<PAGE>
UNITED STATES
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 Period Ended September 30, 1998
or
[_] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
Commission File No. 0-19923
STM WIRELESS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-3758983
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification number)
One Mauchly
Irvine, California 92618
(Address of principal executive offices) (Zip code)
(949) 753-7864
(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 and (2) has been subject to such filing
requirements for the last 90 days.
Yes [X] No [_]
As of November 11, 1998, there were 7,042,204 shares of Common Stock, $0.001 par
value, outstanding.
Page 1 of 19
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STM Wireless, Inc.
Index
Part I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30,
1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations for the
three and nine month periods ended September 30, 1998
and September 30, 1997 4
Condensed Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 1998 and
September 30, 1997 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-16
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STM WIRELESS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $16,641 $ 4,095
Short-term investments 2,227 4,527
Accounts receivable, net 15,316 10,937
Inventories, net 19,437 11,211
Current portion of long-term receivables 592 592
Deferred income taxes 3,132 3,132
------- -------
Total current assets 57,345 34,494
Property & equipment, net 10,434 17,025
Long-term receivables 1,155 1,462
Other assets 4,486 1,436
------- -------
$73,420 $54,417
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $11,250 $ 7,900
Current portion of long-term debt 284 328
Accounts payable 8,467 11,442
Accrued liabilities 8,668 2,139
Customer deposits 979 130
Deferred revenue 1,051 155
Income taxes payable 745 425
------- -------
Total current liabilities 31,444 22,519
Long-term debt 4,371 4,577
Minority interest - 259
Redeemable minority interest 6,205 -
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized, none issued or outstanding - -
Common stock, $0.001 par value; 20,000,000 shares
authorized; issued and outstanding 7,042,204 shares
at Sept. 30, 1998 and 6,448,164 shares at
December 31, 1997 7 6
Additional paid in capital 38,162 34,039
Accumulated deficit (6,581) (6,983)
Other comprehensive income (loss) (188) -
------- -------
Total stockholders' equity 31,400 27,062
------- -------
$73,420 $54,417
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
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STM WIRELESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Products $13,257 $19,672 $28,210 $43,220
Services 1,066 892 2,170 1,813
------- ------- ------- -------
Total revenues 14,323 20,564 30,380 45,033
Cost of revenues:
Products 8,939 14,743 20,491 31,219
Services 569 383 1,973 999
------- ------- ------- -------
Total cost of revenues 9,508 15,126 22,464 32,218
Gross profit 4,815 5,438 7,916 12,815
Operating costs and other operating items:
Selling, general & administrative 2,890 2,334 8,919 5,993
Research & development 1,595 1,542 6,559 4,324
Gain on sale of assets - - (9,950) -
Move and relocation charges - - 980 -
------- ------- ------- -------
Total 4,485 3,876 6,508 10,317
Operating income 330 1,562 1,408 2,498
Other income (expense) 109 (117) 19 (53)
Interest income 296 173 654 498
Interest expense (470) (322) (1,099) (712)
------- ------- ------- -------
Income before income taxes and minority interest 265 1,296 982 2,231
Income tax expense (77) (178) (321) (309)
------- ------- ------- -------
Income before minority interest 188 1,118 661 1,922
Minority interest (150) 82 (260) 154
------- ------- ------- -------
Net income $ 38 $ 1,200 $ 401 $ 2,076
======= ======= ======= =======
Net income per common share:
Basic $ 0.01 $ 0.19 $ 0.06 $ 0.33
----- ======= ======= ======= =======
Diluted $ 0.01 $ 0.18 $ 0.06 $ 0.32
------- ======= ======= ======= =======
Common shares used in computing per share:
Basic 7,042 6,393 6,900 6,367
----- ======= ======= ======= =======
Diluted 7,072 6,683 7,117 6,530
------- ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
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STM WIRELESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
1998 1997
-------- --------
<S> <C> <C>
Net cash (used in) provided by operating activities $(6,413) $ 825
------- -------
Cash flows provided by (used in) investing activities:
Net decrease in short-term investments 2,300 (18)
Equity investment (2,130) -
Sale (acquisition) of property, plant and equipment 5,353 (1,763)
------- -------
Net cash provided by (used in) investing activities 5,523 (1,781)
------- -------
Cash flows from financing activities:
Net decrease in long-term receivables 307 276
Issuance of common stock 4,124 567
Issuance of redeemable preferred stock in subsidiary 5,905 -
Net increase (decrease) in short-term borrowings 3,350 (3,200)
Repayments of long-term debt (250) 85
------- -------
Net cash provided by (used in) financing activities 13,436 (2,272)
------- -------
Net increase (decrease) in cash and cash equivalents 12,546 (3,228)
Cash and cash equivalents at beginning of period 4,095 10,453
------- -------
Cash and cash equivalents at end of period $16,641 $ 7,225
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
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STM WIRELESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
1. Basis of Presentation
These financial statements are unaudited; however, the information
contained herein for STM Wireless, Inc. (the "Company" or "STM") gives effect to
all adjustments (which are normal recurring accruals) necessary, in the opinion
of Company management, to present fairly the financial statements for the
interim periods presented. The results for 1998 reflect the sale of TMSI in
June 1998. The results for the period ended September 30, 1997 have been
restated to include the results of Telecom International, Inc. (TI), which was
acquired in December 1997 and has been accounted for as a pooling of interests.
Results for the periods prior to the merger with TI were as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1997
------------ ------------
<S> <C> <C>
Net Revenues
STM 17,514 39,354
TI 3,050 5,679
------- -------
Combined 20,564 45,033
======= =======
Net Income
STM 1,063 1,999
TI 137 77
------- -------
Combined 1,200 2,076
======= =======
Other Changes in
Stockholder Equity
STM 162 438
TI 90 129
------- -------
Combined 252 567
======= =======
</TABLE>
The results of operations for the current interim period are not
necessarily indicative of the results to be expected for the current year.
Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"), and these financial statements
should be read in conjunction with the financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, which
is on file with the SEC.
6
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2. Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
Raw materials 9,734 $ 5,727
Work in process 3,965 980
Finished goods 5,738 4,504
------- -------
$19,437 $11,211
======= =======
</TABLE>
3. Net Income per Share
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
per Share". This statement replaces the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Net income per share for
the three and nine month periods ended September 30, 1997 have been restated in
accordance with SFAS 128. The following table summarizes the computation of net
income per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 38 $1,200 $ 401 $2,076
====== ====== ====== ======
Basic:
- ------
Weighted average common
shares outstanding used
in computing basic net
income per share 7,042 6,393 6,900 6,367
====== ====== ====== ======
Basic net income per share $ 0.01 $ 0.19 $ 0.06 $ 0.33
====== ====== ====== ======
Diluted:
- --------
Weighted average common
shares outstanding 7,042 6,393 6,900 6,367
Incremental shares from
assumed exercises of options 30 290 217 163
------ ------ ------ ------
Shares used in computing
diluted net income per share 7,072 6,683 7,117 6,530
====== ====== ====== ======
Diluted net income per share $ 0.01 $ 0.18 $ 0.06 $ 0.32
====== ====== ====== ======
</TABLE>
Outstanding options to purchase shares of common stock at prices in excess
of the average market price for the period, and not included in the computation
of diluted income per share, for the three and nine-month periods ended
September 30, 1998 numbered 974,000 and 62,000 respectively; and for the three
and nine-month periods ended September 30, 1997 numbered 23,000 and 57,000
respectively.
7
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4. Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130") "Reporting
Comprehensive Income," which establishes standards for reporting and disclosures
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and requires
reclassification of financial statements for earlier periods to be provided for
comparative purposes. The Company has not determined the manner in which it
will present the information required by SFAS No. 130 in its annual consolidated
financial statements for the year ending December 31, 1998. The Company's total
comprehensive income (loss) for the nine months ended September 30, 1998 was a
loss of $188,000 and for the three months ended September 30, 1998 was income of
$46,000.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information." The Statement establishes standards
for the manner in which public business enterprises report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. This Statement is effective for annual financial
statements for periods beginning after December 15, 1997, and for interim
periods after the first year of adoption. The Company has not yet determined the
impact of adopting these disclosure requirements.
In June 1998, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters or fiscal years beginning after June 15, 1999. SFAS 133 establishes
accounting and reporting standards for derivative instruments embedded in other
contracts and for hedging activities. Application of SFAS 133 is not expected
to have a material impact on the Company's consolidated financial position,
results of operations or liquidity.
5. Issuance of shares
In March of 1998, the Company completed a $10 million equity offering of
common stock of STM and mandatory redeemable preferred stock of its Direc-To-
Phone International (DTPI) subsidiary. Concurrently with and as a condition of
this transaction, the Company also invested $5 million of equity in DTPI,
extended a $10 million loan and entered into a Product Supply Agreement with
DTPI. The principal on the loan is repayable by DTPI out of the proceeds of any
future financings of DTPI that may occur. The proceeds from the issuance of the
mandatory redeemable preferred stock in DTPI plus accrued dividends have been
classified as redeemable minority interest in the accompanying Condensed
Consolidated Balance Sheet at September 30, 1998.
The mandatory redeemable shares in DTPI are redeemable at the option of the
holder (if not sooner converted into common stock of DTPI), on the 5th
anniversary of the
8
<PAGE>
date of issuance, or in the event of an acquisition of STM and STM continues to
hold greater than 50% of the voting stock of DTPI. The redemption amount is
equal to $6,000,000 plus dividends of $0.50 per share per annum accruing from
the date of issuance. These dividends of $600,000 per annum have been classified
as minority interest in the accompanying statements of operations for the three
and nine-months periods ended September 30, 1998.
6. Gain on sale of assets
In June, 1998, the Company completed the sale of its majority-owned
subsidiary, Telecom Multimedia Systems, Inc. (TMSI) to Inter-Tel, Inc. (Inter-
Tel), pursuant to which Inter-Tel agreed to purchase certain assets and assume
certain liabilities of TMSI for approximately $25 million in cash. A gain of
$9,950,000 (net of costs and reserves considered necessary) was realized and is
included in the accompanying Condensed Consolidated Statement of Operations for
the nine-month month period ended September 30, 1998.
7. Sale of Long-term Service Assets
In September 1998, DTPI renegotiated a long-term service contract with its
Mexican partner whereby DTPI was paid approximately $9,500,000 (before expenses)
for the sale and installation of remote terminal equipment utilized in the
provision of telephony services. DTPI retained ownership of certain gateway
infrastructure equipment. Both the remote equipment and the gateway equipment
were classified as Assets for Long-term Service Contracts as part of Property,
Plant & Equipment in the accompanying Condensed Consolidated Balance Sheet at
December 31, 1997 and through June 30, 1998. Arising from the revision of the
agreement, the sales of remote equipment through September 30, 1998 are
classified as revenue in the accompanying Condensed Statements of Operations for
the three and nine-month periods ended September 30, 1998, and the gateway
equipment continues to be classified as Property, Plant & Equipment in the
accompanying balance sheet at September 30, 1998.
8. Equity Investment
In 1998, the Company formed a joint venture with the national telephone
company in Venezuela to provide telephony services in Venezuela. Through its
DTPI subsidiary, the Company owns 49% of this joint venture and accounts for its
investment on the equity basis. At September 30, 1998 the equity investment was
$2,130,000.
9. Reclassifications
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform to the 1998 presentation.
9
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General
- -------
STM Wireless, Inc. (the "Company" or "STM"), founded in 1982, is a
developer, manufacturer and provider of wireless-based satellite communications
infrastructure and user terminal products utilized in public and private
telecommunications networks. These networks support data, fax, voice and video
communication and are used to either bypass or extend terrestrial networks or
provide a communications infrastructure where a network does not currently
exist. The Company's product line is based on proprietary hardware and software
and primarily consists of two-way earth stations sometimes referred to as VSATs
(very small aperture terminals), associated infrastructure equipment and
software, transceivers, modems and other networking equipment. The Company
currently focuses its sales efforts on the international marketplace,
particularly developing countries. The Company's subsidiary, Direc-To-Phone
International, Inc. ("DTPI"), provides fixed telephony services in areas of
lower population density in international markets.
Results of Operations
- ---------------------
Combined product and service revenues were $14,323,000 and $30,380,000,
respectively, for the three and nine-month periods ended September 30, 1998,
compared to $20,564,000 and $45,033,000, respectively, for the corresponding
periods of 1997, representing decreases of 30% and 33%, respectively, from the
prior year periods. Product revenues were $13,257,000 and $28,210,000,
respectively, for the three and nine-month periods ended September 30, 1998,
compared to $19,672,000 and $43,220,000, respectively, for the corresponding
periods in 1997, representing decreases of 33% and 35%, respectively, from the
prior year periods. In the three and nine-month periods ended September 30,
1998, the Company benefited from equipment sales resulting from the September
1998 revision of DTPI's long-term service agreement with its Mexican partner.
In the three and nine-month periods ended September 30, 1997, the Company
benefited from shipments related to a $30,000,000 contract for a rural telephony
network in Southeast Asia. Such shipments to Southeast Asia accounted for
approximately 60% of the Company's revenues in the three and nine-month periods
ended September 30, 1997. The Company believes that the diversion of management
attention to the setting up of the DTPI service business, especially in the
fourth quarter of 1997 and the first quarter of 1998, and the Asian financial
crisis are the primary reasons for the decline in product revenues in 1998
compared to 1997. The Company has redirected its sales efforts to Latin
America, Africa and the Middle East. However, there can be no assurance that
such efforts will generate any revenue, or a specific level of revenue. Service
revenues were $1,066,000 and $2,170,000, respectively, for the three and nine-
month periods ended September 30, 1998, compared to $892,000 and $1,813,000,
respectively, for the corresponding periods in 1997, representing increases of
20% and 20%, respectively, over the prior year periods. The increase in
service revenues in the three months ended
10
<PAGE>
September 30, 1998, compared to the corresponding period of 1997, reflects
increased services arising from the revision of the DTPI Mexican service
agreement. The increase in service revenues in the nine months ended September
30, 1998 reflects service revenues by DTPI which did not exist in the prior
year.
Combined product and service gross profit margins in the three and nine-
month periods ended September 30, 1998, were 34% and 26%, respectively, compared
to 26% and 28%, respectively, for the comparable periods in 1997. Product gross
profit margins in the three and nine-month periods ended September 30, 1998,
were 33% and 27%, respectively, compared to 25% and 28%, respectively, for the
comparable periods in 1997. The gross profit percentage earned in any given
period may be impacted by the mix between core manufactured product sales and
system integration product sales (which earn a lower gross profit percentage
than manufactured products) and the volume of sales in a period due to the
relatively fixed nature of certain direct costs. The increase in product gross
profit margins during the current three-month period was primarily due to a
higher gross profit earned on individual sales in 1998 compared to 1997 due to
the 1997 $30 million contract in Southeast Asia earning a lower gross profit
percentage than 1998 sales. The decrease in product gross profit margins during
the nine-month period was primarily due to the mix of revenues between
manufactured products and system integration products and the volume of sales in
1998 compared to 1997. Service gross profit margins in the three and nine-month
periods ended September 30, 1998, were 47% and 9%, respectively, compared to
57% and 45%, respectively, for the comparable periods in 1997. The service
gross margin in the current three-month period reflects the one-time benefit of
DTPI's revised service agreement in Mexico, while the lower service gross margin
in the current nine-month period reflects the investment in the infrastructure
associated with setting up the DTPI service business.
Selling, general, and administrative (SG&A) expenses for the three-month
period ended September 30, 1998, increased to $2,890,000 from $2,334,000, and
increased as a percentage of revenue from 11% to 20%. For the nine months
ended September 30, 1998, such expenses increased to $8,919,000 from $5,993,000,
and increased as a percentage of revenue from 13% to 29%. The increases in
expenditures for the three-month period ended September 30, 1998 were primarily
due to SG&A costs associated with DTPI (which did not exist in the prior year).
For the nine months ended September 30, 1998, the increases were related to
costs associated with DTPI along with general cost increases associated with the
reorganization of the business into two independent operating divisions. SG&A
expenses for the nine months ended September 30, 1997 were reduced by $400,000
due to the reversal of a reserve, no longer required, for a potential customer
concession.
Research and development expenses (R&D) for the three-month period ended
September 30, 1998, increased to $1,595,000, or 11% of revenues, from
$1,542,000, or 7% of revenues, in the corresponding period of 1997. For the
nine-month period ended September 30, 1998, such expenses increased to
$6,559,000, or 22% of revenues, from $4,324,000, or 10% of revenues, in the
corresponding period of 1997. The increase in the nine-month period was
primarily related to a one-time charge of approximately
11
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$1,400,000 for a contractually committed R&D project with no discernable future
benefit, and for development of the Company's SpaceWeb and SES products.
The gain on sale of assets of $9,950,000 represented a gain (net of costs
and reserves considered necessary) on the sale of substantially all the assets
of the Company's majority owned subsidiary TMSI.
The move and relocation charges of $980,000 primarily comprised severance,
relocation, and move costs incurred in connection with the consolidation of the
Company's Network Systems Division in Georgia.
Interest income increased by $123,000 to $296,000 for the three-month
period ended September 30, 1998 over the three-month period ended September 30,
1997. Interest income increased by $156,000 to $654,000 for the nine-month
period ended September 30, 1998, over the nine-month period ended September 30,
1997. The increase in interest income was due primarily to higher cash deposits
being maintained by the Company as a result of the issuance of shares for cash
by both STM and DTPI, the sale of TMSI, the receipt of cash from the revised
long-term service agreement in Mexico, and a higher level of bank borrowings in
1998 compared to 1997.
Interest expense increased by $148,000 to $470,000 for the three-month
period ended September 30, 1998, over the three-month period ended September 30,
1997. Interest expense increased by $387,000 to $1,099,000 for the nine-month
period ended September 30, 1998, over the nine-month period ended September 30,
1997. The increases were primarily due to an increase in short term borrowings
from banks compared to 1997 when the Company partially financed its working
capital requirements by discounting letters of credit from customers at a lower
cost.
The tax provision of $321,000 represents the Company's estimated tax
provision on its income for the nine months ended September 30, 1998.
The minority interest charge relates to accrued dividends on the mandatory
redeemable shares issued in March, 1998 by DTPI, offset by a credit associated
with TMSI's minority interest in the first quarter of 1998.
Liquidity and Capital Resources
- -------------------------------
In connection with the award of certain long-term service contracts in
Mexico and Venezuela, and due to the capital intensive nature of the Venezuelan
contract, and other contracts that DTPI may be awarded in the future, the
Company continues to review financing alternatives to enable it to pursue these
business opportunities in the most beneficial manner. However, there can be no
assurance that such financing will be available, or that such financing will be
available on terms acceptable to the Company.
In March of 1998, the Company completed a $10 million equity offering of
common stock of STM and mandatory redeemable preferred stock of its DTPI
subsidiary. Concurrently with and as a condition of this transaction, the
Company also invested $5
12
<PAGE>
million of equity in DTPI, extended a $10 million loan and entered into a
Product Supply Agreement with DTPI. The principal on the loan is repayable by
DTPI out of the proceeds of any future financings of DTPI that may occur. The
proceeds from the issuance of the mandatory redeemable preferred stock in DTPI
plus accrued dividends have been classified as redeemable minority interest in
the accompanying Condensed Consolidated Balance sheet at September 30, 1998.
The mandatory redeemable shares in DTPI are redeemable at the option of the
holder (if not sooner converted into common stock of DTPI), on the 5th
anniversary of the date of issuance, or in the event of an acquisition of STM
and STM continues to hold greater than 50% of the voting stock of DTPI. The
redemption amount is equal to $6,000,000 plus dividends of $0.50 per share per
annum accruing from the date of issuance. These dividends of $600,000 per annum
have been classified as minority interest in the accompanying statements of
operations for the three and nine-months periods ended September 30, 1998.
In June, 1998, the Company completed the sale of its majority-owned
subsidiary, Telecom Multimedia Systems, Inc. (TMSI) to Inter-Tel, Inc. (Inter-
Tel), pursuant to which Inter-Tel agreed to purchase certain assets and assume
certain liabilities of TMSI for approximately $25 million in cash. A gain of
$9,950,000 (net of costs and reserves considered necessary) was realized and is
included in the accompanying Condensed Consolidated Statement of Operations for
the nine-month month period ending September 30, 1998.
In September 1998, DTPI renegotiated its long-term service contract with
its Mexican partner whereby DTPI was paid approximately $9,500,000 (before
expenses) for the sale of remote terminal equipment utilized in the provision of
telephony service.
For the first nine months of 1998, the Company had negative cash flows from
operations of $6,413,000, compared to positive cash flows of $825,000 in the
same period of 1997. The decrease in cash flows from operations was primarily
due to a decrease in accounts payable, increased investments in accounts
receivable, inventories, and other assets; partially offset by increases in
accrued liabilities, and customer deposits.
Cash flows from investing activities provided $5,523,000 during the nine
months of 1998. The sale of short-term investments provided $2,300,000 and the
sale of fixed assets, associated with the revised long-term service contract in
Mexico, provided $5,353,000. An equity investment by DTPI used $2,130,000.
Cash provided by financing activities during the nine months of 1998
totaled $13,436,000. An increase in short-term borrowings provided $3,350,000
while repayment of long-term debt used $250,000. A decrease in long-term
receivables provided $307,000. Proceeds from an equity offering totaled
$9,905,000; $4,000,000 from the issuance of common stock in the Company and
$5,905,000 from the issuance of redeemable preferred stock in DTPI. Proceeds
from the exercise of employee stock options provided $124,000.
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<PAGE>
Overall, the Company's cash, cash equivalents, and short-term investments
totaled $18,868,000 at September 30, 1998, as compared to $8,622,000 at December
31, 1997.
Management expects to have sufficient cash generated through operations,
through availability under credit lines and through other sources to meet the
anticipated cash requirements for the next 12 months.
Year 2000
- ---------
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because such computer programs would not properly recognize a year that begins
with "20" instead of "19". This, in turn, could result in major system failures
or miscalculations, and is generally referred to as the "Year 2000 issue", or
"Y2k." The Company has formulated a Year 2000 Plan to address the Company's Year
2000 issues and has created a Year 2000 Task Force to implement the Year 2000
Plan.
The Company's Year 2000 Plan has seven phases, which are as follows: 1)
Phase 1--Organizational Awareness, which entails educating employees, senior
management and the board of directors about the Y2k problem and how to deal with
it; 2) Phase 2--Inventory and Supply Management, which entails taking a complete
inventory of systems and their relative priority to continuing operation and
implementing a supply management process for top vendors and critical
components; 3) Phase 3--Assessment, which entails assessing systems and their
Y2k compliance status; 4) Phase 4--Planning, which entails identifying potential
solutions and their cost in dollars, schedule and ripple effect; 5) Phase 5--
Renovation, which entails implementation of fixes; 6) Phase 6--Validation, which
entails testing the fixes for compliance; and 7) Phase 7--Contingency Planning,
which entails preparing for rollover staffing, inventory adjustment and other
actions which would mitigate the effect of a Y2k failure.
The Company's Year 2000 Plan will be applied in five different areas of
coverage: a) internal systems; b) current products; c) vendors; d) existing
customers; and e) key business partners.
Internal Systems
The Company's internal business systems and PC applications will be a
primary area of focus. The Company is currently evaluating its software
applications, including, but not limited to, its business systems software,
personal computers, computerized manufacturing equipment and embedded chips to
identify any Year 2000 issues that could significantly disrupt the Company's
operations.
The Company plans to have completed the Inventory and Assessment phase of
substantially all critical systems by December 31, 1998, with the Planning phase
to be completed by February 28, 1999 and the Renovation and Validation phases to
be completed by September 1, 1999. The Company currently expects to be Year
2000 compliant on all critical systems which rely on the calendar year before
December 31,
14
<PAGE>
1999. Some non-critical systems may not be addressed until after January 2000,
however, the Company believes such systems will not disrupt the Company's
operations significantly.
Current Products
The Company's certification group has conducted evaluations of its current
products to determine if they are Year 2000 compliant. The Company does not
currently believe that there are any material Year 2000 defects in its products.
With respect to components in the Company's products that are manufactured by
third parties, the Company has completed the Inventory Phase and created a list
of potential problem components, none of which are considered material at this
time. The vendors of these components are in the process of being contacted for
assurances regarding their Year 2000 compliance status.
Vendors
The Company has recently completed the Inventory phase and is currently in
the Assessment Phase with respect to the Year 2000 status of critical suppliers,
and anticipates initiating more extensive inquiries with significant suppliers
during the fourth quarter of 1998 to determine the extent to which the Company
is vulnerable to those third parties' failure to remedy their own Year 2000
issues. The Company does not currently believe that any Year 2000 compliance
issues related to its suppliers will result in a material adverse effect on the
business operations or financial performance of the Company.
Existing Customers
With respect to past products that have been shipped to existing customers,
the Company is still in the Assessment Phase but has already identified certain
problems which will require upgrades to operational networks to make them Year
2000 compliant. The Company is in the process of contacting its customers to
notify them of such problems and expects to complete all necessary upgrades by
September 30, 1999. The Company currently estimates that the total cost of
implementing such upgrades will not exceed $1.0 million and will likely be
offset by service fees charged in connection with completing such upgrades. The
Company believes that a small portion of the upgrades will be provided free of
charge as part of the warranty coverage on the products being upgraded.
Key Business Partners
The Company anticipates completing the Inventory phase with respect to its
key business partners by November 30, 1998, and plans to initiate inquiries with
such key business partners during the fourth quarter of 1998 to determine the
extent to which the Company is vulnerable to those third parties' failure to
remedy their own Year 2000 issues.
15
<PAGE>
The Company currently estimates that the cost of implementing its Year 2000
Plan will not exceed $1.0 million.
The Company anticipates that the Year 2000 issue will not have a material
adverse effect on the financial position or results of operations of the
Company. There can be no assurances, however, that the systems of other
companies or governmental entities, on which the Company relies for supplies,
cash payments, and future business, will be timely converted, or that a failure
to convert by another company or the governmental entities, would not have a
material adverse effect on the financial position or results of operations of
the Company. If third party service providers and vendors, due to the Year 2000
issue, fail to provide the Company with components or materials which are
necessary to manufacture its products, with sufficient electrical power and
other utilities to sustain its manufacturing process, or with adequate, reliable
means of transporting its products to its customers worldwide, then any such
failure could have a material adverse effect on the Company's ability to conduct
business, as well as the Company's financial position and results of operations.
Contingency Plan
The Company has not formulated a contingency plan at this time but is
confident that it will have a contingency plan in place prior to January 1,
2000.
The foregoing Management's Discussion and Analysis of Results of Operations
and Financial Condition and the discussion of Year 2000 issues contains forward-
looking statements and should be read in conjunction with the Company's
disclosures under the caption "Risk Factors and Forward Looking Statements."
Risk Factors and Forward Looking Statements
- -------------------------------------------
THIS DOCUMENT CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE RISKS AND
UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE FORWARD
LOOKING STATEMENTS, ORALLY OR IN WRITING. THE WORDS "ESTIMATE", "PROJECT",
"POTENTIAL", "INTENDED", "EXPECT", "BELIEVE" AND SIMILAR EXPRESSIONS OR WORDS
ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED OR SUGGESTED IN ANY FORWARD LOOKING
STATEMENTS AS A RESULT OF A WIDE VARIETY OF FACTORS AND CONDITIONS, AMONG
OTHERS, LONG TERM CYCLES INVOLVED IN COMPLETING MAJOR CONTRACTS, PARTICULARLY IN
FOREIGN MARKETS, INCREASING COMPETITIVE PRESSURES, GENERAL ECONOMIC CONDITIONS,
TECHNOLOGICAL ADVANCES, THE TIMING OF NEW PRODUCT INTRODUCTIONS, POLITICAL AND
ECONOMIC RISKS INVOLVED IN FOREIGN MARKETS AND FOREIGN CURRENCIES AND THE TIMING
OF OPERATING AND OTHER EXPENDITURES. REFERENCE IS HEREBY MADE TO "RISK FACTORS"
IN THE COMPANY'S FOR 10-K FOR THE YEAR ENDED DECEMBER 31, 1997.
BECAUSE OF THESE AND OTHER FACTORS THAT MAY AFFECT THE COMPANY'S OPERATING
RESULTS, PAST FINANCIAL PERFORMANCE SHOULD NOT BE CONSIDERED AN INDICATOR OF
FUTURE PERFORMANCE, AND INVESTORS SHOULD NOT USE HISTORICAL TRENDS TO ANTICIPATE
RESULTS OR TRENDS IN FUTURE PERIODS.
16
<PAGE>
PART II -- OTHER INFORMATION
Item 4 -- Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
The 1998 Annual Meeting of Stockholders of the Corporation was held on September
17, 1998. The following matters were voted on:
(1) The Stockholders of the Corporation elected the following individuals
to the Company's board of directors
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
Emil Youssefzadeh 6,244,289 385,211
Jack F. Acker 6,244,289 385,211
Frank T. Connors 6,244,289 385,211
Chan Kien Sing 6,244,289 385,211
Dr. Ernest U. Gambaro 6,244,289 385,211
Lawrence D. Lenihan, Jr. 6,244,289 385,211
Guy W. Numann 6,243,189 386,311
</TABLE>
(2) The Stockholders of the Corporation ratified an amendment to the
Corporation's Incentive Stock Option, Nonqualified Stock Option a
Restricted Stock Purchase Plan -- 1992 to increase the number of shares
subject thereto by 900,000 to a total of 1,750,000. The voting results
were as follows:
Votes For Votes Against Abstain Broker Non-Votes
--------- ------------- ------- ----------------
4,369,549 554,281 111,696 1,593,524
(3) The Stockholders of the Corporation ratified the appointment of KPMG
Peat Marwick LLP as independent auditors of the Company for the fiscal
year ending December 31, 1998. The voting results were as follows:
Votes For Votes Against Abstain
--------- ------------- -------
6,594,600 32,500 2,400
17
<PAGE>
Item 5 -- Other Information
- ---------------------------
On May 21, 1998 the Securities and Exchange Commission adopted an amendment
to Rule 14a-4, as promulgated under the Securities and Exchange Act of 1934.
The amendment to Rule 14a-4(c)(1) governs the Company's use of its discretionary
proxy voting authority with respect to a shareholder proposal which the
shareholder has not sought to include in the Company's proxy statement. The new
amendment provides that if a proponent of a proposal fails to notify the Company
at least 45 days prior to the month and day of mailing of the prior year's proxy
statement, then the management proxies will be allowed to use their
discretionary voting authority when the proposal is raised at the meeting,
without any discussion of the matter in the proxy statement.
With respect to the Company's 1999 Annual Meeting of Shareholders, if the
Company is not provided notice of a shareholder proposal, which the shareholder
has not previously sought to include in the Company's proxy statement, by
February 15, 1999, the management proxies will be allowed to use their
discretionary authority as outlined above.
Item 6 -- Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
- -------------
No.
- ---
27 Financial Data Schedule
(b) Reports on Form 8-K
- ------------------------
The Company did not file any reports on Form 8-K during the quarter ending
September 30, 1998.
18
<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.
STM Wireless, Inc.
Date: November 11, 1998 By: /s/ JOSEPH WALLACE
------------------------------------------------
Joseph Wallace
Vice President, Finance
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JUL-1-1997 JUL-1-1998
<PERIOD-END> SEP-1-1997 SEP-30-1998
<CASH> 7,225 16,641
<SECURITIES> 4,527 2,227
<RECEIVABLES> 12,262 16,480
<ALLOWANCES> 633 864
<INVENTORY> 11,384 19,437
<CURRENT-ASSETS> 38,169 57,345
<PP&E> 14,180 17,007
<DEPRECIATION> 4,923 6,573
<TOTAL-ASSETS> 50,478 73,420
<CURRENT-LIABILITIES> 15,180 31,444
<BONDS> 4,824 4,371
0 6,205
0 0
<COMMON> 32,602 38,169
<OTHER-SE> (2,359) (6,769)
<TOTAL-LIABILITY-AND-EQUITY> 50,478 73,420
<SALES> 19,672 13,257
<TOTAL-REVENUES> 20,564 14,323
<CGS> 14,743 8,939
<TOTAL-COSTS> 15,126 9,508
<OTHER-EXPENSES> 3,876 9,485
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 322 470
<INCOME-PRETAX> 1,378 115
<INCOME-TAX> 178 77
<INCOME-CONTINUING> 1,200 38
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,200 38
<EPS-PRIMARY> 0.19 0.01
<EPS-DILUTED> 0.18 0.01
</TABLE>
