-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FPdAEv5iJrvHATFu07TXLgn+9yTfz+w4sB05buYksRcvyQJPhzfs4WxUy0Gx5HKi vwMDO3UGrL1aylWG89rU0A== 0001092388-00-000108.txt : 20000331 0001092388-00-000108.hdr.sgml : 20000331 ACCESSION NUMBER: 0001092388-00-000108 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STM WIRELESS INC CENTRAL INDEX KEY: 0000765414 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 953758983 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19923 FILM NUMBER: 588541 BUSINESS ADDRESS: STREET 1: ONE MAUCHLY CITY: IRVINE STATE: CA ZIP: 92718 BUSINESS PHONE: 7147537864 MAIL ADDRESS: STREET 1: ONE MAUCHLY STREET 2: ONE MAUCHLY CITY: IRVINE STATE: CA ZIP: 92718-2305 FORMER COMPANY: FORMER CONFORMED NAME: SATELLITE TECHNOLOGY MANAGEMENT INC DATE OF NAME CHANGE: 19950518 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO -------- -------- COMMISSION FILE NUMBER: 0-19923 ------------------- STM WIRELESS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-3758983 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION IDENTIFICATION NO.) ONE MAUCHLY, IRVINE, CALIFORNIA 92618 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (949) 753-7864 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.001 PAR VALUE ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 22, 2000, the aggregate market value of the registrant's common stock, held by non-affiliates of the registrant was approximately $60,356,251 based on the closing sales price of $10.375 per share of the common stock as of such date, as reported by the NASDAQ Stock Market. As of March 22, 2000, 7,144,225 shares of the registrant's common stock were outstanding. ================================================================================ Page 1 of 63 Pages Exhibit Index Appears on Page 61 PART I ITEM 1--BUSINESS THE COMPANY STM Wireless, Inc. (the "Company" or "STM"), is a developer, manufacturer and provider of wireless-based satellite communications infrastructure and user terminal products utilized in public and private telecommunications networks 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 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. The Company was incorporated in California in January 1982 as Services Via Satellite and in December 1982 changed its name to Satellite Technology Management, Inc. In January 1995, the Company registered in California to do business as STM Wireless, Inc. In December 1995, the Company reorganized as a Delaware corporation via a merger into a wholly-owned subsidiary with the name STM Wireless, Inc. DESCRIPTION OF THE BUSINESS The Company develops, manufactures and markets wireless based satellite communications infrastructure products to customers for the creation of public and private networks. The Company's products provide customers with the ability to transmit many forms of information including IP based data, voice, fax and video. The Company historically has sold its products primarily in the international arena. The solutions currently provided by the Company are principally satellite communications networks which can be deployed and reconfigured faster and at a lower cost than terrestrial alternatives. The main products that STM sells are small, two-way earth stations referred to as VSATs (very small aperture terminals), associated infrastructure equipment and software. The applications for the Company's product lines falls into three separate classes: o The first class of applications helps solve the problem of insufficient bandwidth to enable the Internet to fulfill its potential for a multitude of new services. By using satellite, Internet Service Providers (ISPs) can bypass the traditional landline infrastructure, which is often unable to economically meet quality of service expectations because of network congestion. STM's SpaceWeb Broadband provides the equipment for service providers to offer high bandwidth to their customers by satellite, both for downloading and for the return channel from the customer to the ISP. In addition to bypassing landline bandwidth restrictions, satellite provides an ideal technology for broadcast applications on the Internet. It offers a large reach by its very nature (one satellite can cover one-third of the earth). Furthermore, STM's solutions feature "IP tuning," which modifies the routing technology of the Internet for broadcast applications. Traditional routing technology over landline infrastructure is not as efficient in broadcast applications. It consequently ties up bandwidth in routing inefficiency, which keeps it from other uses and users. STM's technology is also attractive as a means to enable an ISP to more effectively deploy its access and bandwidth to its customers. o The second class of applications enables cost-effective data and voice communications for corporations and large, geographically dispersed organizations. Powerful drivers for the growth of the Internet are electronic information sharing and business transactions. As this trend continues, it is likely to drive the demand for corporate communication tools such as video conferencing, telemedicine, and distance learning. STM's corporate solutions provide the networks that enable these tools. o The third class of applications targets rural telephony services in developing countries. The demand for rural telephony products and services is considerable. However, the great majority of potential subscribers cannot afford the current service rates of their national providers. In other cases, the potential subscribers who can afford the service are separated by large distances and difficult terrain, which prohibit the cost-effective use of traditional landline and microwave infrastructure. STM's solutions are tailored to enable cost-effective service to a significant proportion of these potential subscribers. One of 2 STM's newest products, SpaceLoop, provides connectivity between a remote location and the national phone network through satellite. It then distributes the access to the subscribers by Wireless Local Loop technology. The Company's product line is based on proprietary hardware and software used in the remote terminals, hubs/gateways and network management systems. The Company's satellite communications product line includes products that are capable of concurrently transmitting and receiving data as well as several channels of digitized voice, using the Company's software to perform call routing and to allocate satellite capacity on call initiation. These product features allow more efficient use of satellite transponders and are attractive to international customers for whom combined voice and data communications costs are a prime concern. The Company has established alliances with customers, distributors and sales representatives in over 30 countries and has supplied networks to customers or end users in many geographic areas, including Argentina, Brazil, Canada, Chile, China, Ecuador, Guatemala, Holland, India, Italy, Jordan, Kenya, Malaysia, Mexico, Nigeria, Pakistan, Peru, Philippines, Spain, Sudan, Thailand, the United States and Venezuela. INDUSTRY BACKGROUND VSAT products provide customers with the ability to transmit several forms of information including voice, fax, data and video by attaching standard communications equipment such as telephones, fax machines or computers to the VSAT which in turn relays information to and from satellites. The primary advantage of VSAT networks is the substantial cost savings compared to land-based telephone networks where the network users are geographically widespread. Due to the nature of satellites, transmission costs are not affected by the distance information travels, while in terrestrial networks, transmission costs are directly related to the distance between the network users. VSAT equipment can be rapidly installed, upgraded or moved. Thus, networks can be expanded or changed with relatively little expense and disruption to users. Bandwidth allocated to each user can be changed dynamically, and the network can be reconfigured and additional features and changes downloaded to the user. Furthermore, the network user or service provider has the ability to monitor operations of the network, collect performance statistics and perform diagnostics. Since the mid-1980s, the VSAT network market has grown with the North American enterprise network market share dominating. In recent years, changes in both the political and regulatory environments have contributed to the international expansion of the VSAT network market. While the North American market is primarily for data transmission applications, in most international markets, applications for basic telephony services including voice, facsimile and low speed data transmission are important. Recently, as a result of the worldwide Internet explosion and the growing demand for high bandwidth applications, VSATs have also emerged as a compelling solution for the provision of high bandwidth Internet services. BROADBAND SATELLITE MARKET In 1999, the Company introduced a family of products to address the growing demand for high bandwidth applications and Internet access via satellite. As the popularity of the Internet grows, so does the demand for rich, high bandwidth content over the Internet. The broadband satellite solutions help solve the problem of insufficient bandwidth to enable the Internet to fulfill its potential for a multitude of new services. By using satellite, Internet Service Providers (ISPs) can bypass the traditional landline infrastructure, which is often unable to economically meet quality of service expectations because of network congestion. In addition, in some areas, broadband satellite solutions allow ISPs and other service providers to build up their networks and customer base at a faster and cheaper pace than they could through traditional terrestrial means. The Company's product line can serve a wide variety of different applications in this market, such as fast Internet access, telemedicine, distance learning, video conferencing, video and audio streaming (TV, news, software, games), virtual private networks, global extension of corporate networks, global ISP services, IP multicast, Push/Data broadcast and e-commerce. The key features of the Company's current product lines include: o Two-way high speed communication over satellite o Availability in Ku- and C-band o Immediate global reach without terrestrial restrictions 3 o Full DVB-S/MPEG-2 compliance o Bandwidth on Demand and Quality of Service controlled o High speed reception of up to 48 Mbps o 9.6 kbps to 384 kbps return path per VSAT o Fast and easy ability to deploy o Costs are insensitive to distance o Provides trunking and last mile access in one network o Satellite link enhancement through TCP/IP acceleration ENTERPRISE NETWORKS Enterprise networks are private communications systems which provide a solution for organizations with frequent communications needs between remote locations allowing them to collect, process, respond to and disseminate information in a timely, reliable and cost-efficient manner. VSATs have historically been used in developed countries for transaction oriented applications, including point-of-purchase transactions, credit card verification, automatic teller machine transactions, and inventory management. In recent years, the price of VSATs has decreased, their functionality and reliability have improved and the number of communication protocols that can be supported has increased. The Company believes that these improvements allow VSAT networks to compete effectively as full service communications systems in international markets where the lack of reliable terrestrial networks necessitates the use of alternative telecommunication infrastructure. In addition to transaction oriented applications, international VSAT enterprise networks are used for communications applications such as e-mail, intranets, Internet access and basic voice service. The Company believes there will be a significant growth in VSAT enterprise networks as a result of increased electronic information sharing and business transactions on the Internet. RURAL TELEPHONY MARKET As the world's economies continue to globalize, the need for countries to provide their population with access to telecommunications service has become significantly more important as a means of increasing competitiveness. In response, many developing countries throughout the world have begun to make significant capital expenditures on the deployment of new networks and the expansion of their existing telephone infrastructure to increase telephony penetration. While traditional terrestrial telecommunications networks are being deployed and expanded in the urban areas of these developing countries to increase telephony penetration, it is more difficult to provide networks to the rural areas of these countries due to the dispersion of the population and difficult terrain that often characterizes these locations. As a result, in a large number of remote and rural areas in developing countries, there continues to be limited or no telephone service. There are a number of alternatives to satellite technology that are being used to meet increased demand for telecommunication services. Wireline and cellular telephony networks can be used to effectively meet telecommunications needs in rural areas with relatively higher population densities. However, the Company believes that VSAT networks have a number of advantages over alternative solutions for many rural and urban telephony applications in developing countries where low population density and rough terrain are considerations. Due to the nature of satellites, transmission costs are not affected by the distance signals must travel. Therefore, generally, the greater the distance between the sites to be served, the greater the benefit of a VSAT network. VSAT equipment can be rapidly installed and connected to a network and can easily be upgraded, expanded or relocated with relatively little expense and disruption. VSAT networks are relatively simple to reconfigure, are relatively immune to difficulties in topography and can be located almost anywhere. To complement its product offerings, the Company has developed a wireless local loop (WLL) product, SpaceLoop, and is considering entering into strategic relationships with other providers of WLL products, thereby ensuring that the Company has an economical product offering in more densely populated regions. 4 BUSINESS STRATEGY STM seeks to leverage its technical strength in networking and telephony technologies as well as its strong position and marketing expertise in international markets to become the leading supplier of satellite-based communications solutions. To achieve this objective, the Company is pursuing the following initiatives: STRENGTHEN POSITION IN BROADBAND SATELLITE MARKET: The Company began marketing and selling its broadband satellite products in 1999 as a result of an alliance it created with Harmonic Data Systems. The Company is focused on increasing its broadband product sales on an absolute basis as well as a percentage of its total sales. In addition, the Company intends to enter into more strategic relationships and alliances in order to strengthen its broadband product portfolio and distribution channels for broadband products. EXPAND MARKET SHARE IN ENTERPRISE NETWORKS: The Company believes there will be a significant growth in VSAT enterprise networks as a result of increased electronic information sharing and business transactions on the Internet. The Company's enterprise network strategy is to capitalize on its international expertise to sell more products in the international market. SOLIDIFY POSITION IN RURAL TELEPHONY MARKET: Management believes that STM offers a comprehensive rural telephony solution through a suite of products specifically designed to service these needs. Management believes that the use of VSATs for rural telephony has yet to fully mature and a substantial global market opportunity exists for this technology to serve rural telephony needs. LEVERAGE EXISTING MARKETING AND DISTRIBUTION CHANNELS: STM's sales and distribution networks comprise 30 countries in five continents and the Company's products are currently utilized by more than 70 customers with equipment installed in approximately 90 countries. The Company seeks to increase the breadth of products that can be sold through its distribution network by both internal research and development ("R&D") and strategic alliances with other manufacturers, as well as complementary acquisitions. STM has incurred significant R&D expenditures in recent years relative to its revenues, as management believes that the Company's significant dedication of resources to R&D is necessary to compete in a rapidly changing market. STM's R&D efforts are primarily focused on reducing the overall cost of its products to its customers, as well as increasing their features and performance, thereby expanding the addressable market size. PRODUCTS The principal products sold by the Company are two-way small earth stations referred to as VSATs (very small aperture terminals), associated infrastructure equipment and software, transceivers, modems and other networking equipment, as well as voice over IP gateway and software solutions. The Company's satellite products communicate via geostationary satellites in order to provide customers the ability to exchange several forms of information including voice, fax, data and video within their networks. Geostationary satellites are placed in orbit approximately 23,000 miles above the earth so that their orbit matches the speed of the earth's rotation resulting in the satellite maintaining a fixed position relevant to the earth's surface. VSAT networks can offer advantages over traditional networks of terrestrial telephone lines including control over the network itself, improved response times with cost reduction opportunities and increased flexibility and reliability. For voice communications, VSAT networks are particularly suited to providing communications between geographically dispersed locations in that they are easier to install and provide wider accessibility and availability than terrestrial and microwave transmission alternatives. The Company's VSAT products fall into two categories. Both of these product categories may be used by customers to build networks capable of communicating voice, fax, data and video, but, because they use different architectures, the use of each product is determined by the particular needs of the customer's network. The principal difference between the two product categories lie in the methodology used for communicating between any two remote VSATs on a network. There is a "mesh" product that employs circuit switched transmission. In mesh networks, any one VSAT communicates directly with any other VSAT on the network via a single transmission to and from the satellite. Then, there is what is often termed a "star" product that employs packetized transmission. 5 EXISTING PRODUCTS SATELLITE PRODUCTS: SPACEWEB ONLINE: Introduced in 1999, SpaceWeb Online was created for demanding data and Internet access applications in the home-and-branch-office setting. SpaceWeb Online maintains a constant, highly reliable connection. Because it uses satellite for both transmission and reception, it is fully independent of landline infrastructure. It features up to 48 Mbps of Time Division Multiplex (TDM) bandwidth for downloading in a Digital Video Broadcast (DVB) format, with up to 192 kbps of bandwidth for the Time Division Multiple Access (TDMA) return channel. SPACEWEB ISP: Introduced in 1999, SpaceWeb ISP provides powerful features to meet ISP and enterprise network requirements. In addition to 48Mbps of DVB bandwidth for downloading, each return channel is a "Single Channel per Carrier" (SCPC) satellite line between 9.6 and 384 kbps that is assigned on-demand with the Company's DAMA technology. This enables the network to provide high-bandwidth users with return channels that can vary with their needs, providing great overall bandwidth flexibility and control. Furthermore, SpaceWeb ISP seamlessly integrates Internet access and data with full-mesh connections for voice, fax, and video conferencing into one network architecture. SPACEWEB DIAL-UP: Introduced in 1999, SpaceWeb Dial-up enables the small office to share both LAN and voice services on an "as-needed" basis in one wireless package. It uses the Company's SES technology to provide high-quality, economical DAMA voice links with fax and data services up to 14.4 kbps. Remote Internet and data files can be easily accessed with its 48Mbps of DVB bandwidth for downloading. SPACEWEB PC: Introduced in 1999, SpaceWeb PC delivers full Internet access and telephony features to the most remote single-user terminals in the network. A single-user version of the SpaceWeb Dial-Up, the SpaceWeb PC connects directly to a standard PC through a universal serial bus interface. SES: In 1998, the Company completed development of SES, which is a low cost telephony product derived from and compatible with DAMA 10000. As an extension of DAMA 10000, SES is targeted at the provision of telephony services to unserved or underserved regions of the world. SES is designed to provide reliable, affordable, on-demand telecommunications service in remote and rural areas. SES is a small, lightweight and low cost terminal ideally suited for areas where telecommunications service is unavailable, unreliable or simply too expensive. Since it is satellite-based, a SES terminal is capable of being installed quickly, virtually anywhere, to allow immediate access to the SES network and the PSTN. SES provides telecommunications service with high quality voice and industry standard interfaces. SPACEWEB: In 1998, the Company completed development of SpaceWeb, which is an evolutionary development of the X.STAR family and is fully compatible with X.STAR. SpaceWeb provides a low cost, star-connected solution for data, fax and voice applications and is aimed at international Internet access. SpaceWeb is a low cost terminal that communicates with a low cost central hub whose modular architecture will be designed to provide attractive start up costs, without restricting network growth potential. For reliable end to end communications, SpaceWeb utilizes the Company's X.STAR communications protocol and supports all of the same communications protocols as X.STAR. HUBS/GATEWAYS: The Company manufactures the digital and modem portion of the hubs/gateways which are comprised of a series of special purpose processing units utilized in multiplexing, network configuration and routing of information to the appropriate network destinations. This is controlled by the Company's proprietary networking and system software. Typically, the digital portion of the hub/gateway has a number of voice and data ports that directly attach to the user's equipment. Transmission between the hub/gateway and the remote VSAT is via a satellite transponder. The hub/gateway also includes radio frequency components and an antenna, which are purchased from suppliers and integrated into the system by the Company. The hub/gateway interacts with a network management system, which operates on a local or remote work station using proprietary software supplied by the Company. NETWORK MANAGEMENT SYSTEMS: The Company provides a network management system which shows network status in real time, and permits the operator to monitor and control network operations, including the diagnosis of problems. The interface with the operator is by a graphic display of the network status on a color monitor. The network management system can also be used for redefining network parameters, for adding and deleting remote network locations, for changing protocols and for collecting and reporting operational information 6 and providing management reports. In addition, the system can be expanded if the hub/gateway is shared among several customers, to permit each customer to have such capabilities. The network management system can be installed remotely from the hub/gateway location if required. SYSTEMS INTEGRATION PRODUCTS: The Company also integrates equipment from other manufacturers into systems or earth stations manufactured by the Company. These products include antennas, radio frequency equipment, satellite modems, voice and data multiplexers, local area network routers and video communications equipment. The Company expects to continue to sell such systems on an individual project basis as part of its direct sales effort. DAMA 10000: The Company's DAMA 10000 product primarily supports public and private networks that need to have full connectivity among all sites. The DAMA 10000 is a fully integrated product that offers the flexibility to create and manage both large and small networks. With an expandable system architecture and highly configurable terminal equipment, the DAMA 10000 is a cost efficient solution for small to very large networks. The system supports full mesh, point-to-point or point-to-multi-point communications circuits and any user can connect to any other user on the network. DAMA 10000 uses a proprietary control channel to set up and tear down calls between VSATs as these are requested by users on the network. This results in satellite capacity only being consumed when calls are requested, thereby optimizing satellite transponder costs for the customer. In addition, DAMA 10000 provides support for the major international telephony signaling systems including R2 and DTMF as well as various payphone metering schemes, allowing it to be interconnected with the Public Switched Telephony System ("PSTN") in many countries around the world. These features of the product have resulted in it being ideally suited for rural telephony applications where individual VSATs provide multiple telephone lines to subscribers in remote locations. These VSATs are, in turn, all interconnected via satellite with the PSTN in the country of deployment providing the remote subscribers with worldwide calling capability. X.STAR: The Company's X.STAR product primarily supports private networks with a need to connect remote user locations with a central site. A typical application of an X.STAR network would be the processing of point of sale transactions between retail outlets and a central database. However, the X.STAR product supports all types of data including voice, fax and broadcast video and more recently has been used by customers to interconnect LANs across their enterprises. The network is controlled by a central hub that acts as a gateway to the host facilities and as a switching and routing center for transmitting information between VSATs. A powerful network management system ("NMS") is also a part of the hub and multiple remote NMS stations may be deployed on the network. In an X.STAR network, VSATs all receive a common broadcast signal from the hub, filtering the data received to accept only the information addressed to devices connected to the VSAT. In order to transmit information back to the hub or to another VSAT via the hub, VSATs on the network share a common transmit channel back to the hub. Access to this transmit channel is controlled by the Company's unique dynamic capacity allocations algorithm which allocates a transmission time and duration to each VSAT dynamically based on its traffic requirements. X.STAR uses a packet-based transmission and switching protocol that makes it suitable for the transmission of packetized data which is increasingly being used in today's communications networks including the Internet. This protocol establishes and maintains error-free channels from initiation points to destination points on a network. In addition, the X.STAR product supports most major communications protocols including SDLC, X.25, X.3, HDLC and TCP/IP, resulting in seamless transport of information using these protocols across an X.STAR network. SPACELOOP: The Company recently completed development of its SpaceLoop product, which provides a wireless local loop ("WLL") solution for rural telephony. In rural areas where there are a fairly large number (approximately between 50 and 500) of potential subscribers within a five-kilometer radius, both business and residential, it is not economical to deploy DAMA 10000 or SES terminals for each subscriber due to their relatively high cost per line deployed. Where the average usage per month per subscriber is likely to be 400 minutes or less, STM would deploy a WLL solution with a lower capital cost per line installed, that allows such customers to become subscribers at a much lower price point. STM's SpaceLoop technology would be used to provide WLL connectivity within a community. 7 SERVICES PROJECT MANAGEMENT: The Company offers engineering, project management, and contract services in support of products sold. CUSTOM DEVELOPMENT: From time to time, the Company receives orders from its customers and distributors for product features, new products or software protocols and functions that enhance the Company's product lines. While such custom development orders do not contribute significantly to the Company's revenues, they demonstrate the Company's ability to be responsive to market requirements. TECHNICAL SUPPORT SERVICES: The Company provides technical support services to its installed base of customers either directly or through third-parties. Services include technical support, installations, maintenance, training and spares provisioning. SALES AND MARKETING The Company sells its satellite communication products directly and through international distributors and alliances which are supported by the Company's sales and marketing personnel. The Company has focused its sales efforts on the following: o Expanding global coverage through increasing the number of highly trained, direct sales personnel with regional responsibilities. o Identifying sales opportunities that exist with newly licensed service providers in international markets, particularly those focused on providing rural telephony services. o Identifying capable, local distributors and replacing, if necessary, its current distributors and alliances. o Supplying highly integrated, low cost solutions to customers through the Company's product offerings. Export sales, as a percentage of revenues, were approximately 93%, 90% and 95% in 1999, 1998 and 1997, respectively. BACKLOG The Company's backlog represents future revenues that may be earned from sales orders or sales contracts for products or services. As of December 31, 1999, the Company's backlog was approximately $7,800,000. At December 31, 1998, the Company's backlog was approximately $7,500,000. Both the 1999 and 1998 backlog exclude any backlog associated with SkyOnline, Inc., formerly known as Direc-To-Phone International, Inc. ("DTPI"), which was deconsolidated in June 1999. (See note 4 to the consolidated financial statements.) The Company manufactures its products on the basis of customer orders and its forecast of near-term demand from its customers. The Company conducts nearly all of its business with foreign customers in United States currency and accordingly, is generally not subject to foreign currency fluctuations. Customary terms of business for product sales are a substantial deposit on order with the remainder guaranteed by an irrevocable letter of credit or, when appropriate, open account. MANUFACTURING The Company's products are assembled by the Company using subsystems and circuit boards supplied by subcontractors. The Company's products use a number of application specific integrated circuit (ASIC) chips, monolithic microwave integrated circuits (MMIC) and customized components or subassemblies produced by a limited number of suppliers. In the event that such suppliers are unable to fulfill the Company's requirements, the Company may experience an interruption in production until an alternative source of supply is developed. The Company maintains an inventory of certain long lead time components and subassemblies to limit the potential for such an interruption. The Company believes that there are a number of companies capable of providing replacements for the types of unique chips, customized components and subassemblies used in its products. 8 RESEARCH AND DEVELOPMENT The Company's research and development efforts are devoted to the design and implementation of satellite and wireless radio communications network hardware and software. The Company's future growth depends on adaptation of its existing satellite communications products to new applications, and the introduction of new communications products that will gain market acceptance and benefit from the Company's established international distribution channels. Accordingly, the Company is actively applying its communications expertise to design and develop new hardware and software products and enhance existing products. STM's R&D efforts are primarily focused on reducing the overall cost of ownership of its products to its customers, thereby expanding the addressable market size. In addition, the Company may opportunistically acquire products, technologies or companies consistent with its commercial objectives to serve the evolving needs of the Company's customer base. In 1999, 1998, and 1997, the Company incurred expenses of $5,354,000, $8,102,000 and $6,387,000, respectively, on research and development activities. During this period, the Company continued the development of the DAMA 10000 VSAT, completed development of the SES and SpaceWeb products (including broadband products) and continued development of the SpaceLoop product. COMPETITION The Company has a number of competitors in the satellite communications field, most of which have substantially greater financial, marketing, and technological resources than the Company. The Company's competitors include large companies such as Hughes Network Systems and Gilat Satellite Networks. There can be no assurance that the Company will not experience increased competition in the future from these or other competitors which may adversely affect the Company's ability to continue to successfully market its products or services. The Company believes that it has been able to compete with these companies by offering flexible and cost effective products and utilizing the resources of local distributors, forming strategic alliances with major corporations, and by emphasizing product features and functions such as concurrent support of multiple protocols, voice capability, built-in diagnostic ports and downloadable software and configurations, which allow the products to serve the diverse needs of international customers. These product features and functions are based upon the Company's proprietary hardware and software. See "Patents and Intellectual Property." However, most of the Company's competitors offer products which have one or more of the features and functions similar to those offered by the Company. The Company believes that the quality, performance and capabilities of its products, its ability to customize certain network functions and the efficient utilization of satellite capacity, coupled with the products generally offered by the Company's major vendors, have contributed to the Company's ability to compete. The Company's major competitors have the resources available to develop products with features and functions, competitive with, or superior to, those offered by the Company. There can be no assurance that such competitors will not develop such features or functions, or that the Company will be able to maintain a lower cost advantage for these products. PATENTS AND INTELLECTUAL PROPERTY The Company relies on a combination of trade secrets, copyrights, trademarks, service marks and contractual rights to protect its technology and software. The Company attempts to protect its trade secrets and other proprietary information through agreements with its customers, suppliers, employees and consultants. While the Company has filed certain patent applications, the Company believes that the improvement of existing products, reliance upon trade secrets, copyrights and unpatented proprietary know-how and the development of new products are generally as important as patent protection in establishing and maintaining a competitive advantage because, among other reasons, patents often provide only narrow protection which may not provide a competitive advantage in areas of rapid technological change. The use of trade secrets and copyrights will not necessarily protect the Company from the use by other persons of its technology or software, or technology or software that is similar to that which is embodied in the Company's trade secrets or copyrights. There can be no assurance that others will not be able to duplicate the Company's technology and software in whole or in part. In addition, the laws of certain countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. The inability of the Company to protect its intellectual property and proprietary technology could have a material adverse effect on its 9 business, operating results and financial condition. With respect to the Company's venture into new fields, the Company believes that patent protection may be necessary. Accordingly, the Company has applied for some patents and intends to pursue patent protection for additional products developed by the Company. In addition, as the number of patents, copyrights and other intellectual property rights in the Company's industry increases, and as the coverage of these rights and the functionality of the products of new markets further overlap, the Company believes that its products may increasingly become the subject of infringement claims. The Company may in the future be notified that it is infringing upon certain intellectual property rights of others. Although the Company has not received any such notification to date, and there are no pending or threatened intellectual property lawsuits against the Company, there can be no assurance that such litigation or infringement claims will not occur in the future. Any such litigation or claims could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, operating results and financial condition. GOVERNMENT REGULATIONS The Communications Act of 1934, as amended, gives the Federal Communications Commission ("FCC") jurisdiction over the communications products and services provided by the Company in the United States. Part 25 of the FCC's rules and regulations governs the operation and use of satellite transponders and requires authorization for construction and operation of each transmitting earth station, including VSATs installed on customers' premises. The Company's international sales are also subject to Department of Commerce regulations for export of its products, which usually meet general license requirements depending on country of destination. EMPLOYEES As of December 31, 1999, the Company employed 101 people on a full-time basis, including 59 employees in engineering/research and development, 13 employees in manufacturing, 11 employees in marketing and sales and 18 employees in administration and accounting. The Company believes that its relations with all employees are satisfactory. The employees and the Company are not parties to any collective bargaining agreements. RISK FACTORS FORWARD LOOKING STATEMENTS. THIS DOCUMENT CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE FORWARD LOOKING STATEMENTS, ORALLY OR IN WRITING. THE WORDS "ESTIMATE", "PROJECT", "POTENTIAL", "INTENDED", "EXPECT", "BELIEVE" AND SIMILAR EXPRESSIONS OR WORDS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED OR SUGGESTED IN ANY FORWARD LOOKING STATEMENTS AS A RESULT OF A WIDE VARIETY OF FACTORS AND CONDITIONS, AMONG OTHERS, LIQUIDITY AND FINANCING RISKS, LONG TERM CYCLES INVOLVED IN COMPLETING MAJOR CONTRACTS, PARTICULARLY IN FOREIGN MARKETS, INCREASING COMPETITIVE PRESSURES, GENERAL ECONOMIC CONDITIONS, TECHNOLOGICAL ADVANCES, THE TIMING OF NEW PRODUCT INTRODUCTIONS, POLITICAL AND ECONOMIC RISKS INVOLVED IN FOREIGN MARKETS AND FOREIGN CURRENCIES, THE TIMING OF OPERATING AND OTHER EXPENDITURES AND OTHER RISKS IDENTIFIED BELOW. 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. FUTURE CAPITAL REQUIREMENTS The Company used net cash in operations of approximately $822,000 in the year ended December 31, 1999. There can be no assurance that the Company will generate positive cash flow from operations in fiscal 2000 or thereafter. The Company's ability to fund its capital requirements out of available cash, traditional sources of 10 financing and cash generated from operations will depend on numerous factors, including but not limited to the commercial success of the Company's products and services and the Company's ability to collect payments for certain sales commitments. As of March 29, 2000 the Company had approximately $7,500,000 in unrestricted cash, including approximately $3,750,000 received by the Company in connection with the recent financing of the Company's services affiliate, SkyOnline, Inc., which reduced the Company's ownership in SkyOnline, Inc. from approximately 44% to approximately 15%. In addition, on March 27, 2000, the Company obtained a $3,300,000 line of credit from The CIT Group. Should the Company's business increase significantly, the Company may be required to seek additional funds through debt or equity financings, product licensing or distribution transactions or some other source of financing in order to provide sufficient working capital for the Company. The Company believes that such alternative sources of financing are available. The issuance of additional equity securities by the Company could result in substantial dilution to stockholders. If the Company is required to raise additional working capital, there can be no assurance that the Company will be able to raise such additional working capital on acceptable terms, if at all. HISTORY OF LOSSES AND FLUCTUATIONS IN QUARTERLY OPERATING RESULTS Results of operations may fluctuate significantly and will depend upon numerous factors, including the competitive environment in which the Company operates, the delays that arise when operating in an international environment, the long lead time and extended sales effort required to secure larger value orders that the Company focuses on obtaining, the continued need to invest in the development of new products and in the enhancement of existing products, the risk of inventory obsolescence and the exposure to disputes by international customers. The Company has incurred operating losses in 1999, 1998 and 1997. There can be no assurance that there will not be operating losses in future periods. The Company's quarterly operating results fluctuate primarily due to the timing of product sales. Sales of the Company's products are generally consummated through large orders which require a long lead-time and an extended sales effort. The Company's sales in any quarter are dependent on orders booked and shipped in that quarter. As a result, the precise timing of the recognition of revenue from an order can have a significant impact on the Company's total revenues and operating results for a particular period. The Company's operating results for a particular period could be adversely affected if an order is cancelled or rescheduled by customers or cannot be shipped in time to recognize revenue during that period due to, for example, unanticipated manufacturing, testing, shipping or product acceptance delays. In addition, the Company's expense levels are based, in large part, on the Company's expectations as to future revenues and are, therefore, relatively fixed in the short term. If revenue levels fall below expectations, net income will be disproportionately and adversely affected. The impact of these and other factors on the Company's revenues and operating results in any future period cannot be forecast with any degree of certainty. Accordingly, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON BROADBAND MARKET In 1999, the Company introduced a family of products to address the growing demand for high bandwidth applications and Internet access via satellite. This market is highly competitive and there can be no assurance that the Company will be able to capture a significant portion of the market. The Company's ability to penetrate this market will depend on its ability to develop strategic alliances, reduce product costs, develop further refinements to its products and successfully develop additional distribution channels for its products. DEPENDENCE ON VSAT MARKET A significant part of the Company's product revenues are derived from sales of VSAT communications networks. A significant slowdown in the market for VSAT communications networks and services or the replacement of the existing VSAT technology by an alternative technology could have a material adverse effect on the Company's business, operating results and financial condition. 11 COMPETITION The market for the Company's products is intensely competitive. Many of the companies that have developed competing technologies and that market competing products, including Hughes Network Systems and Gilat Satellite Networks, have significantly greater financial, technical and marketing resources than the Company. There can be no assurance that the Company's competitors will not succeed in developing technologies and products that are more effective or less costly than any which have been or are being developed by the Company or that would render the Company's technologies or products obsolete or not competitive or that their greater financial resources will not enable them to penetrate new markets for VSAT products more quickly than the Company. The Company also competes against various companies that offer communications network systems based on other technologies (e.g., terrestrial lines and frame relay or radio and microwave transmission) that in certain circumstances can be competitive in price and performance with the Company's products. There can be no assurance that these or other technologies will not capture a significant part of the markets in which the Company's VSAT products compete. RAPID TECHNOLOGICAL CHANGE The technology underlying the Company's products and services is subject to rapid change. The Company's success will depend in part upon its continuing ability to respond quickly and successfully to technological advances by developing and introducing new products. Most of the Company's competitors have substantially greater financial and technical resources than the Company. If one or more of the Company's competitors were to introduce competing products with superior technological features, such introduction could have a material adverse effect on the success of the Company's products. DEPENDENCE ON EMERGING MARKETS The Company has generated approximately 44%, 50% and 14% of its revenue in Latin and South America in 1999, 1998 and 1997, respectively, 25%, 21% and 6% of its revenues in Africa and the Middle East in 1999, 1998 and 1997, respectively, and 19%, 17% and 68% of its revenue in Asia in 1999, 1998 and 1997, respectively. The deterioration of the Asian economies in 1998 has impacted and is continuing to impact the level of revenues that the Company is generating in Asia. While in any individual year, the Company's revenues generally represent new projects to new or existing customers in new or existing geographic regions, there can be no assurance that the present condition of the Asian economies will not continue to negatively impact the level of revenues generated by the Company in the Asian markets in future years. In addition, any deterioration in the Latin American economies could impact the level of revenues that the Company generates in Latin America. DEPENDENCE ON KEY PERSONNEL The Company's future performance is significantly dependent on the continued active participation of Emil Youssefzadeh, the Company's founder and Chief Executive Officer. Should Mr. Youssefzadeh leave or otherwise become unavailable to the Company, the Company's business, operating results and financial condition may be materially adversely affected. The Company has obtained a "key man" life insurance policy in the amount of $5,000,000 on the life of Mr. Youssefzadeh. In addition to Mr. Youssefzadeh, the Company's future success depends upon its ability to attract and retain additional highly qualified management and technical personnel. The Company faces intense competition for qualified personnel, and there can be no assurance that the Company will be able to attract and retain such personnel. DEPENDENCE ON KEY SUPPLIERS AND MANUFACTURERS Certain components used by the Company in its existing products are purchased from single source suppliers and manufacturers. While the Company maintains an inventory of components and believes that alternative suppliers and manufacturers for all such components are currently available at reasonable terms, an interruption in the delivery of these components may have a material adverse effect on the Company. There can be no assurance as to when or whether the Company would be able to locate any such alternative suppliers. Furthermore, there can be no assurance that the Company will not encounter future component shortages or other disruptions in the supply of materials. Delays associated with raw materials or component shortages could have a material adverse effect on the Company's business, operating results and financial condition. 12 RURAL TELEPHONY MARKET The Company's strategy includes focusing on selling rural telephony networking infrastructure and terminals for use in developing countries. There can be no assurance that a substantial market for rural telephony equipment in developing countries will ever develop, or if such a market does develop, that fixed-site VSAT-based equipment will capture a significant portion of that market. The Company's ability to penetrate this market will be dependent on its ability to develop equipment and software which can be utilized by regional and local service providers to market and sell the use of such systems. Furthermore, there can be no assurance that the regional and local service providers will be able to successfully market such services to rural subscribers. SALES TO FOREIGN CUSTOMERS The Company historically has generated substantially all of its revenue in overseas markets. While the Company is making efforts to penetrate the domestic market with its products, the Company's success is dependent upon its ability to continue to successfully market voice and data VSAT communication networks in the international market. The Company's export sales, as a percentage of total revenues, were approximately 93%, 90% and 95% in 1999, 1998 and 1997, respectively. As a result, the Company is subject to various risks, including currency fluctuations, greater difficulty of administering business globally, compliance with multiple and potentially conflicting regulatory requirements, such as export and import requirements, tariffs and other barriers, differences in intellectual property protections, difficulties in staffing and managing foreign operations, longer accounts receivable cycles and delays in resolving customer disputes, repatriation of earnings, export control restrictions, overlapping or differing tax structures, political and economic instability and general trade restrictions. If any of these risks materializes, it could have a material adverse effect on the Company's business, operating results and financial condition. In addition, the satellite network service industries in the Company's target markets are highly regulated, which may limit the number and identity of potential service providers to which the Company can sell its products. Given the high degree of regulation in the Company's target market, and given the fact that such markets, which are primarily developing countries, involve greater political and economic instability, there can be no assurance that the Company's products will achieve general market acceptance in the Company's target markets. The Company's foreign sales are generally invoiced in U.S. dollars. However, as the Company expands its international sales into new markets, the Company may be paid in foreign currencies with greater frequency, and exposure to losses in foreign currency transactions may increase. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION for a description of the Company's foreign currency exposure in Brazil. In addition, if the relative value of the U.S. dollar in comparison to the Company's foreign customers' currency should increase, the resulting effective price increase of the Company's products to such foreign customers could result in decreased sales which could have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON PROPRIETARY RIGHTS; RISK OF INFRINGEMENT CLAIMS The Company relies on a combination of trade secrets, copyrights, trademarks, service marks and contractual rights to protect its technology and software. The Company attempts to protect its trade secrets and other proprietary information through agreements with its customers, suppliers, employees and consultants. While the Company has filed certain patent applications, the Company believes that the improvement of existing products, reliance upon trade secrets, copyrights and unpatented proprietary know-how and the development of new products are generally as important as patent protection in establishing and maintaining a competitive advantage because, among other reasons, patents often provide only narrow protection which may not provide a competitive advantage in areas of rapid technological change. The use of trade secrets and copyrights will not necessarily protect the Company from the use by other persons of its technology or software, or technology or software that is similar to that which is embodied in the Company's trade secrets or copyrights. There can be no assurance that others will not be able to duplicate the Company's technology and software in whole or in part. In addition, the laws of certain countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. The inability of the Company to protect its intellectual property and proprietary technology could have a material adverse effect on its business, operating results and financial condition. With respect to the Company's venture into new fields, the Company believes that patent protection may be necessary. Accordingly, the Company has applied for some patents and intends to pursue patent protection for additional products developed by the Company. In addition, as the number of patents, copyrights and other intellectual property rights in the Company's industry increases, and as the 13 coverage of these rights and the functionality of the products of new markets further overlap, the Company believes that its products may increasingly become the subject of infringement claims. The Company may in the future be notified that it is infringing upon certain intellectual property rights of others. Although the Company has not received any such notification to date, and there are no pending or threatened intellectual property lawsuits against the Company, there can be no assurance that such litigation or infringement claims will not occur in the future. Any such litigation or claims could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS AND CREDIT RISK A significant portion of the Company's revenues are derived from a limited number of customers. The Company's success depends, in part, on its ability to establish and maintain relationships with such customers. Revenues attributable to the Company's top two customers in 1999 constituted approximately 41% of the Company's revenues. As a result, a decrease in revenues generated from either of these customers could have a material adverse effect on the Company's business, results of operation and financial condition. The Company generates a substantial amount of its revenues from individually significant orders, primarily on an international basis. These sales are on a letter of credit or a similar guaranteed basis or on an open account basis. Generally, credit on an open account basis is only extended to customers with substantial financial resources or to public utilities that are government owned in the country to which the product is shipped. There can be no assurance, however, that these customers will not encounter liquidity problems that could result in exceptional delays in the payment of or the inability to pay, accounts receivable balances. In the event of such an occurrence, the Company's financial condition and results of operations could be adversely affected. (See note 14 to the consolidated financial statements which discusses sales to Principal Customers.) POSSIBLE VOLATILITY OF STOCK PRICES The market prices for securities of technology companies, including the Company, have been volatile. Quarter to quarter variations in operating results, changes in earnings estimates by analysts, announcements of technological innovations or new products by the Company or its competitors, announcements of major contract awards and other events or factors may have a significant impact on the market price of the Company's Common Stock. In addition, the securities of many technology companies have experienced extreme price and volume fluctuations, which have often been unrelated to the companies' operating performance. These conditions may adversely affect the market price of the Company's Common Stock. In addition, the Company trades on the NASDAQ National Market under the symbol "STMI". Failure to meet listing requirements may result in the Company being moved from the National Market to the SmallCap Market or being de-listed. As a result, investors could find it more difficult to dispose of, or to obtain accurate quotations as to the value of the Company's Common Stock and the trading price per share could be reduced. ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation provides for 5,000,000 authorized but unissued shares of Preferred Stock, the rights, preferences, qualifications, limitations and restrictions of which may be fixed by the Board of Directors without any further vote or action by the stockholders. The Company's charter documents prescribe procedures for the nomination and election of directors and limit the ability of stockholders to take actions by written consent which could make it more difficult for stockholders to elect directors or take other actions. Further, the Company's Bylaws include a "fair price provision" which requires the affirmative vote of two-thirds of the outstanding shares of capital stock entitled to vote generally in the election of directors to approve certain business combinations. In addition, the Company's stock option plan provides for the acceleration of vesting of options granted under such plan in the event of certain transactions which result in a change of control of the Company. Further, Section 203 of the General Corporation Law of Delaware prohibits the Company from engaging in certain business combinations with interested stockholders. These provisions may have the effect of delaying or preventing a change in control of the Company without action by the stockholders and therefore could adversely affect the price of the Company's Common Stock. CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATED ENTITIES As of March 22, 2000, the Company's officers, directors and their affiliates owned approximately 21.8% of the outstanding Common Stock. If such stockholders were to act in concert, they might be able to control 14 substantially all matters requiring approval by the stockholders of the Company, including the election of directors. Such concentration of ownership could discourage or prevent a change in control of the Company. See "Principal Stockholders." POTENTIAL PRODUCT LIABILITY CLAIMS Although to date the Company has not experienced any product liability claims, the sale and support of products by the Company involves the risk of such claims. The Company maintains product liability insurance in amounts it believes are customary for similar businesses in the industry; however, a successful product liability claim brought against the Company, in excess of the amount for which the Company is insured, or for which coverage is not provided under the Company's insurance policies, could have a material adverse effect upon the Company's business, financial condition and results of operations. 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. In addition, it is possible that our suppliers' and service providers' failure to adequately address the year 2000 problem could have an adverse effect on their operations, which, in turn, could have an adverse impact on us. ITEM 2--PROPERTIES The Company's principal offices are located in a 62,000 square foot facility in Irvine, California, which houses all functions including manufacturing, engineering, accounting, administration, marketing, sales, and service. The Company purchased this facility on July 28, 1994 and refinanced the facility in September 1999. As a result of the refinancing, the Company issued a promissory mortgage note (the "Mortgage Note") in the amount of $7.0 million. The Mortgage Note is secured by the Company's land and building and related fixtures and accrues interest at 7% per annum. The Mortgage Note requires monthly principal and interest payments of approximately $46,571 and is being amortized over a thirty-year period and matures on November 2014, at which time all remaining principal and accrued interest is due. The Company currently subleases approximately 19,100 square feet of its Irvine facility to another Company under a four year lease. ITEM 3--LEGAL PROCEEDINGS From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. As of December 31, 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. ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 15 PART II ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the NASDAQ Stock Market under the symbol STMI. The high and low transaction prices for the common stock, as reported by the National Association of Securities Dealers, Inc. for each of the quarterly periods for the years ended December 31, 1999 and 1998 are set forth in the following table:
PRICE RANGE PER SHARE OF COMMON 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------------------------------- ------------ ------------ ------------ ------------ Year Ended December 31, 1999 High................................... $ 6.063 $ 4.750 $ 4.000 $ 8.375 Low.................................... 2.281 2.563 2.250 3.125 Year Ended December 31, 1998 High................................... $ 13.250 $ 14.750 $ 10.250 $ 7.688 Low.................................... 6.750 8.750 3.563 4.000
As of August 1, 1999, there were 84 stockholders of record, and approximately 1,688 beneficial owners. The Company does not currently pay cash dividends on its common stock and intends to retain earnings, if any, for use in the operation and expansion of its business. ITEM 6--SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein. Effective March 31, 1996, the Company sold all the outstanding common stock of RF Microsystems ("RF"), a wholly-owned subsidiary for $2,926,000. This sale qualified as a disposal of a segment of a business and accordingly prior period financial statements have been restated to reflect the discontinuance of this segment of the business. In December 1997, the Company issued 480,000 shares of common stock in exchange for all the outstanding common stock of Telecom International, Inc. ("TI"), a company that specialized in network systems integration. The transaction was accounted for as a pooling of interests and accordingly, the Company's financial statements have been restated to include the results of TI for all applicable periods. TI commenced operations on June 12, 1995. In June 1998, the Company completed the sale of its majority-owned subsidiary, TMSI, to Inter-Tel, Incorporated ("Inter-Tel") pursuant to which Inter-Tel agreed to purchase certain assets and assume certain liabilities of TMSI for approximately $25 million in cash. A gain of $9,950,000 (net of costs and reserves then considered necessary) was realized and is included in the consolidated statement of operations data for the year ended December 31, 1998. In June 1999, upon the release of substantially all the final funds from escrow, the Company re-evaluated 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 $2,964,000, which has been classified as a gain on the sale of assets for the year ended December 31, 1999. (See note 3 to the consolidated financial statements.) In 1997, the Company was awarded, through its then 100% owned subsidiary, DTPI, two long-term service contracts to provide rural telephony services in Mexico and Venezuela. DTPI was established in 1996 for the purpose of offering fixed satellite telephony and advanced data services in emerging markets. In September 1998, DTPI renegotiated its long-term service contract with its Mexican partner whereby DTPI was paid approximately $9,500,000 (before expenses) for the sale and installation of remote terminal equipment utilized in the provision of telephony services. DTPI retained ownership of certain gateway infrastructure equipment. Both the remote and gateway equipment were classified as assets for long-term service contracts as part of total assets at December 31, 1997. As a result of the revision of the agreement, the sales of remote equipment were classified as revenue in the Company's consolidated statement of operations data for 1998 and the gateway equipment was classified as part of 16 total assets in the consolidated balance sheet data at December 31, 1998. There were no revenues associated with this Mexican customer in 1999. Arising from the award of the long-term service contract in Venezuela in 1998, DTPI formed Altair, S.A. with the national telephone company in Venezuela to provide telephony services in Venezuela. Through DTPI, the Company owned 49% of this joint venture and accounted for its investment on an equity basis. The equity investment of $4,151,000 in Altair is included in the consolidated balance sheet data at December 31, 1998. Revenues of approximately $740,000 and $3,600,000, representing sales to Altair, were included in total revenues in 1999 and 1998, respectively, and the equity share of the net loss of Altair for 1999 of $59,000 and the net income of Altair for 1998 of $66,000 was included as part of the net loss in the consolidated statement of operations data. The revenues and share of the net loss recognized in 1999 for Altair represent the revenues and net loss through June 17, 1999. (See notes 4 and 17 to consolidated financial statements.) In March 1998, the Company completed a $10 million equity offering of common stock of STM for $4,000,000 and mandatory redeemable preferred stock of DTPI for $6,000,000; representing 25% of the voting stock of DTPI. The net proceeds from the issuance of the mandatory redeemable preferred stock in DTPI plus accrued dividends of $6,355,000 were classified as redeemable minority interest in the consolidated balance sheet data at December 31, 1998. The accrued dividends of $450,000 and $275,000 (through June 17, 1999), are classified as minority interest expense in the Company's consolidated statement of operations data for the years ended December 31, 1998 and 1999, respectively. On June 17, 1999, the Company and DTPI completed a 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. ("REMEC") and Pequot Private Equity Fund ("Pequot"). The proceeds comprised cash of $2,219,000, net of transaction costs of $281,000, a reduction in accounts payable of approximately $2,300,000 and an offset against future purchases of inventory for approximately $2,300,000. As a result of the June 17, 1999 financing, the Company reduced its ownership in the voting stock of DTPI from 75% to approximately 44% and relinquished operating control of DTPI. Due to losses incurred by DTPI from inception through June 17, 1999, STM's equity investment in DTPI including a $7,500,000 note receivable from DTPI was reduced to zero. STM has no funding obligations to DTPI nor has it guaranteed any obligations of DTPI. Therefore, in accordance with the Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for investments in Common Stock", ("APB 18"), STM discontinued accruing losses of DTPI. The consolidated results of operations for 1999 include the results of DTPI through June 17, 1999, and the consolidated balance sheet at December 31, 1999, excludes the assets and liabilities of DTPI. In connection with the sale of the shares in DTPI, the Company granted a concession of $1,600,000 against future purchases of product by DTPI from STM and agreed to a price adjustment of approximately $1,500,000 with REMEC whereby the purchase price of all future purchases of committed product from REMEC were increased. Such liabilities are included in working capital and long-term liabilities in the consolidated balance sheet data at December 31, 1999. In addition, DTPI repaid STM $2,500,000 of a $10,000,000 note receivable due to STM. At December 31, 1999, the remaining balance of the note receivable was repayable out of the proceeds of future DTPI financings. The remaining balance was written down to zero due to STM absorbing the losses of DTPI from inception. However, subsequent to December 31, 1999, DTPI completed a financing resulting in a payment of $3,750,000 to STM. (See note 20 to consolidated financial statements.) Arising primarily from the devaluation of the Brazilian Real, the Company incurred foreign currency devaluation costs of $1,906,000 (primarily in the first quarter of 1999) that comprised losses 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 has only partially compensated the Company for the reduction in the value of the Brazilian Real). 17 The consolidated statement of operations data and loss per share of common stock with respect to the years ended December 31, 1999, 1998 and 1997, and the consolidated balance sheet data at December 31, 1999 and 1998 are derived from audited financial statements included elsewhere herein. The consolidated statement of operations data and income (loss) per share of common stock for the years ended December 31, 1996 and 1995 and the consolidated balance sheet data at December 31, 1997, 1996 and 1995 are derived from audited financial statements restated in connection with the disposal of RF discussed above.
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues........................................... $ 22,226 $ 42,022 $ 52,148 $ 38,294 $ 31,881 Gross profit............................................. 5,662 7,064 13,749 9,328 10,990 Operating (loss) income.................................. (8,852) (14,764) (2,227) (7,255) 998 Gain on sale of assets................................... 2,964 9,950 -- -- -- Foreign currency devaluation costs....................... (1,906) -- -- -- -- (Loss) income before discontinued operations............. (8,311) (9,406) (2,051) (5,156) 1,067 Net (loss) income........................................ $ (8,311) $ (9,406) $ (2,051) $ (5,068) $ 1,400 (Loss) income per share of common stock: (Loss) income before discontinued operations: Basic........................................... $ (1.18) $ (1.36) $ (0.32) $ (0.81) $ 0.18 Diluted......................................... $ (1.18) $ (1.36) $ (0.32) $ (0.81) $ 0.17 Net (loss) income: Basic........................................... $ (1.18) $ (1.36) $ (0.32) $ (0.80) $ 0.23 Diluted......................................... $ (1.18) $ (1.36) $ (0.32) $ (0.80) $ 0.22 Weighted average common shares for calculating basic income (loss) per share............................... 7,042 6,936 6,384 6,318 6,009 Weighted average common shares for calculating diluted income (loss) per share............................... 7,042 6,936 6,384 6,318 6,335 CONSOLIDATED BALANCE SHEET DATA: Working capital.......................................... $ 12,996 $ 16,013 $ 12,374 $ 21,773 $ 24,529 Equity investment in affiliates.......................... 157 4,151 -- -- -- Total assets............................................. 34,478 63,201 54,417 51,840 46,839 Redeemable minority interest............................. -- 6,355 -- -- -- Long-term debt........................................... 7,049 4,306 4,577 4,828 4,488 Other long-term liabilities.............................. 762 -- -- -- -- Stockholders' equity..................................... $ 13,447 $ 21,758 $ 27,062 $ 28,292 $ 33,028
18 QUARTERLY INFORMATION (UNAUDITED): The following table sets forth certain unaudited quarterly financial information for the Company's last eight fiscal quarters. This information includes all normal recurring adjustments that the Company considers necessary for a fair presentation. The operating results for any quarter are not necessarily indicative of results for any future period. See Risk Factors: History of Losses and Fluctuations in Quarterly Operating Results in Part 1 of this document.
YEAR ENDED DECEMBER 31, 1999 --------------------------------------------------------------------- 1ST 2ND 3RD 4TH TOTAL QUARTER QUARTER QUARTER QUARTER* YEAR ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenues............................................. $ 3,091 $ 5,982 $ 6,536 $ 6,617 $ 22,226 Gross profit............................................... (1,329) 1,835 2,587 2,569 5,662 Operating loss............................................. (6,472) (2,154) (125) (101) (8,852) Gain on sale of assets..................................... -- 2,964 -- -- 2,964 Foreign currency devaluation costs......................... (1,554) (308) (122) 78 (1,906) Net (loss) income.......................................... $ (8,463) $ 368 $ (246) $ 30 $ (8,311) Income (loss) per share of common stock: Basic................................................. $ (1.20) $ 0.05 $ (0.03) $ 0.00 $ (1.18) Diluted............................................... $ (1.20) $ 0.05 $ (0.03) $ 0.00 $ (1.18) YEAR ENDED DECEMBER 31, 1998 --------------------------------------------------------------------- Total revenues............................................. 6,949 9,107 14,323 11,643 42,022 Gross profit............................................... 959 2,141 4,815 (851) 7,064 Operating (loss) income.................................... (3,967) (4,906) 335 (6,226) (14,764) Gain on sale of assets..................................... -- 9,950 -- -- 9,950 Net (loss) income.......................................... (4,074) 4,434 39 (9,805) (9,406) Income (loss) per share of common stock: Basic................................................. $ (0.62) 0.63 0.01 (1.39) (1.36) Diluted............................................... $ (0.62) 0.60 0.01 (1.39) (1.36)
* The results for the fourth quarter of 1998 included charges of approximately $7,100,000 which comprised approximately $2,500,000 for inventory obsolescence associated with an earlier version of the Company's products, certain items that were considered excess to requirements and reserves established for certain inventory on long-term loan to customers, approximately $3,200,000 for taxes comprising the write-off of deferred tax assets due to uncertainty concerning the realizability of such assets due to continued losses by the Company and a reserve established for certain tax exposures in Brazil, reserves established for accounts receivable balances of approximately $900,000 associated with the Company's Mexican partner and other overdue balances and an impairment reserve of $500,000 associated with the carrying value of certain long-term revenue generating assets due to the Mexican partner experiencing financial difficulties. ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION BACKGROUND STM is a developer, manufacturer, supplier and service provider of wireless-based satellite communications infrastructure and user terminal products utilized 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 referred to as VSATs (very small aperture terminals), associated infrastructure equipment and software, transceivers, modems and other networking equipment. Historically, the Company has focused its sales efforts on the international marketplace, particularly developing countries. For the year ended December 31, 1999, approximately 93% of the Company's revenue was generated in 19 the international market through foreign distributors and sales representatives. The Company's customers include government agencies, telephone companies, multi-location corporations and others. In December 1997, the Company issued 480,000 shares of common stock in exchange for all the outstanding common stock of Telecom International, Inc. ("TI"), a company that specializes in network systems integration. The transaction was accounted for as a pooling of interests and accordingly, the Company's consolidated financial statements have been restated to include the results of TI for all applicable periods. In June 1998, the Company completed the sale of its then majority-owned subsidiary, TMSI, to Inter-Tel, Incorporated ("Inter-Tel") pursuant to which Inter-Tel agreed to purchase certain assets and assume certain liabilities of TMSI for approximately $25 million in cash. A gain of $9,950,000 (net of costs and reserves then considered necessary) was realized and is included in the consolidated statement of operations for the year ended December 31, 1998. In June 1999, upon the release of substantially all the funds from escrow, the Company re-evaluated 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 $2,964,000, which has been classified as a gain on the sale of assets for the year ended December 31, 1999. (See notes 3 and 12 to the consolidated financial statements.) In 1997, the Company was awarded, through its then 100% owned subsidiary, DTPI, two long-term service contracts to provide rural telephony services in Mexico and Venezuela. DTPI was established in 1996 for the purpose of offering fixed satellite telephony and advanced data services in emerging markets. In September 1998, DTPI renegotiated its long-term service contract with its Mexican partner whereby DTPI was paid approximately $9,500,000 (before expenses) for the sale and installation of remote terminal equipment utilized in the provision of telephony services. DTPI retained ownership of certain gateway infrastructure equipment. As a result of the revision of the agreement, the sales of remote equipment were classified as revenue in the Company's consolidated statement of operations for 1998 and the gateway equipment was classified as Property, Plant and Equipment in the consolidated balance sheet at December 31, 1998. There were no revenues associated with this Mexican customer in 1999. Arising from the award of the long-term service contract in Venezuela in 1998, DTPI formed Altair with the national telephone company in Venezuela to provide telephony services in Venezuela. Through DTPI, the Company owned 49% of this joint venture and accounted for its investment on an equity basis. The equity investment of $4,151,000 in Altair was included in the consolidated balance sheet at December 31, 1998. Revenues of approximately $740,000 and $3,600,000 were included in total revenues in 1999 and 1998, respectively, and the equity share of the net loss of Altair for 1999 of $59,000 and the net income for 1998 of $66,000 was included in the consolidated statements of operations for 1999 and 1998, respectively. The revenues and share of net loss recognized in 1999 for Altair represent the results of Altair through June 17, 1999. (See notes 4 and 17 to consolidated financial statements.) In March 1998, the Company completed a $10 million equity offering of common stock of STM for $4,000,000 and mandatory redeemable preferred stock of DTPI for $6,000,000; representing 25% of the voting stock of DTPI. The proceeds from the issuance of the mandatory redeemable preferred stock in DTPI plus accrued dividends of $6,355,000 were classified as redeemable minority interest in the consolidated balance sheet at December 31, 1998. The dividends of $450,000 and $275,000 (through June 17, 1999), are classified as minority interest in the Company's consolidated statement of operations for the years ended December 31, 1998 and 1999, respectively. On June 17, 1999, the Company and DTPI completed a 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. ("REMEC") and Pequot Private Equity Fund ("Pequot"). The proceeds comprised cash of $2,219,000, net of transaction costs of $281,000, a reduction in accounts payable of approximately $2,300,000 and an offset against future purchases of inventory for approximately $2,300,000. As a result of the June 17, 1999 financing, the Company reduced its ownership in the voting stock of DTPI from 75% to approximately 44%. In addition, in June 1999, DTPI appointed a new Chairman and Chief Executive Officer. These factors resulted in the Company relinquishing operating control of DTPI and the Company changed it's accounting for DTPI from a full consolidation method to the equity method. However, due to losses incurred by DTPI from inception through June 17, 1999, STM's equity investment in DTPI, including a $7,500,000 note receivable from DTPI, was reduced to zero. STM has no funding obligations to DTPI nor has it guaranteed any obligations of DTPI. Therefore, in accordance with the APB18, STM discontinued accruing losses of DTPI. The 20 results of operations for 1999 include the results of DTPI through June 17, 1999, and the consolidated balance sheet at December 31, 1999, excludes the assets and liabilities of DTPI. In connection with the sale of the shares in DTPI, the Company granted a concession of $1,600,000 against future purchases of product by DTPI from STM and agreed to a price adjustment of approximately $1,500,000 with REMEC whereby the purchase price of all future purchases of committed product from REMEC were increased. In addition, DTPI repaid STM $2,500,000 of a $10,000,000 note receivable due to STM. RESULTS OF OPERATIONS The following table sets forth for the periods presented the percentages of revenues represented by certain items in the Company's consolidated statements of operations for the last three fiscal years. The percentages include the results of DTPI from inception through June 17, 1999.
YEAR ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 --------- --------- -------- Revenues.............................................................................. 100.0% 100.0% 100.0% Cost of revenues...................................................................... 74.5 83.2 73.6 --------- --------- -------- Gross profit..................................................................... 25.5 16.8 26.4 Selling, general and administrative expenses.......................................... 36.5 30.3 18.4 Research and development costs........................................................ 24.1 19.3 12.2 Restructuring costs................................................................... 4.7 -- -- Move and relocation charges........................................................... -- 2.3 -- --------- --------- -------- Total operating costs............................................................ 65.3 51.9 30.6 --------- --------- -------- Operating loss................................................................... (39.8) (35.1) (4.2) Gain on sale of assets................................................................ 13.3 23.6 -- Other income (expense)................................................................ 0.4 (0.1) 0.1 Foreign currency devaluation costs.................................................... (8.6) -- -- Net interest (expense) income......................................................... (1.2) (1.3) (0.6) --------- --------- -------- Loss before income taxes and minority interest........................................ (35.9) (12.9) (4.7) Income tax (expense) benefit.......................................................... -- (8.8) 0.5 --------- --------- -------- Loss before minority interest......................................................... (35.9) (21.7) (4.2) Equity in net income (loss) of affiliate.............................................. (0.3) 0.1 -- Minority interest..................................................................... (1.2) (0.8) 0.3 --------- --------- -------- Net loss.............................................................................. (37.4)% (22.4)% (3.9)% ========= ========= ========
YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998 Total revenues (including DTPI through June 17, 1999) were $22,226,000 for 1999, compared to $42,022,000 for 1998, representing a decrease of 47% over the prior year period. Product revenues were $19,962,000 for 1999, compared to $39,355,000 for 1998 representing a decrease of 49% over the prior year period. Service revenues were $2,264,000 for 1999, compared to $2,667,000 for 1998, representing a decrease of 15% over the prior year. Excluding DTPI (in which the Company sold its controlling interest effective June 17, 1999) from both 1999 and 1998, total revenues, product revenues and service revenues would have been $21,392,000, $19,222,000 and $2,170,000, respectively, for 1999 compared with $28,419,000, $27,708,000 and $711,000, respectively, for 1998, representing decreases of 25% and 31% in total revenues and product revenues, respectively, and an increase in service revenues of 205%. The increase in service revenues reflects the higher service content of certain 1999 projects and increased revenue earned by the company's Asian service center in 1999 (its first full year of operation). The level of service revenue can vary depending on the projects in any given period. The overall lower level of revenues, excluding DTPI, in 1999 compared to 1998 relates to a lower level of revenues earned in Asia, the Middle East and in the United States in 1999, partially offset by an increase in revenues in Latin America. The Company's revenues in total and by region can vary significantly depending upon the timing of projects and the value of individual projects. In addition, the economic uncertainty in emerging markets continues to impair the sales cycle for the Company's products. Revenue opportunities were also adversely impacted by the significant devaluation and continued instability in the Brazilian currency in 1999. As part of its restructuring of the 21 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. Management recognizes that its historical focus on the emerging markets has been successful in terms of the broad geographical spread of its customer base but has been unsuccessful in terms of producing consistent revenue growth and stability. For the future, the Company intends to focus more attention on United States domestic sales through developing products more suitable to that market and by developing strategic relationships with larger industry players with complementary product offerings. 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 1999 was 25% compared to 17% in 1998. Excluding DTPI (in which the Company sold its controlling interest on June 17, 1999), the gross profit percentages would have been 35% for 1999, compared to 28% for 1998. The gross profit, excluding DTPI for 1998 was positively impacted by the realization of intercompany profits previously deferred on the sale of equipment by DTPI to its Mexican partner and was negatively impacted by inventory reserves of $2,640,000. Adjusted for these matters, the gross profit, excluding DTPI, would have been approximately 21% for 1998. The improved gross profit percentages for STM excluding DTPI, in 1999, reflects primarily improved margins earned on the Company's new lower cost products and lower system integration sales in 1999 (which typically have a lower gross profit percentage). The average gross profit percentage (excluding DTPI) earned in quarters two to four of 1999 was 39%. Selling, general and administrative (SG&A) expenses for 1999 decreased to $8,118,000 (37% of revenue) from $12,746,000 (30% of revenue) for 1998. Excluding DTPI (in which the Company sold its controlling interest on June 17, 1999), in 1999 SG&A would have decreased to $6,608,000 (31% of revenue) compared to $10,186,000 (36% of revenue) for 1998. Excluding DTPI, the reduction in SG&A in 1999 compared to 1998 reflects reduced costs primarily in the second through the fourth quarters of 1999 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 1999 decreased to $5,354,000 (24% of revenues) from $8,102,000 (19% of revenues) in 1998. There were no R&D expenses associated with DTPI. The decrease in R&D costs in 1999 compared to 1998 primarily relate to (i) cost reductions (including some headcount reductions) due to completion of the development of the Company's new low cost VSAT products, (ii) a charge of approximately $1,400,000 in 1998 for a contractually committed R&D project with no discernable future benefit, and (iii) the absence in 1999 of any R&D costs associated with TMSI (the assets of which were sold in June 1998). The restructuring costs of $1,042,000 recognized in 1999 related to cost reduction programs implemented in the first 6 months of 1999 and comprised severance costs associated with approximately 70 terminated employees, the write-off of certain assets in the Company's Brazilian subsidiary and the cost of exiting a lease commitment, which was determined to be in excess of current requirements. (See note 19 to the consolidated financial statements.) 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 gain on sale of assets of $9,950,000 in 1998 represented a gain (net of costs incurred and reserves then considered necessary) on the sale of substantially all the assets of TMSI. In June 1999, upon the release of substantially all 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 1999. The foreign currency devaluation costs of $1,906,000 in 1999 arose primarily from the devaluation of the Brazilian Real and comprised losses 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 only partially compensated the Company for the reduction in the value of the Brazilian Real). Interest income increased by $242,000 to $1,221,000 in 1999 from $979,000 in 1998. Excluding DTPI (in which the Company sold its controlling interest on June 17, 1999), interest income would have been $980,000 in 1999 compared with $664,000 for 1998. The increase in interest income, excluding DTPI, for 1999 primarily relates 22 to interest income recognized on a note receivable due from DTPI subsequent to the deconsolidation of DTPI. (See notes 4 and 17 to the consolidated financial statements.) Interest expense increased to $1,491,000 in 1999 from $1,476,000 in 1998. There was no external interest expense associated with DTPI. For 1999, the average level of borrowings decreased compared with 1998. However, in 1999 the Company paid a higher effective rate of interest on its line of credit borrowings due to the Company and its bank negotiating a pay down of its borrowings. (See note 8 to the consolidated financial statements.) The absence of a tax provision in 1999 is due to continued losses by the Company. No deferred tax benefit has been recognized due to uncertainty as to relizability of such benefit due to the continuing losses. The tax liabilities recognized represent estimated liabilities for foreign exposures. The tax provision of $3,698,000 in 1998 reflected the write-off of the Company's deferred tax assets at December 31, 1998, due to uncertainty concerning the ability to realize such assets as a result of the Company's continued losses and a $1,000,000 provision established for overseas tax liabilities. The equity in net income (loss) of unconsolidated affiliate for 1998 and 1999 represented the Company's share of the loss for 1999 and income for 1998 of DTPI's Venezuelan affiliate which was accounted for on an equity basis. Coinciding with the Company relinquishing control of DTPI there was no equity pick-up required after June 17, 1999. The minority interest charge in 1999 related to accrued dividends (representing accretion to the liquidation preference) through June 17, 1999, on the mandatory redeemable shares issued in March 1998 by DTPI. In 1998, the minority interest charge represented the accrued dividends on the mandatory redeemable shares of DTPI for the period April 1, 1998, through December 31, 1998, and a minority interest credit associated with TMSI through the date of sale of the assets of TMSI in June 1998. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Revenues decreased to $42,022,000 in 1998 from $52,148,000 in 1997. The decrease of $10,126,000 was primarily in product revenues. In 1997, the Company benefited from a $30 million product sale to a customer in Southeast Asia that was fully recognized as revenue in 1997. During 1998, due to the Asian crisis, revenues from Asia decreased from $35,630,000 in 1997 to $7,309,000 in 1998. The Company refocused its sales efforts to Latin and South America, Africa and the Middle East in an effort to recover momentum in the business. In addition, in 1998, the Company renegotiated its long-term service contract with DTPI's Mexican partner resulting in approximately $9,500,000 of revenue and generated revenues of approximately $3,600,000 from DTPI's Venezuelan Altair joint venture. The Company believes that the diversion of management attention to the setting up of the DTPI service business as well as the Asian financial crisis, in general, were the primary reasons for the decline in product revenues in 1998 compared to 1997. The effect of the Asian crisis carried forward in 1999. The increase in service revenue in 1998 compared to 1997 related to service revenues generated by the Company's DTPI long-term service business, which commenced operations in late 1997. Approximately $1,400,000 of such service revenues were from DTPI's Mexican partner (see note 5 to the consolidated financial statements), which experienced financial difficulties in late 1998, resulting in no on-going revenue from this customer. Gross profit decreased to 17% of revenues in 1998 compared to 26% in 1997. The decrease to 17% in 1998 related to inventory reserves of approximately $2,640,000 established in 1998 and direct costs associated with the DTPI business of approximately $2,200,000 that did not exist in 1997 due to DTPI only commencing operations in December 1997. The inventory reserves were for (i) inventory obsolescence associated with an earlier version of the Company's products, (ii) certain items that are considered excess to requirements and, (iii) reserves considered necessary for product on long-term loan to certain customers. The product gross profit percentage is comparable year on year when adjusted for the inventory reserves. The service gross profit decreased from 43% in 1997 to a negative 11% and reflected the direct infrastructure costs of establishing DTPI as well as a $500,000 impairment reserve established against certain gateway equipment associated with the DTPI's Mexican partner where there was an impairment of the carrying value of revenue generating assets, due to the Mexican partner experiencing financial difficulties. Selling, general and administrative expenses in 1998 were $12,746,000 compared to $9,589,000 in 1997. As a percentage of revenues, these expenses increased to 30% in 1998 from 18% in 1997. The dollar increase of $3,157,000 in 1998 compared to 1997 reflects increased costs of approximately $2,600,000 relating to DTPI that did not exist in the prior year and other general increases in costs including bad debt reserves, rent on the Company's 23 new Atlanta facility with associated administrative overhead and an increased number of sales personnel. The increase in percentage terms reflects the relatively fixed nature of such costs irrespective of the level of revenues. Research and development costs were $8,102,000 in 1998 as compared to $6,387,000 in 1997. As a percentage of revenues, these costs increased to 19% in 1998 as compared to 12% in 1997. The dollar increase was due to expenditures for personnel and outside services in support of the Company's continuing new product development efforts for the SES and SpaceWeb products and an expense of approximately $1,400,000 for a contractually committed research and development project with no discernible future benefit that was recognized in 1998. 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 gain on sale of assets of $9,950,000 in 1998 represented a gain (net of costs and reserves then considered necessary at the time) on the sale of the Company's majority-owned subsidiary, TMSI. The reserves established primarily related to exposures to litigation, intellectual property indemnifications, customer concessions, license fees and management bonuses. (See note 3 to the consolidated financial statements.) Interest income increased by $295,000 to $979,000 in 1998, compared to 1997. The increase in interest income was due primarily to higher cash deposits being maintained by the Company as a result of the issuance of shares for cash by both STM and DTPI, the sale of the assets of TMSI, the receipt of cash from the DTPI's long-term service agreement in Mexico and higher level of bank borrowings in 1998 compared to 1997. Interest expense increased by $494,000 to $1,476,000 in 1998 compared to 1997. The increase was primarily due to an increase in short-term borrowings from banks compared to 1997 when the Company partially financed its working capital requirements by discounting letters of credit from customers at a lower cost. The tax provision of $3,698,000 in 1998, compared to a tax benefit of $306,000 in 1997, reflected the write-off of the Company's deferred tax assets at December 31, 1998, due to uncertainty concerning the ability to realize such assets as a result of the Company experiencing continued losses and a tax provision of $1,000,000 established for tax exposures in Brazil. The minority interest charge relates to accrued dividends on the mandatory redeemable shares issued in March 1998, by DTPI (see note 10 to the consolidated financial statements), offset by a credit associated with TMSI's minority interest in the first quarter of 1998 (prior to the sale of TMSI in the second quarter of 1998). LIQUIDITY AND CAPITAL RESOURCES In 1999, the Company completed a financing package through the sale of shares in DTPI for cash of $2,500,000, credits of approximately $4,600,000 and the partial repayment of $2,500,000 of a note receivable due from DTPI, which in total made funds of approximately $9,600,000 available. In addition, in October 1999, the Company refinanced its corporate headquarters through a deed of trust for $7,000,000 thereby paying off existing debt on the headquarters of approximately $4,000,000 and generating additional cash of approximately $3,000,000. With these cash resources, in December 1999 the Company fully paid down borrowings under a short term line of credit. Subsequent to December 31, 1999, DTPI (the Company's 44% affiliate which was deconsolidated effective June 17, 1999, as a result of the Company reducing its ownership in the voting stock of DTPI) reached agreement with third party investors to invest new capital of $45,000,000 in DTPI. Under the terms of this agreement, DTPI paid STM cash of $3,750,000 and STM's ownership in DTPI was reduced to approximately 15%. (See note 20 to the consolidated financial statements.) The Company recently obtained a new line of credit for approximately $3,300,000 which should make additional cash of approximately $2,800,000 available to the Company. In 1999, the Company had negative cash flows from operations of $822,000 compared to $19,430,000 in 1998. Certain non-cash items plus a reduction of $8,004,000 in accounts receivable reduced the usage of cash by the net loss for 1999 from $8,311,000 to the cash used in operations of $822,000. The net cash usage from operations in 1998 was primarily a result of net losses for the year, increases in accounts receivable and inventories and decreases in accounts payable. 24 In 1999, the Company generated $810,000 from investing activities compared to $13,828,000 in 1998. In 1998, the Company generated $17,299,000 from the sale of TMSI and $1,821,000 from the sale of short-term investments and used $3,168,000 to invest in Altair, $1,500,000 for purchases of property, plant and equipment and $624,000 to increase restricted assets. In 1999, the Company generated cash of $4,719,000 from the June 1999 financing and $1,106,000 from the sale of short-term investments and used cash of $3,149,000 which was forfeited upon deconsolidation of DTPI, $1,102,000 to invest in Altair, $466,000 to increase restricted cash and $298,000 for purchases of property, plant and equipment. In 1999, net cash used in financing activities was $5,716,000 compared to cash generated of $12,523,000 in 1998. In 1998, the Company generated $9,988,000 from the sale of shares, $2,750,000 from an increase in short-term borrowings offset by a net usage of $215,000 associated with long-term debt. In 1999, the Company generated $2,939,000 net from refinancing its corporate headquarters and used $8,650,000 by repaying short-term borrowings. Overall, the Company's cash, cash equivalents and short-term investments (excluding restricted balances) totaled $4,441,000 at December 31, 1999 compared to $12,122,000 at December 31, 1998. Management expects to have sufficient cash generated from operations, through availability under lines of credit, cash received from DTPI and through other sources to meet the anticipated cash requirements for the next twelve months. In September, 1994 the Company's Board of Directors authorized a stock repurchase program whereby the Company may repurchase, in the open market, up to 10% of its shares outstanding, at times and prices to be determined by the Board. The repurchased shares would be used for potential future acquisitions and for exercises under the Company's stock option plans. The Company has not repurchased any shares to date nor does it have any present commitments or intention to repurchase shares at this time. 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 it business in the ordinary course. 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, is effective for all fiscal quarters or 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. ITEM 7A--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 a significant portion of its Brazilian revenue 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 expressed an unwillingness to adjust contract amounts to fully reflect some of the exchange rate fluctuations. Brazilian counsel advised the Company that there is uncertainty as to the enforceability of provisions which tie payments to foreign currency rates (see note 6 to the consolidated financial statements). The Company, therefore, whenever possible, negotiates sales from Brazilian customers in U.S. dollars to avoid any uncertainty as to the value of receivables. The Company does not use derivatives to manage any foreign currency exposures. 25 The Company's exposure to market risk is mainly comprised of interest rate risk and credit risk related to its short-term investments. The Company addresses these 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. ITEM 8--FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE: Consolidated Financial Statements:
Report of Independent Auditors....................................................................................... 27 Consolidated Balance Sheets as of December 31, 1999 and 1998......................................................... 28 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997........................... 29 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997................. 30 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997........................... 31 Notes to Consolidated Financial Statements........................................................................... 33 Financial Statement Schedule: (For the three years ended December 31, 1999) Schedule II--Valuation and Qualifying Accounts and Reserves........................................................... 50
All other financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 26 REPORT OF INDEPENDENT AUDITORS The Board of Directors STM Wireless, Inc.: We have audited the accompanying consolidated financial statements of STM Wireless, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of STM Wireless, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Orange County, California March 2, 2000 27 STM WIRELESS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1999 1998 ------------ -------------- ASSETS Current assets: Cash and cash equivalents......................................................................$ 4,441 $ 11,016 Short-term investments......................................................................... -- 1,106 Restricted cash and short-term investments..................................................... 2,615 2,224 Accounts receivable, less allowances of $590 in 1999 and $2,022 in 1998........................ 7,841 17,016 Inventories.................................................................................... 11,069 13,108 Current portion of long-term receivables....................................................... -- 702 Prepaid expenses and other current assets...................................................... 250 1,623 ------------ -------------- Total current assets......................................................................... 26,216 46,795 Property, plant and equipment, net................................................................ 7,964 11,056 Long-term receivables............................................................................. -- 788 Equity investment in affiliates................................................................... 157 4,151 Other assets...................................................................................... 141 411 ------------ -------------- Total assets.................................................................................$ 34,478 $ 63,201 ============ ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings..........................................................................$ 2,000 $ 10,650 Current portion of long-term debt.............................................................. 542 384 Accounts payable............................................................................... 5,967 9,582 Accrued liabilities............................................................................ 4,214 7,256 Customer deposits and deferred revenue......................................................... 7 1,910 Income taxes payable........................................................................... 490 1,000 ------------ -------------- Total current liabilities.................................................................... 13,220 30,782 Long-term debt.................................................................................... 7,049 4,306 Redeemable minority interest...................................................................... -- 6,355 Other long-term liabilities....................................................................... 762 -- Commitments and contingencies (note 12)........................................................... -- -- Stockholders' equity: Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued or outstanding.................................................................................. -- -- Common stock, $0.001 par value; 20,000,000 shares authorized; 7,042,204 shares issued and outstanding at December 31, 1999 and 1998, respectively.................... 7 7 Additional paid in capital..................................................................... 38,140 38,140 Accumulated deficit............................................................................ (24,700) (16,389) ------------ -------------- Total stockholders' equity................................................................... 13,447 21,758 ------------ -------------- Total Liabilities and Stockholders' Equity...................................................$ 34,478 $ 63,201 ============ ==============
See accompanying notes to consolidated financial statements. 28 STM WIRELESS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997 -------- --------- -------- Revenues: Products................................................................ $19,962 $ 39,355 $49,824 Services................................................................ 2,264 2,667 2,324 -------- --------- -------- Total revenues................................................... 22,226 42,022 52,148 Cost of revenues: Products................................................................ 14,386 32,010 37,084 Services................................................................ 2,178 2,948 1,315 -------- --------- -------- Total cost of revenues........................................... 16,564 34,958 38,399 -------- --------- -------- Gross profit..................................................... 5,662 7,064 13,749 Selling, general and administrative expenses.................................... 8,118 12,746 9,589 Research and development costs.................................................. 5,354 8,102 6,387 Move and relocation charges..................................................... -- 980 -- Restructuring costs............................................................. 1,042 -- -- -------- --------- -------- Total operating costs............................................ 14,514 21,828 15,976 -------- --------- -------- Operating loss................................................... (8,852) (14,764) (2,227) Interest income................................................................. 1,221 979 684 Interest expense................................................................ (1,491) (1,476) (982) Foreign currency devaluation costs.............................................. (1,906) -- -- Gain on sale of assets.......................................................... 2,964 9,950 -- Other income (expense), net..................................................... 87 (53) 42 -------- --------- -------- Loss before income taxes, equity income and minority interest.... (7,977) (5,364) (2,483) Income tax benefit (expense).................................................... -- (3,698) 306 -------- --------- -------- Loss before equity income and minority interest.................. (7,977) (9,062) (2,177) Equity in net income (loss) of unconsolidated affiliates........................ (59) 66 -- Minority interest benefit (expense)............................................. (275) (410) 126 -------- --------- -------- Net loss......................................................... $(8,311) $ (9,406) $(2,051) ======== ========= ======== Loss per share of common stock: Basic:.................................................................. $ (1.18) $ (1.36) $ (0.32) Diluted:................................................................ $ (1.18) $ (1.36) $ (0.32) Common shares used in computing per share amounts: Basic................................................................... 7,042 6,936 6,384 Diluted................................................................. 7,042 6,936 6,384
See accompanying notes to consolidated financial statements. 29 STM WIRELESS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NUMBER OF COMMON ADDITIONAL TOTAL SHARES STOCK PAID-IN ACCUMULATED STOCKHOLDERS' COMMON STOCK AT PAR VALUE CAPITAL DEFICIT EQUITY ---------------- --------------- ------------ ----------------- --------------- Balance at December 31, 1996.................. 6,294,250 $6 $33,218 $ (4,932) $28,292 Issuance of common stock...................... 34,900 -- 162 -- 162 Exercise of stock options..................... 119,014 -- 659 -- 659 Net loss...................................... -- -- -- (2,051) (2,051) ---------------- --------------- ------------ ----------------- --------------- Balance at December 31, 1997.................. 6,448,164 $6 $34,039 $ (6,983) $27,062 Issuance of common stock, net of costs (note 11)............................... 571,429 1 3,955 -- 3,956 Exercise of stock options..................... 22,611 -- 146 -- 146 Net loss...................................... -- -- (9,406) (9,406) ---------------- --------------- ------------ ----------------- --------------- Balance at December 31, 1998.................. 7,042,204 $7 $38,140 $(16,389) $21,758 Net loss...................................... -- -- -- (8,311) (8,311) ---------------- --------------- ------------ ----------------- --------------- Balance at December 31, 1999.................. 7,042,204 $7 $38,140 $(24,700) $13,447 ================ =============== ============ ================= ===============
See accompanying notes to consolidated financial statements. 30 STM WIRELESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS)
1999 1998 1997 ----------- ----------- ----------- Cash flows from operating activities: Net loss............................................................................ $ (8,311) $ (9,406) $ (2,051) Adjustments to reconcile net loss to net cash provided by (used in) operations: Minority interest................................................................... 275 410 (126) Equity in losses (earnings) of affiliates........................................... 59 (66) -- Gain on sale of TMSI................................................................ (2,964) (9,950) -- Provision (recovery) for allowances on accounts receivable.......................... (136) 1,488 91 Provision (recovery) for inventory obsolescence..................................... (189) 2,640 (456) Provision for impairment of long-lived assets....................................... -- 500 -- Non-cash restructuring charges...................................................... 246 -- -- Foreign currency devaluation costs.................................................. 1,906 -- -- Depreciation and amortization....................................................... 2,769 2,025 1,548 Changes in assets and liabilities, excluding effects of sale of subsidiaries: (Increase) decrease in accounts receivable..................................... 8,004 (6,656) 1,540 Increase in inventories........................................................ (43) (1,218) (1,539) (Increase) decrease in prepaid and other current assets........................ 1,257 (1,167) (206) (Increase) decrease in deferred income taxes................................... -- 3,132 (306) (Increase) decrease in long-term receivables................................... 906 564 473 (Increase) decrease in other assets............................................ 234 -- (140) Increase (decrease) in accounts payable........................................ (1,161) (3,811) 3,009 Increase (decrease) in customer deposits....................................... (1,433) 1,625 (628) Increase (decrease) in accrued liabilities..................................... (1,731) (115) 240 Increase (decrease) in income taxes payable.................................... (510) 575 (32) ----------- ----------- ----------- Net cash provided by (used in) operating activities....................... (822) (19,430) 1,417 ----------- ----------- ----------- Cash flows from investing activities: Net change in short-term investments................................................ $ 1,106 $ 1,821 $ (18) Increase in restricted assets....................................................... (466) (624) -- Purchases of property, plant, & equipment........................................... (298) (1,500) (9,922) Cash forfeited upon sale of DTPI.................................................... (3,149) -- -- Equity investment in Altair......................................................... (1,102) (3,168) -- Proceeds from sale of TMSI.......................................................... -- 17,299 -- Proceeds from repayment of note receivable.......................................... 2,500 -- -- Proceeds from sale of DTPI stock, net............................................... 2,219 -- -- ----------- ----------- ----------- Net cash provided by (used in) investing activities............................ 810 13,828 (9,940) ----------- ----------- ----------- (CONTINUED)
See accompanying notes to consolidated financial statements. 31 STM WIRELESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS)
1999 1998 1997 -------- -------- -------- Cash flows from financing activities: (Repayment) Increase in short-term borrowings, net......................... (8,650) 2,750 1,500 Proceeds from issuance of common stock, net................................ -- 4,102 821 Proceeds from issuance of redeemable preferred stock in subsidiary, net.... -- 5,886 -- Proceeds from issuance of long-term leases................................. 90 56 120 Proceeds from refinancing of corporate headquarters........................ 7,000 -- -- Repayments of long-term debt............................................... (4,156) (271) (276) -------- -------- -------- Net cash provided (used in) by financing activities................... (5,716) 12,523 2,165 -------- -------- -------- Effect of foreign exchange rate on cash and cash equivalents.................... (847) -- -- Net increase (decrease) in cash and cash equivalents............................ (6,575) 6,921 (6,358) Cash and cash equivalents at beginning of year.................................. 11,016 4,095 10,453 -------- -------- -------- Cash and cash equivalents at end of year........................................ $ 4,441 $11,016 $ 4,095 ======== ======== ======== Supplemental disclosure of cash flow information: Interest paid.............................................................. $ 1,466 $ 1,476 $ 982 ======== ======== ======== Income taxes paid.......................................................... $ 208 $ -- $ 230 ======== ======== ========
In 1998, the Company contributed approximately $917,000 in inventory to Altair, the Company's joint venture with CANTV. See accompanying notes to consolidated financial statements. 32 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (1) DESCRIPTION OF THE COMPANY STM Wireless, Inc. (the "Company" or "STM") is a developer, manufacturer and provider of wireless-based satellite communications infrastructure and user terminal products utilized in public and private telecommunications networks 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 referred to as VSATs (very small aperture terminals), associated infrastructure equipment and software, transceivers, modems and other networking equipment. The Company historically has focused its sales efforts on the international marketplace, particularly developing countries. The Company's former subsidiary, SkyOnline, Inc., formerly known as Direc-To-Phone International, Inc. ("DTPI"), provides telecommunications services in international markets. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial results of the Company and its wholly-owned subsidiaries, including Telecom Multimedia Systems, Inc., ("TMSI") for all periods through March 1998, and DTPI for all periods from inception through June 1999. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods presented. Actual results could differ significantly from those estimates. REVENUE RECOGNITION Sales of the Company's communications products and related installed software are generally recognized upon shipment. Sales of the Company's products to distributors are normally not subject to right of return. Service revenues are recognized when services have been performed. Revenues from certain long-term product and service contracts are recognized under the percentage-of-completion method, whereby contract costs are expensed as incurred and revenues are recorded based on the ratio of costs incurred to total estimated costs at completion. If the estimate of total contract costs results in a loss, a provision is made currently for the total anticipated loss. The Company generally warrants its products to be free from defects for a period of one year from shipment. Estimated warranty liabilities are evaluated for adequacy on an on-going basis. CASH AND CASH EQUIVALENTS Cash equivalents are highly liquid investments which are readily convertible into known amounts of cash and have original maturities of three months or less, consisting primarily of cash, certificates of deposit and other money market instruments. SHORT-TERM INVESTMENTS The Company's short-term investments consist primarily of certificates of deposit with original maturities between 90 and 360 days. As of December 31, 1998, the fair market value of these securities approximates cost. There were no short-term investments at December 31, 1999. 33 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) RESTRICTED ASSETS Cash and short-term investments whose use is restricted are classified separately as restricted cash and short-term investments. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market and consist of the following: DECEMBER 31, ----------------------------- 1999 1998 ------------- -------------- (DOLLARS IN THOUSANDS) Raw materials........................... $ 6,091 $ 7,423 Work in process......................... 590 823 Finished goods.......................... 4,388 4,862 ------------- -------------- $ 11,069 $ 13,108 ============= ============== Certain components used by the Company in its existing products are purchased from single source suppliers and manufacturers. While the Company maintains an inventory of components and believes that alternative suppliers and manufacturers for all such components are available at reasonable terms, an interruption in the delivery of these components may have a material adverse effect on the Company. In December 1998, the Company increased its inventory reserves by approximately $2,640,000 to recognize the increased risk of obsolescence associated with previous generations of the Company's products, certain other items that were considered excess to requirements and certain inventory on long-term loan to customers. In 1999, the Company reduced its inventory reserves by approximately $189,000 through the sale of inventory, previously reserved. EQUITY METHOD OF ACCOUNTING Investments in twenty to fifty percent-owned affiliates are accounted for under the equity method of accounting, whereby the investment in and advances to the affiliate are carried at cost, plus the Company's equity in undistributed earnings or losses since acquisition. The Company defers its share of the profits or losses on sales to affiliates and when appropriate these amounts are amortized to income. In accordance with Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock", ("APB18"), when an equity investment is reduced to zero and there are no funding obligations or guarantees of the obligations of the affiliate, the Company does not accrue any future losses of the affiliate and discontinues the equity method until such time that the affiliate is profitable. Reserves are provided where management determines that the investment or equity in earnings has been permanently impaired. As of December 31, 1999, and 1998, no such reserves were considered necessary. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets. Buildings are depreciated over 30 years. Satellite equipment, other equipment and furniture and fixtures are depreciated over 3-5 years. Assets used for long-term service contracts associated with DTPI's business were depreciated commencing when the asset was placed in service, over the shorter of their estimated useful lives or the lives of the contracts to which they related. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the lease. LONG-TERM RECEIVABLES Long-term receivables are recorded at cost. Management, considering current information and events regarding the borrowers' ability to repay their obligations, considers a note to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the note's effective interest rate. Cash receipts on impaired notes receivable 34 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) are applied to reduce the principal amount of such notes until the principal has been recovered and are recognized as interest income, thereafter. As of December 31, 1998, the Company did not consider an allowance for impaired notes receivable to be necessary. Arising from the currency devaluation in Brazil in 1999, the Company negotiated a settlement of certain long-term receivables from a customer in Brazil. The loss arising of $584,000 has been classified as a part of the foreign currency devaluation costs in the accompanying consolidated statement of operations in 1999. FAIR VALUE OF FINANCIAL INSTRUMENTS As of December 31, 1999, and 1998, the carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and income taxes payable approximate fair value due to the short-term nature of such instruments. The carrying value of short-term investments approximates fair value based on quoted market prices for those or similar investments. The fair value of all debt and long-term receivables approximate fair value as the related interest rates approximate rates currently available to/from the Company. RESEARCH AND DEVELOPMENT All research and development costs are charged to expense as incurred and primarily consist of salaries and applicable overhead expenses of employees directly involved in the design of the satellite network hardware and software and certain third party outside service costs. INCOME TAXES Income taxes are accounted for under the asset and liability method. This method generally provides that deferred tax assets and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and expected benefits of utilizing net operating loss ("NOL") carryforwards. The Company records a valuation allowance for certain temporary differences for which it is not more likely than not that it will realize future tax benefits. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period of enactment. STOCK OPTIONS PLANS The Company measures stock-based compensation for employees using the intrinsic-value method which assumes that options granted with exercise prices at the fair market value of the underlying stock at the date of grant have no intrinsic value. In accordance with Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," pro forma net loss and net loss per share are presented in note 11 as if the fair value method had been applied. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF Long-lived assets are reviewed for impairment in value based upon undiscounted future operating cash flows, and appropriate losses are recognized whenever circumstances indicate that the carrying amount of an asset may not be recoverable. FOREIGN CURRENCY TRANSLATION The Company has determined that the U.S. dollar is the functional currency for its subsidiaries outside the U.S. under SFAS No. 52, "Foreign Currency Translation" ("SFAS 52"). Based on this determination, the Company's foreign operations are measured by reflecting the financial results of such operations as if they had taken place within a U.S. dollar-based economic environment. Inventory, fixed assets and other non-monetary assets and liabilities are remeasured from foreign currencies to U.S. dollars at historical exchange rates whereas cash, accounts receivable and other monetary assets and liabilities are remeasured at current exchange rates. Gains and losses resulting from those remeasurements are included in income for the current period. In 1999, the Company incurred foreign currency devaluation costs of $1,906,000 primarily associated with the devaluation of the Brazilian 35 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) currency. Such costs are included in the consolidated statement of operations for the year ended December 31, 1999. Foreign currency losses in 1998 and 1997 were not material. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 137, is effective for all periods for 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. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Application of SFAS 133 is not expected to have a material impact on the Company's consolidated financial position, results of operations or liquidity. RECLASSIFICATIONS Certain reclassifications have been made to the 1998 and 1997 consolidated financial statements to conform to the 1999 presentation. (3) ACQUISITIONS AND DISPOSALS TELECOM INTERNATIONAL, INC. On December 12, 1997, the Company issued 480,000 shares of its common stock in exchange for all of the outstanding common stock of Telecom International, Inc. ("TI"). TI was a system integrator and installer of large satellite terminals used in rural telephony and enterprise networks. The merger was accounted for as a pooling of interests and accordingly, all financial statements have been restated as if the merger took place at the beginning of 1997. TELECOM MULTIMEDIA SYSTEMS, INC. In August 1995, the Company purchased 72.5% of the outstanding common stock and newly issued preferred stock of Telecom Multimedia Systems, Inc. ("TMSI") for $1,000,000 cash and 10,000 shares of the Company's common stock valued at $18.75 per share. The acquisition of TMSI was accounted for under the purchase method of accounting. Accordingly, the purchase price was allocated to the net assets acquired based upon their estimated fair market values. In 1998, the Company sold certain assets and transferred certain liabilities of TMSI for approximately $25 million in cash. Gains of approximately $2,964,000 and $9,950,000 (net of transaction costs, certain normal course reserves considered necessary and reserves required for certain contingent liabilities) were recognized in the accompanying consolidated statements of operations in 1999 and 1998, respectively. Included in the consolidated balance sheets at December 31, 1999 and 1998, is approximately $88,000 and $1,000,000, respectively, of cash in escrow classified as accounts receivable and approximately $880,000 and $4,300,000, respectively, classified as accrued liabilities, related to the disposition of TMSI. In connection with the sale of the assets of TMSI, the Company is required to indemnify and hold harmless the Buyer for certain losses, liabilities, claims, damages, expense or diminution of value arising directly or indirectly from or in connection with a breach of any representation, covenant, claim for expenses, liabilities which are not assumed, taxes or specific customer claims. The indemnification provisions apply for periods ranging from 2 years to 6 years depending upon the nature of the exposure. The maximum exposure to the Company under the indemnification provisions is $9,000,000. In addition, there are potential liabilities to customers that are specific to TMSI. The Company established accruals of approximately $3,700,000 at the time of the sale in June 1999 (comprised of a customer claim, intellectual property exposures and management bonuses) and these balances were included as a component of accrued liabilities at December 31, 1998. 36 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In June 1999, upon the release of substantially all of the 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 $2,964,000 which has been classified as a gain on the sale of assets in the accompanying consolidated statement of operations for the year ended December 31, 1999. At December 31, 1999, a balance of approximately $880,000 continues to be accrued primarily associated with a specific customer dispute and is classified as part of accrued liabilities in the accompanying consolidated balance sheet at December 31, 1999. The accompanying consolidated statements of operations reflect the operations of TMSI through March 31, 1998, the effective date of disposal. The following sets out summarized financial information giving effect to the disposal of TMSI. THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1998 1997 ------------------- ---------------- (UNAUDITED) Net revenues: STM............................... $ 6,267 $50,440 TMSI.............................. 682 1,708 ------------------- ---------------- Total........................ $ 6,949 $52,148 =================== ================ Net loss STM............................... $(3,929) $(1,592) TMSI.............................. (145) (459) ------------------- ---------------- Total....................... $(4,074) $(2,051) =================== ================ (4) DECONSOLIDATION OF DTPI STM incorporated DTPI in 1996. In March 1998, the Company invested $15 million in DTPI, (comprising $5 million for 1,000,000 shares of Series B Preferred Stock, and a $10 million loan) and entered into a Product Supply Agreement with DTPI. The loan was repayable out of the proceeds of future DTPI financings. Through June 17, 1999, STM consolidated the results of DTPI. In June 1999, the Company and DTPI completed a 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. ("REMEC") and two funds managed by Pequot Capital Management, Inc. ("Pequot"), thereby reducing STM's ownership to 44% of the voting stock of DTPI. In addition, in June 1999, DTPI announced the appointment of a new chairman and chief executive officer of DTPI. As a result, STM relinquished operating control of DTPI and changed its accounting for DTPI from the full consolidation method to the equity method, effective June 17, 1999. Due to the losses incurred by DTPI from inception through June 17, 1999, STM's equity investment in DTPI has been reduced to zero. STM has no funding obligations to DTPI nor has STM guaranteed any obligations of DTPI. Therefore, in accordance with APB18, STM has not accrued any losses of DTPI subsequent to June 17, 1999, and will only apply the equity method of accounting for DTPI, at such time that DTPI is profitable and losses not previously recognized are fully recovered. Therefore, the accompanying consolidated statement of income for the year ended December 31, 1999, only includes the results of DTPI for the period January 1, 1999, through June 17, 1999. The proceeds of $7,100,000 comprised cash of $2,219,000 net of transaction costs of $281,000, a reduction in accounts payable of approximately $2,300,000 and a credit against future purchases of inventory for approximately $2,300,000. Due to uncertainty concerning the recoverability of the $2,300,000 credit against future purchases, such credit was fully reserved at June 30, 1999, but will be recognized when realized as income in future periods. Approximately $125,000 of such credits were realized through December 31, 1999. 37 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In connection with the sale of the shares in DTPI, STM granted a price adjustment of approximately $1,500,000 to REMEC whereby the price of all future purchases of committed product from REMEC were increased and STM granted DTPI a concession of $1,600,000 against future purchases of product by DTPI from STM. These obligations were accrued at the time of sale of the DTPI shares. DTPI also repaid STM $2,500,000 of a $10,000,000 note receivable from DTPI, with the remaining balance of $7,500,000 of the note to be repaid out of the proceeds of future DTPI financings, if any. As a result of the foregoing, there was no gain or loss recognized on the sale of the DTPI shares. (See note 20.) The following sets out summarized financial information giving effect to the deconsolidation of DTPI. THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1999 1998 ------------------ --------------- (unaudited) Net revenues: STM................................ $ 2,101 $ 28,419 DTPI............................... 990 13,603 ------------------ --------------- Total......................... $ 3,091 $ 42,022 ================== =============== Net loss STM................................ $ (5,915) $ (5,013) DTPI............................... (2,548) (4,393) ------------------ --------------- Total........................ $ (8,463) $ (9,406) ================== =============== (5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following:
DECEMBER 31, 1999 1998 ----------- ----------- (DOLLARS IN THOUSANDS) Land................................................................... $ 2,530 $ 2,530 Building and building improvements..................................... 3,549 3,549 Assets for long-term service contracts................................. -- 2,380 Satellite equipment.................................................... 1,424 717 Equipment.............................................................. 8,396 8,198 Furniture and fixtures and leasehold improvements...................... 341 894 ----------- ----------- 16,240 18,268 Less: Accumulated depreciation and amortization........................... 8,276 7,212 ----------- ----------- $ 7,964 $ 11,056 =========== ===========
Property, plant and equipment at December 1999 excludes the assets of DTPI (see note 4). Assets for long-term service contracts consisted of equipment related to DTPI's long-term fixed telephony service operations in Mexico. In 1998, DTPI renegotiated its long-term service contract with its Mexican partner whereby DTPI was paid approximately $9,500,000 (before expenses) for the sale and installation of remote terminal equipment utilized in the provision of telephony services. Under the terms of the revised agreement, DTPI retained ownership of certain gateway infrastructure equipment, which was classified as assets for long-term service contracts at December 31, 1998. The sales of remote equipment were classified as revenue in the accompanying consolidated statement of operations for 1998. Due to uncertainty surrounding the recoverability of the gateway equipment at December 31, 1998, as a result of the Mexican partner experiencing financial difficulties, DTPI recognized an impairment charge of $500,000, in 38 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", to adjust the carrying value of the equipment to its estimated fair value. (6) LONG-TERM RECEIVABLES The Company's long-term receivables as of December 31, 1998 related primarily to a lease of certain satellite equipment to a customer in Brazil under a sales-type lease arrangement. Total minimum lease payments receivable (including interest receivable) on this sales-type lease were $1,632,000 at December 31, 1998, comprising principal of $1,490,000 and unearned interest of $142,000. The receivables were denominated in the Brazilian local currency, however, the customer contracts contained adjustment provisions to take into account fluctuations in the local currency against the U.S. dollar. These adjustment provisions were honored in prior years. Arising from the devaluation of the Brazilian local currency in the first quarter of 1999, the customer was unwilling to honor the adjustment provisions of the contract due to the extent of the devaluation. Brazilian counsel advised the Company that there was uncertainty as to the enforceability of such adjustment provisions under Brazilian law. Therefore, the Company negotiated a settlement with the customer resulting in a concession of approximately $584,000. Such concession has been classified as part of the foreign currency devaluation costs in the accompanying consolidated statement of operations for the year ended December 31, 1999. (7) ACCRUED LIABILITIES Accrued liabilities consist of the following:
DECEMBER 31, ---------------------------- 1999 1998 ------------- ------------- (DOLLARS IN THOUSANDS) Accrued salaries, bonuses and payroll related expenses...... $ 506 $ 1,948 Accrued engineering services................................ 23 659 Accrued legal & professional fees........................... 128 254 Accrued agent commissions................................... 80 373 Accrued litigation, concessions and indemnifications........ 2,493 2,654 Accrued licenses............................................ -- 368 Other....................................................... 984 1,000 ------------- ------------- $ 4,214 $ 7,256 ============= =============
(8) SHORT-TERM BORROWINGS AND LONG-TERM DEBT SHORT-TERM BORROWINGS The Company has a revolving credit facility with one bank totaling $2,000,000. The facility is secured by the Company's certificates of deposit in the same amount with the bank. Borrowings are due on demand and accrue interest at .75% over the certificates of deposit rate. At December 31, 1999 and 1998, the outstanding balances under this credit facility were $2,000,000 and $1,600,000, respectively. At December 31, 1998, the Company had borrowings of $9,050,000 under a $10,000,000 line of credit. Due to the losses incurred in 1998 and thereafter, the Company was not in compliance with certain covenants of the loan agreement and the bank sought repayment of all borrowings. Through cash becoming available from the sale of stock in DTPI, the partial repayment of a note receivable from DTPI (see note 4) and the refinancing of the Company's corporate headquarters, the Company made agreed paydowns of these borrowings during 1999 and fully repaid all outstanding balances on December 31, 1999. LONG-TERM DEBT In connection with the purchase of the Company's headquarters on July 28, 1994, the Company entered into a purchase money promissory mortgage note ("Mortgage Note") in the amount of $4,320,000. In October 1999, 39 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) the Company refinanced its corporate headquarters through a deed of trust for $7,000,000, thereby paying off the existing mortgage note for $4,061,000 and generating cash of $2,939,000. The deed of trust for $7,000,000 is secured by the Company's land, building and fixtures, accrues interest at 7% per annum, and requires monthly principal and interest payments of $46,571. The deed of trust is being amortized over a 30-year period and matures in November 2014, at which time all remaining principal and accrued interest is due. Long-term debt consists of the following: DECEMBER 31, ---------------------------- 1999 1998 ------------- ------------- (DOLLARS IN THOUSANDS) Mortgage payable on building.............. $ 6,994 $ 4,063 Notes payable--Banco do Brasil............ 224 -- Capitalized lease obligations............. 373 627 ------------- ------------- Total................................ 7,591 4,690 Less current portion...................... (542) (384) ------------- ------------- Long-term debt........................... $ 7,049 $ 4,306 ============= ============= The obligations for capital leases relate to leases entered into for the purchase of computers, fixtures and test equipment. The capitalized leases are at rates which vary from 9.5% to 12.7% per annum. Future maturities on long-term debt are as follows: YEAR ENDED DECEMBER 31, ----------------------- (DOLLARS IN THOUSANDS) 2000............................................. $ 542 2001............................................. 192 2002............................................. 85 2003............................................. 88 2004............................................. 95 Thereafter....................................... 6,589 ----------------------- $7,591 ======================= (9) EQUITY INVESTMENT IN AFFILIATES STM EQUITY INVESTMENT IN DTPI STM incorporated DTPI in 1996. In March 1998, the Company invested $15 million in DTPI, (comprising $5 million for 1,000,000 shares of Series B Preferred Stock, and a $10 million loan) and entered into a Product Supply Agreement with DTPI. The loan was repayable out of the proceeds of future DTPI financings. Through June 17, 1999, STM consolidated the results of DTPI. Effective June 17, 1999, STM deconsolidated the results of DTPI (see note 4). Due to STM's equity investment being zero, STM having no funding obligations to DTPI, nor STM guaranteeing any obligations of DTPI, in accordance with APB18, STM has not accrued any losses of DTPI since June 17, 1999, and will only apply the equity method of accounting for DTPI at such time that DTPI is profitable and losses not previously recognized are fully recovered (see note 20). DTPI EQUITY INVESTMENT IN ALTAIR In connection with the award of a contract for the provision of rural telephony services in Venezuela, in May 1998, DTPI formed Altair S.A. ("Altair"), a joint venture with Compania Anonima Nacional Telefonos de Venezuela (CANTV). Altair is 49% owned by DTPI. In connection with the deconsolidation of DTPI (see note 4), the Company no longer accounts for DTPI's investment in Altair from June 17, 1999. 40 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At December 31, 1999 and 1998, the Company's equity investment in Altair was zero and $4,151,000, respectively. The 1998 balance comprised cash of approximately $625,000, a non-cash contribution of approximately $917,000, advances of approximately $2,543,000, plus equity in the undistributed earnings of Altair of approximately $66,000. In 1999, the Company recognized equity losses of $59,000 for Altair and made additional cash contributions of $1,102,000 through June 17, 1999 (the date of deconsolidation of DTPI). (10) REDEEMABLE MINORITY INTEREST In March 1998, the Company completed a $10 million equity offering with Pequot for 571,429 shares of STM common stock and 1,200,000 shares of Series A mandatory redeemable preferred stock of DTPI, the Company's then majority-owned subsidiary. The DTPI Series A shares were redeemable at the option of the holder, if not converted earlier into DTPI common stock, on the fifth anniversary of the date of issuance, or in the event of an acquisition of the Company where the Company continued to hold a majority of the voting stock of DTPI and a public offering of DTPI shares has not been consummated. In the event of such acquisition, STM had a funding obligation for such redemption amount. For 1999 and 1998, the Company accrued dividends of $275,000 and $450,000, respectively, that are classified as minority interest expense in the accompanying consolidated statements of operations, representing for 1999 the accretion required for the period January 1, 1999, to June 17, 1999, and for 1998, the accretion required for the period April 1, 1998, to December 31, 1998. At December 31, 1998, an amount of $6,355,000 representing proceeds from the issuance of the mandatory redeemable Series A Preferred Stock in DTPI plus accrued dividends net of unamortized issuance costs were classified as redeemable minority interest in the accompanying consolidated balance sheet at such date. Effective June 17, 1999, the Company deconsolidated DTPI as a result of the reduction of STM's ownership of the voting stock in DTPI to approximately 44% (see notes 4 and 9). As STM no longer has majority ownership of the stock of DTPI, there is no funding obligation for the redeemable preferred stock in the event of an acquisition of STM. Therefore, the redeemable minority interest has been excluded from STM's balance sheet coinciding with the deconsolidation of DTPI. (11) STOCKHOLDERS' EQUITY PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of preferred stock. The Board of Directors has the authority to issue the preferred stock in one or more series, and to fix the rights, preferences, privileges and restrictions thereof without any further vote by the holders of common stock. COMMON STOCK As set out in the consolidated statement of stockholders' equity for the year ended December 31, 1998, the Company completed an equity offering of 571,429 shares of STM common stock in a private placement with funds managed by Pequot Capital Management, Inc. in March of 1998. The offering resulted in net proceeds of approximately $3,956,000. In December 1997, the Company issued 480,000 shares of common stock in exchange for all the outstanding common stock of TI (see note 3). STOCK OPTIONS In January 1992, the Company adopted the Incentive Stock Option, Non Qualified Stock Option and Restricted Stock Purchase Plan--1992 (the "1992 Plan"). The 1992 Plan was amended by the Board of Directors in 1998 to increase the number of stock options available for grant by 900,000. The 1992 Plan now provides for the grant by the Company of options and/or rights to purchase up to an aggregate of 1,750,000 shares of common stock. 41 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In October 1994, the Company's Board of Directors adopted the Satellite Technology Management, Inc. 1994 Option Plan for Non-Employee Directors (the "1994 Plan"). The 1994 Plan was approved by the Company's stockholders in July 1995. The 1994 Plan provides for the grant by the Company of options to purchase up to 250,000 shares of common stock to non-employee members of the Company's Board of directors who are neither employees nor paid consultants of the Company. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's basic and diluted net loss and net loss per share would have been adjusted to the following pro forma amounts: 1999 1998 1997 -------- --------- -------- Net loss: As reported.......................... $(8,311) $ (9,406) $(2,051) Pro forma............................ $(8,970) $(10,170) $(2,543) Loss per basic and fully diluted share: As reported.......................... $ (1.18) $ (1.36) $ (0.32) Pro forma............................ $ (1.27) $ (1.47) $ (0.40) At the date of grant, the weighted average fair value of options granted were $1,443,000, $2,198,000 and $1,237,000 for 1999, 1998 and 1997, respectively. This was determined using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 1999, 1998 and 1997--risk free interest rate of 5.47%, 5.33% and 6.33%, respectively, an expected life of five years and an expected volatility rate of 84.2%, 72.6% and 68.3%, respectively, and expected dividend yield of 0%. A summary of stock option transactions under all plans follows: WEIGHTED-AVERAGE NUMBER EXERCISE PRICE OF SHARES PER SHARE ---------- ----------------- Options outstanding at December 31, 1996.. 719,415 $9.71 Granted.............................. 207,000 8.40 Exercised............................ (119,014) 5.54 Canceled............................. (112,858) 9.57 Cancelled for regrant (1)............ (332,850) 12.68 Regranted (1)........................ 332,850 7.13 ---------- ----------------- Options outstanding at December 31, 1997.. 694,543 $7.40 Granted.............................. 488,000 8.57 Exercised............................ (22,611) 6.47 Canceled............................. (73,659) 10.37 ---------- ----------------- Options outstanding at December 31, 1998.. 1,086,273 $7.75 Granted.............................. 800,100 3.17 Cancelled............................ (734,549) 6.55 ---------- ----------------- Options outstanding at December 31, 1999.. 1,151,824 $5.33 ========== ================= The following table summarizes information regarding the stock options outstanding at December 31, 1999:
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE RANGE OF OUTSTANDING REMAINING EXERCISE PRICE EXERCISABLE EXERCISE PRICE EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE PER SHARE AT 12/31/99 PER SHARE - ------------------ ----------- ---------------- ---------------- ----------- ---------------- $2.50--6.75....... 656,575 9.03 $3.37 46,875 $4.93 6.83--8.00....... 340,349 6.26 7.16 281,243 7.17 8.05--14.25...... 154,900 8.20 9.66 48,425 9.67 ----------- ----------- $2.50--14.25...... 1,151,824 8.10 $5.33 376,543 $7.21 =========== ================ =========== ================
Common stock received through the exercise of non-qualified stock options or incentive stock options which are sold by the optionee within two years of grant or one year of exercise result in a tax deduction for the Company equivalent to the taxable gain recognized by the optionee. For financial reporting purposes, the tax effect of this 42 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) deduction is accounted for as a credit to common stock rather than as a reduction of income tax expense if such tax benefit is more likely than not to be realized. (1) The Company implemented an option cancellation/regrant program for directors, executive officers, and all other employees holding stock options with an exercise price per share in excess of the market value of the Company's common stock at the time the cancellation/regrant occurred. Optionees who accepted the repricing agreed that the regranted options would vest ratably over a period one year longer than the vesting period of the options cancelled. The program was effected on March 20, 1997 and 332,850 options in excess of $7.125 per share were cancelled and 332,850 new options were granted at an exercise price of $7.125, the fair value on the date of grant. (12) COMMITMENTS AND CONTINGENCIES REMEC Under a Development, Manufacturing and Product Supply Agreement, dated April 30,1996 as amended, the Company entered into a three year agreement to undertake the joint development of two products. The agreement required the Company to reimburse REMEC for engineering expenses for the development of the products up to $1,250,000 and to purchase products up to approximately $18,000,000. STM has title to and ownership of the design of the products and has exclusive rights to the sale of the products. The three year period commenced with the production of the first unit, which was in late 1998. Should the Company fail to purchase the minimum requirement of the products or elects to terminate the agreement, the Company may be required to pay REMEC up to $2,475,000. To date, the Company has expensed $1,250,000 for engineering expenses and has purchased approximately $1,600,000 of product through December 31, 1999. Associated with the sale of shares in DTPI to REMEC (see note 4), the Company agreed to a price adjustment whereby the purchase price of all future purchases of committed product from REMEC was increased. At December 31, 1999, the Company had established an accrual of $1,458,000 for such price increases of which $729,000 is classified as part of accrued liabilities and $729,000 is classified as long-term liabilities in the accompanying consolidated balance sheet at December 31, 1999. DTPI The terms of the product supply agreement as amended between STM and DTPI (see note 4) requires STM to supply equipment to DTPI at significantly reduced margins, compared to normal third party customers, or in some instances, at negative margins. OTHER VENDORS COMMITMENTS Under a Development, Manufacturing and Product Supply Agreement dated March 27, 1998, the Company entered into a two-year agreement with a vendor to undertake the joint development of a product. In November 1999, the Company and the vendor mutually agreed to cancel this contract and there are no purchase commitments existing at December 31, 1999. While management believes that none of its purchase commitments are in excess of requirements and all purchases will be used to fulfill customer orders in the normal course of business, there can be no assurance that the Company will generate any future level of revenues sufficient to satisfy its purchase commitments. LEASE COMMITMENTS In 1998, the Company relocated it Network Systems Division to Georgia and entered into a five-year lease commitment for administrative offices, warehouse and manufacturing facilities. In 1999, the Company relocated its operations back to California as part of its restructuring of it operations (see note 19). The Company and the landlord agreed to terminate the lease agreement for a termination fee of approximately $300,000. At December 31, 1999, there are no remaining lease commitments for this facility. The 43 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) termination fee of $300,000 is included as part of restructuring costs of $1,042,000 in the accompanying consolidated statement of operations for the year ended December 31, 1999. Rent expense for 1999 and 1998 was approximately $280,000 and $102,000, respectively. In May 1999, the Company entered into a lease agreement under which the Company leases a portion of its headquarters building to a third party. Future minimum rental income under this lease as of December 31, 1999 are as follows: $253,000 in 2000; $266,000 in 2001; $279,000 in 2003; and $106,000 in 2004. Rental income for 1999 was approximately $153,000. LITIGATION The Company is involved as both plaintiff and defendant in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's liquidity, financial position or results of operation. BID BONDS At December 31, 1999, the Company was contingently liable for standby letters of credit for $225,000 for bid bonds issued in connection with customer tender documents. (13) INCOME TAXES The components of loss from operations before income taxes, equity income and minority interest are as follows: YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 -------------- -------------- -------------- (DOLLARS IN THOUSANDS) U.S...................... $ (3,491) $ (3,781) $ (2,294) Foreign.................. (4,486) (1,583) (189) -------------- -------------- -------------- Total............... $ (7,977) $ (5,364) $ (2,483) ============== ============== ============== The components of income tax benefit (expense) consists of the following: YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 -------------- -------------- -------------- (DOLLARS IN THOUSANDS) Current: Federal............. $ -- $ 272 $ -- State............... -- (88) -- Foreign............. -- (593) -- -------------- -------------- -------------- Total current.. -- (409) -- -------------- -------------- -------------- Deferred: Federal............. -- (2,777) 224 State............... -- (512) 82 -------------- -------------- -------------- Total deferred. -- (3,289) 306 -------------- -------------- -------------- Total.......... $ -- $ (3,698) $ 306 ============== ============== ============== The actual income tax (expense) benefit differs from the statutory Federal income tax rate as follows: YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ----- ------ ------ Statutory Federal income tax rate........... 34.0% 34.0% 34.0% State taxes, net of Federal tax benefit..... 7.7 (2.0) (3.3) Effect of foreign operations................ (19.1) (17.5) (19.4) (Increase) decrease in valuation allowance.. (43.6) (41.9) (1.0) Other, net.................................. -- 2.0 2.0 Permanent differences....................... 21.0 (43.5) -- ----- ------ ------ Effective tax rate..................... --% (68.9)% 12.3% ===== ====== ====== 44 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Cumulative temporary differences which give rise to deferred tax assets and liabilities at December 31, 1999 and 1998 are as follows: 1999 1998 ------- -------- (DOLLARS IN THOUSANDS) Deferred tax assets: Inventories.............................. $ 1,923 $ 2,164 Accounts receivable...................... 3,208 186 Accrued expenses......................... 677 348 R&D costs capitalized for tax purposes... 68 139 Tax credit carryforwards................. 792 1,051 Net operating loss carryforwards......... 1,514 793 Other.................................... -- 137 Valuation allowance...................... (8,120) (4,646) -------- -------- Total deferred tax assets........... 62 172 Deferred tax liabilities: Fixed assets............................. (62) (172) -------- -------- Net deferred tax assets............. $ - $ -- ======== ======== The valuation allowance established against deferred tax assets was increased by $3,474,000 in 1999 due to continuing losses over the last three years. The Company has determined that it is not more likely than not that deferred tax assets will be realizable. At December 31, 1999, the Company had available federal net operating losses of approximately $4,100,000 which expire in 2012 through 2019, state net operating losses of approximately $2,000,000 which expire in 2004, federal research and development credits of approximately $600,000 which expire in 2000 through 2014 and alternative minimum tax credits of approximately $192,000 that are carried forward indefinitely. Included in the tax provision for 1998 was a reserve for $1,000,000 for certain tax exposures that have been assessed in Brazil. To date, the Company has responded to the assessment by the Brazilian tax authorities and intends to continue to vigorously challenge the tax assessments. Payments of $208,000 were made in 1999, although none of the tax claims have been finalized to date. The Company has not provided for U.S. Federal income and foreign withholding taxes on its foreign subsidiaries' undistributed earnings as of December 31, 1999, because such earnings are intended to be reinvested indefinitely. If these earnings are distributed in the future, foreign tax credits would become available under U.S. law to reduce the effect on the Company's overall tax liability. (14) BUSINESS SEGMENT INFORMATION AND SALES TO PRINCIPAL CUSTOMERS In 1998, the Company adopted SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). The Company operates in one principal industry segment: the design, manufacture and provision of wireless-based satellite communications infrastructure and terminal user products. 45 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Revenues by geographic area:
YEAR ENDED DECEMBER 31, -------------------------------------- 1999 1998 1997 ------------ ---------- ----------- (DOLLARS IN THOUSANDS) Total: Latin & South America............................. $ 9,673 $ 21,101 $ 7,269 Africa & Middle East.............................. 5,632 8,856 2,976 Asia.............................................. 4,332 7,309 35,630 United States..................................... 1,493 4,164 2,362 Europe............................................ 1,096 592 3,911 --------- ---------- ---------- Total sales.................................. $22,226 $ 42,022 $ 52,148 ========= =========== ========== YEAR ENDED DECEMBER 31, ------------------------------------- 1999 1998 1997 ------------ ---------- ---------- (DOLLARS IN THOUSANDS) Products: Latin & South America............................. $ 9,505 $ 19,377 $ 6,865 Africa & Middle East.............................. 4,926 8,856 2,976 Asia.............................................. 3,550 7,034 35,630 United States..................................... 1,255 3,496 442 Europe............................................ 726 592 3,911 --------- ----------- ----------- $19,962 $ 39,355 $49,824 ========= =========== =========== YEAR ENDED DECEMBER 31, -------------------------------------- 1999 1998 1997 ---------- ------------ ----------- (DOLLARS IN THOUSANDS) Services: Latin & South America............................. $ 168 $ 1,724 $ 404 Africa & Middle East.............................. 706 -- -- Asia.............................................. 782 275 -- United States..................................... 238 668 1,920 Europe............................................ 370 -- -- ---------- ------------ ----------- $ 2,264 $ 2,667 $ 2,324 ========== ============ =========== YEAR ENDED DECEMBER 31, -------------------------------------- 1999 1998 1997 ---------- ----------- ----------- (DOLLARS IN THOUSANDS) Operating loss by geographic area is as follows: Latin & South America............................. $ (2,439) $ (1,117) $ 510 Africa & Middle East.............................. -- -- -- Asia.............................................. (21) 11 (76) United States..................................... (6,392) (13,658) (2,661) Europe............................................ -- -- -- ---------- ----------- ----------- $ (8,852) $ (14,764) $ (2,227) ========== =========== =========== DECEMBER 31 ------------------------------------- 1999 1998 1997 ---------- ----------- ----------- (DOLLARS IN THOUSANDS) Identifiable assets by geographic area are as follows: Latin & South America............................... $ 1,332 $11,487 $ 6,145 Africa & Middle East................................ -- -- -- Asia................................................ 926 1,146 53 United States....................................... 32,220 50,568 48,219 Europe.............................................. -- -- -- ---------- ----------- ----------- $34,478 $63,201 $ 54,417 ========== =========== ===========
46 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company generates a substantial amount of its revenues from individually significant orders, primarily on an international basis to both developed and developing countries. This can give rise to a concentration of revenues and credit risks to individual customers and in geographic regions. While in an individual year a customer can represent a significant proportion of the revenues for that year, the Company does not generate a significant level of on-going repeat revenues from any individual customer. The Company's revenues, in general, in any given year represent new projects, to new or existing customers in new or existing geographic regions. The Company has generated approximately 44%, 50%, and 14% of its revenue in Latin and South America in 1999, 1998 and 1997, respectively, 25%, 21% and 6% of its revenues in Africa and the Middle East in 1999, 1998 and 1997, respectively, and 20%, 17% and 68% of its revenue in Asia in 1999, 1998 and 1997, respectively. In 1999, the Company had two customers, one in Latin America and one in Africa, which represented approximately 25% and 16% of the Company's consolidated revenues for 1999, respectively. In 1998, the Company had two customers, one in Latin American and one in Asia, which represented approximately 23% and 10% of the Company's consolidated revenues for 1998, respectively. In addition, the Company generated approximately 3%, 2% and 59% of revenues from one Asian customer in 1999, 1998 and 1997, respectively. The deterioration of the Asian economies is negatively impacting the level of revenues that the Company is earning from this customer. LATIN AND SOUTH AMERICA Sales in Latin and South America in 1999 were to 12 customers. There were significant sales to one customer for approximately $5,600,000. At December 31, 1999, the accounts receivable balance from this customer was approximately $1,400,000. AFRICA & MIDDLE EAST Sales in Africa and the Middle East were to 7 customers, one of which represented revenue of approximately $3,600,000 at December 31, 1999. At December 31, 1999, the account receivable balance from this customer was approximately $2,300,000. The Company sells its products and services internationally. To assure collection, the Company evaluates the credit risk associated with each customer and will require either letters of credit or similar guarantees, substantial up-front deposits or when acceptable, may extend credit on an open account basis. In 1998, the Company established approximately $1,488,000 in accounts receivable allowances, primarily for customer concessions and allowances that were estimated to be required. The majority of such balances have been written off by December 31, 1999. The Company reduced its accounts receivable reserves by $136,000 in 1999. (15) EMPLOYEE BENEFITS Effective September 1991, the Company adopted a defined contribution 401(k) savings and investment plan. The Company's contributions to the plan are determined at the discretion of the Board of Directors. During 1997, the Company made contributions of $7,000 to the Plan. In 1998, coinciding with the merger of the TI plan into the Company's plan, the Board of Directors approved a matching contribution equal to the lesser of, with respect to each participant (a) one-half of the amount contributed by such participant to the plan, (b) $1,600 or (c) 1% of the participants salary to be paid on an annual basis. Amounts of approximately $30,000 and $70,000 were expensed in 1999 and 1998, respectively, for the Company's matching contributions. 47 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (16) LOSS PER COMMON SHARE The following table presents the computation of basic and diluted loss per share:
1999 1998 1997 ---------- ---------- ----------- Numerator: Numerator for basic and diluted loss per share--net loss................................ $ (8,311) $ (9,406) $ (2,051) ========== ========== =========== Denominator: Denominator for basic loss per share--weighted average number of 7,042 6,936 6,384 common shares outstanding during the period.......................................... Incremental common shares attributable to exercise of outstanding options -- -- -- and warrants......................................................................... ---------- ---------- ----------- Denominator for diluted loss per share.................................................... 7,042 6,936 6,384 ========== ========== =========== Basic loss per share...................................................................... $ (1.18) $ (1.36) $ (0.32) ========== ========== =========== Diluted loss per share.................................................................... $ (1.18) $ (1.36) $ (0.32) ========== ========== ===========
The computation of diluted loss per share for 1999, 1998 and 1997 excluded the effect of incremental common shares attributable to the exercise of outstanding common stock options (see note 11) because their effect would be anti-dilutive. (17) RELATED PARTY TRANSACTIONS DTPI, INC. The Company's consolidated results include the results of DTPI through June 17, 1999 (see note 4). TRANSACTIONS PRIOR TO JUNE 17, 1999 Under the terms of its investment in DTPI (see notes 4 and 10), Pequot and DTPI entered into a consulting agreement for $100,000 on an annual basis. Accordingly, the Company recognized an expense to Pequot of approximately $50,000 and $75,000 for 1999 (through June 17, 1999) and 1998, respectively. DTPI supplies equipment to its 49% owned joint venture, Altair, S.A. (see note 9). Sales to Altair in 1999 (through June 17, 1999) and 1998 were approximately $1,450,000 and $7,250,000, respectively, of which approximately $740,000 and $3,600,000 were recognized as revenue due to DTPI's investment in Altair being accounted for under the equity method. DTPI also advanced cash to Altair to fund its capital expenditures and operating expenses and earned interest of 13% on all cash advances. Interest income earned on advances to Altair of approximately $128,000 and $56,000 were recognized in 1999 and 1998, respectively. At December 31, 1998, the accounts receivable balance due from Altair was approximately $4,400,000. TRANSACTIONS SUBSEQUENT TO JUNE 17, 1999 Subsequent to deconsolidation of DTPI, STM had certain related party transactions with DTPI. STM supplied equipment for approximately $320,000 and recognized revenue of approximately $180,000, representing 56% of the value of equipment supplied due to STM continuing to own 44% of DTPI. This equipment was supplied under the terms of a product supply agreement between STM and DTPI, as amended. Associated with the sale of the shares of DTPI by STM on June 17, 1999, STM granted DTPI a concession of $1,600,000 against future purchases of product by DTPI from STM. Such concession reduced the value of cash receipts from DTPI subsequent to June 17, 1999, by approximately $150,000. The terms of the product supply agreement as amended between STM and DTPI requires STM to supply equipment to DTPI at significantly reduced margins, compared to normal third party customers, or in some instances, at negative margins. 48 STM WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) STM recognized interest income in 1999 of approximately $412,000 on a $7,500,000 note receivable from DTPI. The note bears interest at 10% per annum. Due to STM providing office accommodation to certain DTPI employees and DTPI employees participating in STM's employee benefit plan, there were certain normal course recharges of expenses to DTPI at estimated cost. For the period subsequent to June 17, 1999, such recharges were approximately $200,000. OTHER RELATED PARTY TRANSACTIONS In the normal course of business, the Company contracts with Gulf Communications International, Inc. ("GCI") to provide installation services for its products. GCI was formerly 50% owned by, a former officer and director of the Company. Total purchases by the Company from GCI were approximately $327,000, $921,000 and $720,000 in 1999, 1998 and 1997, respectively. (18) 1998: FOURTH QUARTER ADJUSTMENTS The results for the fourth quarter of 1998 includes charges of approximately $7,100,000 which comprised approximately $2,500,000 for inventory obsolescence associated with an earlier version of the Company's products, certain items that are considered excess to requirements and reserves established for certain inventory on long-term loan to customers, approximately $3,200,000 for taxes comprising the write-off of deferred tax assets due to uncertainty concerning the realizability of such assets due to continued losses by the Company and a reserve established for certain tax exposures in Brazil, reserves established for accounts receivable balances of approximately $900,000 associated with the DTPI's Mexican partner and other STM overdue balances and an impairment reserve of $500,000 associated with the carrying value of certain long-term revenue generating assets due to DTPI's Mexican partner experiencing financial difficulties. (19) RESTRUCTURING COSTS In recognition of the low overall level of revenues 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 exited its Atlanta facility, relocated its manufacturing operations back to California and terminated its Atlanta workforce. Restructuring costs of $1,042,000 were recognized in 1999, comprising severance obligations of $502,000 for approximately 70 terminated employees, costs of $190,000 associated with writing-off the assets of the Company's Brazilian subsidiary and costs of $350,000 associated with exiting the Atlanta lease commitment, which was excess to requirements. All such expenses were paid in 1999 and there is no restructuring related accrual balance remaining at December 31, 1999. (20) SUBSEQUENT EVENTS (UNAUDITED) On March 28, 2000, DTPI completed a $45 million financing which reduced STM's ownership to 15% of DTPI, on a fully diluted basis. Coinciding with this financing, STM received $3,750,000 in cash from DTPI. 49 SCHEDULE II STM WIRELESS, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 ACCOUNTS RECEIVABLE ALLOWANCES (DOLLARS IN THOUSANDS)
CHARGED BALANCE AT (CREDITED) TO BEGINNING COSTS AND BALANCE AT OF PERIOD EXPENSES DEDUCTIONS END OF PERIOD ---------------- -------------- --------------- ---------------- YEAR ENDED December 31, 1999.................................. $ 2,022 (136) 1,296 $ 590 December 31, 1998.................................. $ 1,019 1,488 485 $ 2,022 December 31, 1997.................................. $ 2,006 91 1,078 $ 1,019 INVENTORY RESERVES (DOLLARS IN THOUSANDS) CHARGED BALANCE AT (CREDITED) BEGINNING TO COSTS AND BALANCE AT OF PERIOD EXPENSES DEDUCTIONS END OF PERIOD --------------- -------------- -------------- ---------------- YEAR ENDED December 31, 1999.................................. $ 5,650 (189) 4,229 $ 1,232 December 31, 1998.................................. $ 3,010 2,640 -- $ 5,650 December 31, 1997.................................. $ 3,466 (456) -- $ 3,010
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 50 PART III ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company currently has a Board of Directors consisting of five members. The following sets forth certain information relating to the Company's directors, executive officers and vice-presidents: FRANK T. CONNORS, 66, has been a director of the Company since June 1988, and served as its Chairman of the Board of Directors since September 1999 and from June 1988 to September 1993, and as its Chief Executive Officer from June 1988 to January 1991. From March 1999 to September 1999, Mr. Connors served as acting President of the Company. From January 1998 to January of 1999, Mr. Connors served as President of Direc-To-Phone International, Inc. (now SkyOnline, Inc.). From October of 1994 to January 1998, Mr. Connors was Executive Vice President of the Company. From December 1982 to January 1988, Mr. Connors was the Chief Executive Officer of Doelz Networks, a manufacturer of packet switching equipment. From 1979 to 1981, Mr. Connors was Group Vice President of Northern Telecom's Computer Systems Group. Mr. Connors is currently a director of DISC, Inc. (NASDAQ NMS: DCSC; DCSCW), an optical computer storage manufacturing Company located in northern California, and SkyOnline, Inc., the Company's formally majority-owned services subsidiary. EMIL YOUSSEFZADEH, 47, is the founder of the Company. He has been a director of the Company and has served as Chief Executive Officer from January 1982 to June 1988 and since January 1991. Mr. Youssefzadeh has served as President from January 1982 to January 1998 and since September 1999. From January 1979 until founding the Company, Mr. Youssefzadeh was a satellite research engineer with Hughes Aircraft Company where his projects included design of satellite communications systems and satellite earth stations. He also was a member of the team for communications system engineering for the Intelsat VI spacecraft. DR. ERNEST U. GAMBARO, 61, has been a director of the Company since March 1997. In 1988, Dr. Gambaro directed the formation of Infonet Services Corp. (NYSE: IN), a provider of cross-border managed data communications services to multinational corporations worldwide, and has since served as its Senior Vice President, General Counsel and Secretary. Prior to 1988, Dr. Gambaro was Assistant General Counsel for Computer Sciences Corporation focusing on the Company's international, acquisition and divestiture activities. Between 1962 and 1975, Dr. Gambaro directed programs at The Aerospace Corporation relating to the conceptual definition and implementation of advanced technology systems for space. CLAUDE BURGIO, 55, has been Chairman and Chief Executive Officer of SkyOnline, Inc. since June 1999 and a director of the Company since September 1999. From October 1997 to June 1999, Mr. Burgio was president of Lockheed Martin Telecommunications and President of the Global Transport Services and Operations unit of Lockheed Martin Global Telecommunications (LMGT). From September 1995 to October 1997 Mr. Burgio was Vice President, Engineering for the International Telecommunications Satellite Organization (INTELSAT), responsible for all aspects of the INTELSAT system, including new service development in areas such as broadband access and Internet via satellite, wireless local loop and direct-to-home interactive services. From April 1984 to August 1995, Mr. Burgio was Director of the Telecommunications and Systems Division of Aerospatiale. Mr. Burgio significantly expanded the commercial scope of the telecommunications activities of Aerospatiale, providing a worldwide network of customers with satellite based telecommunications systems and services. DR. MARK SHAHRIARY, 55, has been a director of the Company since March 2000. From JANUARY 1999 to SEPTEMBER 1999, Dr. Shahriary served as President of Teledesic LLC, which is building a global, satellite-based network to offer telecommunications services. From SEPTEMBER 1983 to JANUARY 1999, Dr. Shahriary held various management positions at Hughes Space and Communications, most recently as executive vice president in charge of operations. Dr. Shahriary is the winner of the 1989 L.A. Hyland Patent Award, the highest award given at Hughes, and holds seven U.S. patents related to various communication designs. He earned his BSEE and MSEE from California State University and his Ph.D. in solid state engineering from the University of California at Los Angeles. Dr. Shahriary is also on the Board of Directors of Peregrine Semiconductor Corporation. JOSEPH J. WALLACE, 40, has been Vice President-Finance and Chief Financial Officer of the Company since March 1997. From April 1994 to March 1997, Mr. Wallace was Corporate Controller of MAI Systems Corporation, a publicly held worldwide provider of total information system solutions. From 1990 to 1993, Mr. Wallace was Controller and Chief Financial Officer of Simmons Magee, PLC, a British based value added reseller of computer 51 products and services. Mr. Wallace is a Fellow of the Institute of Chartered Accountants in Ireland (equivalent to the American CPA or a masters program). JACQUES YOUSSEFMIR, 28, has been Vice President and General Counsel of the Company since April 1998. From 1995 to April 1998, Mr. Youssefmir practiced law as an associate in the Los Angeles office of Latham & Watkins, where he specialized in corporate transactions. Mr. Youssefmir received his B.A. in 1992 from Arizona State University and his J.D. in 1995 from the Harvard Law School. BERND STEINEBRUNNER, 36, has been Vice President, Product Management and Sales Engineering since he joined the Company in September 1999. Prior to joining the Company, Mr. Steinebrunner spent 11 years at Bosch Telecom GmbH in Germany, where he held several positions including Supervisor of the Proposal Management Team. Mr. Steinebrunner received his DIPLOM INGENIEUR at the University of Ulm, Germany. RENATO GONCALVES DIAS, 48, joined the Company in 1994 and has been Vice President for Latin American Sales since JULY 1999. Prior to joining the Company, Mr. Dias held positions in several Brazilian firms including SID Telecon, where he was a Cellular System Engineering Manager, and Avionics Systems, where he was a Commercial Manager in charge of sales of on-board avionics for commercial and military aircraft. Mr. Dias received his bachelors degree in engineering from the Institute of Technology of Aeronautics in Brazil and an M.A. in International Affairs from George Washington University. DAVID BREDENDICK, 33, joined the Company in 1996 and has served as its Vice President, Business Development since February 2000, and Regional Director, Asia from February 1996 to February 2000. Prior to joining the Company, Mr. Bredendick worked as a business development manager and system engineer at McDonnell Douglas. Mr. Bredendick has a B.S. from University of California, Los Angeles, and has an M.B.A. from the University of California, Irvine. GENE MEISTAD, 61, joined the Company in 1986 and has served as Vice President of Manufacturing since November 1999 and from FEBRUARY 1986 to November 1998. Prior to joining the Company, Mr. Meistad was Manager at Production Control at BASF, where he helped develop their manufacturing resource planning system. Prior to joining BASF, Mr. Meistad was a Materials Manager at Siemen's AG. Mr. Meistad attended Fullerton College and has served in the U.S. Armed Forces. PAUL PERSON, 53, joined the Company in 1985 and has served as its Chief Scientist since APRIL 1997. Mr. Person currently oversees the Company's operating systems and networking software. Prior to joining the Company, Mr. Person was a systems engineer at Teledyne Corp. and at Compucorp, Inc. Mr. Person attended the University of Minnesota and served in the US Air Force, where he worked on missile guidance electronics. Mr. Youssefzadeh and Mr. Youssefmir are cousins. There are no other family relationships between any director, executive officer or person nominated or chosen by the Registrant to become a director or executive officer. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based solely upon its review of the copies of reporting forms furnished to the Company, or written representations that no annual Form 5 reports were required, the Company believes that all filing requirements under Section 16(a) of the Exchange Act applicable to its directors, executive officers and any persons holding 10% or more of the Registrant's common stock with respect to the Registrant's year ended December 31, 1999, were satisfied, except as follows: Frank Connors filed a late Form 4 with respect to the sale of 20,000 shares of the Company's common stock in December 1999; and Claude Burgio filed a late form 3 with respect to becoming a director of the Company in September 1999. 52 ITEM 11--EXECUTIVE COMPENSATION The following table sets forth compensation received for the three years ended December 31, 1999, by the Company's Chief Executive Officer, Chairman and the four other most highly compensated executive officers of the Company serving at December 31, 1999 (collectively, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ----------------------------------- NAME AND PRINCIPLE POSITION YEAR SALARY ($) BONUS ($) OTHER ($) AWARDS OPTIONS (#) - ------------------------------------- ------ ----------- ----------- ---------- --------------------- Emil Youssefzadeh.................... 1999 299,905 0 33,020(7) 0 President and Chief 1998 310,574 0 33,020(7) 0 Executive Officer 1997 239,698 0 33,020(7) 10,000(10) Frank Connors (1).................... 1999 12,267 0 141,600(8) 20,000 Chairman of the Board 1998 206,092 0 0 0 1997 165,577 0 0 15,000(10) Joseph Wallace (2)................... 1999 148,700 0 1,600(9) 40,000 Vice President, Finance & 1998 149,811 30,000(5) 0 0 Chief Financial Officer 1997 95,673 0 0 25,000 Jacques Youssefmir (3)............... 1999 120,000 10,000 1,385(9) 20,000 Vice President & 1998 84,000 49,860(6) 12,500(11) General Counsel Renato Goncalves Dias............... 1999 125,000 0 1,300(9) 23,000 Vice President, 1998 124,283 8,000 0 0(11) Latin American Sales 1997 114,613 7,000 0 15,000(10) Bernd Steinebrunner (4).............. 1999 34,102 0 0 20,000 Vice President, Product Management & Sales Engineering
- -------------- (1) Mr. Connors served as acting President of the Company from March 1999 through September 1999. (2) Mr. Wallace commenced employment with the Company in March 1997. (3) Mr. Youssefmir commenced employment with the Company in April 1998. (4) Mr. Steinebrunner commenced employment with the Company in September 1999. (5) Represents bonus paid in connection with the sale of substantially all of the assets of Telecom Multimedia Systems, Inc., the Company's subsidiary, to Inter-Tel, Incorporated in June 1998. (6) Comprised of (a) $6,000 sign on bonus and (b) $43,860 bonus paid in connection with the sale of substantially all of the assets of Telecom Multimedia Systems, Inc., the Company's subsidiary, to Inter-Tel, Incorporated in June 1998. (7) Amounts represent automobile allowance and expenses paid by the Company for the benefit of Mr. Youssefzadeh. (8) Represents (a) $100,000 paid to Mr. Connors in connection with his retirement as an officer in January 1999, (b) $25,000 paid to Mr. Connors while he served as acting President from March 1999 to September 1999, (c) $15,000 in directors fees and (d) $1,600 Company match under the Company's 401k plan. (9) Figures represent Company matches under the Company's 401k plan. (10) Includes regrants to Mr. Youssefzadeh, Mr. Connors and Mr. Dias of 10,000 options, 15,000 options and 15,000 options, respectively, on March 20, 1997 in connection with the Company's option cancellation/regrant program (11) During 1998, Mr. Youssefmir and Mr. Dias were granted options to purchase common stock of Direc-To-Phone International, Inc. (now SkyOnline, Inc.), the Company's then majority-owned subsidiary. 53 Mr. Youssefmir and Mr. Dias were granted options to purchase 25,000 shares and 14,400 shares, respectively, of SkyOnline, Inc. common stock. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information concerning individual grants of STM Wireless, Inc. stock options made during the fiscal year ended December 31, 1999, to each of the Named Executive Officers:
% TOTAL POTENTIAL REALIZABLE OPTIONS VALUE AT ASSUMED OPTIONS GRANTED TO EXERCISE ANNUAL RATES OF STOCK GRANTED EMPLOYEES IN PRICE EXPIRATION PRICE APPRECIATION NAME (NO.) FISCAL YR. (1) ($/SHARE) DATE (2) FOR OPTION TERM (3) - ------------------------ --------- ------------- --------- ---------- --------------------- 5% ($) 10% ($) ------- -------- Frank Connors........... 20,000 2.5 % $5.375 1/8/09 $67,606 $171,327 Joseph Wallace.......... 40,000 5.0 % 2.75 7/28/09 69,178 175,312 Jacques Youssefmir...... 20,000 2.5 % 2.75 7/28/09 34,589 87,656 Renato Goncalves Dias... 23,000(4) 2.87% 2.696(4) (4) 38,996 98,825 Bernd Steinebrunner..... 20,000 2.5 % 3.50 9/16/09 44,000 111,561
- ------------- (1) Options to purchase an aggregate of 800,100 shares of Common Stock were granted to employees, including the named Executive Officers, during the year ended December 31, 1999. (2) Options granted have a term of ten years, subject to earlier termination on certain events related to termination of employment or service to the Company. (3) The potential realizable value is calculated based on the term of the option at its time of grant (10 years). It is calculated by assuming that the stock price appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. No gain to the option holder is possible unless the stock price increases over the option term. (4) Mr. Dias received stock options on two separate grant dates. Mr. Dias received 5,000 stock options at an exercise price of $2.50 per share on March 12, 1999. These options expire on March 12, 2009. Mr. Dias also received 18,000 options at an exercise price of $2.75 per share on July 28, 1999. These options expire on July 28, 2009. The following table sets forth information concerning exercises of stock options during the fiscal year ended December 31, 1999, by each of the named executive officers and the year-end value of unexercised options:
VALUES OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL OPTIONS AT YEAR END (NO.) FISCAL END($) SHARES ACQUIRED ON EXERCISABLE/ EXERCISABLE/ NAME EXERCISE (NO.) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE(1) - ------------------------------------------------ ------------------- ------------------- ----------------- ---------------- Emil Youssefzadeh.............................. 0 0 10,000/0 0/0 Frank Connors.................................. 0 0 15,000/20,000 0/$25,000 Joseph Wallace................................. 0 0 12,500/52,500 0/$155,000 Jacques Youssefmir............................. 0 0 2,500/30,000 0/$77,500 Renato Dias.................................... 0 0 7,500/30,500 0/$90,375 Bernd Steinebrunner............................ 0 0 0/20,000 0/$62,500
- --------------- (1) Value is based on fair market value of Common Stock as of December 31, 1999 stock market close minus the exercise price or base price of "in-the-money" options. The closing sales price for the Company's Common Stock as of December 31, 1999 on the NASDAQ Stock Market was $6.625. DIRECTORS' FEES Each of the outside directors receives an annual retainer at the rate of $15,000 for services rendered in his or her capacity as a director of the Company. Accordingly, during 1999, Mr. Connors received $15,000; Mr. Gambaro 54 received $15,000; and Mr. Burgio received $ 3,750 (as he joined the Company's Board in September of 1999) for their services as outside directors of the Company. The Company's outside directors also receive options to purchase 20,000 shares of the Company's common stock upon joining the Company's board, with an exercise price equal to the fair market value of the common stock at the time of grant. The Company's outside directors were also reimbursed for expenses incurred for meetings of the Board of Directors which they attended. RETIREMENT OF MR. CONNORS In 1999, Mr. Connors retired from his position as an executive officer of the Company, at which time, the Company granted Mr. Connors a retirement package which consists of (a) $100,000 and (b) retention, at the Company's expense, of medical and health benefits for Mr. Connors and his dependents through 1999. Mr. Connors also received $25,000 in connection with his services to the Company as Acting President from March 1999 through September 1999. In addition, as long as Mr. Connors remains on the Company's Board of Directors, he will be entitled to the same remuneration as the other outside directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Company's Board of Directors consists of three members. During the year ended December 31, 1999, Dr. Gambaro, Lawrence D. Lenihan, Jr. and Guy W. Numann were members of the Compensation Committee until the annual meeting of the stockholders of the Company in September of 1999. Following the annual meeting of the stockholders of the Company, the Compensation Committee was comprised of Dr. Gambaro, Mr. Connors and Mr. Burgio. Mr. Connors served as acting President of the Company from March 1999 to September 1999 and President of SkyOnline from January 1998 to January 1999. 55 REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE The following report is submitted by the Compensation and Stock Option Committee of the Board of Directors with respect to the executive compensation policies established by the Compensation and Stock Option Committee and recommended to the Board of Directors and compensation paid or awarded to executive officers for the fiscal year ended December 31, 1999. The Compensation and Stock Option Committee determines the annual salary, bonus and other benefits, including incentive compensation awards, of the Company's senior management and recommends new employee benefit plans and changes to existing plans to the Company's Board of Directors. The Compensation Committee of the Company's Board of Directors consists of three members. During the year ended December 31, 1999, Dr. Gambaro, Lawrence D. Lenihan, Jr. and Guy W. Numann were members of the Compensation Committee until the annual meeting of the stockholders of the Company in September of 1999. Following the annual meeting of the stockholders of the Company, the Compensation Committee was comprised of Dr. Gambaro, Mr. Connors and Mr. Burgio. COMPENSATION POLICIES AND OBJECTIVES In establishing and evaluating the effectiveness of compensation programs for executive officers, as well as other employees of the Company, the Compensation and Stock Option Committee is guided by three basic principles: o The Company must offer competitive salaries to be able to attract and retain highly-qualified and experienced executives and other management personnel. o Annual executive compensation in excess of base salaries should be tied to individual and Company performance. o The financial interests of the Company's executive officers should be aligned with the financial interest of the stockholders, primarily through stock option grants which reward executives for improvements in the market performance of the Company's Common Stock. SALARIES AND EMPLOYEE BENEFIT PROGRAMS. In order to retain executives and other key employees, and to be able to attract additional well-qualified executives when the need arises, the Company strives to offer salaries, and health care and other employee benefit programs, to its executives and other key employees that are comparable to those offered to persons with similar skills and responsibilities by competing businesses in the local geographic area. In recommending salaries for executive officers, the Compensation and Stock Option Committee (i) reviews the historical performance of the executives and (ii) informally reviews available information, including information published in secondary sources, regarding prevailing salaries and compensation programs offered by competing businesses that are comparable to the Company in terms of size, revenue, financial performance and industry group. Many, though not all, of these competing businesses, that have securities which are publicly traded, are included in the S&P Communication--Equipment Manufacturer Index used in the Stock Performance Graph below. Another factor which is considered in recommending salaries of executive officers is the cost of living in Southern California where the Company is headquartered, as such cost generally is higher than in other parts of the country. In order to retain qualified management personnel, the Company has followed the practice of seeking to promote executives from within the Company whenever practicable. The Board of Directors believes that this policy enhances employee morale and provides continuity of management. Typically, modest salary increases are made in conjunction with such promotions. PERFORMANCE-BASED COMPENSATION. The Board of Directors believes that the motivation of executives and key employees increases as the market value of the Company's Common Stock increases. Nevertheless, the Company provides a merit bonus in cash or stock options to executives and key employees which is dependent on the Company's achievements and the direct contributions made by each executive and other key employees. Accordingly, at the beginning of each fiscal year, the Company establishes short term and long term plans, and at the end of the fiscal year, the collective and individual contributions of the executives to the Company's achievements are evaluated. Cash bonuses are awarded if the Company achieves or exceeds the earnings goal 56 established for the fiscal year and are limited, subject to extraordinary exceptions, to amounts ranging from five percent (5%) to fifty percent (50%) of an executive's base salary. The earnings goal is established on the basis of the annual operating plan developed by management and approved by the Board of Directors. The annual operating plan, which is designed to maximize profitability within the constraints of economic and competitive conditions, some of which are outside the control of the Company, is developed on the basis of (i) the Company's performance for the prior fiscal year; (ii) estimates of sales revenue for the plan year based upon recent market conditions, trends and competition and other factors which, based on historical experience, or expected to affect the level of sales that can be achieved; (iii) historical operating costs and cost savings that management believes can be realized; (iv) competitive conditions faced by the Company; and (v) additional expenditures beyond prior fiscal years in expansion or research and development toward growth of the Company's business in future fiscal years. By taking all of these factors into account, including market conditions, the earnings goal in the annual operating plan is determined. In certain instances, bonuses are awarded not only on the basis of the Company's overall profitability, but also on the achievement by an executive of specific objectives within his or her area of responsibility. For example, a bonus may be awarded for any executive's efforts in achieving greater than anticipated cost savings, or completing a new product on target. As a result of this performance-based merit bonus program, executive compensation, and the proportion of each executive's total cash compensation that is represented by incentive or bonus income, may increase in those years in which the Company's profitability increases. STOCK OPTIONS AND EQUITY-BASED PROGRAMS. In order to align the financial interests of executive officers and other key employees with those of the stockholders, the Company grants stock options to its executive officers and other key employees on a periodic basis, taking into account the size and terms of previous grants of equity-based compensation and stock holdings in determining awards. Stock option grants, in particular, reward executive officers and other key employees for performance that results in increases in the market price of the Company's Common Stock, which directly benefit all stockholders. Moreover, the Compensation and Stock Option Committee generally has followed the practice of granting options on terms which provide that the options become exercisable in cumulative annual installments, generally over a three to five-year period. The Compensation and Stock Option Committee believes that this feature of the option grants not only provides an incentive for executive officers to remain in the employ of the Company, but also makes longer term growth in share prices important for the executives who receive stock options. FISCAL YEAR 1999 COMPENSATION The salaries of the Named Executive Officers generally decreased over the salaries paid in fiscal 1998, primarily as a result of cost cutting measures the Company took in 1999. Since the Company did not meet the earnings goals established for the year, no bonus payments were made to any of the Named Executive Officers for the year ended December 31, 1999 except for Mr. Youssefmir who received a bonus of $10,000. The Company is required to disclose its policy regarding qualifying executive compensation deductibility under Section 162(m) of the Internal Revenue Code of 1986, as amended, which provides that, for purposes of the regular income tax and the alternative minimum tax, the otherwise allowable deduction for compensation paid or accrued with respect to a covered employee of a public corporation is limited to no more than $1 million per year. It is not expected that the compensation to be paid to the Company's executive officers for fiscal 2000 will exceed the $1 million limit per officer. The Company's Incentive Stock Option, Non-Qualified Stock Option and Restricted Stock Purchase Plan--1992 is structured so that any compensation deemed paid to an executive officer when he exercises an outstanding option under the plan, with an exercise price equal to the fair market value of the option shares on the grant date, will qualify as performance-based compensation that will not be subject to the $1 million limitation. The Compensation Committee of the Board of Directors Dr. Ernest U. Gambaro Frank Connors Claude Burgio 57 STOCK PERFORMANCE GRAPH Set forth below is a line graph comparing the cumulative stockholder return on the Company's Common Stock with the cumulative total return of the S&P Communications-Equipment/Manufacturer Index and the NASDAQ Stock Market--US Index for the period commencing December 31, 1994 and ended on December 31, 1999. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* AMONG STM WIRELESS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX AND THE S & P COMMUNICATIONS EQUIPMENT INDEX [PERFORMANCE CHART APPEARS HERE]
12/94 12/95 12/96 12/97 12/98 12/99 ----- ----- ----- ----- ----- ----- STM Wireless, Inc. 100 131 47 58 32 45 Nasdaq Stock Market (U.S.) 100 141 174 213 300 542 S&P Communications Equipment 100 150 175 228 402 883
* $100 INVESTED ON 12/31/94 IN STOCK OR INDEX - INCLUDING REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31. 58 ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Set forth below is certain information as of March 22, 2000, regarding the beneficial ownership of the Company's common stock by (i) any person who was known by the Company to own more than 5% of the voting securities of the Company, (ii) each of the directors, (iii) each of the Named Executive Officers and (iv) all directors and executive officers as a group. Except as otherwise indicated, the Company believes, based on information furnished by such owners, that the beneficial owners of the Registrant's Common Stock listed below have sole investment and voting power with respect to such shares, subject to applicable community property laws.
FIVE PERCENT SHAREHOLDERS, DIRECTORS, AMOUNT AND NATURE NAMED EXECUTIVE OFFICERS OF BENEFICIAL PERCENT OF AND DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP OWNERSHIP CLASS - ------------------------------------------------------ -------------------- --------------- Emil Youssefzadeh (1)................................ 1,336,755 18.5% STM Wireless, Inc. One Mauchly Irvine, California 92618 Dimensional Fund Advisors, Inc. (2).................. 430,500 6.0% 1299 Ocean Avenue 11th Floor Santa Monica, CA 90401 Pequot Capital Management, Inc(3).................... 426,000 5.9% c/o David J. Malat 500 Nyala Farm Road, Westport, CT 06880 Frank Connors.................................... (4) 178,080 2.5% Mark Shahriary....................................... 12,000 * Dr. Ernest U. Gambaro............................ (5) 15,000 * Claude Burgio........................................ 0 * Joseph Wallace................................... (6) 18,750 * Jacques Youssefmir............................... (7) 5,000 * Renato Goncalves Dias............................ (8) 11,250 * Bernd Steinebrunner.................................. 0 * All Directors and Executive Officer as a group (9 persons) (1)(4)(5)(6)(7)(8) 1,576,835 21.8% - ---------------------------------
* Less than 1% (1) Includes 249,000 and 244,020 shares held by Kamil Youssefzadeh and Shafig Youssefzadeh, respectively, who are brothers of Emil Youssefzadeh, for which Emil Youssefzadeh has voting rights. Accordingly, Emil Youssefzadeh is deemed to share beneficial ownership of these shares. Further, includes 10,000 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 2000. (2) According to a report filed with the Securities and Exchange Commission, Dimensional Fund Advisors Inc. ("Dimensional"), an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager to certain other commingled group trusts and separate accounts. These investment companies, trusts and accounts are the "Funds". In its role as investment adviser or manager, Dimensional possesses voting and/or investment power over 430,500 shares of common stock of the 59 Company that are owned the Funds. All such securities are owned by the Funds and Dimensional disclaims beneficial ownership of such securities. (3) Based on a report filed with the Securities and Exchange Commission on March 21, 2000. (4) Inclusive of 20,000 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 2000. (5) Inclusive of 15,000 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 2000. (5) Inclusive of 18,750 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 2000. (6) Inclusive of 5,000 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 2000. (7) Inclusive of 11,250 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 2000. (8) Inclusive of 3,750 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 2000. ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company continues to contract with Gulf Communications International, Inc. ("GCI") in the normal course of business to provide installation services. Until June 1998, Jack Acker, the president of the Company's Network Systems Division from January 1998 to March 1999 and a member of the Company's Board of Directors from September 1998 to March 1999, served as the Chairman of the Board of GCI and was a 50% owner of GCI. Total purchases by the Company from GCI were approximately $327,000, $921,000 and $720,000 in 1999, 1998 and 1997, respectively. In December 1997, the Company entered into an Agreement and Plan of Merger with Telecom International, Inc. ("TI") pursuant to which TI merged with and into a wholly-owned subsidiary of the Company. Under the terms of the acquisition, the Company issued 480,000 shares of its Common Stock to TI's former stockholders, including Jack Acker, who received 260,458 shares of the Company's Common Stock as a result of the acquisition. In March 1998, the Company completed a $10 million equity offering of shares of the Company and Direc-To-Phone International, Inc. (subsequently renamed SkyOnline, Inc.), the Company's former subsidiary, to two funds managed by Pequot Capital Management, Inc. Through the transaction, Pequot also acquired 571,429 shares in the Company. In June 1999, Pequot purchased additional SkyOnline shares from the Company for $2.5 million. Lawrence Lenihan, a principal of Pequot, was a member of the board of directors of the Company from September 1998 to March 2000. The Company has entered into a product supply agreement with SkyOnline pursuant to which the Company is required to offer SkyOnline certain product at the lowest price available to the Company's other customers. Claude Burgio, a member of the Company's Board of Directors since September 1999, is SkyOnline's chief executive officer and chairman of the board. 60 PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND EXHIBITS (1) FINANCIAL STATEMENTS: THE FOLLOWING CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY, ARE INCORPORATED BY REFERENCE UNDER PART II, ITEM 8 HEREIN. PAGE Consolidated Balance Sheets as of December 31, 1999 and 1998............. 28 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997...................................................... 29 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997......................................... 30 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997...................................................... 31 Notes to Consolidated Financial Statements.............................. 33 Independent Auditors' Report............................................ 27 The following schedule is filed herewith: Schedule II--Valuation and Qualifying Accounts and Reserves are incorporated by reference under Part II, Item 8 herein. Selected Quarterly Financial Data are incorporated by reference under Part II, Item 6 herein. All other schedules are omitted because they are not required, are not applicable or the information is included in the consolidated financial statements or notes thereto. (3) EXHIBITS EXHIBIT NO. DESCRIPTION REPORT ----------- ----------- ------ 3.1**** Restated Certificate of Incorporation of the Company 3.2**** Bylaws of the Company 10.1* Satellite Technology Management, Inc. Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan--1992 (the "Plan") 10.2* Form of Incentive Stock Option Agreement pertaining to the Plan 10.3* Form of Nonqualified Stock Option agreement pertaining to the Plan 10.4* Form of Indemnification Agreement between Registrant and its directors 10.16** Federal Communication Commission authorization and order. File Nos. 2061/2062-DSE-P/L84 and 3379/3380-DSE-P/L84. 10.21**** 1994 Stock Option Plan for Non-Employee Directors 10.22***** Stock Purchase Agreement between STM Wireless, Inc. and REMEC, Inc. dated March 31, 1996 10.31****** Loan and Security Agreement, dated March 27, 2000, by and between STM Wireless, Inc. and the CIT Group/Business Credit, Inc. 10.32****** Loan Agreement dated September 29, 1999, by and between STM Wireless, Inc. and the Zapara Family Trust u/d/t dated March 4, 1982. 61 ****** 21. Subsidiaries of Registrant ****** 23.1 Consent of KPMG LLP ****** 27.1 Financial Data Schedule Year Ended 1999 - --------------- * Incorporated herein by reference to the referenced exhibit number to the Company's Registration Statement on Form S-1, Reg. No. 33-45694. ** Incorporated by reference to the referenced exhibit number to the Company's Form 10-Q for the Quarter ended June 30, 1994. *** Incorporated by reference to the referenced exhibit number to the Company's Form 10-Q for the Quarter ended September 30, 1994. **** Incorporated by reference to the Company's Form 10-K filed for the year ended December 31, 1995. ***** Incorporated by reference to the referenced exhibit to the Company's Form 10-Q for the Quarter ended March 31, 1996. ****** Filed herewith. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS EXHIBIT NO. DESCRIPTION REPORT ----------- ----------- ------ 10.1 Satellite Technology Management, Inc. Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan--1992 (the "Plan").* 10.2 Form of Incentive Stock Option Agreement pertaining to the Plan.* 10.3 Form of Nonqualified Stock Option Agreement pertaining to the Plan.* 10.21 1994 Stock Option Plan for Non-Employee Directors**** (b) REPORTS ON FORM 8-K None. 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 30, 2000 STM WIRELESS, INC. By: /s/ EMIL YOUSSEFZADEH ----------------------------------- Emil Youssefzadeh President & Chief Executive Officer By: /s/ JOSEPH WALLACE ----------------------------------- Joseph Wallace Vice President, Finance, Chief Financial Officer and Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each person whose signature to this report on Form 10-K appears below hereby appoints Emil Youssefzadeh and Joseph Wallace, or either of them, to act severally as attorneys-in-fact and agents, with power of substitution and resubstitution, for each of the undersigned, for any and all capacities, to sign on his behalf, individually and in the capacities stated below, and to file any and all amendments to this report on Form 10-K, which amendment or amendments may make changes and additions as such attorneys-in-fact may deem necessary.
SIGNATURE TITLE DATE /s/ EMIL YOUSSEFZADEH Chief Executive Officer and Director March 30, 2000 - ---------------------------------------- Emil Youssefzadeh /s/ JOSEPH J. WALLACE Vice President, Finance, Chief Financial Officer March 30, 2000 - ---------------------------------------- and Principal Accounting Officer Joseph J. Wallace /s/ FRANK T. CONNORS Chairman of the Board March 30, 2000 - ---------------------------------------- Frank T. Connors /s/ CLAUDE BURGIO Director March 30, 2000 - ---------------------------------------- Claude Burgio /s/ MARK SHAHRIARY Director March 30, 2000 - ---------------------------------------- Mark Shahriary /s/ DR. ERNEST U. GAMBARO Director March 30, 2000 - ---------------------------------------- Dr. Ernest U. Gambaro
63 EX-10.31 2 EXHIBIT 10.31 LOAN AND SECURITY AGREEMENT This Agreement is between the undersigned Borrower and the undersigned Lender concerning loans and other credit accommodations to be made by Lender to Borrower. SECTION 1. PARTIES 1.1 The "BORROWER" is identified in Section 10.5(c) and its successors and assigns. If more than one Borrower is specified in Section 10.5(c), all references to Borrower shall mean each of them, jointly and severally, individually and collectively, and the successors and assigns of each. 1.2 The "LENDER" is THE CIT GROUP/BUSINESS CREDIT, INC. and its agents, designees, representatives, successors and assigns. SECTION 2. LOANS AND OTHER CREDIT ACCOMMODATIONS 2.1 REVOLVING LOANS. Lender shall, subject to the terms and conditions contained herein, make revolving loans to Borrower ("REVOLVING LOANS") in amounts requested by Borrower from time to time, but not in excess of the lesser of (i) the amount set forth in Section 10.1(f) and (ii) the Net Availability existing immediately prior to the making of the requested loan and provided the requested loan would not cause the outstanding Obligations hereunder to exceed the Maximum Credit. (a) The "MAXIMUM CREDIT" is set forth in Section 10.1(a). (b) The "GROSS AVAILABILITY" is at any time (i) the product of the outstanding amount of Eligible Accounts, multiplied by the Eligible Accounts Percentage set forth in Section 10.1(b), plus: (ii) the product obtained by multiplying the applicable Eligible Inventory Percentage set forth in Section 10.1(b) by the values (based on the lower of cost, market, or export purchase orders and contracts stated at cost) of Eligible Inventory, but the amount so added shall not exceed any sublimits set forth in Section 10.1(c). (c) The "NET AVAILABILITY" shall be calculated at any time as an amount equal to the Gross Availability minus the aggregate amount of all then-outstanding Obligations (including Accommodations other than Accommodations provided under Section 2.3(b)) to Lender. (d) "ELIGIBLE ACCOUNTS" are accounts created by Borrower in the ordinary course of its business which are and remain reasonably acceptable to Lender for lending purposes. General criteria for Eligible Accounts are set forth below but may be revised from time to time by Lender, in its reasonable business judgment, on fifteen (15) days' prior written notice to Borrower. Lender shall, in general, deem and continue to deem accounts to be Eligible Accounts if: (1) such accounts arise from bona fide completed transactions and have not remained unpaid for more than the number of days after the invoice date set forth in Section 10.1(d); (2) the amounts of the accounts reported to Lender are absolutely owing to Borrower and payment is not conditional or contingent, (such as consignments, guaranteed sales or right of return or other similar terms); (3) the accounts are eligible under Export-Import Bank's Working Capital Guarantee Program (including any waivers granted by Export Import Bank); (4) such accounts do not arise from retainages or bill and hold sales; (5) there are no contra relationships, setoffs, counterclaims or disputes existing with respect thereto and there are no other facts existing or threatened which would materially impair or delay the collectibility of all or any portion thereof; (6) the goods giving rise thereto were not at the time of the sale subject to any liens except those permitted in this Agreement; (7) such accounts are not accounts with respect to which the account debtor or any officer or employee thereof is an officer, employee or agent of or is affiliated with Borrower, directly or indirectly, whether by virtue of family membership, ownership, control, management or otherwise; (8) such accounts are invoiced by Borrower and denominated only in United States dollars and payable in the United States; (9) Borrower has delivered to Lender such documents as Lender may have requested pursuant to Section 5.9 hereof in connection with such accounts and Lender shall have received verifications of such accounts, reasonably satisfactory to it, if sent to the account debtors or any other obligors or any bailees pursuant to Section 5.5 hereof; (10) there are no facts existing or threatened which Lender reasonably believes would result in any material adverse change in the account debtor's financial condition; (11) not more than fifty percent (50%) of the accounts of an account debtor or its affiliates owed to Borrower are more than the number of days set forth in Section 10.1(d); (12) such accounts are owed by account debtors whose total indebtedness to Borrower does not exceed the amount of any customer credit limits as reasonably established from time to time on notice to Borrower (the amount exceeding the credit limit shall not be eligible); (13) such accounts are owed by account debtors reasonably deemed creditworthy at all times by Lender; (14) such accounts are owed by account debtors located in countries on Export-Import Bank's approved list and , if required by Export-Import Bank, are insured by foreign credit insurance acceptable to Export-Import Bank and Lender and assigned to Lender; and (15) such accounts are not owed by an account debtor that is a defense or military agency of a foreign government. (e) "ELIGIBLE INVENTORY" is raw material, work in process and finished goods inventory, owned by Borrower and designated for foreign sale, which is and remains reasonably acceptable to Lender for lending purposes and is located at one of the addresses set forth in Section 10.5(e). Borrower shall deliver to Lender copies of foreign purchase orders with such frequency as Lender may reasonably require. (f) Lender shall have a continuing right to reduce the Gross Availability by implementing reasonable Reserves ("RESERVES"), and to increase and decrease such Reserves from time to time, if and to the extent that, in Lender's reasonable business judgment, such Reserves are necessary to protect Lender against any state of facts which does, or would, with notice or passage of time or both, constitute an Event of Default or have a material adverse effect on any Collateral. Without limiting the forgoing, Lender may establish Reserves for the product supply agreement between Borrower and SkyOnline, Inc. up to $1,200,000 and such Reserves will be subject to reduction as the product supply agreement between Borrower and SkyOnline, Inc. is fulfilled as indicated by Borrower's written notice to Lender. (g) If a voluntary or involuntary petition under the Bankruptcy Code is filed against the Borrower, then Lender need not make loans. (h) Revolving Loans will not at any time exceed the Gross Availability unless Lender has consented in writing. 2 (i) Subject to the terms and conditions hereof, including but not limited to the existence of sufficient Gross Availability and Net Availability, Borrower agrees to borrow sufficient amounts from time to time so that the outstanding Revolving Loans and Accommodations, shall at all times equal or exceed the principal amount set forth in Section 10.1(e) as the Minimum Borrowing; provided, that if Borrower fails to do so, interest shall nevertheless accrue on the Obligations as if Borrower had borrowed such amounts as would have been sufficient to maintain the outstanding Revolving Loans and Accommodations at an amount equal to the Minimum Borrowing (and Lender shall have the right to charge Borrower's loan account for such additional interest), and provided further that such accrual shall not impose upon Lender any obligation to make loans to Borrower to increase the outstanding Revolving Loans or Accommodations to such Minimum Borrowing. Borrower will maintain Gross Availability at all times in amounts sufficient to permit Borrower to comply with the Minimum Borrowing requirement. 2.2 INTENTIONALLY OMITTED. 2.3 ACCOMMODATIONS. (a) Lender shall issue or cause to be issued, from time to time at Borrower's request and on terms and conditions and for purposes reasonably satisfactory to Lender, credit accommodations consisting of letters of credit, bankers' acceptances, merchandise purchase guaranties or other guaranties or indemnities for Borrower's account ("ACCOMMODATIONS"). Borrower shall execute and perform additional agreements relating to the Accommodations in form and substance reasonably acceptable to Lender and the issuer of any Accommodations, all of which shall supplement the rights and remedies granted herein. Any payments made by Lender or any affiliate of Lender in connection with the Accommodations shall constitute additional Revolving Loans to Borrower. The aggregate undrawn face amount of all Accommodations outstanding under this Section 2.3(a) shall not exceed $750,000 at any time. Lender will establish Reserves equal to (i) 25% of the face amount of standby and (ii) 30% of the face amount of commercial letters of credit used for purchases of Eligible Inventory. (b) In the event Borrower does not have sufficient Gross Availability and Net Availability for Accommodations under Section 2.3(a), Lender shall issue or cause to be issued, from time to time at Borrower's request and on terms and conditions and for purposes reasonably satisfactory to Lender, Accommodations under this Section 2.3(b) provided that Borrower shall have deposited an amount of cash collateral in form and substance reasonably satisfactory to Lender equal to 100% of the face amount of such Accommodations and so long as no Event of Default has occurred and is continuing Lender will remit to Borrower any interest generated from such cash collateral on a monthly basis. The Accommodations under this Section 2.3(b) shall not be part of the EXIM guaranty facility except to the extent the reimbursement to Lender results in the creation of Revolving Loans. Borrower shall execute and perform additional agreements relating to the Accommodations in form and substance acceptable to Lender and the issuer of any Accommodations, all of which shall supplement the rights and remedies granted herein. Any payments made by Lender or any affiliate of Lender in connection with the Accommodations shall be repaid from the cash collateral provided under this Section 2.3(b) and to the extent such cash collateral is insufficient then such payments shall constitute additional Revolving Loans to Borrower. The aggregate undrawn face amount of all Accommodations 3 outstanding under this Section 2.3(b) shall not exceed $500,000 at any time and shall not exceed the Maximum Credit when added to all then outstanding Obligations. Unless otherwise provided, "Accommodations" shall include Accommodations provided under this Section 2.3(b). SECTION 3. INTEREST AND FEES 3.1 INTEREST. (a) Interest on the Revolving Loans shall be payable by Borrower on the first day of each month, calculated upon the closing daily balances in the loan account of Borrower for each day during the immediately preceding month, at the per annum rate set forth as the Interest Rate in Section 10.3(a). The Interest Rate shall increase or decrease by an amount equal to each increase or decrease, respectively, in the Prime Rate (as defined below), effective as of the date of each such change. Interest shall in no month be less than the Interest Rate multiplied by the Minimum Borrowing set forth in Section 10.1(e). In no event shall charges constituting interest exceed the rate permitted under any applicable law or regulation, and if any provision of this Agreement is in contravention of any such law or regulation, such provision shall be deemed amended to conform thereto. (b) The "PRIME RATE" is the rate of interest publicly announced by The Chase Manhattan Bank in New York, New York, or its successors and assigns from time to time as its prime rate (the Prime Rate is not intended to be the lowest rate of interest charged by The Chase Manhattan Bank to its borrowers). 3.2 FEES. Borrower shall pay to Lender: (a) CLOSING FEE. At closing, a fee in the amount set forth in Section 10.3(c). (b) EXIM BANK FEE. Borrower shall pay Lender an annual Export-Import Bank Facility Fee in the amounts required by Export-Import Bank (currently 0.25% of Maximum Credit on first $2,000,000 and 0.75% on balance of the amount under Section 10.1(f)), and shall reimburse Lender for any and all fees, costs and expenses paid to Export-Import Bank by Lender in connection with this transaction under the Export-Import Bank Working Capital Guarantee Program. (c) FACILITY FEE. A Facility Fee at each anniversary of closing as set forth in Section 10.3(d) provided that no Facility Fee will be due on the anniversary if the Obligations are paid in full on such anniversary date in accordance with this Agreement. (d) ACCOMMODATION FEES. Fees equal to 2.0% per annum of the face amount of outstanding Accommodations, plus fees and costs incurred by Lender in connection with such Accommodations, payable monthly in arrears. SECTION 4. GRANT OF SECURITY INTEREST 4.1 GRANT OF SECURITY INTEREST. To secure the payment and performance in full of all Obligations, Borrower hereby grants to Lender a continuing security interest in and lien upon, 4 and a right of setoff against, and Borrower hereby assigns and pledges to Lender, all of the Collateral, including any Collateral not deemed eligible for lending purposes. 4.2 "OBLIGATIONS" shall mean any and all Revolving Loans and Accommodations, and all other indebtedness, liabilities and obligations of every kind, nature and description owing by Borrower to Lender and/or its affiliates, including principal, interest, charges, fees and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, arising under or in connection with this Agreement or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal Term or after the commencement of any case with respect to Borrower under the United States Bankruptcy Code or any similar statute, whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, original, renewed or extended and whether arising directly or howsoever acquired by Lender including from any other entity outright, conditionally or as collateral security, by assignment, merger with any other entity, participations or interests of Lender in the obligations of Borrower to others, assumption, operation of law, subrogation or otherwise and shall also include all amounts chargeable to Borrower under this Agreement or in connection with any of the foregoing. 4.3 "COLLATERAL" shall mean all of the following property of Borrower: (a) All now owned and hereafter acquired right, title and interest of Borrower in, to and in respect of all: accounts, interests in goods represented by accounts, returned, reclaimed or repossessed goods with respect thereto and rights as an unpaid vendor; contract rights; chattel paper; investment property (excluding the stock of SkyOnline, Inc. owned by Borrower); general intangibles (including, but not limited to, tax and duty refunds, registered and unregistered patents, trademarks, service marks, copyrights, trade names, applications for the foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer lists, licenses, whether as licensor or licensee, choses in action and other claims, and existing and future leasehold interests in equipment and fixtures); documents; instruments; letters of credit, bankers' acceptances or guaranties; cash moneys, deposits, securities, bank accounts, deposit accounts, credits and other property now or hereafter held in any capacity by Lender, its affiliates or any entity which, at any time, participates in Lender's financing of Borrower or at any other depository or other institution; agreements or property securing or relating to any of the items referred to above; (b) All now owned and hereafter acquired right, title and interest of Borrower in, to and in respect of goods, including, but not limited to: (i) All inventory, wherever located, whether now owned or hereafter acquired, of whatever kind, nature or description, including all raw materials, work-in-process, finished goods, and materials to be used or consumed in Borrower's business; and all names or marks affixed to or to be affixed thereto for purposes of selling same by the seller, manufacturer, lessor or licensor thereof; (ii) All equipment and fixtures, wherever located, whether now owned or hereafter acquired, including, without limitation, all machinery, equipment, motor vehicles, furniture and fixtures, and any and all additions, substitutions, replacements (including spare parts), and accessions thereof and thereto; and 5 (iii) All consumer goods, farm products, crops, timber, minerals or the like (including oil and gas), wherever located, whether now owned or hereafter acquired, of whatever kind, nature or description; (c) All now owned and hereafter acquired right, title and interests of Borrower in, to and in respect of any personal property in or upon which Borrower has or may hereafter have a security interest, lien or right of setoff; (d) All present and future books and records relating to any of the above including, without limitation, all computer programs, printed output and computer readable data in the possession or control of the Borrower, any computer service bureau or other third party; and (e) All products and proceeds of the foregoing in whatever form and wherever located, including, without limitation, all insurance proceeds and all claims against third parties for loss or destruction of or damage to any of the foregoing. SECTION 5. COLLECTION AND ADMINISTRATION 5.1 COLLECTIONS. Borrower will, at its expense as Lender requests, direct that all remittances and all other proceeds of accounts and other Collateral be sent to a bank account selected by Lender. Borrower shall bear all risk of loss of any funds deposited into such account. In connection therewith, Borrower shall execute such lock box and bank account agreements as Lender shall specify. Any collections or other proceeds received by Borrower shall be held in trust for Lender and immediately remitted to Lender in kind. 5.2 CHARGES TO LOAN ACCOUNT. At Lender's option, all payments of principal, interest, fees, costs, expenses and other charges provided for in this Agreement, or in any other agreement now or hereafter existing between Lender and Borrower, may be charged on the date when due, as principal to any loan account of Borrower maintained by Lender. Interest, fees for Accommodations and any other amounts payable by Borrower to Lender based on a per annum rate shall be calculated on the basis of actual days elapsed over a 360-day year. 5.3 PAYMENTS. All Obligations shall be payable at Lender's Office set forth in Section 10.5(a) or at Lender's bank designated in Section 10.5(b) or at such other bank or place as Lender may expressly designate from time to time for purposes of this Section. Lender shall apply all proceeds of accounts or other Collateral received by Lender and all other payments in respect of the Obligations to the Revolving Loans whether or not then due or to any other Obligations then due, in whatever order or manner Lender shall determine. For purposes of determining Gross Availability and Net Availability and for the calculation of the Minimum Borrowing, remittances and other payments will be treated as credited to the loan account of Borrower maintained by Lender and Collateral balances to which they relate, upon the date of Lender's receipt of advice from Lender's bank that such remittances or other payments have been credited to Lender's account or in the case of remittances or other payments received directly in kind by Lender, upon the date of Lender's deposit thereof at Lender's bank, subject to final payment and collection. In computing interest charges, the loan account of Borrower will be credited with remittances and other payments the number of days set forth in SECTION 10.3(b) after the day Lender has received advice of receipt of remittances in Lender's account at 6 Lender's Bank. For purposes of this Agreement, "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or any other day on which Lender or banks located in states where Lender has its offices, are authorized to close. 5.4 LOAN ACCOUNT STATEMENTS. Lender shall render to Borrower monthly a loan account statement. Each statement shall be considered correct and binding upon Borrower as an account stated, except to the extent that Lender receives, within ninety (90) days after the mailing of such statement, written notice from Borrower of any specific exceptions by Borrower to that statement, provided that, at any time after the date hereof, Borrower advises Lender in writing of an error or overcharge of interest or fees in the loan account statement, Lender shall take steps to correct the error. 5.5 DIRECT COLLECTIONS. Lender may, at any time, (a) either (i) after an Event of Default (unless Lender has specifically waived the Event of Default in writing) or (ii) if Lender has reasonable concerns about the collection of Borrower's accounts receivable and upon one Business Day notice to Borrower, notify any account debtor that the accounts and other Collateral which includes a monetary obligation have been assigned to Lender by Borrower and that payment thereof is to be made to the order of and directly to Lender, (b) send, or cause to be sent by its designee, requests (which may identify the sender by a pseudonym) for verification by telephone, in writing or otherwise of accounts and other Collateral directly to any account debtor or any other obligor or any bailee with respect thereto, (c) demand, collect or enforce payment of any accounts or such other Collateral, but without any duty to do so, and Lender shall not be liable for any failure to collect or enforce payment thereof, (d) take or bring, in the name of Lender or Borrower, all steps, actions, suits or proceedings deemed by Lender necessary or desirable to effect collection of or other realization upon the accounts and other Collateral, (e) after an Event of Default, change the address for delivery of mail to Borrower and to receive and open mail addressed to Borrower, and (f) after an Event of Default, extend the time of payment of, compromise or settle for cash, credit, return of merchandise, and upon any terms or conditions, any and all accounts or other Collateral which includes a monetary obligation and discharge or release the account debtor or other obligor, without affecting any of the Obligations. At Lender's request, all invoices and statements sent to any account debtor, other obligor or bailee, shall state that the accounts and such other Collateral have been assigned to Lender and are payable directly and only to Lender . 5.6 ATTORNEY-IN-FACT. Borrower hereby irrevocably appoints Lender as Borrower's attorney-in-fact and authorizes Lender at Borrower's sole expense, to exercise at any times in Lender's discretion reasonably exercised all or any of the powers necessary for Lender to obtain information about the Collateral or to enforce Lender's rights. 5.7 LIABILITY. Borrower hereby releases and exculpates Lender, its officers and employees from any liability arising from any acts under this Agreement or in furtherance thereof, except for gross negligence or willful misconduct. Lender will not have any liability to Borrower for lost profits or other special or consequential damages. 5.8 ADMINISTRATION OF ACCOUNTS. After written notice by Lender to Borrower or without notice after an Event of Default, Borrower shall not, (a) materially amend, modify, settle or compromise any of the accounts or any other Collateral which includes a monetary 7 obligation, (b) release in whole or in part any account debtor or other person liable for the payment of any of the accounts or any such other Collateral, or (c) grant any credits, discounts, allowances, deductions, return authorizations or the like with respect to any of the accounts or any such other Collateral. 5.9 DOCUMENTS. Borrower shall deliver to Lender, as Lender may request, all documents, schedules, invoices, proofs of delivery, purchase orders, statements, contracts and all other information evidencing or relating to the Collateral, in form and substance reasonably satisfactory to Lender and duly executed by Borrower. Without limiting the provisions of Section 5.5, Borrower's granting of credits, discounts, allowances, deductions, return authorizations or the like will be promptly reported to Lender in writing. In no event shall any schedule or confirmatory assignment (or the absence thereof or omission of any of the accounts or other Collateral therefrom) limit or in any way be construed as a waiver, limitation or modification of the security interests or rights of Lender (unless such waiver, limitation or modification is consented to in writing by Lender) or the warranties, representations and covenants of Borrower under this Agreement. Any documents, schedules, invoices or other paper delivered to Lender by Borrower may be destroyed or otherwise disposed of by Lender six (6) months after receipt by Lender, unless Borrower requests their return in writing in advance and makes prior arrangements for their return at Borrower's expense. 5.10 ACCESS. Lender shall have access, prior to an Event of Default during reasonable business hours and on or after an Event of Default at any time, to all of the premises where Collateral is located for the purposes of inspecting or copying the Collateral, and all Borrower's books and records. Lender, at no charge, may reasonably use such of Borrower's personnel, equipment, including computer equipment, programs, printed output and computer readable media, supplies and premises for the collection of accounts and realization on other Collateral as Lender, in its sole discretion, deems appropriate. Borrower hereby irrevocably authorizes all accountants and third parties to disclose and deliver to Lender at Borrower's expense all financial information, books and records, work papers, management reports and other information in their possession regarding Borrower. 5.11 ENVIRONMENTAL AUDITS. At such time as Lender reasonably believes there is an environmental issue in connection with any of Borrower's property or if required by Export-Import Bank, at the sole expense of Borrower, Borrower shall provide Lender, or its designee, complete access to all of Borrower's facilities for the purpose of conducting an environmental audit of such facilities as Lender may deem necessary. SECTION 6. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS Borrower hereby represents, warrants and covenants to Lender the following, the truth and accuracy of which, and compliance with which, shall be continuing conditions of the making of loans or other credit accommodations by Lender to Borrower: 6.1 FINANCIAL AND OTHER REPORTS. Borrower shall keep and maintain its books and records in accordance with generally accepted accounting principles, consistently applied. Borrower shall, at its expense on 8 or before Wednesday of each week, deliver to Lender true and complete weekly inventory reports relating to the prior week. Borrower shall, at its expense on or before the tenth (10th) day of each month, deliver to Lender: (a) true and complete monthly agings of its accounts receivable and accounts payable; (b) monthly inventory reports; and (c) before the twentieth (20th) day of each month, internally prepared interim financial statements. Annually, Borrower shall deliver audited financial statements of Borrower accompanied by the report and opinion thereon of independent certified public accountants acceptable to Lender, as soon as available, but in no event later than ninety (90) days after the end of Borrower's fiscal year. Annually, not later than 30 days prior to the beginning of each fiscal year, Borrower shall provide cash flow projections in a format reasonably acceptable to Lender. Borrower shall at its own expense and as frequently as requested deliver to Lender and Export-Import Bank all reports required by Export-Import Bank. All of the foregoing shall be in such form and together with such information with respect to the business of Borrower or any guarantor, as Lender may in each case reasonably request. 6.2 TRADE NAMES. Borrower may from time to time render invoices under its trade names set forth in Section 10.5(g) and, Borrower represents that: (a) each trade name does not refer to another corporation or other legal entity, (b) all accounts and proceeds thereof (including any returned merchandise) invoiced under any such trade names are owned exclusively by Borrower and (c) Lender may receive, endorse and deposit to any loan account of Borrower maintained by Lender all checks or other remittances made payable to any trade name of Borrower representing payment with respect to such sales or services. 6.3 LOSSES. Borrower shall promptly notify Lender in writing of any material loss, damage, investigation, action, suit, proceeding or claim relating to a portion of the Collateral or which may result in any material adverse change in Borrower's business, assets, liabilities or condition, financial or otherwise. 6.4 BOOKS AND RECORDS. Borrower's books and records concerning accounts and its chief executive office are and shall be maintained only at the address set forth in Section 10.5(d). Borrower's only other places of business and the only other locations of Collateral of the type described in Sections 4.3(b), (c) and (d), if any, are and shall be the addresses set forth in Section 10.5(f) hereof, except Borrower may change such locations or open a new place of business after thirty (30) days prior written notice to Lender. Borrower shall execute and deliver or cause to be executed and delivered to Lender such financing statements, amendments, financing documents and security and other agreements as Lender may reasonably require. 6.5 TITLE. Borrower has and at all times will continue to have good and marketable title to all of the Collateral and all of the stock of SkyOnline, Inc. owned by Borrower, free and clear of all liens, security interests, claims or encumbrances of any kind except in favor of Lender and except, if any, those set forth on Schedule A hereto and Borrower will not sell or encumber the stock of SkyOnline, Inc. owned by Borrower without Lender's prior written consent; provided that the representations and warranties of Borrower in this Section 6.5 do not apply to any part of the Collateral which is the subject of the Security Agreement (Intellectual Property) by and between Borrower and Lender dated as of even date herewith. 6.6 DISPOSITION OF ASSETS. Borrower shall not directly or indirectly: (a) sell, lease, transfer, assign, abandon or otherwise dispose of any material part of the Collateral or any material portion of its other assets (other than sales of inventory to buyers in the ordinary course 9 of business or sales of inventory to SkyOnline, Inc. pursuant to the product supply agreement between SkyOnline, Inc. and Borrower) or (b) consolidate with or merge with or into any other entity, or permit any other entity to consolidate with or merge with or into Borrower or (c) form or acquire any interest in any firm, corporation or other entity without Lender's prior written consent which consent shall be within Lender's reasonable business judgment. Notwithstanding the foregoing, Borrower may refinance its real property located at One Mauchly, Irvine, California, provided (i) Borrower has received the prior written consent of Lender and the Export-Import Bank, (ii) no Event of Default has occurred and is continuing, and (iii) the proceeds from such refinancing are retained by Borrower and utilized as working capital. 6.7 INSURANCE. Borrower shall at all times maintain, with financially sound and reputable insurers, adequate insurance (including, without limitation, at the option of Lender, earthquake and flood insurance) with respect to the Collateral and other assets. All such insurance policies shall be in such form, substance, amounts and coverage as may be reasonably satisfactory to Lender and shall provide for thirty (30) days' prior written notice to Lender of cancellation or reduction of coverage. Lender may obtain at Borrower's expense, any such insurance should Borrower fail to do so and adjust or settle any claim or other matter under or arising pursuant to such insurance or to amend or cancel such insurance. Borrower shall provide evidence of such insurance and a lender's loss payable endorsement satisfactory to Lender. Borrower shall deliver to Lender, in kind, all instruments representing proceeds of insurance received by Borrower. Lender may apply any insurance proceeds received at any time to the cost of repairs to or replacement of any portion of the Collateral and/or, at Lender's option, to payment of or as security for any of the Obligations in any order or manner as Lender determines. 6.8 COMPLIANCE WITH LAWS. Borrower is and at all times will continue to be in material compliance with the requirements of all material laws, rules, regulations and orders of any governmental authority relating to its business (including laws, rules, regulations and orders relating to income, withholding, excise, property and social security taxes, minimum wages, employee retirement and welfare benefits, employee health and safety, or environmental matters). Borrower shall promptly notify Lender and in any event no later than two Business Days after Borrower receives notice from a third party alleging that Borrower is in default under any material agreement or other instrument binding on Borrower or its property. Borrower shall pay and discharge all taxes, assessments and governmental charges against Borrower or any Collateral when due, unless the same are being contested in good faith. Lender may establish Reserves for the amount contested and penalties which may accrue thereon. 6.9 ACCOUNTS. With respect to each account deemed an Eligible Account, except as reported in writing to Lender, Borrower has no knowledge that any of the criteria for eligibility are not or are no longer satisfied and the Eligibility criteria will continue to be satisfied. All statements made and all unpaid balances and other information appearing in the invoices, agreements, proofs of rendition of services and delivery of goods and other documentation relating to the accounts, and all confirmatory assignments, schedules, statements of account and books and records with respect thereto, are true and correct and in all respects what they purport to be. 10 6.10 EQUIPMENT. With respect to Borrower's equipment, Borrower shall keep the equipment in good order and repair, and in running and marketable condition, ordinary wear and tear excepted. 6.11 FINANCIAL COVENANTS. Borrower shall have, as of the end of each quarter, aggregate excess availability under this Agreement (including unrestricted and unencumbered (other than liens in favor of Lender) U.S. Dollars in domestic bank accounts) in the amount set forth in Section 10.4. 6.12 SKYONLINE, INC. NOTE. If the SkyOnline, Inc. financing transaction described in Borrower's press release dated January 24, 2000 does not close within 90 days of the date hereof, Borrower shall assign and deliver to Lender the note(s) receivable owing to Borrower from SkyOnline, Inc., provided that so long as no Event of Default has occurred and is continuing Borrower may use payments received under such note(s) as working capital. 6.13 AFFILIATED TRANSACTIONS. Borrower will not, directly or indirectly: (a) lend or advance money or property to, guarantee or assume indebtedness of, or invest (by capital contribution or otherwise) in any person, firm, corporation or other entity in an aggregate amount outstanding at any one time exceeding $100,000; or (b) declare, pay or make any dividend, redemption or other distribution on account of any shares of any class of stock of Borrower now or hereafter outstanding; or (c) make any payment of the principal amount of or interest on any indebtedness owing to any officer, director, shareholder, or affiliate of Borrower; or (d) make any loans or advances to any officer, director, employee, shareholder or affiliate of Borrower except in the ordinary course of business in an aggregate amount outstanding at any one time not exceeding $50,000 for normal business purposes including, but not limited to, reimbursement of travel expenses, (e) enter into any sale, lease or other transaction with any officer, director, employee, shareholder or affiliate of Borrower on terms that are less favorable to Borrower than those which might be obtained at the time from persons who are not an officer, director, employee, shareholder or affiliate of Borrower. 6.14 FEES AND EXPENSES. Borrower shall pay, on Lender's demand, all costs, expenses, filing fees and taxes payable in connection with the preparation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of the Obligations, Lender's rights in the Collateral, this Agreement and all other existing and future agreements or documents contemplated herein or related hereto, including any amendments, waivers, supplements or consents which may hereafter be made or entered into in respect hereof, or in any way involving claims or defense asserted by Lender or claims or defense against Lender asserted by Borrower, any guarantor or any third party directly or indirectly arising out of or related to the relationship between Borrower and Lender or any guarantor and Lender, including, but not limited to the following, whether incurred before, during or after the initial or any renewal Term or after the commencement of any case with respect to Borrower or any guarantor under the United States Bankruptcy Code or any similar statute: (a) all costs and expenses of filing or recording (including Uniform Commercial Code financing statement filing taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if applicable); (b) all title insurance and other insurance premiums, appraisal fees, fees incurred in connection with any environmental report, audit or survey and search fees; (c) all fees as then in effect relating to the wire transfer of loan proceeds and other funds and fees then in effect for returned checks, 11 lock boxes, collateral proceeds accounts and credit reports; (d) all reasonable expenses and costs heretofore and from time to time hereafter incurred by Lender during the course of periodic field examinations of the Collateral and Borrower's operations including field examiner travel, food and lodging, plus a per diem charge at the rate and subject to the limit set forth in Section 10.3(g) (or if higher, at the then prevailing rate charged by Lender) for Lender's examiners in the field and office; and (e) the costs, disbursements and fees of in-house and outside counsel to Lender, including but not limited to such fees and disbursements incurred as a result of a workout, restructuring, reorganization, liquidation, insolvency proceeding or litigation between the parties hereto, any third party and in any appeals arising therefrom. 6.15 FURTHER ASSURANCES. At the request of Lender, at any time and from time to time, at Borrower's sole expense, Borrower shall execute and deliver or cause to be executed and delivered to Lender, such agreements, documents and instruments, including waivers, consents and subordination agreements from mortgagees or other holders of security interests or liens, landlords or bailees, and do or cause to be done such further acts as Lender, in its discretion reasonably exercised, deems necessary or desirable to create, preserve, perfect or validate any security interest of Lender or the priority thereof in the Collateral and otherwise to effectuate the provisions and purposes of this Agreement. Borrower hereby authorizes Lender to file financing statements or amendments against Borrower in favor of Lender with respect to the Collateral, without Borrower's signature and to file as financing statements any carbon, photographic or other reproductions of this Agreement or any financing statements signed by Borrower. Without limiting the foregoing, the obligation of Lender to make the initial advance hereunder is subject to, among other things, the delivery or satisfaction in Lender's discretion of each of the following conditions, agreements and documents as applicable: (a) grant to Lender of a second trust deed on Borrower's real property located at One Mauchly, Irvine, California supported by a policy of title insurance with respect to such trust deed in form reasonably acceptable to Lender; (b) intellectual property security agreements; (c) a blocked or Lender bank account established for the proceeds of Collateral; (d) excess availability (including unrestricted and unencumbered U.S. Dollars in domestic bank accounts) after giving effect to contemplated initial advances and Reserves established by Lender equals or exceeds $2,500,000 plus an amount equal to any Reserves for past due accounts payable as deemed reasonably appropriate by Lender (provided that no Reserve for past due accounts payable owing to Benchmark Electronics, Inc. shall be implemented by Lender in calculating minimum excess availability under this subsection 6.15(d) and Section 6.11 so long as Lender is in receipt of satisfactory evidence that Borrower is in full compliance with the payment terms for accounts payable owed to Benchmark Electronics, Inc.) and provided Borrower has no past due taxes; (e) Lender shall have received the written waiver of the Export-Import Bank with respect to such matters as Lender reasonably deems necessary or appropriate; (f) all Export-Import Bank approvals, guaranties, waivers and other documentation shall have been executed and delivered by all parties thereto and Lender shall be reasonably satisfied that the Export-Import Bank Working Capital Guaranty Program is in effect with respect to the Revolving Loans and Accommodations hereunder (other than Accommodations provided under Section 2.3(b)), and Borrower shall have paid all fees, costs and expenses required by Export-Import Bank; (g) landlord waivers on all of Borrower's leased locations; (h) mortgagee waivers on all of Borrower's owned locations; (i) subordination agreements from such parties, if any, as Lender shall require; (j) first priority lien on all of the Collateral including, without limitation, all intellectual property (subject only to Permitted Encumbrances); (k) Lender shall have received warrants to purchase 10,000 shares of capital stock of Borrower, 12 on such terms as Lender shall require, (l) for the three months ended December 31, 1999, Borrower shall achieve net sales of no less than $6,000,000 and a net loss of no greater than $1,000,000, as determined by Lender, based on Borrower's internally prepared interim income statements, and (m) no material adverse change in Borrower's business, operation, health, profits, or prospects or in the condition of the Collateral shall have occurred from the date of the most recent financial statements submitted to Lender or the most recent field examinations conducted by Lender. 6.16 ENVIRONMENTAL CONDITION. None of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute. No lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower. Borrower has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency or any action or omission by Borrower resulting in the releasing, or otherwise exposing of hazardous waste or hazardous substances into the environment. Borrower is and will continue to be in compliance (in all material respects) with all statutes, regulations, ordinances and other legal requirements pertaining to the production, storage, handling, treatment, release, transportation or disposal of any hazardous waste or hazardous substance. The representations made in this Section 6.16 to the extent relating to events or circumstances occurring prior to Borrower's occupancy and/or ownership of its properties or assets shall be limited to Borrower's actual knowledge. 6.17 STATE OF INCORPORATION. If Borrower is a corporation, it is duly organized, existing and in good standing under the laws of the state set forth in Section 10.5(h). 6.18 LETTER OF CREDIT RIGHTS. Borrower covenants that, at Lender's request, upon the occurrence of any of the events described in Section 7.1 (without regard to any cure periods provided for herein) Borrower shall take all action and execute any documents reasonably necessary or requested by Lender to assign to Lender all of Borrower's right, title and interest in and to any of Borrower's letter of credit rights whereby Borrower is named as a beneficiary of or otherwise has a right to receive proceeds from letters of credit issued from time to time in support of obligations owed to Borrower. SECTION 7. EVENTS OF DEFAULT AND REMEDIES 7.1 EVENTS OF DEFAULT. All Obligations shall be immediately due and payable, without notice or demand, and any provisions of this Agreement as to future loans and credit accommodations by Lender shall terminate automatically, upon the termination or non-renewal of this Agreement or, at Lender's option, upon or at any time after the occurrence or existence of any one or more of the following "EVENTS OF DEFAULT": (a) Borrower fails to pay when due any of the Obligations or fails to perform any of the terms of this Agreement or any other existing or future financing, security or other agreement between Borrower and Lender or any affiliate of Lender, provided that to the extent an Event of Default is curable in Lender's reasonable judgment Borrower shall have two Business Days to cure any monetary default and ten Business Days to cure any non-monetary default. Without 13 limiting the foregoing, the parties agree that any Event of Default resulting from the fraudulent acts of Borrower is not curable; (b) Any representation, warranty or statement of fact made by Borrower to Lender in this Agreement or any other agreement, schedule, confirmatory assignment or otherwise, or to any affiliate of Lender, shall prove inaccurate or misleading in any material respect; (c) Any guarantor revokes, terminates or fails to perform any of the material terms of any guaranty, endorsement or other agreement of such party in favor of Lender or any affiliate of Lender; (d) Any judgment or judgments aggregating in excess of the amount set forth in Section 10.5(i) or any injunction or attachment is obtained against Borrower or any guarantor, which remains unstayed for a period of ten (10) days or is enforced; (e) Borrower or any guarantor dies or ceases to exist or the usual business of Borrower or any guarantor ceases or is suspended; (f) Any change in the chief financial officer or controlling ownership of Borrower; (g) Borrower or any guarantor becomes insolvent, makes an assignment for the benefit of creditors, makes or sends notice of a bulk transfer or calls a general meeting of its creditors or principal creditors; (h) Any petition or application for any relief under the bankruptcy laws of the United States now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at law or in equity) is filed by or against Borrower or any guarantor; (i) The indictment or threatened indictment of Borrower or any guarantor under any criminal statute, or commencement or threatened commencement of criminal or civil proceedings against Borrower or any guarantor, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any of the property of Borrower or such guarantor which Lender reasonably believes may have a material adverse effect on the Collateral or Borrower's business; (j) Lender in its sole discretion declares an Event of Default upon (a) Borrower being in default under any material agreement, document or instrument to which Borrower is a party or by which Borrower or any of its property is bound and (b) Lender's receipt of notice as described in Section 6.8 or Lender otherwise becoming aware of any default or event of default occurring on the part of Borrower under any material agreement, document or instrument to which Borrower is a party or by which Borrower or any of its property is bound; (k) In Lender's reasonable judgment, any material adverse change occurs in the nature or conduct of Borrower's business; or (l) If for any reason the Obligations of Borrower hereunder are no longer guaranteed pursuant to the Export-Import Bank Working Capital Guarantee Program. 14 7.2 REMEDIES. Upon the occurrence of an Event of Default (including the expiration of any cure period specifically set forth in Section 7.1) and at any time thereafter, Lender shall have all the default rights and remedies provided in this Agreement, any other agreements between Borrower and Lender, the Uniform Commercial Code and other applicable law, all of which rights and remedies may be exercised without notice to Borrower, all such notices being hereby waived, except such notice as is expressly provided for hereunder or is not waivable under applicable law. All rights and remedies of Lender are cumulative and not exclusive and are enforceable, in Lender's discretion, alternatively, successively, or concurrently on any one or more occasions and in any order Lender may determine. Without limiting the foregoing, Lender may (a) accelerate the payment of all Obligations and demand immediate payment thereof to Lender, (b) with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion of the Collateral, (c) require Borrower, at Borrower's expense, to assemble and make available to Lender any part or all of the Collateral at any place and time designated by Lender, (d) collect, foreclose, receive, appropriate, setoff and realize upon any and all Collateral, (e) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including, without limitation, entering into contracts with respect thereto, by public or private sales at any exchange, broker's board, any office of Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for cash, upon credit or for future delivery, with the Lender having the right to purchase the whole or any part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of Borrower, which right or equity of redemption is hereby expressly waived and released by Borrower. If any of the Collateral is sold or leased by Lender upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Lender. If notice of disposition of Collateral is required by law, five (5) days prior notice by Lender to Borrower designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made, shall be deemed to be reasonable notice thereof and Borrower waives any other notice. In the event Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, Borrower waives the posting of any bond which might otherwise be required. 7.3 APPLICATION OF PROCEEDS. Lender may apply the cash proceeds of Collateral other than accounts actually received by Lender from any sale, lease, foreclosure or other disposition of the Collateral to payment of any of the Obligations, in whole or in part and in such order as Lender may elect, whether or not then due. Borrower shall remain liable to Lender for the payment of any deficiency together with interest at the highest rate provided for herein and all costs and expenses of collection or enforcement, including reasonable attorneys' fees and legal expenses. 7.4 LENDER'S CURE OF THIRD PARTY AGREEMENT DEFAULT. Lender may, at its option, cure any default by Borrower under any agreement with a third party or pay or bond on appeal any judgment entered against Borrower, discharge taxes, liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral and pay any amount, incur any expense or perform any act which, in Lender's sole judgment, is necessary or appropriate to preserve, protect, insure, maintain, or realize upon the Collateral. Lender may charge Borrower's loan account for any amounts so expended, such amounts to be repayable by 15 Borrower on demand. Lender shall be under no obligation to effect such cure, payment, bonding or discharge, and shall not, by doing so, be deemed to have assumed any obligation or liability of Borrower. SECTION 8. JURY TRIAL WAIVER; CERTAIN OTHER WAIVERS AND CONSENTS 8.1 JURY TRIAL WAIVER. BORROWER AND LENDER EACH WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INSTITUTED BY EITHER OF THEM AGAINST THE OTHER WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, THE OBLIGATIONS, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY BORROWER OR LENDER, OR, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN BORROWER AND LENDER. IN NO EVENT WILL LENDER BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES. 8.2 COUNTERCLAIMS. Borrower waives all rights to interpose any claims, deductions, setoffs or counterclaims of any kind, nature or description in any action or proceeding instituted by Lender with respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating thereto, except compulsory counterclaims. 8.3 JURISDICTION. Borrower hereby irrevocably submits and consents to the nonexclusive jurisdiction of the State and Federal Courts located in the State in which the office of Lender designated in Section 10.5(a) is located and any other State where any Collateral is located with respect to any action or proceeding arising out of this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating thereto. In any such action or proceeding, Borrower waives personal service of the summons and complaint or other process and papers therein and agrees that the service thereof may be made by mail directed to Borrower at its chief executive office set forth herein or other address thereof of which Lender has received notice as provided herein, service to be deemed complete five (5) days after mailing, or as permitted under the rules of either of said Courts. Any such action or proceeding commenced by Borrower against Lender will be litigated only in a Federal Court located in the district, or a State Court in the State and County, in which the office of Lender designated in Section 10.5(a) is located and Borrower waives any objection based on forum non conveniens and any objection to venue in connection therewith. 8.4 NO WAIVER BY LENDER. Lender shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights or remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. A waiver by Lender of any right or remedy on any one occasion shall not be construed as a bar to or waiver of any such right or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. SECTION 9. TERM OF AGREEMENT; MISCELLANEOUS 9.1 TERM. This Agreement shall only become effective upon execution and delivery by Borrower and Lender and shall continue in full force and effect for a term set forth in Section 10.6 from the date hereof and shall be deemed automatically renewed, based upon all of 16 the terms and provisions of this Agreement, for successive terms of equal duration thereafter unless terminated as of the end of the initial or any renewal term (each a "TERM") by either party giving the other written notice at least sixty (60) days' prior to the end of the then current Term. 9.2 EARLY TERMINATION. Borrower may also terminate this Agreement by giving Lender at least thirty (30) days prior written notice and payment in full of all of the Obligations as provided herein, including the Early Termination Fee. Thirty days after receipt of such early termination notice, Lender need not make any further loans or accommodations. In view of the impracticality and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits, the Early Termination fee shall be the percentage of the Maximum Credit set forth in SECTION 10.3(h). Lender shall also have the right to terminate this Agreement at any time upon or after the occurrence of an Event of Default. If Lender terminates this Agreement upon or after the occurrence of an Event of Default, Borrower shall pay Lender forthwith, in full, payment in all Obligations, but excluding the Early Termination Fee and any Facility Fee not yet charged. 9.3 TERMINATION INDEMNITY DEPOSIT. Upon termination of this Agreement by Borrower, as permitted herein, in addition to payment of all Obligations which are not contingent, Borrower shall deposit such amount of cash collateral as Lender determines is necessary to secure Lender from loss, cost, damage or expense, including reasonable attorneys' fees, in connection with any open Accommodations or remittance items or other payments provisionally credited to the Obligations and/or to which Lender has not yet received final and indefeasible payment. 9.4 NOTICES. Except as otherwise provided, all notices, requests and demands hereunder shall be (a) made to Lender at its address set forth in Section 10.5(a) and to Borrower at its chief executive office set forth in Section 10.5(d), or to such other address as either party may designate by written notice to the other in accordance with this provision, and (b) deemed to have been given or made: if by hand, immediately upon delivery; if by telex, telegram or telecopy (fax), immediately upon receipt; if by overnight delivery service, one day after dispatch; and if by first class or certified mail, three (3) days after mailing. 9.5 SEVERABILITY. If any provision of this Agreement is held to be invalid or unenforceable, such provision shall not affect this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision held to be invalid or unenforceable. 9.6 ENTIRE AGREEMENT; AMENDMENTS; ASSIGNMENTS. This Agreement contains the entire agreement of the parties as to the subject matter hereof, all prior commitments, proposals and negotiations concerning the subject matter hereof being merged herein. Neither this Agreement nor any provision hereof shall be amended, modified or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns, except that any obligation of Lender under this Agreement shall not be assignable nor inure to the successors and assigns of Borrower. 17 9.7 DISCHARGE OF BORROWER. No termination of this Agreement shall relieve or discharge Borrower of its Obligations, grants of Collateral, duties and covenants hereunder or otherwise until such time as all Obligations to Lender have been indefeasibly paid and satisfied in full, including, without limitation, the continuation and survival in full force and effect of all security interests and liens of Lender in and upon all then existing and thereafter-arising or acquired Collateral and all warranties and waivers of Borrower. 9.8 USAGE. All terms used herein which are defined in the Uniform Commercial Code shall have the meanings given therein unless otherwise defined in this Agreement and all references to the singular or plural herein shall also mean the plural or singular, respectively. 9.9 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State in which the office of Lender set forth in Section 10.5(a) below is located. 18 SECTION 10. ADDITIONAL DEFINITIONS AND TERMS 10.1 (a) Maximum Credit: $3,300,000 (b) Gross Availability 90% provided that the Dilution Percentage does Eligible Accounts Percentage: not exceed 5%. The Dilution Percentage is the sum of Borrower's credits, allowances, discounts, write-offs, contra-accounts and offsets and deductions which reduce the value of accounts receivable divided by gross invoices. The Dilution Percentage shall be calculated on a rolling 90 day average. If the Dilution Percentage exceeds 5% then the Eligible Accounts Percentage shall be reduced by such excess Dilution Percentage. Eligible Inventory Percentage: 70% (c) Intentionally Omitted. (d) Maximum days after Invoice 60 days past original due date, not to Date for Eligible Accounts: exceed 150 days after invoice date. (e) Minimum Borrowing: $1,500,000 less any Reserves created on or after one Business Day after the date hereof except a Reserve created as a result of an increase in the Dilution Percentage. (f) Revolving Load Sublimit $2,800,000 (g) Accommodations under EXIM facility $750,000 (sublimit of Revolving Loans) (h) Accomodations under non-EXIM $500,000 facility 10.2 Intentionally Omitted. 10.3 Interest, Fees & Charges: 19 (a) Interest Rate: Prime Rate plus 1.0% per annum(1) (b) Clearance: 3 Business Days (c) Closing Fee: 1.25% of Maximum Credit (d) Facility Fee: 1.0% of Maximum Credit(2) (e) Accommodation Fee 2% over a 360 day year plus bank charges (f) Intentionally Omitted (g) Field Examination per diem charge per then prevailing rate (currently $750, examiner subject to change). Aggregate Field Examination per diem charges (including out-of-pocket expenses) shall not exceed $10,000 in any year in which no Event of Default occurred or was continuing (h) Early Termination Fee: First year: Second year or thereafter: 1.0% of the Maximum Credit(3) 0.50% of the Maximum Credit 10.4 Financial Covenants: $1,000,000 10.5 (a) Lender's Office: 300 South Grand Avenue 3rd Floor Los Angeles, California 90071 (b) Lender's Bank: Bank of America NT&SA, 1850 Gateway Blvd., Concord, California 94520 (c) Borrower: STM Wireless, Inc. - ------------------------------- (1)The interest rate will be reduced to the Prime Rate plus 0.50% per annum after the first annivesary herof if Borrower at any time reports positive net income (determined in accordance with GAAP) for two consecutive quarters as reported in Borrower's Form 10Q submitted to the Securities and Exchange Commission and no Event of Default is then continuing. (2)The Facility fee will be reduced to (i) 0.25% of the Maximum Credit if Borrower reports positive net income (determined in accordance with GAAP) on its Forms 10Q submitted to the Securities and Exchange Commission for the two consecutive fiscal quarters immediately preceding the relevant anniversary date, or (ii) 0.50% of the Maximum Credit if Borrower reports positive net income (determined in accordance with GAAP) on its Form 10Q submitted to the Securities and Exchange Commission for the fiscal quarter immediately preceding the relevant anniversary date. (3)Reduced to 0.5% of the Maximum Credit if this Agreement is terminated and the Obligations are paid in full in cash with the proceeds of and substantially concurrent with a sale of 100% of the stock or assets of Borrower to an unaffiliated person or entity in an arms length transaction. 20 (d) Borrower's Chief Executive Office: One Mauchly Irvine, California 92618 (e) Locations of Eligible Inventory One Mauchly Collateral: Irvine, California 92618 (f) Borrower's Other Offices and 3500 Garry Street Locations of Collateral: Santa Ana, California 92704 (g) Borrower's Trade Names for STM Invoicing: (h) Borrower's State of Incorporation: Delaware (i) Judgment Amount: $400,000 10.6 Term: Two (2) Years
21 IN WITNESS WHEREOF, Borrower and Lender have duly executed this Agreement this ____ day of March, 2000. LENDER BORROWER: THE CIT GROUP/BUSINESS CREDIT, INC. STM WIRELESS, INC. By:_________________________ By:_____________________ Title:______________________ Title:__________________ 22 SCHEDULE A PERMITTED LIENS 1. Liens indicated by the following financing statements: JURISDICTION SECURED PARTY FILING DATE FILING NO. CALIFORNIA The CIT Group/Equipment Finance (via 4/24/96 9611560758 assignment) CALIFORNIA The CIT Group/Equipment Finance (via 8/12/96 9622560847 assignment) CALIFORNIA GreatAmerica Leasing Corporation (via 10/7/96 9628460041 assignment) CALIFORNIA Mcgrath RentCorp 12/27/96 9636561225 CALIFORNIA GE Capital Computer Leasing Corporation 1/29/97 9703060229 CALIFORNIA Deutsche Financial Services Holding 5/1/97 9712260068 Corporation (via assignment) CALIFORNIA Hewlett-Packard Company Finance & 8/5/97 9722360701 Remarketing Division CALIFORNIA Bankers Leasing Association 2/23/98 9805760354 CALIFORNIA Bankers Leasing Association 5/26/98 9814760476 CALIFORNIA Newcourt Financial USA, Inc. 2/3/99 9904160648 CALIFORNIA Zapara Family Trust U/D/T dated 10/12/99 9929160232 March 4, 1982 CALIFORNIA Mita Copystar America, Inc. 12/9/99 9934860459 GEORGIA/ Fulton Amtrade International Bank of Georgia 7/14/99 06099013716 County, GA Orange County, CA Zapara Family Trust U/D/T dated 10/05/99 19990708073 March 4, 1982
EX-10.32 3 EXHIBIT 10.32 EXHIBIT 10.32 LOAN AGREEMENT THIS LOAN AGREEMENT ("Agreement"), is entered into as of September ___, 1999 (the "Effective Date"), by and between STM Wireless, Inc., a Delaware corporation ("Borrower"), and Thomas M. Zapara and Violet J. Zapara, Trustees of the Zapara Family Trust U/D/T Dated March 4, 1982 ("Lender"). RECITALS A. Borrower owns fee simple title to that certain real property located in the City of Irvine, County of Orange, State of California, as more particularly described in Exhibit "A" attached hereto and incorporated herein by this reference (the "Real Property"), and the building and other improvements located on the Real Property, having an address of One Mauchly, Irvine, California, together with all fixtures thereon or thereto (collectively, the "Improvements"). The Real Property and Improvements are referred to collectively herein as the "Property." B. Borrower has applied to Lender for a loan in the amount of Seven Million Dollars ($7,000,000.00) (the "Loan Amount"), upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the covenants and conditions herein contained, the parties agree as follows: AGREEMENT 1. THE LOAN. Subject to the terms and conditions of this Agreement, Lender agrees to lend to Borrower and Borrower agrees to borrow from Lender the Loan Amount (the "Loan"). 1.1 EVIDENCE OF INDEBTEDNESS UNDER THE LOAN. Amounts outstanding under the Loan shall be evidenced by a promissory note (the "Note") to be secured, among other things, by a Deed of Trust with Assignment of Rents to be recorded against the Property (the "Deed of Trust"). In the event of any inconsistency between the Note or the Deed of Trust and this Agreement, the provisions of this Agreement shall prevail. 1.2 INTEREST RATE. 1 1.2.1 INTEREST RATE. Interest at the rate of seven percent (7%) per annum (the "Interest Rate") shall accrue on the outstanding and unpaid balance of the Loan Amount commencing on the date of distribution of the Loan Amount until repaid. This Agreement, the Note, the Deed of Trust, and the other "Security Documents" (as that term is defined below) are collectively referred to herein as the "Loan Documents." 1.2.2 RATE AFTER DEFAULT. Upon the occurrence of an Event of Default, Lender may increase the interest rate five percentage points (5%) (the "Default Interest Rate"), and include any unpaid interest as of the date of default as part of the sum due and subject to the Default Interest Rate. The application of the Default Interest Rate shall not be interpreted or deemed to extend any cure period set forth in this Agreement or otherwise to limit any of Lender's remedies under this Agreement or any of the other Loan Documents. 1.2.3 ORDER OF APPLICATION. Any payments received by Lender will be applied as set forth in the Note. 1.3 PREPAYMENT OF PRINCIPAL. Borrower shall have the right to prepay the Loan, in whole or in part, at any time, without premium or penalty, provided that Borrower must pay, together with any prepayment, all accrued but unpaid interest upon the principal so prepaid. 1.4 SECURITY. Payment of the Note shall be secured by the following (collectively, the "Security Documents"): 1.4.1 The Deed of Trust, to be executed and acknowledged by Borrower; 1.4.2 A Security Agreement ("Security Agreement") of even date herewith, to be executed by Borrower; 1.4.3 A Financing Statement (Form UCC-1), to be executed by Borrower; and 1.4.4 Such other Security Documents that Lender may reasonably request to perfect Lender's security interests in and to the Property. 1.5 PAYMENTS AND TERM. The Loan and interest thereon shall be due and payable in monthly installments of Forty-Six Thousand Five Hundred Seventy-One Dollars Seventeen Cents ($46,571.17) per month, commencing on December 1, 1999, and continuing on the first day of each and every month thereafter until November 1, 2014 (the "Maturity Date"), on which Maturity Date all principal and interest then remaining unpaid under the Note shall be due and payable in full. Interest for the partial month in which the Loan is made shall be due and payable as of the date the Loan is made. 2 Monthly installments of principal and interest are calculated on a thirty (30) year amortization schedule at the Interest Rate. All amounts payable by Borrower on or with respect to the Loan or pursuant to the terms of any other Loan Documents, shall be paid in lawful money of the United States of America to Lender, in same day funds, not later than 1:00 p.m. (California time) on the date due. 2. INSURANCE. 2.1 TITLE INSURANCE. Concurrently with the recording of the Deed of Trust, Borrower shall, at Borrower's sole cost and expense, deliver or cause to be delivered to Lender an ALTA Lender's Title Insurance Policy issued by Fidelity National Title Company (the "Title Company") with liability limits equal to the Loan Amount and with coverage and in form satisfactory to Lender (the "Title Policy"). The Title Policy shall insure Lender's interest under the Deed of Trust as a valid first lien on the Property, together with such endorsements to the Title Insurance Policy as Lender may require, and thereafter Borrower shall, at Borrower's own cost and expense, do all things necessary to maintain the Deed of Trust as a valid first lien on the Property. 2.2 PROPERTY AND LIABILITY INSURANCE. At all times throughout the Loan term Borrower shall, at its sole cost and expense, maintain or cause any tenant on the Property to maintain insurance, and shall pay, as the same becomes due and payable, all premiums in respect thereof, including, but not necessarily limited to: 2.2.1 PROPERTY. Insurance against loss or damage by fire, lightning, earthquake (as may be required hereinbelow) and other perils, on an all risk basis, such coverage to be in an amount not less than the full replacement value of the building and other improvements on the Property. 2.2.2 LIABILITY. Insurance protecting the Borrower and the Lender against loss or losses from liability imposed by law or assumed in any written contract and arising from personal injury including bodily injury or death, having a limit of liability of not less than One Million Dollars ($1,000,000.00) (combined single limit for personal injury, including bodily injury or death, and property damage), and One Million Dollars ($1,000,000.00) aggregate for personal injury, including bodily injury or death, and property damage, and an umbrella excess liability policy in an amount not less than Two Million Dollars ($2,000,000.00), protecting Borrower and Lender against any loss or liability or damage for personal injury, including bodily injury or death, or property damage. (a) Such liability policies must provide comprehensive general liability insurance with coverages for Property and Operations, Products and Completed Operations, Blanket Contractual Liability, Personal Injury Liability, Broad Form Property Damage (including completed operations), Explosion Hazard, Collapse Hazard and Underground property Damage Hazard. 3 (b) In addition, Borrower shall maintain in full force and effect business auto liability insurance, including all non-owed and hired autos, with a limit of liability of not less than One Million Dollars ($1,000,000.00) (combined single limit for personal injury including bodily injury or death, and property damage). (c) All such policies described in this Section 2.2.2 must be written on an occurrence basis so as to provide blanket contractual liability, broad form property damage coverage, and coverage for products and completed operations. Liability insurance under this Section may be provided under a blanket policy which specifically refers to the Property. 2.2.3 ADDITIONAL INSURANCE. Borrower shall provide such other policies of insurance as Lender may reasonably request in writing. 2.2.4 OTHER. All required insurance shall be produced and maintained in financially sound and generally recognized responsible insurance companies selected by Borrower and subject to the reasonable approval of Lender (provided that such companies shall comply with the requirements of this Section 2.2.4). Such companies shall be authorized to write such insurance in the State of California The company issuing the policies shall be rated "A:VII" or better by A.M. Best Co., in Best's Key Guide, or such other rating as may be acceptable to Lender. All property policies evidencing the required insurance shall name Lender as first mortgagee, and all liability policies evidencing the required insurance shall name Lender as additional insured. All policies shall provide for payment to Lender of the net proceeds of insurance resulting from any claim for loss or damage thereunder (except in the case of liability insurance, in which case the net proceeds shall be paid directly to the aggrieved party), shall not be cancelable as to the interests of Lender due to the acts of Borrower, and shall provide for at least ten (10) days prior written notice to Lender of cancellation thereof for failure to pay premiums or charges due, and at least thirty (30) days prior written notice of the cancellation or material modification (including reduction in coverage) for any other reason thereof to Lender. 2.2.5 EVIDENCE. All policies of insurance or certificates of insurance evidencing that such insurance is in full force and effect shall be delivered to the Lender on or before the close of the Loan (together with proof of the payment of the premiums thereof). At least ten (10) days prior to notice to Lender of cancellation thereof for failure to pay premiums or charges due, and at least thirty (30) days prior to the expiration or cancellation of each such policy for any other reason, Borrower shall furnish Lender evidence that such policy has been renewed or replaced in the form of a certificate reflecting that there is in full force and effect, with a term covering the next succeeding calendar year, insurance of the types and in the amounts required. 4 3. REPRESENTATIONS AND WARRANTIES. 3.1 CONSIDERATION. As an inducement to Lender to execute this Agreement and to disburse the Loan, Borrower represents and warrants to Lender that the following statements set forth in this Section 3 are true, correct and complete as of the date of the recordation of the Deed of Trust against the Property. 3.2 ORGANIZATION, POWERS AND GOOD STANDING. 3.2.1 ORGANIZATION AND POWERS. Borrower is a Delaware corporation, duly organized and validly existing under the laws of the State of Delaware and authorized to do business and doing business in the State of California. Borrower has all requisite power and authority, rights and franchises to carry on Borrower's businesses as now conducted and as proposed to be conducted, and to enter into and perform this Agreement and the other Loan Documents executed by Borrower. The address of the Borrower's chief executive office and principal place of business is as set forth below in Section 6.2. 3.2.2 GOOD STANDING. Borrower has made all filings and is in good standing in the State Delaware and in the State of California and in each other jurisdiction in which the nature of the business Borrower transacts makes such filings necessary or where the failure to make such filings could have a materially adverse effect on the business, operations, assets or condition (financial or otherwise) of Borrower. 3.3 AUTHORIZATION OF LOAN DOCUMENTS. 3.3.1 AUTHORIZATION. All Loan Documents to be executed by Borrower are within Borrower's powers and have been duly authorized by all necessary corporate action. 3.3.2 NO CONFLICT. The execution, delivery and performance of the Loan Documents by Borrower will not violate (i) Borrower's articles of organization and other formation documents, (ii) any legal requirements affecting Borrower, or (iii) any agreement to which Borrower is bound or to which Borrower is a party. 3.3.3 BINDING OBLIGATIONS. This Agreement and the other Loan Documents create legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general principles of equity. 5 3.4 NO MATERIAL DEFAULTS. There exists no material violation of or material default by Borrower and, to the best knowledge of Borrower, no event has occurred which, upon the giving of notice or the passage of time, or both, would constitute a material default with respect to: (a) The terms of any instrument evidencing or securing any indebtedness secured by the Property; (b) Any license, permit, statute, ordinance, law, judgment, order, writ, injunction, decree, rule or regulation of any governmental authority, or any determination or award of any arbitrator to which Borrower or the Property may be bound; or (c) Any mortgage, instrument, agreement or document by which Borroweror any of Borrower's properties, is bound (i) which involves any Loan Document, (ii) which involves the Property and is not adequately covered by insurance, (iii) that might materially and adversely affect the ability of Borrower to perform Borrower's obligations under any of the Loan Documents or any other material instrument, agreement or document to which Borrower is a party, or (iv) which might adversely affect the priority of the liens created by this Agreement or any of the Loan Documents. 3.5 ENVIRONMENTAL MATTERS. (a) Borrower has not, and shall not engage in, or authorize, any activities on the Property or bring onto or create on, or permit to be brought onto or created on, the Property, any hazardous, toxic or infectious materials, wastes or substances (collectively, "Substances"), or any storage tanks or similar receptacles of any size or shape above or below ground (collectively, "Tanks"), the possession, use or installation of which requires a permit from any federal, state or local governmental agency or body ("Agency") having jurisdiction over such Tanks or Substances or which is not in compliance with any current or future federal, state or local law, statute, rule, regulation, order, decision, or ordinance pertaining to Tanks or Substances ("Standards"), unless any such permit has been obtained, applicable zoning allows for such use, and any such activity is conducted strictly in compliance with any and all Standards. (b) Borrower shall indemnify and hold Lender and Lender's respective successors and assigns harmless from and against any and all claims, liabilities, losses, damages, costs and expenses, including, but not limited to, reasonable attorneys' fees, court costs and litigation expenses, investigators' fees, fines, penalties and remediation and/or abatement costs regarding any Substance or Tank, which Lender may incur or sustain by reason of or in connection with any breach of Borrower's covenants and representations and agreements under paragraph 3.5(a) above. The obligation of Borrower under 6 this paragraph 3.5(a) is a separate obligation of Borrower separate from the Note and shall survive the repayment of the Note and reconveyance of the Deed of Trust, foreclosure, or conveyance of the Deed of Trust, foreclosure, or conveyance of the Property by deed in lieu of foreclosure. Lender's right to enter the Property pursuant to this Agreement and the Deed of Trust shall include the right to conduct inspections for any Substance or any Tank. If any such inspection indicates the existence of any Substance or Tank in violation of any Standard, then, in addition to all the rights and remedies of Lender or Trustee under this Agreement and the Deed of Trust, Borrower shall pay for the costs of such inspection and for remediation and/or abatement and this Agreement and the Deed of Trust expressly secures payment of those costs and obligations. 3.6 LITIGATION; ADVERSE FACTS. There is no action, suit, investigation, proceeding or arbitration (whether or not purportedly on behalf of Borrower), at law or in equity or before or by any foreign or domestic court or other governmental entity ("Legal Action"), pending or, to the best knowledge of Borrower, threatened against or affecting Borrower or any of Borrower's respective assets which could reasonably be expected to result in any material adverse change in the business, operations, assets (including the Property) or condition (financial or otherwise) of Borrower or would materially and adversely affect Borrower's ability to perform Borrower's obligations under the Loan Documents. There is no basis known to Borrower for any such action, suit or proceeding. Borrower is not: (a) In violation of any applicable law, which violation materially and adversely affects or may materially and adversely affect the business, operations, assets (including the Property) or condition (financial or otherwise) of Borrower; or (b) Subject to, or in default with respect to, any other legal requirement that would have a material adverse effect on the business, operations, assets (including the Property) or condition (financial or otherwise) of Borrower. There is no Legal Action pending, or to the knowledge of Borrower threatened against or affecting Borrower questioning the validity or the enforceability of this Agreement or any of the other Loan Documents. 3.7 TITLE TO PROPERTIES; LIENS. Borrower is the sole owner of, and has good and marketable title to, the fee interest in the Property, free from any adverse lien, security interest or encumbrance of any kind whatsoever, excepting only: (a) Liens and encumbrances shown on the Title Report; 7 (b) Liens and security interests in favor of Lender; and (c) Other matters which have been approved in writing by Lender. 3.8 DISCLOSURE. There is no fact known to Borrower that materially and adversely affects the business, operations, assets or condition (financial or otherwise) of Borrower that has not been disclosed in this Agreement or in other documents, certificates and written statements furnished to Lender in connection herewith. 3.9 PAYMENT OF TAXES. All tax returns and reports of Borrower required to be filed have been timely filed, and all taxes, assessments, fees and other governmental charges upon Borrower and upon Borrower's assets, income and franchises which are due and payable have been paid when due and payable. Borrower knows of no proposed tax assessment against Borrower that would be material to the condition (financial or otherwise) of Borrower, and Borrower has not contracted with any government entity in connection with such taxes. 3.10 COMPLIANCE WITH LAWS. The Property, and the uses to which the Property is and will be put by Borrower, comply fully with all applicable laws and restrictive covenants, including, without limitation, all requirements of the California Department of Real Estate and all requirements under the Interstate Land Sales Disclosure Act. 3.11 FINANCIAL CONDITION. All financial data previously delivered to Lender in connection with the Loan and/or relating to Borrower are true, correct and complete in all respects. Such financial data fairly presents the financial position of the Borrower as of the date thereof. No material adverse change has occurred in such financial position and, except for this Loan, no borrowings have been made by Borrower since the date thereof which are secured by, or might give rise to, a lien or claim against the Property, the proceeds of this Loan, or other assets of Borrower. 3.12 OTHER LOAN DOCUMENTS. Each of the representations and warranties of Borrower contained in any of the other Loan Documents is true and correct in all respects. All of such representations and warranties are incorporated herein for the benefit of Lender. 4. COVENANTS OF BORROWER. 4.1 CONSIDERATION. As an inducement to Lender to execute this Agreement and to make the Loan, Borrower hereby covenants as set forth in this Section 4, which covenants shall remain in effect so long as either the Note shall remain unpaid or any obligation of Borrower under any of the other Loan Documents remains outstanding or unperformed. 8 4.2 COMPLIANCE WITH LAWS. Borrower will comply and, to the extent Borrower is able, will require others to comply with all laws and requirements of all governmental authorities having jurisdiction over the Property, and will furnish Lender with reports of any official searches for violation of any requirements established by such governmental authorities. Borrower will comply and, to the extent Borrower is able, will require others to comply with applicable covenants, conditions and restrictions, and all restrictive covenants and all obligations created by private contracts and leases which affect ownership, construction, equipping, fixturing, use or operation of the Property. 4.3 RECORDS. Borrower shall keep and maintain full and accurate accounts and records of Borrower's operations with respect to the Loan according to sound accounting practices for Borrower's type of business, and permit Lender or Lender's representatives to inspect and copy the same upon reasonable notice to Borrower and during normal business hours upon any date prior to the expiration of thirty (30) days after repayment in full of the Loan. 4.4 ASSESSMENTS. Borrower shall pay or discharge all lawful claims, including taxes, assessments and governmental charges or levies imposed upon Borrower or Borrower's income or profits or upon any property (including the Property) belonging to Borrower, prior to the date upon which penalties attach thereto, and shall submit evidence satisfactory to Lender confirming the payment of all taxes, assessments and charges against the Property, provided that Borrower may in good faith contest any such claims by appropriate administrative or judicial proceedings as long as: (a) Borrower has, in Lender's judgment, a reasonable basis for such contest; (b) Borrower pays, prior to the date any interest or penalties will attach thereto, any portion of any such claims that Borrower does not contest; (c) Borrower's contest will not result in or pose any risk of the seizure, sale or imposition of a lien upon the Property or any portion thereof; (d) Borrower delivers to Lender such bond or other security as Lender may require in connection with such contest; (e) Borrower at all times prosecutes such contest with due diligence; and (f) Borrower pays, prior to the date any interest or penalties will attach thereto, the amount of the disputed claim that is determined to be due and owing by Borrower. 9 In the event that Borrower does not make any payment required to be made pursuant to subsection 4.4(f) above, Lender may draw or realize upon any bond or other security delivered to Lender in connection with the contest by Borrower, in order to make such payment. 4.5 EXPENSES. Without limiting the generality of the foregoing, Borrower shall pay: (a) All taxes and recording expenses, including stamp taxes, if any, relating to the Deed of Trust and any other documents and instruments securing the Loan; (b) The fees and expenses of Lender's counsel relating to Lender's consultation with such counsel in connection with the Loan, the negotiation, documentation and closing of the Loan and the Loan Documents; and (c) The other fees, costs and expenses incurred by Lender in connection with the Loan, including but not limited to internal documentation and review, cost review, appraisal, appraisal review, environmental and inspections. 4.6 TRADE NAMES. Borrower shall immediately notify Lender in writing of any change in the legal, trade or fictitious business names used by Borrower and shall, upon Lender's request, execute any additional financing statements and other certificates necessary to reflect the change in trade names or fictitious business names. 4.7 MAINTENANCE OF EXISTENCE. Borrower shall maintain and preserve Borrower's existence and all rights and franchises material to Borrower's business. 5. EVENTS OF DEFAULT AND REMEDIES. 5.1 EVENTS OF DEFAULT. The occurrence of any one (1) or more of the following shall constitute an Event of Default under this Agreement: 5.1.1 Failure by Borrower to pay any monetary amount when due under any Loan Document and the expiration of ten (10) days after written notice of such failure by Lender to Borrower. 5.1.2 Failure by Borrower to perform any obligation not involving the payment of money, or to comply with any other term or condition applicable to Borrower under any Loan Document, and the expiration of thirty (30) days after written notice of such failure by Lender to Borrower; provided, however, 10 that if such failure cannot be remedied by the payment of money and cannot be remedied within such 30-day period and Borrower promptly takes and diligently pursues action to remedy such failure, Borrower shall have an additional period of time, not to exceed ninety (90) days, within which Borrower may remedy such failure. 5.1.3 Any representation or warranty by Borrower in any Loan Document is materially false, incorrect, or misleading as of the date made. 5.1.4 Borrower (i) is unable or admits in writing Borrower's inability to pay Borrower's monetary obligations as they become due, (ii) makes a general assignment for the benefit of creditors, or (iii) applies for, consents to or acquiesces in the appointment of a trustee, receiver or other custodian for Borrower or Borrower's property or any part thereof, or in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for Borrower, or the property of Borrower or any part thereof, and such appointment is not discharged within sixty (60) days. 5.1.5 Commencement of any case under the Bankruptcy Code, Title 11 of the United States Code or commencement of any other bankruptcy arrangement, reorganization, receivership, custodianship or similar proceeding under any federal, state or foreign law by or against Borrower. 5.1.6 Any material litigation or proceeding is commenced before any governmental authority against or affecting Borrower, or the property of Borrower or any part thereof, and such litigation or proceeding is not defended diligently and in good faith by Borrower. 5.1.7 Commencement of any action or proceeding which seeks as one of its remedies the dissolution of Borrower. 5.1.8 All or any part of the property of Borrower is attached, levied upon or otherwise seized by legal process, and such attachment, levy or seizure is not quashed, stayed or released within sixty (60) days of the date thereof. 5.1.9 The occurrence of any prohibited transfer under the Deed of Trust, unless prior to such transfer the holder of the Note has delivered to Borrower the written consent of such holder to such transfer. 5.1.10 The occurrence of any Event of Default, as such term is defined in any other Loan Document. 5.2 REMEDIES. Notwithstanding any provision to the contrary herein or any of the other Loan Documents, during the continuance of any Event of Default under this Agreement, or during the continuance of an Event of Default under any of the other Loan Documents, if the Event of Default shall not be cured within the 11 applicable notice and cure periods, then Lender shall, at Lender's option, have the remedies provided in the Loan Document breached by Borrower, including, without limitation, the option to declare all outstanding indebtedness to be immediately due and payable without presentment, demand, protest or notice of any kind, and Lender may exercise all rights and remedies available to Lender under any or all of the Loan Documents. All sums expended by Lender for such purposes shall be deemed to have been disbursed to and borrowed by Borrower and shall be secured by the Deed of Trust on the Property. 6. MISCELLANEOUS. 6.1 ASSIGNMENT. 6.1.1 Borrower shall not assign this Agreement or any interest Borrower may have in the monies due hereunder, without the prior written consent of Lender, which consent may be granted or withheld in Lender's sole and absolute discretion. 6.1.2 Lender may at any time assign this Agreement, the Note, the Deed of Trust and other Loan Documents, and upon such assignment Lender shall have no further obligation or liability of any nature in connection herewith. Upon such assignment, the provisions of this Agreement shall continue to apply to the Loan and such assignee shall be substituted in the place and stead of Lender hereunder with all rights, obligations and remedies of Lender herein provided, including without limitation the right to so further assign this Agreement, the Note, the Deed of Trust and other Loan Documents. 6.2 NOTICES. All notices, requests, demands and consents to be made hereunder to the parties hereto shall be in writing and shall be delivered by hand or sent by registered mail or certified mail, postage prepaid, return receipt requested, through the United States Postal Service to the addresses shown below or such other address which the parties may provide to one another in accordance herewith. Such notices, requests, demands and consents, if sent by mail, shall be deemed given two (2) business days after deposit in the United States mail, and if delivered by hand, shall be deemed given when delivered. If to Borrower: STM Wireless, Inc. One Mauchly Irvine, CA 92618-2305 Attn: Chief Financial Officer If to Lender: Thomas M. Zapara and Violet J. Zapara, Trustees of The Zapara Family Trust 98 South La Senda 12 South Laguna CA 92677 Attn: William S. Gray With a copy to: Voss, Cook & Thel LLP 840 Newport Center Drive, Suite 700 Newport Beach, CA 92660 Attn: Bruce V. Cook, Esq. 6.3 INCONSISTENCIES WITH THE LOAN DOCUMENTS. In the event of any inconsistencies between the terms of this Agreement and any terms of any of the Loan Documents, the terms of this Agreement shall govern and prevail. 6.4 NO WAIVER. No disbursement of the Loan shall constitute a waiver of any conditions to Lender's obligation to make further disbursements nor, in the event Borrower is unable to satisfy any such conditions, shall any such waiver have the effect of precluding Lender from thereafter declaring such inability to constitute an Event of Default under this Agreement. 6.5 LENDER APPROVAL OF INSTRUMENTS AND PARTIES. All proceedings taken in accordance with transactions provided for herein, and all surveys, appraisals and documents required or contemplated by this Agreement and the persons responsible for the execution and preparation thereof, shall be satisfactory to and subject to approval by Lender. Lender's counsel shall be provided with copies of all documents which they may reasonably request in connection with this Agreement. 6.6 PAYMENT OF EXPENSES. Borrower shall pay all taxes and assessments and all expenses, charges, costs and fees provided for in this Agreement or relating to the Loan, including, without limitation, any fees incurred for recording or filing any of the Loan Documents, title insurance premiums and charges, tax service contract fees, fees of any consultants, Lender's processing and closing fees, fees and expenses of Lender's counsel, printing, photostatting and duplicating expenses and air freight charges. The obligations on the part of Borrower under this Section 6.6 shall survive the closing of the Loan and the repayment thereof. 6.7 TITLES AND HEADINGS. The titles and headings of sections of this Agreement are intended for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 6.8 CHANGE, DISCHARGE, TERMINATION OR WAIVER. No provision of this Agreement may be changed, discharged, terminated or waived except in writing signed by the party against whom enforcement of the change, discharge, termination or waiver is sought. No failure on the part of Lender to exercise and no delay by Lender in exercising any right or remedy under the Loan Documents or under the law shall operate as a waiver thereof. 13 6.9 CHOICE OF LAW. This Agreement and the transaction contemplated hereunder shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflict of laws principles. 6.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts each of which shall be deemed an original, but all such counterparts together shall constitute but one agreement. 6.11 TIME IS OF THE ESSENCE. Time is of the essence of this Agreement. 6.12 ATTORNEYS' FEES. Borrower shall promptly pay to Lender from Borrower's own funds or from the proceeds of the Loan, upon demand, with interest thereon from the date of demand at the Default Interest Rate, attorneys' fees and all reasonable costs and other expenses paid or incurred by Lender in enforcing or exercising Lender's rights or remedies created by, connected with or provided for in this Agreement or any of the other Loan Documents, and payment thereof shall be secured by the Deed of Trust. If at any time Borrower fails, refuses or neglects to do any of the things herein provided to be done by Borrower, Lender shall have the right, but not the obligation, to do the same but at the expense and for the account of Borrower. The amount of any moneys so expended or obligations so incurred by Lender, together with interest thereon at the Default Interest Rate, shall be repaid to Lender forthwith upon written demand therefor and payment thereof shall be secured by the Deed of Trust. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written. "BORROWER" STM WIRELESS, INC., a Delaware corporation By: -------------------------------------- Its: -------------------------------------- By: -------------------------------------- Its: -------------------------------------- [Signatures Continued on Following Page] "LENDER" ----------------------------------------- 14 THOMAS M. ZAPARA, Co-Trustee of the Zapara Family Trust U/D/T Dated March 4, 1982 ----------------------------------------- VIOLET J. ZAPARA, Co-Trustee of the Zapara Family Trust U/D/T Dated March 4, 1982 Zapara/STM Wireless/Docs/Loan Agreement3 15 EXHIBIT "A" PROPERTY DESCRIPTION EXHIBIT "A" EX-21 4 EXHIBIT 21 EXHIBIT 21 STM WIRELESS, INC. SUBSIDIARIES The subsidiaries of the Company are: PERCENTAGE OWNERSHIP ------------------------- STM do Brasil................................ 100.0% Avenida das Americas, 3333 Sala 801 22631-003 Rio de Janeiro, Brazil STM de Mexico, S. A de C.V. ................. 100.0% Monte Pelvoux No. 130-3ER. Piso Lomas de Chapultpepec 11000 Mexico, D.F. STM Wireless Systems, Ltd.................... 100.0% 50/9 Viphavadee-Rangsit 38 Viphavadee-Rangsit Road Ladyao Chatuchak Bangkok, 10900 Thailand STM Sales Corp. .............................. 100.0% 134 West Soledad Avenue Suite 401 Agana, Guam 96910 Telecom Multimedia Systems, Inc. ............. 100.0% One Mauchly Irvine, California 92618 64 EX-23.1 5 EXHIBIT 23.1 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors STM Wireless, Inc.: We consent to incorporation by reference in the registration statements (Nos. 33-50806, 33-995570, 33-99572 and 333-94227) on Form S-8 and registration statements (Nos. 33-70650, 33-73962, 33-99568, 333-50485, 333-85707 and 333-92723) on Form S-3 of STM Wireless, Inc. of our report dated March 2, 2000, relating to the consolidated balance sheets of STM Wireless, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999, and the related schedule, which report appears in the December 31, 1999 annual report on Form 10-K of STM Wireless, Inc. KPMG LLP Orange County, California March 29, 2000 65 EX-27 6 FDS
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 4,441 0 8,431 (590) 11,069 26,216 16,240 (8,276) 34,478 13,220 0 0 0 7 13,440 34,478 22,226 22,226 16,564 16,564 14,514 0 1,491 (7,977) 0 (8,311) 0 0 0 (8,311) (1.18) (1.18)
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