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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission File Number 0-19923
STM WIRELESS, INC.
(Exact name of the registrant as specified in its charter)
Delaware 95-3758983
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE MAUCHLY, IRVINE, CALIFORNIA 92618
(Address of principal executive offices)
(714) 753-7864
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
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 that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 24, 1998, the aggregate market value of the registrant's common
stock, held by non-affiliates of the registrant was approximately $40,167,272
based on the closing sales price of $12.25 per share of the common stock as of
such date, as reported by The NASDAQ Stock Market. As of March 24, 1998,
7,027,593 shares of the registrant's common stock were outstanding.
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Page 1 of 74 Pages
Exhibit Index appears on Page 68
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PART I
ITEM 1 - BUSINESS
THE COMPANY
STM Wireless, Inc. (the "Company" or "STM"), 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 because management believes that these areas
offer greater applications for the Company's technology, a higher growth
potential and more favorable competitive dynamics. The Company's proprietary
equipment and software are utilized by businesses, government agencies and
telephone companies in Europe, the Americas, Africa and Asia.
The Company was incorporated in California in January 1982 as Services
Via Satellite and in December 1982 changed its name to Satellite Technology
Management, Inc. In January 1995, the Company registered in California to do
business as STM Wireless, Inc. In December 1995, the Company reorganized as a
Delaware corporation via a merger into a wholly-owned subsidiary with the name
STM Wireless, Inc.
RECENT EVENTS
Direc-To-Phone International, Inc.: As part of STM's goal to expand its
role as a leading provider of fixed telephony solutions, the Company formed
Direc-To-Phone International, Inc. ("DTPI") in September 1996. Utilizing
equipment manufactured by STM and others, DTPI, through joint ventures and
partnership agreements with local telecommunication service providers, provides
rural telephony services in developing countries. DTPI seeks to achieve
international market penetration for its products and services through the
establishment of in-country joint venture relationships. DTPI and its joint
venture partners are responsible for their pro rata share of the cost of any
investment. DTPI contributes technology, know-how and expertise while the local
partners maintain the operating licenses, and provide frontline customer
service. In the second half of 1997, DTPI was awarded two major contracts for
rural telephony services in Mexico and Venezuela.
In Mexico, DTPI has partnered with a newly created entity, a joint
venture between Korea Telecom and a local Mexican partner, formed to hold and
operate telecommunications licenses in Mexico (the "Mexican Telecom Venture"),
to build and operate a nationwide telephony network. The Mexican Telecom Venture
has guaranteed DTPI a minimum revenue stream of approximately $103 million over
the ten-year term of the contract.
In Venezuela, DTPI is in the process of forming a joint venture ("JV")
with Compania Anonima Telefonos de Venezuela ("CANTV"), the Venezuelan national
telephone company. DTPI will hold a 49% ownership in the JV. Under the JV
agreement, CANTV guarantees minimum revenues to the JV and DTPI's share of such
revenues is approximately $50 million over the fifteen-year term of the
agreement.
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Acquisition of TI: As part of STM's strategy to leverage its existing
marketing and distribution channels through the acquisition of companies with
complementary products and services, in December 1997, the Company entered into
an Agreement and Plan of Merger with Telecom International, Inc. ("TI") pursuant
to which TI merged with and into a wholly-owned subsidiary of STM. TI was a
leading service provider that integrated and installed satellite communications
systems used in rural telephony and enterprise networks. Under the terms of this
acquisition, STM issued 480,000 shares of its Common Stock. The acquisition was
accounted for as a pooling of interests transaction and accordingly, all prior
period financial results have been restated to include the results of TI.
Equity Financing: In March 1998, the Company completed a $10 million
equity offering of shares of STM and DTPI to Pequot Private Equity Fund L.P.
("Pequot"), the private investment vehicle of Dawson-Samberg Capital Management,
Inc. Through the transaction, Pequot acquired 571,429 newly issued shares of
common stock of STM.
New Management Organization: In January 1998, the Company announced that
it would operate as three independent but related business units. Each business
unit will operate independently and have its own President. The re-organization
is intended to strengthen the Company's management. The three operating
divisions are:
STM Network Systems combines the systems integration and digital video
business of TI with the core STM Wireless design, manufacture and sales of
satellite network systems;
Direc-To-Phone International, Inc., as previously described, is the
Company's majority-owned rural telephony services subsidiary; and
Telecom Multimedia Systems, Inc. is the Company's majority-owned
technology subsidiary which focuses on Internet telephony and voice over IP
solutions.
DESCRIPTION OF THE BUSINESS
The Company, founded in 1982, develops, manufactures and markets
wireless based satellite communications infrastructure products to customers for
the creation of public and private networks. These networks are used to either
bypass or extend terrestrial networks or in some instances to provide a
communications infrastructure where a terrestrial network does not exist. The
Company's products provide customers with the ability to transmit many forms of
information including voice, fax, data and video. The Company sells its products
primarily in the international marketplace where the growing deregulation of
telecommunications markets and rapid economic growth stimulates the demand for
communications infrastructure. The solutions currently provided by the Company
are principally satellite communications networks which can be deployed and
reconfigured faster and at a lower cost than terrestrial alternatives. The main
products that STM sells are two-way small earth stations referred to as VSATs
(very small aperture terminals), associated infrastructure equipment and
software, transceivers, modems and other networking equipment.
The Company's product line is based on proprietary hardware and software
used in the remote terminals, hubs/gateways and network management systems. The
Company's satellite communications product line includes products that are
capable of concurrently transmitting and receiving data as well as several
channels of digitized voice, using the Company's software to perform call
routing and to allocate satellite capacity on call initiation. These product
features allow more efficient use of satellite transponders and are attractive
to international customers for whom combined voice and data communications costs
are a prime concern.
The Company has established alliances with customers, distributors and
sales representatives in over 30 countries and has supplied, both through STM
and TI, networks to customers or end users in many geographic areas, including
Argentina, Bosnia, Brazil, Canada, Chile, China, Columbia, Dominican Republic,
Ecuador, Germany, Haiti, Holland, Hungary, India, Italy, Kenya, Malaysia,
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Mauritania, Mexico, Pakistan, Peru, Philippines, Poland, Sudan, audi Arabia,
Spain, Sudan, Thailand, the United States, Venezuela and Zambia.
INDUSTRY BACKGROUND
VSAT products provide customers with the ability to transmit several
forms of information including voice, fax, data and video by attaching standard
communications equipment such as telephones, fax machines or computers to the
VSAT which in turn relays information to and from satellites. The primary
advantage of VSAT networks is the substantial cost savings compared to
land-based telephone networks where the network users are geographically
widespread. Due to the nature of satellites, transmission costs are not affected
by the distance information travels, while in terrestrial networks, transmission
costs are directly related to the distance between the network users. VSAT
equipment can be rapidly installed, upgraded or moved. Thus, networks can be
expanded or changed with relatively little expense and disruption to users.
Bandwidth allocated to each user can be changed dynamically, and the network can
be reconfigured and additional features and changes downloaded to the user.
Furthermore, the network user or service provider has the ability to monitor
operations of the network, collect performance statistics and perform
diagnostics.
The Company divides the market for VSAT applications into two segments.
The rural telephony segment is comprised of providing basic telephony services
to rural or isolated areas of developing countries. The enterprise network
segment is comprised of business or government organizations that install
private networks or subscribe to services offered by independent operators to
provide communications between branch offices and corporate headquarters.
Since the mid-1980s, the VSAT network market has grown with the North
American enterprise network market share dominating. In recent years, changes in
both the political and regulatory environments have contributed to the
international expansion of the VSAT network market. While the North American
market is primarily for data transmission applications, in most international
markets, applications for basic telephony services including voice, facsimile
and low speed data transmission are important. Recently, VSATs have emerged as a
compelling solution for providers of such basic telephony services in developing
countries. In certain developing countries where existing communications systems
are inadequate for the growing economy, VSATs are a practical method of quickly
making available sophisticated communications capabilities. A significant growth
opportunity for these capabilities is rural telephony, the provision of
telephone facilities to villages located in remote or difficult terrain.
In response to the current opportunity that exists for the provision of
products and services in the rural telephony market, the Company is incurring
significant expenditures on developing improved products that are especially
suitable for rural telephony applications and should result in the availability
of lower priced, high quality rural telephony products. Additionally, due to the
similarities between rural telephony and enterprise network products, the
Company's research and development expenditures should also result in the
availability of lower priced, high quality enterprise network products.
RURAL TELEPHONY MARKET
As the world's economies continue to globalize, the need for countries
to provide their population with access to telecommunications service has become
significantly more important as a means of increasing competitiveness. In
developed countries, the International Telecommunications Union reports estimate
that the average telephony penetration is over 50 lines per 100 inhabitants,
while the overall global penetration is still under 15 lines per 100
inhabitants, and in certain developing countries, less than two lines per 100
inhabitants. In response, many developing countries throughout
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the world have begun to make significant capital expenditures on the deployment
of new networks and the expansion of their existing telephone infrastructure to
increase telephony penetration. While traditional terrestrial telecommunications
networks are being deployed and expanded in the urban areas of these developing
countries to increase telephony penetration, it is more difficult to provide
networks to the rural areas of these countries due to the dispersion of the
population and difficult terrain that often characterizes these locations. As a
result, in a large number of remote and rural areas in developing countries,
there continues to be limited or no telephone service.
To date, the local telephone service providers in less developed
countries, where the need for rural telephony is greatest, have focused their
attention on developing and increasing the telephony penetration in urban areas,
which they have considered better short-term opportunities to increase revenues
at a lower cost, rather than providing rural telephony. In response to the need
for telephone service in rural areas, governments are increasingly putting
pressure on the telephone service providers to offer universal service coverage
by ensuring telephony availability in these regions. Deregulation of the
telecommunication markets in these developing countries has led to increased
competition and many governments are requiring the domestic telephone companies
to fulfill certain rural telephony obligations as a prerequisite to renewing
their licenses. The Company believes that this increased emphasis on providing
rural telephony services will generate significant market opportunities
primarily in Latin America, Asia/Pacific and Eastern Europe.
There are a number of alternatives to satellite technology that are
being used to meet increased demand for telecommunication services. Wireline and
cellular telephony networks can be used to effectively meet telecommunications
needs in rural areas with relatively higher population densities. However, in
many of the rural areas of developing countries, villages can be scattered
sometimes several hundred miles apart and may be inaccessible by road at all
times due to harsh terrain or at certain times of the year due to climatic
conditions. In addition, the spending power of the inhabitants of those villages
has limited the subscriber count. Satellite telephony networks offer significant
advantages compared to traditional telephony systems in these areas. The
following describes the primary disadvantages of using alternative technologies
in these markets:
Wireline systems: Wireline systems involve the laying of fiber or copper
wires between the telephone operating company's central office and each
subscriber's home or office. The principal drawbacks of wireline systems
include: expense of constructing networks over long distances and rough
terrain; susceptibility to weather and vandalism and long construction
time.
Cellular systems: Cellular systems involve the use of a cellular phone
to communicate directly with a locally installed base station
transmitter which, in turn, switches the communication to the intended
recipient. The principal drawbacks to cellular systems for rural
telephony arise from the limited geographical coverage of cellular base
stations resulting in the need for a relatively high population density
over which to spread the infrastructure costs of the many base stations
needed.
Wireless local loop systems ("WLL"): Much like cellular systems, typical
WLL systems involve the use of fixed or mobile telephone handsets to
communicate with locally installed base station transmitters. WLL
systems are generally designed for higher density applications than
those addressed by the Company. However, due to their lower cost and
efficiency for local distribution WLL systems can be used as a
complementary distribution product in satellite-based rural telephony
networks and the Company is examining such combined product solutions.
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Microwave systems: Microwave systems involve the use of microwave radios
to communicate directly between two points. The principal drawbacks to
microwave systems are the high cost of providing service and limited
service availability in rough terrain due to the requirement for a line
of sight between the two points. Many rural areas are not easily
accessible and the terrain makes the cost of constructing many microwave
towers with relay sites prohibitive.
Mobile satellite systems ("MSS"): Mobile satellite systems involve the
use of hand held phones to communicate typically via Low Earth Orbiting
Satellites ("LEOS"). In the MSS model, the LEOS act as a replacement for
the local base station transmitter of cellular systems but provide much
greater range based on the satellite footprint. No MSS systems are
currently in operation and the first major one (Iridium) is not
scheduled to be available until later in 1998. Due to the high cost of
satellite construction and launch, MSS systems are expected to have much
higher usage costs. This predicates against their use as a viable
replacement of VSATs for the rural telephony market.
In summary, the Company believes that VSAT networks have a number of
advantages over alternative solutions for many rural and urban telephony
applications in developing countries where low population density and rough
terrain are considerations. Due to the nature of satellites, transmission costs
are not affected by the distance signals must travel. Therefore, generally, the
greater the distance between the sites to be served, the greater the benefit of
a VSAT network. VSAT equipment can be rapidly installed and connected to a
network and can easily be upgraded, expanded or relocated with relatively little
expense and disruption. VSAT networks are relatively simple to reconfigure, are
relatively immune to difficulties in topography and can be located almost
anywhere.
To complement its product offerings, the Company is developing a WLL
product and is considering entering into strategic relationship with other
providers of WLL products, thereby ensuring that the Company has an economical
product offering in more densely populated regions.
ENTERPRISE NETWORKS
Enterprise networks are private communications systems which provide a
solution for organizations with frequent communications needs between remote
locations allowing them to collect, process, respond to and disseminate
information in a timely, reliable and cost-efficient manner. VSATs have
historically been used in developed countries for transaction oriented
applications, including point-of-purchase transactions, credit card
verification, automatic teller machine transactions, and inventory management.
In recent years, the price of VSATs has decreased, their functionality
and reliability have improved and the number of communication protocols that can
be supported has increased. These improvements allow VSAT networks to compete
effectively as full service communications systems in international markets
where the lack of reliable terrestrial networks necessitates the use of
alternative telecommunication infrastructure. In addition to transaction
oriented applications, international VSAT enterprise networks are used for
communications applications such as e-mail, intranets, Internet access and basic
voice service. The Company believes that the need for these advanced
telecommunication services coupled with the lack of infrastructure to provide
these services will cause the international VSAT enterprise network market to
grow much more rapidly than the domestic market.
Historically, the concentration of sales of VSATs in the United States
and other developed countries has been primarily to large corporations for
transaction oriented enterprise networks. It is believed that over 60% of
worldwide installations for enterprise network VSAT terminals are in North
America. The Company has focused its efforts in the international markets due to
the more favorable competitive
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environment, the growth potential of the market, especially in rural telephony
and other services and the Company's overseas operating experience.
BUSINESS STRATEGY
STM seeks to leverage its technical strength in networking and telephony
technologies as well as its strong position and marketing expertise in
international markets to become the leading supplier of satellite-based
communications solutions to emerging countries. To achieve this objective, the
Company is pursuing the following initiatives:
Solidify Leadership Position in Rural Telephony Market: In a large
number of rural areas in developing countries, telephone service is limited or
non-existent. Often such areas are characterized by rough terrain, low
population density and a harsh climate. As deregulation and economic necessity
have spurred demand in developing nations for telecommunications infrastructure,
many countries have mandated that their telephone companies provide telephony
services to rural regions. The Company believes that satellite communications
networks, which can be deployed and reconfigured faster and at a lower cost than
terrestrial and microwave transmission alternatives, offers a cost effective
solution for these regions.
Management believes that STM offers a comprehensive rural telephony
solution through a suite of products specifically designed to service these
needs. The competitiveness of the Company's product portfolio and system
architecture is evidenced by the fact that during 1997, STM was awarded
contracts for three major rural telephony projects in Mexico, Venezuela and
Thailand for approximately $180 million. Of these contracts, $30 million was
attributable to an equipment supply contract and $150 million was attributable
to long-term service contracts through DTPI. Management believes that the use of
VSATs for rural telephony is currently in its infancy and a substantial global
market opportunity exists for this technology to serve rural telephony needs.
Expand Market Share in Enterprise Networks: VSAT networks are also used
by organizations with numerous geographically dispersed locations and frequent
communications needs between those remote locations. VSAT-based enterprise
networks are attractive to customers due to the substantial cost savings as well
as the higher level of flexibility and control these networks offer compared to
traditional telephone service. Both political and regulatory advances have
contributed to the international market growing faster than the domestic market.
The Company's enterprise network strategy is to capitalize on its international
expertise to sell products in the growing international market.
To that end, the Company acquired TI, whose business is the integration
and installation of large satellite terminals used in rural telephony and
enterprise networks. Management believes that supplementing the Company's
enterprise network expertise with the TI expertise and experience should
increase the Company's ability to capitalize on market opportunities.
Leverage Existing Marketing and Distribution Channels: STM's sales and
distribution networks comprise 30 countries in five continents and the
Company's products are currently utilized by more than 70 customers with
equipment installed in approximately 90 countries. The Company seeks to increase
the breadth of products that can be sold through its distribution network by
both internal research and development ("R&D") and strategic alliances with
other manufacturers, as well as complementary acquisitions. STM has incurred
significant R&D expenditures in recent years relative to its revenues, as
management believes that the Company's significant dedication of resources to
R&D is the primary reason for the competitive edge and market leadership of the
Company's product portfolio. STM's R&D efforts are primarily focused on reducing
the overall cost of its products to its customers, as well as increasing their
performance, thereby expanding the
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addressable market size.
PRODUCTS
The principal products sold by the Company are two-way small earth
stations referred to as VSATs (very small aperture terminals), associated
infrastructure equipment and software, transceivers, modems and other networking
equipment, as well as voice over IP gateway and software solutions. The
Company's satellite products communicate via geostationary satellites in order
to provide customers the ability to exchange several forms of information
including voice, fax, data and video within their networks. Geostationary
satellites are placed in orbit approximately 23,000 miles above the earth so
that their orbit matches the speed of the earth's rotation resulting in the
satellite maintaining a fixed position relevant to the earth's surface. VSAT
networks can offer advantages over traditional networks of terrestrial telephone
lines including control over the network itself, improved response times with
cost reduction opportunities and increased flexibility and reliability. For
voice communications, VSAT networks are particularly suited to providing
communications between geographically dispersed locations in that they are
easier to install and provide wider accessibility and availability than
terrestrial and microwave transmission alternatives.
The Company's VSAT products fall into two principal families: DAMA 10000
and X.STAR. Both of these product families may be used by customers to build
networks capable of communicating voice, fax, data and video, but, because they
use different architectures, the use of each product is determined by the
particular needs of the customer's network. The principal difference between the
two product families lie in the methodology used for communicating between any
two remote VSATs on a network. DAMA 10000 is what is often termed a "mesh"
product and employs circuit switched transmission. In mesh networks, any one
VSAT communicates directly with any other VSAT on the network via a single
transmission to and from the satellite. X.STAR, however, is what is often termed
a "star" product and employs packetized transmission.
Existing Products and Products Under Development
Satellite Products:
DAMA 10000: The Company's DAMA 10000 product primarily supports public
and private networks that need to have full connectivity among all sites. The
DAMA 10000 is a fully integrated product that offers the flexibility to create
and manage both large and small networks. With an expandable system architecture
and highly configurable terminal equipment, the DAMA 10000 is a cost efficient
solution for small to very large networks. The system supports full mesh,
point-to-point or point-to-multi-point communications circuits and any user can
connect to any other user on the network. DAMA 10000 uses a proprietary control
channel to set up and tear down calls between VSATs as these are requested by
users on the network. This results in satellite capacity only being consumed
when calls are requested, thereby optimizing satellite transponder costs for the
customer. In addition, DAMA 10000 provides support for the major international
telephony signaling systems including R2 and DTMF as well as various payphone
metering schemes, allowing it to be interconnected with the Public Switched
Telephony System ("PSTN") in many countries around the world. These features of
the product have resulted in it being ideally suited for rural telephony
applications where individual VSATs provide multiple telephone lines to
subscribers in remote locations. These VSATs are, in turn, all interconnected
via satellite with the PSTN in the country of deployment providing the remote
subscribers with worldwide calling capability.
Subscriber Earth Station: The Company's Subscriber Earth Station
("SES"), currently under development, is expected to be a low cost telephony
product derived from and compatible with DAMA 10000. As an extension of DAMA
10000, the SES will be targeted at the provision of
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telephony services to unserved or underserved regions of the world. SES will be
designed to provide reliable, affordable, on-demand telecommunications service
in remote and rural areas. SES will be a small, light weight and low cost
terminal ideally suited for areas where telecommunications service is
unavailable, unreliable or simply too expensive. Since it will be
satellite-based, an SES terminal will be capable of being installed quickly,
virtually anywhere, to allow immediate access to the SES network and the PSTN.
SES will provide telecommunications service with high quality voice and industry
standard interfaces. It is expected that the SES will be available in 1998.
X.STAR: The Company's X.STAR product primarily supports private networks
with a need to connect remote user locations with a central site. A typical
application of an X.STAR network would be the processing of point of sale
transactions between retail outlets and a central database. However, the X.STAR
product supports all types of data including voice, fax and broadcast video and
more recently has been used by customers to interconnect LANs across their
enterprises. The network is controlled by a central hub that acts as a gateway
to the host facilities and as a switching and routing center for transmitting
information between VSATs. A powerful network management system ("NMS") is also
a part of the hub and multiple remote NMS stations may be deployed on the
network.
In an X.STAR network, VSATs all receive a common broadcast signal from
the hub, filtering the data received to accept only the information addressed to
devices connected to the VSAT. In order to transmit information back to the hub
or to another VSAT via the hub, VSATs on the network share a common transmit
channel back to the hub. Access to this transmit channel is controlled by the
Company's unique dynamic capacity allocations algorithm which allocates a
transmission time and duration to each VSAT dynamically based on its traffic
requirements.
X.STAR uses a packet-based transmission and switching protocol that
makes it suitable for the transmission of packetized data which is increasingly
being used in today's communications networks including the Internet. This
protocol establishes and maintains error-free channels from initiation points to
destination points on a network. In addition, the X.STAR product supports most
major communications protocols including SDLC, X.25, X.3, HDLC and TCP/IP,
resulting in seamless transport of information using these protocols across an
X.STAR network.
SpaceWeb: The Company's SpaceWeb product, currently under development,
is an evolutionary development of the X.STAR family and will be fully compatible
with X.STAR. SpaceWeb will provide a low cost, star-connected solution for data,
fax and voice applications and is aimed at international Internet access.
SpaceWeb will be a low cost terminal that communicates with a low cost central
hub whose modular architecture will be designed to provide attractive start up
costs, without restricting network growth potential. For reliable end to end
communications, SpaceWeb will utilize the Company's X.STAR communications
protocol and will support all of the same communications protocols as X.STAR. It
is expected that SpaceWeb will be available in 1998.
Hubs/Gateways: The Company manufactures the digital and modem portion of
the hubs/gateways which are comprised of a series of special purpose processing
units utilized in multiplexing, network configuration and routing of information
to the appropriate network destinations. This is controlled by the Company's
proprietary networking and system software. Typically, the digital portion of
the hub/gateway has a number of voice and data ports that directly attach to the
user's equipment. Transmission between the hub/gateway and the remote VSAT is
via a satellite transponder. The hub/gateway also includes radio frequency
components and an antenna, which are purchased from suppliers and integrated
into the system by the Company. The hub/gateway interacts with a network
management system, which operates on a local or remote work station using
proprietary software supplied by the Company.
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Network Management Systems: The Company provides a network management
system which shows network status in real time, and permits the operator to
monitor and control network operations, including the diagnosis of problems. The
interface with the operator is by a graphic display of the network status on a
color monitor. The network management system can also be used for redefining
network parameters, for adding and deleting remote network locations, for
changing protocols and for collecting and reporting operational information and
providing management reports. In addition, the system can be expanded if the
hub/gateway is shared among several customers, to permit each customer to have
such capabilities. The network management system can be installed remotely from
the hub/gateway location if required.
Systems Integration Products: The Company also integrates equipment from
other manufacturers into systems or earth stations manufactured by the Company.
These products include antennas, radio frequency equipment, satellite modems,
voice and data multiplexers, local area network routers and video communications
equipment. The STM Network Systems division expects to continue to sell such
systems on an individual project basis as part of its direct sales effort.
Terrestrial Communications Products:
Internet and Frame Relay Products: Through its subsidiary, Telecom
Multimedia Systems Inc. ("TMSI"), the Company has introduced another line of
communication products. TMSI's core technology is a proprietary software
platform (CLEARCONNECT(TM)) that acts as an operating system kernel for a
variety of compression and signaling technologies utilized for the transport of
voice, fax and data over communications networks. TMSI's CLEARCONNECT(TM)
platform supports many International Telecommunications Union ("ITU") standards
for digital voice compression including G.711, G.165, G.721/G723, G723.1, G.726,
G.728 and G.729. In addition, TMSI supports the AMBE algorithm for low bit rate
voice as well as Group III fax and modem relay up to V.32bis. With such a
comprehensive suite of compression protocols supported, TMSI provides the
Company with state of the art voice, fax and modem transport in its DAMA 10000,
SES, X.STAR and SpaceWeb product lines.
TMSI has also deployed its software on its own hardware platforms.
TMSI's Lepton product family is used by customers to compress and transport
information over public and private communications networks. The Lepton offers a
variety of standard user and network interfaces which when combined with the
CLEARCONNECT(TM) software allow users to maximize the amount of information
transported over a given amount of terrestrial or wireless capacity thereby
reducing the cost of transmission facilities for the customer.
TMSI's Lepton products can also be used to connect legacy telephony with
the Internet. The introduction of telephony services over the Internet is vital
for realizing true multimedia services. TMSI's suite of technologies for voice
and facsimile compression, telephony operating systems, signaling and other
related functions can readily be used for seamless voice communication over
packet switched networks including the Internet.
TMSI's products are all capable of remote management using its
MediaMaster network management system. MediaMaster provides users with a
friendly Graphical User Interface ("GUI") for monitoring and controlling
different aspects of the equipment and software. In addition, MediaMaster is
being enhanced to offer customers the capabilities for user authentication,
billing and directory services.
SERVICES
Rural Telephony Services: Utilizing equipment manufactured by STM and
others, DTPI, through joint ventures and partnership agreements with local
telecommunication service providers, provides rural telephony services in
developing countries. DTPI invests in the joint ventures, contributes
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technology, know-how and expertise, while the local partners maintain the
operating licenses, and provide frontline customer service, as well as
contributing their share of the required investment. See Recent Events for a
more detailed review of DTPI.
Project Management: The Company offers engineering, project management,
and contract services in support of products sold.
Custom Development: From time to time the Company receives orders from
its customers and distributors for product features, new products or software
protocols and functions that enhance the Company's product lines. While such
custom development orders do not contribute significantly to the Company's
revenues, they demonstrate the Company's ability to be responsive to market
requirements.
Technical Support Services: The Company provides technical support
services to its installed base of customers either directly or through
third-parties. Services include technical support, installations, maintenance,
training and spares provisioning.
SALES AND MARKETING
Network Systems Division: The Company sells its satellite communication
products directly and through international distributors and alliances which are
supported by the Company's sales and marketing personnel. With the recent
re-organization of the business into three independent but related business
units, the Network Systems division has focused its sales efforts on the
following:
o Expanding global coverage through increasing the number of highly
trained direct sales personnel with regional responsibilities
o Identifying sales opportunities that exist with newly licensed
service providers in international markets, particularly those
focused on providing rural telephony services
o Identifying capable local distributors and replacing, if necessary,
its current distributors and alliances
o Supplying highly integrated low cost solutions to customers through
the Company's product offerings.
Direc-To-Phone International, Inc.: DTPI was founded as a separate
business unit of STM with the intention of becoming the predominant provider of
Direct To Home telephony services in developing countries. To date, DTPI has
been awarded two long-term service contracts for the provision of rural
telephony services in Mexico and Venezuela. Both of these contracts are with
local, in-country partners who are the license holders in the respective
countries and include a guaranteed minimum level of revenue by the local
in-country partner to subsidize the initial service. DTPI aims to increase
penetration and volume by moving toward consumer level pricing and operation. To
achieve this, DTPI is focused on the following:
o Being the first to market a fixed satellite telephony solution, on a
mass scale, with a consumer oriented product that can satisfy the
demand in unserved areas;
o leveraging the marketing, operating and technical capabilities of
local partners for each region or country;
o providing potential subscribers and users with a high quality
telephone and other added value services;
o employing a system design that has the lowest recurring cost compared
to other satellite-
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based competing systems;
o offering domestic long distance calls, to the extent possible from a
regulatory standpoint, at the same basic per minute rate as local
calls;
o employing a consumer oriented sales and marketing strategy that
differentiates the Company from others and provides for a higher
level of product acceptance by end users; and
o seeking strategic partners who can further increase the visibility
and market penetration of the Company's services.
Export sales, as a percentage of revenues, were approximately 96%, 91%
and 95% in 1997, 1996 and 1995, respectively. In 1997, sales to a single
customer in Thailand accounted for approximately 59% of revenues. No other
customer accounted for greater than 10% of revenues in 1997. Reference is made
to Note 12 of the notes to the consolidated financial statements - Sales to
Principal Customers, Geographic Regions and Concentration of Credit Risk in Item
8 - "Financial Statements, Financial Statement Schedule and Supplementary Data".
BACKLOG
The Company's backlog represents all future revenues that may be earned
from signed sales orders or sales contracts for products or services. As of
December 31, 1997, the Company's backlog was approximately $153.2 million,
comprising approximately $150 million in long-term service contracts and
approximately $3.2 million for products. At December 31, 1996, the Company's
product backlog was approximately $9.0 million. Based on current estimates,
approximately $145 million of the long-term service backlog will not be filled
in 1998. The Company manufactures its products on the basis of customer orders
and its forecast of near-term demand from its customers and for use by DTPI in
its service business. The Company conducts nearly all of its business with
foreign customers in United States currency and accordingly, is generally not
subject to foreign currency fluctuations. Customary terms of business for
product sales are a substantial deposit on order with the remainder guaranteed
by an irrevocable letter of credit or, when appropriate, open account. For DTPI,
the terms of business for its existing contracts include an initial fee payable
upon the telephone lines being commissioned. In addition, there are revenue
sharing arrangements based upon actual revenues earned and guaranteed monthly
fees. The service backlog at December 31, 1997, represents the value of the
guaranteed minimum revenue sharing and the initial fees.
MANUFACTURING
The Company's products are assembled by the Company using subsystems and
circuit boards supplied by subcontractors. The Company's microwave products are
designed and fabricated utilizing microwave components manufactured by outside
suppliers. The Company maintains adequate stock to reduce the procurement lead
time for certain components. The Company's products use a number of application
specific integrated circuit (ASIC) chips, monolithic microwave integrated
circuits (MMIC) and customized components or subassemblies produced by a limited
number of suppliers. In the event that such suppliers are unable to fulfill the
Company's requirements, the Company may experience an interruption in production
until an alternative source of supply is developed. The Company maintains an
inventory of certain long lead time components and subassemblies to limit the
potential for such an interruption. The Company believes that there are a number
of companies capable of providing replacements for the types of unique chips,
customized components and subassemblies used in its products.
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RESEARCH AND DEVELOPMENT
The Company's research and development efforts are devoted to the design
and implementation of satellite and wireless radio communications network
hardware and software, along with voice over IP software and hardware solutions.
The Company's future growth depends on adaptation of its existing satellite
communications products to new applications, and the introduction of new
communications products that will gain market acceptance and benefit from the
Company's established international distribution channels. Accordingly, the
Company is actively applying its communications expertise to design and develop
new hardware and software products and enhance existing products.
STM's R&D efforts are primarily focused on reducing the overall cost of
ownership of its products to its customers, thereby expanding the addressable
market size. For example, the Company is developing two new low cost products;
Subscriber Earth Station, aimed at the rural telephony market, and SpaceWeb to
provide fast internet communication in enterprise networks. The Company believes
that these products will be priced low enough to attract a large market
internationally, and expects to begin shipping them in 1998. In addition, the
Company may opportunistically acquire products, technologies or companies
consistent with its commercial objectives to serve the evolving needs of the
Company's customer base.
In 1997, 1996, and 1995, the Company incurred expenses of $6,387,000,
$6,895,000, and $3,677,000 respectively, on research and development activities.
During this period, the Company enhanced the TXR-3000 VSAT, and continued the
development of the DAMA 10000 VSAT, SMR 2000, SCPC C-Band satellite transceiver,
and started development of the Subscriber Earth Station, SpaceWeb and Internet
telephony products.
COMPETITION
Network Systems Division: The Company has a number of competitors in the
satellite communications field, most of which have substantially greater
financial, marketing, and technological resources than the Company. The
Company's competitors include large companies such as Hughes Network Systems
and Scientific Atlanta, all of whom compete to some extent in some international
markets. There can be no assurance that the Company will not experience
increased competition in the future from these or other competitors which may
adversely affect the Company's ability to continue to successfully market its
products or services. The Company believes that it has been able to compete with
these companies by offering flexible and cost effective products and utilizing
the resources of local distributors, forming strategic alliances with major
corporations, and by emphasizing product features and functions such as
concurrent support of multiple protocols, voice capability, built-in diagnostic
ports and downloadable software and configurations, which allow the products to
serve the diverse needs of international customers. These product features and
functions are based upon the Company's proprietary hardware and software.
See "Patents and Intellectual Property."
However, most of the Company's competitors offer products which have one
or more of the features and functions similar to those offered by the Company.
The Company believes that the quality, performance and capabilities of its
products, its ability to customize certain network functions and the efficient
utilization of satellite capacity, coupled with the products generally offered
by the Company's major vendors, have contributed to the Company's ability to
compete successfully. The Company's major competitors have the resources
available to develop products with features and functions, competitive with, or
superior to, those offered by the Company. There can be no assurance that such
competitors will not develop such features or functions, or that the Company
will be able to maintain a lower cost advantage for these products.
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Direc-To-Phone International, Inc.: DTPI deploys wireless-based
communication infrastructure products utilizing geostationary satellite
spectrum. Geostationary satellites are placed in orbit approximately 23,000
miles above the earth so that their orbit matches the speed of the earth's
rotation resulting in the satellite maintaining a fixed position relative to the
earth's surface. This gives a fixed area of coverage, or footprint, in which
satellite networks can operate. This distance above the earth also produces two
drawbacks of geostationary satellites. First, because there is a significant
distance traveled, there is a noticeable delay (approximately 250 msec) between
transmission and reception. This can be disconcerting in voice networks,
especially if a double-hop (or two transmissions) is needed because of the
network design. DTPI uses full-mesh products which minimize this delay and so it
is not a significant factor in DTPI rural telephony networks. A similar delay
occurs on many standard international calls when the trunking is done by
satellite transmission. The second disadvantage is, due to the long distance,
transmission power and reception sensitivity needs to be greater than for the
LEOS (see below). This means larger equipment which precludes mobile telephony.
However, in the rural telephony market, mobility is not a requirement.
DTPI's potential direct competitors in the geostationary rural telephony
service arena are suppliers of geostationary networks such as Hughes,
Scientific-Atlanta, SPAR/Comstream and Gilat. However, due to the significant
investments in technology made by STM in the past years, it is believed that STM
presently holds a strong competitive position in rural telephony products.
Furthermore, with DTPI's successes in Mexico and Venezuela and STM's prior rural
telephony sales in Thailand and Argentina, the Company believes DTPI is a leader
in rural telephony solutions. Other geostationary satellite-based competitors
include American Mobile Satellite Corporation (AMSC), Asia Pacific Mobile
Telecom (APMT), Afro-Asian Satellite (ASC), Asean Cellular System (ACS) and
Comsat.
Mobile Satellite Systems (MSS) use Low Earth Orbit Satellites (LEOS).
LEOS, because of their low proximity to the earth, move in relation to the
earth's surface, therefore, a constellation of satellites is needed. At any one
time, two or more satellites must be in sight of the user in order to carry out
a successful call handoff if the active satellite disappears below the horizon.
This adds to the complication and expense of the MSS offering. MSS does have two
advantages - smaller handheld terminals and lower voice transmission delay.
However, DTPI considers its most immediate and serious competition to
come from MSS. Despite their potential higher cost of service, compared to DTPI,
their financial projections include significant penetration into the unserved
and underserved areas of developing countries. Despite the advantages of a
mobile service, DTPI believes that the high cost of MSS service will make its
geostationary solution a more realistic solution for telephony service in remote
areas.
PATENTS AND INTELLECTUAL PROPERTY
The Company relies on a combination of trade secrets, copyrights,
trademarks, service marks and contractual rights to protect its techonoloy and
software. The Company attempts to protect its trade secrets and other
proprietary information through agreements with its customers, suppliers,
employees and consultants. Except for terrestrial and low cost telephony
products, the Company does not have patent protection on any aspect of its
technology or software. The Company believes that the improvement of existing
products, reliance upon trade secrets, copyrights and unpatented proprietary
know-how and the development of new products are generally as important as
patent protection in establishing and maintaining a competitive advantage
because, among other reasons, patents often provide only narrow protection which
may not result in a competitive advantage in areas of rapid technological
change. Further, patents require public disclosure of information which may
otherwise be subject to trade secret protection. The Company believes that the
value of its products is dependent upon its proprietary software and hardware
remaining "trade secrets" or subject to copyright protection.
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However, with its venture into new fields such as terrestrial and low cost
telephony products, the Company believes that patent protection may be more
appropriate. Accordingly, the Company has applied for one patent and is in the
process of pursuing one additional patent. However, there can be no assurance
that the Company's proprietary technology will remain a trade secret, or that
others will not develop a similar technology and use such technology to compete
with the Company. In addition, the laws of certain countries in which the
Company's products are or may be developed, manufactured or sold may not protect
the Company's products and intellectual property rights to the same extent as
the laws of the United States. The inability of the Company to protect its
intellectual property and proprietary technology could have a material adverse
effect on its business, operating results and financial condition. As the number
of patents, copyrights and other intellectual property rights in the Company's
industry increases, and as the coverage of these rights and the functionality of
the products of new markets further overlap, the Company believes that its
products may increasingly become the subject of infringement claims. The Company
may in the future be notified that it is infringing upon certain intellectual
property rights of others. Although the Company has not received any such
notification to date, and there are no pending or threatened intellectual
property lawsuits against the Company, there can be no assurance that such
litigation or infringement claims will not occur in the future. Any such
litigation or claims could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
operating results and financial condition.
GOVERNMENT REGULATIONS
The Communications Act of 1934, as amended, gives the Federal
Communications Commission ("FCC") jurisdiction over the communications products
and services provided by the Company in the United States. Part 25 of the FCC's
rules and regulations governs the operation and use of satellite transponders
and requires authorization for construction and operation of each transmitting
earth station, including VSATs installed on customers' premises. The Company
believes it has received all authorizations from the FCC required to date in the
operation of its two-way VSAT network in the United States.
The Company's international sales are also subject to Department of
Commerce regulations for export of its products, which usually meet general
license requirements depending on country of destination.
EMPLOYEES
As of December 31, 1997, the Company employed 208 people on a full-time
basis, including 45 employees in engineering/research and development, 64
employees in manufacturing, 27 employees in marketing and sales, 32 employees in
administration and accounting, and 40 employees in customer service and support.
The Company believes that its relations with all employees are
satisfactory. The employees and the Company are not parties to any collective
bargaining agreements.
RISK FACTORS
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.
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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.
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.
HISTORY OF LOSSES AND FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Results of operations may fluctuate significantly and will depend upon
numerous factors, including the competitive environment in which the Company
operates, the delays that arise when operating in an international environment,
the long lead time and extended sales effort required to secure larger value
orders that the Company focuses on obtaining, the continued need to invest in
the development of new products and in the enhancement of existing products, the
risk of inventory obsolescence and the exposure to disputes by international
customers.
The Company has incurred operating losses in both 1997 and 1996 and may
incur losses in 1998. However, the Company has taken certain actions that it
believes should improve the operating results of the Company. Management
believes that through investing in DTPI as a service business with long-term
recurring revenues, the Company, over time, will be able to generate a more
stable pattern of business. In addition, the Company has recently reorganized
itself internally to focus clearly on its three main businesses and has
strengthened its management team through the acquisition of TI in December 1997.
It is believed that these actions should lead to improved operating results.
However, there can be no assurance that there will not be operating losses in
the future periods, or that the Company's reorganization will lead to improved
operating results.
The Company's quarterly operating results fluctuate primarily due to the
timing of product sales. Sales of the Company's products are generally
consummated through large orders which require a long lead-time and an extended
sales effort. The Company's sales in any quarter are dependent on orders booked
and shipped in that quarter. As a result, the precise timing of the recognition
of revenue from an order can have a significant impact on the Company's total
revenues and operating results for a particular period. The Company's operating
results for a particular period could be adversely affected if an order is
cancelled or rescheduled by customers or cannot be shipped in time to recognize
revenue during that period due to, for example, unanticipated manufacturing,
testing, shipping or product acceptance delays. In addition, the Company's
expense levels are based, in large part, on the Company's expectations as to
future revenues and are, therefore, relatively fixed in the short term. If
revenue levels fall below expectations, net income will be disproportionately
and adversely affected. The impact of these and other factors on the Company's
revenues and operating results in any future period cannot be forecast with any
degree of certainty. Accordingly, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as an indication of future performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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DEPENDENCE ON VSAT MARKET
A significant part of the Company's product revenues are derived from sales
of VSAT communications networks. While the market for VSAT communications
networks and services has grown steadily since its inception in the mid-1980s,
there can be no assurance that this market will continue to grow or that the
technology serving this market will not be replaced by an alternative
technology. A significant slowdown in this market or the replacement of the
existing VSAT technology by an alternative technology could have a material
adverse effect on the Company's business, operating results and financial
condition.
DEPENDENCE ON ASIAN MARKETS
The Company generated 68%, 53% and 40% of its revenues in Asia in 1997,
1996 and 1995, respectively. In addition, the Company generated approximately
59%, 33% and 6% of revenues from one Asian customer in 1997, 1996 and 1995,
respectively. While in any individual year, the Company's revenues generally
represent new projects to new or existing customers in new or existing
geographic regions, there can be no assurance that the recent turmoil in the
Asian economies will not have any impact on the level of revenues generated by
the Company in this market in future years and that any shortfall in such
revenues will not have a material adverse effect on the results of operation and
financial condition of the Company.
RURAL TELEPHONY MARKET
The Company's strategy includes focusing on establishing rural telephony
networking infrastructure for developing countries through strategic alliances
with regional and local service providers. There can be no assurance that a
substantial market for rural telephony equipment in developing countries will
ever develop, or if such a market does develop, that fixed-site VSAT-based
equipment will capture a significant portion of that market. The Company's
ability to penetrate this market will be dependent on its ability to develop
equipment and software which can be utilized by regional and local service
providers to market and sell the use of such systems. Furthermore, there can be
no assurance that the regional and local service providers will be able to
successfully market such services to rural subscribers.
SALES TO FOREIGN CUSTOMERS
The Company's success is dependent upon its ability to continue to
successfully market voice and data VSAT communication networks in the
international market. The Company's export sales, as a percentage of total
revenues, were approximately 96%, 91%, and 95% in 1997, 1996 and 1995,
respectively. As a result, the Company is subject to various risks, including
currency fluctuations, greater difficulty of administering business globally,
compliance with multiple and potentially conflicting regulatory requirements,
such as import requirements, tariffs and other barriers, differences in
intellectual property protections, difficulties in staffing and managing foreign
operations, longer accounts receivable cycles and delays in resolving customer
disputes, repatriation of earnings, export control restrictions, overlapping or
differing tax structures, political and economic instability and general trade
restrictions. If any of these risks materializes, it could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the satellite network service industries in the
Company's target markets are highly regulated, which may limit the number and
identity of potential service providers to which the Company can sell its
products. Given the high degree of regulation in the Company's target market,
and given the fact that such markets, which are primarily developing countries,
involve greater political and economic instability, there can be no assurance
that the Company's products will achieve general market acceptance in the
Company's target markets. The Company's foreign sales are generally invoiced in
U.S. dollars. However, as the Company continues to expand its international
operations, the Company may be paid in foreign currencies, and exposure to
losses in foreign currency transactions may increase. In addition, if the
relative value of the U.S. dollar in comparison to the Company's foreign
customers' currency should increase, the resulting effective price increase of
the Company's products to such foreign customers could result in decreased sales
which could have a material adverse effect on the Company's business, operating
results and financial condition.
DEPENDENCE ON SUCCESS OF DTPI
Under the terms of its existing contracts, DTPI is required to finance its
pro rata share of the build-out of the rural telephony networks for its
long-term service contracts in Mexico and Venezuela.
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This will require substantial capital expenditures by DTPI, in addition to the
ongoing operating costs of running these rural telephony projects. Furthermore,
DTPI is investing in establishing a senior management team, whose
responsibilities will be to grow the business and to secure new contracts in
other countries. For DTPI to succeed, the Company will have to attract
substantial debt or equity financings either into DTPI directly, or into STM.
Also, due to the long term nature of the contracts that DTPI enters into, should
there be a breach of contract by either party to the contracts, or should the
customer be unable to pay the guaranteed revenues under the contracts, DTPI may
not be able to realize expected revenues and cash flows. In March 1998, the
Company completed a $10 million equity offering and is working with other
investors to secure additional financing. Should the Company not be able to
secure such financing, or should customer disputes or collectibility issues
arise, the Company may not be able to meet its business objectives for DTPI
which could have a significant impact on the size of the Company's business and
its level of profitability in the future.
COMPETITION
The market for the Company's products is intensely competitive. Many of the
companies that have developed competing technologies and market competing
products, including Hughes Network Systems and Scientific Atlanta, have
significantly greater financial, technical and marketing resources than the
Company. In addition, the Company's competitors in rural telephony have
substantially greater resources available to them to develop their products and
to establish strategic relationships in developing countries. There can be no
assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective or less costly than any which
have been or are being developed by the Company or that would render the
Company's technologies or products obsolete or not competitive or that their
greater financial resources will not enable them to penetrate developing
countries more quickly than DTPI. The Company also competes against various
companies that offer communications network systems based on other technologies
(e.g., terrestrial lines and frame relay or radio and microwave transmission)
that in certain circumstances can be competitive in price and performance with
the Company's products. There can be no assurance that these or other
technologies will not capture a significant part of the markets in which the
Company's VSAT products compete.
RAPID TECHNOLOGICAL CHANGE
The technology underlying the Company's products and services is subject
to rapid change. The Company's success will depend in part upon its continuing
ability to respond quickly and successfully to technological advances by
developing and introducing new products. Most of the Company's competitors have
substantially greater financial and technical resources than the Company. If one
or more of the Company's competitors were to introduce competing products with
superior technological features, such introduction could have a material adverse
effect on the success of the Company's products.
DEPENDENCE ON PROPRIETARY RIGHTS; RISK OF INFRINGEMENT CLAIMS
The Company relies on a combination of trade secrets, copyrights,
trademarks, service marks and contractual rights to protect its technology and
software. The Company attempts to protect its trade secrets and other
proprietary information through agreements with its customers, suppliers,
employees and consultants. Except for terrestrial and low cost telephony
products, the Company does not have patent protection on any aspect of its
technology or software. The Company believes that the improvement of existing
products, reliance upon trade secrets, copyrights and unpatented proprietary
know-how and the development of new products are generally as important as
patent protection in establishing and maintaining a competitive advantage
because, among other reasons, patents often provide only narrow
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protection which may not provide a competitive advantage in areas of rapid
technological change. The use of trade secrets and copyrights will not
necessarily protect the Company from the use by other persons of its technology
or software, or technology or software that is similar to that which is embodied
in the Company's trade secrets or copyrights. There can be no assurance that
others will not be able to duplicate the Company's technology and software in
whole or in part. In addition, the laws of certain countries in which the
Company's products are or may be developed, manufactured or sold may not protect
the Company's products and intellectual property rights to the same extent as
the laws of the United States. The inability of the Company to protect its
intellectual property and proprietary technology could have a material adverse
effect on its business, operating results and financial condition. With respect
to the Company's venture into new fields such as terrestrial and low cost
telephony products, the Company believes that patent protection may be
necessary. Accordingly, the Company has applied for one patent and is in the
process of seeking additional patent protection with respect to this
application. In addition, as the number of patents, copyrights and other
intellectual property rights in the Company's industry increases, and as the
coverage of these rights and the functionality of the products of new markets
further overlap, the Company believes that its products may increasingly become
the subject of infringement claims. The Company may in the future be notified
that it is infringing upon certain intellectual property rights of others.
Although the Company has not received any such notification to date, and there
are no pending or threatened intellectual property lawsuits against the Company,
there can be no assurance that such litigation or infringement claims will not
occur in the future. Any such litigation or claims could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's future performance is significantly dependent on the
continued active participation of Emil Youssefzadeh, the Company's founder,
Chief Executive Officer and President. However, in January 1998, the Company
announced a reorganization of the Company's businesses which will strengthen the
Company management and reduce the Company's dependence on Mr. Youssefzadeh.
However, should Mr. Youssefzadeh leave or otherwise become unavailable to the
Company, the Company's business, operating results and financial condition may
be materially adversely affected. The Company has obtained a "key man" life
insurance policy in the amount of $5,000,000 on the life of Mr. Youssefzadeh. In
addition to Mr. Youssefzadeh, the Company's future success depends upon its
ability to attract and retain additional highly qualified management and
technical personnel. The Company faces intense competition for qualified
personnel, and there can be no assurance that the Company will be able to
attract and retain such personnel.
ABILITY TO MANAGE GROWTH AND EXPANSION
The Company has experienced growth over the past few years and aims to
continue to expand its operations both in the traditional, core manufacturing
business and through DTPI, its rural telephony service business. The management
of the Company's growth, if any, requires continued expansion of the Company's
operational and financial control systems, as well as a significant increase in
the Company's manufacturing, testing, quality control, delivery and service
operations. Although the Company has not experienced disruption in manufacturing
or shipment of its products in connection with its expansion to date, the
inability of the Company to meet its manufacturing and delivery commitments in a
timely manner (as a result of its expansion or otherwise) could result in the
loss of sales by the Company, expose it to contractual penalties, costs or
expenses and damage the Company's reputation in the marketplace. The Company's
inability to manage growth effectively could have a material adverse effect on
its business, operating results and financial condition and results of
operations. In addition, as a result of the planned expansion, the Company's
operating expenses have increased and the Company's operating results will be
adversely affected if sales do not increase as anticipated.
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DEPENDENCE ON KEY SUPPLIERS AND MANUFACTURERS
Certain components used by the Company in its existing products are
purchased from single source suppliers and manufacturers. While the Company
maintains an inventory of components and believes that alternative suppliers and
manufacturers for all such components are currently available at reasonable
terms, an interruption in the delivery of these components may have a material
adverse effect on the Company. There can be no assurance as to when or whether
the Company would be able to locate any such alternative suppliers. Furthermore,
there can be no assurance that the Company will not encounter future component
shortages or other disruptions in the supply of materials. Delays associated
with raw materials or component shortages could have a material adverse effect
on the Company's business, operating results and financial condition.
POTENTIAL PRODUCT LIABILITY CLAIMS
Although to date the Company has not experienced any product liability
claims, the sale and support of products by the Company involves the risk of
such claims. The Company maintains product liability insurance in amounts it
believes are customary for similar businesses in the industry; however, a
successful product liability claim brought against the Company, in excess of the
amount for which the Company is insured, or for which coverage is not provided
under the Company's insurance policies, could have a material adverse effect
upon the Company's business, financial condition and results of operations.
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATED ENTITIES
As of September 30, 1997, the officers, directors, principal
stockholders and their affiliates owned approximately 54% of the outstanding
Common Stock. If such stockholders were to act in concert, they would be able to
control substantially all matters requiring approval by the stockholders of the
Company, including the election of directors. Such concentration of ownership
could discourage or prevent a change in control of the Company.
See "Principal Stockholders."
POSSIBLE VOLATILITY OF STOCK PRICES
The market prices for securities of technology companies, including the
Company, have been volatile. Quarter to quarter variations in operating results,
changes in earnings estimates by analysts, announcements of technological
innovations or new products by the Company or its competitors, announcements of
major contract awards and other events or factors may have a significant impact
on the market price of the Company's Common Stock. In addition, the securities
of many technology companies have experienced extreme price and volume
fluctuations, which have often been unrelated to the companies' operating
performance. These conditions may adversely affect the market price of the
Company's Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation provides for 5,000,000
authorized but unissued shares of Preferred Stock, the rights, preferences,
qualifications, limitations and restrictions of which may be fixed by the Board
of Directors without any further vote or action by the stockholders. The
Company's charter documents prescribe procedures for the nomination and election
of directors and limit the ability of stockholders to take actions by written
consent which could make it more difficult for stockholders to elect directors
or take other actions. Further, the Company's Bylaws include a "fair price
provision" which requires the affirmative vote of two-thirds of the outstanding
shares of
20
<PAGE> 21
capital stock entitled to vote generally in the election of directors to approve
certain business combinations. In addition, the Company's stock option plan
provides for the acceleration of vesting of options granted under such plan in
the event of certain transactions which result in a change of control of the
Company. Further, Section 203 of the General Corporation Law of Delaware
prohibits the Company from engaging in certain business combinations with
interested stockholders. These provisions may have the effect of delaying or
preventing a change in control of the Company without action by the stockholders
and therefore could adversely affect the price of the Company's Common Stock.
CONCENTRATION OF CREDIT RISK
The Company generates a substantial amount of its revenues from
individually significant orders, primarily on an international basis. These
sales are on a letter of credit or a similar guaranteed basis or on an open
account basis. Generally, credit on an open account basis is only extended to
customers with substantial financial resources or to public utilities that are
government owned in the country to which the product is shipped. There can be no
assurance, however, that these customers will not encounter liquidity problems
that could result in exceptional delays in the payment of or the inability to
pay, accounts receivable balances. In the event of such an occurrence, the
Company's financial condition and results of operations could be adversely
affected.
YEAR 2000 COMPLIANCE
Many existing software programs use only two digits to identify the year
in the date field. If such programs are not corrected, date data concerning the
Year 2000 could cause many computer applications to fail, lock-up or generate
erroneous results. The Company is in the process of identifying and assessing
its mission-critical systems related to the Year 2000 and will commit the
resource necessary to resolve any potential Year 2000 issues. Although the
Company is addressing such issues in what it considers sufficient time prior to
century rollover, there can be no assurance that there will be no interruption
of operations or other limitations of system functionality, or that the Company
will not incur substantial costs to avoid such occurrences. The Company is
currently assessing the cost to remediate its Year 2000 issues. Although the
actual costs to remediate these issues is not yet fully known, based upon
information to date, it is expected that the remediation will not have a
material impact on the Company's financial condition or operating results.
However, failure to identify the mission-critical systems related to Year 2000
or failure to commit the resources necessary to resolve the Year 2000 issues on
a timely basis, could have a material impact on the Company's financial
condition or operating results.
ITEM 2 - PROPERTIES
The Company's principal offices are located in a 62,000 square foot
facility in Irvine, California, which houses all functions including
manufacturing, engineering, accounting, administration, marketing, sales, and
service. The Company purchased this facility on July 28, 1994 with cash reserves
and a purchase money promissory mortgage note (the "Mortgage Note") in the
amount of approximately $4.3 million. The Mortgage Note is secured by the
Company's land and building, accrues interest at 7% per annum, and requires
monthly principal and interest payments of approximately $28,700 which commenced
with the Company's occupancy in October 1994. The Mortgage Note is being
amortized over a thirty-year period and matures on September 1, 2009, at which
time all remaining principal and accrued interest is due.
21
<PAGE> 22
ITEM 3 - LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
December 31, 1997, the Company was not engaged in any material legal proceedings
which the Company expects, individually or in the aggregate, will have a
material adverse effect on the Company's results of operations or its financial
condition.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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<PAGE> 23
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ Stock Market under the
symbol STMI. The high and low transaction prices for the common stock, as
reported by the National Association of Securities Dealers, Inc. for each of the
quarterly periods for the years ended December 31, 1997 and 1996 are set forth
in the following table:
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Price Range Per Share of Common Stock Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
High 8 3/4 9 5/8 18 1/4 20 1/2
Low 6 1/2 6 3/8 9 7 7/8
Year Ended December 31, 1996
High 19 3/4 14 3/4 12 1/4 10 1/4
Low 9 5/8 10 7 1/4 6 1/2
</TABLE>
There were 102 shareholders of record, and approximately 1300 beneficial
owners, as of March 17, 1997.
The Company does not currently pay cash dividends on its common stock
and intends to retain earnings, if any, for use in the operation and expansion
of its business.
23
<PAGE> 24
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere herein.
Effective March 31, 1996, the Company sold all the outstanding common
stock of RF Microsystems ("RF") a wholly owned subsidiary for $2,926,000. This
sale qualified as a disposal of a segment of the business and accordingly prior
period financial statements have been reclassified to reflect the discontinuance
of this segment of the business. See note 4 to the consolidated financial
statements.
In December 1997, the Company issued 480,000 shares of common stock in
exchange for all the outstanding common stock of Telecom International, Inc.
("TI"), a company that specializes in network systems integration. The
transaction was accounted for as a pooling of interests and accordingly, the
Company's financial statements have been restated to include the results of TI
for all applicable periods. TI commenced operations on June 12, 1995.
The statement of operations data and income (loss) per share of common
stock with respect to the years ended December 31, 1997, 1996, and 1995 and the
balance sheet data at December 31, 1997 and 1996 are derived from audited
financial statements included elsewhere herein. The statement of operations data
and income (loss) per share of common stock for the year ended December 31, 1994
and 1993 and the balance sheet data at December 31, 1995, 1994, and 1993 are
derived from audited financial statements reclassified in connection with the
disposal discussed above.
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Statement of Operations Data
Total revenues $ 52,148 $ 38,294 $ 31,881 $ 20,474 $ 11,143
Gross profit 13,749 9,328 10,990 8,568 3,472
Operating (loss) income (2,227) (7,255) 998 1,682 (3,196)
(Loss) income before cumulative
effect of change in accounting
principle and discontinued operations (2,051) (5,156) 1,067 1,767 (2,395)
Net (loss) income $ (2,051) $ (5,068) $ 1,400 $ 1,562 $ (1,926)
(Loss) income per share of Common Stock:
(Loss) income before cumulative
effect of change in accounting
principle and discontinued operations:
Basic $ (0.32) $ (0.81) $ 0.18 $ 0.33 $ (0.49)
Diluted $ (0.32) $ (0.81) $ 0.17 $ 0.32 $ (0.49)
Net (loss) income:
Basic $ (0.32) $ (0.80) $ 0.23 $ 0.29 $ (0.39)
Diluted $ (0.32) $ (0.80) $ 0.22 $ 0.28 $ (0.39)
Weighted average common shares for
calculating basic income (loss) per share 6,384 6,318 6,009 5,314 4,878
Weighted average common shares for
calculating diluted income
(loss) per share 6,384 6,318 6,335 5,570 4,878
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Working capital $ 11,975 $ 21,773 $ 24,529 $ 26,770 $ 19,365
Total assets 54,417 51,840 46,839 40,216 25,797
Long term debt 4,577 4,828 4,488 4,445 --
Stockholders' equity $ 27,062 $ 28,292 $ 33,028 $ 30,229 $ 21,384
</TABLE>
Quarterly Information (unaudited):
The following table sets forth certain unaudited quarterly financial
information for the Company's last eight fiscal quarters. All quarters have been
restated to include the results of TI. This information includes all normal
recurring adjustments that the Company considers necessary for a fair
presentation. The operating results for any quarter are not necessarily
indicative of results for any future period. See Risk Factors: History of Losses
and Fluctuations in Quarterly Operating Results in Part 1 of this document.
<TABLE>
<CAPTION>
Year ended December 31, 1997 1st 2nd 3rd 4th* Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total revenue $ 8,228 16,241 20,564 7,115 52,148
Gross profit 2,863 4,514 5,438 934 13,749
Operating income (loss) 123 813 1,562 (4,725) (2,227)
Net income (loss) $ 152 724 1,200 (4,127) (2,051)
Income (loss) per share of common stock:
Basic $ 0.02 0.11 0.19 (0.64) (0.32)
Diluted $ 0.02 0.11 0.18 (0.64) (0.32)
Year ended December 31, 1996
Total revenues $ 7,561 10,564 8,757 11,412 38,294
Gross profit 3,253 3,680 3,671 (1,276) 9,328
Operating income (loss) 1 682 (65) (7,873) (7,255)
Net income (loss) $ 220 410 (8) (5,690) (5,068)
Income (loss) per share of common stock:
Basic $ 0.03 0.06 -- (0.90) (0.80)
Diluted $ 0.03 0.06 -- (0.90) (0.80)
</TABLE>
* The results for the fourth quarter of 1996 included charges of $5,200,000
which comprised reserves of $2,500,000, primarily for inventory obsolescence due
to the uncertainty about future revenues from the previous generation of the
Company's products, $1,000,000 for the settlement of contractual commitments and
claims, including $650,000 non-recurring engineering charges for a version of a
product that the Company does not expect to sell in significant quantities and
$1,700,000, primarily for customer concessions and allowances.
25
<PAGE> 26
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
BACKGROUND
STM is a developer, manufacturer, supplier and service provider of
wireless-based satellite communications infrastructure and user terminal
products, utilized for the creation of 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 because management believes that these areas
offer greater applications for the Company's technology, a higher growth
potential and more favorable competitive dynamics. Approximately 95% of the
Company's revenue is generated in the international market through foreign
distributors and sales representatives. The Company's customers include
government agencies, telephone companies, multi-location corporations and
others.
During August, 1995 the Company purchased 72.5% of the outstanding common
stock and newly issued preferred stock of Telecom Multimedia Systems, Inc.
("TMSI") for $1,000,000 cash and 10,000 shares of the Company's common stock.
Arising from this transaction, the Company has approximately $617,000 of net
intangible assets and a balance of $259,000 due to the minority shareholders at
December 31, 1997.
Effective March 31, 1996, the Company sold its RF subsidiary for $2,926,000
cash to REMEC, Inc. ("REMEC") Further, the Company also entered into a
Technology Purchase Agreement on March 31, 1996 with REMEC whereby the Company
sold certain of its technologies, which were not part of the RF business
segment, for $1,000,000 cash. See Note 4 to the consolidated financial
statements. In addition, the Company entered into a Development, Manufacturing
and Product Supply Agreement and a Manufacturing Supply Agreement which
established REMEC as the sole provider for certain components that are
incorporated into the Company's products utilizing the aforementioned
technologies. The Development, Manufacturing and Product Supply Agreement also
provides for joint development of other products by the Company and REMEC which
will require purchases of such products by the Company at specified levels and
market prices. See note 10 to the consolidated financial statements. The sale of
RF has been accounted as a discontinuation of a segment of the business and
prior period financial statements have been reclassified. Accordingly, the 1995
comparatives included herein have been revised to compare current year
continuing operations to prior periods continuing operations.
In 1997, the Company was awarded, through its Direc-To-Phone International
subsidiary, two long-term service contracts to provide rural telephony services
in Mexico and Venezuela. DTPI was established in 1996 for the purpose of
offering fixed satellite telephony and advanced data services in emerging
markets. DTPI uses products manufactured by STM to enter into service agreements
with local partners for the purpose of generating long-term cash flows. These
service contracts will require significant up-front investment in equipment in
both countries. Such equipment will give rise to long-term cash flows from both
these contracts through revenue sharing arrangements with local in-country
service providers. In addition to the revenue sharing arrangement, there are
certain guaranteed monthly minimum revenues on a per line basis as well as one
time fees that are earned upon commissioning of each line. No revenues were
recognized under these contracts in 1997.
26
<PAGE> 27
In December 1997, the Company issued 480,000 shares of common stock in
exchange for all the outstanding common stock of Telecom International, Inc.
("TI"), a company that specializes in network systems integration. The
transaction was accounted for as a pooling of interests and accordingly, the
Company financial statements have been restated to include the results of TI for
all applicable periods.
RESULTS OF OPERATIONS
The following table sets forth for the periods presented the percentages of
revenues represented by certain items in the Company's Statements of Operations
for the last three fiscal years. These percentages have been recalculated to
give effect to the discontinuation of the RF business segment in 1996 and the
acquisition of TI in 1997.
<TABLE>
Year ended December 31, 1997 1996 1995
- ----------------------- ------ ------ ------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 73.6 75.6 65.5
------ ------ ------
Gross profit 26.4 24.4 34.5
Selling, general and administrative expenses 18.4 25.3 19.8
Research and development costs 12.2 18.0 11.6
------ ------ ------
Total operating costs 30.6 43.3 31.4
------ ------ ------
Operating (loss) income (4.2) (18.9) 3.1
Other (expense) income 0.1 (0.2) --
Net Interest income (expense) (0.6) 0.5 1.1
------ ------ ------
(Loss) income from continuing operations
before income taxes and minority interest (4.7) (18.6) 4.2
Income tax benefit (expense) 0.5 5.0 (1.1)
------ ------ ------
(Loss) income from continuing operations
before minority interest (4.2) (13.6) 3.1
Minority interest 0.3 0.1 0.2
------ ------ ------
(Loss) income from continuing operations (3.9) (13.5) 3.3
Income (loss) from discontinued operations and
gain on sale in 1996 -- 0.3 1.1
------ ------ ------
Net (loss) income (3.9)% (13.2)% 4.4%
====== ====== ======
</TABLE>
RESULTS OF CONTINUING OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues increased to $52,148,000 in 1997 from $38,294,000 in 1996, a 36.2%
increase, primarily as a result of the revenue earned under a $30 million
equipment supply contract with a customer in Thailand and an increase in
revenues earned by the Company's system integration business in 1997.
Approximately $30 million of revenues were recognized under this equipment
27
<PAGE> 28
supply agreement and these revenues were recognized throughout the year
primarily in quarters 1 through 3 of 1997. The Company earned approximately
$12,500,000 from the same customer in Thailand in 1996 under another contract.
The Company's system integration business was acquired in 1997 when the Company
acquired TI in December 1997 in a transaction that was accounted for as a
pooling of interests and accordingly, the Company's financial statements were
restated to include the results of TI.
The decline in service revenues to $2,324,000 in 1997 compared to
$2,904,000 in 1996 reflected a lower service content in 1997 revenues that can
occur, depending upon the nature of the contracts that the Company enters into
in any given period.
The Company's focus on larger value sales can expose the Company to a
concentration of revenues to individual customers and in geographic regions
during particular fiscal periods. The $30 million equipment supply contract in
1997 increased this concentration of revenues. In recognition of this, the
Company's sales and marketing activities have been increased to broaden coverage
in the Company's selected markets. However, the Company will continue to take
advantage of individual significant contracts should they arise for both its
equipment supply and service business.
Gross profits increased to 26.4% of revenues in 1997 from 24.4% in 1996.
Excluding approximately $2,500,000 of inventory obsolescence reserves included
in cost of revenues in 1996, the adjusted gross profit percentage for 1996 would
have been approximately 30.9%. The decline in the gross profit in 1997 reflects
a relatively lower gross profit percentage earned by the Company on the $30
million equipment supply sale to the customer in Thailand and a higher system
integration sales content at a lower gross profit percentage than the core
manufacturing business, in 1997 compared to 1996.
Selling, general and administrative expenses in 1997 were $9,589,000
compared to $9,688,000 in 1996. Measured as a percent of revenues, these
expenses decreased to 18.4% in 1997 as compared to 25.3% in 1996. The 1996
expense included approximately $1,700,000 associated with customer concessions
and allowances. Excluding this $1,700,000 from the 1996 expense, the adjusted
1996 selling, general and administrative expenses would have been $7,988,000 or
20.9% of revenues, compared to 18.4% for 1997. The decrease in percentage terms
in 1997 reflected the relatively fixed nature of certain costs that did not
increase in proportion to the increase in revenues. The dollar increase in
selling, general and administrative expenses in 1997 compared to 1996 (adjusted
for the $1,700,000 previously discussed) reflected increased costs, primarily to
support the growth in revenue in both the core manufacturing business and the
system integration business.
Research and development expenses were $6,387,000 in 1997 as compared to
$6,895,000 in 1996. Measured as a percent of revenues, these expenses decreased
to 12.2% in 1997 as compared to 18.0% in 1996. Adjusting the 1996 expense for
$1,000,000 of non-recurring engineering charges associated with a product that
the Company does not expect to sell in significant numbers and was fully
expensed in 1996, research and development expenses in 1997 would have increased
by $492,000, or 8.3% over the comparable 1996 expense. This dollar increase was
due to planned expenditures for personnel and outside services in support of the
Company's continuing new product development efforts. In percentage terms, the
adjusted 1996 expenses represented 15.4% of revenues. The decrease in percentage
terms in 1997 was due to the relatively fixed nature of certain costs that did
not increase in proportion to the increase in revenues.
The income tax benefit for 1997 was $306,000 as compared to $1,907,000 in
1996. The decrease in the income tax benefit in 1997 compared to 1996 related to
a lower loss in 1997 compared to 1996 and the Company reviewing the level of
deferred tax assets existing at December 31, 1997 for
28
<PAGE> 29
realizability due to the Company incurring losses for both 1997 and 1996.
Management believes that its is more likely than not that the Company will
realize the benefit of its existing timing differences, however, there can be no
assurance that the Company will generate any specific level of income in future
years.
The minority interest of $126,000 and $67,000 in 1997 and 1996
respectively, represented the share of the losses of TMSI attributable to the
minority shareholders.
The income from discontinued operations and gain on sale, net of income
taxes in 1996 of $88,000 related to the disposal of RF.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues for 1996 were $38,294,000 compared with $31,881,000 for 1995, a
20.1% increase. The increase in revenues in 1996 compared to 1995 related to
increased sales to certain key customers and increased sales in the system
integration business. Revenues in 1996 included significant sales to customers
in Thailand, the Netherlands, India, Brazil and the Philippines.
Service revenues for 1996 were $2,904,000 compared to $3,611,000 in 1995, a
decrease of 19.6%. This decrease in 1996 was primarily the result of the absence
of a 1995 management services contract for the provision of services to a
Malaysian customer.
The gross profit for 1996 was $9,328,000 compared to $10,990,000 for 1995,
representing gross profit percentages of 24.4% and 34.5% for 1996 and 1995,
respectively. The decrease in the gross profit to 24.4% in 1996 was primarily
the result of the recognition of inventory obsolescence reserves which reflected
the Company's decision to focus on the high volume public telephony business
represented by the DAMA product and the higher system integration sales content
in 1996 compared to 1995, at a lower gross profit percentage than the core
manufacturing business.
Selling, general and administrative expenses were $9,688,000 in 1996
compared to $6,315,000 in 1995, representing 25.3% and 19.8% of revenues for
1996 and 1995, respectively. The increase of $3,373,000 in 1996 comprised
increased selling costs of approximately $1,700,000 attributable to reserves
established in 1996 to recognize customer concessions and allowances and
increased costs incurred to support the growth in revenues in both the core
manufacturing business and the system integration business. Excluding the
$1,700,000 reserves established, the selling, general and administrative
expenses would have represented 20.9% of revenues in 1996 compared to 19.8% of
revenues in 1995.
Research and development costs for 1996 were $6,895,000 compared to
$3,677,000 in 1995, representing 18.0% and 11.6% of revenues for 1996 and 1995,
respectively. Approximately $1.0 million of the increase was attributable to the
Company recognizing its full obligation for certain non-recurring engineering
charges associated with a product that the Company does not expect to sell in
significant numbers. The remaining increase related to planned investment in
personnel and outside services, both in the Company and its TMSI subsidiary.
Interest income for 1996 was $982,000 compared to $702,000 for 1995. The
increase reflected higher investment income generated from the Company's excess
cash. Interest expense for 1996 was $764,000 compared with $379,000 for 1995.
The increase reflected a higher level of short term borrowings as a result of
draw downs under the Company's credit facilities.
In 1996, the Company had an income tax benefit of $1,907,000 compared to an
income tax
29
<PAGE> 30
provision of $347,000 in 1996. The 1996 benefit reflected losses incurred in
1996 as compared with income for 1995. The benefit in 1996 primarily related to
the effects of current year net operating losses on deferred income taxes.
The minority interest of $67,000 and $82,000 for 1996 and 1995
respectively, represented the share of losses of TMSI attributable to the
minority shareholders.
The income from discontinued operations and gain on sale in 1996, net of
income taxes related to RF and represented in 1996, the net income from
operations for the period January 1, 1996 to March 31, 1996 and the gain on the
sale, while in 1995 it represented the results of operations for the year 1995.
RESULTS OF DISCONTINUED OPERATIONS
For 1996 and 1995, revenues for RF were $1,216,000 and $5,339,000, net
income (loss) was $37,000 and $333,000, respectively, and the gain on sale in
1996 was $51,000.
LIQUIDITY AND CAPITAL RESOURCES
In 1997, the Company had positive cash flows from continuing operations of
$944,000 compared to negative cash flows of $2,378,000 in 1996. This improved
cash flow from continuing operations in 1997 compared to 1996, was primarily a
result of lower net losses for the year, decreases in accounts receivable, and
increases in accounts payable, partially offset by increases in inventories.
In 1997, the Company used $9,940,000 in investing activities, compared with
$2,332,000 provided by investing activities in 1996. The significant changes in
1997 compared to 1996 primarily relate to approximately $7,800,000 of property,
plant and equipment that was capitalized in the fourth quarter of 1997 in
connection with the Company's long-term service contracts in Mexico and
Venezuela and the absence of the proceeds of the disposal of RF, which occurred
in 1996.
In 1997, net cash provided by financing activities was $2,638,000, compared
to $4,873,000 in 1996, primarily comprising in 1997, net proceeds received under
credit facilities of $1,344,000 and proceeds from the issuance of common stock
of $821,000 (mainly arising from the exercise of stock options). In 1996, the
net proceeds received under credit facilities was $5,157,000.
Overall, the Company's cash, cash equivalents and short-term investments
totaled $8,622,000 at December 31, 1997 compared to $14,962,000 at December 31,
1996.
The Company has lines of credit from three separate banks totaling
$13,350,000. Availability under these lines of credit at December 31, 1997 was
approximately $13,000,000, of which $7,900,000 was drawn down.
In connection with the award of certain long-term service contracts in
Mexico and Venezuela, and due to the capital intensive nature of these
contracts, and other contracts that DTPI may be awarded in the future, the
Company is reviewing 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, nor that such financing will be
available on terms acceptable to the Company. However, subsequent to December
31, 1997, the Company and DTPI completed a $10 million equity offering with
Pequot Private Equity Fund L.P., the private investment vehicle of
Dawson-Samberg Capital Management, Inc. for newly issued shares in both STM and
DTPI.
Management expects to have sufficient cash generated through operations,
through availability under existing lines of credit and through other sources to
meet its anticipated cash requirements for the next 12 months.
30
<PAGE> 31
In September, 1994 the Company's Board of Directors authorized a stock
repurchase program whereby the Company may repurchase, in the open market, up to
10% of its shares outstanding, at times and prices to be determined by the
Board. The repurchased shares would be used for potential future acquisitions
and for exercises under the Company's stock option plans. The Company has not
repurchased any shares to date nor does it have any present commitments to
repurchase shares at this time.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS Nos. 130
and 131, Reporting Comprehensive Income ("SFAS 130") and Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131") respectively
(collectively, the "Statements"). The Statements are effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for reporting
of comprehensive income and its components in annual financial statements. SFAS
131 establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. Application of the Statements' requirements is not expected to
have a material impact on the Company's consolidated financial position, results
of operations or loss per share as currently reported.
YEAR 2000 COMPLIANCE
Many existing software programs use only two digits to identify the year in
the date field. If such programs are not corrected, date data concerning the
Year 2000 could cause many computer applications to fail, lock-up or generate
erroneous results.
The Company is in the process of identifying and assessing its
mission-critical systems related to the Year 2000 and will commit the resources
necessary to resolve any potential Year 2000 issues. Although the Company is
addressing such issues in what it considers is sufficient time prior to century
rollover, there can be no assurance that there will be no interruption of
operations or other limitations of system functionality, or that the Company
will not incur substantial costs to avoid such occurrences.
The Company is currently assessing the cost to remediate its Year 2000
issues. Although the actual cost to remediate these issues is not yet fully
known, based upon information to date, it is expected that the remediation will
not have a material impact on the Company's financial condition or operating
results.
31
<PAGE> 32
ITEM 8 - FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND SUPPLEMENTARY
DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE:
<TABLE>
<CAPTION>
Consolidated Financial Statements:
<S> <C>
Report of Independent Auditors......................................................... 33
Consolidated Balance Sheets as of December 31, 1997 and 1996........................... 34
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996, and 1995........................................ 35
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996, and 1995.................................. 36
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996, and 1995........................................ 37
Notes to Consolidated Financial Statements............................................. 39
Financial Statement Schedule:
(For the three years ended December 31, 1997)
Schedule II - Valuation and Qualifying Accounts and Reserves........................... 57
</TABLE>
All other financial statement schedules are omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
32
<PAGE> 33
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
STM Wireless, Inc.:
We have audited the accompanying consolidated financial statements of STM
Wireless, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of STM Wireless, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Orange County, California
March 26, 1998
33
<PAGE> 34
STM WIRELESS, INC.
Consolidated Balance Sheets
December 31, 1997 and 1996
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents including restricted cash of $1,600
in 1997 and 1996 $ 4,095 $ 10,453
Short-term investments 4,527 4,509
Accounts receivable, less allowances of $1,019 in 1997 and
$2,006 in 1996 10,937 12,568
Inventories 11,211 9,216
Current portion of long-term receivables 592 536
Deferred income taxes 3,132 2,826
-------- --------
Total current assets 34,494 40,108
Property, plant and equipment, net 17,025 8,496
Long-term receivables 1,462 1,991
Other assets 1,436 1,245
-------- --------
$ 54,417 $ 51,840
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 7,900 $ 6,400
Current portion of long-term debt 328 233
Accounts payable 11,597 8,588
Accrued liabilities 2,139 1,899
Customer deposits 130 758
Income taxes payable 425 457
-------- --------
Total current liabilities 22,519 18,335
Long-term debt 4,577 4,828
Minority interest in consolidated subsidiary 259 385
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; 6,448,164 and 6,294,250 shares
issued and outstanding at December 31, 1997
and 1996, respectively 6 6
Additional paid in capital 34,039 33,218
Accumulated deficit (6,983) (4,932)
-------- --------
Total stockholders' equity 27,062 28,292
-------- --------
$ 54,417 $ 51,840
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 35
STM WIRELESS, INC.
Consolidated Statements of Operations Years ended
December 31, 1997, 1996 and 1995 (dollars in thousands,
except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Products $ 49,824 $ 35,390 $ 28,270
Services 2,324 2,904 3,611
-------- -------- --------
Total revenues 52,148 38,294 31,881
Cost of revenues:
Products 37,084 27,573 19,312
Services 1,315 1,393 1,579
-------- -------- --------
Total cost of revenues 38,399 28,966 20,891
Gross profit 13,749 9,328 10,990
Selling, general and administrative expenses 9,589 9,688 6,315
Research and development costs 6,387 6,895 3,677
-------- -------- --------
Total operating costs 15,976 16,583 9,992
-------- -------- --------
Operating (loss) income (2,227) (7,255) 998
Interest income 684 982 702
Interest expense (982) (764) (379)
Other income (expense) 42 (93) 11
-------- -------- --------
(Loss) income from continuing operations
before income taxes and minority interest (2,483) (7,130) 1,332
Income tax benefit (expense) 306 1,907 (347)
-------- -------- --------
(Loss) income from continuing operations
before minority interest (2,177) (5,223) 985
Minority interest in net loss of consolidated subsidiary 126 67 82
-------- -------- --------
(Loss) income from continuing operations (2,051) (5,156) 1,067
Income from discontinued operations and gain on sale in
1996, net of income taxes -- 88 333
-------- -------- --------
Net (loss) income $ (2,051) $ (5,068) $ 1,400
======== ======== ========
(Loss) income per share of common stock restated:
Basic:
Continuing operations $ (0.32) $ (0.81) $ 0.18
Discontinued operations -- 0.01 0.05
-------- -------- --------
Net (loss) income $ (0.32) $ (0.80) $ 0.23
======== ======== ========
Diluted:
Continuing operations $ (0.32) $ (0.81) $ 0.17
Discontinued operations -- 0.01 0.05
-------- -------- --------
Net (loss) income $ (0.32) $ (0.80) $ 0.22
======== ======== ========
Common shares used in computing per share amounts -
restated:
Basic 6,384 6,318 6,009
Diluted 6,384 6,318 6,335
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 36
STM WIRELESS, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1995, 1996 and 1997
(dollars in thousands except share data)
<TABLE>
<CAPTION>
Retained
Number of Additional Earnings Total
Shares Common Stock Paid-in (Accumulated Stockholders'
Common Stock at par Value Capital Deficit) Equity
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 5,697,950 $ -- $ 31,488 $ (1,264) $ 30,224
Issuance of common stock
for acquisition of
Telecom International 364,990 -- 820 -- 820
Exercise of stock options
and warrants 108,269 -- 277 -- 277
Issuance of common stock
for acquisition of TMSI 10,000 -- 188 -- 188
Income tax benefit on
stock options -- -- 115 -- 115
Increase in par value to
$0.001 per share -- 6 (6) -- --
Net income -- -- -- 1,400 1,400
--------- --------- --------- --------- ---------
Balance at
December 31, 1995 6,181,209 6 32,882 136 33,024
Issuance of common stock
for acquisition of
Telecom International 80,100 -- 240 -- 240
Exercise of stock options 32,941 -- 96 -- 96
Net loss -- -- -- (5,068) (5,068)
--------- --------- --------- --------- ---------
Balance at
December 31, 1996 6,294,250 6 33,218 (4,932) 28,292
Issuance of common stock
for acquisition of
Telecom International 34,900 -- 162 -- 162
Exercise of stock options 119,014 -- 659 -- 659
Net loss -- -- -- (2,051) (2,051)
--------- --------- --------- --------- ---------
Balance at
December 31, 1997 6,448,164 $ 6 $ 34,039 $ (6,983) $ 27,062
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 37
STM WIRELESS, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,051) $ (5,068) $ 1,400
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
continuing operations --
Discontinued Operations -- (37) (333)
Gain on sale of discontinued
operations -- (51) --
Provision for allowances on
accounts receivable 91 1,931 --
Provision for inventory obsolescence (456) 2,728 190
Reversal of sale -- 2,132 --
Depreciation and amortization 1,548 1,181 1,144
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable 1,540 (2,753) (2,534)
Increase in inventories (1,539) (5,689) (1,244)
Increase in deferred income taxes (306) (1,250) (1,073)
(Increase) decrease in other
assets (346) 38 (848)
Increase in accounts payable 3,009 4,590 2,194
Increase (decrease) in customer
deposits (628) 698 60
Increase (decrease) in accrued
liabilities 240 (116) 537
Increase (decrease) in minority
interest (126) (67) 452
Increase (decrease) in income tax
payable (32) (645) 1,003
-------- -------- --------
Net cash provided by (used in)
continuing operations 944 (2,378) 948
Net cash provided by (used in) -- 923 (1,361)
-------- -------- --------
discontinued operations
Net cash provided by (used in)
operating activities 944 (1,455) (413)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments (5,622) (5,759) (14,338)
Sales and maturities of short-term
investment 5,604 6,200 17,863
Purchases of property, plant, &
equipment (9,922) (1,035) (2,237)
Proceeds from sale of discontinued
operations -- 2,926 --
-------- -------- --------
Net cash provided by (used in)
investing activities $ (9,940) 2,332 1,288
-------- -------- --------
</TABLE>
(CONTINUED)
See accompanying notes to consolidated financial statements
37
<PAGE> 38
STM WIRELESS, INC.
Consolidated Statement of Cash Flows (CONTINUED) Years
ended December 31, 1997, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Increase in long-term receivables $ -- $ (883) $ (4,083)
Payments received from long-term
receivables 473 283 25
Proceeds from issuance of common
stock, net 821 316 1,097
Proceeds from issuance of debt 1,841 8,611 2,749
Repayments of debt (497) (3,454) (985)
-------- -------- --------
Net cash provided by (used in)
financing activities 2,638 4,873 (1,197)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents (6,358) 5,750 (322)
Cash and cash equivalents at beginning of year 10,453 4,703 5,025
-------- -------- --------
Cash and cash equivalents at end of year $ 4,095 10,453 4,703
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 982 $ 722 $ 379
======== ======== ========
Income taxes paid $ 230 $ 79 $ 118
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 39
STM WIRELESS, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995
(1) Description of the Company
STM Wireless, Inc. (the "Company" or "STM") 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"), will provide fixed telephony services in international
markets.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its majority and wholly-owned subsidiaries including DTPI,
the Company's fixed telephony service subsidiary and Telecom
International, Inc. ("TI"), the Company's system integration subsidiary
(see note 3). The minority interest relates to Telecom Multimedia
Systems, Inc., ("TMSI"), the Company's internet telephony and voice over
IP solutions subsidiary (see note 3). All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the dates of the balance sheets and
revenues and expenses for the periods. Actual results could differ
significantly from those estimates.
Revenue Recognition
Sales of the Company's communications products and related installed
software are generally recognized upon shipment. Sales of the Company's
products to distributors are normally not subject to right of return.
Revenues from contract services are earned under cost reimbursement and
fixed price type contracts. Revenues from contracts are recognized under
the percentage-of-completion method, whereby contract costs are expensed
as incurred and revenues are recorded based on the ratio of costs
incurred to total estimated costs at completion. There were no costs and
estimated earnings in excess of billings on contracts under the
percentage of completion method at December 31, 1997, and 1996
respectively. If the estimate of total contract costs
39
<PAGE> 40
results in a loss, a provision is made currently for the total
anticipated loss.
The Company generally warrants its products to be free from defects for
a period of one year from shipment. Estimated warranty expense is
recognized upon shipment of equipment.
Cash Equivalents
Cash equivalents are highly liquid investments which are readily
convertible into known amounts of cash and have original maturities of
three months or less, consisting primarily of cash, certificates of
deposit and other money market instruments.
Short-term Investments
The Company's short-term investments consisting of certificates of
deposits, various U.S. government securities, and others have been
classified as "available for sale" and have original maturities between
90 and 360 days. As of December 31, 1997 and 1996 the fair market value
of these securities approximates cost.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or market and consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
------- -------
(dollars in thousands)
<S> <C> <C>
Raw materials $ 5,727 $ 5,512
Work in process 980 1,662
Finished goods 4,504 2,042
------- -------
$11,211 $ 9,216
======= =======
</TABLE>
Certain components used by the Company in its existing products are
purchased from single source suppliers and manufacturers. While the
Company maintains an inventory of components and believes that
alternative suppliers and manufacturers for all such components are
available at reasonable terms, an interruption in the delivery of these
components may have a material adverse effect on the Company.
In December 1996, the Company increased its inventory reserves by
approximately $2,500,000 to recognize the increased risk of obsolescence
associated with previous generations of the Company's products and to
reflect the Company's present focus on the high volume public telephony
business. These reserves are substantially intact at December 31, 1997.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets.
Buildings are depreciated over 30 years. Satellite equipment, other
equipment and furniture and fixtures are depreciated over 3-5 years.
Assets used for long-term service contracts will be depreciated
commencing when the asset is placed in service, over the shorter of
their estimated useful lives or the lives of the contracts to which they
relate. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the
40
<PAGE> 41
term of the lease.
Long-Term Receivables
Long-term receivables are recorded at cost, less the related allowance
for impaired notes receivable. Management, considering current
information and events regarding the borrowers' ability to repay their
obligations, considers a note to be impaired when it is probable that
the Company will be unable to collect all amounts due according to the
contractual terms of the note agreement. When a loan is considered to be
impaired, the amount of the impairment is measured based on the present
value of expected future cash flows discounted at the note's effective
interest rate. Impairment losses are included in the allowance for
doubtful accounts through a charge to bad debt expense. Cash receipts on
impaired notes receivable are applied to reduce the principal amount of
such notes until the principal has been recovered and are recognized as
interest income, thereafter. As of December 31, 1997 and 1996, the
Company has not considered an allowance for impaired notes receivable to
be necessary.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments,"
requires entities to disclose the fair value of financial instruments,
both assets and liabilities recognized and not recognized on the balance
sheet, for which it is practicable to estimate fair value. SFAS No. 107
defines fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
As of December 31, 1997 and 1996, the carrying value of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities
and income taxes payable approximate fair value due to the short term
nature of such instruments. The carrying value of short-term investments
approximate fair value based on quoted market prices for those or
similar investments. The fair value of all debt and long-term
receivables approximate fair value as the related interest rates
approximate rates currently available to/from the Company.
Research and Development
All research and development costs are charged to expense as incurred
and primarily consist of salaries and applicable overhead expenses of
employees directly involved in the design and implementation of the
satellite network hardware and software and certain third party outside
service costs.
Income Taxes
Income taxes are accounted for under the asset and liability method.
This method generally provides that deferred tax assets and liabilities
be recognized for temporary differences between the financial reporting
basis and the tax basis of the Company's assets and liabilities and
expected benefits of utilizing net operating loss ("NOL") carryforwards.
The Company records a valuation allowance for certain temporary
differences for which it is not more likely than not that it will
realize future tax benefits. The impact on deferred taxes of changes in
tax rates and laws, if any, are applied to the years during which
temporary differences are expected to be settled and reflected in the
financial statements in the period of enactment.
41
<PAGE> 42
Stock Options Plans
Prior to January 1, 1996, the Company accounted for its stock option
plans in accordance with the provisions of the Accounting Principles
Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS No. 123, "Accounting for Stock-based Compensation,"
which permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income
(loss) and pro forma net income (loss) per share disclosures for
employee stock option grants made in 1995 and future years, as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Impairment of Long-lived assets and Long-lived assets to be disposed of
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.
Income (Loss) per Share of Common Stock
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. All income and loss per share amounts for all periods presented
have been restated to conform to the SFAS No. 128 requirements (see note
14).
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS Nos.
130 and 131, "Reporting Comprehensive Income" ("SFAS 131") and
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), respectively (collectively, the "Statements"). The
Statements are effective for fiscal years beginning after December 15,
1997. SFAS 130 established standards for reporting of comprehensive
income and its components in annual financial statements. SFAS 131
establishes standards for reporting financial and descriptive
information about an enterprise's operating segments in its annual
financial statements and selected segment information in interim
financial reports. Reclassification or restatement of comparative
financial statements or financial information for earlier periods is
required upon adoption of SFAS 130 and SFAS 131, respectively.
Application of the Statements' requirements is not expected to have a
material impact on the Company's consolidated financial position,
results of operations or income (loss) per share data as currently
reported.
42
<PAGE> 43
Reclassifications
Certain reclassifications have been made to the 1996 and 1995
consolidated financial statements to conform to the 1997 presentation.
(3) Acquisitions
Telecom International, Inc.
On December 12, 1997, the Company issued 480,000 shares of its common
stock in exchange for all of the outstanding common stock of TI. TI is a
system integrator and installer of large satellite terminals used in
rural telephony and enterprise networks. The merger has been accounted
for as a pooling of interests and accordingly, all prior period
financial statements have been restated as if the merger took place at
the beginning of such periods.
TI was a Subchapter S corporation for income tax purposes from its
inception on June 12, 1995, to December 31, 1995, and therefore did not
pay U.S. federal income taxes. Effective January 1, 1996, TI elected C
corporation status for federal income tax reporting purposes. TI will be
included in the Company's U.S. consolidated tax return effective
December 12, 1997 (the date of acquisition).
Results of operations for the periods prior to the merger with TI are as
follows:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, Year Ended Period Ended
1997 December 31, December 31,
(dollars in thousands) (Unaudited) 1996 1995*
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues
STM $39,354 34,809 31,744
TI 5,679 3,485 137
------- ------- -------
Combined $45,033 38,294 31,881
======= ======= =======
Net income (loss)
STM $ 1,999 (4,816) 1,722
TI 77 (252) (322)
------- ------- -------
Combined $ 2,076 (5,068) 1,400
======= ======= =======
Other changes in stockholders'
equity
STM $ 438 96 580
TI 129 240 820
------- ------- -------
Combined $ 567 336 1,400
======= ======= =======
</TABLE>
* TI commenced operations on June 12, 1995.
43
<PAGE> 44
Telecom Multimedia Systems, Inc.
In August 1995, the Company purchased 72.5% of the outstanding common
stock and newly issued preferred stock of Telecom Multimedia Systems,
Inc. ("TMSI") for $1,000,000 cash and 10,000 shares of the Company's
common stock valued at $18.75 per share. TMSI develops and markets
advanced Internet telephony products, leveraging its expertise in
digital signal processing solutions to provide low delay, high quality,
voice over IP solutions. The acquisition of TMSI was accounted for as a
purchase. Accordingly, the purchase price was allocated to the net
assets acquired based upon their estimated fair market values. The
accompanying consolidated statements of income reflect the operations of
TMSI since the effective date of the acquisition.
(4) Discontinued Operations
Effective March 31, 1996, the Company sold its RF Microsystems ("RF")
subsidiary to REMEC, Inc.("REMEC") for cash of $2,926,000. RF designed
and manufactured microwave systems and components and provided technical
support under government contracts. Such disposition has been accounted
for as a disposal of a segment of a business and prior period financial
statements have been reclassified to reflect discontinuance of this
business segment.
During the three-months ended March 31, 1996 and the year ended December
1995, RF had revenues of $1,216,000, and $5,339,000 respectively and net
income of $37,000, and $333,000, respectively. Additionally, the Company
recorded a gain on the sale of RF of $51,000 which is included in income
from discontinued operations and gain on sale in 1996, net of income
taxes in the accompanying consolidated statement of operations for 1996.
(5) Property, Plant and Equipment
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
------- -------
(dollars in thousands)
<S> <C> <C>
Land $ 2,530 2,530
Building and building improvements 3,753 3,636
Assets for long-term service contracts 7,776 --
Satellite equipment 592 580
Equipment 7,455 5,453
Furniture and fixtures and Leasehold improvements 253 218
------- -------
22,359 12,417
Less accumulated depreciation and amortization 5,334 3,921
------- -------
$17,025 8,496
======= =======
</TABLE>
Assets for long-term service contracts are primarily equipment related
to DTPI's long-term fixed telephony service contracts in Mexico and
Venezuela which are primarily expected to be placed in service during
1998. For consolidation purposes, this equipment is valued at cost,
however, there is a Product Supply Agreement in place that requires
DTPI to purchase equipment at specified market prices
44
<PAGE> 45
from STM.
(6) Long-term receivables
The Company's long-term receivables relate primarily to a lease of
certain satellite equipment to a customer in Brazil under a sales-type
lease arrangement. Total minimum lease payments receivable on this
sales-type lease are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
(dollars in thousands)
<S> <C>
1998 $ 759
1999 759
2000 828
2001 18
------
2,364
Less: Unearned Interest 310
------
2,054
Less: Current Portion 592
------
$1,462
======
</TABLE>
(7) Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------------
(dollars in thousands)
<S> <C> <C>
Accrued salaries, bonuses and payroll related $ 935 $ 782
expenses
Accrued warranty 80 80
Accrued legal & audit fees 295 309
Accrued agents commissions 350 234
Other 479 494
------ ------
$2,139 $1,899
====== ======
</TABLE>
(8) Short Term Borrowings and Long Term Debt
Short Term Borrowings
The Company has a secured $10,000,000 revolving line of credit with
Wells Fargo HSBC Trade Bank N.A. (Trade Bank). Borrowings under this
facility bear interest at Prime plus 0.25%. The prime rate at December
31, 1997 was 8.50%. Funds are available under this line of credit based
upon the level of foreign orders, inventory balances available to
fulfill foreign orders and certain eligible foreign accounts receivable
balances. In addition, this facility can be used to issue standby
letters of credit for bid and performance guarantees subject to a 25%
collateral requirement and availability under the line of credit. The
agreement contains various restrictions and covenants including
maintaining a minimum net worth, a minimum current ratio, and the
requirement to be profitable on an annual and quarterly basis. The
Company was in compliance with or had secured waivers from Trade Bank to
permit the Company to be in compliance with such restrictions and
covenants at
45
<PAGE> 46
December 31, 1997. At December 31, 1997, and 1996, the amounts available
under this facility were $10,000,000 and $4,800,000, respectively of
which $5,850,000 and $4,800,000 were drawn down at December 31, 1997 and
1996, respectively.
In January 1997, the Company arranged a secured additional line of
credit with a bank for $1,750,000. The facility bears interest at prime,
plus 1% and is guaranteed by the Company. Funds are available under this
line of credit based on certain eligible accounts receivables and
inventory balances. At December 31, 1997, the amount available under
this facility was approximately $1,466,000 of which $450,000 was drawn
down.
The Company continues to have two revolving credit facilities with one
bank totaling $1,600,000. The facilities are secured by the Company's
certificates of deposit in the same amount with the bank. Borrowings are
due on demand and accrue interest at .75% over the certificates of
deposit rate. At both December 31, 1997 and 1996, the outstanding
balances under these credit facilities was $1,600,000.
Long term debt
In connection with the purchase of the Company's headquarters on July
28, 1994, the Company entered into a purchase money promissory mortgage
note ("Mortgage Note") in the amount of $4,320,000. The Mortgage Note is
secured by the Company's land and building, accrues interest at 7% per
annum, and requires monthly principal and interest payments of $28,741
which commenced on October 1, 1994. The Mortgage Note is being amortized
over a 30-year period and matures on September 1, 2009, at which time
all remaining principal and accrued interest is due.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
-----------------------
(dollars in thousands)
<S> <C> <C>
Mortgage payable on building $ 4,165 4,213
Capitalized lease obligations 740 621
Notes payable -- 227
------- -------
Total 4,905 5,061
Less current portion (328) (233)
------- -------
Long-term debt $ 4,577 4,828
======= =======
</TABLE>
The increase in the obligations for capital leases in 1997 relates to
new leases entered into in 1997 for the purchase of computer and test
equipment. The capitalized leases are at rates which vary from 8.5% to
10.7% per annum.
The notes payable at December 31, 1996, related to amounts payable to
stockholders of TI. These notes bore interest at 12% and were due on
October 31, 1998, and December 1, 1998. In 1997, prior to the
acquisition of TI by STM, $90,000 of notes payable was converted into
46
<PAGE> 47
30,000 shares of common stock of TI and the remaining principal balance
plus accrued interest were repaid in full.
Future maturities on long-term debt are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
(dollars in thousands)
<S> <C>
1998 $ 328
1999 322
2000 220
2001 115
2002 73
Thereafter 3,847
------
$4,905
======
</TABLE>
(9) Stockholders' Equity
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock.
The Board of Directors has the authority to issue the preferred stock in
one or more series, and to fix the rights, preferences, privileges and
restrictions thereof without any further vote by the holders of common
stock.
Common Stock
In December 1997, the Company issued 480,000 shares of common stock in
exchange for all the outstanding common stock of TI (see note 2).
Stock Options
In 1984, the Company adopted an Incentive Stock Option Plan ("ISO") (the
"1984 Plan") to reward the performance and contributions of eligible
employees. Options were granted at the discretion of the Board of
Directors to selected employees to purchase shares of the Company's
common stock at fair market value at the date of grant. Options
generally became exercisable in annual installments beginning one year
after the date of grant. All options expired ten years after the date of
grant. No more than 498,000 shares were to be issued under the 1984
Plan. Also, the Company from time to time granted non qualified stock
options to directors, consultants and officers. These options were
granted and vested based upon terms decided upon by the Board of
Directors. At December 31, 1996, all options to purchase shares had been
exercised. The 1984 Plan was terminated by the Board of Directors in
February 1992.
In January 1992, the Company adopted the Incentive Stock Option, Non
qualified Stock Option and Restricted Stock Purchase Plan - 1992 (the
"1992 Plan"). The 1992 Plan was amended by the Board of Directors in
both 1995 and 1994 to increase the number of stock options available for
grant by 500,000. The 1992 Plan now provides for the grant by the
Company of options and/or rights to purchase up to an aggregate of
850,000 shares of common stock.
47
<PAGE> 48
In October 1994, the Company's Board of Directors adopted the Satellite
Technology Management, Inc. 1994 Option Plan for Non-Employee Directors
(the "1994 Plan"). The 1994 Plan was approved by the Company's
stockholders in July 1995. The 1994 Plan provides for the grant by the
Company of options to purchase up to 250,000 shares of common stock to
non-employee members of the Company's Board of directors who are neither
employees nor paid consultants of the Company.
As explained in Note 2, the Company applies APB Opinion No. 25 in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for the Company's plans in the consolidated
financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No.
123, the Company's basic and diluted net income (loss) and net income
(loss) per share would have been adjusted to the following pro forma
amounts:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported $ (2,051) $ (5,068) $ 1,400
Pro forma $ (3,288) $ (5,818) $ 1,005
Basic income (loss) per share:
As reported $ (0.32) $ (0.80) $ 0.23
Pro forma $ (0.52) $ (0.92) $ 0.17
Diluted income (loss) per share:
As reported $ (0.32) $ (0.80) $ 0.22
Pro forma $ (0.52) $ (0.92) $ 0.16
</TABLE>
Compensation cost of $1,237,000, $750,000, and $395,000 for 1997, 1996
and 1995 respectively, was determined using the Black-Scholes option
pricing model with the following weighted average assumptions for grants
in 1997, 1996, and 1995 -- risk free interest rate of 6.33%, 6.21%, and
6.31%, respectively, an expected life of five years and an expected
volatility rate of 68.3%, 55.8% and 55.8%, respectively.
Pro forma net income (loss) and pro forma income (loss) per share
reflects only options granted in 1997, 1996 and 1995. Therefore, the full
impact of calculating compensation cost for stock options under SFAS 123
is not reflected in the net income (loss) presented above because
compensation cost is reflected over the options' vesting period of five
years and compensation cost for options granted prior to January 1, 1995
is not considered.
A summary of stock option transactions under all plans follows:
<TABLE>
<CAPTION>
Number Weighted-Average
of Exercise Price
Shares Per Share
-------------------------------
<S> <C> <C>
Options outstanding at
December 31, 1994: 482,883 5.28
Granted 305,175 13.47
Exercised (100,769) 2.00
Canceled (55,583) 9.99
--------
Options outstanding at
December 31, 1995: 631,706 9.34
Granted 272,000 11.69
</TABLE>
48
<PAGE> 49
<TABLE>
<S> <C> <C>
Exercised (32,941) 2.93
Canceled (151,350) 13.25
--------
Options outstanding at
December 31, 1996: 719,415 $ 9.71
Granted 207,000 8.40
Exercised (119,014) 5.54
Canceled (112,858) 9.57
Cancelled for regrant (1) (332,850) 12.68
Regranted (1) 332,850 7.13
--------
Options outstanding at
December 31, 1997: 694,543 7.40
========
</TABLE>
The following table summarizes information regarding the stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Outstanding Contractual Price Exercisable Price
Exercise Prices at 12/31/97 Life per Share at 12/31/97 per Share
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 3.88 - 6.75 67,375 6.27 5.14 47,750 $ 4.54
7.13 - 7.88 529,268 8.56 7.16 192,873 7.19
8.50 -14.00 97,900 9.31 10.28 6,725 9.49
------- -------
$ 3.88 -14.00 694,543 8.45 7.40 247,348 $ 6.74
======= =======
</TABLE>
Common stock received through the exercise of non-qualified stock
options or incentive stock options which are sold by the optionee within
two years of grant or one year of exercise result in a tax deduction for
the Company equivalent to the taxable gain recognized by the optionee.
For financial reporting purposes, the tax effect of this deduction is
accounted for as a credit to common stock rather than as a reduction of
income tax expense. Such optionee sales resulted in a tax benefit to the
Company of approximately $115,000 during 1995.
At December 31, 1997, the range of exercise prices and weighted -
average remaining contractual life of outstanding options under the
Company's stock option plans were $ 3.88 to $14.00 and 8.45 years,
respectively.
(1) The Company implemented an option cancellation/regrant program for
directors, executive officers, and all other employees holding stock
options with an exercise price per share in excess of the market
value of STM Wireless, Inc. common stock at the time the
cancellation/regrant occurred. Optionees who accepted the repricing
agreed that the regranted options would vest ratably over a period
one year longer than the vesting period of the options cancelled. The
program was effected on March 20, 1997 and 332,850 options in excess
of $7.125 per share were cancelled and 332,850 new options were
granted at an exercise price of $7.125, the fair value on the date of
grant.
Stock Purchase Warrants
In connection with the Company's initial public offering of common stock
(the "IPO") in 1992, the Underwriter acquired warrants from the Company
to purchase up to 162,500 shares of Common Stock at an exercise price of
$15.00 per share. The warrants were exercisable for
49
<PAGE> 50
a period of four years beginning one year after the date of the IPO and
expired in 1997.
In May 1993, in connection with a settlement agreement, a warrant to
purchase 7,500 shares of Common Stock at an exercise price of $10.00 per
share was granted. The warrant was fully exercised during 1995.
(10) Commitments and Contingencies
Purchase Commitments
In connection with the sale of RF (see note 4), the Company entered into
purchase commitments with REMEC to purchase components that are
incorporated into certain of the Company's products.
Under the Manufacturing and Product Supply Agreement dated April 30,
1996 the Company entered into a two year agreement to purchase a minimum
of $9,375,000 of product for which there is no remaining obligation at
December 31, 1997.
Under the Development, Manufacturing and Product Supply Agreement, dated
April 30,1996 as amended November 1, 1996, the Company entered into a
three year agreement to undertake the joint development of two products.
The agreement requires the Company to reimburse REMEC for non-recurring
engineering expenses for the development of the products up to
$1,250,000 and to purchase products up to approximately $18,000,000. STM
will have title to and ownership of the design of the products and will
have exclusive rights to the sale of the products. The three year period
commences with the production of the first unit, which is expected to be
in 1998. Should the Company fail to purchase the minimum requirement of
the products or elects to terminate the agreement, the Company will be
required to pay REMEC up to $2,475,000. To date, the Company has
expensed $1,250,000 for non-recurring engineering expenses of which
$250,000 and $1,000,000 was recognized in 1997 and 1996, respectively.
While management believes that none of these purchase commitments are in
excess of requirements and all purchases will be used to fulfill
customer orders and orders in connection with the Company's long-term
contracts in Mexico and Venezuela, in the normal course of business,
there can be no assurance that the Company will generate a future level
of revenues sufficient to satisfy its purchase commitments.
Litigation
The Company is involved as both plaintiff and defendant in various
claims and legal actions arising in the ordinary course of business. In
the opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the Company's financial
position or results of operation.
Contingency
A wholly-owned subsidiary of the Company, the net assets of which are
insignificant, is contingently liable under a $1,592,000 standby letter
of credit as security for a non-recourse bank loan made to the Company
in a back-to-back lending arrangement. The total facility available to
the Company is $3,600,000. Under the arrangement, a customer pledged
cash balances and cash flows sufficient to repay bank indebtedness used
by that customer to fund
50
<PAGE> 51
purchases from the subsidiary. The customer's bank indebtedness was
arranged under terms duplicate to, and is being used to service, the
non-recourse bank loan. The Company has determined that the customer's
cash security is sufficient to repay the bank's loan and that it is
remote that the standby letter of credit will be negotiated to repay any
indebtedness owed by the customer. Accordingly, the back-to-back loans
have been offset by the Company.
In addition, the Company is contingently liable for standby letters of
credit for a $120,000 bid bond issued in connection with a customer
tender document.
(11) Income Taxes
The components of income tax benefit (expense) consists of the
following:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
--------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Current:
Federal $ -- $ 549 (102)
State -- 147 (45)
Foreign -- (39) (1,273)
------- ------- -------
Total Current -- 657 (1,420)
------- ------- -------
Deferred:
Federal 224 1,127 947
State 82 123 126
------- ------- -------
306 1,250 1,073
------- ------- -------
Total $ 306 $ 1,907 (347)
======= ======= =======
</TABLE>
The actual income tax benefit (expense) differs from the statutory
Federal income tax rate as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Statutory Federal income tax rate 34.0% 34.0% (34.0)%
State taxes, net of Federal tax benefit (3.3) 3.5 2.6
Effect of foreign operations (19.4) 7.7 --
(Increase) decrease in valuation allowance (1.0) (16.9) 6.8
Other, net 2.0 (1.6) (1.4)
------ ------ ------
Effective tax rate 12.3% 26.7% (26.0)%
====== ====== ======
</TABLE>
51
<PAGE> 52
Cumulative temporary differences which give rise to deferred tax
assets and liabilities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------
(dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Inventories $ 1,088 $ 1,386
Accounts receivable 408 642
Accrued expenses 497 645
R&D costs capitalized for tax purposes 208 277
Tax credit carryforwards 1,051 1,856
Net operating loss carryforwards 2,241 1,088
Other 99 46
Valuation allowance (2,398) (2,376)
------- -------
Total deferred tax assets 3,194 3,564
Deferred tax liabilities:
Fixed assets (62) --
Minority interest -- (60)
Unremitted earnings of foreign subsidiary -- (678)
------- -------
Net deferred tax assets $ 3,132 $ 2,826
======= =======
</TABLE>
The valuation allowance established against deferred tax assets was
increased by $22,000 in 1997. In order to fully realize the net deferred
tax asset of $3,132,000 at December 31, 1997, the Company must generate
net taxable income during the carryforward period of approximately
$7,830,000. Additionally, in order to utilize the foreign tax credit
carryforward the Company must have sufficient foreign source income.
Management believes it is more likely than not that the Company will
realize the benefit of the existing net deferred tax assets as of
December 31, 1997 and that the existing net deductible temporary
differences will reverse during periods in which the Company generates
net taxable income; however, there can be no assurance that the Company
will generate any earnings or any specific level of continuing earnings
in future years.
At December 31, 1997, the Company had available research and development
credit carryforwards of approximately $450,000 which expire in 2001 to
2010, as well as $95,000 of alternative minimum tax credits which
carryforward indefinitely.
The Company has not provided for U.S. Federal income and foreign
withholding taxes on its foreign subsidiaries' undistributed earnings as
of December 31, 1997, because such earnings are intended to be
reinvested indefinitely. If these earnings are distributed in the
future, foreign tax credits would become available under U.S. law to
reduce the effect on the Company's overall tax liability.
52
<PAGE> 53
(12) Sales to Principal Customers, Geographic Regions and Concentration of
Credit Risk
Sales by geographic area are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Asia $35,630 $20,166 12,773
Latin & South America 7,269 5,212 8,972
Europe 3,911 6,778 8,273
Africa 2,976 2,436 23
North America 2,362 3,702 1,840
------- ------- -------
Total sales $52,148 $38,294 31,881
======= ======= =======
</TABLE>
The Company generates a substantial amount of its revenues from
individually significant orders, primarily on an international basis to
both developed and developing countries. This can give rise to a
concentration of revenues and credit risks to individual customers and
in geographic regions.
No revenues were recognized in 1997, for certain long-term service
contracts in Mexico and Venezuela that were awarded to DTPI in 1997.
In 1997, the Company generated revenues from approximately 45 customers
in 25 countries (including the United States) compared to approximately
58 customers in 26 countries in 1996.
While in an individual year a customer can represent a significant
proportion of the revenues for that year, the Company does not generate
a significant level of on-going repeat revenues for any individual
customer. The Company's revenues, in general, in any given year
represent new projects, to new or existing customers in new or existing
geographic regions.
However, the Company has generated approximately 68%, 53% and 40% of its
revenue in Asia in 1997, 1996 and 1995, respectively. In addition, the
Company has generated approximately 59%, 33% and 6% of revenues from one
Asian customer in 1997, 1996 and 1995, respectively. The recent
deterioration of the Asian economies may impact the level of revenues
that the Company may earn in future years.
To date, the Company has been successful in generating sales to new
customers, however, there can be no assurance that the Company will
generate any revenues or any specific level of continuing revenues in
future years.
Asia
Within the Asian region there were sales to one customer in Thailand for
approximately $30,600,000, 12,500,000 and approximately $2,050,000 in
1997, 1996 and 1995, respectively. At December 31, 1996 and 1995, the
accounts receivable balances for this customer were approximately
$1,476,000 and $211,000, respectively. There was no balance receivable
from this customer at December 31, 1997. In addition, sales in India in
1996 and 1995 were approximately $4,350,000 and $5,100,000 respectively.
The sales in 1996 were to six customers while in 1995 there were sales
to two customers of which approximately $4,650,000 was to one customer.
53
<PAGE> 54
For 1995, there were sales to a single Malaysian customer having as a
director and major shareholder the Chairman of the Board of Directors
and major shareholder of Berjaya. Berjaya owns 1,221,294 shares (17.1%)
of the Company's common stock. Revenues in 1995 for this customer
include product hardware and software of $4,698,000 and engineering,
project management and contract negotiation fees (services) of
$1,175,000. There were no sales to this customer in 1996 and 1997.
Latin and South America
Sales in Latin and South America in 1997 were to 17 customers. There was
only one significant sale to a customer in Venezuela for approximately
$3,300,000 in 1997. At December 31, 1997, the accounts receivable
balance for this customer was approximately $2,200,000. The Company and
this customer entered into a joint venture agreement in December 1997,
to provide long-term fixed telephony services in Venezuela. Sales in
Brazil in 1997, 1996 and 1995 were approximately $1,313,000, $2,737,000
and $4,084,000, respectively. Sales in 1996 are net of a 1995 sale of
$2,132,000 that was reversed in 1996 as a result of the Company's
decision to rescind the sale and refund the original deposit made by the
customer, due to changed economic and regulatory conditions in Brazil.
Europe
Sales in Europe in 1997 were to 5 customers. The only significant sale
in 1997 was to a customer in Poland for approximately $2,500,000. The
accounts receivable balance for this customer was approximately
$1,100,000 at December 31, 1997. There were no sales to this customer in
1996 or 1995. In Holland, sales to one customer were approximately
$600,000, $3,800,000 and $1,680,000 in 1997, 1996 and 1995,
respectively. In Spain, sales to one customer were approximately
$560,000, $660,000 and $6,450,000 in 1997, 1996 and 1995, respectively.
Sales in Italy amounting to approximately $2,335,000 in 1996 were
primarily to a distributor whose Former Chief Executive Officer was a
member of the Company's Board of Directors from November 1991 until
April 1993.
North America
Sales in North America have been reclassified in 1996 and 1995 for the
sale of RF in 1996 which has been treated as a discontinuation of a
segment of the business. Sales by RF in 1996 and 1995 were $1,216,000
and $5,339,000, respectively and all sales were to customers in North
America.
Sales are, in general, to customers with substantial financial resources
or to public utilities that are government owned in the country to which
the product is shipped.
The Company sells substantially all of its products and services
internationally both on a letter of credit or similar guaranteed basis,
whereby customers post secured letters of credit to assure collection
of receivables, and on an open account basis. At December 31, 1997 and
1996, the Company had five customers, which accounted for approximately
$5,835,000 and $6,111,000, respectively of total accounts receivable, of
which 68% and 63%, respectively were on a letter of credit basis.
In 1996, the Company established approximately $1,700,000 in accounts
receivable
54
<PAGE> 55
allowances, primarily for customer concessions and allowances that were
estimated to be required. Approximately $1,100,000 of accounts
receivable were written-off against these allowances in 1997.
(13) Employee Benefits
Effective September 1991, the Company adopted a defined contribution
401(k) savings and investment plan. The Company's contributions to the
plan are determined at the discretion of the Board of Directors. During
1997, 1996 and 1995, the Company made no contributions to the Plan.
In 1996, TI established a separate, defined contribution 401(k) savings
and investment plan for all its eligible employees. Under the plan, the
Company contributes a specified percentage of each eligible employee's
contribution. The Company's contributions totaled approximately $7,000
and $4,000 in 1997 and 1996, respectively.
(14) Income (loss) per common share
As discussed in Note 2, the Company adopted SFAS No. 128 effective
December 31, 1997. The following table illustrates the computation of
basic and diluted loss per share under the provisions of SFAS No. 128.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted income
(loss) per share - net (loss) income $ (2,051) $ (5,068) $1,400
========= ========= ======
Denominator:
Denominator for basic income (loss) per
share - weighted average number of
common shares outstanding during the period 6,384 6,318 6,009
Incremental common shares attributable to
exercise of outstanding options and warrants -- -- 326
--------- --------- ------
Denominator for diluted income (loss) per share 6,384 6,318 6,335
========= ========= ======
Basic (loss) income per share $ (0.32) $ (0.80) $ 0.23
========= ========= ======
Diluted (loss) income per share $ (0.32) $ (0.80) $ 0.22
========= ========= ======
</TABLE>
The computation of diluted loss per share for 1997 and 1996 excluded the
effect of incremental common shares attributable to the exercise of
outstanding common stock options because their effect would be
anti-dilutive (see note 9).
(15) Related Party Transaction
In the normal course of business, the Company contracts with Gulf
Communications International, Inc. ("GCI") to provide installation
services for its products. GCI is 50%
55
<PAGE> 56
owned by an officer of the Company. Total purchases by the Company from
GCI were approximately $720,000 and $469,000 in 1997 and 1996,
respectively.
(16) Subsequent Event (unaudited)
In March 1998, the Company completed a $10 million equity offering of
shares of STM and DTPI. 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 that may occur.
56
<PAGE> 57
SCHEDULE II
STM WIRELESS, INC.
Valuation and Qualifying Accounts and Reserves
For the years ended December 31, 1997, 1996 and 1995
Reserve for Accounts Receivable Allowances
(dollars in thousands)
<TABLE>
<CAPTION>
Charged
Balance at (credited) to
Beginning Costs and Balance at
Year ended of Period Expenses Deductions(a) End of Period
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997 $2,006 91 1,078 $1,019
====== ====== ====== ======
December 31, 1996 $ 75 1,931 -- $2,006
====== ====== ====== ======
December 31, 1995 $ 75 -- -- $ 75
====== ====== ====== ======
</TABLE>
Inventory Reserves
(dollars in thousands)
<TABLE>
<CAPTION>
Charged
Balance at (credited) to
Beginning Costs and Balance at
Year ended of Period Expenses Deductions (b) End of Period
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997 $3,466 (456) -- $3,010
====== ====== ====== ======
December 31, 1996 $ 738 2,728 -- $3,466
====== ====== ====== ======
December 31, 1995 $ 752 190 204 $ 738
====== ====== ====== ======
</TABLE>
(a) write-off of uncollectible accounts
(b) write-off of excess and obsolete inventories
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
57
<PAGE> 58
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information relating to the Company's directors
and executive officers:
Emil Youssefzadeh, 45, is the founder of the Company. He has been director
of the Company and has served as its President since he founded the Company in
January 1982, and has served as Chief Executive Officer from January 1982 to
June 1988 and since January 1991. From January 1979 until founding the Company,
Mr. Youssefzadeh was a satellite research engineer with Hughes Aircraft Company
where his projects included design of satellite communications systems and
satellite earth stations. He also was a member of the team responsible for
communications system engineering for the Intelsat-VI spacecraft.
Dennis W. Elliott, 56, has been a director of the Company since January
1985 and since October 1993 has been Chairman of the Board of Directors. Mr.
Elliott has served as President of Elliott Communications, a consulting firm
specializing in telecommunication strategy and high technology ventures, since
he founded it in February 1990. From March 1989 to January 1990 and from March
1987 to March 1989, Mr. Elliott was Chief Executive Officer and President of
Pacific Telecom Cable, Inc., and Chief Executive Officer and President of
National Gateway Telecom, Inc., respectively, both subsidiaries of Pacific
Telecom, Inc. From June 1984 to March 1987, he served as Executive Vice
President for Pacific Telecom, Inc., and from January 1976 to June 1984, he
served as Vice President, Finance of RCA American Communications, a domestic
satellite communications carrier.
Frank T. Connors, 64, has been a director of the Company since June 1988,
and served as its Chairman of the Board of Directors from June 1988 to September
1993, and as its Chief Executive Officer from June 1988 to January 1991. Since
October 1, 1994 Mr. Connors has been Vice Chairman and Executive Vice President
of the Company. Since January 1998, Mr. Connors is also President of
Direc-To-Phone International, Inc., the Company's fixed telephony service
subsidiary. From December 1982 to January 1988 Mr. Connors was the Chief
Executive Officer of Doelz Networks, a manufacturer of packet switching
equipment. From 1979 to 1981, Mr. Connors was Group Vice President of Northern
Telecom's Computer Systems Group. Mr. Connors is currently a director of DISC,
Inc. (NASDAQ NM : DCSC; DCSCW), an optical computer storage manufacturing
Company located in northern California.
Dianne Walker, 41, has been a director of the Company since January 1985.
Since December 1994, Ms. Walker has served as an independent consultant. From
September 1992 to December 1994, Ms. Walker has served as a consultant to Bear
Stearns & Co., Inc., a national investment banking firm. From January 1990 to
August 1992, Ms. Walker served as a consultant to Kidder, Peabody & Co., Inc., a
national investment banking firm. From January 1983 to October 1989, Ms. Walker
served in various positions with PacifiCorp, including Director, Mergers and
Acquisitions with Pacific Power & Light Co., a division of PacifiCorp, and Vice
President of Pacific Crest Capital, PacifiCorp's venture capital fund. Ms.
Walker also serves as a director of Comdial Corp, Microtest Inc., MicroAge Inc.
and Arizona Public Service Company.
Dr. Ernest U. Gambaro, 59, has been a director of the Company since March
1997. In 1988, Dr. Gambaro directed the formation of Infonet Services
Corporation has since served as its Vice President, General Counsel and
Secretary. Infonet Services Corporation operates the world's largest value added
international data communication network with offices in 58 countries. Prior to
1988, Dr. Gambaro was Assistant General Counsel for Computer Sciences
Corporation focusing on the Company's international, acquisition and divestiture
activities. Between 1962 and 1975, Dr. Gambaro
58
<PAGE> 59
directed programs at The Aerospace Corporation relating to the conceptual,
definition and implementation of advanced technology systems for space.
Tan Kim Poh, 44, served as a director of the Company since April 1994 and
Group Executive Director of Berjaya Group Berhad since August 1991 until his
death in early 1998. From June 1989 to August 1991, Mr. Tan served as a
Consultant and Advisor to IGB Corporation Bhd., a large publicly listed property
company in Malaysia. From February 1977 to May 1989, Mr. Tan served as General
Manager, Banking and Corporation Services of D & C Sakura Merchant Bankers
Berhad, a Malaysian merchant banking firm. Mr. Tan presently served as a
director of Berjaya Group Berhad, a Malaysian company which is a strategic
partner of, and investor in, the Company. Mr. Tan has been replaced by Kien Sing
Chan as Berjaya's representative director.
Chan Kien Sing, 42, is a member of the Malaysian Association of Certified
Public Accountants and Malaysian Institute of Accountants. Mr. Chan joined
Berjaya in 1989 as General Manager, Investment. In 1993, he was appointed to the
Board of Berjaya Group Berhad. Mr. Chan is a director of various subsidiary
companies under the Berjaya Group of companies in Malaysia. He is also a
director in several foreign-based companies such as Berjaya Holding (HK) Ltd., a
company listed on the Hong Kong Stock Exchange, and International Lottery &
Totalizator Systems, Inc. a company listed on the NASDAQ stock market.
Mohammed H. Farzin, 47, has been Executive Vice President of the Company
since January 1998. From January 1993 to January 1998, Mr. Farzin was the
Company's Vice President for Technology and Business Development. From January
1990 to January 1993, Mr. Farzin was the Company's Manager of Systems
Engineering.
Jack F. Acker, 51, has been President of STM's Network System division
since January 1998. From June 1995 to December 1997, Mr. Acker was President and
Chief Executive Officer of Telecom International, Inc. ("TI"), when TI was
acquired by STM. From 1984 to 1993, Mr. Acker was Corporate Senior Vice
President and President of the Network Systems Group at Scientific Atlanta, a
large satellite communications systems company. From 1968 to 1994, Mr. Acker was
responsible for developing communications system at Harris Corporation. Mr.
Acker is currently Chairman and a significant shareholder in Gulf
Communications, Inc., a supplier of installation services to the Company.
Michael Lindsay, 40, has been a corporate officer and Chief Operating
Officer of Direc-To-Phone International, Inc., the Company's fixed telephony
services provider since January 1998. Mr. Lindsay was Chief Operating Officer of
the Company from July 1994 until January 1998. From January 1993 to March 1994,
Mr. Lindsay served as Chief Operating Officer of Numedia Corporation, a software
developer. From September 1988 to October 1992, Mr. Lindsay held various officer
positions at Dowty Communications, Inc., a company specializing in data
communications, including President, Executive Vice President and Vice President
- - Finance and Operations.
Joseph J. Wallace, 38, has been Vice President-Finance and Chief Financial
Officer of the Company since March 1997. From April 1994 to March 1997, Mr.
Wallace was Corporate Controller of MAI Systems Corporation, a publicly held
worldwide provider of total information system solutions for the hospitality and
manufacturing industries. From 1990 to 1993, Mr. Wallace was Controller and
Chief Financial Officer of Simmons Magee, PLC, a British based value added
reseller of computer products and services.
There are no family relationships between any director, executive officer
or person nominated or chosen by the Registrant to become a director or
executive officer.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely upon its review of the copies of reporting forms furnished to
the Registrant, or written representations that no annual Form 5 reports were
required, the Registrant believes that all
59
<PAGE> 60
filing requirements under Section 16(a) of the Exchange Act applicable to its
directors, executive officers and any persons holding 10% or more of the
Registrant's common stock with respect to the Registrant's year ended December
31, 1997, were satisfied.
60
<PAGE> 61
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth compensation received for the three years
ended December 31, 1997, by the Company's Chief Executive Officer, and the other
executive officers whose salary and bonus exceeded $100,000 for fiscal year 1997
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Name and
Principle Position Year Salary ($) Bonus ($) Other ($) (2) Awards Options (#)
- ------------------ ---- ---------- --------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Emil Youssefzadeh 1997 239,698 33,020 10,000 (3)
President and Chief 1996 219,448 33,020 10,000 (4)
Executive Officer 1995 222,883 -0- 33,000 -0-
Frank Connors 1997 165,577 -0- -0- 15,000 (5)
Executive VP, 1996 150,000 -0- -0- 10,000 (4)
Vice Chairman & 1995 150,000 -0- -0- 5,000 (4)
President, DTPI
Michael Lindsay 1997 160,169 -0- -0- -0-
Corporate Officer & 1996 148,440 -0- -0- -0-
Chief Operating 1995 143,554 -0- -0- -0-
Officer, DTPI
Joseph Wallace (1) 1997 95,673 -0- -0- 25,000
VP, Finance & Chief
Financial Officer
</TABLE>
(1) Mr. Wallace commenced employment with the Company in March 1997.
(2) During 1997, 1996 and 1995 amounts represent $33,020, $33,020 and $33,000,
respectively, of automobile allowance and expenses paid by the Company for
the benefit of the Chief Executive Officer.
(3) Includes regrant of 10,000 options on March 20, 1997 in connection with the
Company's option cancellation/regrant program.
(4) These options were cancelled on March 20, 1997 in connection with the
Company's option cancellation/regrant program.
(5) Includes regrant of 15,000 options on March 20, 1997 in connection with the
Company's option cancellation/regrant program.
61
<PAGE> 62
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended December 31, 1997, to each of
the Named Executive Officers:
<TABLE>
<CAPTION>
%
TOTAL POTENTIAL REALIZABLE
OPTIONS VALUE AT ASSUMED
GRANTED TO ANNUAL RATES OF STOCK
OPTIONS EMPLOYEES EXERCISE PRICE APPRECIATION
GRANTED IN FISCAL PRICE EXPIRATION FOR OPTION TERM (3)
NAME (NO.) YR. (1) ($/SHARE) DATE (2) 5%($) 10%($)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Emil Youssefzadeh 10,000(4) 1.85% $ 7.125 5/2/06 $ 44,809 $113,554
Frank Connors 10,000(4) 1.85% $ 7.125 5/2/06 $ 44,809 $113,554
5,000(5) .93% $ 7.125 9/30/04 $ 22,404 $ 56,777
Joseph Wallace 25,000 4.63% $ 7.125 3/11/07 $112,021 $283,885
</TABLE>
(1) Options to purchase an aggregate of 539,850 shares of Common Stock were
granted to employees, including the named Executive Officers, during the
year ended December 31, 1997. Included were 332,850 options granted to
replace a like number of options cancelled in connection with the company's
cancellation/regrant program.
(2) Options granted have a term of ten years, subject to earlier termination on
certain events related to termination of employment or service to the
Company.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years). It is calculated by assuming that the stock
price appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the
last day of its term for the appreciated stock price. No gain to the option
holder is possible unless the stock price increases over the option term.
(4) Regrant of 10,000 options on March 20, 1997 in connection with the Company's
option cancellation/regrant program.
(5) Regrant of 5,000 options on March 20, 1997 in connection with the Company's
option cancellation/regrant program.
The Company implemented an option cancellation/regrant program for directors,
executive officers, and all other employees holding stock options with an
exercise price per share in excess of the market value of STM's common stock at
the time the cancellation/regrant occurred. Optionees who accepted the repricing
agreed that the re-granted options would vest ratably over a period one year
longer than the vesting period of the options cancelled. The program was
effected on March 20, 1997 and 332,850 options in excess of $7.125 per share
were cancelled and 332,850 new options were granted with an exercise price of
$7.125.
62
<PAGE> 63
The following table sets forth information regarding option repricings for all
executive officers with respect to each of the Company's executive officers who
participated in the option cancellation/regrant program effective March 20,
1997.
10-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
MARKET LENGTH OF
NUMBER OF PRICE OF EXERCISE ORIGINAL OPTION
SECURITIES STOCK AT PRICE AT NEW TERM
UNDERLYING TIME OF TIME OF EXERCISE REMAINING
OPTIONS REPRICING REPRICING PRICE AT DATE OF
NAME DATE REPRICED ($) ($) ($) REPRICING
------- ------ -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Emil Youssefzadeh 3/20/97 10,000 $ 7.125 $ 12.125 $ 7.125 9 years 1 month
Frank Connors 3/20/97 10,000 $ 7.125 $ 12.125 $ 7.125 9 years 1 month
3/20/97 5,000 $ 7.125 $ 9.875 $ 7.125 7 years 6 months
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning exercises of stock options
during the fiscal year ended December 31, 1997, by each of the named executive
officers and the year-end value of unexercised options:
<TABLE>
<CAPTION>
VALUES OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FISCAL YEAREND FISCAL
ACQUIRED ON VALUE (NO.) END ($)
NAME EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
(NO.) ($) UNEXERCISABLE UNEXERCISABLE (1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Emil Youssefzadeh -0- -0- 3,334/6,666 $4,584/$9,166
Frank Connors -0- -0- 8,334/6,666 $11,459/$9,166
Michael Lindsay -0- -0- 60,000/40,000 $82,500/$55,000
Joseph Wallace -0- -0- -0-/25,000 $0/$34,375
</TABLE>
(1) Value is based on fair market value of Common Stock as of December 31, 1997
stock market close minus the exercise price or base price of "in-the-money"
options. The closing sales price for the Company's Common Stock as of
December 31, 1997 on the NASDAQ Stock Market was $8.50
Directors' Fees
The Chairman of the Board of Directors receives an annual retainer at
the rate of $48,000, and each of the outside directors receives an annual
retainer at the rate of $15,000 for services
63
<PAGE> 64
rendered in his or her capacity as a director of the Company. Accordingly,
during 1997, Mr. Elliott received $48,000 and Ms. Walker and Mr. Tan received
$15,000 and Mr. Gambaro received $11,250 (as he joined the Company's Board in
March 1997) for their services as outside directors of the Company. The
Company's outside directors were also reimbursed for expenses incurred for
meetings of the Board of Directors which they attended.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 1997, the Company's Board of
Directors established the levels of compensation for the Company's executive
officers. Emil Youssefzadeh, a director and the President and Chief Executive
Officer of the Company, and Frank Connors, the Vice Chairman and the Executive
Vice President of the Company participated in the deliberations of the Board
regarding executive compensation, but did not participate in proceedings or
decisions of the Board of Directors regarding their compensation.
64
<PAGE> 65
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is certain information as of March 31, 1998, regarding
the beneficial ownership of the Company's common stock by (i) any person who was
known by the Company to own more than 5% of the voting securities of the
Company, (ii) each of the directors, (iii) each of the Named Executive Officers
and (iv) all directors and executive officers as a group. Except as otherwise
indicated, the Company believes, based on information furnished by such owners,
that the beneficial owners of the Registrant's Common Stock listed below have
sole investment and voting power with respect to such shares, subject to
applicable community property laws.
<TABLE>
<CAPTION>
FIVE PERCENT SHAREHOLDERS, DIRECTORS, NAMED AMOUNT AND NATURE OF
EXECUTIVE OFFICERS AND DIRECTORS AND EXECUTIVE BENEFICIAL OWNERSHIP PERCENT OF CLASS
OFFICERS AS A GROUP
------------------------------------------------ --------------------- ------------------
<S> <C> <C>
Emil Youssefzadeh (1)
STM Wireless, Inc. 1,322,922 18.5%
One Mauchly
Irvine, California 92618
Berjaya Group (Cayman), Ltd. (2) 1,221,294 17.1%
Level 17, Shahzan Prudential Tower
30 Jalan Sultan Ismail
50250 Kuala Lumpur, Malaysia
Kien Sing Chan (3) 1,221,294 17.1%
Level 17, Shahzan Prudential Tower
30 Jalan Sultan Ismail
50250 Kuala Lumpur, Malaysia
Dawson Samberg Capital Management, Inc. (4) 753,929 10.5%
c/o Amiel M. Peretz
354 Pequot Avenue, Southport, CT 06490
Jack F. Acker 260,458 3.6%
Frank T. Connors (5) 189,747 2.7%
Dennis W. Elliott (6) 21,308 *
Dianne C. Walker (7) 29,308 *
Dr. Ernest U. Gambaro (8) 5,000 *
Michael Lindsay (9) 60,000 *
Joseph Wallace (10) 6,250 *
All Directors and Executive
Officers as a group (11 persons) (1) (3) 3,870,216 54.1%
</TABLE>
- --------------------------
* Less than 1%
(1) Includes 249,000 and 244,020 shares held by Kamil Youssefzadeh and Shafigh
Youssefzadeh, respectively, who are brothers of Emil Youssefzadeh, for which
Emil Youssefzadeh has voting rights. Accordingly, Emil Youssefzadeh is
deemed to share beneficial ownership of these shares. Further, includes
6,667 shares issuable upon exercise of stock options exercisable within 60
days of March 17, 1998.
65
<PAGE> 66
(2) According to a report filed with the Securities and Exchange Commission,
Berjaya Group (Cayman), Ltd. ("Berjaya Cayman") is a wholly-owned subsidiary
of, and is controlled by, Berjaya Group Berhad ("Berjaya"), a Malaysian
corporation, whose principal offices are located at Level 17, Shahzan
Prudential Tower, 30 Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia.
Accordingly, Berjaya may be deemed to beneficially own such shares. However,
Berjaya disclaims such beneficial ownership pursuant to Rule 13d-4 under the
Securities Exchange Act of 1934, as amended.
(3) Consists of shares held by Berjaya Cayman. Mr. Chan is Group Executive
Director of Berjaya and, accordingly, may be deemed to beneficially own such
shares. However, Mr. Chan disclaims such beneficial ownership pursuant to
Rule 13d-4 under the Securities Exchange Act of 1934, as amended.
(4) At March 31, 1998, Dawson-Samberg beneficially owned 753,929 shares in the
Company. 571,429 shares were acquired through its Pequot Private Equity Fund
L.P. in an equity offering of shares. (See Item 13.)
(5) Inclusive of 11,667 shares issuable upon exercise of stock options
exercisable within 60 days of March 17, 1998.
(6) Inclusive of 16,000 shares issuable upon exercise of stock options
exercisable within 60 days of March 17, 1998.
(7) Inclusive of 16,000 shares issuable upon exercise of stock options
exercisable within 60 days of March 17, 1998.
(8) Consists of 5,000 shares issuable upon exercise of stock options exercisable
within 60 days of March 17, 1998.
(9) Consists of 60,000 shares issuable upon exercise of stock options
exercisable within 60 days of March 17, 1998.
(10)Consists of 6,250 shares issuable upon exercise of stock options
exercisable within 60 days of March 17, 1998.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1994, the Registrant sold 693,188 shares of newly issued common
stock at a price of $10.00 per share to Berjaya Cayman, a wholly-owned
subsidiary of Berjaya Group Berhad. In addition, Berjaya Cayman purchased an
additional 528,106 shares of common stock from the open market and from certain
former shareholders of the Company, COM.NET S.p.A. ("COMNET") and IMI Capital
Markets USA Corporation. A major shareholder and the Chairman of the Board of
Directors of Berjaya Group Berhad is also a major shareholder and a director of
Mutiara Telecommunications SDN ("Mutiara") a customer of the Company. The
Company made sales of products and provided services to Mutiara approximating
$5,873,000 in 1995. The Registrant believes that the terms and conditions of
sales to Mutiara were negotiated at arm's length and are no less favorable than
those that could be entered into with independent parties.
In 1997 and 1996, the Company contracted with Gulf Communications
International, Inc. ("GCI") in the normal course of business to provide
installation services. GCI is 50% owned by an officer of the Company. Total
purchases by the Company from GCI were approximately $720,000 and $469,000 in
1997 and 1996, respectively.
In March 1998, the Company completed a $10 million equity offering of
shares of STM and Direc-To-Phone International, Inc. ("DTPI"), the Company's
subsidiary, to Pequot Private Equity Fund L.P. ("Pequot"), the private
investment vehicle of Dawson-Samberg Capital Management, Inc. Through the
transaction, Pequot acquired 571,429 shares in the Company. Dawson-Samberg
Capital
66
<PAGE> 67
Management, Inc. is the beneficial owner of these shares. In addition, they
purchased 182,500 shares in the open market which approximates to 10% of the
outstanding shares of common stock of the Company. Coinciding with the equity
offering, two officers of Pequot were appointed to DTPI's Board of Directors.
67
<PAGE> 68
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND EXHIBITS
(1) Financial Statements: The following Consolidated Financial
Statements of the Company, are incorporated by reference under
Part II, Item 8 herein.
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditors' Report
The following schedule is filed herewith:
Schedule II -- Valuation and Qualifying Accounts and Reserves are
incorporated by reference under Part II, Item 8 herein.
Selected Quarterly Financial Data are incorporated by reference under
Part II, Item 6 herein.
All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REPORT
----------- ----------- ------
<S> <C>
3.1 **** Restated Certificate of Incorporation of the Company
3.2 **** Bylaws of the Company
10.1 * Satellite Technology Management, Inc. Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan -
1992 (the "Plan")
10.2 * Form of Incentive Stock Option Agreement pertaining to the Plan
10.3 * Form of Nonqualified Stock Option agreement pertaining to the
Plan
10.4 * Form of Indemnification Agreement between Registrant and its
directors
10.16** Federal Communication Commission authorization and order.
File
</TABLE>
68
<PAGE> 69
<TABLE>
<S> <C>
Nos. 2061/2062-DSE-P/L84 and 3379/3380-DSE-P/L84.
10.18 ** Stock Purchase Agreement, dated April 1, 1994, by and among
the Company, Berjaya Group (Cayman), Ltd. and Emil
Youssefzadeh and Albert Youssefzadeh
10.19*** Agreement for Purchase and Sales of Real Property
and Escrow Instructions dated June 1, 1994, by and
between Thomas M. Zapara, Violet Zapara, trustees
of the Zapara Family Trust W/D/T dated March 4,
1982 and the Company
10.21**** 1994 Stock Option Plan for Non-Employee Directors
10.22***** Stock Purchase Agreement between STM Wireless, Inc. and REMEC,
Inc. dated March 31, 1996
10.23****** Credit Agreement entered into as of 31st day of May, 1996, by
and between STM Wireless, Inc. ("Borrower") and Wells Fargo
HSBC Trade Bank N.A. ("Bank")
21. Subsidiaries of Registrant
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule Year Ended 1997
27.2 Financial Data Schedule Restated Year Ended 1996
27.3 Financial Data Schedule Restated Year Ended 1995
</TABLE>
- ----------
* Incorporated herein by reference to the referenced exhibit number
to the Company's Registration Statement on Form S-1, Reg. No.
33-45694.
** Incorporated by reference to the referenced exhibit number to the
Company's Form 10-Q for the Quarter ended June 30, 1994.
*** Incorporated by reference to the referenced exhibit number to the
Company's Form 10-Q for the Quarter ended September 30, 1994.
**** Incorporated by reference to the Company's Form 10-K filed for
the year ended December 31, 1995.
***** Incorporated by reference to the referenced exhibit to the
Company's Form 10-Q for the Quarter ended March 31, 1996.
****** Incorporated by reference to the referenced exhibit to the
Company's Form 10-Q for the Quarter ended June 30,1996.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REPORT
----------- ----------- ------
<S> <C> <C>
10.1 Satellite Technology Management, Inc.
Incentive Stock Option, Nonqualified Stock
Option and Restricted Stock Purchase Plan - 1992
(the "Plan"). *
10.2 Form of Incentive Stock Option Agreement
pertaining to the Plan. *
10.3 Form of Nonqualified Stock Option Agreement
pertaining to the Plan. *
10.21 1994 Stock Option Plan for Non-Employee Directors ****
</TABLE>
69
<PAGE> 70
(b) Reports on Form 8-K
On December 30, 1997, the Company filed under Item 2 on From 8-K
details of the acquisition of Telecom International, Inc. which
was acquired on December 12, 1997.
On January 27, 1998, the Company filed under Item 5 on Form 8-K
copies of 2 December 1997 press releases announcing the
positioning of the Company as a service provider and previewing
the 1997 results and announcing a long-term service contract in
Venezuela with CANTV.
70
<PAGE> 71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 10, 1998 STM Wireless, Inc.
By: EMIL YOUSSEFZADEH
--------------------------------------
Emil Youssefzadeh
Chief Executive Officer and
President, Director and Secretary
By: JOSEPH WALLACE
--------------------------------------
Joseph Wallace
Vice President, Finance Chief
Financial Officer and Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Each person whose
signature to this report on Form 10-K appears below hereby appoints Emil
Youssefzadeh and Joseph Wallace, or either of them, to act severally as
attorneys-in-fact and agents, with power of substitution and resubstitution, for
each of the undersigned, for any and all capacities, to sign on his behalf,
individually and in the capacities stated below, and to file any and all
amendments to this report on Form 10-K, which amendment or amendments may make
changes and additions as such attorneys-in-fact may deem necessary.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
DENNIS W. ELLIOTT Chairman of the Board April 10, 1998
- --------------------------------
Dennis W. Elliott
EMIL YOUSSEFZADEH Chief Executive Officer and April 10, 1998
- -------------------------------- Director
Emil Youssefzadeh
JOSEPH J. WALLACE Vice President, Finance, April 10, 1998
- -------------------------------- Chief Financial Officer and
Joseph J. Wallace Principal Accounting Officer
FRANK T. CONNORS Executive Vice President and April 10, 1998
- -------------------------------- Vice Chairman of the Board
Frank T. Connors
DIANNE WALKER Director April 10, 1998
- --------------------------------
Dianne Walker
KIEN SING CHAN Director April 10, 1998
- --------------------------------
Kien Sing Chan
DR. ERNEST U. GAMBARO Director April 10, 1998
- --------------------------------
Dr. Ernest U. Gambaro
</TABLE>
71
<PAGE> 1
EXHIBIT 21
STM WIRELESS, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
The subsidiaries of the Company are: Percentage Ownership
--------------------
<S> <C>
STM do Brasil 100.0%
Avenida das Americas, 3333
Sala 801
22631-003 Rio de Janeiro, Brazil
STM de Mexico , S. A de C.V. 100.0%
Monte Pelvoux No. 130 - 3ER. Piso
Lomas de Chapultpepec
11000 Mexico, D.F.
STM Wireless Systems, Ltd. 100.0%
50/9 Viphavadee-Rangsit 38
Viphavadee-Rangsit Road
Ladyao Chatuchak
Bangkok, 10900 Thailand
STM Sales Corp. 100.0%
134 West Soledad Avenue
Suite 401
Agana, Guam 96910
Direc-to-Phone International, Inc. 75.0%
One Mauchly
Irvine, CA 92618
Telecom Multimedia Systems, Inc. 72.5%
One Mauchly
Irvine, California 92618
</TABLE>
<PAGE> 1
Consent of Independent Auditors
The Board of Directors
STM Wireless, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-50806, 33-99570, 33-99572) on Form S-8 and registration statements (Nos.
33-73962, 33-70650, 33-99568) on Form S-3 of STM Wireless, Inc. of our report
dated March 26, 1998, relating to the consolidated balance sheets of STM
Wireless, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997,
and the related schedule, which report appears in the December 31, 1997 annual
report on Form 10-K of STM Wireless, Inc.
Orange County, California
April 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,095
<SECURITIES> 4,527
<RECEIVABLES> 11,956
<ALLOWANCES> 1,019
<INVENTORY> 11,211
<CURRENT-ASSETS> 34,494
<PP&E> 22,360
<DEPRECIATION> 5,335
<TOTAL-ASSETS> 54,417
<CURRENT-LIABILITIES> 22,519
<BONDS> 4,577
0
0
<COMMON> 6
<OTHER-SE> 27,056
<TOTAL-LIABILITY-AND-EQUITY> 54,417
<SALES> 49,824
<TOTAL-REVENUES> 52,148
<CGS> 37,084
<TOTAL-COSTS> 38,399
<OTHER-EXPENSES> 15,976
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 982
<INCOME-PRETAX> (2,483)
<INCOME-TAX> 306
<INCOME-CONTINUING> (2,051)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,051)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,453
<SECURITIES> 4,509
<RECEIVABLES> 14,574
<ALLOWANCES> 2,006
<INVENTORY> 9,216
<CURRENT-ASSETS> 40,108
<PP&E> 12,417
<DEPRECIATION> 3,921
<TOTAL-ASSETS> 51,840
<CURRENT-LIABILITIES> 18,335
<BONDS> 4,828
0
0
<COMMON> 6
<OTHER-SE> 28,286
<TOTAL-LIABILITY-AND-EQUITY> 51,840
<SALES> 38,294
<TOTAL-REVENUES> 38,294
<CGS> 28,966
<TOTAL-COSTS> 28,966
<OTHER-EXPENSES> 16,583
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 764
<INCOME-PRETAX> (7,130)
<INCOME-TAX> 1,907
<INCOME-CONTINUING> (5,223)
<DISCONTINUED> 88
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,068)
<EPS-PRIMARY> (0.80)<F1>
<EPS-DILUTED> (0.80)
<FN>
<F1>For Purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,703
<SECURITIES> 4,950
<RECEIVABLES> 11,687
<ALLOWANCES> 75
<INVENTORY> 6,255
<CURRENT-ASSETS> 33,401
<PP&E> 11,377
<DEPRECIATION> 2,737
<TOTAL-ASSETS> 46,839
<CURRENT-LIABILITIES> 8,872
<BONDS> 4,488
0
0
<COMMON> 0
<OTHER-SE> 33,028
<TOTAL-LIABILITY-AND-EQUITY> 46,839
<SALES> 31,881
<TOTAL-REVENUES> 31,881
<CGS> 20,891
<TOTAL-COSTS> 20,891
<OTHER-EXPENSES> 9,992
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 379
<INCOME-PRETAX> 1,332
<INCOME-TAX> 347
<INCOME-CONTINUING> 985
<DISCONTINUED> 333
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,440
<EPS-PRIMARY> 0.23<F1>
<EPS-DILUTED> 0.22
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
