<PAGE>
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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, 2000
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-19923
--------------
STM WIRELESS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3758983
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
ONE MAUCHLY, IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(949) 753-7864
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the last 90 days. Yes |X| No |_|
As of August 4, 2000, there were 7,247,475 shares of Common Stock,
$0.001 par value per share, outstanding.
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1 of 1
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STM WIRELESS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<S> <C> <C>
Condensed Consolidated Balance Sheets at June 30, 2000
and December 31, 1999..................................................................... 3
Condensed Consolidated Statements of Operations for the
three and six-month periods ended June 30, 2000 and June 30, 1999......................... 4
Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 30, 2000 and June 30, 1999....................................... 5
Notes to Condensed Consolidated Financial Statements...................................... 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................................... 10-14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK......................................................................... 15
PART II. OTHER INFORMATION.................................................................................. 16
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
</TABLE>
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>
JUNE DECEMBER
30, 2000 31, 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 6,893 $ 4,441
Restricted cash and short-term investments.................................. 2,379 2,615
Accounts receivable, net.................................................... 4,685 7,841
Inventories, net............................................................ 11,843 11,069
Prepaid expenses and other current assets................................... 436 250
------------ -------------
Total current assets.................................................... 26,236 26,216
Property & equipment, net........................................................ 7,582 7,964
Equity and other investments..................................................... 157 157
Other assets..................................................................... 155 141
------------ -------------
$ 34,130 $ 34,478
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings....................................................... $ 3,365 $ 2,000
Current portion of long-term debt........................................... 287 542
Accounts payable............................................................ 3,997 5,967
Accrued liabilities......................................................... 2,690 4,214
Customer deposits and deferred revenue...................................... 32 7
Income taxes payable........................................................ 503 490
------------- -------------
Total current liabilities............................................... 10,874 13,220
Long-term debt................................................................... 6,909 7,049
Other long-term liabilities...................................................... 762 762
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 7,147,475 shares
at June 30, 2000 and 7,042,204 at December 31, 1999....................... 7 7
Additional paid in capital.................................................. 38,883 38,140
Accumulated deficit......................................................... (23,305) (24,700)
------------- -------------
Total stockholders' equity.............................................. 15,585 13,447
------------- -------------
$ 34,130 $ 34,478
============= =============
</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 SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Products.............................................. $ 2,815 $ 5,517 $ 6,050 $ 8,143
Services.............................................. 282 465 864 930
--------- --------- -------- ---------
Total revenues................................ 3,097 5,982 6,914 9,073
Cost of revenues:
Products.............................................. 1,548 3,380 3,567 6,714
Services.............................................. 490 767 884 1,853
--------- --------- -------- ---------
Total cost of revenues........................ 2,038 4,147 4,451 8,567
Gross profit................................................. 1,059 1,835 2,463 506
Operating costs and other operating items:
Selling, general & administrative expenses............ 1,651 2,356 2,998 5,366
Research & development................................ 1,410 1,208 2,782 2,724
Restructuring costs................................... - 425 - 1,042
Recovery of note receivable from affiliate............ - - (3,175) -
--------- --------- --------- ---------
Total......................................... 3,061 3,989 2,605 9,132
Operating loss............................................... (2,002) (2,154) (142) (8,626)
Other income (expense)................................ - (5) - 62
Foreign currency devaluation costs.................... (263) (308) (257) (1,862)
Gain on sale of assets................................ 840 2,964 840 2,964
Gain on disposal of affiliate......................... 440 - 1,015 -
Interest income....................................... 165 251 422 517
Interest expense...................................... (272) (305) (433) (816)
-------- --------- -------- ---------
Income (loss) before income taxes and minority interests..... (1,092) 443 1,445 (7,761)
Income tax expense.................................... (50) - (50) -
--------- --------- --------- ---------
Income (loss) before minority interests...................... (1,142) 443 1,395 (7,761)
Equity in net income (loss) of unconsolidated
affiliate............................................. - 50 - (59)
Minority interests.................................... - (125) - (275)
-------- --------- -------- ---------
Net income (loss)............................................ $ (1,142) $ 368 $ 1,395 $ (8,095)
======== ========== ======== ==========
Net income (loss) per common share:
BASIC................................................ $ (0.16) $ 0.05 $ 0.20 $ (1.15)
----- ---------- --------- -------- ----------
DILUTED.............................................. $ (0.16) $ 0.05 $ 0.19 $ (1.15)
------- ========== ========= ======== ==========
Common shares used in computing per share amounts:
BASIC................................................ 7,145 7,042 7,120 7,042
-----
DILUTED.............................................. 7,145 7,129 7,479 7,042
-------
</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,
2000 1999
---- ----
<S> <C> <C>
Net cash used in operations................................................. $ (59) $ (1,905)
---------- ----------
Cash flows provided by investing activities:
Proceeds from the sale of stock in DTPI............................. 440 2,500
Proceeds from repayment of note receivable DTPI, net................ 575 2,219
Cash forfeited upon sale of DTPI.................................... - (3,149)
Equity investment in affiliate company.............................. - (1,102)
Decrease in restricted cash......................................... 236 62
Net decrease in short-term investments.............................. - 354
Acquisition of property, plant and equipment........................ (353) (263)
---------- ----------
Net cash provided by investing activities................................... 898 621
---------- ----------
Cash flows from financing activities:
Net decrease in long-term receivable................................ - 790
Proceeds from exercise of stock options............................. 650 -
Increases (repayments) of short-term borrowings..................... 1,365 (2,250)
Proceeds from long-term leases...................................... - 90
Repayment of long-term debt......................................... (395) (163)
---------- ----------
Net cash provided by (used in) financing activities......................... 1,620 (1,533)
---------- -----------
Effect of exchange rate on changes in cash and cash equivalents............. (7) (1,121)
Net increase (decrease) in cash and cash equivalents........................ 2,452 (3,938)
Cash and cash equivalents at beginning of period............................ 4,441 11,016
---------- ----------
Cash and cash equivalents at end of period.................................. $ 6,893 $ 7,078
========== ==========
</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, 2000 AND 1999
(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 (consisting only of normal accruals), in the opinion
of Company management, to present fairly the financial statements for the
interim periods presented.
The results for the three and six months ended June 30, 1999, include the
results of Direc-To-Phone International, Inc. ("DTPI") through June 17, 1999. As
a result of STM reducing its ownership in DTPI in June 1999, the Company
discontinued consolidating the results of DTPI from that date.
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 condensed consolidated
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, 1999, which is on file with the SEC.
2. INVENTORIES:
Inventories are summarized as follows:
JUNE 30, DECEMBER
2000 31, 1999
------------- ------------
Raw materials........................... $ 6,127 $ 6,091
Work in process......................... 2,793 590
Finished goods.......................... 2,923 4,388
------------- ------------
$ 11,843 $ 11,069
============= ============
6
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3. NET INCOME (LOSS) PER SHARE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED
JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (loss)................................ $ (1,142) $ 368 $ 1,395 $ (8,095)
---------- --------- --------- -----------
BASIC:
Weighted average common shares
outstanding used in computing basic
net income (loss) per share................... 7,145 7,042 7,120 7,042
--------- --------- --------- ----------
Basic net income (loss) per share................ $ (0.16) $ 0.05 $ 0.20 $ (1.15)
--------- --------- --------- ----------
DILUTED:
Weighted average common shares
outstanding................................... 7,145 7,042 7,120 7,042
Dilutive options outstanding..................... - 87 359 -
--------- --------- --------- ----------
Shares used in computing diluted net
income (loss) per share....................... 7,145 7,129 7,479 7,042
--------- --------- --------- ----------
Diluted net income (loss) per share.............. $ (0.16) $ 0.05 $ 0.19 $ (1.15)
--------- --------- --------- ----------
</TABLE>
For the six months ended June 30, 2000, options to purchase approximately
200,000 shares of common stock were not included in the computation of diluted
net income per share because the options' exercise price was greater than the
average market price of the common shares, and therefore, the effect would be
antidilutive. For the three months ended June 30, 2000, options to purchase
approximately 1,117,000 shares of common stock were outstanding and were
excluded from the computation of diluted net loss per share as the effect would
be antidilutive. Options to purchase approximately 952,000 shares of common
stock were outstanding for the six months ended June 30, 1999, and were excluded
from the computation of diluted net loss per share as the effect would have been
antidilutive.
4. 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, as amended by SFAS
137 and SFAS 138, 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 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.
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements," as amended, which for the Company is effective October 1,
2000. SAB No. 101 summarizes certain of the SEC staff's views regarding the
appropriate recognition of revenue in financial statements. The Company believes
that adoption of SAB No. 101 will have no material impact on its financial
statements.
7
<PAGE>
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation an Interpretation of APB 25." FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12, 2000.
The Company does not expect that the adoption of FIN 44 will have a material
effect on the Company's financial position or results of operations.
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 THREE MONTHS ENDED SIX MONTHS ENDED
GEOGRAPHIC AREAS JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
Total:
<S> <C> <C> <C> <C>
Latin & South America........... $ 265 $ 3,569 $ 997 $ 4,934
Africa & Middle East............ 266 158 667 769
Asia............................ 2,102 1,395 3,137 2,285
United States................... 432 60 1,918 210
Europe.......................... 32 800 195 875
----------- ---------- ------------ -----------
Total................................ $ 3,097 $ 5,982 $ 6,914 $ 9,073
=========== ========== ============ ===========
Products:
Latin & South America........... $ 253 3,464 $ 832 $ 4,696
Africa & Middle East............ 256 49 624 623
Asia............................ 1,932 1,188 2,775 1,925
United States................... 374 16 1,755 85
Europe.......................... - 800 64 814
----------- ---------- ------------ -----------
Total................................ $ 2,815 $ 5,517 $ 6,050 $ 8,143
=========== ========== ============ ===========
Services:
Latin & South America........... $ 12 $ 105 $ 165 $ 238
Africa & Middle East............ 10 109 43 146
Asia............................ 170 207 362 360
United States................... 58 44 163 125
Europe.......................... 32 - 131 61
----------- ---------- ------------ -----------
Total................................ $ 282 $ 465 $ 864 $ 930
=========== ========== ============ ===========
Operating loss by area:
Latin & South America........... $ (12) $ (856) $ 48 $ (2,192)
Africa & Middle East............ - - - -
Asia............................ 41 130 82 (78)
United States................... (2,031) (1,428) (272) (6,356)
Europe.......................... - - - -
----------- ---------- ------------ -----------
Total................................ $ (2,002) $ (2,154) $ (142) $ (8,626)
=========== ========== ============ ===========
</TABLE>
8
<PAGE>
Operating income for the six months ended June 30, 2000 includes the
recovery of a note receivable of $3,175,000 that has been included as part of
operating income for the United States. See note 6.
The operating loss for DTPI for the three and six months ended June 30,
1999, was approximately $1,300,000 and approximately $3,500,000, respectively.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------------- ----------------
<S> <C> <C>
Identifiable assets by geographic area:
United States........................................................ $ 32,181 $ 32,220
Asia................................................................. 1,074 926
Latin & South America................................................ 875 1,332
--------- ---------
Total ............................................................. $ 34,130 $ 34,478
========= =========
</TABLE>
6. RECOVERY OF NOTE RECEIVABLE FROM AFFILIATE AND GAIN ON DISPOSAL OF
AFFILIATE:
On March 28, 2000, DTPI completed a $45 million financing which reduced
STM's ownership to approximately 15% of DTPI on a fully diluted basis.
Coinciding with this financing, STM received $3,750,000 in cash from DTPI
representing a partial repayment of a $7,500,000 note receivable from DTPI. The
remaining balance of the note receivable, which was fully reserved, was
converted into preferred stock of DTPI, 60 days after the close of the
financing.
The $7,500,000 note receivable from DTPI was fully reserved through a
combination of the Company's equity interest in the losses of DTPI recorded
through June 17, 1999, and additional provisions effectively made at the date of
deconsolidation on June 17, 1999. The total recovery of the note of $3,750,000
is reflected on two line items in the income statement for the six months ended
June 30, 2000: $3,175,000 is shown in operating income as a "Recovery of note
receivable from affiliate" and $575,000 is reflected as non-operating income
under the caption "Gain on disposal of affiliate". The portion treated as "Gain
on disposal of affiliate" was the portion of the reserve that was effectively
established at the date of deconsolidation. The remaining portion was reported
as operating income as the reserve against the note through June 17, 1999, was
originally recorded through losses from operations.
In addition, in June 2000, the Company sold shares of DTPI for $440,000.
The value of such shares had been written down to zero as a result of STM
recognizing losses of DTPI from inception. The proceeds of $440,000 have been
classified as "Gain on disposal of affiliate" in the accompanying condensed
consolidated statements of operations for the three and six months ended June
30, 2000.
7. 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 of costs and reserves considered necessary) was recognized in
1998.
In the second quarters of 1999 and 2000, upon the release of the final
funds from escrow and the resolution of certain customer claims, respectively,
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 gains of $2,964,000 in 1999 and $840,000 in 2000.
These gains have been classified as gains on the sale of assets in the three and
six months ended June 30, 1999 and 2000, respectively. At June 30, 2000, the
Company's remaining accruals for probable exposures associated with this
transaction are immaterial.
9
<PAGE>
8. SHORT-TERM BORROWINGS:
On March 27, 2000, the Company entered into a new two year revolving
line of credit for approximately $3,300,000 of which $2,800,000 is available for
on-going working capital requirements. The line of credit bears interest at
Prime plus 1%.
Availability to borrow the $2,800,000 is based upon a percentage of
eligible inventory and accounts receivable. Borrowings under the line of credit
at June 30, 2000, were approximately $1,400,000. The lender was granted a
security interest in substantially all of the Company's assets.
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 provider of wireless-based satellite
communications infrastructure and user terminal products utilized in public and
private telecommunications networks for broadband and telephony applications.
These networks support IP based data, fax, voice and video communication and are
used to either bypass or extend terrestrial networks. 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. The Company's proprietary
equipment and software are utilized by businesses, government agencies and
telephone companies in Europe, the Americas, Africa and Asia.
RESULTS OF OPERATIONS:
The results of operations for the three and six months ended June 30,
1999 include the results of DTPI, the Company's former subsidiary, through June
17, 1999.
Total revenues were $3,097,000 and $6,914,000, respectively, for the
three and six month periods ended June 30, 2000, compared to $5,982,000 and
$9,073,000, respectively, for the corresponding periods in 1999, representing
decreases of 48% and 24%, respectively, over the prior year periods. Product
revenues were $2,815,000 and $6,050,000, respectively, for the three and six
month periods ended June 30, 2000, compared to $5,517,000 and $8,143,000,
respectively, for the corresponding periods in 1999, representing decreases of
49% and 26%, respectively, over the prior year periods. Service revenues were
$282,000 and $864,000, respectively, for the three and six months periods ended
June 30, 2000, compared to $465,000 and $930,000, respectively, for the
corresponding periods of 1999, representing decreases of 39% and 7%,
respectively, over the prior year periods.
Excluding DTPI (in which the Company sold its controlling interest
effective June 17, 1999) from 1999, the percentage decrease in total revenues
would have been 50% and 16% for the three and six months ended June 30, 2000,
respectively. Product revenues would have decreased 51% and 18% for the three
and six months ended June 30, 2000, respectively, and service revenues would
have decreased by 33% and increased by 3% in the three and six months ended June
30, 2000, respectively. The increase in service revenues in the six months ended
June 30, 2000, reflects the higher service content of certain 2000 projects.
The decline in revenues in the three and six months ended June 30, 2000,
compared to June 30, 1999, primarily reflects reduced sales in Latin and South
America partially offset by increased sales in Asia and the United States. The
Company's revenues in total and by region can vary significantly depending upon
the timing of projects and the value of individual projects. Sales efforts are
generally focused on specific customers and specific known and identified
projects. Sales into the emerging markets continue to be impacted by delays and
uncertainty. However, the Company is now focusing
10
<PAGE>
significant time and resources in pursuing revenue opportunities for its new
range of broadband products. The Company believes there are significant
opportunities for sales of these products in primarily developed, but also in
developing countries. The Company believes that these measures over time should
enable the Company to increase its sales in the United States and Europe and
reduce its reliance on the emerging markets. 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,
2000, was 34% in 2000 compared to 31% in the corresponding period of 1999. For
the six months ended June 30, 2000, the gross profit was 36% compared to 6% for
the corresponding period of 1999. Excluding DTPI (in which the Company sold its
controlling interest on June 17, 1999) the gross profit percentages would have
been 42% and 29% for the three and six months ended June 30, 1999. The reduced
gross profit of 34% in the three months ended June 30, 2000, compared to 42% for
STM excluding DTPI in the three months ended June 30, 1999, reflects increased
customer service costs. For the six months ended June 30, 2000, the improved
gross profit percentage of 36% compared to 29% excluding DTPI in the six months
ended June 30, 1999, reflects improved margins on the Company's lower cost
products which began from the second quarter of 1999. On an overall basis, the
gross profit percentage in 2000 is being adversely impacted by the low volume of
sales in the six months ended June 30, 2000, compared to the level of relatively
fixed customer service costs.
Selling, general and administrative (SG&A) expenses for the three months
ended June 30, 2000, decreased to $1,651,000 (53% of revenue) from $2,356,000
(39% of revenue) for the corresponding period of the prior year. For the six
months ended June 30, 2000, such expenses decreased to $2,998,000 (43% of
revenue) from $5,366,000 (59% of revenue) for the corresponding period of the
prior year. Excluding DTPI (in which the Company sold its controlling interest
in on June 17, 1999), SG&A would have been $1,815,000 (30% of revenue), and
$3,856,000 (47% of revenue) for the three and six months ended June 30, 1999,
respectively. The dollar reduction in SG&A in 2000 compared to 1999, excluding
DTPI, reflects reduced costs arising from the cost reduction programs
implemented by the Company in the first and second quarters of 1999.
Research and development (R&D) costs for the three month period ended
June 30, 2000, were $1,410,000 (46% of revenue) compared to $1,208,000 (20% of
revenue) in the corresponding period of 1999. For the six month period ended
June 30, 2000, such costs were $2,782,000 (40% of revenue) compared to
$2,724,000 (30% of revenue) in the corresponding period of 1999. There were no
R&D costs associated with DTPI. The increase in R&D costs in the three months
ended June 30, 2000, compared to 1999 primarily related to costs incurred in
completing the Company's SpaceLoop product. R&D costs for the six months ended
June 30, 2000, are consistent with the prior year period.
The recovery of the note receivable from affiliate of $3,175,000 for the
six months ended June 30, 2000, related to the $3,750,000 received from DTPI as
a result of DTPI's financing. See note 6 to the condensed consolidated financial
statements. $3,175,000 of this recovery was classified as part of operating
income and the balance of $575,000 was classified as a gain on disposal of
affiliate in the accompanying condensed consolidated financial statements for
the six months ended June 30, 2000.
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. All restructuring
related accruals were paid as of December 31, 1999.
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
11
<PAGE>
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 foreign currency devaluation costs of $263,000 and $257,000
recognized in the three and six months ended June 30, 2000, primarily reflects a
write-down of certain accounts receivable balances from a customer in Brazil
whereby the customer will not now reimburse the Company for changes in the
exchange rate.
The gain on sale of assets of $840,000 for the three and six months ended
June 30, 2000, and $2,964,000 for the three and six months ended June 30, 1999,
represented gains on the sale of substantially all the assets of TMSI. In the
second quarters of 1999 and 2000, upon the release of the final funds from
escrow and the resolution of a customer claim, respectively, the Company
re-evaluated certain accruals that were established at the time of the sale,
resulting in the recognition of additional gains on the sale of the assets of
TMSI. See note 7 to the condensed consolidated financial statements.
In the three months ended June 30, 2000, the Company disposed of shares
in DTPI resulting in a gain of $440,000 which has been classified as a gain on
disposal of affiliate in the accompanying condensed consolidated financial
statements for the three and six months ended June 30, 2000. Combined with the
$575,000 associated with the note recovery from DTPI, the resulting gain on
disposal of affiliate was $1,015,000 for the six months ended June 30, 2000.
Interest income was $165,000 for the three months ended June 30,2000,
compared to $251,000 for the three months ended June 30, 1999, and was $422,000
for the six months ended June 30, 2000, compared to $517,000 for the
corresponding period of 1999. Excluding DTPI from 1999, interest income would
have been $153,000 and $276,000 for the three and six months ended June 30,
1999, respectively. Interest income for the three months ended June 30, 2000,
and 1999 excluding DTPI were consistent. Interest income for the six months
ended June 30, 2000, increased by $146,000 compared to the corresponding period
of 1999, excluding DTPI. Such increase primarily related to interest earned on a
note receivable from DTPI.
Interest expense for the three months ended June 30, 2000, was $272,000
compared to $305,000 for the corresponding period of 1999. The reduction in
interest expense in the three months ended June 30, 2000 compared to 1999
related to a lower level of borrowings in 2000 compared to 1999 partially offset
by increased costs associated with a new line of credit and certain letter of
credit discounting costs. For the six months ended June 30, 2000, interest
expense was $433,000 compared with $816,000 for the comparable period of 1999.
The reduction in interest expense for the six months in 2000 compared with 1999
related to a lower level of borrowings in 2000 compared with 1999.
The tax provision for the three and six months ended June 30, 2000,
related to overseas taxes. The absence of a U.S. tax provision in the three and
six months ended June 30, 2000, is due to continued net operating losses
available to the Company to offset current year income. No tax provision was
recorded in 1999 due to losses in the period.
The minority interest charge in 1999 related to accrued dividends through
June 17, 1999, on the mandatory redeemable shares issued in March 1998 by DTPI.
No comparable balance exists in 2000 due to the June 1999 deconsolidation of
DTPI by STM.
The equity in net income and losses of unconsolidated affiliate in 1999
represented the Company's share of the income and losses of DTPI's Venezuelan
affiliate through June 17, 1999, which was accounted for under the equity
method. No comparable balance exists in 2000 due to the June 1999
deconsolidation of DTPI by STM.
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LIQUIDITY AND CAPITAL RESOURCES:
On March 27, 2000, the Company entered into a new two year revolving line
of credit facility of approximately $3,300,000 of which $2,800,000 is available
for on-going working capital requirements. Borrowings under this line of credit
at June 30, 2000 were approximately $1,400,000. The line of credit bears
interest at Prime plus 1%.
Coinciding with the DTPI financing, the Company received $3,750,000 from
DTPI in cash representing 50% of a note receivable of $7,500,000 due from DTPI.
See note 6 to the condensed consolidated financial statements.
For the first six months of 2000, the Company had negative cash flows
from operating activities of $59,000, compared to $1,905,000 in the same period
of 1999. The negative cash flows in 2000 were positively impacted by the
$3,175,000 portion of the $3,750,000 note recovery from DTPI shown as operating
income and negatively impacted by a decrease in accounts payable and losses for
the period.
Cash flows from investing activities in the first three months of 2000
totaled $898,000 comprising a decrease in restricted cash and short term
investments, the acquisition of property plant and equipment offset by the
$1,015,000 non-operating cash proceeds from the note receivable from DTPI and
the sale of shares in DTPI.
Cash provided by financing activities during the first three months of
2000 totaled $1,620,000, comprising an increase in short term borrowings under
the new line of credit, proceeds from the issuance of stock upon the exercise of
stock options partially offset by repayments of long-term debt.
Overall, the Company's cash and cash equivalents totaled $6,893,000 at
June 30, 2000, as compared to $4,441,000 at December 31, 1999.
Management expects to have sufficient cash generated from operations,
through availability under lines of credit and existing cash balances and
through other sources to meet the anticipated cash requirements for the next
twelve months.
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, as amended by SFAS
137 and SFAS 138, 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 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.
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements," as amended, which for the Company is effective October 1,
2000. SAB No. 101 summarizes certain of the SEC staff's views regarding the
appropriate recognition of revenue in financial statements. The Company believes
that adoption of SAB No. 101 will have no material impact on its financial
statements.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation an Interpretation of APB 25." FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation
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awards in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998 or
January 12, 2000. The Company does not expect that the adoption of FIN 44 will
have a material effect on the Company's financial position or results of
operations.
YEAR 2000:
The Company has experienced no material disruption in the operation of
its business as a result of the transition from 1999 to 2000. The Company
estimates that it spent less than $1 million in out-of-pocket expenses through
December 31, 1999, to address the year 2000 issue. The Company continues to
monitor the year 2000 issue. It is possible that year 2000 problems (or leap
year issues) may become evident as the year progresses. Such issues could have a
material adverse impact on the Company's results of operations, financial
condition and cash flows if the Company is unable to conduct its business in the
ordinary course.
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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, prior to the devaluation of the Brazilian currency in
January 1999, the Company had generated revenues in Brazil based in the local
currency of Brazil. While the contracts relating to such arrangements generally
contained provisions that called 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 that
tie payments to foreign currency rates. The Company, therefore, whenever
possible, negotiates sales from Brazilian customers in U.S. dollars to avoid any
uncertainty as to the value of receivables, although there are certain remaining
foreign currency denominated balances of approximately $500,000. The Company's
interest income and expense is sensitive to fluctuations in the general level of
U.S. interest rates. Changes in U.S. interest rates affect the interest earned
on the Company's cash and cash equivalents and the interest expense on the
Company's debt.
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, 1999.
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.
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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, 2000, the Company was not engaged in any material legal proceedings
which the Company expects, individually or in the aggregate, will have a
material adverse effect on the Company's results of operations or its financial
condition.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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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 11, 2000 By: /S/JOSEPH WALLACE
------------------------------
Joseph Wallace
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
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