<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 March 31, 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
(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 May 11, 1999, there were 7,042,204 shares of Common Stock, $0.001 par
value per share, outstanding.
Page 1 of 18
<PAGE>
STM Wireless, Inc.
Index
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998 3
Condensed Consolidated Statements of Operations for the three
month periods ended March 31, 1999 and March 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the three
month periods ended March 31, 1999 and March 31, 1998 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
Part II. Other Information 17
Item 1. Legal Proceedings
Item 3. Defaults Upon Senior Securities
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
STM WIRELESS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1999 1998
------------------ -------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 8,870 $ 11,016
Short-term investments 612 1,106
Restricted cash and short-term investments 3,258 2,224
Accounts receivable, net 10,790 17,016
Inventories, net 14,001 13,108
Current portion of long-term receivables 209 702
Prepaid expenses and other current assets 306 1,623
------------------- -------------------
Total current assets 38,046 46,795
Property & equipment, net 10,433 11,056
Long-term receivables - 788
Equity and other investments 4,978 4,151
Other assets 402 411
------------------- -------------------
$ 53,859 $ 63,201
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 10,650 $ 10,650
Current portion of long-term debt 386 384
Accounts payable 9,075 9,582
Accrued liabilities 7,423 7,256
Customer deposits and deferred revenue 1,248 1,910
Income taxes payable 950 1,000
------------------- -------------------
Total current liabilities 29,732 30,782
Long-term debt 4,327 4,306
Redeemable minority interest 6,505 6,355
Subsequent event
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 March 31, 1999 and December 31, 1998 7 7
Additional paid in capital 38,140 38,140
Accumulated deficit (24,852) (16,389)
------------------- -------------------
Total Stockholders' equity 13,295 21,758
------------------- -------------------
$ 53,859 $63,201
=================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
STM WIRELESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months
ended March 31,
1999 1998
--------- --------
<S> <C> <C>
Revenues:
Products $ 2,626 $ 6,320
Services 465 629
--------- --------
Total revenues 3,091 6,949
Cost of revenues:
Products 3,334 5,271
Services 1,086 719
--------- --------
Total cost of revenues 4,420 5,990
Gross profit (loss) (1,329) 959
Operating costs:
Selling, general & administrative expenses 3,010 2,868
Research & development costs 1,516 2,056
Restructuring costs 617 -
--------- --------
Total operating costs 5,143 4,924
Operating loss (6,472) (3,965)
Other income (expense) 67 (54)
Foreign currency devaluation costs (1,554) -
Interest income 266 139
Interest expense (511) (304)
--------- --------
Loss from operations, before minority
interest and income taxes (8,204) (4,184)
Income tax expense - -
--------- --------
Loss from operations before minority interest (8,204) (4,184)
Minority interest (expense) benefit (150) 113
Equity in net loss of unconsolidated affiliate (109) -
--------- --------
Net loss $(8,463) $(4,071)
========= ========
Net loss per share:
Basic $(1.20) $(0.62)
-----
Diluted $(1.20) $(0.62)
-------
Common shares used in computing
per share amounts:
Basic 7,042 6,619
----- ===== =====
Diluted 7,042 6,619
------- ===== =====
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
STM WIRELESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 1998
-------------- ---------------
<S> <C> <C>
Net cash provided by used in operations $ 96 $(8,707)
Cash flows from investing activities:
Net decrease in short-term investments 494 2,300
Increase in restricted assets (1,034) -
Acquisition of property and equipment (164) (1,567)
Equity and other investments (827) -
-------------- ---------------
Net cash provided by (used in) investing activities (1,531) 733
-------------- ---------------
Cash flows from financing activities:
Net decrease in long-term receivables - -
Proceeds from issuance of common stock - 4,039
Proceeds from issuance of preferred stock in subsidiary - 5,905
Net increase in short-term borrowings - 3,700
Increase (repayment) of long-term debt 23 (69)
-------------- ---------------
Net cash provided by financing activities 23 13,575
-------------- ---------------
Effect of exchange rate changes on cash and cash equivalents (734) -
Net increase (decrease) in cash and cash equivalents (2,146) 5,601
Cash and cash equivalents at beginning of period 11,016 4,095
-------------- ---------------
Cash and cash equivalents at end of period $ 8,870 $ 9,696
============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
STM WIRELESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 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.
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:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Raw materials $ 6,890 $ 7,423
Work in process 2,058 823
Finished goods 5,053 4,862
---------- ------------
$14,001 $13,108
========== ============
</TABLE>
3. Net Loss per Share:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 1998
---------- ------------
<S> <C> <C>
Net loss $(8,463) $(4,071)
Basic:
------
Weighted average common shares outstanding
used in computing basic net loss per share 7,042 6,619
---------- ------------
Basic net loss per share $ (1.20) (0.62)
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Diluted:
--------
<S> <C> <C>
Weighted average common shares outstanding 7,042 6,619
Dilutive options outstanding - -
Shares used in computing diluted net loss per share 7,042 6,619
Diluted net loss per share $ (1.20) $ (0.62)
</TABLE>
Options to purchase 1,392,598 and 1,086,273 shares of common stock were
outstanding at March 31, 1999 and December 31, 1998, respectively, and were
excluded from the computation of diluted net loss per share as the effect
would be antidilutive.
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 is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. 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.
<TABLE>
<CAPTION>
Revenues by geographic area: Three Months
Ended March 31,
1999 1998
---------------- ----------------
<S> <C> <C>
(dollars in thousands)
Total:
Latin & South America $ 1,365 $ 1,597
Africa & Middle East 611 975
Asia 890 3,350
United States 150 444
Europe 75 583
------- -------
Total sales $ 3,091 $ 6,949
======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months
Ended March 31,
Products: 1999 1998
---------------- ----------------
<S> <C> <C>
Latin & South America $ 1,232 $ 1,172
Africa & Middle East 574 975
Asia 737 3,350
United States 67 240
Europe 16 583
------- -------
Total $ 2,626 $ 6,320
======= =======
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended March 31,
Services: 1999 1998
---------------- ----------------
<S> <C> <C>
Latin & South America $ 133 $ 425
Africa & Middle East 37 -
Asia 153 -
United States 83 204
Europe 59 -
------- -------
Total $ 465 $ 629
======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months
Ended March 31,
Operating loss by geographic area 1999 1998
---------------- ----------------
<S> <C> <C>
Latin & South America $(1,336) $ (251)
Africa & Middle East - -
Asia (208) (44)
United States (4,928) (3,670)
Europe - -
------- -------
Total $(6,472) $(3,965)
======= =======
March 31, December 31,
Identifiable assets by geographic area 1999 1998
---------------- ----------------
<S> <C> <C>
Latin & South America $10,650 $11,487
Africa & Middle East - -
Asia 978 1,146
United States 42,231 50,568
Europe - -
------- -------
Total $53,859 $63,201
======= =======
</TABLE>
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 $1,554,000 in the quarter ended March 31, 1999,
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 quarter ended March 31, 1999. At March 31, 1999, the Company
had cash balances of approximately $2,300,000 and account receivable
balances of $1,700,000 that are subject to foreign currency exposure risks.
8
<PAGE>
7. Restructuring Costs:
As a result of the low level of revenues and the foreign currency
losses incurred in the quarter ended March 31, 1999, the Company has
implemented a cost reduction program to improve the operating performance
of the business. A restructuring charge of $617,000 was recognized in the
quarter ended March 31, 1999, comprising severance costs associated with
approximately 30 terminated employees, the write-off of assets in the
Company's Brazilian subsidiary and an accrual for the estimated costs
associated with lease commitments, a certain portion of which has been
determined to be in excess of current requirements. During the quarter
severance payments of approximately $127,000 were made to terminated
employees. At March 31, 1999, the restructuring accrual balance was
approximately $310,000.
8. Subsequent Events:
Short Term Borrowings
---------------------
In connection with the Company's short-term borrowings under a
secured $10,000,000 revolving line of credit 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 current borrowings at $9,050,000. The Company received a
demand letter from the Bank, in which the Bank threatened to pursue all
available alternatives, including commencing foreclosure proceedings on its
collateral, if all outstanding amounts were not paid by the Company by May
17, 1999. The Company is currently in discussions with the Bank and expects
to make suitable arrangements with the Bank. It is expected that an
agreement with the Bank will require a permanent pay down of a portion of
the line and may require the Company to give the Bank, amongst other
things, additional collateral including a second deed of trust on the
Company's corporate headquarters, guarantees from all the Company's
domestic and foreign subsidiaries (except DTPI), a pledge of the note
receivable from DTPI and an assignment of the Company's patents, trademarks
and leasehold interests. The agreement may also reduce the advance rates
against inventory and accounts receivable balances and may require a
permanent paydown of the line of credit should the company sell its
corporate headquarters or should DTPI repay the note to STM out of the
proceeds of future financings.
There can be no assurance that the Company will reach agreement with
the Bank, nor, that should the company reach agreement with the Bank, that
there will not be another event of default during the term of the
agreement. Additionally, there can be no assurance that the company will
have sufficient eligible foreign orders, inventory and accounts receivable
balances to enable the Company to continue to borrow at its current level.
Should the Company not reach agreement with the bank or should the Company
experience a future event of default or should the Company not have
sufficient eligibility to continue to borrow at its existing levels, the
Company may be required to paydown either all of a portion of the line of
credit and dispose of certain assets to satisfy obligations to the bank.
In order for the Company to meet its working capital requirements,
the Company may be required to seek additional funds through debt or equity
financings in order to provide sufficient working capital for the Company.
The Company believes that such alternative sources of financing are
available to meet its anticipated cash requirements in the next twelve
months. The issuance of additional equity securities by the Company could
result in substantial dilution to the stockholders. If the Company incurs
additional debt, the Company's increased leverage may affect its ability to
raise capital in the future and may limit its flexibility to adapt to
changing market conditions.
Termination of Merger Discussions with REMEC
--------------------------------------------
On April 14, 1999, the Company announced that it had entered into a
letter of intent with REMEC, Inc. (NASDAQ NM Symbol: REMC) ("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.
Issuance of Shares
------------------
On May 17, 1999, the Company reached an agreement to dispose of
shares of DTPI for approximately $7,100,000 to REMEC and Pequot Private
Equity Fund, Inc. ("Pequot"). In addition, DTPI received loan commitments
in the amount of $7,500,000 from REMEC and Pequot. The loans to DTPI are
repayable after 2 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.
Concurrently with the closing of the above transactions, all
categories of Preferred Stock of DTPI will be amended to be identical, and
the Company will enter into a manufacturing agreement with REMEC.
9
<PAGE>
Item 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
General:
- -------
STM Wireless, Inc. (the "Company" or "STM"), founded in 1982, is a
developer, manufacturer, 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 subsidiary,
Direc-To-Phone international, inc. ("DTPI"), provides fixed telephony services
in areas of lower population density in international markets. The Company's
customers include government agencies, telephone companies, multi-location
corporations and others.
Issuance of Shares
- ------------------
On May 17, 1999, the Company reached an agreement to dispose of shares of
DTPI for approximately $7,100,000 to Remec, Inc. ("Remec") and Pequot Private
Equity Fund, Inc. ("Pequot"). In addition, DTPI received loan commitments in the
amount of $7,500,000 from Remec and Pequot. The loans to DTPI are repayable
after 2 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.
Concurrently with the closing of the above transactions, all categories of
Preferred Stock of DTPI will be amended to be identical, and the Company will
enter into a manufacturing agreement with REMEC.
Results of Operations:
- ---------------------
Total revenues were $3,091,000 for the three-month period ended March 31,
1999, compared to $6,949,000 for the corresponding period of 1998, a decrease of
56%. Product revenues were $2,626,000 for the three-month period ended March
31, 1999, compared to $6,320,000 for the corresponding period in 1998, a
decrease of 58%. Service revenues were $465,000 for the three-month period
ended March 31, 1999, compared to $629,000 for the corresponding period of 1998,
a decrease of 26%. The decline in revenues reflects the continuing weakness in
the developing regions of Asia and Latin America that historically have
comprised a large segment of the company's market base. The economic
uncertainty in these regions is continuing 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.
Management 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 total negative gross profit margin in the three-month period ended
March 31, 1999 was 43% compared to positive 14% for the comparable period in
1998. Product gross profit
10
<PAGE>
margin in the three-month period ended March 31, 1999 was negative 27% compared
to positive 17% for the comparable period in 1998. The negative product gross
profit margin reflects low margins earned on sales to customers in the quarter
due to the mix of products and the geographical area of sales, a certain level
of relatively fixed costs associated with program management and customer
service that did not decline in line with the decline in revenues and costs due
to a lower than planned throughput in the factory in the quarter due to a lower
than expected level of sales orders. The negative service gross profit margin
reflects a relatively fixed level of costs associated with the provision of the
DTPI services and accelerated depreciation of certain revenue generating gateway
equipment due to the uncertainty as to the level of revenues (if any) that will
be generated in the future from this equipment, as a result of the continued
financial difficulties being experienced by DTPI'S Mexican partner.
Selling, general and administrative expenses (SG&A) for the three-month
period ended March 31, 1999 increased by $142,000 to $3,010,000 or 97% of
revenues, from $2,868,000, or 41% of revenues, in the corresponding period of
1998. The increase in SG&A compared to the three-months ended March 31, 1998
was primarily attributable to increased selling and marketing costs associated
with broadening the Company's sales activities and increased costs associated
with the company's manufacturing and operations facility in Georgia.
Research and development (R&D) expenses for the three-month period ended
March 31, 1999 decreased to $1,516,000, or 49% of total revenues, from
$2,056,000, or 30% of total revenues, in the corresponding period of 1998. The
decrease in R&D costs compared to the corresponding period of the prior year
reflects the June 1998 disposal of the business of TMSI, the Company's former
voice over IP subsidiary.
The restructuring costs of $617,000 recognized in the three months ended
March 31, 1999, comprised severance costs associated with approximately 30
terminated employees, the write-off of assets in the Company's Brazilian
subsidiary and an accrual for the estimated cost associated with lease
commitments, a certain portion of which has been determined to be in excess of
current requirements.
The foreign currency devaluation costs of $1,554,000 recognized in the
three months ended March 31, 1999 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).
Interest income increased by $127,000 to $266,000 for the three-month
period ended March 31, 1999, over the three-month period ended March 31, 1998.
The increase in interest income was primarily due to higher cash deposits in the
three months ended March 31, 1999 compared to the corresponding period of 1998
and interest earned on advances to the Company's Venezuela equity affiliate
Altair (which is accounted for on an equity basis).
Interest expense increased by $207,000 to $511,000 for the three-month
period ended March 31, 1999, over the three-month period ended March 31, 1998.
The increase was primarily due to a higher average level of short-term
borrowings in 1999 compared to 1998 and interest costs associated with the
Company's credit facility in Brazil.
The absence of a tax provision is due to continued losses by the Company.
The minority interest charge in 1999 relates to accrued dividends on the
mandatory redeemable shares issued in March 1998 by DTPI.
Liquidity and Capital Resources:
- -------------------------------
In connection with the award of the long-term service contract in
Venezuela, and due to the capital intensive nature of this contract, and other
contracts that DTPI may be awarded in the future, the Company continues to
review financing alternatives to enable it to pursue these business
opportunities in the most beneficial manner. However, there can be no assurance
that
11
<PAGE>
such financing will be available, or that such financing will be available
on terms acceptable to the Company.
In connection with the Company's short-term borrowings under a secured
$10,000,000 revolving line of credit 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 current borrowings at
$9,050,000. The Company received a demand letter from the Bank, in which the
Bank threatened to pursue all available alternatives, including commencing
foreclosure proceedings on its collateral, if all outstanding amounts were not
paid by the Company by May 17, 1999. The Company is currently in discussions
with the Bank and expects to make suitable arrangements with the Bank. It is
expected that an agreement with the Bank will require a permanent pay down of a
portion of the line and will require the Company to give the Bank, amongst other
things, additional collateral including a second deed of trust on the Company's
corporate headquarters, guarantees from all the Company's domestic and foreign
subsidiaries (except DTPI), a pledge of the note receivable from DTPI and an
assignment of the Company's patents, trademarks and leasehold interests. The
agreement may also reduce the advance rates against inventory and accounts
receivable balances and may require a permanent paydown of the line of credit
should the company sell its corporate headquarters or should DTPI repay the note
to STM out of the proceeds of future financings.
There can be no assurance that the Company will reach agreement with the
Bank, nor, that should the Company reach agreement with the Bank, that there
will not be another event of default during the term of the agreement.
Additionally, there can be no assurance that the company will have sufficient
eligible foreign orders, inventory and accounts receivable balances to enable
the Company to continue to borrow at its current level. Should the Company not
reach agreement with the bank or should the Company experience an event of
default or should the Company not have sufficient eligibility to continue to
borrow at its existing levels, the Company may be required to paydown either all
or a portion of the line of credit and dispose of certain assets to satisfy
obligations to the bank.
On May 17, 1999, the Company reached an agreement to dispose of shares of
DTPI for approximately $7,100,000 to REMEC and Pequot Private Equity Fund, Inc.
("Pequot"). In addition, DTPI received loan commitments in the amount of
$7,500,000 from REMEC and Pequot. The loans to DTPI are repayable after
2 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.
Concurrently with the closing of the above transactions, all categories of
Preferred Stock of DTPI will be amended to be identical, and the Company will
enter into a manufacturing agreement with REMEC.
In order for the Company to meet its ongoing working capital requirements,
the company may be required to seek additional funds through debt or equity
financings in order to provide sufficient working capital for the Company. The
Company believes that such alternative sources of financing are available to
meet its anticipated cash requirements in the next twelve months. The issuance
of additional equity securities by the Company could result in substantial
dilution to the stockholders. If the Company incurs additional debt, the
Company's increased leverage may affect its ability to raise capital in the
future and may limit its flexibility to adapt to changing market conditions.
For the first three months of 1999, the Company had positive cash flows
from operating activities of $96,000, compared to negative cash flows of
$8,787,000 in the same period of 1998. The positive cash flows are primarily due
to a decrease in accounts receivable and prepaid expenses partially offset by
the net loss, increased investments in inventory, reduction in accounts payable
and customer deposits.
12
<PAGE>
Cash used in investing activities in the first three months of 1999 totaled
$1,531,000, comprising a decrease in short term investments, an increase in
restricted assets, acquisition of property plant and equipment and an increase
in equity and other investments.
Cash provided by financing activities during the first three months totaled
$23,000 comprising an increase in long-term debt.
Overall, the Company's cash and cash equivalents totaled $8,870,000 at
March 31, 1999, as compared to $11,016,000 at December 31, 1998.
New Accounting Standards:
- ------------------------
In June 1998, the Financial Accounting Standards board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. 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,
13
<PAGE>
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 September 1, 1999. With the exception of a
scheduled upgrade to the Company's Infoflow 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 65% 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 is in the process of contacting its customers to notify them of such
problems and expects to complete all necessary upgrades by December 31, 1999.
The Company currently estimates that the total cost of implementing such
upgrades will not exceed $1.0 million and will likely be offset by service fees
charged in connection with completing such upgrades. The Company believes that
a small portion of the upgrades will be provided free of charge as part of the
warranty coverage 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 50% 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 - The Company has not formulated a contingency plan at this
time but expects to have a contingency plan in place prior to September 30,
1999.
The Company currently estimates that the cost of implementing its Year 2000
plan will not exceed $1.0 million (including the cost of upgrading the
operational networks of current customers). Cost incurred to date has been
minimal.
14
<PAGE>
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.
15
<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 April 30, 1999, the Company's cash
assets included approximately $2.0 million 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
FORM 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 AN INDICATOR OF
FUTURE PERFORMANCE, AND INVESTORS SHOULD NOT USE HISTORICAL TRENDS TO ANTICIPATE
RESULTS OR TRENDS IN FUTURE PERIODS.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 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 March 31,
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 March 15, 1999 in which the
Company previewed its results for the year ended December 31, 1998.
17
<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: May 20, 1999 By: /s/ JOSEPH WALLACE
-----------------------------------
Joseph Wallace
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,870
<SECURITIES> 612
<RECEIVABLES> 10,790
<ALLOWANCES> 0
<INVENTORY> 14,001
<CURRENT-ASSETS> 38,046
<PP&E> 10,433
<DEPRECIATION> 0
<TOTAL-ASSETS> 53,859
<CURRENT-LIABILITIES> 29,732
<BONDS> 0
6,505
0
<COMMON> 7
<OTHER-SE> 13,288
<TOTAL-LIABILITY-AND-EQUITY> 53,859
<SALES> 3,091
<TOTAL-REVENUES> 3,091
<CGS> 4,420
<TOTAL-COSTS> 4,420
<OTHER-EXPENSES> 5,143
<LOSS-PROVISION> (1,554)
<INTEREST-EXPENSE> (511)
<INCOME-PRETAX> (8,204)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,463)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,463)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
