<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Period Ended June 30, 1999
or
[_] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
Commission File No. 0-19923
STM WIRELESS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-3758983
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification number)
One Mauchly
Irvine, California 92618-2305
(Address of principal executive offices) (Zip code)
(949) 753-7864
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the last 90 days.
Yes No
X ___
- ---
As of August 10, 1999, there were 7,042,204 shares of Common Stock, $0.001 par
value per share, outstanding.
Page 1 of 24
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STM Wireless, Inc.
Index
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1999
and December 31, 1998..................................................... 3
Condensed Consolidated Statements of Operations for the
three and six month periods ended June 30, 1999 and June 30, 1998......... 4
Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 30, 1999 and June 30, 1998....................... 5
Notes to Condensed Consolidated Financial Statements...................... 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 12-18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk......................................................... 19
Part II. Other Information................................................................... 20
</TABLE>
Item 1. Legal Proceedings
Item 3. Defaults Upon Senior Securities
Item 6. Exhibits and Reports on Form 8-K
2
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PART I - FINANCIAL INFORMATION (Item 1 - Financial Statements)
STM WIRELESS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) (unaudited)
<TABLE>
<CAPTION>
ASSETS
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,078 $ 11,016
Short-term investments 752 1,106
Restricted cash and short-term investments 2,162 2,224
Accounts receivable, net 9,358 17,016
Inventories, net 12,164 13,108
Current portion of long-term receivables - 702
Prepaid expenses and other current assets 455 1,623
---------- -------------
Total current assets 31,969 46,795
Property & equipment, net 8,755 11,056
Long-term receivables - 788
Equity and other investments 157 4,151
Other assets 418 411
---------- -------------
$ 41,299 $ 63,201
========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 8,400 $ 10,650
Current portion of long-term debt 372 384
Accounts payable 6,365 9,582
Accrued liabilities 5,924 7,256
Customer deposits and deferred revenue 225 1,910
Income taxes payable 950 1,000
---------- -------------
Total current liabilities 22,236 30,782
Long-term debt 4,245 4,306
Redeemable minority interest - 6,355
Other long-term liabilities 1,134 -
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized, none issued or outstanding - -
Common stock, $0.001 par value; 20,000,000 shares
authorized; issued and outstanding 7,042,204 shares
at June 30,1999 and December 31, 1998 7 7
Additional paid in capital 38,161 38,140
Accumulated deficit (24,484) (16,389)
---------- -------------
Total Stockholders' equity 13,684 21,758
---------- -------------
$ 41,299 $ 63,201
========== =============
</TABLE>
(See accompanying notes to condensed consolidated financial statements.)
3
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STM WIRELESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Note 10) (Note 10)
Revenues:
Products $ 5,517 $ 8,633 $ 8,143 $ 14,953
Services 465 475 930 1,104
--------- --------- -------- ---------
Total revenues 5,982 9,108 9,073 16,057
Cost of revenues:
Products 3,380 6,281 6,714 11,552
Services 767 686 1,853 1,404
--------- --------- -------- ---------
Total cost of revenues 4,147 6,967 8,567 12,956
Gross profit 1,835 2,141 506 3,101
Operating costs and other operating items:
Selling, general & administrative expenses 2,356 3,161 5,366 6,029
Research & development 1,208 2,906 2,724 4,964
Restructuring costs 425 - 1,042 -
Move and relocation charges - 980 - 980
--------- --------- -------- ---------
Total 3,989 7,047 9,132 11,973
Operating income (loss) (2,154) (4,906) (8,626) (8,872)
Other income (expense) (5) (36) 62 (90)
Foreign currency devaluation costs (308) - (1,862) -
Gain on sale of assets 2,964 9,950 2,964 9,950
Interest income 251 219 517 358
Interest expense (305) (326) (816) (629)
--------- --------- -------- ---------
Income (loss) before income taxes and minority interest 443 4,901 (7,761) 717
Income tax expense - (244) - (244)
--------- --------- -------- ---------
Income (loss) before minority interest 443 4,657 (7,761) 473
Equity in net income (loss) of
unconsolidated affiliate 50 - (59) -
Minority interest (125) (223) (275) (110)
--------- --------- -------- ---------
Net income (loss) $ 368 $ 4,434 $ (8,095) $ 363
========= ========= ======== =========
Net income (loss) per common share:
Basic $ 0.05 $ 0.63 $ (1.15) $ 0.05
----- --------- --------- -------- ---------
Diluted $ 0.05 $ 0.60 $ (1.15) $ 0.05
------- ========= ========= ======== =========
Common shares used in computing per share amounts:
Basic 7,042 7,035 7,042 6,828
-----
Diluted 7,129 7,340 7,042 7,072
-------
</TABLE>
(See accompanying notes to condensed consolidated financial statements.)
4
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STM WIRELESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1999 1998
---- ----
<S> <C> <C>
Net cash used in operations $ (6,437) $ (16,837)
---------- ----------
Cash flows provided by (used in) investing activities:
Proceeds from the sale of stock in DTPI 2,500 -
Proceeds from repayment of note by DTPI 2,500 -
Proceeds from the sale of TMSI - 17,299
Equity investment in affiliate company - (650)
Decrease in restricted cash 62 -
Net decrease in short-term investments 354 2,300
Acquisition of property, plant and equipment (263) (245)
---------- ----------
Net cash provided by investing activities 5,153 18,704
---------- ----------
Cash flows from financing activities:
Net decrease in long-term receivable 790 218
Issuance of common stock - 4,102
Issuance of redeemable preferred stock in DTPI - 5,886
Increases (repayments) of short-term borrowings (2,250) 3,350
Proceeds from long-term leases 90 -
Repayment of long-term debt (163) (151)
---------- ----------
Net cash provided by (used in) financing activities (1,533) 13,405
----------- ----------
Effect of exchange rate on changes in cash and cash equivalents (1,121) -
Net increase (decrease) in cash and cash equivalents (3,938) 15,272
Cash and cash equivalents at beginning of period 11,016 4,095
---------- ----------
Cash and cash equivalents at end of period $ 7,078 $ 19,367
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
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STM WIRELESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 1999 and 1998
(Unaudited)
1. Basis of Presentation:
These financial statements are unaudited; however, the information
contained herein for STM Wireless, Inc. (the "Company" or "STM") gives
effect to all adjustments necessary, in the opinion of Company management,
to present fairly the financial statements for the interim periods
presented.
As a result of the Company reducing its ownership of Direc-To-Phone
International, Inc. ("DTPI") to approximately 44% of the voting stock of
DTPI (see Notes 9 and 10), the Company will no longer consolidate the
results of DTPI, going forward. Accordingly, the accompanying Condensed
Consolidated Statement of Operations includes the results of DTPI through
June 17, 1999 and the Condensed Consolidated Balance Sheet at June 30,
1999, excludes the assets and liabilities of DTPI.
The results of operations for the current interim period are not
necessarily indicative of the results to be expected for the current year.
Although the Company believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC"), and
these financial statements should be read in conjunction with the financial
statements included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, which is on file with the SEC.
2. Inventories:
Inventories are summarized as follows:
(amount in thousands)
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials $ 6,147 $ 7,423
Work in process 2,045 823
Finished goods 3,972 4,862
---------- -------------
$ 12,164 $ 13,108
========== =============
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3. Net Income (Loss) per Share:
(amount in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (loss) $ 368 $ 4,434 $(8,095) $ 363
--------- --------- ------- ----------
Basic:
Weighted average common shares outstanding used
in computing basic net income (loss) per
share 7,042 7,035 7,042 6,828
--------- --------- --------- ----------
Basic net income (loss) per share $ 0.05 $ 0.63 $ (1.15) $ 0.05
--------- --------- --------- ----------
Diluted:
Weighted average common shares outstanding
7,042 7,035 7,042 6,828
Dilutive options outstanding 87 305 - 244
--------- --------- --------- ----------
Shares used in computing diluted net income 7,129 7,340 7,042 7,072
--------- --------- --------- ----------
(loss) per share
Diluted net income (loss) per share $ 0.05 $ 0.60 $ (1.15) $ 0.05
--------- --------- --------- ----------
Anti-dilutive options excluded from calculation
of net income (loss)
per share 952 1,393 38 38
--------- --------- --------- ----------
</TABLE>
4. Recently Issued Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as
amended by SFAS 137, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS 133, establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. Adoption of SFAS 133 is not expected to have a material impact
on the Company's consolidated financial position, results of operations or
liquidity.
5. Geographic and Business Segment Information:
The Company operates in one principal industry segment: the design,
manufacture and provision of wireless-based satellite communications
infrastructures.
7
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<TABLE>
<CAPTION>
Revenues by Three Months Ended Six Months Ended
geographic areas June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total:
Latin & South America $ 3,569 $ 4,003 $ 4,934 $ 5,600
Africa & Middle East 158 3,097 769 4,072
Asia 1,395 1,093 2,285 4,443
United States 60 910 210 1,354
Europe 800 5 875 588
---------- ---------- ----------- -----------
Total $ 5,982 $ 9,108 $ 9,073 $ 16,057
========== ========== =========== ===========
Products:
Latin & South America $ 3,464 $ 3,685 $ 4,696 $ 4,857
Africa & Middle East 49 3,041 623 4,031
Asia 1,188 1,051 1,925 4,401
United States 16 856 85 1,096
Europe 800 - 814 568
---------- ---------- ----------- -----------
Total $ 5,517 $ 8,633 $ 8,143 $ 14,953
========== ========== =========== ===========
Services:
Latin & South America $ 105 $ 318 $ 238 $ 743
Africa & Middle East 109 56 146 41
Asia 207 42 360 42
United States 44 54 125 258
Europe - 5 61 20
---------- ---------- ----------- -----------
Total $ 465 $ 475 $ 930 $ 1,104
========== ========== =========== ===========
Operating loss by area:
Latin & South America $ (856) $ (773) $ (2,192) $ (1,024)
Africa & Middle East - - - -
Asia 130 2 (78) (43)
United States (1,428) (4,135) (6,356) (7,805)
Europe - - - -
---------- ---------- ----------- -----------
Total $ (2,154) $(4,906) $ (8,626) $ (8,872)
========== ========== =========== ===========
June 30, December 31,
1999 1998
Identifiable assets by area:
Latin & South America $ 2,096 $ 11,487
Africa & Middle East - -
Asia 1,128 1,146
United States 38,075 50,568
Europe - -
----------- -----------
Total $ 41,299 $ 63,201
=========== ===========
</TABLE>
(The identifiable assets at June 30, 1999 exclude the assets of DTPI.
See Notes 9 and 10.)
8
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6. Foreign Currency Devaluation Costs:
The Company has certain overseas accounts receivable balances due
primarily from Brazilian customers. In addition, the Company has overseas
cash balances which can vary in value depending upon the timing of cash
receipts from customers in Brazil and the remittance of these balances back
to the United States.
Arising primarily from the devaluation of the Brazilian Real, the
Company incurred losses of $308,000 and $1,862,000 for the three months and
six months ended June 30, 1999, respectively, on cash balances, on certain
account receivable balances (where the Company negotiated a settlement of
its long-term receivable due to the currency devaluation) and on other
accounts receivable balances (where the customer partially compensated the
Company for the reduction in the value of the Brazilian Real). In
accordance with SFAS 52, the Company recognized these losses in the period
in which the exchange rate fluctuation occurred. At June 30, 1999, the
Company had cash balances of approximately $1,200,000 and account
receivable balances of approximately $860,000 that are subject to foreign
currency exposure risks.
7. Restructuring Costs:
As a result of the low overall level of revenues in 1999 and the foreign
currency losses incurred primarily in the quarter ended March 31, 1999, the
Company implemented cost reduction programs in both Quarter 1, 1999 and
Quarter 2, 1999 to improve the operating performance of the business. As a
result of these cost reduction programs, the Company has exited its Atlanta
facility, relocated its manufacturing operations back to California and
terminated the majority of its Atlanta workforce. Restructuring costs of
$425,000 and $1,042,000 (comprising exit costs of its Atlanta facility of
approximately $350,000, the write-off of assets in Brazil of approximately
$190,000 and severance costs of $502,000) were recognized in the three
months and six months ended June 30, 1999, respectively, comprising
severance costs associated with approximately 67 terminated employees, the
write-off of assets in the Company's Brazilian subsidiary and an accrual
for the estimated costs associated with exiting a lease commitment, which
has been determined to be in excess of current requirements. During the
quarter, severance payments of approximately $203,000 were made to
terminated employees. At June 30, 1999, the restructuring accrual balance
was approximately $610,000.
8. Short-Term Borrowings:
In connection with the Company's short-term borrowings under a secured
$10,000,000 revolving line of credit (the "loan agreement") with Wells
Fargo HSBC Trade Bank N.A. guaranteed by the Export-Import Bank of the
United States ("EXIM") under its Working Capital Guarantee Program
(collectively, the "Bank"), the Company was not in compliance with certain
covenants at December 31, 1998. In addition, the line
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of credit expired on April 1, 1999, with the borrowings at $9,050,000. In
June 1999, the Company reached an agreement with the bank whereby the bank
agreed to forbear from exercising its rights under the loan agreement
through August 31, 1999, in consideration for the paydown of the line of
credit by $2,250,000 (to $6,800,000) and the provision of additional
collateral to the bank.
To increase its short-term cash resources, in June 1999 the Company
completed a financing package which made funds of approximately $9,600,000
available to STM (see Note 9). The Company also expects to receive a
commitment letter for a new line of credit to replace the existing line of
credit; however, there can be no assurance that this new financing will be
consummated. In addition, the Company estimates it has in excess of
$4,000,000 of equity in its corporate headquarters, and the Company plans
to enter into a sale and leaseback arrangement in the near future to
liquidate this equity; however, there can be no assurance that this will be
consummated.
9. New Financing
On June 17, 1999, the Company and DTPI completed a new financing whereby
the Company sold shares in DTPI representing approximately 31% of the
voting stock of DTPI for approximately $7,100,000 to REMEC, Inc. (NASDAQ NM
Symbol: REMC) ("REMEC") and Pequot Private Equity Fund ("Pequot")
(comprising cash of $2,500,000, a reduction in accounts payable of
approximately $2,200,000 and an offset against future purchase of inventory
for approximately $2,400,000). DTPI also received loans in the amount of
$7,500,000 from REMEC and Pequot.
In connection with sale of the shares in DTPI, the Company granted DTPI
a concession of $1,600,000 against future purchases and agreed to a price
adjustment with REMEC whereby the purchase price of all future purchases of
committed product will be increased upon entering into a manufacturing
outsourcing agreement with REMEC.
The loans to DTPI from Pequot and REMEC are repayable after two years,
bear interest at 10% and are automatically converted into equity upon the
consumption of a future DTPI financing of at least $10,000,000.
From the proceeds of the loans received, DTPI repaid STM $2,500,000 of a
$10,000,000 note payable to STM. The remaining $7,500,000 of the note will
be payable to STM out of the proceeds of future DTPI financings.
10. Sales of Shares of DTPI
On June 17, 1999, the Company reduced its ownership in DTPI from 75% to
approximately 44% through the sale of shares in DTPI for approximately
$7,100,000 (see Note 9). In addition, on June 3, 1999, DTPI announced the
appointment of Claude Burgio as Chairman and Chief Executive Officer of
DTPI. As a result, STM will only
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own approximately 44% of the voting stock of DTPI, and will not control the
Board of Directors of DTPI.
The accompanying Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999, include the results of DTPI
through June 17, 1999, and the balance sheet at June 30, 1999, excludes the
assets and liabilities of DTPI.
For the year ended December 31, 1998, DTPI earned revenues of
$13,603,000 and incurred an operating loss of approximately $3,400,000 with
a net loss of approximately $4,400,000.
For the three months ended March 31, 1999, DTPI earned revenues of
$990,000 and incurred an operating loss of approximately $2,200,000 with a
net loss of approximately $2,500,000.
At March 31, 1999, the total assets of DTPI were approximately
$21,050,000.
Reference is made to Form 8-K dated July 2, 1999, filed with the SEC
which includes Pro-Forma Condensed Consolidated Financial Statements in
accordance with Article 11 of Regulation S-X.
Due to the losses incurred by DTPI from inception through June 17, 1999,
and the receipt of proceeds from the sale of shares in DTPI, STM's equity
investment in DTPI has been reduced to zero. In addition, STM has no
funding obligations to DTPI nor has STM guaranteed the obligations of DTPI.
Therefore, in accordance with Accounting Principles Board Opinion No. 18,
STM will not accrue any future losses of DTPI and will discontinue applying
the equity method of accounting for DTPI, until such time that DTPI is
profitable.
11. Gain on sale of assets
In June 1998, the Company completed the sale of its majority-owned
subsidiary, Telecom Multimedia Systems, Inc. ("TMSI") to Inter-Tel, Inc.
("Inter-Tel"), pursuant to which Inter-Tel agreed to purchase certain
assets and assume certain liabilities of TMSI for approximately $25,000,000
in cash. A gain of $9,950,000 (net costs and reserves considered
necessary) was realized and is included in the accompanying Condensed
Consolidated Statements of Operations for the three and six month periods
ended June 30, 1998.
In June 1999, upon the release of the final funds from escrow, the
Company reevaluated certain accruals that were established at the time of
the sale and concluded that certain of these accruals were no longer
required, resulting in an additional gain of approximately $3,000,000 which
has been classified as a gain on the sale of assets in the three and six
months ended June 30, 1999. At June 30, 1999, the Company has a
11
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remaining accrual of approximately $1,000,000 for probable exposures
associated with this transaction.
12. Termination of Merger Discussions with REMEC
On April 14, 1999, the Company announced that it had entered into a
letter of intent with REMEC which provided for the merger of the Company
with REMEC, or a subsidiary of REMEC. On May 17, 1999, the Company
announced that STM and REMEC had mutually agreed to terminate merger
discussions. (See Note 9.)
13. Reclassifications
Certain reclassifications have been made to the 1998 Condensed
Consolidated Financial Statements to conform to the 1999 presentation.
12
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Item 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
General:
- -------
STM Wireless, Inc. (the "Company" or "STM"), founded in 1982, is a
developer, manufacturer, supplier and service 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 primarily 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 have favorable growth dynamics. The Company's former
subsidiary, Direc-To-Phone International, Inc. ("DTPI"), provides broadband
Internet and low and medium density ("LMD") telephony services to customers in
developing markets and is a provider of fixed-station satellite-based LMD
telephony services with operations in Venezuela and Mexico. DTPI plans to
leverage its unique strength in LMD markets to provide IP-based data and voice
services to urban markets as well. The Company's customers include government
agencies, telephone companies, multi-location corporations and others.
On June 17, 1999, the Company sold shares of DTPI for approximately
$7,100,000 to REMEC, Inc. ("REMEC") and Pequot Private Equity Fund, Inc.
("Pequot") and DTPI received loans in the amount of $7,500,000 from REMEC and
Pequot. The loans to DTPI from REMEC and Pequot are repayable by DTPI after two
years, bear interest at 10% per annum and are automatically converted into
equity upon the consummation of a future DTPI financing of at least $10,000,000.
As a result of this transaction, STM reduced its ownership in DTPI from 75% to
approximately 44% of the voting stock of DTPI and has de-consolidated DTPI as of
June 17, 1999. Therefore, the results of operations include the results of DTPI
through June 17, 1999, and the balance sheet at June 30, 1999, excludes the
assets and liabilities of DTPI. (See Note 10 of the Notes to the Condensed
Consolidated Financial Statements.)
Results of Operations:
- ---------------------
Total revenues were $5,982,000 and $9,073,000, respectively, for the three
and six month periods ended June 30, 1999, compared to $9,108,000 and
$16,057,000, respectively, for the corresponding periods in 1998, representing
decreases of 34% and 43%, respectively, over the prior year periods. Product
revenues were $5,517,000 and $8,143,000, respectively, for the three and six
month periods ended June 30, 1999, compared to $8,633,000 and $14,953,000,
respectively, for the corresponding periods in 1998, representing decreases of
36% and 46%, respectively, over the prior year periods. Service revenues were
$465,000 and $930,000, respectively for the three and six months periods ended
June 30, 1999, compared to $475,000
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and $1,104,000 respectively, for the corresponding periods of 199, representing
decreases of 2% and 16% respectively, over the prior year periods.
Excluding DTPI (in which the Company sold its controlling interest in
effective June 17, 1999) from both 1999 and 1998, in the three months ended June
30, 1999, the percentage decrease in revenues would have been 26% and 30% for
total revenue and product revenues, respectively, while service revenues would
have increased by 271%, and in the six months ended June 30, 1999, the
percentage decreases would have been 44% and 49% for total revenue and product
revenues, while services revenues would have increased by 120%. The increase in
service revenues reflect the higher service content of certain 1999 projects and
increased revenue earned by the Company's Asian service center in 1999.
The decline in product revenue in the quarter ended June 30, 1999, compared
to June 30, 1998 reflects the absence of revenue primarily in Africa and the
Middle East, which are new markets for the Company's products and where the
Company is continuing to develop its customer base. For the six months ended
June 30, 1999, the decline in revenues reflects the continuing weakness in the
developing regions of Asia and Latin America, as well as a shortfall in revenue
in Africa. The economic uncertainty in these regions continues to impair the
sales cycle for the Company's products. Revenue opportunities were also
adversely impacted by the currency devaluation that occurred in Brazil in the
first quarter of 1999. As part of its restructuring of the operations of the
Company, management has reorganized its sales activities through personnel
changes and there is more direct involvement by the Chief Executive Officer of
the Company in the sales activities. Sales efforts are focused on specific
customers and specific known and identified projects, however, there can be no
assurance that such efforts will generate any revenue or any specific level of
revenues.
The gross profit percentage earned for the three months ended June 30,
1999, was 31% in 1999 compared to 24% in the corresponding period of 1998. For
the six months ended June 30, 1999, the gross profit was 5.6% compared to 19.3%
for the corresponding period of 1998. Excluding DTPI (in which the Company sold
its controlling interest in on June 17, 1999) the gross profit percentages would
have been 42% and 29% for the three and six months ended June 30, 1999, compared
to 32% and 25% for the three and six months ended June 30, 1998, respectively.
The negative impact of DTPI on the consolidated gross profit percentages
reflects a lower level of DTPI revenues in 1999 compared to 1998, fixed costs
that did not decline in proportion to the reduction in revenues and accelerated
depreciation of equipment due to uncertainty as to the level of revenues (if
any) that will be generated in the future from the equipment. The improved
gross profit percentages for STM excluding DTPI, in quarter 2, 1999, reflects
improved margins earned on the Company's new lower cost products and higher
gross profits negotiated on certain orders.
Selling, general and administrative (SG&A) expenses for the three months
ended June 30, 1999, decreased to $2,356,000 (39% of revenue) from $3,161,000
(35% of revenue) for the corresponding period of the prior year. For the six
months ended June 30, 1999, such expenses decreased to $5,366,000 (59% of
revenue) from $6,029,000 (37% of revenue) for the corresponding period of the
prior year. Excluding DTPI (which the Company sold its controlling
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interest in on June 17, 1999) SG&A would have decreased to $1,815,000 (30% of
revenue) from $2,379,000 (29% of revenue) for the three months ended June 30,
1999, and would have decreased to $3,856,000 (47% of revenues) from 4,588,000
(31% of revenues) for the six months ended June 30, 1999. Excluding DTPI, the
reduction in SG&A in 1999 compared to 1998 in dollar terms reflects reduced
costs primarily in the second quarter of 1999 arising from the cost reduction
programs implemented by the Company in the first and second quarters of 1999.
The increase in SG&A as a percentage of sales in 1999 compared to 1998 reflects
the relatively fixed nature of certain SG&A costs which did not decline in line
with the reduction in revenues.
Research and development (R&D) expenses for the three-month period ended
June 30, 1999 decreased to $1,208,000 (20% of revenues) from $2,906,000 (32% of
revenues) in the corresponding period of 1998. For the six month period ended
June 30, 1999, such expenses decreased to $2,724,000 (30% of revenues) from
$4,964,000 (31% of revenues) in the corresponding period of 1998. There are no
R&D expenses associated with DTPI. The decrease in R&D expenses in 1999
compared to 1998 related to a one-time charge of approximately $1,400,000 in the
three months ended June 30, 1998, for a contractually committed R&D project with
no discernable future benefit, the absence in 1999 of any R&D expenses
associated with TMSI (the assets of which were sold in June 1998) and cost
reductions in 1999 due to completion of the development of the Company's new,
low cost VSAT products.
The restructuring costs of $425,000 and $1,042,000 recognized in the three
and six months ended June 30, 1999, respectively, comprised severance costs
associated with approximately 67 terminated employees, the write-off of certain
assets in the Company's Brazilian subsidiary and an accrual for the estimated
costs associated with exiting a lease commitment, which has been determined to
be in excess of current requirements.
The move and relocation charges of $980,000 in 1998 primarily comprised
severance, relocation and move costs incurred in connection with the
consolidation of the Company's Network Systems Division in Georgia.
The foreign currency devaluation costs of $308,000 and $1,862,000,
recognized in the three and six months ended June 30, 1999, respectively, arose
primarily from the devaluation of the Brazilian Real and comprised losses on
cash balances, on certain account receivable balances (where the Company has
negotiated a settlement of its long-term receivable due to the currency
devaluation) and on other accounts receivable balances (where the customer has
partially compensated the Company for the reduction in the value of the
Brazilian Real).
The gain on sale of assets of $9,950,000 for the three and six months ended
June 30, 1998, represented a gain (net of costs and reserves considered
necessary) on the sale of substantially all the assets of TMSI. In June 1999,
upon the release of the final funds from escrow, the Company re-evaluated
certain accruals that were established at the time of the sale, resulting in the
recognition of $2,964,000 as an additional gain on the sale of assets of TMSI in
the three and six months ended June 30, 1999.
15
<PAGE>
Interest income increased by $32,000 to $251,000 for the three month period
ended June 30, 1999 from $219,000 for the three month period ended June 30,
1998. Interest income increased by $159,000 to $517,000 for the six month
period ended June 30, 1999, from $358,000 for the six month period ended June
30, 1998. Excluding DTPI (which the Company sold its controlling interest in on
June 17, 1999) interest income would have been $123,000 and $276,000 for the
three and six months ended June 30, 1999, respectively, compared with $182,000
and $278,000 for the three and six months ended June 30, 1998, respectively.
Interest expense decreased $21,000 to $305,000 for the three month period
ended June 30, 1999, from $326,000 for the three month period ended June 30,
1998. Interest expense increased by $187,000 to $816,000 for the six month
period ended June 30, 1999, from $629,000 for the six month period ended June
30, 1998. There is no external interest expense associated with DTPI. The
increase in interest expense in the six months ended June 30, 1999, compared to
the corresponding period of 1998 primarily related to the Company's line of
credit in Brazil.
The absence of a tax provision in 1999 is due to continued losses by the
Company. The tax provision of $244,000 in 1998 represented the Company's
estimated tax provision on its income for the six months ended June 30, 1999.
The minority interest charge in 1999 relates to accrued dividends on the
mandatory redeemable shares issued in March 1998 by DTPI. In 1998, the minority
interest charge represented the accrual dividends on the mandatory redeemable
shares of DTPI and a minority interest credit associated with TMSI through the
date of sale of the assets of TMSI.
Liquidity and Capital Resources:
- -------------------------------
On June 17, 1999, the Company and DTPI completed a new financing whereby
the Company sold shares in DTPI representing approximately 31% of the voting
stock of DTPI for approximately $7,100,000 (comprising cash of $2,500,000, a
reduction in accounts payable of approximately $2,200,000 and an offset against
future purchase of inventory for approximately $2,400,000) to REMEC and Pequot
and DTPI received loans in the amount of $7,500,000 from REMEC and Pequot.
In connection with the sale of the shares in DTPI, the Company granted DTPI
a concession of $1,600,000 against future purchases and agreed to a price
adjustment with REMEC whereby the purchase price of all future purchases of
committed product will be increased upon entering into a manufacturing
outsourcing agreement with REMEC.
The loans to DTPI from REMEC and Pequot are repayable by DTPI after two
years, bear interest at 10% and are automatically converted into equity upon the
consummation of a financing of at least $10,000,000.
From the proceeds of the loans, DTPI repaid STM $2,500,000 of a $10,000,000
note payable to STM. The remaining $7,500,000 of the note will be payable to
STM out of the proceeds of future DTPI financings.
16
<PAGE>
In connection with the Company's short-term borrowings under a secured
$10,000,000 revolving line of credit (the "loan agreement") with Wells Fargo
HSBC Trade Bank N.A. guaranteed by the Export-Import Bank of the United States
("EXIM") under its Working Capital Guarantee Program (collectively, the "Bank"),
the Company was not in compliance with certain covenants at December 31, 1998.
In addition, the line of credit expired on April 1, 1999, with the borrowings at
$9,050,000.
In June 1999, the Company reached an agreement with the bank whereby the
bank agreed to forbear from exercising its rights under the loan agreement
through August 31, 1999, in consideration for the paydown of the line of credit
by $2,250,000 (to $6,800,000) and the provision of additional collateral to the
bank.
The Company expects to receive a commitment letter for a new line of credit
to replace its existing obligations to the Bank. However, there
can be no assurance that this financing will be consummated. The Company also
estimates it has in excess of $4,000,000 of equity in its corporate
headquarters, and the Company plans to enter into a sale and leaseback
arrangement in the near future to liquidate this equity. However, there can be
no assurance that such transactions will be consummated.
For the six months ended June 30, 1999, the Company had negative cash flows
from operating activities of $6,437,000. The negative cash flows are primarily
due to continued operating losses and the paydown of accounts payable partially
offset by a reduction in accounts receivable and prepaid expenses. For the six
months ended June 30, 1998, the negative cash flow from operations reflected
losses for operations for the period, increased investment in inventory,
accounts receivable and an equity contribution of inventory offset partially
offset by an increase in accounts payable and customer deposits.
Cash generated by investing activities in the six months ended June 30,
1999 totaled $5,153,000 comprising $5,000,000 from the sale of shares in DTPI,
a decrease in short-term investments, an increase in restricted assets partially
offset by the acquisition of plant property and equipment.
Cash used in financing activities during the six months ended June 30,
1999, totaled $1,533,000, comprising a repayment of short-term borrowings of
$2,250,000 and long-term debt of $163,000 partially offset by a decrease in
long-term receivables of $790,000 and proceeds from long-term leases of $90,000.
Overall, the Company's cash and cash equivalents totaled $7,078,000 at June
30, 1999, as compared to $11,016,000 at December 31, 1998.
17
<PAGE>
New Accounting Standards:
- ------------------------
In June 1998, the Financial Accounting Standards Board issued a statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
137, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Adoption of SFAS 133 is not expected to
have a material impact on the Company's consolidated financial position, results
of operations or liquidity.
Year 2000:
- ---------
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because such computer programs would not properly recognize a year that begins
with "20" instead of "19". This, in turn, could result in major system failures
or miscalculations, and is generally referred to as the "Year 2000 issue". The
Company has formulated a Year 2000 Plan to address the Company's Year 2000
issues and has created a Year 2000 Task Force to implement the Year 2000 Plan.
The Company's Year 2000 Plan has seven phases, which are as follows: 1)
Phase 1 - Organization Awareness, which entails educating employees, senior
management and the board of directors about the Y2k problem and how to deal with
it; 2) Phase 2 - Inventory and Supply Management, which entails taking a
complete inventory of systems and their relative priority to continuing
operations and implementing a supply management process for top vendors and
critical components; 3) Phase 3 - Assessment, which entails assessing systems
and their Y2k compliance status; 4) Phase 4 - Planning, which entails preparing
an estimate of costs and identifying potential solutions and their cost in
dollars, schedule and ripple effect; 5) Phase 5 - Renovation, which entails
implementation of fixes; 6) Phase 6 - Validation, which entails testing the
fixes for compliance; and 7) Phase 7 - Contingency Planning, which entails
preparing for rollover staffing, inventory adjustment and other actions which
would mitigate the effect of a Y2k failure.
The Company's Year 2000 Plan will be applied in five different areas of
coverage: a) internal systems; b) current products; c) vendors; d) existing
customers; and e) key business partners.
Internal Systems - The Company's internal business systems and PC
applications will be a primary area of focus. The Company is currently
evaluating its software applications, including, but not limited to, its
business systems software, personal computers, computerized manufacturing
equipment and embedded chips to identify any Year 2000 issues that could
significantly disrupt the Company's operations.
The Company has completed the Inventory and Assessment phase of
substantially all critical systems. The Planning, Renovation and Validation
phases are scheduled to be completed by October 31, 1999. With the exception of
a scheduled upgrade to the Company's Infoflow
18
<PAGE>
business management software system, upgrades primarily consist of implementing
free bug patches or planned software upgrades to current versions. The Company
expects to be Year 2000 compliant on all critical systems which rely on the
calendar year before December 31, 1999. Some non-critical systems may not be
addressed until after January 2000, however, the Company believes such systems
will not disrupt the Company's operations significantly.
Current Products - The Company's certification group has conducted
evaluations of its current products to determine if they are Year 2000
compliant. The Company does not currently believe that there are any material
Year 2000 defects in its products. With respect to components in the Company's
products that are manufactured by third parties, the Company has completed the
Inventory and Assessment phase and does not currently believe that there are any
material Year 2000 defects.
Vendors - The Company has completed the Inventory phase and is currently in
the Assessment phase with respect to the Year 2000 status of critical suppliers.
The Company has contacted the top 99% of critical suppliers, and has completed
over 75% of the Assessment phase with no serious risks discovered. The Company
does not currently believe that any Year 2000 compliance issues related to its
suppliers will result in a material adverse effect on the business operations or
financial performance of the Company.
Existing Customers - With respect to products that have been shipped to
existing customers, the Company has identified certain problems that will
require upgrades to operational networks to make them Year 2000 compliant. The
Company has contacted substantially all of its customers to notify them of such
problems and expects to complete all upgrades requested to date by December 31,
1999. The Company currently estimates that the total cost of implementing such
upgrades will not exceed $1,000,000 and will likely be offset by service fees
charged in connection with completing such upgrades. The Company believes that
a small portion of the upgrades will be provided free of charge as part of the
warranty coverage or software maintenance agreements on the products being
upgraded.
Key Business Partners - The Company has completed the Inventory phase with
respect to its key business partners, and currently is in the Assessment phase
with over 75% completion to date. The Company has not identified any areas
where the Company is vulnerable to those third parties' failure to remedy their
own Year 2000 issues.
Contingency Plan - A contingency plan has not yet been developed for
dealing with the most reasonably likely worst case scenario with respect to the
Company's Year 2000 compliance, and such scenario has not yet been clearly
identified. It is impossible to fully assess potential consequences in the event
service interruptions from suppliers occur or in the event that there are
disruptions in such infrastructure areas as utilities, communications,
transportation, banking and government. Assuming no major public infrastructure
service disruption occurs, the Company believes that it will be able to manage
its Year 2000 transition without a material effect on its results of operations
or financial condition. The Company has not completed contingency plans in the
event that a disruption in the public infrastructure does occur.
19
<PAGE>
The Company currently estimates that the cost of implementing its Year 2000
Plan will not exceed $1,000,000 (including the cost of upgrading the operational
networks of current customers). Costs incurred to date have been less than
$200,000.
The Company anticipates that the Year 2000 issue will not have a material
adverse effect on the financial position or results of operations of the
Company. There can be no assurance, however, that the systems of other
companies or governmental entities, on which the Company relies for supplies,
cash payments, and future business, will be timely converted, or that a failure
to convert by another company or the governmental entities, would not have a
material adverse effect on the financial position or results of operations of
the Company. If third party service providers and vendors, due to the Year 2000
issue, fail to provide the Company with components or materials which are
necessary to manufacture its products, with sufficient electrical power and
other utilities to sustain its manufacturing process, or with adequate, reliable
means of transporting its products to its customers worldwide, then any such
failure could have a material adverse effect on the Company's ability to conduct
business, as well as the Company's financial position and results of operations.
20
<PAGE>
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
To avoid the risk of fluctuating exchange rates associated with
international sales, the Company conducts most international sales in United
States currency. However, the Company has generated, and expects to continue
generating, revenues in Brazil based in the local currency of Brazil. While the
contracts relating to such arrangements contain provisions that call for
payments to be adjusted to take into account fluctuations in foreign currency
exchange rates, the Company's customers in Brazil have expressed an
unwillingness to adjust contract amounts to fully reflect the exchange rate
fluctuations. Brazilian counsel has advised the Company that there is
uncertainty as to the enforceability of provisions which tie payments to foreign
currency rates. The Company, therefore, has negotiated and is negotiating
settlements of its receivables from its Brazilian customers. The Company's
currency exposure in Brazil is also exacerbated by the Brazilian exchange
control rules, which limit the Company's ability to repatriate its Brazilian
currency. As of June 30, 1999, the Company's cash assets included approximately
$1,200,000 in Brazil (based on the exchange rates as of such date). While the
Company is in the process of repatriating such funds, there can be no assurance
that such process will be completed in a timely fashion or that the Company will
not suffer additional losses as a result of the Brazilian currency fluctuation.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment rate and credit risks by monitoring credit
quality standards and maturity dates of investments. The Company's exposure to
market risk is not expected to be material. The Company does not use derivative
financial instruments in its investment portfolio.
Risk Factors and Forward Looking Statements:
- -------------------------------------------
THIS DOCUMENT CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE RISKS AND
UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE FORWARD
LOOKING STATEMENTS, ORALLY OR IN WRITING. THE WORDS "ESTIMATE", "PROJECT",
"POTENTIAL", "INTENDED", "EXPECT", "BELIEVE" AND SIMILAR EXPRESSIONS OR WORDS
ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED OR SUGGESTED IN ANY FORWARD LOOKING STATEMENTS
AS A RESULT OF A WIDE VARIETY OF FACTORS AND CONDITIONS, AMONG OTHERS, LACK OF
LIQUIDITY AND WORKING CAPITAL, INABILITY TO RAISE DEBT OR EQUITY FINANCING, 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, THE EFFECTS OF
THE YEAR 2000 ISSUES, POLITICAL AND ECONOMIC RISKS INVOLVED IN FOREIGN MARKETS
AND FOREIGN CURRENCIES AND THE TIMING OF OPERATING AND OTHER EXPENDITURES.
REFERENCE IS HEREBY MADE TO "RISK FACTORS" IN THE COMPANY'S 10-K FOR THE YEAR
ENDED DECEMBER 31, 1998.
BECAUSE OF THESE AND OTHER FACTORS THAT MAY AFFECT THE COMPANY'S OPERATING
RESULTS, PAST FINANCIAL PERFORMANCE SHOULD NOT BE CONSIDERED
21
<PAGE>
AN INDICATOR OF FUTURE PERFORMANCE, AND INVESTORS SHOULD NOT USE HISTORICAL
TRENDS TO ANTICIPATE RESULTS OR TRENDS IN FUTURE PERIODS.
22
<PAGE>
PART II - OTHER INFORMATION
Item 1 - 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 June 30,
1999, 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.
However, see Management's Discussion and Analysis of Results of Operations and
Financial Condition for a discussion of the status of the Company's relationship
with its Bank.
Item 3 - Defaults Upon Senior Securities
See Management's Discussion and Analyses of Results of Operations and
Financial Condition for a description of the Company's defaults under its bank
line of credit.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on April 9, 1999, in which
it released its fourth quarter and year-end results for fiscal
1998. The Company filed a report on Form 8-K on April 19, 1999, in
which the Company announced that it had entered into a letter of
intent to merge with REMEC, Inc. The letter of intent was
subsequently terminated.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STM Wireless, Inc.
Date: August 19, 1999 By: JOSEPH WALLACE
-------------------------------
Joseph Wallace
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
24
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,078
<SECURITIES> 752
<RECEIVABLES> 9,358
<ALLOWANCES> 0
<INVENTORY> 12,164
<CURRENT-ASSETS> 31,969
<PP&E> 8,755
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,299
<CURRENT-LIABILITIES> 22,236
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 13,677
<TOTAL-LIABILITY-AND-EQUITY> 41,299
<SALES> 5,982
<TOTAL-REVENUES> 5,982
<CGS> 4,147
<TOTAL-COSTS> 4,147
<OTHER-EXPENSES> 3,989
<LOSS-PROVISION> (308)
<INTEREST-EXPENSE> (305)
<INCOME-PRETAX> 443
<INCOME-TAX> 0
<INCOME-CONTINUING> 368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 368
<EPS-BASIC> 0.05
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