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SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10K





x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2001or ̈

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





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STM WIRELESS, INC.


(Exact name of registrant as specified in its charter)





Delaware

953758983(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer Identification No.)





One Mauchly, Irvine, California 92618


(Address of principal executive offices)





(949) 7537864


(Registrants telephone number, including area code)





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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





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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.    x





As of March 22, 2002, the aggregate market value of the registrants common stock, held by non-affiliates of the registrant was approximately $12,946,203 based on the closing sales price of $2.15 per share of the common stock as of
such date, as reported by the Nasdaq Stock Market. As of March 22, 2002, 7,248,325 shares of the registrants common stock were outstanding.





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Page 1 of 72 Pages


Exhibit Index Appears on Page 70




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PART I





ITEM 1BUSINESS





The Company





STM Wireless, Inc. (the Company or STM), is a developer, manufacturer and provider of wireless-based satellite communications infrastructure and user terminal products utilized in public and
private telecommunications networks 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. In 2001, export sales and sales to end users outside the United States comprised 94% of the Companys revenues. 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, associated
infrastructure equipment and software.





The applications for the Companys product lines falls into three separate classes:





| |  |  | One 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 products provide 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Another 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The last class of applications targets rural telephony services in developing countries. The demand for rural telephony products and services in developing countries 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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, Bolivia, Brazil, Cameroon, Canada, Chile, China, the Czech Republic, Ecuador, France, Guatemala, Holland, India,
Indonesia, Italy, Jordan, Kenya, Malaysia, Mexico, Morocco, Nigeria, Pakistan, Peru, Philippines, Spain, Sudan, Thailand, United Arab Emirates, 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





The Companys family of products 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, 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 may 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.




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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:





| |  |  | Two-way high speed communication over satellite
| | - |  | -----------------------------------------------




| |  |  | Availability in Ku- and C-band
| | - |  | ------------------------------




| |  |  | Immediate global reach without terrestrial restrictions
| | - |  | -------------------------------------------------------

| |  |  | Full DVB-S/MPEG-2 compliance
| | - |  | ----------------------------




| |  |  | Bandwidth on Demand and Quality of Service controlled
| | - |  | -----------------------------------------------------




| |  |  | High speed reception of up to 48 Mbps
| | - |  | -------------------------------------




| |  |  | 9.6 kbps to 384 kbps return path per VSAT
| | - |  | -----------------------------------------




| |  |  | Fast and easy ability to deploy
| | - |  | -------------------------------




| |  |  | Costs are insensitive to distance
| | - |  | ---------------------------------




| |  |  | Provides trunking and last mile access in one network
| | - |  | -----------------------------------------------------




| |  |  | 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 organizations 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.




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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.





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 a 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 through December 31, 2001, has deployed its broadband solution for a number of customers, primarily in overseas markets. The Company is focused on increasing its broadband product sales both through direct sales and entering into strategic
relationships and vendor alliances. In addition, the Company is focused on reducing the cost of its products to improve its competitive position in the market for broadband satellite solutions.





Expand Market Share in Enterprise Networks: The Company continues to believe 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. In addition,
the Company is focused on increasing its share of the rural telephony market through developing lower cost and feature rich products that will provide customers with a higher level of reliability and flexibility.





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 continues to incur significant R&D expenditures 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.





Products





The principal products sold by the Company are VSATs, 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




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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. In addition, there is a
growing need for subscriber broadband last-mile access for which there is no clear terrestrial solution even in large areas of developed countries.





The Companys VSAT products fall into two categories: mesh and star products. 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 lies in the methodology
used for communicating between any two remote VSATs on a network. The mesh product 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. A star product employs packetized transmission.





Existing Products





The Company recently announced the release of its latest lines of VSAT products, the SES Solante  and the SpaceWeb Olante  . The new lines of products are intended to enhance STMs competitive position in the emerging markets, particularly in the rural telephony and non-consumer broadband applications, which have been the Companys
primary focus. The two lines of products are designed to gradually merge the last generation of data and telephony products (i.e., the SpaceWeb Online and Subscriber Earth Station (SES)) from a customer application perspective.





SpaceWeb Olante Family:    The SpaceWeb Olante family of products are an evolutionary development of the SpaceWeb
and X.STAR family and are fully backward compatible.





| |  |  | SpaceWeb Olante: delivers end-to-end, two-way, asymmetric broadband by satellite. The network architecture features a star topology with a compact, modular Hub Station
and integrated Remote Stations. The central Hub station broadcasts a DVB-S/MPEG compliant outbound channel at up to 48 Mbps to the Remote Stations. The Remote Stations transmit back to the Hub Station over satellite using Time Division Multiple
Access at burst rates that can be set up to 192 Kbps. Both Hub and Remote Stations include powerful built-in router capabilities and Quality of Service controls for advanced packet address and delivery features.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




SpaceWeb Olante supports a wide range of innovative services for high-bandwidth users. These include Fast Internet Access, Virtual Private
Networks, Distance Learning, Multicasting, Data Broadcasting, and Push Services. Available in C-, INSAT-, and Ku-Band versions, SpaceWeb Olante offers great flexibility to meet operational requirements around the globe. SpaceWeb Olante is a TCP/IP
based product but also 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.





A sophisticated Network Management System features Quality of Service through Bandwidth on Demand controls. These ensure efficient, cost-effective use
of satellite resources.





The Hub Station equipment scales in proportion to the number of Remote Stations in the network. This
capability minimizes initial capital expenditures and facilitates fast deployment.





| |  |  | SpaceWeb Online: SpaceWeb Online is the Companys first generation broadband product and 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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. 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.





SES Solante Family:    The SES Solante Family of products are targeted at the provision of telephony
services to unserved or underserved regions of the world. SES Solante is based on STMs field-proven DAMA 10000 network platform.





| |  |  | SES Solante: The SES Solante provides voice, fax, and narrowband data services to remote areas by satellite. It combines powerful call routing and network management
features with a small, easy-to-install outdoor terminal tailored for solar power. It is a cost-effective solution for rural telephony applications, such as public calling offices and payphone calling-card services.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The SES Solante is designed to provide reliable, affordable, on-demand telecommunications to areas in which services are unavailable,
unreliable, or too expensive. Since it is satellite-based, the SES Solante can be quickly installed virtually anywhere, allowing rapid access to both the satellite and terrestrial public telephone (PSTN) networks. SES Solante features an all-weather
exterior package, with no need for an indoor unit or weather-proof shelter. Moreover, it uses the Companys DAMA 10000 Network Management System, which maximizes the use of available satellite bandwidth and minimizes operational costs. This
enables SES Solante to combine high-quality voice and industry standard interfaces with cost-effective, efficient use of precious satellite bandwidth.





| |  |  | Subscriber Earth Station (SES): SES is a telephony product derived from and compatible with DAMA 10000. SES was designed to provide reliable, affordable, on-demand
telecommunications service in remote and rural areas. SES is a small, lightweight terminal ideally suited for areas where telecommunications service is unavailable, unreliable or simply too expensive. Since it is satellite-based, like the latest SES
Solante product, a SES terminal is capable of being installed quickly, virtually anywhere to allow immediate access to the SES network and the Public Switched Telephone Network (PSTN). SES provides telecommunications service with high quality voice
and industry standard interfaces.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | 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 an 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 PSTN in many countries
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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.





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 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.





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 agents and alliances, which are supported by the Companys sales and marketing personnel. The Company continues to focus
its sales efforts on the following:





| |  |  | Expanding global coverage through its highly trained, direct sales personnel with regional responsibilities, and through developing strategic alliances with larger
organizations with international presence.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Identifying sales opportunities that exist with newly licensed service providers in international markets, particularly those focused on providing rural telephony services.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Identifying capable, local distributors and replacing, if necessary, its current distributors and alliances.
| | - |  | ------------------------------------------------------------------------------------------------------------




| |  |  | Supplying highly integrated, low cost solutions to customers through the Companys product offerings.
| | - |  | -----------------------------------------------------------------------------------------------------




Export sales and sales to end users outside the United States, as a percentage of revenues, were approximately 94%, 96% and 93% in 2001, 2000 and 1999,
respectively.





Backlog





The Companys backlog represents future revenues that the Company expects to be earned from sales orders or sales contracts for products or services. At December 31, 2001, the Companys backlog was approximately $11,100,000. As of
December 31, 2000, the Companys backlog was approximately $9,600,000. The Company manufactures its products on the basis of customer orders and its forecast of near-term demand from its customers. The Company conducts virtually 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 can be 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 or if a subcontractor experiences quality problems, the Company may experience an interruption in production until an alternative source of supply is developed or such quality issues are resolved. The Company maintains an inventory of
certain long lead time components and subassemblies to limit the potential for such an interruption. Although, the Company has test procedures that should identify most product defects on components and subassemblies received from subcontractors,
there can be no assurance that the Company will detect all product defects prior to shipment, which could result in warranty claims against the Company. 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. With the introduction of the new SpaceWeb Olante and the SES Solante, there will be more commonality between our products at the subsystem level which will
simplify the manufacturing process. In addition, the Company will outsource the manufacture of certain of the subsystems for products whenever it makes commercial sense to do so.





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.




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In 2001, 2000 and 1999, the Company incurred expenses of $5,266,000, $5,417,000 and $5,354,000,
respectively, on research and development activities. During this period, the Company completed the development of the SpaceWeb Olante, SES Solante and upgraded its hub/gateway products.





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 primary competitors include larger companies such as Hughes Network Systems, Gilat Satellite
Networks and Viasat. 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 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 functionality based upon the Companys proprietary hardware and software.





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 for efficient utilization of satellite capacity, coupled with the Companys networking skills in integrating third party products into its product portfolio, 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. 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 and been awarded two patents and intends to pursue patent protection for additional products developed by the Company,
for which one application is currently pending.





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 the country of destination.




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Employees





As of December 31, 2001, the Company employed 137 people on a full-time basis, including 69 employees in engineering/research and development, 33 employees in manufacturing, 19 employees in sales and marketing and 16
employees in administration and accounting.





The Company believes that its relations with its 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, ACCEPTANCE OF THE COMPANYS BROADBAND PRODUCTS, 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 generated net cash from operations of approximately $50,000 in the year ended December 31, 2001. In the years ended December 31, 2000 and 1999, the Company used cash in
operations of $3,943,000 and $822,000, respectively. There can be no assurance that the Company will generate positive cash flows from operations in fiscal 2002 or thereafter. In addition, the Companys quarterly sales cycle can make future
financial results less predictable. Like many technology companies, STM generally sells and ships more hardware in the third month of each quarter than in the first and second months. The Company may also build products early in the quarter in
anticipation of demand later in the quarter which can adversely impact inventory levels and cash resources. The Companys ability to fund its capital requirements out of available cash, traditional sources of 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 from sales agreements. 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 potentially available, if required. However, such sources of finance may not be available at favorable terms, which may lead to the issuance of additional equity securities
by the Company that 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.




11




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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 of $972,000, $7,932,000 and $8,852,000 in 2001, 2000 and 1999, respectively. Although, in 2001 the Company improved its operating performance by
increasing revenues by 74% compared to the year ended December 31, 2000, 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 can be 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 Emerging Markets





The Company generated approximately 44%, 32% and 44% of
its revenues from customers and users in Latin and South America in 2001, 2000 and 1999, respectively, 18%, 14% and 25% of its revenues in Africa and the Middle East in 2001, 2000 and 1999, respectively, and 25%, 42% and 19% of its revenue in Asia
in 2001, 2000 and 1999, respectively. While in any individual year, the Companys revenues generally represent new projects to new or existing customers in new or existing geographic regions, there can be no assurance that economic conditions
in the emerging economies will not negatively impact the level of revenues generated by the Company in foreign markets in future years.





Dependence on
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.





No Assurance of Growth in Satellite Broadband Market





The Companys SpaceWeb Olante
family of products addresses the growing demand for high bandwidth applications and Internet access via satellite. This market is highly competitive and due to the decline in the




12




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telecom sector, in general, there can be no assurance that broadband will continue to grow at rates experienced in recent years, on an ongoing basis. In addition, consumers may choose from a
variety of broadband products to obtain high bandwidth internet access and there is no assurance that consumers will adopt satellite-based products or that satellite-based broadband products will capture a significant portion of the broadband
market. The Companys ability to penetrate this market will depend on its ability to develop strategic alliances, continually reduce product costs, develop further refinements to its products and successfully develop additional distribution
channels for its products. However, the Company believes its success to date in selling its broadband products is a result of its focus on the non-consumer broadband market where its products can command higher prices and resulting higher margins
than would be attainable in the consumer broadband market. Failure to achieve market penetration in the broadband market could have a material adverse effect on the Companys business, operating results, and financial condition.





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.





Intense
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, Gilat Satellite Networks and Viasat 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. In response to those market conditions, the Company has recently introduced
the lower cost SES Solante and SpaceWeb Olante products and has increased its local direct sales force in target markets, to improve our competitive position. 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 Key Personnel





The Companys current and 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,




13




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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 and subsystems used by the Company in its existing products are purchased from single
source suppliers and manufacturers. 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. 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. Futhermore, the Company depends on its suppliers and subcontractors to manufacture quality products. Although the Company has implemented test procedures that should identify most product defects on components and subassemblies received
from subcontractors, there can be no assurance that the Company will detect all product defects prior to shipment, which could result in warranty claims against the Company. In addition, there can be exposure to inventory obsolescence associated
with entering into a high-volume and single-source contracts with vendors.





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 international markets. The Companys export sales and sales to end
users outside the United States, as a percentage of total revenues, were approximately 94%, 96% and 93% in 2001, 2000 and 1999, 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. These risks have had and may continue to have a materially 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. 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




14




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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 and been awarded two patents and
intends to pursue patent protection for additional products developed by the Company, for which one application is currently pending. In addition, as the number of patents, copyrights and other intellectual property rights in the Companys
industry increases, and as the coverage of these rights and the functionality of the products of new markets further overlap, the Company believes that its products may increasingly become the subject of infringement claims. The Company may in the
future be notified that it is infringing upon certain intellectual property rights of others. Although the Company has not received any such notification to date, and there are no pending or threatened intellectual property lawsuits against the
Company, there can be no assurance that such litigation or infringement claims will not occur in the future. Any such litigation or claims could result in substantial costs and diversion of resources and could have a material adverse effect on the
Companys business, operating results and financial condition.





Dependence on a Limited Number of Customers and Credit Risk





A significant portion of the Companys revenues are derived from a limited number of customers in any given year. 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 5 customers in 2001 constituted approximately 62% of the Companys revenues. DTPI, the
Companys former affiliate until December 2001 (when the Company disposed of it remaining ownership) contributed approximately 25% to the Companys revenues in 2001.There is not expected to be significant repeat business from DTPI in 2002.
In addition, a decrease in revenues generated from any of these other customers could have a material adverse effect on the Companys business, results of operation and financial condition. However, in any individual year, the Companys
revenues generally represent new projects to new or existing customers in new or existing geographic regions 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 where the customer has demonstrated the
ability to pay 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 11 to the consolidated financial
statements, which discusses sales to principal customers.)





Possible Volatility of Stock Prices and Listing Requirements





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 general market 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




15




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conditions may adversely affect the market price of the Companys Common Stock. In addition, the Company trades on the Nasdaq Stock Market under the symbol STMI. Under updated
Nasdaq listing standards, the Company is required to maintain stockholders equity of $10 million effective November 1, 2002. As of December 31, 2001, the Companys stockholders equity was $10,752,000. However, the Company has
incurred operating losses in each of the last five years, although in 2001, the operating losses were reduced substantially and the Company generated net income in 2001 due to non-operating gains. Therefore, the Company will need to remain
profitable or raise additional capital to comply with the updated Nasdaq rules. 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, 2002, the Companys officers, directors and
their affiliates owned approximately 20% of the outstanding Common Stock. If such stockholders were to act in concert, they might be able to control substantially all matters requiring approval by the stockholders of the Company, including the
election of directors. Such concentration of ownership could discourage or prevent a change in control of the Company. See Principal Stockholders.





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.





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




16




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$46,571 and is being amortized over a thirty-year period and matures in November 2014, at which time all remaining principal and accrued interest is due. In addition, the Companys lender
has a second security interest on the Companys land and buildings as part of the security for a line of credit of $3,300,000. 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





The Company is involved as both plaintiff and defendant in various claims and legal actions arising in the ordinary course of business. The Company does not expect that these matters will individually or in the
aggregate have a material adverse effect on the Companys results of operations, liquidity or its financial condition.





On
October 28, 2001, the Company obtained a Peruvian court injunction against OSIPTEL, a Peruvian government entity, and Gilat-To-Home (Gilat), controlled by Gilat Satellite Networks, Ltd. of Israel in connection with a $27,800,000 contract
to provide a VSAT network for phone services in Peru. STM, in consortium with another Peruvian company was originally announced the winner of the competitive bidding for the contract in September 2000. Gilats original bid was approximately
$10,000,000 higher than STMs consortium. The court ruling ordered Gilat and OSIPTEL to suspend work immediately on the VSAT contract. The injunction was issued after the court found sufficient evidence that Gilat and OSIPTEL violated Peruvian
law regarding competitive bidding for a government contract by allowing Gilat and others to reduce their bid to match that of STMs consortium and revoking the award to STM. Such injunction was subsequently overturned in favor of Gilat.
However, STM has appealed the decision and the matter is currently under appeal.





Additionally, STM filed a lawsuit on October
22, 2001, in the Superior Court of Californian against Gilat Satellite Networks, Ltd. and its subsidiary rStar for Gilats improper interference with STMs winning bid. Several of the suits allegations are that Gilat had improper
privileged access to government information that allowed Gilat to make a public announcement of government actions even though government records indicate that these actions had not yet occurred, and that Gilat used such privileged access to help
recover its irregular $10,000,000 price reduction. On October 6, 2001, OSIPTEL issued a new tender with a budget of $12,000,000 that for practical reasons, only Gilat could be the main beneficiary.





ITEM 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





The 2000 Annual Meeting of Stockholders of the Company was held on December 6, 2001 and the following matters were approved by stockholders.





(1)  Stockholders elected the following five (5) nominees to serve as directors until the next annual meeting of stockholders or until their successors are elected and have
qualified:





Name

Votes For

Votes WithheldEmil Youssefzadeh

5,124,961

37,250Frank T. Connors

5,130,361

32,120Dr. Ernest U. Gambaro

5,130,861

31,620Louis B. Horwitz

5,126,361

36,120K. C. Schaaf

5,126,461

36,020





(2)  Stockholders approved the adoption of the Companys 2002
Stock Incentive Plan which authorized the issuance of up to 500,000 shares of the Companys Common Stock, as follows:





Votes For

Votes Against

Abstain

Broker Non-Votes625,601

181,527

20,250

4,335,103


(3)  Stockholders ratified the appointment of KPMG LLP as independent auditors of the Company for the fiscal
year ended December 31, 2001, as follows:





Votes For

Votes Against

Abstain5,146,010

7,521

8,950




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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 closing 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, 2001 and 2000 are set forth in the following
table:





Price Range Per Share of Common Stock

1st Quarter

2nd Quarter

3rd Quarter

4th QuarterYear Ended December 31, 2001High

$
4.9690

$
2.2000

$
2.9500

$
2.1000Low


1.5000


1.0310


1.0300


1.0000Year Ended December 31, 2000High

$
15.0000

$
8.8750

$
8.0000

$
9.6875Low


5.4375


3.3750


4.2500


1.9375





As of March 6, 2002, there were 62 stockholders of record, and approximately
2,000 beneficial owners.





The Company has never paid 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.





In June 1998, the Company completed the sale of its majority-owned subsidiary, Telecom Multimedia Systems, Inc. (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. Gains of $9,950,000, $2,964,000 and $840,000 (net of costs
and reserves considered necessary) were realized and are included in the consolidated statement of operations data for the years ended December 31, 1998, 1999 and 2000, respectively. All such gains have been classified as gains on sale of assets for
the years ended December 31, 1998 through 2000. (See Note 3 to the consolidated financial statements.)





In 1997, the Company was
awarded, through its then 100% owned subsidiary, SkyOnline, Inc., formerly known as Direc-To-Phone International, Inc. (DTPI), two long-term service contracts to provide rural telephony services in Mexico and Venezuela. 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. DTPI
retained ownership of certain gateway infrastructure equipment. Both the remote and gateway equipment were classified 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 total assets in the consolidated balance sheet data at December 31, 1998. There were no material
revenues associated with this Mexican customer since 1998.





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 by DTPI, were included in




18




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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 14 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 for 1998 and $275,000 for 1999 (through June 17, 1999), were classified as part of the net loss 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. In
addition, DTPI also repaid STM $2,500,000 of a $10,000,000 note receivable.





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 remaining balance of $7,500,000 from the $10,000,000 note receivable from DTPI) was reduced to zero and STM discontinued accruing losses of DTPI. The consolidated statements of operations data for 1999 includes the results of DTPI through June 17,
1999.





Subsequent to the reduction of STMs ownership to approximately 44%, STM recognized revenue on sales to DTPI. (See
Note 14 to the consolidated financial statements.)





DTPI repaid STM $3,750,000 of the note receivable in March 2000 and the
remaining balance of such note receivable of $3,750,000 was converted into Preferred Stock of DTPI in June 2000. (See Note 4 to consolidated financial statements.) STM also sold shares in DTPI for $440,000 in 2000. $3,175,000 of the repayment of the
note receivable in 2000 is classified as recovery of note receivable from affiliate and the balance of the repayment along with the proceeds from the sale of the shares in DTPI have been classified as Gain on disposal of
affiliate in the statement of operations data for 2000.





In 2001, the Company disposed of its remaining ownership in DTPI
for $4,839,000 (net of disposal costs incurred). Such sale proceeds have been classified as Gain on disposal of affiliate in the Statement of Operations data for 2001.





Arising primarily from the devaluation of the Brazilian Real, the Company incurred foreign currency losses of $1,906,000 in 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 had only partially agreed to compensate the Company for
the reduction in the value of the Brazilian Real). Foreign currency losses were $341,000 in 2000 due primarily to a reduction in an accounts receivable balance in Brazil where the customer would not reimburse the Company for additional losses due to
the devaluation of the Brazilian real.





The consolidated statement of operations data and loss per share of common stock with
respect to the years ended December 31, 2001, 2000 and 1999, and the consolidated balance sheet data at December 31, 2001 and 2000 are derived from audited financial statements included elsewhere herein. The consolidated statement of




19




---

operations data and income (loss) per share of common stock for the years ended December 31, 1998 and 1997 and the consolidated balance sheet data at December 31, 1999, 1998 and 1997 are derived
from audited financial statements not included herein.





Year ended December 31,2001


2000


1999


1998


1997(in thousands, except per share data)Consolidated Statement of Operations Data:Total revenues

$
29,601


$
17,059


$
22,226


$
42,022


$
52,148Gross profit


9,926



1,848



5,662



7,064



13,749Recovery of note receivable from affiliate






3,175











Operating loss


(972
)


(7,932
)


(8,852
)


(14,764
)


(2,227
)Gain on sale of assets






840



2,964



9,950



Gain on disposal of affiliate


4,839



1,015











Foreign currency gains (losses)


10



(341
)


(1,906
)






Net income (loss)


3,203



(6,747
)


(8,311
)


(9,406
)


(2,051
)Income (loss) per share of common stock:Basic

$
0.44


$
(0.94
)

$
(1.18
)

$
(1.36
)

$
(0.32
)Diluted

$
0.44


$
(0.94
)

$
(1.18
)

$
(1.36
)

$
(0.32
)Weighted average common shares for calculating basic income (loss) per share


7,248



7,184



7,042



6,936



6,384Weighted average common shares for calculating diluted income (loss) per share


7,248



7,184



7,042



6,936



6,384Consolidated Balance Sheet Data:Working capital

$
9,945


$
5,889


$
12,996


$
16,013


$
12,374Equity investment in affiliates






157



157



4,151



Total assets


30,561



29,466



34,478



63,201



54,417Redeemable minority interest














6,355



Long-term debt


6,763



6,848



7,049



4,306



4,577Other long-term liabilities


32



33



762







Stockholders equity

$
10,752


$
7,547


$
13,447


$
21,758


$
27,062




20




---




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, 20011st Quarter


2nd Quarter


3rd Quarter


4th *Quarter


Total Year(in thousands, except per share data)Consolidated Statement of Operations Data:Total revenues

$
6,234


$
7,111


$
7,766


$
8,490


$
29,601Gross profit


2,001



2,378



2,802



2,745



9,926Operating income (loss)


(589
)


(379
)


(125
)


121



(972
)Gain on disposal of affiliate






2,510







2,329



4,839Net income (loss)

$
(764
)

$
1,947


$
(273
)

$
2,293


$
3,203Income (loss) per share of common stock:Basic

$
(0.11
)

$
0.27


$
(0.04
)

$
0.32


$
0.44Diluted

$
(0.11
)

$
0.27


$
(0.04
)

$
0.32


$
0.44Year ended December 31, 2000Total revenues

$
3,817


$
3,097


$
5,010


$
5,135


$
17,059Gross profit


1,405



1,059



1,787



(2,403
)


1,848Recovery of note receivable from affiliate


3,175















3,175Operating income (loss)


1,860



(2,002
)


(1,202
)


(6,588
)


(7,932
)Gain on disposal of affiliate


575



440











1,015Gain on sale of assets






840











840Net income (loss)

$
2,537


$
(1,142
)

$
(1,327
)

$
(6,815
)

$
(6,747
)Income (loss) per share of common stock:Basic

$
0.36


$
(0.16
)

$
(0.18
)

$
(0.94
)

$
(0.94
)Diluted

$
0.33


$
(0.16
)

$
(0.18
)

$
(0.94
)

$
(0.94
)


---

|* |  | The results for the fourth quarter of 2000, included charges of approximately $4,900,000, which comprised inventory reserves of approximately $3,300,000 and approximately
$1,600,000 for bad debt provisions and settlements. The inventory reserves of $3,300,000 comprised excess inventory associated with a version of the Companys products that was to be replaced in 2001, obsolescence for certain components that
were designed out of the Companys products and a reserve established for certain components that were required to be valued at estimated net realizable value. Total inventory reserves established in 2000 were approximately $4,950,000. The
additional reserve established in the fourth quarter of 2000 was due to the Company formalizing a development plan to replace existing products and thereby increasing the Companys exposure primarily to excess inventories and the Company
finalizing a sales price for certain components in inventory at December 31, 2000. The increase in the reserves for bad debts and settlements established in the fourth quarter of 2000 was due to the Company agreeing to settle a customer dispute and
due to certain occurrences that significantly increased the risk of non- collection of certain customer balances in the fourth quarter and prior to the release of results for the fourth quarter of 2000. The results for the fourth quarter of 2001,
included relatively higher manufacturing costs and additional inventory reserves totaling approximately $1,100,000 partially offset by bad debts recoveries and a credit for outside services associated with a research and development project totaling
approximately $750,000.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21




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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, 2001, approximately 94% of the Companys revenue was generated in the international markets through direct sales
representatives and foreign distributors. The Companys customers include government agencies, telephone companies, multi-location corporations and others.





Critical Accounting Policies and Estimates





The Companys discussion and analysis of its financial
condition and results of operations are based upon the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires management 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. Therefore, on an ongoing basis, the Company evaluates its estimates, including those for bad debts provisions, inventory reserves and other obligations. For estimated bad debts, the Company reviews on an individual account
basis the age of the receivable, all circumstances surrounding the transaction that gave rise to the receivable and whether the customer continues to have the financial resources to pay the receivable as of the balance sheet date and prior to the
issuance of the financial statements for the respective period. For estimated inventory reserves, the Company performs a review of the higher value inventory items and applies the results of the review to the lower value inventory items by product
category. The respective inventory reserve is based upon the historical activity in the inventory item; its expected future use based upon changes to the design of a particular product, whether the product into which the inventory item is
incorporated is expected to be discontinued in the near future and whether there are any lower of cost or market considerations. For other obligations, where judgment is required, the Company reviews the circumstances surrounding the obligation and
evaluates the facts and circumstances to determine an appropriate level of accrual for such obligation.





There are a number of
critical accounting policies that are most important to the portrayal of the Companys financial condition and results of operation.





Sales of the Companys communication products and related installed software are generally recognized upon shipment when the title and risk of loss have been transferred to the customer. Sales of the
Companys products to distributors are normally not subject to right of return. Service revenues are recognized as services are completed. Generally, the Companys sales are multiple element arrangements and sales contracts or sales orders
are supported by a detailed pricing schedule for each element (including services) of the contract or sales order. The installation of the Companys equipment may be performed by third parties, although new customers generally rely on the
Company to commission and install the initial equipment. When there are acceptance criteria to be met, generally there is an acceptance document agreed between the Company and the customer prior to the shipment, such that the Company can determine
if there is any material risk of non-acceptance. For repeat customers, the Company is very familiar with the customers network environment, such that, it can be determined if there is any material risk of non-acceptance. If it is determined that
there is a significant risk of non-acceptance, the Company will defer revenue on all shipments of product until acceptance has occurred. Where there is a payment installment tied to acceptance or where partial shipments of product are allowed under




22




---

the respective sales contract, revenue is recognized for shipments of product that have occurred and where the Company has a legal basis for an enforceable claim for those elements delivered
irrespective of whether the Company performs the installation and commissioning of the equipment.





Inventory valuation and the
appropriate cost of sales for product for a given period can require the exercise of judgment on an ongoing basis. On an annual basis, the Company sets its standards based on expected purchase costs of products and components that are incorporated
into the products. Manufacturing overhead is estimated and absorbed into the product cost based upon assumed activity levels for the year. Such standards are reevaluated on a quarterly basis based on the level of variance experienced. Due to the
relatively high dollar value of individual sales in a given period and the materiality of such individual sales to the results for the period, there can be significant variations in the level of activity in a given period depending upon the timing
of individual sales. Should the Company assume an incorrect level of activity in a given year, there may be certain quarters where the results for the period are negatively impacted by a disproportionate level of under-absorbed manufacturing
overhead.





Related Party Transactions





The Company, on an ongoing basis, has had transactions with DTPI, the Companys former 100% owned subsidiary. From 1998 through 2001, the Company has reduced its ownership in DTPI, such that at December 31, 2001,
the Companys ownership was reduced to zero. Effective June 1999, the Company deconsolidated the results of DTPI.





In 1998,
STM and DTPI negotiated a Product Supply Agreement that set out agreed pricing of products to be supplied by STM to DTPI. The Product Supply Agreement required STM to supply certain product to DTPI at relatively favorable pricing to DTPI. The
original Product Supply Agreement required DTPI to purchase certain volumes of equipment from STM to retain these favorable prices. This volume commitment was eliminated in June 1999 as part of the DTPI and STM refinancing. STM supplied equipment
under the product Supply Agreement through the year-ended December 31, 2000. In 2001, STM and DTPI negotiated a new Product Supply Agreement under which STM earned more commercially standard margins on the sale of equipment. All transactions between
STM and DTPI were negotiated on an arms length basis as DTPI either had independent third party investors or management independent of STM, negotiating on its behalf. (See Notes 4 and 14 of the consolidated financial statements.)





There are no other Related Party relationships that have a material impact on the Companys results of operations or financial
condition. However, see Note 14 to the consolidated financial statements.




23




---




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 31,2001


2000


1999Revenues

100.0
%

100.0
%

100.0
%Cost of revenues

66.5


89.2


74.5Gross profit

33.5


10.8


25.5Selling, general and administrative expenses

19.0


44.2


36.5Research and development costs

17.8


31.7


24.1Recovery of note receivable from affiliate




(18.6
)

Restructuring costs







4.7Total operating costs

36.8


57.3


65.3Operating loss

(3.3
)

(46.5
)

(39.8
)Gain on disposal of affiliate

16.4


5.9


Gain on sale of assets




4.9


13.3Other income (expense)







0.4Foreign currency gain (loss)




(2.0
)

(8.6
)Net interest expense

(2.3
)

(1.7
)

(1.2
)Income (loss) before income taxes, equity loss and minority interest

10.8


(39.4
)

(35.9
)Income taxes




(0.2
)

Income (loss) before minority interest

10.8


(39.6
)

(35.9
)Equity in net loss of affiliate







(0.3
)Minority interest







(1.2
)Net income (loss)

10.8
%

(39.6
)%

(37.4
)%





Year Ended December 31, 2001, Compared to Year Ended December 31, 2000





Total revenues were $29,601,000 in 2001, compared to $17,059,000 in 2000, representing an increase of 74% over the prior year period. Product revenues
were $26,443,000 in 2001, compared to $15,595,000 for the corresponding period of 2000, representing an increase of 70% over the prior year period. Service revenues were $3,158,000 in 2001, compared to $1,464,000 in 2000, representing an increase of
116% over the prior year period.





The increase in revenues in 2001 compared to 2000 reflects increased sales to end users
primarily in Latin and South America but also in all other areas of the world in which STM sells products. The Company has reported six successive quarters of revenue growth beginning with the third quarter of 2000. Revenues have increased from
$5,010,000 in the third quarter 2000 to approximately $8,490,000 in the fourth quarter of 2001. Management believes that the increase in revenues in general are a result of initiatives started in prior years through expanding the number of direct
sales personnel in target markets and focusing on winning repeat business from existing customers. In Latin and South America, revenues increased from $5,459,000 in 2000 to $12,976,000 in 2001, primarily as a result of increased sales to two
existing customers, one of which was DTPI, where sales increased from approximately $3,000,000 in 2000 to approximately $7,400,000 in 2001. The relatively higher increase in service revenue of 116% compared to product revenues of 70% primarily
reflects increased out of warranty repair service revenue from two customers and higher network service revenue from one customer. Management is focused on achieving continued growth in fiscal 2002 compared to fiscal 2001; however, there can be no
assurance that continued quarterly growth can be sustained and as in prior years, the




24




---

Companys revenues in total, by region and by period can vary significantly depending upon the timing of projects, the value of individual projects, the level of risk of non-acceptance for a
project and other factors.





The gross profit percentage earned for 2001 and 2000 was 33.5% and 10.8%, respectively. The gross
profit for 2001 of 33.5% included an increase in inventory reserves and a high level of manufacturing rework costs of approximately $1,100,000. The gross profit for 2000 of 10.8% was positively impacted by approximately $2,100,000 associated with a
settlement with a vendor and a credit against inventory purchases and negatively impacted by approximately $4,950,000 for increased inventory reserves. Adjusting for these amounts, the gross profit for 2001 would have been 37% compared to 28% for
2000. The increased gross profit percentage in 2001 compared to 2000 reflects a higher negotiated gross profit on certain 2001 sales and the effect of the overall higher volume of sales in 2001 compared to 2000 relative to certain fixed direct
costs. With the introduction of the Companys new lower cost SpaceWeb Olante and SES Solante products in 2002, the Company expects to earn on average an increased gross profit percentage on its sales during 2002, however, the level of gross
profit earned can vary by customer, by region and by project, as well as with the overall volume of sales in any given period and there is no assurance that the gross profit percentage will increase. Furthermore, the Company may be forced to reduce
the selling price of its products in response to its competitors pricing strategies or practices. Such reduction in selling price would reduce the gross profit earned in any given period.





Selling, general and administrative (SG&A) expenses for 2001 decreased to $5,632,000 (19% of revenue) from $7,538,000 (44.2% of revenue) for the corresponding period of the prior
year. SG&A expenses in 2001 include a credit of $633,000 associated with the recovery of bad debts previously reserved. SG&A expenses in 2000 include approximately $1,600,000 in increased bad debt reserves and settlements. Excluding these
credits and charges from both years, SG&A costs would have been $6,265,000 in 2001 compared to $5,938,000 in 2000, reflecting increased sales costs due to the increased revenues in 2001 and legal costs associated with litigation that the Company
is pursuing in Peru associated with a customer contract. See Item 3: Legal Proceedings.





Research and development (R&D)
expenses for 2001 decreased to $5,266,000 (17.8% of revenues) from $5,417,000 (31.7% of revenues) for the corresponding period of the prior year. The 2001 cost reduction as compared to the corresponding period of 2000 was due primarily to a credit
for an accrual no longer required in 2001 for outside services associated with a research and development project. However, the level of R&D costs can vary depending on the stage reached in a product development cycle. 2001 development efforts
were focused on reducing unit product cost, optimizing product design, and improving manufacturability through creating commonality in production platforms for different products. Such efforts will continue in 2002. Management believes that these
efforts will yield future positive results in terms of higher gross margins and improved inventory control. However, as discussed previously, there can be no assurance that such higher margins will be achieved.





The recovery of the note receivable from affiliate of $3,175,000 in 2000 was related to the $3,750,000 received from DTPI as a result of DTPIs
financing (see Note 4 to the condensed consolidated financial statements). $3,175,000 of this recovery was classified as part of operating income and the balance of $575,000 was classified as a gain on disposal of affiliate in the consolidated
financial statements for 2000.





The foreign currency gain of $10,000 and loss of $341,000 recognized in 2001 and 2000,
respectively, reflect in 2000 a write-down of certain accounts receivable balances from a customer in Brazil whereby the customer did not reimburse the Company for changes in the exchange rate between the Brazilian real and the United States dollar
and ongoing gain and losses relating to the Companys Thailand operation. The Company conducts substantially all of its international sales in the U.S. dollars.





The gain on sale of assets of $840,000 in 2000 represented a gain on the sale of substantially all the assets of TMSI. In 2000, upon the resolution of a customer claim, the Company
re-evaluated certain accruals that were established at the time of the sale, resulting in the recognition of additional gains on the sale of the assets of TMSI. There was no similar gains recognized in 2001. See Note 3 to the consolidated financial
statements.




25




---




In 2001 and 2000, the Company disposed of shares in DTPI resulting in net gains of $4,839,000
and $440,000, respectively, which have been classified as gains on disposal of affiliate in the accompanying consolidated financial statements. Combined with the $575,000 associated with the note recovery from DTPI, the resulting gain on disposal of
affiliate was $1,015,000 for 2000. The Company has now disposed of its remaining ownership in DTPI.





Interest income was
$278,000 for 2001, compared to $687,000 for 2000. Along with the reduction in interest rate levels in general, interest income for 2001 is less than interest income earned in the corresponding periods of 2000 due primarily to lower average cash
balances throughout the year and the absence in 2001 of interest received on a note receivable from DTPI, that was repaid in full, during the second quarter of 2000.





Interest expense for 2001 was $952,000 compared to $978,000 for the corresponding period of 2000. Although interest rates in general fell in 2001, the consistent level of interest
expense in 2001 compared to 2000 reflects a higher average level of borrowings in 2001 than 2000 due to the Companys line of credit being established at the end of March 2000 (see Note 7 to the financial statements) and higher loan balances
carried during the first quarter of 2001. In addition, the Company records interest on the mortgage on its corporate headquarters which bears a fixed rate of interest of 7%.





The tax provision for 2000 is related to overseas taxes. The absence of a U.S. tax provision in 2001 is due to continued net operating losses available to the Company to offset current
year income.





Year Ended December 31, 2000, Compared to Year Ended December 31, 1999





Total revenues were $17,059,000 for 2000, compared to $22,226,000 for 1999 (including DTPI through June 17, 1999), representing a decrease of 23% over the prior year period. Product
revenues were $15,595,000 for 2000, compared to $19,962,000 for 1999 representing a decrease of 22% over the prior year period. Service revenues were $1,464,000 for 2000, compared to $2,264,000 for 1999, representing a decrease of 35% over the prior
year.





The decline in revenues in 2000, compared to 1999, primarily reflects reduced sales in Latin and South America and
Africa, the Middle East and the United States partially offset by increased sales in Asia and Europe. The Companys revenues in total and by region can vary significantly depending upon the timing of projects and the value of individual
projects. Sales efforts were generally focused on specific customers and specific known and identified projects. Sales into the emerging markets continued to be impacted by delays and uncertainty. The Company focused significant time and resources
in pursuing revenue opportunities for its new range of broadband products. The Company believed that these measures over time would enable the Company to complement its efforts on rural telephony projects in the emerging markets.





The gross profit percentage earned for 2000 was 10.8% compared to 25.5% in 1999. The gross profit for 2000 was positively impacted by
approximately $2,100,000 associated with a settlement with a vendor and a credit against inventory purchases and negatively impacted by approximately $4,950,000 for increased inventory reserves established during the year and at December 31, 2000.
The inventory reserves primarily comprised excess inventory associated with a version of the Companys products that was to be replaced in 2001, obsolescence for certain components that have been designed out of products and a reserve
established for certain components that were valued at an estimated net realizable value. Excluding these adjustments, the gross profit for 2000 would have been approximately 28%.





Selling, general and administrative (SG&A) expenses for 2000 decreased to $7,538,000 (44.2% of revenue) from $8,118,000 (36.5% of revenue) for 1999. Excluding DTPI (in which the
Company sold its controlling interest on June 17, 1999), in 1999 SG&A would have been $6,608,000 (31% of revenue). The increase in SG&A excluding DTPI, in 2000 compared to 1999, reflected approximately $1,600,000 in increased bad debt
reserves and settlements accrued in the fourth quarter of 2000, partially offset by reduced costs arising from the cost reduction programs implemented by the Company in the second half of 1999.




26




---




Research and development (R&D) costs for 2000 increased to $5,417,000 (31.7% of revenues)
from $5,354,000 (24.1% of revenues) in 1999. In dollar terms, the R&D costs are consistent year on year reflecting the relatively fixed nature of such costs, although the actual product development projects can vary year over year.





The recovery of the note receivable from affiliate of $3,175,000 in 2000, related to the $3,750,000 received from DTPI as a result of
DTPIs financing. (See Note 4 to the consolidated financial statements.) $3,175,000 of this recovery was classified as part of operating income and the balance of $575,000 was classified as a gain on disposal of affiliate in the accompanying
consolidated statement of operations for 2000.





The restructuring costs of $1,042,000 recognized in 1999 comprised severance
costs associated with 67 terminated employees, the write-off of certain assets in the Companys Brazilian subsidiary and an accrual for the estimated costs associated with exiting a lease commitment. All restructuring related accruals were paid
as of December 31, 1999.





The foreign currency loss of $1,906,000, recognized 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 has negotiated a settlement of its long-term receivable due to the currency devaluation) and on other accounts receivable balances
(where the customer has partially compensated the Company for the reduction in the value of the Brazilian Real). The foreign currency loss of $341,000 recognized in 2000, primarily reflected a write-down of certain accounts receivable balances from
a customer in Brazil (where the customer would not reimburse the Company for changes in the exchange rate between the Brazilian real and the United States dollar on accounts receivable balances) and the devaluation of the Thai baht in 2000.





The gain on sale of assets of $840,000 for 2000 and $2,964,000 for 1999, represented gains on the sale of substantially all the
assets of TMSI. In 1999 and 2000, upon the release of the final funds from escrow and the resolution of a customer claim, respectively, the Company re-evaluated certain accruals that were established at the time of the sale, resulting in the
recognition of additional gains on the sale of the assets of TMSI. (See Note 3 to the consolidated financial statements).





In
2000, the Company disposed of shares in DTPI resulting in a gain of $440,000, which has been classified as a gain on disposal of affiliate in the accompanying consolidated statement of operations for 2000. Combined with the $575,000 associated with
the note recovery from DTPI, the resulting gain on disposal of affiliate was $1,015,000 in 2000.





Interest income was $687,000
in 2000, compared to $1,221,000 in 1999. Excluding DTPI from 1999, interest income would have been $980,000 for 1999. The decrease in interest income reflects lower overall cash balances in 2000 compared to 1999 and lower interest income on a note
receivable from DTPI in 2000 compared to 1999, due to the note being partially repaid in March 2000 and the balance of the note being converted into preferred stock of DTPI in June 2000.





Interest expense for 2000, was $978,000 compared to $1,491,000 for 1999. The reduction in interest expense in 2000 compared to 1999, related to a lower average level of short and
long-term borrowings in 2000 compared to 1999, partially offset by increased costs associated with a new line of credit in 2000 and certain letter of credit discounting costs.





The tax provision for 2000 was due to taxes incurred by a foreign subsidiary. The absence of a U.S. tax provision in 2000 and 1999 is due to net operating losses incurred by the Company.





The minority interest charge in 1999 related to accrued dividends through June 17, 1999, on the mandatory redeemable shares
issued in March 1998 by DTPI. No comparable balance exists in 2000 due to the June 1999 deconsolidation of DTPI by STM.




27




---




The equity in net loss of unconsolidated affiliate in 1999 represented the Companys share
of the losses of DTPIs equity investment in Altair through June 17, 1999, which was accounted for under the equity method. No comparable balance exists in 2000 due to the June 1999 deconsolidation of DTPI by STM.





Liquidity and Capital Resources





The Company
sells the majority of its product in the emerging markets. While in any individual year, the Companys revenues generally represent new projects to new or existing customers in new or existing geographic regions, an economic downturn in the
emerging markets, in general, could negatively impact the level of revenue generated by the Company which could materially impact results of operations and the Companys cash resources. The Company does not anticipate a significant economic
downturn in the emerging markets. Also, the Company focuses its sales efforts on sales opportunities where funding for the project is reasonably likely to be available.





Sales of the Companys products are focused on rural telephony, broadband Internet connectivity and private networks. Should the demand for the Companys products decline due
to changed market conditions, a decline in revenues could materially impact the results of operations and the Companys cash resources. Currently, the Company continues to foresee demand for its products.





The Company has a history of losses, fluctuations in operating results and cash usage. The results of operations may fluctuate due to numerous factors,
including the competitive environment in which the Company operates, the delays that can arise in an international environment, the long lead time and extended sales efforts required to secure larger value orders and the continued need to invest in
the development of new products and in the enhancement of existing products. In addition, the Companys quarterly sales cycle can make future financial results less predictable. Like many technology companies, STM generally sells and ships more
hardware in the third month of each quarter than in the first and second months. The Company may also build products early in the quarter in anticipation of demand later in the quarter which can adversely impact inventory levels and cash resources.
Since 1998, the Company has funded losses from operations through disposing of its investments in DTPI and the sale of the assets in TMSI. The Company has now disposed of all its remaining investment in DTPI. However, the Companys operating
performance in 2001, has improved such that operating losses have decreased and positive cash flows from operations were $50,000 for the year 2001.





In 2001, the Company disposed of its remaining shares in DTPI for $4,839,000, net. (See Note 4 to the consolidated financial statements.)





In addition, in September 2001, the Company renewed its line of credit for $3,300,000 through March 2004. Borrowings under this line of credit were $1,500,000 at December 31, 2001.





In 2001, the Company had positive cash flows from operations of $50,000 compared to cash used in operations of $3,943,000 in
2000. The net cash flows from operations in 2001 was primarily due to reduced operating losses for the year, decreases in accounts receivable and inventories partially offset by decreases in customer deposits and accrued liabilities incurred in
2001.





In 2001, the Company generated cash of $3,020,000 from investing activities compared to cash usage of $286,000 in 2000.
In 2001, the Company realized $4,839,000 from the sale of its shares in DTPI and used cash through the purchase of property, plant and equipment of $571,000, through increasing restricted cash by $1,100,000 and increasing short-term investments of
$148,000. In 2000, the company invested $1,666,000 in property, plant and equipment, which was reduced by $575,000 in proceeds from the repayment of a note receivable, $440,000 from the sale of shares in DTPI and a reduction in restricted cash of
$365,000.




28




---




In 2001, net cash used in financing activities was $1,315,000 compared to cash generated of
$2,691,000 in 2000. In 2001, the Company repaid short-term borrowings of $1,124,000 and long-term debt of $192,000. In 2000, the Company generated $2,588,000 from short-term borrowings, $654,000 from the proceeds from stock options and repaid
long-term debt of $551,000.





Overall, the Companys cash and cash equivalents (excluding restricted balances) totaled
$4,658,000 at December 31, 2001, compared to $2,903,000 at December 31, 2000.





At December 31, 2001, the Company was
contingently liable for standby letters of credit of $2,490,000, of which $1,140,000 restricts borrowings under its line of credit by approximately $250,000 and the balance of $1,350,000 was cash collateralized at December 31, 2001. Such $1,350,000
was included in restricted cash and short-term investments of $3,350,000 at December 31, 2001 but will become available for use in operations once the standby letter of credit expires.





At December 31, 2001, there was one customer with extended payment terms beyond 90 days for $220,000 of its receivable balance.





At December 31, 2001, the Company had unused availability under its line of credit of approximately $1,100,000.





At December 31, 2001, the Companys only long-term contractual obligation was for its corporate headquarters for approximately $550,000 per annum (including principal and interest).
The Company has leased a portion of its corporate headquarters to a third party through May 2003 and such rental income will be $276,000 in 2002 and $158,000 in 2003.





At December 31, 2001, the Companys currents assets were $22,959,000 and current liabilities were $13,014,000, representing a current ratio of 1.76 to 1.0. Excluding inventory of
$7,516,000, the Companys quick ratio (current assets less inventory compared to current liabilities) was 1.19 to 1.0. Managements expectations are that the Companys financial performance will continue to improve in 2002 based on
current backlog and known sales opportunities which the Company believes it will be successful in winning. However, should the performance of the Company not continue to improve in 2002, the Company would expect to reduce its costs to a level
reflecting its reduced revenue expectations and take other corrective actions to preserve its cash resources. Should the Companys stock price improve relative to December 31, 2001, the Company may raise additional capital or debt on more
favorable terms than are currently available. Accordingly, management expects to have sufficient cash generated from operations, through availability under lines of credit, and from other external sources to meet the anticipated cash requirements
for the next twelve months.





New Accounting Standards





In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets (Statement 144), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. Statement 144 supersedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business.
Statement 144 retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of any entity that either has been disposed of or is classified as held for sale.





The Company is required and plans to adopt the provisions of Statement 144 for the quarter ending March 31, 2002. The Company does not believe that
Statement 144 will have a material impact on its financial statements.




29




---




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. In Thailand, the Companys subsidiary invoices most customers in local currency based on contractual prices denominated in United States currency to minimize the risk of foreign exchange loss. However, there is the risk of loss on
accounts receivable in that the local currency may devalue relative to the United States currency during the period of collection. The balance in accounts receivable carried in Thailand as of December 31, 2001 and 2000, respectively, was
approximately $135,000 and $206,000, respectively. Foreign exchange gain and all losses in 2001 were immaterial. The Company does not use derivative financial instruments in its investment portfolio.





The Companys exposure to short-term interest rate fluctuations is limited to its short-term borrowings under its line of credit for $3,300,000.
Such line of credit allows borrowings up to $2,800,000 and therefore a 1% increase in interest rates would increase interest expense by $28,000.




30




---




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

32Consolidated Balance Sheets as of December 31, 2001 and 2000

33Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999

34Consolidated Statements of Stockholders Equity for the years ended December 31, 2001, 2000 and 1999

35Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999

36Notes to Consolidated Financial Statements

38Financial Statement Schedule: (For the three years ended December 31,
2001)Schedule IIValuation and Qualifying Accounts

56





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.




31




---




REPORT OF INDEPENDENT AUDITORS





The Board of Directors and Stockholders


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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. 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.





| | KP | MG LLP
| | -- | ------




Costa
Mesa, California


February 15, 2002




32




---

STM WIRELESS, INC.





CONSOLIDATED BALANCE SHEETS


December 31, 2001 and 2000





2001


2000(dollars in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents

$
4,658


$
2,903Short-term investments


148



Restricted cash and short-term investments


3,350



2,250Accounts receivable, less allowances of $1,265 in 2001 and $1,701 in 2000


6,788



7,014Inventories


7,516



8,355Prepaid expenses and other current assets


499



405Total current assets


22,959



20,927Property, plant and equipment, net


7,556



8,266Equity investment in affiliate






157Other assets


46



116Total assets

$
30,561


$
29,466LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term borrowings

$
3,464


$
4,588Current portion of long-term debt


85



192Accounts payable


6,008



5,941Accrued liabilities


2,067



2,552Customer deposits and deferred revenue


857



1,224Income taxes payable


533



541Total current liabilities


13,014



15,038Long-term debt


6,763



6,848Other long-term liabilities


32



33Stockholders 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; 7,248,325 and 7,248,075 shares issued and outstanding at December 31,
2001 and 2000, respectively


7



7Additional paid in capital


39,289



39,287Accumulated deficit


(28,244
)


(31,447
)Receivable from stockholder


(300
)


(300
)Total stockholders equity


10,752



7,547Total liabilities and stockholders equity

$
30,561


$
29,466





See accompanying notes to consolidated financial statements.




33




---

STM WIRELESS, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


Years ended December 31, 2001, 2000 and 1999





2001


2000


1999(dollars in thousands, except per share data)Revenues:Products

$
26,443


$
15,595


$
19,962Services


3,158



1,464



2,264Total revenues


29,601



17,059



22,226Cost of revenues:Products


17,278



13,344



14,386Services


2,397



1,867



2,178Total cost of revenues


19,675



15,211



16,564Gross profit


9,926



1,848



5,662Operating expenses and other operating items:Selling, general and administrative expenses


5,632



7,538



8,118Research and development costs


5,266



5,417



5,354Recovery of note receivable from affiliate






(3,175
)


Restructuring costs










1,042Total operating costs


10,898



9,780



14,514Operating loss


(972
)


(7,932
)


(8,852
)Interest income


278



687



1,221Interest expense


(952
)


(978
)


(1,491
)Foreign currency gain (loss)


10



(341
)


(1,906
)Gain on sale of assets






840



2,964Gain on disposal of affiliate


4,839



1,015



Other income, net










87Income (loss) before income taxes, equity loss and minority interest


3,203



(6,709
)


(7,977
)Income tax expense






(38
)


Income (loss) before equity loss and minority interest


3,203



(6,747
)


(7,977
)Equity in net loss of unconsolidated affiliates










(59
)Minority interest










(275
)Net income (loss)

$
3,203


$
(6,747
)

$
(8,311
)Net income (loss) per share of common stock:Basic

$
0.44


$
(0.94
)

$
(1.18
)Diluted

$
0.44


$
(0.94
)

$
(1.18
)Common shares used in computing per share amounts:Basic


7,248



7,184



7,042Diluted


7,248



7,184



7,042





See accompanying notes to consolidated financial statements.




34




---

STM WIRELESS, INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


Years ended December 31, 2001, 2000 and 1999





Number of Shares Common Stock


Common Stock at Par Value

Additional Paid-in Capital


Accumulated Deficit


Receivable From Stockholder


Total Stockholders Equity(dollars in thousands)Balance at December 31, 1998

7,042,204


$
7

$
38,140


$
(16,389
)

$



$
21,758Net loss












(8,311
)






(8,311
)Balance at December 31, 1999

7,042,204



7


38,140



(24,700
)






13,447Issuance of common stock at fair value

100,000






400







(300
)


100Exercise of stock options

105,871






654











654Fair value of stock warrants issued








93











93Net loss












(6,747
)






(6,747
)Balance at December 31, 2000

7,248,075



7


39,287



(31,447
)


(300
)


7,547Exercise of stock options

250






1











1Shares repurchased in open market

(7,125
)





(10
)










(10
)Donation of shares

7,125






11











11Net income












3,203







3,203Balance at December 31, 2001

7,248,325


$
7

$
39,289


$
(28,244
)

$
(300
)

$
10,752














See accompanying notes to consolidated financial statements.




35




---

STM WIRELESS, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


Years ended December 31, 2001, 2000 and 1999





2001


2000


1999(dollars in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)

$
3,203


$
(6,747
)

$
(8,311
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Minority interest










275Equity in losses of affiliates










59Gain on sale of TMSI






(840
)


(2,964
)Gain on resolution of vendor dispute






(1,234
)


Gain on disposal of affiliate


(4,839
)


(440
)


Recovery of note receivable






(575
)


Provision (recovery) for allowances on accounts receivable, net


(632
)


1,338



(136
)Non-cash restructuring charges










246Foreign currency devaluation (gain) loss


(10
)


341



1,906Depreciation and amortization


1,281



1,491



2,769Changes in assets and liabilities, excluding effects of sale of subsidiaries:(Increase) decrease in accounts receivable


868



(851
)


8,004(Increase) decrease in inventories


839



2,714



(232
)(Increase) decrease in prepaid and other current assets


(94
)


(147
)


1,257Decrease in long-term receivables










906Decrease in other assets


227



62



234Increase (decrease) in accounts payable


67



(26
)


(1,161
)Increase (decrease) in customer deposits and deferred revenue


(367
)


1,217



(1,433
)Decrease in accrued liabilities


(485
)


(297
)


(1,731
)Increase (decrease) in income taxes payable


(8
)


51



(510
)Net cash provided by (used in) operating activities


50



(3,943
)


(822
)CASH FLOWS FROM INVESTING ACTIVITIES:Net change in short-term investments


(148
)






1,106Decrease (increase) in restricted cash and short-term investments


(1,100
)


365



(466
)Purchases of property, plant, and equipment


(571
)


(1,666
)


(298
)Cash forfeited upon sale of DTPI










(3,149
)Equity investment in Altair










(1,102
)Proceeds from repayment of note receivable






575



2,500Proceeds from sale of DTPI stock, net


4,839



440



2,219Net cash provided by (used in) investing activities


3,020



(286
)


810





(continued)




36




---

STM WIRELESS, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS(Continued)


Years ended December 31, 2001, 2000 and 1999





2001


2000


1999(dollars in thousands)CASH FLOWS FROM FINANCING ACTIVITIES:(Repayment) increase in short-term borrowings, net


(1,124
)


2,588



(8,650
)Proceeds from issuance of common stock, net


1



654



Proceeds from issuance of long-term leases










90Proceeds from refinancing of corporate headquarters










7,000Repayments of long-term debt


(192
)


(551
)


(4,156
)Net cash provided by (used in) financing activities


(1,315
)


2,691



(5,716
)Effect of foreign exchange rate on cash and cash equivalents










(847
)Net increase (decrease) in cash and cash equivalents


1,755



(1,538
)


(6,575
)Cash and cash equivalents at beginning of year


2,903



4,441



11,016Cash and cash equivalents at end of year

$
4,658


$
2,903


$
4,441SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:Interest paid

$
904


$
789


$
1,466Income taxes paid

$



$



$
208





In 2000, the Company issued common stock to a former director of the Company with
a fair value of $400,000 in connection with consulting services (see Note 14) and issued stock warrants with a fair value of $93,000 in connection with the Companys line of credit (see Note 7).











See Accompanying Notes to Consolidated Financial Statements.




37




---




STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(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 subsidiaries and
affiliates accounted for under the equity method of accounting, including DTPI 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 accounting principles generally accepted in the United States of America. 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.





Therefore, on an ongoing basis, the Company evaluates its estimates, including those for bad debts provisions, inventory reserves and other obligations.
For estimated bad debts, the Company reviews on an individual account basis the age of the receivable, all circumstances surrounding the transaction that gave rise to the receivable and whether the customer continues to have the financial resources
to pay the receivable as of the balance sheet date and prior to the issuance of the financial statements for the respective period. For estimated inventory reserves, the Company performs an in-depth review of the higher value inventory items and
applies the results of the in-depth review to the lower value inventory items by product category. The respective inventory reserve is based upon the historical activity in the inventory item; its expected future use based upon changes to the design
of a particular product, whether the product into which the inventory item is incorporated is expected to be discontinued in the near future and whether there are any lower of cost or market considerations. For other obligations, where judgment is
required, the Company reviews the circumstances surrounding the obligation and evaluates the facts and circumstances to determine an appropriate level of accrual for such obligation.





Revenue Recognition





Sales of the Companys
communications products and related installed software are generally recognized upon shipment when title and risk of loss have been transferred to the customer. Sales of the Companys products to distributors are normally not subject to right
of return. Service revenues are recognized as services are completed.





Generally, the Companys sales are multiple element
arrangements and sales contracts are supported by a detailed pricing schedule for each element of the contract. The installation of the Companys equipment may be performed by third parties, although new customers generally rely on the Company
to commission and install the




38




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




initial equipment. When there are acceptance criteria to be met, generally there is an acceptance document agreed between the Company and the customer prior to the shipment, such that the Company
can determine if there is any material risk of non-acceptance. For repeat customers, the Company is very familiar with the customers network environment, such that, it can determined if there is any material risk of non-acceptance. If it is
determined that there is a significant risk of non-acceptance, the Company will defer revenue on all shipments of product until acceptance has occurred. Where there is a payment installment tied to acceptance or where partial shipments of product
are allowed under the respective sales contract, revenue is recognized for shipments of product that have occurred and where the Company has a legal basis for an enforceable claim for those elements delivered irrespective of whether the Company
performs the installation and commissioning of the equipment.





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.





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 31,2001

2000(dollars in thousands)Raw materials

$
3,440

$
5,046Work in process


1,600


1,275Finished goods


2,476


2,034$
7,516

$
8,355





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 2000, the Company increased its inventory
reserves by approximately $4,950,000 to recognize excess inventory associated with a version of the Companys products that was to be replaced in 2001, obsolescence for certain components that have been designed out of the Companys
existing products and a reserve established for certain components to value them at estimated net realizable value. In 2001, the Company increased its inventory reserves by $256,000, primarily associated with changes to the Companys product
portfolio.




39




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Accounting for Investments in Affiliates





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. 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 record any additional losses of the affiliate until such time that the affiliate is
sufficiently profitable to recover previously unrecognized losses. Reserves are provided where management determines that the investment has experienced an other than temporary decline in value. As of December 31, 2001 and 2000, the Company had no
investments that were accounted for under the equity method.





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 are applied to reduce the principal amount of such notes until the principal has been recovered and are recognized as interest income,
thereafter. 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
gains (losses) in the accompanying consolidated statement of operations in 1999. As of December 31, 2001 and 2000, there were no amounts recorded as long-term receivables.





Fair Value of Financial Instruments





As of December 31,
2001 and 2000, 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 approximates fair value as the related interest rates approximate rates currently available to 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. Deferred tax assets and liabilities are recognized for temporary differences
between the financial reporting basis and the tax basis of the Companys




40




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




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.





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 based upon projected discounted cash flows, 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 2000, the Company incurred foreign currency losses of $341,000 primarily associated with the devaluation of the Brazilian currency. In 1999, $1,906,000 was recognized as foreign
currency losses, also associated with the Brazilian currency. Foreign currency losses in 2001 were not material. Such costs are included in the consolidated statement of operations for the annual periods noted.





New Accounting Pronouncements





In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets (Statement 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived
assets. Statement 144 supersedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. Statement 144 retains the
requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of any entity that either has been disposed of or is classified as held for sale.





The Company is required and plans to adopt the provisions of Statement 144 for the quarter ending March 31, 2002. The Company does not believe that
Statement 144 will have a material impact on its financial statements.





Reclassifications





Certain reclassifications have been made to the 2000 and 1999 consolidated financial statements to conform to the 2001 presentation.




41




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







(3)    Acquisitions and Disposals





Telecom Multimedia Systems, Inc. (TMSI)





In 1998, the Company sold certain assets and transferred certain liabilities of TMSI for approximately $25 million in cash. Gains of approximately $13,754,000 were ultimately realized of which $840,000 and
$2,964,000 were recognized in the accompanying consolidated statements of operations in 2000 and 1999, respectively. The gain of $2,964,000 in 1999 was recognized upon the release of final funds from escrow. The gain of $840,000 in 2000 was
recognized upon the resolution of a customer claim. Included in the consolidated balance sheets at December 31, 2001 and 2000, is approximately $95,000 and $92,000, respectively, of cash in escrow classified as accounts receivable and approximately
$20,000 and $40,000, respectively, classified as accrued liabilities, related to the disposition of TMSI.


(4)    Deconsolidation and Accounting for DTPI





STM incorporated DTPI in 1996 as a wholly-owned subsidiary of STM. In March 1998, the Company invested $15 million in DTPI,
comprising $5 million for Preferred Stock, and a $10 million loan. The loan was repayable out of the proceeds of future DTPI financings. Concurrently with this investment, Pequot Capital Management (Pequot) acquired a 25% ownership 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 Pequot, thereby reducing STMs ownership to 44% of the voting stock of DTPI and DTPI repaid to STM $2,500,000 of a note receivable
from DTPI. In addition, DTPI announced the appointment of a new chairman and chief executive officer of DTPI. As a result, STM relinquished operating control of DTPI, deconsolidated DTPI and changed to the equity method, effective 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. Additionally, as part of the June 1999 financing, STM granted a price increase of approximately $1,458,000 to REMEC and granted DTPI a concession of $1,600,000 against future purchases of product by DTPI from STM. These obligations were
accrued as part of the June 1999 deconsolidation of DTPI.





As a result of STMs deconsolidation of DTPI, STM no longer
accounted for DTPIs equity investment in Altair, nor for DTPIs redeemable preferred stock. Through June 16, 1999, the Company recognized equity losses of $59,000 for DTPIs equity investment in Altair and a minority interest expense
of $275,000 associated with DTPIs redeemable preferred stock.





Due to the losses incurred by DTPI from inception through
June 17, 1999, STMs equity investment in DTPI (including the remaining note receivable from DTPI of $7,500,000 at June 17, 1999) was reduced to zero. STM had no funding obligations to DTPI nor had STM guaranteed any obligations of DTPI.
Therefore, STM has not accrued any losses of DTPI subsequent to June 17, 1999, and the accompanying consolidated statement of operations for the year ended December 31, 1999, only includes the results of DTPI for the period January 1, 1999, through
June 17, 1999.





On March 28, 2000, DTPI issued additional shares that resulted in diluting STMs ownership in DTPI to
approximately 16% and STM discontinued the equity method of accounting for DTPI. Coinciding with this financing, STM received $3,750,000 in cash from DTPI representing a partial repayment of the $7,500,000 note




42




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




receivable from DTPI. The remaining balance of the receivable was converted into preferred stock of DTPI. The $7,500,000 note receivable from DTPI had been fully reserved through a combination of
the Companys equity interest in the losses of DTPI recorded through June 17, 1999, and additional provisions effectively made at the date of deconsolidation on June 17, 1999. The total recovery of the note of $3,750,000 is reflected on two
line items on the consolidated statements of operations for the year ended December 31, 2000: $3,175,000 is shown in operating costs as a Recovery of note receivable from affiliate (representing that portion of the note receivable that
had been reserved against through STMs equity interest in the losses in DTPI) and $575,000 is reflected as non-operating income under the caption Gain on disposal of affiliate (representing that portion of the note recovery that
had been reserved against at the date of deconsolidation).





In June 2000, the Company sold shares of DTPI for $440,000 and
reduced its ownership in DTPI to approximately 15%. The gain of $440,000 has been classified as Gain on disposal of affiliate in the accompanying consolidated statement of operations for the year ended December 31, 2000.





In August 2000, coinciding with an amendment to the product supply agreement with REMEC, the price increases on future product commitments
were eliminated in consideration for STM releasing REMEC from all claims for past product disputes such that approximately $1,234,000 was credited to income (as part of product cost of revenues in the accompanying statement of operations for 2000)
and the balance of the REMEC price increase accrual of $224,000 was amortized to income as purchases from REMEC occurred at such higher prices.





In 2001, the Company disposed of its remaining shares in DTPI for cash proceeds of $4,839,000, net of costs incurred of $180,000. Such gain of $4,839,000 has been classified as Gain on disposal of
affiliate in the accompanying consolidated statement of operations at December 31, 2001.





The following sets out
summarized financial information giving effect to the deconsolidation of DTPI.





Three Months Ended March 31, 1999(unaudited)Net revenues:STM

$
2,101DTPI


990Total

$
3,091Net loss:STM

$
(5,915
)DTPI


(2,548
)Total

$
(8,463
)




43




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







(5)    Property, Plant and Equipment





Property, plant and equipment consisted of the following:





December 31,2001

2000(dollars in thousands)Land

$
2,530

$
2,530Building and building improvements


3,561


3,549Satellite equipment


2,636


2,506Equipment


9,233


8,895Furniture and fixtures and leasehold improvements


516


425$
18,476

$
17,905Less:Accumulated depreciation and amortization


10,920


9,639$
7,556

$
8,266





(6)    Accrued Liabilities





Accrued liabilities consist of the following:





December 31,2001

2000(dollars in thousands)Accrued salaries, bonuses and payroll related expenses

$
950

$
617Accrued engineering services





299Accrued legal & professional fees


121


161Accrued agent commissions


471


476Accrued litigation and concessions


260


817Other


265


182$
2,067

$
2,552





(7)    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 0.75%
over the certificates of deposit rate. At December 31, 2001 and 2000, the outstanding balances under this credit facility were $2,000,000.





On March 27, 2000, the Company entered into a two-year revolving line of credit for $3,300,000 of which $2,800,000 is available for on-going working capital requirements. Such line of credit was renewed in
September 2001 and now extends through March 2004. The line of credit bears interest at prime plus 1%. At December 31, 2001 and 2000, respectively, the interest rate on this facility was 5.75% and 10.5%, respectively. In connection with this
credit facility, the Company issued a warrant to purchase 10,000 shares of common stock at an exercise price of $10.50 per share. The warrant has a five-year term. The fair value of the warrant of $93,000 at the date of issuance is being amortized
over the term of the credit agreement. The Company has




44




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




recognized $36,000 and $35,000 of this amount as interest expense in 2001 and 2000, respectively. The remaining balance of $22,000 is included in prepaid expenses.





Availability to borrow the $2,800,000 is based upon a percentage of eligible inventories and accounts receivable. Borrowings under the line of credit at
December 31, 2001, and 2000 were approximately $1,500,000 and $2,588,000, respectively, with additional availability of approximately $1,100,000 as of December 31, 2001. The lender was granted a security interest in substantially all of the
Companys assets.





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, 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 31,2001


2000(dollars in thousands)Mortgage payable on building

$
6,846


$
6,923Other


2



117Total


6,848



7,040Less current portion


(85
)


(192
)Long-term debt

$
6,763


$
6,848





Future maturities on long-term debt are as follows:





Year ended December 31,(dollars in thousands)2002

$
852003


882004


952005


1012006


109Thereafter


6,370$
6,848




45




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







(8)    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.





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
provided 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. 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 provided 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. Options generally vest ratably over four years and are exercisable up to ten years from the date of grant. At December 31, 2001, both the 1992 and the 1994 Plans were terminated and all unissued
options under the Plan were cancelled. In January 2002, the Company adopted the 2002 Stock Incentive Plan (the 2002 Plan). The 2002 Plan authorizes the issuance of up to 500,000 shares of Common Stock to qualified employees,
officers, directors, consultants and other service providers.





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:





2001

2000


1999Net income/(loss):As reported

$
3,203

$
(6,747
)

$
(8,311
)Pro forma

$
2,629

$
(7,246
)

$
(8,610
)Income (loss) per basic and fully diluted share:As reported

$
0.44

$
(0.94
)

$
(1.18
)Pro forma

$
0.36

$
(1.01
)

$
(1.20
)





At the date of grant, the weighted average fair value per option granted was
$1.77, $3.60 and $1.80 for 2001, 2000 and 1999, respectively. This was determined using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2001, 2000 and 1999risk free interest rate of 4.17%,
6.30% and 5.47%, respectively, an expected life of three years and an expected volatility rate of 127.0%, 104.9% and 84.72%, respectively, and expected dividend yield of 0% for all years.




46




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







A summary of stock option transactions under all plans follows:





Number of Shares


Weighted-Average Exercise Price Per ShareOptions outstanding at December 31, 1998

1,086,273


$
7.75Granted

800,100



3.17Cancelled

(734,549
)


6.55Options outstanding at December 31, 1999

1,151,824



5.33Granted

510,750



5.27Exercised

(105,871
)


6.18Cancelled

(255,182
)


6.71Options outstanding at December 31, 2000

1,301,521



4.97Granted

138,000



2.38Exercised

(250
)


2.75Cancelled

(175,567
)


7.11Options outstanding at December 31, 2001

1,263,704


$
4.39





The following table summarizes information regarding the stock options
outstanding at December 31, 2001:





Range of Exercise Prices

Number Outstanding at 12/31/01

Weighted Average Remaining Contractual Life

Weighted Average Exercise Price Per Share

Number Exercisable at 12/31/01

Weighted Average Exercise Price Per Share$1.39  2.75

434,350

7.90

$
2.46

153,750

$
2.563.25  4.25

447,100

6.40


4.10

193,100


4.094.8814.25

382,254

6.60


6.91

259,317


7.34$1.3914.25

1,263,704

6.98

$
4.39

606,167

$
5.09





Common stock received through the exercise of non-qualified stock options or
incentive stock options, which are sold by the optionee within two years of grant or one year of exercise result in a tax deduction for the Company equivalent to the taxable gain recognized by the optionee. For financial reporting purposes, the tax
effect of this deduction is ultimately 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.





(9)    Commitments and Contingencies





Lease Commitments





In 1999, as part of its restructuring of it operations (see Note 15), the Company incurred a lease termination fee of
approximately $300,000. Such 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 was approximately $280,000.





In May 1999, the Company entered into a lease agreement under which the Company leases a portion of its corporate headquarters to a third party. Future minimum rental income under this lease as of December 31, 2001,
are as follows: $276,000 in 2002 and $158,000 in 2003. Rental income for 2001, 2000 and 1999 was approximately $234,000 and $248,000 and $153,000, respectively.




47




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Litigation





The Company is involved as both plaintiff and defendant in various claims and legal actions arising in the ordinary course of business. The Company does not expect that other matters
will individually or in the aggregate have a material adverse effect on the Companys results of operations, liquidity or its financial condition.





Bid Bonds





At December 31, 2001, the Company was contingently liable for standby letters
of credit of $2,490,000, of which $1,140,000 restricts borrowings under its line of credit by approximately $250,000 and the balance of $1,350,000 was cash collateralized at December 31, 2001. Such $1,350,000 was included in restricted cash and
short-term investments of $3,350,000 at December 31, 2001 but will become available for use in operations once the standby letter of credit expires.





(10)    Income Taxes





The components of income (loss) from operations before income taxes,
equity loss and minority interest expense are as follows:





Year ended December 31,2001

2000


1999(dollars in thousands)U.S.

$
2,713

$
(6,465
)

$
(3,491
)Foreign


490


(244
)


(4,486
)Total

$
3,203

$
(6,709
)

$
(7,977
)





The components of income tax benefit (expense) consists of the following:





Year ended December 31,2001

2000

1999(dollars in thousands)Current:Federal

$





$
State








Foreign





38


Total current

$


$
38

$
Deferred:Federal








State








Total deferred

$


$


$
Total

$


$
38

$





48




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The actual income tax (expense) differs from the statutory Federal income tax rate
as follows:





Year ended December 31,2001


2000


1999Statutory Federal income tax rate

(34.0
)%

34.0
%

34.0
%State taxes, net of Federal tax benefit

(7.7
)

2.7


7.7Effect of foreign operations

4.8


(1.8
)

(19.1
)(Increase) decrease in valuation allowance

36.1


(37.0
)

(43.6
)Other, net

0.8


1.5


Permanent differences







21.0Effective tax rate

0.0
%

(0.6
)%

0.0
%





Cumulative temporary differences, which give rise to deferred tax assets and
liabilities at December 31, 2001 and 2000 are as follows:





2001


2000(dollars in thousands)Deferred tax assets:Inventories

$
2,004


$
2,768Accounts receivable


359



2,038Accrued expenses


530



475Tax credit carryforwards


853



688Net operating loss carryforwards


5,545



4,596Valuation allowance


(9,444
)


(10,600
)Total deferred tax assets


153



(35
)Deferred tax liabilities:Fixed assets


(153
)


35Net deferred tax assets

$



$






The valuation allowance established against deferred tax assets was decreased by
$1,156,000 in 2001 due primarily to decreased timing differences associated with accounts receivable balances. The Company has incurred operating losses in each of the three years included herein and has determined that it is not more likely than
not that deferred tax assets will be realizable.





At December 31, 2001, the Company had available federal net operating losses
of approximately $15,200,000, which expire in 2009 through 2021, state net operating losses of approximately $6,500,000, which expire in 2004, 2010 and 2011, federal research and development credits of approximately $600,000, which expire in 2001
through 2013 and state tax credits of approximately $620,000 that are carried forward indefinitely.





Included in the tax
provision for prior years were reserves 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.





The Company has not provided for U.S. Federal income and foreign withholding taxes on its foreign
subsidiaries undistributed earnings as of December 31, 2001, as 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.




49




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







(11)    Business Segment Information and Sales to Principal Customers





The Company operates in one principal industry segment: the design, manufacture and provision of wireless-based satellite
communications infrastructure and terminal user products.





Revenues by geographic area:





Year ended December 31,2001

2000

1999(dollars in thousands)Total:Latin & South America

$
12,976

$
5,459

$
9,673Asia


7,344


7,210


4,332Africa & Middle East


5,461


2,304


5,632Europe


1,966


1,339


1,096United States


1,854


747


1,493Total sales

$
29,601

$
17,059

$
22,226Year ended December 31,2001

2000

1999(dollars in thousands)Products:Latin & South America

$
12,300

$
5,329

$
9,505Asia


6,269


6,468


3,550Africa & Middle East


5,067


2,233


4,926Europe


1,700


1,106


726United States


1,107


459


1,255$
26,443

$
15,595

$
19,962


Year ended December 31,2001


2000


1999(dollars in thousands)Services:Latin & South America

$
676


$
130


$
168Asia


1,075



742



782Africa & Middle East


394



71



706Europe


266



233



370United States


747



288



238$
3,158


$
1,464


$
2,264Year ended December 31,2001


2000


1999(dollars in thousands)Operating income (loss) by geographic area is as follows:Latin & South America

$
(14
)

$
(322
)

$
(2,439
)Asia


460



108



(21
)Africa & Middle East










Europe










United States


(1,418
)


(7,718
)


(6,392
)$
(972
)

$
(7,932
)

$
(8,852
)




50




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


As of December 31,2001

2000

1999(dollars in thousands)Identifiable assets by geographic area are as follows:Asia

$
1,190

$
1,143

$
926United States


29,222


28,159


32,220Latin & South America


149


164


1,332Africa & Middle East








Europe








$
30,561

$
29,466

$
34,478





Sales into Africa and the Middle East and Europe are serviced through the U.S.
legal entity and therefore, there are no operating income (losses) or identifiable assets in those regions.





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 25%, 42% and 19% of its revenue in Asia in 2001,
2000 and 1999, respectively; 44%, 32% and 44% of its revenue in Latin and South America in 2001, 2000, and 1999, respectively; and 6%, 4% and 7% of its revenue in the United States in 2001, 2000 and 1999, respectively. In 2001, the Company had two
customers, both in Latin America, which represented 25% and 15% of the Companys consolidated revenues for 2001. In 2000, the Company had two customers, one in the Latin America and one in Asia, which represented 17% and 14% of the
Companys consolidated revenues for 2000, respectively. In 1999, the Company had two customers, one in Latin America and one in Africa, which represented 25% and 16% of the Companys consolidated revenues for 1999, respectively.





Latin and South America





Sales in Latin and South America in 2001 were to 15 customers. There were significant sales to two customers in total for approximately $11,800,000 in 2001. At December 31, 2001, the accounts receivable balance from
these customers was approximately $1,557,000.





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.





(12)    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.




51




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







In 1998, 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 $44,000, $26,000, and $30,000
were expensed in 2001, 2000 and 1999 respectively, for the Companys matching contributions.





(13)    Income(loss) per Common
Share





The following table presents the computation of basic and diluted loss per share:





2001

2000


1999Numerator:Numerator for basic and diluted income(loss) per share

$
3,203

$
(6,747
)

$
(8,311
)Denominator:Denominator for basic loss per shareweighted average number of common shares outstanding during the period


7,248


7,184



7,042Incremental common shares attributable to exercise of outstanding options and warrants









Denominator for diluted loss per share


7,248


7,184



7,042Basic loss per share

$
0.44

$
(0.94
)

$
(1.18
)Diluted loss per share

$
0.44

$
(0.94
)

$
(1.18
)





The computation of diluted loss per share for all periods excluded the effect of
any incremental common shares attributable to the exercise of outstanding common stock options (see Note 8) and stock warrants because their effect would be anti-dilutive. Options and warrants to purchase 1,268,300, 1,301,521, and 1,151,824 shares
of common stock were not included in the computation of diluted net income (loss) per share for the years ended December 31, 2001, 2000 and 1999, respectively, as the effect would have been anti-dilutive.





(14)    Related Party Transactions





DTPI





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), 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 through June 17, 1999.





DTPI supplied equipment to its 49% owned joint venture,
Altair, S.A. Sales to Altair through June 17, 1999, was approximately $1,450,000, of which approximately $740,000 was 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 was recognized in 1999.




52




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Transactions subsequent to June 17, 1999





Subsequent to deconsolidation of DTPI, STM had certain related party transactions with DTPI.





In 1999, 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. 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.





In 1999, STM recognized interest income of approximately $412,000 on a $7,500,000 note receivable from DTPI. The note bore 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, to December 31, 1999, such recharges were approximately $200,000.





During the year 2000, STM delivered to DTPI, under the terms of the June 17, 1999 amended product supply agreement, product valued at approximately $2,933,000. Such revenues were
recognized at 100% of the sales value of the equipment supplied due to STM discontinuing the use of the equity method for DTPI. The proceeds from these sales were reduced by the DTPI concession, which had the effect of reducing cash receipts by
approximately $1,500,000.





During 2001, STM delivered to DTPI, under the terms of a 2001 product purchase agreement, product
valued at approximately $7,013,000. These revenues were recognized at 100% of the sales value. Services valued at approximately $400,000 were also provided to DTPI during 2001.





STM also provided office accommodation to certain DTPI employees during 2001 and 2000. Recharges for such expenses totaled $16,000 and $53,000 for 2001 and 2000, respectively. DTPI has
also reimbursed STM for other expenses at cost, totaling $28,000 and $167,000 for 2001 and 2000, respectively. Interest income recognized by STM during 2000 in connection with the note receivable totaled $157,000. $3,750,000 of such note was repaid
in March 2000 and the remaining balance of $3,750,000 was converted into preferred stock of DTPI in June 2000 and is carried at no value in the accompanying consolidated balance sheet at December 31, 2000.





Other Related Party Transactions





In May 2000, the Company entered into an Investment and Consulting Agreement with Zavareh LLC (a limited partnership controlled by Dr. Mark Shahriary, a former director of the Company) whereby Zavareh was to provide advice to the Company
for up to 2 years in consideration for the Company issuing 100,000 shares of restricted common stock with a fair value of $400,000 to Zavareh LLC and reimbursing Zavareh for out-of-pocket expenses of $3,000 per month. This contract was terminated in
November 2000 and Dr. Shahriary currently owes the Company approximately $300,000 for such shares of common stock. An expense of $100,000 was recognized for the period May 2000 to November 2000 in the accompanying consolidated statement of
operations. The Company and Dr. Shahriary are currently negotiating a settlement of this matter.





In July 2000, the Company
entered into a license agreement with BroadEdge, Inc., a satellite-based broadband provider offering high quality streaming media content, pursuant to which the Company granted to BroadEdge an exclusive license to use certain intellectual property
of the Company for a period of ten years.




53




---



STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




Such intellectual property had no carrying value in the Companys books. In exchange for the license, the Company received 1,000,000 shares of the Common Stock of BroadEdge, or approximately
10% of its capital stock. Because the value of the stock received and the licenses given were not readily determinable, the transaction was not reflected in the Companys financial statements. Mr. Youssefzadeh, the Companys president and
chief executive officer, is the founder and a member of the Board of Directors and a 70% stockholder of BroadEdge. During 2000, the Company recognized approximately $29,000 in revenues and received approximately $35,000 in reimbursable expenses from
BroadEdge. During 2001, the Company purchased approximately $14,000 in fixed assets from BroadEdge and received approximately $131,000 in reimbursable expenses.





In 2000, Mr. K.C. Schaaf was elected to the Companys board of directors. Mr. Schaaf is a partner in Stradling, Yocca, Carlson and Rauth (SYCR), the Companys
outside legal counsel. The Company incurred legal fees to SYCR of approximately $84,000, $37,000 and $47,000, for the years ended December 31, 2001, 2000 and 1999, respectively. Mr. Schaaf has waived any fees or compensation for his services as a
director of the Company but charges the Company at normal billing rates for time incurred by SYCR in providing legal services to the Company.





(15)    Restructuring Costs





The Company implemented cost reduction programs in 1999. As a
result of these cost reduction programs, the Company exited its Atlanta facility, relocated its manufacturing operations and terminated part of its workforce. Restructuring costs of $1,042,000 were recognized in 1999, comprising severance
obligations of $502,000, 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.




54




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STM WIRELESS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







(16)    Quarterly Results of Operations (unaudited)





Year ended December 31, 20011st Quarter


2nd Quarter


3rd Quarter


4th Quarter

Total Year(dollars in thousands, except per share data)Total revenue

$
6,234


$
7,111


$
7,766


$
8,490

$
29,601Gross profit


2,001



2,378



2,802



2,745


9,926Operating income (loss)


(589
)


(379
)


(125
)


121


(972
)Gain on disposal of affiliate






2,510







2,329


4,839Net (loss) income

$
(764
)

$
1,947


$
(273
)

$
2,293

$
3,203Income (loss) per share of common stock:Basic

$
(0.11
)

$
0.27


$
(0.04
)

$
0.32

$
0.44Diluted

$
(0.11
)

$
0.27


$
(0.04
)

$
0.32

$
0.44





Year ended December 31, 20001st Quarter

2nd Quarter


3rd Quarter


4th Quarter


Total Year(dollars in thousands, except per share data)Total revenue

$
3,817

$
3,097


$
5,010


$
5,135


$
17,059Gross profit


1,405


1,059



1,787



(2,403
)


1,848Recovery of note receivable from affiliate


3,175














3,175Operating income (loss)


1,860


(2,002
)


(1,202
)


(6,588
)


(7,932
)Gain on disposal of affiliate


575


440











1,015Gain on sale of assets





840











840Net (loss) income

$
2,537

$
(1,142
)

$
(1,327
)

$
(6,815
)

$
(6,747
)Income (loss) per share of common stock:Basic

$
0.36

$
(0.16
)

$
(0.18
)

$
(0.94
)

$
(0.94
)Diluted

$
0.33

$
(0.16
)

$
(0.18
)

$
(0.94
)

$
(0.94
)


---

|* |  | The results for the fourth quarter of 2000, included charges of approximately $4,900,000, which comprised inventory reserves of approximately $3,300,000 and approximately
$1,600,000 for bad debt provisions and settlements. The inventory reserves of $3,300,000 comprised excess inventory associated with a version of the Companys products that was to be replaced in 2001, obsolescence for certain components that
were designed out of the Companys products and a reserve established for certain components that were required to be valued at estimated net realizable value. Total inventory reserves established in 2000 were approximately $4,950,000. The
additional reserve established in the fourth quarter of 2000 was due to the Company formalizing a development plan to replace existing products and thereby increasing the Companys exposure primarily to excess inventories and the Company
finalizing a sales price for certain components in inventory at December 31, 2000. The increase in the reserves for bad debts and settlements established in the fourth quarter of 2000 was due to the Company agreeing to settle a customer dispute and
due to certain occurrences that significantly increased the risk of non-collection of certain customer balances in the fourth quarter and prior to the release of results for the fourth quarter of 2000. The results for the fourth quarter of 2001,
included relatively higher manufacturing costs and additional inventory reserves totaling approximately $1,100,000 partially offset by bad debts recoveries and a credit for outside services associated with a research and development project totaling
approximately $750,000.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



55




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SCHEDULE II





STM WIRELESS, INC.


Valuation and Qualifying Accounts


For
the years ended December 31, 2001, 2000 and 1999





Allowance For Doubtful Accounts


(in thousands)





Year ended

Balance at Beginning of Year

Charged (Credited) to Costs and Expenses


Reclassifications/ Deductions


Balance at End of YearDecember 31, 2001

$
1,701

$
(632
)

$
196


$
1,265December 31, 2000

$
590

$
1,338


$
(227
)

$
1,701December 31, 1999

$
2,022

$
(136
)

$
(1,296
)

$
590







56




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ITEM 9CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





Not applicable.




57




---




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, 68, 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., the Companys former majority-owned services subsidiary. From October 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.





Emil Youssefzadeh, 49, is the founder of the Company and has been a director of the Company since January 1982. He has served as the Companys Chief Executive Officer from January 1982 to June 1988 and since January 1991. Mr.
Youssefzadeh has also served as President of the Company 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, 63, 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 served as its Senior Vice President, General Counsel and Secretary until his retirement in October 2000. 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.





Louis B. Horwitz, 74,
has been a director of the Company since November 2000. From 1976 through 1999 he was Chairman of the Board of Directors of Datum, Inc. (NASDAQ NM: DATM) and was its President and Chief Executive Officer from 1976 through April 1998. Datum, Inc.
designs, manufactures and markets a wide variety of high performance time and frequency products used in telecommunications networks. Prior to joining Datum, Mr. Horwitz was an independent management consultant and Executive Vice President of Xerox
Data Systems.





K.C. Schaaf, 54, has been a director of the Company since November 2000. He is a founding partner of the
law firm Stradling Yocca Carlson & Rauth, counsel to the Company, which was established in 1976. He specializes in corporate finance, securities, mergers and acquisitions and technology law. Mr. Schaaf received a B.S.E.E. degree, with Special
Honors, from the University of Colorado at Boulder in 1970 and a J.D. degree from the Stanford University Law School in 1973.





Joseph J. Wallace, 42, 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 products and services.




58




---




James R. Luecke, 45, rejoined the Company in August 2000 as Chief Technology Officer
(CTO). From January 1999 to August 2000, he was Vice President of Technology with WirelessHome, Inc. and was responsible as chief systems engineer for the development of a CDMA-based, point-to-multipoint broadband wireless system used for Internet
access. From March 1993 until January 1999, Mr. Luecke held various positions with the Company, including Corporate Chief Scientist and was responsible as lead systems engineer, for the development of the Companys telephony products, including
Subscriber Earth Station (SES). Mr. Luecke has authored/co-authored 14 IEEE conference publications, has five patents (two pending), and has over 22 years experience in the wireless industry, primarily dealing with satellite communications systems
and modem equipment.





Bernd Steinebrunner, 38, 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.





Renato Goncalves Dias, 50, joined the Company in 1994 and has been Vice President for Latin American Sales since July 1999. From 1994 to July
1999, Mr. Dias held several positions with the Company, including Cellular Chief Engineer and Director of System Test. 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.





David Bredendick, 35, 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.





Gregg Mead, 53, joined the Company in August 2000 as Vice President Manufacturing. From July 2000 until August 2001, he was Vice President, Manufacturing Operations for DigiScents, a start up company directed
at introducing scents recognition interactively into computer games and other data exchanges. From 1998 through June 2000, Mr. Mead was Vice President of Operations for Excelsior Manufacturing, Inc., a contract manufacturer offering full turnkey
services. From 1995 to 1998, he was Director of Operations of Peninsula Wireless Communications, a manufacturer of repeaters, micro-cells and RF communications products. Mr. Mead has also held positions with Logistix Inc. and Code-a-Phone, Inc.





Section 16(a) Beneficial Ownership Reporting Compliance





Based solely upon its review of the copies of reporting forms furnished to the Company, 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, 2001, were satisfied.




59




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ITEM 11EXECUTIVE COMPENSATION





The following table sets forth compensation received for the three years ended December 31, 2001, by the Companys Chief Executive Officer and the four other most highly compensated
executive officers of the Company serving at December 31, 2001 (collectively, the Named Executive Officers):





Summary
Compensation Table





Annual CompensationName and Principle Position

Year

Salary ($)

Bonus ($)


Other ($)


Long-Term Option Awards (#)Emil Youssefzadeh

2001

265,400

150,000
(3)

33,020
(4)

0President and Chief

2000

265,382

0


33,020
(4)

200,000Executive Officer

1999

299,905

0


33,020
(4)

0Joseph Wallace

2001

157,500

30,000
(3)

1,575
(5)Vice President, Finance &

2000

155,916

0


1,487
(5)

0Chief Financial Officer

1999

148,700

0


1,600
(5)

40,000James R. Luecke (1)

2001

150,000

0


1,500
(5)Chief Technology Officer

2000

51,923

0


0


25,0001999

15,705

0


1,404
(5)

0Renato Goncalves Dias

2001

130,000

0


1,300
(5)Vice President,

2000

130,000

0


700
(5)

0Latin American Sales

1999

125,000

0


1,300
(5)

23,000Bernd Steinebrunner (2)

2001

119,808

0


1,198
(5)Vice President, Product Management

2000

103,196

0


208
(5)

0& Sales Engineering

1999

34,102

0


0


20,000


---

|(1) |  | Mr. Luecke was employed with the Company through January 1, 1999. He rejoined the Company in August 2000.
|--- |  | ---------------------------------------------------------------------------------------------------------

|(2) |  | Mr. Steinebrunner commenced employment with the Company in September 1999.
|--- |  | --------------------------------------------------------------------------

|(3) |  | Represents bonus paid in connection with the sale of the Companys remaining shares in DTPI in 2001.
|--- |  | ----------------------------------------------------------------------------------------------------

|(4) |  | Amounts represent automobile allowance and expenses paid by the Company for the benefit of Mr. Youssefzadeh.
|--- |  | ------------------------------------------------------------------------------------------------------------

|(5) |  | Figures represent Company matches under the Companys 401k plan.
|--- |  | ----------------------------------------------------------------



60




---




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, 2001, to each of the Named
Executive Officers:





Name

Options Granted (No.)

% Total Options Granted to Employees In Fiscal Yr.


Exercise Price ($/share)

Expiration Date

Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for
Option Term5% ($)

10% ($)Emil Youssefzadeh

0

0
%

0

0

0

0Joseph J. Wallace

0

0
%

0

0

0

0Jim Luecke

0

0
%

0

0

0

0Renato Goncalves Dias

0

0
%

0

0

0

0Bernd Steinebrunner

0

0
%

0

0

0

0





The Company adopted the 2002 Stock Incentive Plan (2002 Plan) on
November 2, 2001, which was approved by its stockholders in December 2001 and became effective January 1, 2002. The 2002 Plan authorizes the issuance of up to 500,000 shares of common stock in order to enhance the Companys ability to attract
and retain the services of qualified employees, officers, directors, and other service providers.





The following table sets
forth information concerning exercises of stock options during the fiscal year ended December 31, 2001, by each of the named executive officers and the year-end value of unexercised options:





Name

Shares Acquired on Exercise (No.)

Value Realized ($)

Number of Unexercised Options at Fiscal Year end (No.) Exercisable/ Unexercisable

Values of Unexercised In-the-Money
Options at Fiscal End ($) Exercisable/ Unexercisable (1)Emil Youssefzadeh

0

0

97,500/112,500

$
0/$0Joseph J. Wallace

0

0

45,000/20,000

$
0/$0James Luecke

0

0

5,000/15,000

$
0/$0Renato Dias

0

0

27,750/10,250

$
0/$0Bernd Steinebrunner

0

0

10,000/10,000

$
0/$0


---

|(1) |  | Value is based on fair market value of Common Stock as of December 31, 2001 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, 2001 on the NASDAQ Stock Market was $1.40.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Directors Fees





Each of the outside directors receives an annual retainer at the rate of $15,000 for
services rendered in his capacity as a director of the Company, except for Mr. Connors who received $48,000 for his services as Chairman and Mr. K.C. Schaaf who waived any fees for his service. Accordingly, during 2001, Mr. Connors received $48,000
and Mr. Gambaro and Mr. Horwitz each received $15,000 for their services as outside directors of the Company. The Companys outside directors were also reimbursed for expenses incurred for meetings of the Board of Directors which they attended.
In addition, the outside directors may earn additional compensation in the event they provide non-director related services to the Company. Such compensation will be awarded on a case-by-case basis and is not expected to be material in any period.




61




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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 consisted 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 in 1999 $25,000 in connection with his services to the Company as Acting
President from March 1999 through September 1999 and in 2000, 25,000 options were granted in connection with such services.





Compensation and Stock Option Committee Interlocks and Insider Participation





The Compensation and Stock Option
Committee of the Companys Board of Directors consists of three members. During the year ended December 31, 2001, Mr. Connors, Dr. Gambaro and Mr. Horwitz were members of the Compensation and Stock Option Committee.





No executive officer serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers
serving on the Companys Board of Directors or Compensation and Stock Option Committee.




62




---




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, 2001.





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, 2001, Mr. Connors, Dr. Gambaro and Mr. Horwitz were members of the Compensation Committee.





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:





| |  |  | The Company must offer competitive salaries to be able to attract and retain highly-qualified and experienced executives and other management personnel.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Annual executive compensation in excess of base salaries should be tied to individual and Company performance.
| | - |  | --------------------------------------------------------------------------------------------------------------




| |  |  | 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 Telecommunications Equipment 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




63




---

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 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; and (iv) competitive conditions faced by the Company. 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 2001 Compensation





The
salaries of the Named Executive Officers generally did not increase in 2001 over the salaries paid in fiscal 2000 except for Mr. Steinebrunner, whose salary increased from $110,0000 to $125,000 per annum effective September 2001. 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, 2001 with the following exceptions. Mr. Youssefzadeh and Mr. Wallace each received special
merit bonuses in connection with their role in the sale of the remaining shares in DTPI.





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




64




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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.





| | Th | e Compensation and Stock Option
| | -- | -------------------------------

| | Co | mmittee of the Board of Directors
| | -- | ---------------------------------




| | Dr | . Ernest U. Gambaro
| | -- | -------------------

| | Fra | nk T. Connors
| | --- | -------------

| | Lo | uis B. Horwitz
| | -- | --------------



65




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REPORT OF THE AUDIT COMMITTEE





The Audit Committee of the Board has furnished the following report with respect to the Companys audited financial statements for the year ended December 31, 2001:





The Board has determined that each member of the Audit Committee is independent as defined in the listing standards of the
National Association of Securities Dealers except Mr. Connors, where it was deemed by the Board to be in the best interest of the Company and its stockholders for Mr. Connors to be a member of the Audit Committee. Mr. Connors does not meet the
definition of independence because he was the President of the Company from March 1999 to September 1999 and the President of SkyOnline, Inc., the Companys former majority owned subsidiary, from January 1998 to January 1999. The board has
determined, in its business judgment, that Mr. Connors former relationship with the Company does not interfere with his ability to exercise independent judgment. The Board is currently conducting a search for additional independent directors.





As noted in the Audit Committee Charter, management is responsible for preparing the Companys financial statements. The
Companys independent auditors are responsible for auditing the financial statements. The activities of the Audit Committee are in no way designed to supersede or alter those traditional responsibilities. The Audit Committees role does
not provide any special assurances with regard to the Companys financial statements, nor does it involve a professional evaluation of the quality of the audits performed by the independent auditors.





The Audit Committee has reviewed and discussed the audited financial statements with the Companys management and the independent auditors.





The Audit Committee has discussed with the independent auditors, KPMG LLP, the matters required to be discussed by Statement of
Auditing Standards No. 61, Communication With Audit Committees.





The Audit Committee has received the written disclosures and
the letter from the independent auditors required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, has considered the compatibility of receiving nonaudit services from the independent auditors with
maintaining the independent auditors independence, and has discussed with the independent auditors their independence from the Company.





The Audit Committee has also considered whether the services and fees of KPMG LLP other than those rendered in connection with the annual audit and quarterly interim reviews of the Companys financial statements
are compatible with maintaining the independence of KPMG LLP. The services and fees of KPMG LLP for 2001 were:





| |  |  | Audit Fee$121,000
| | - |  | ------------------




| |  |  | Financial Information Systems Design and Implementation Fees$0
| | - |  | ---------------------------------------------------------------




| |  |  | All Other Fees:
| | - |  | ---------------






Tax compliance and tax advise$23,500

Employee Benefit Plan Audit$10,000





Based on the review and discussions referred to above, the Audit Committee
recommended to the Board that the audited financial statements be included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2001.





| | Th | e Audit Committee of the Board of Directors
| | -- | -------------------------------------------




| | Lo | uis B. Horwitz
| | -- | --------------

| | Dr | . Ernest U. Gambaro
| | -- | -------------------

| | Fra | nk T. Connors
| | --- | -------------



66




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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, 1996 and ending on December 31, 2001.





COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*


AMONG STM WIRELESS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX


AND THE S&P TELECOMMUNICATIONS EQUIPMENT INDEX





LOGO





|* |  | $100 invested on 12/31/96 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.
|- |  | ----------------------------------------------------------------------------------------------------------------




| |  | Copyright©2002, Standard &
Poors, a division of The McGraw-Hill Companies, Inc. All rights.
| |  | --------------------------------------------------------------------------------------------




Each of the Report of the
Compensation and Stock Option Committee and the Performance Graph is not soliciting material, is not deemed filed with the SEC and is not to be incorporated by reference in any filing of the Company under the Securities Exchange Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.







67




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ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





Set forth below is certain information as of March 22, 2002, 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, Named Executive Officers
and Directors and Executive Officers as a Group

Amount and Nature of Beneficial Ownership

Percent of ClassEmil Youssefzadeh (1)

1,184,922

15.6
%STM Wireless, Inc.One MauchlyIrvine, California 92618Dimensional Fund Advisors, Inc. (2)

447,300

5.8
%1299 Ocean Avenue, 11th FloorSanta Monica, California 90401Frank T. Connors. (3)

235,580

3.1
%Dr. Ernest U. Gambaro (4)

42,500

*Louis B. Horwitz (5)

32,500

*Joseph Wallace (6)

45,000

*Renato Goncalves Dias (7)

27,750

*Bernd Steinebrunner (8)

10,000

*James R. Luecke (9)

5,000

*K.C. Schaaf

0

*All directors and executive officers as a group (9 persons) (1) (3) (4) (5) (6) (7) (8) and (9)

1,583,252

20.9
%


---

|* |  | Less than 1%
|- |  | ------------




|(1) |  | Includes 244,020 shares held by Shafigh Youssefzadeh, who is a brother of Emil Youssefzadeh, for which Emil Youssefzadeh has voting rights. Accordingly, Emil Youssefzadeh is
deemed to share beneficial ownership of these shares. Further, includes 106,875 shares issuable upon exercise of stock options exercisable within 60 days of the Record Date.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 447,300 shares of common stock of the Company that are owned
by the Funds. All such securities are owned by the Funds and Dimensional disclaims beneficial ownership of such securities.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Inclusive of 77,500 shares issuable upon exercise of stock options exercisable within 60 days of March 22, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|(4) |  | Inclusive of 42,500 shares issuable upon exercise of stock options exercisable within 60 days of March 22, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------



68




---

|(5) |  | Inclusive of 32,500 shares issuable upon exercise of stock options exercisable within 60 days of March 22, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|(6) |  | Inclusive of 45,000 shares issuable upon exercise of stock options exercisable within 60 days of March 22, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|(7) |  | Inclusive of 27,750 shares issuable upon exercise of stock options exercisable within 60 days of March 22, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|(8) |  | Inclusive of 10,000 shares issuable upon exercise of stock options exercisable within 60 days of March 22, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|(9) |  | Inclusive of 5,000 shares issuable upon exercise of stock options exercisable within 60 days of March 22, 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------




ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





In May 2000, the Company entered into an Investment and Consulting Agreement with Zavareh LLC (a limited partnership controlled by Dr. Mark Shahriary, a former director of the company) whereby Zavareh was to provide
advice to the Company for up to 2 years in consideration for the Company issuing 100,000 restricted shares of common stock with a fair value of $400,000 to Zavareh LLC and reimbursing Zavareh for out-of-pocket expenses of $3,000 per month. This
contract was terminated in November 2000 and Mr. Shahriary currently owes the Company approximately $300,000 for such shares of common stock. The Company expensed $100,000 for the services performed in the period May 2000 through November 2000. The
Company and Dr. Shahriary are currently negotiating a settlement of this matter.





In July 2000, the Company entered into a
license agreement with BroadEdge, Inc., a satellite-based broadband provider offering high quality streaming media content, pursuant to which the Company granted to BroadEdge an exclusive license to use certain intellectual property of the Company
for a period of ten years. In exchange for the license, the Company received 1,000,000 shares of the Common Stock of BroadEdge, or approximately 10% of its capital stock. Mr. Youssefzadeh is the founder and a member of the Board of Directors and a
70% stockholder of BroadEdge. In addition, Infonet Services Corporation is a stockholder in BroadEdge. The license agreement and the purchase of shares of BroadEdge was approved by a majority of the disinterested directors of the Company. It is
possible that the Company and BroadEdge may have common customers in the future, although it is anticipated that the Companys main focus will be the supply of equipment, while BroadEdge will pursue service opportunities. The Company and
BroadEdge have a policy that BroadEdge shall not provide any products or services to any existing or prospective customer of the Company unless the opportunity is waived by the Company. In addition, any transaction between the Company and BroadEdge
is to be independently approved. During 2000, the Company recognized revenues of approximately $29,000 from BroadEdge and during 2001 and 2000 the Company received reimbursable expenses of approximately $131,000 and $35,000, respectively, from
BroadEdge, and in 2001 purchased fixed assets of $14,000 from BroadEdge.





In 2000, Mr. K.C. Schaaf was elected to the
Companys board of directors. Mr. Schaaf is a partner in Stradling, Yocca, Carlson and Rauth (SYCR), the Companys outside legal counsel. The Company incurred legal fees to SYCR of approximately $84,000, $37,000 and $47,000,
for the years ended December 31, 2001, 2000 and 1999, respectively. Mr. Schaaf has waived any fees or compensation for his services as a director of the Company but charges the Company at normal billing rates for time incurred by SYCR in providing
legal services to the Company.




69




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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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------




PageIndependent Auditors Report

32Consolidated Balance Sheets as of December 31, 2001 and 2000

33Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999

34Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2001, 2000 and 1999

35Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999

36Notes to Consolidated Financial Statements

38





The following schedule is filed herewith:





Schedule IIValuation and Qualifying Accounts 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.


Description3.1***


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. 061/2062-DSE-P/L84 and 3379/3380-DSE-P/L84.10.21***


1994 Stock Option Plan for Non-Employee Directors.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,
198210.33
*****

2002 Stock Incentive Plan.10.34
*****

Form of Stock Option Agreement pertaining to the 2002 Stock Incentive Plan.10.35
*****

Form of Restricted Stock Purchase Agreement pertaining to the 2002 Stock Incentive Plan.




70




---

Exhibit No.

Description21.0*****

Subsidiaries of Registrant.23.1*****

Consent of KPMG LLP.


---

|* |  | 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 Companys Form 10-K filed for the year ended December 31, 1995.
|--- |  | ------------------------------------------------------------------------------------------------

|**** |  | Incorporated by reference to the Companys Form 10-K for the year ended December 31, 1999.
|---- |  | ------------------------------------------------------------------------------------------

|***** |  | Filed herewith.
|----- |  | ---------------




Executive Compensation Plans and
Arrangements





Exhibit No.

Description10.1

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.***10.33

2002 Stock Incentive Plan.10.34

Form of Stock Option Agreement pertaining to the 2002 Stock Incentive Plan.10.35

Form of Restricted Stock Purchase Agreement pertaining to the 2002 Stock Incentive Plan.





(b)    Reports on Form 8-K





None.







71




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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.





STM WIRELESS, INC.By:

/s/    EMIL YOUSSEFZADEHEmil Youssefzadeh President & Chief Executive Officer





By:

/s/    JOSEPH WALLACEJoseph 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 Emil Youssefzadeh

Chief Executive Officer and Director

March 26, 2001/s/    JOSEPH J. WALLACE Joseph J. Wallace

Vice President, Finance, Chief Financial Officer and Principal Accounting Officer

March 26, 2001/s/    FRANK T. CONNORS Frank T. Connors

Chairman of the Board

March 26, 2001/s/    DR. ERNEST U.
GAMBARO Dr. Ernest U. Gambaro

Director

March 26, 2001/s/    LOUIS B. HORWITZ Louis B. Horwitz

Director

March 26, 2001/s/    K.C. SCHAAF K.C. Schaaf

Director

March 26, 2001




72