization.................................. 313 268
Reserve for returns and bad debts.............................. 65 33
Changes in operating assets and liabilities.................... (976) (242)
--------- ------
Net cash (used for) provided by operating activities......... (2,056) 399
--------- ------
Cash flows from investing activities:
Net purchases of short-term investments........................ (6,790) --
Purchases of property and equipment............................ (249) (299)
Cash paid for business acquisition , net of cash acquired...... (408) --
Change in other assets......................................... 34 (19)
--------- ------
Net cash used for investing activities................... (7,413) (318)
--------- ------
Cash flows from financing activities:
Proceeds from issuance of common stock......................... 329 --
Payments on capital lease obligations.......................... (284) --
--------- ------
Net cash provided by financing activities.................... 45 --
--------- ------
Net cash used by discontinued operations........................... -- (178)
--------- ------
Effect of exchange rate changes on cash............................ (30) (31)
--------- ------
Net decrease in cash and cash equivalents.......................... (9,454) (128)
Cash and cash equivalents, beginning of period..................... 19,495 6,252
--------- ------
Cash and cash equivalents, end of period........................... $ 10,041 $6,124
========= ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. General
The consolidated financial statements include the accounts of Vertel
Corporation and its subsidiaries (the ''Company''). All significant
intercompany balances and transactions have been eliminated in consolidation.
The interim consolidated financial statements are unaudited. In the opinion of
management, the interim financial statements include all adjustments, consisting
of only normal, recurring adjustments, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows. In the
fourth quarter of 1998, the Company adopted a calendar-year convention for its
fiscal year end and quarter ends. Accordingly, the fiscal year end for 1998 was
December 31, 1998. Prior to the fourth quarter of 1998, the Company's fiscal
year was the 52 or 53-week period ending on the Saturday nearest to December 31,
and the fiscal quarter ends ended on the thirteenth Saturday of the quarter
period. For simplicity of presentation, the Company has described the 13 weeks
ended March 28, 1998 as the three months ended March 28, 1998.
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-month period ended March 31, 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>
Three Month Period Ended
---------------------------
March 31, March 28,
1999 1998
--------- ---------
<S> <C> <C>
Trade accounts receivable...................... $(503) $ 528
Prepaid expenses and other current assets...... (16) (505)
Accounts payable............................... 186 (47)
Accrued wages and related liabilities.......... (99) 158
Cash payments for restructuring expenses....... -- (930)
Other accrued liabilities...................... (83) 415
Accrued taxes payable.......................... (161) --
Deferred revenue............................... (300) 139
----- -----
$(976) $(242)
===== =====
</TABLE>
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
3. Acquisition of Expersoft Corporation
In March, 1999, the Company acquired Expersoft Corporation (''Expersoft'').
Expersoft develops and markets standards-based, high performance Common Object
Request Broker Architecture (CORBA) software technology. The acquisition price
was approximately $3,225,000 and consisted of cash of $3,000,000 and acquisition
costs of $225,000. At March 31, 1999 the Company had paid $656,000 of the cash
consideration and acquisition costs. The balance of $2,569,000 is expected to
be paid during the three month periods ending June 30, 1999 ($2,059,000) and
September 30, 1999 ($510,000). The acquisition was accounted for as a purchase.
In connection with the purchase, assets were acquired and obligations incurred
as follows (in thousands):
<TABLE>
<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 March 31, 1999
and March 28, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Month Period Ended
--------------------------------
March 31, March 28,
1999 1998
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Pro forma revenues....................................... $ 4,939 $ 5,603
Pro forma net loss....................................... $ 1,757 $ 853
Pro forma loss per share basic and diluted............... $ (0.07) $ (0.04)
Shares used in computation of pro forma loss per share... 25,016 22,548
</TABLE>
<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 development, deployment
and success of new and enhanced telecommunications management network ("TMN")
products, loss of key customer relationships, the impact of competitive products
and the dependence on key partners and alliances, 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.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Results of Operations
Net Revenues. Net revenues decreased $396,000 or 8% to $4,522,000 for the
three months ended March 31, 1999 (the "first quarter of 1999") compared to
$4,918,000 for the three month period ended March 28, 1998 (the "first quarter
of 1998"). The reduction in revenues was primarily due to lower license
revenues in 1999.
License revenues decreased $495,000 or 14% to $3,162,000 during the first
quarter of 1999 from $3,657,000 during the first quarter of 1998. The decrease
in license revenues during the first quarter of 1999 compared to the first
quarter of 1998 was primarily the result of the one-time licensing to a related
party during the first quarter of 1998 ($704,000) and revenues during the first
quarter of 1998 related to Company's CDPD and pACT product line ($216,000),
which was sold by the Company during the third quarter of 1998. The decreases
were partially offset by license revenue from Expersoft ($431,000) which was
acquired during March 1999.
Service revenues increased $99,000 or 8% to $1,360,000 during the first quarter
of 1999 from $1,261,000 during the first quarter of 1998. The increase in
service revenues during the first quarter of 1999 compared to the first quarter
of 1998 was primarily the result of the Expersoft acquisition ($167,000), which
was partially offset by lower custom software engineering services ($70,000)
performed during the first quarter of fiscal 1999 compared to the first quarter
of 1998.
Sales to customers outside of the United States comprised approximately 38% of
net revenues in the first quarter of 1999 compared to 32% in the same period of
1998. The Company has historically reported a high percentage of sales to
customers outside of the United States which the Company believes reflects a
high degree of investment by non-U.S. companies in new infrastructure, compared
to their U.S. counterparts. The Company expects to continue significant
international sales, however, continued economic turmoil in foreign markets
could impact future sales in those regions.
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 56% of net revenues in the first quarter of 1999, from
73% in the first quarter of 1998. The decrease in the first quarter of 1999 was
primarily due to reduced margins on professional engineering services, an
increased technical support infrastructure and a certain license transaction of
Expersoft valued at $402,000 of which $385,000 in costs and estimated earnings
had accrued to Expersoft prior to the acquisition as a result of Expersoft
completing substantially all of the related software development.
Research and Development. The Company has invested heavily in research and
development to expand its expertise in TMN-based software solutions, TMN-based
applications and technologies and to continue sustaining support of its product
offerings. Through its Expersoft acquisition, the Company added CORBA
technology to its network management solutions and intends to develop embedded
telecom specific implementations of this technology. The major components of
R&D expenses are engineering salaries, employee benefits and associated
overhead, fees to outside contractors, the cost of facilities and depreciation
of capital equipment, which consists primarily of computer and test equipment.
Costs related to R&D in certain cases are offset by customer reimbursement of
non-recurring engineering efforts.
Total R&D expenses increased $201,000 or 14% to $1,636,000 in the first
quarter of 1999 from $1,435,000 in the first quarter of 1998. The increase in
R&D expenses during the first quarter of 1999 was primarily the result of lower
non-recurring engineering services performed during the first quarter of 1999 as
compared to the first quarter of 1998 ($94,000), and the addition of Expersoft's
product development organization ($59,000).
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 $70,000 or 5% to $1,557,000 in the
first quarter of 1999 from $1,487,000 in the first quarter of 1998. The
increase in the first quarter of 1999 was primarily due to increased sales
commission expenses and expenses related to trade shows.
The Company intends to expand its sales and marketing functions further during
1999 to support anticipated broader market adoption of TMN and CORBA product
technologies and anticipates its dollar expenditures on sales and marketing will
be higher in 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 professional fees, investor
relations costs and insurance premiums. General and administrative expenses
increased $395,000 or 60% to $1,052,000 in the first quarter of 1999 as compared
to $657,000 in the first quarter of 1998. The increase in the first quarter of
1999 was primarily the result of a non-recurring charge of $193,000 related to
the value of stock options granted to three former officers in January 1999 and
approximately $100,000 related to Expersoft for the partial interim period, of
which $40,000 related to the commencement in amortization of $4.7 million in
goodwill in connection with the acquisition. The goodwill is being amortized
over five years and will approximate $238,000 per quarter.
Loss from Continuing Operations. The Company incurred a loss from continuing
operations of $1,707,000 in the first quarter of 1999 compared to income from
continuing operations in the first quarter of 1998 of $11,000. The loss in the
first quarter of 1999 was due to a combination of lower revenues, lower margins
and higher operating expenses as discussed above.
Other Income, Net. Other income, net decreased $212,000 or 46% to $249,000
in the first quarter of 1999 as compared to $461,000 for the first quarter of
1998. Although interest income increased by $150,000 in the first quarter of
1999 as a result of the higher cash balances, this increase was more than offset
by the non-recurring $400,000 gain to reflect curtailment of a non-U.S. pension
plan that previously covered the Company's Irish employees recorded in the first
quarter of 1998.
Provision for Income Taxes. The Company did not record a provision for
income taxes in the first quarter of 1999 as the Company anticipates utilizing
net operating losses to offset any pre-tax income. In the first quarter of 1998
the Company recorded a provision for taxes in the amount of $132,000, 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.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
Net cash used by operating activities during the first quarter of 1999 was
$2,056,000 compared to $399,000 generated by operating activities in the first
quarter of 1998. The negative cash flow from operations in the first quarter of
1999 was primarily the result of the operating loss from continuing operations
($1,458,000), an increase in accounts receivable ($503,000), a decrease in
deferred revenue ($300,000) and a decrease in accrued taxes payable ($161,000).
These amounts were partially offset by an increase in accounts payable
($186,000) and non-cash depreciation and amortization ($313,000).
Net cash used by investing activities in the first quarter of 1999 was
$7,413,000 compared to $318,000 in the first quarter of 1998. The net cash used
in the first quarter of 1999 primarily comprised purchases of short-term
investments ($6,790,000), cash paid to date for the acquisition of Expersoft
($408,000) and purchases of property and equipment ($249,000).
Net cash provided in the first quarter of 1999 by financing activities was
$45,000. This amount is comprised of $329,000 received from the exercise of
stock which was offset by payments of $284,000 for capital lease obligations
resulting from the Expersoft acquisition.
The Company believes that cash and short-term investment balances ($17,809,000
at March 31, 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 June 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 (90%) 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 June 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.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 June
1999.
The Company has completed an evaluation of Year 2000 issues associated with
its non-IP systems. Most of them are Year 2000 compliant. Those non-IP systems
that are not Year 2000 compliant will be repaired or replaced by June 1999.
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 March 31, 1999, the Company has spent less than $200,000 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 $150,000 for other replacements or upgrades and for communicating
with key suppliers and customers. Approximately $120,000 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 June 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 March
31, 1999, the Company had $10,041,000 and $7,768,000 in cash and cash
equivalents and short-term investments, respectively, with a weighted average
variable rate of 4.75% and 4.99%, respectively.
<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 $357,000 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.
<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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VERTEL CORPORATION
(Registrant)
Date: May 10, 1999 /s/ GORDON L. ALMQUIST
__________________________________
Gordon L. Almquist
Vice President, Finance and Administration,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule for the three months ended March 31, 1999:
filed electronically.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS AT MARCH 31, 1999 AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,041
<SECURITIES> 7,768
<RECEIVABLES> 5,073
<ALLOWANCES> 621
<INVENTORY> 0
<CURRENT-ASSETS> 23,472
<PP&E> 1,325<F1>
<DEPRECIATION> 4,702
<TOTAL-ASSETS> 31,320<F2>
<CURRENT-LIABILITIES> 10,307
<BONDS> 0
0
0
<COMMON> 251
<OTHER-SE> 20,762
<TOTAL-LIABILITY-AND-EQUITY> 21,013
<SALES> 4,522
<TOTAL-REVENUES> 4,522
<CGS> 1,984
<TOTAL-COSTS> 1,984
<OTHER-EXPENSES> (257)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8)
<INCOME-PRETAX> (1,458)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,458)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,458)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
<FN>
<F1>PP&E IS NET OF ACCUMULATED DEPRECIATION OF $5,032.
<F2>TOTAL ASSETS INCLUDE $365 OF OTHER ASSETS AND INVESTMENTS OF $1,437.
</FN>
</TABLE>
