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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D. C. 20549





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FORM 10-Q





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(Mark One)





|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For the quarterly period ended June 30, 2002





or





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




Commission File Number: 0-19923





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STM WIRELESS, INC.


(Exact Name of Registrant as
Specified in its Charter)





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Delaware (State or other
jurisdiction of incorporation or organization)

95-3758983 (I.R.S.
Employer Identification Number)One Mauchly, Irvine, California (Address of principal executive offices)

92618 (Zip code)


(949) 753-7864


(Registrants telephone number, including area code)





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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 and (2) has
been subject to such filing requirements for the last 90 days.





Yes x No  ̈





As of August 6, 2002, there were 7,248,325 shares of Common
Stock, $0.001 par value per share, outstanding.





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STM WIRELESS, INC.





INDEX





PagePart I.

Financial InformationItem 1.

Financial StatementsCondensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001

3Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2002 and June 30, 2001

4Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2002 and June 30, 2001

5Notes to Condensed Consolidated Financial Statements for the three and six month periods ended June 30, 2002 and June 30, 2001

6-9Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

9-13Item 3.

Quantitative And Qualitative Disclosures About Market Risk

13-14Part II.

Other Information

15Item 1.

Legal ProceedingsItem 6.

Exhibits And Reports On Form 8-K




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##### Table of Contents

Part IFinancial Information (Item 1Financial Statements)





STM WIRELESS, INC





CONDENSED CONSOLIDATED BALANCE SHEETS


(In Thousands, Except Per Share Data)


(Unaudited)





June 30, 2002


December 31, 2001AssetsCurrent assets:Cash and cash equivalents

$
1,179


$
4,658Short-term investments






148Restricted cash and short-term investments


11



3,350Accounts receivable, net


7,950



6,788Inventories, net


7,625



7,516Prepaid expenses and other current assets


415



499Total current assets


17,180



22,959Property & equipment, net


7,521



7,556Other assets


35



46$
24,736


$
30,561Liabilities and Stockholders EquityCurrent liabilities:Short-term borrowings

$
1,550


$
3,464Current portion of long-term debt


85



85Accounts payable


7,204



6,008Accrued liabilities


2,329



2,067Customer deposits and deferred revenue


943



857Income taxes payable


526



533Total current liabilities


12,637



13,014Long-term debt


6,720



6,763Other long-term liabilities


32



32Stockholders equity:Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued or outstanding






Common stock, $0.001 par value; 20,000,000 shares authorized; issued and outstanding 7,248,325 shares at June 30, 2002
and December 31, 2001


7



7Additional paid in capital


39,289



39,289Accumulated deficit


(33,649
)


(28,244
)Receivable from stockholder


(300
)


(300
)Total stockholders equity


5,347



10,752$
24,736


$
30,561





See accompanying notes to condensed consolidated financial statements




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STM WIRELESS, INC





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(In Thousands, Except Per Share Data)


(Unaudited)





For the Three Months EndedJune 30,


For the Six months EndedJune 30,2002


2001


2002


2001Revenues:Products

$
3,365


$
6,485


$
8,290


$
12,050Services


649



626



1,376



1,295Total revenues


4,014



7,111



9,666



13,345Cost of revenues:Products


3,379



4,191



7,190



7,780Services


525



542



1,147



1,186Total cost of revenues


3,904



4,733



8,337



8,966Gross profit


110



2,378



1,329



4,379Operating costs and other operating items:Selling, general & administrative expenses


1,808



1,436



3,519



2,651Research & development


1,428



1,321



2,938



2,696Total


3,236



2,757



6,457



5,347Operating loss


(3,126
)


(379
)


(5,128
)


(968
)Foreign currency gain (loss)


22



(6
)


21



(6
)Gain on disposal of affiliate






2,510







2,510Interest income


13



84



37



181Interest expense


(158
)


(262
)


(335
)


(534
)Income (loss) before income taxes


(3,249
)


1,947



(5,405
)


1,183Income tax benefit (expense)














Net income (loss)

$
(3,249
)

$
1,947


$
(5,405
)

$
1,183Net income (loss) per common share:Basic

$
(0.45
)

$
0.27


$
(0.75
)

$
0.16Diluted

$
(0.45
)

$
0.27


$
(0.75
)

$
0.16Common shares used in computing per share amounts:Basic


7,248



7,248



7,248



7,248Diluted


7,248



7,248



7,248



7,250





See accompanying notes to condensed consolidated financial statements.




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STM WIRELESS, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In Thousands)


(Unaudited)





Six months Ended June 30,2002


2001Net cash provided by (used in) operations

$
(4,838
)

$
518Cash flows provided by investing activities:Proceeds from the sale of stock in DTPI






2,510Decrease in restricted assets


3,339



100(Increase) decrease in short-term investments


148



(162
)Acquisition of property, plant and equipment


(174
)


(311
)Net cash provided by investing activities


3,313



2,137Cash flows from financing activities:Repayments of short-term borrowings, net


(1,914
)


(1,114
)Increase in other long-term liabilities






76Repayment of long-term debt


(40
)


(126
)Net cash provided by (used in) financing activities


(1,954
)


(1,164
)Net increase (decrease) in cash and cash equivalents


(3,479
)


1,491Cash and cash equivalents at beginning of period


4,658



2,903Cash and cash equivalents at end of period

$
1,179


$
4,394Supplemental disclosure of cash flow information:Interest paid

$
381


$
545Income taxes paid

$
36


$









See accompanying notes to
condensed consolidated financial statements.




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##### Table of Contents




STM WIRELESS, INC.





NOTES TO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





1.    Basis of Presentation:





These financial statements are unaudited; however, the information contained herein for STM Wireless, Inc. and its subsidiaries (the Company or STM) gives effect to all adjustments necessary (consisting only
of normal accruals), in the opinion of Company management, to present fairly the financial statements for the interim periods presented.





The results of operations for the current interim period are not necessarily indicative of the results to be expected for the current year.





Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and
footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC), and these condensed consolidated financial statements should be read in conjunction with the financial statements included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2001, which is on file with the SEC. Certain reclassifications have been made to the 2001 condensed consolidated financial statements to conform to the 2002 presentation.





2.    Inventories:





Inventories are
summarized as follows:





June 30, 2002

December 31, 2001Raw materials

$
3,970

$
3,440Work in process


808


1,600Finished goods


2,847


2,476$
7,625

$
7,516





3.    Net Income (Loss) Per Share:





Three Months Ended June 30,

Six months Ended June 30,2002


2001

2002


2001Net income (loss)

$
(3,249
)

$
1,947

$
(5,405
)

$
1,183Basic:Weighted average common shares outstanding used in computing basic net income (loss) per share


7,248



7,248


7,248



7,248Basic net income (loss) per share

$
(0.45
)

$
0.27

$
(0.75
)

$
0.16Diluted:Weighted average common sharesoutstanding


7,248



7,248


7,248



7,248Dilutive options outstanding













2Shares used in computing diluted net income (loss) per share


7,248



7,248


7,248



7,250Diluted net income (loss) per share

$
(0.45
)

$
0.27

$
(0.75
)

$
0.16





For the three and six months ended June 30, 2002, options to
purchase approximately 1,143,000 shares of common stock were not included in the computation of diluted net income per share, as the effect would be antidilutive. For the three and six months ended June 30, 2001, options to purchase approximately
1,271,000 and




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1,298,000 shares of common stock, respectively, were outstanding and were excluded from the computation
of diluted net income per share, as the effect would be antidilutive.





4.    New Accounting Standards:





In October 2001, the Financial Accounting Standards Board 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 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 adopted Statement 144 on January 1, 2002. The adoption of Statement 144 had no effect on the Companys financial statements.




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5.    Geographic and Business Segment Information:





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





Revenues By Geographic Areas

Three Months Ended June 30,


Six months Ended June 30,2002


2001


2002


2001Total:Latin & South America

$
(332
)

$
4,574


$
2,797


$
8,014Africa & Middle East


1,080



459



2,013



1,407Asia


2,005



1,321



3,184



2,240United States


168



292



405



682Europe


1,093



465



1,267



1,002Total

$
4,014


$
7,111


$
9,666


$
13,345Products:Latin & South America

$
(368
)

$
4,432


$
2,711


$
7,695Africa & Middle East


871



451



1,766



1,342Asia


1,770



1,067



2,457



1,813United States


73



162



225



350Europe


1,019



373



1,131



850Total

$
3,365


$
6,485


$
8,290


$
12,050Services:Latin & South America

$
36


$
142


$
86


$
319Africa & Middle East


209



8



247



65Asia


235



254



727



427United States


95



130



180



332Europe


74



92



136



152Total

$
649


$
626


$
1,376


$
1,295Operating income (loss) by area:Latin & South America

$



$
(14
)

$



$
(14
)Africa & Middle East














Asia


(80
)


168



63



180United States


(3,046
)


(533
)


(5,191
)


(1,134
)Europe














Total

$
(3,126
)

$
(379
)

$
(5,128
)

$
(968
)





In the three month period ended June 30, 2002, there were two
customers to whom individual sales exceeded 10% of total revenues, and the total of revenues to these customers represented 65% of total revenues for the period. In the corresponding period ended June 30, 2001, there was a total of two customers to
which individual sales exceeded 10% of total revenues, and the total of revenues to these customers represented 63% of total revenues. As of June 30, 2002, there were three customers in which accounts receivable balances exceeded 10% of accounts
receivable.





In the six month period ended June 30, 2002, there were three customers to whom individual sales
exceeded 10% of total revenues, and the total of revenues to these customers represented 52% of total revenues for the period. In the corresponding period ended June 30, 2001, there was a total of three customers to which individual sales exceeded
10% of total revenues and the total of revenues to these customers represented 67% of total revenues.




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June 30, 2002

December 31, 2001Identifiable assets by geographic area:United States

$
23,248

$
29,222Asia


1,338


1,190Latin & South America


150


149Total

$
24,736

$
30,561





6.    Short-Term Borrowings:





On March 27, 2000, the Company completed a revolving line of credit for approximately $3,300,000 of which $2,800,000 is available for
on-going working capital requirements. In September 2001, the Company renewed its line of credit under this facility for $3,300,000 through March 2004. The lender was granted a security interest in substantially all of the Companys assets.





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 June 30, 2002 and December 31, 2001, were approximately $1,550,000 and $1,464,000, respectively. At June 30, 2002, the unused credit available on this line of credit was approximately $60,000.





During the three months ended June 30, 2002, the Company retired a $2,000,000 line of credit that was fully collateralized by
restricted cash and short-term investment balances. As of December 31, 2001, the amount outstanding under this line of credit was $2,000,000 with the $2,000,000 collateralized balances included as part of restricted cash and short-term investments.





Item 2Managements Discussion and Analysis of Results of Operations and Financial Condition





General:





STM Wireless, Inc. (the Company or STM), founded in 1982,
is a developer, manufacturer, supplier and provider of wireless-based satellite communications infrastructure and user terminal products utilized in public and private telecommunications networks for broadband and telephony applications. These
networks support telephone grade voice, fax, data communication and IP based data, 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 telephone companies,
businesses, and government agencies in Europe, the Americas, the Middle East, Africa and Asia.





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. 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. 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




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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.





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. Third parties may perform the installation of the Companys equipment, 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 at the time of shipment if there is any material risk of
non-acceptance. For repeat customers, the Company is very familiar with the customers 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 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.





Results of Operations:





Total revenues were $4,014,000 and
$9,666,000, respectively, for the three and six month periods ended June 30, 2002, compared to $7,111,000 and $13,345,000, respectively, for the corresponding periods of 2001, representing decreases of 44% and 28%, respectively, over the prior year
periods. Product revenues were $3,365,000 and $8,290,000, respectively, for the three and six month periods ended June 30, 2002, compared to $6,485,000 and $12,050,000, respectively, for the corresponding periods of 2001, representing decreases of
48% and 31%, respectively, over the prior year periods. Service revenues were $649,000 and $1,376,000, respectively, for the three and six month periods ended June 30, 2002, compared to $626,000 and $1,295,000, respectively, for the corresponding
periods of 2001, representing increases of 4% and 6%, respectively, over the prior year periods.





The 44% decrease
in total revenues for the three months ended June 30, 2002 compared to the corresponding period in 2001 was attributed primarily to a decrease of approximately $4,900,000 in the Latin and South America region offset by increases in the Africa and
Middle East region of $621,000, the Asia region of $684,000, and the Europe region of $628,000. For the six months ended June 30, 2002, total revenues declined 28% as compared to the same period in 2001 due primarily to a decrease of approximately
$5,200,000 in revenues to Latin and South America offset by increases in the Africa and Middle East region of $606,000, the Asia region of $944,000, and the Europe region of $265,000. In fiscal 2001, the Company earned 25% of its revenues from one
U.S. based customer, who serves primarily the Latin and South America region, and that customer has not purchased and is not expected to purchase significant products from the Company during 2002. Product revenues in the Latin and South America
region in the three and six months ended June 30, 2002 were also adversely affected by a $400,000 sales incentive granted during the second quarter to a long-term customer to be applied as a credit against future sales orders. This incentive was
accounted for as a reduction to second quarter sales.




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Delays are not uncommon in the international markets where the Company operates.
Customer concentrations have occurred in prior years as the Companys revenues are characterized by relatively high value and low volume sales. Management continues to be focused on increasing revenues on a quarterly basis through identifying
specific projects and regions where the Company has a competitive advantage and has established customer relationships. Management currently expects revenues to be approximately $6,500,000 and $7,000,000 in the third and fourth quarters of fiscal
2002, respectively. However, there can be no assurance that the Company will meet these targets or earn any specific level of revenues consistent with prior periods. The 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.





Gross profit percentage earned in the three months ended June 30, 2002 was 3% versus 33% for the same period ended June 30, 2001. For the three months ended June 30, 2002, the gross profit percentage
for product revenues declined from 35% in 2001 to negative 0.4% in 2002 and the gross profit percentage for service revenues increased from 13% in 2001 to 19% in 2002. Gross profit on product revenues in the three months ended June 30, 2002 was
adversely affected by a sales incentive of $675,000 ($400,000 of which was a reduction in revenues and $275,000 of which was equipment with no revenue which was classified as a cost of product revenues in the accompanying condensed consolidated
statement of operations), costs to take into volume production the multi-channel version of the Solante family of products, volume related manufacturing variances and certain relatively fixed direct costs that did not decrease in line with revenues.
The gross profit percentage earned in the six months ended June 30, 2002 was 14% versus 33% for the corresponding period of 2001. The decline in gross profit percentage for product revenues from 35% in the six months ended June 30, 2001 to 13% in
2002 is attributed to the sales incentive of $675,000 that arose in the second quarter of 2002, new product introduction costs for the Companys new family of products, volume related manufacturing variances and certain relatively fixed costs
that did not decrease in line with revenues. The improved services gross profit percentage earned in both the three months and the six months ended June 30, 2002 compared to the corresponding period of the prior year reflects improved margins on the
Companys repair activities. Based on managements current expected revenue mix in the third and fourth quarters of 2002, the anticipated gross profit percentage for the third quarter is approximately 35% and for the fourth quarter is 30%;
however, there can be no assurance that the Company can meet these targets. The Company has experienced intense competition during the six months ended June 30, 2002 and the Company may be forced to reduce its selling price of its products in
response to its competitors pricing strategies or practices, in general or in any part of the world. Therefore, the level of gross profit can vary by customer, by product and by application as well as the overall volume of sales in any given
period.





Selling, general and administrative expenses (SG&A) for the three months ended June 30,
2002 increased by $372,000 to $1,808,000, or 45% of revenues, from $1,436,000, or 20% of revenues, in the corresponding period of 2001. For the six-month period ended June 30, 2002, SG&A expense increased by $868,000 to $3,519,000, or 36% of
revenues, from $2,651,000, or 20% of revenues for the corresponding period of 2001. The increase in spending is due to increases in third-party consultancy costs, advertising and promotional expenses, and higher headcount related expenses. During
the second and third quarters of fiscal 2002, cost reduction programs were implemented to reduce expenditure levels. Sales efforts are currently focused on qualified sales opportunities and also to directly target new customers that the Company has
not previously done business with. Due to the cost reduction efforts in the third quarter of 2002, SG&A is expected to be approximately $1,400,000 in the third quarter and approximately $1,350,000 in the fourth quarter of 2002, although the
level of SG&A expense can vary by due to the level of direct sales costs for individual projects.





Research
and development (R&D) expenses for the three months ended June 30, 2002 increased to $1,428,000 (36% of revenues), from $1,321,000 (19% of revenues), for the corresponding period of the prior year. For the six months ended June 30,
2002, R&D expenses increased to $2,938,000 (30% of revenues), from $2,696,000 (20% of revenues), for the corresponding period of the prior year. Expense increases are due to headcount related expenses partly offset by a reduction in the use of
third-party resources and materials in connection with the Solante product enhancements. R&D costs were reduced during the second quarter of fiscal 2002 that should favorably impact the overall level of R&D expenses in the second half of
fiscal 2002, such that expected R&D costs in the third and fourth quarters of 2002 are expected to be approximately $1,100,000, respectively. However, these costs can vary depending on the stage reached in a product development cycle. Current
development efforts are focused on the addition of new product functions and features, reducing unit product cost, optimizing product design, and improving manufacturability. Management believes that these efforts will yield future positive results
in terms of higher gross margins and improved inventory control.




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The foreign currency gain of $22,000 and $21,000 recognized in the three and six
months ended June 30, 2002 were attributable primarily to the Companys Thailand operation. The gain is the result of the Thai currency having strengthened against the U.S. Dollar since the start of fiscal 2002. The Company conducts most of its
international sales in the U.S. Dollar.





In the three and six month periods ended June 30, 2001 the Company
disposed of shares in DTPI resulting in a total gain of $2,510,000, which has been classified as a gain on disposal of affiliate in the accompanying condensed consolidated financial statements. No such gain was recognized in the corresponding period
in 2002.





Interest income was $13,000 for the three months ended June 30, 2002, compared to $84,000 for the three
months ended June 30, 2001, and was $37,000 for the six months ended June 30, 2002, compared to $181,000 for the corresponding period of 2001. Along with the reduction in interest rate levels in general, interest income for the six months ended June
30, 2002 is less than the interest income recognized in the corresponding periods of 2001 due primarily to lower average cash balances for both restricted and unrestricted cash balances and short-term investments attributable partly to the
retirement of a line of credit for $2,000,000 that was fully collateralized with cash in an interest bearing account (note 6 to the condensed consolidated financial statements).





Liquidity and Capital Resources:





For the first six months
of 2002, the Company had a negative cash flow from operating activities of $4,838,000 as compared to a positive cash flow of $518,000 for the corresponding period of 2001. The negative cash flow for the period ended June 30, 2002 is attributable
primarily to the net loss of $5,405,000 offset by increases in accounts payable and accrued expenses. For the corresponding period of 2001, the positive cash flow from operating activities of $518,000 was due primarily to net income of $1,183,000
adjusted by a gain on the sale of DTPI shares for $2,510,000 (classified as an element of cash flow from investing activity) and reductions in accounts payable and accrued liabilities. Positive effects were an increase in customer deposits, a
decrease in accounts receivable, and amortization and depreciation of long-term assets.





Cash flows from investing
activities totaled $3,313,000 and $2,137,000 for the six months ended June 30, 2002 and June 30, 2001, respectively. The positive cash flows for 2002 consisted primarily of the release and availability of approximately $1,300,000 of funds previously
classified as restricted cash in connection with a performance bond and the repayment of the $2,000,000 line of credit with funds also previously classified as restricted (note 6 to condensed consolidated financial statements). The positive cash
flow from investing activity for 2001 was due primarily to the sale of 50% of the remaining shares in DTPI for $2,510,000 offset by $311,000 for capital expenditures and an increase of $162,000 in short-term investments





Cash flows from financing activities totaled a negative $1,954,000 and a negative $1,164,000 for the six-month periods ended June 30, 2002
and 2001, respectively. The negative cash flow for 2002 consisted primarily of the repayment of the line of credit for $2,000,000 previously classified as short-term borrowings. The negative cash flow for 2001 was due primarily to the net repayment
of approximately $1,114,000 to reduce the balance owed under the existing secured line of credit (note 6 to the condensed consolidated financial statements).





Overall, the Companys cash and cash equivalents totaled $1,179,000 at June 30, 2002 as compared to $4,658,000 at December 31, 2001.





At June 30, 2002, the Company was contingently liable for standby letters of credit of approximately $1,190,000, which reduces available borrowings under its line of credit
to approximately $60,000 (see note 6 to the condensed consolidated financial statements). At December 31, 2001, the Company was contingently liable for standby letters of credit totaling $2,490,000 of which $1,140,000 restricted borrowings under its
line of credit and the balance was cash collateralized at December 31, 2001.





At June 30, 2002, the Company had
unused availability under its line of credit of approximately $60,000.





At June 30, 2002, the Company had two
customers with extended payment terms beyond 90 days but less than 280 days for approximately $2,500,000.





At June
30, 2002, the Companys current assets were $17,180,000 and current liabilities were $12,637,000, representing a current ratio of 1.36 to 1.00. Excluding inventories of $7,625,000, the Companys quick ratio (current assets less inventories
compared to current liabilities) was 0.76 to 1.00. The Company is currently




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conserving cash resources by aggressively reducing operating costs to a level commensurate with current
and near-term revenue expectations, focusing sales efforts on reducing current inventory and closely monitoring new inventory purchases to reduce the risk of excess inventory, working closely with key vendors, and managing customer receivables
closely to ensure collection on a timely basis. In addition, the Company is focused on generating cash through shipping existing backlog and closing near term sales opportunities including the licensing the production of certain of the
Companys products for certain markets. Additionally, to increase the cash available to the business, the Company may consider the sale and leaseback of the Companys corporate headquarters in Irvine, California and is seeking alternative
arrangements to secure certain bid and performance bonds that under the present arrangement restricts its ability to borrow under its existing line of credit. The Company believes that these actions taken collectively should improve the working
capital position of the Company in the short-term. Accordingly, management expects to have sufficient cash generated from operations, through availability under its line of credit, and from other external sources to meet its anticipated cash
requirements for the next twelve months. However, in the event these actions are not successful or the Company has a shortfall in anticipated sales, the Company will be required to raise additional working capital through debt and/or equity
financing. There can be no assurance that the Company will be successful in raising funds, or if funds are available, that they will be available on terms that will not result in substantial costs or dilution to existing stockholders.





New Accounting Standards:





In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or 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 an entity that either has been disposed of or is classified as held for sale.





The Company adopted Statement 144 on January 1, 2002. The adoption of Statement 144 had no effect on the Companys financial
statements.





Item 3Quantitative and Qualitative Disclosures About Market Risk





To avoid the
risk of fluctuating exchange rates associated with international sales, the Company conducts most international sales in United States currency. 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 June 30, 2002 and as of December 31, 2001 is approximately $146,000 and $135,000, respectively. Foreign exchange gain through the six months ended June 30, 2002
due primarily to the weakening of the U.S. Dollar against the Thai Baht was $21,000.





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.





The Company does not use derivative financial instruments in its investment portfolio.





Risk Factors and Forward Looking Statements:





THIS DOCUMENT CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE FORWARD LOOKING STATEMENTS, ORALLY OR IN WRITING. THE WORDS ESTIMATE, PROJECT, POTENTIAL,
INTENDED, EXPECT, BELIEVE AND SIMILAR EXPRESSIONS OR WORDS ARE




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INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED OR SUGGESTED IN ANY FORWARD LOOKING STATEMENTS AS A RESULT OF A WIDE VARIETY OF FACTORS AND CONDITIONS, AMONG OTHERS, LACK OF LIQUIDITY AND WORKING CAPITAL, INABILITY TO RAISE DEBT OR EQUITY FINANCING, LONG TERM CYCLES INVOLVED IN
COMPLETING MAJOR CONTRACTS, PARTICULARLY IN FOREIGN MARKETS, INCREASING COMPETITIVE PRESSURES, DEPENDENCE ON EMERGING MARKETS AND A LIMITED NUMBER OF CUSTOMERS, GENERAL ECONOMIC CONDITIONS, TECHNOLOGICAL ADVANCES, THE TIMING OF NEW PRODUCT
INTRODUCTIONS, POLITICAL AND ECONOMIC RISKS INVOLVED IN FOREIGN MARKETS AND FOREIGN CURRENCIES AND THE TIMING OF OPERATING AND OTHER EXPENDITURES, AND POSSIBLE VOLATILITY OF STOCK PRICES AND NASDAQ LISTING REQUIREMENTS. REFERENCE IS HEREBY MADE TO
RISK FACTORS IN THE COMPANYS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001.





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.





On August 13, 2002, Nasdaq notified the Company that it is not in compliance with Nasdaqs
minimum bid price of $1.00 per share required for continued listing on the Nasdaq National Market. The Company has until November 11, 2002 to regain compliance with Nasdaqs minimum bid requirement. In addition, Nasdaq notified the Company that
it is not in compliance with the minimum stockholders equity requirement of $10,000,000, which becomes effective on November 1, 2002. As of June 30, 2002, the Companys stockholders equity was $5,347,000. Prior to November 11, 2002,
the Company may be delisted for failure to satisfy listing requirements other than the minimum bid price. Failure to meet the listing requirements may result in the Company being moved from the National Market to the SmallCap Market or being
delisted. 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 decline.




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Part IIOther Information





Item 1Legal Proceedings





From time to time, the Company is involved in litigation
relating to claims arising out of its operations in the normal course of business. 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.





Item 6Exhibits and Reports On Form 8-K





(a)    Exhibits





99.1 Certificate of Chief Executive Officer





99.2 Certificate of Chief Financial Officer





(b)    Reports on Form 8-K





None





Items 1, 2, 3, 4, and 5 are not applicable and have been omitted.







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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.





STM WIRELESS, INC.Date: August 13, 2002



By:

/s/    JOSEPH WALLACEJoseph Wallace Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)




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