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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-25540
STB SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1855896
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1651 North Glenville Drive, Richardson, Texas 75081
(Address of principal executive offices)
(214)234-8750
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
NUMBER OF SHARES OUTSTANDING AS OF
TITLE OF EACH CLASS: SEPTEMBER 16, 1996:
- -------------------- ----------------------------------
Common Stock, $.01 par value 4,507,364
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STB SYSTEMS, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION NUMBER
Item 1 Consolidated Financial Statements (unaudited):
Consolidated Balance Sheet at July 31, 1996
and October 31, 1995 2
Consolidated Statement of Operations for the
quarter ended July 31, 1996 and 1995 3
Consolidated Statement of Operations for the nine
months ended July 31, 1996 and 1995 4
Consolidated Statement of Cash Flows for the nine
months ended July 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-11
PART II OTHER INFORMATION
Item 1 Legal Proceedings 11
Items 2 through 4 have been omitted since the registrant has no
reportable events in relation to these items.
Item 5 Other Information - Business Risks 11-13
Item 6 Exhibits and Reports on Form 8-K 13
Signatures 14
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STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(dollars in thousands)
JULY 31, OCTOBER 31,
1996 1995
-------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,132 $ 4,162
Accounts receivable - trade, net of allowance for
doubtful accounts of $465 and $449, respectively 22,075 20,634
Inventories, net 20,465 27,875
Other current assets 329 869
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Total current assets 47,001 53,540
Property and equipment, net 4,506 3,397
Other assets 1,099 602
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Total assets $52,606 $57,539
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 4,818 $11,411
Accounts payable - trade 15,925 17,731
Accrued wages, commissions and bonuses 962 559
Notes payable to related parties - 700
Other accrued liabilities 1,147 791
Current portion of long-term liabilities 722 727
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Total current liabilities 23,574 31,919
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Long-term liabilities:
Long-term notes payable 1,125 1,500
Obligations under capital leases and other
long-term liabilities 547 758
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Total long-term liabilities 1,672 2,258
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Shareholders' equity:
Preferred stock, 2,000,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 20,000,000 shares
authorized, 4,504,387 and 4,500,000 shares
issued and outstanding, respectively 45 45
Additional paid-in capital 22,213 22,160
Retained earnings 5,347 1,402
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27,605 23,607
Treasury stock, 35 shares, at cost (245) (245)
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Total shareholders' equity 27,360 23,362
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Total liabilities and shareholders' equity $52,606 $57,539
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------- -------
The accompanying notes are an integral part of these financial statements
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STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(dollars in thousands except per share amounts)
QUARTER ENDED
JULY 31,
-----------------------
1996 1995
--------- ---------
Net sales $ 42,537 $ 25,663
Cost of sales 33,921 22,114
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Gross profit 8,616 3,549
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Operating expenses:
Research and development 1,182 713
Sales and marketing 2,847 1,992
General and administrative 2,214 1,429
--------- ---------
Total Operating Expenses 6,243 4,134
--------- ---------
Income (loss) from operations 2,373 (585)
Interest expense, net 271 170
--------- ---------
Income (loss) before income taxes 2,102 (755)
Provision (benefit) for income taxes 722 (258)
--------- ---------
Net income (loss) $ 1,380 $ (497)
Pro forma data:
Pro forma adjustment to general and
administrative expenses - -
Pro forma adjustment to reflect interest
on Founding Shareholder Notes - -
Pro forma adjustment to reflect federal
income taxes - -
--------- ---------
Net income (loss) $ 1,380 $ (497)
--------- ---------
--------- ---------
Net income (loss) per share $ 0.30 $ (0.11)
--------- ---------
--------- ---------
Weighted average shares outstanding used in
the net income per share calculation 4,591,303 4,500,000
Supplemental pro forma net income (loss)
per share $ (0.11)
---------
---------
Weighted average shares used in the
supplemental pro forma net income per
share calculation 4,500,000
The accompanying notes are an integral part of these financial statements.
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STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(dollars in thousands except per share amounts)
NINE MONTHS ENDED
JULY 31,
-----------------------
1996 1995
--------- ---------
Net sales $ 132,034 $ 89,771
Cost of sales 107,753 76,415
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Gross profit 24,281 13,356
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Operating expenses:
Research and development 2,975 2,051
Sales and marketing 7,847 5,300
General and administrative 6,591 4,523
--------- ---------
Total Operating Expenses 17,413 11,874
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Income from operations 6,868 1,482
Interest expense, net 869 556
--------- ---------
Income before income taxes 5,999 926
Provision (benefit) for income taxes 2,052 (131)
--------- ---------
Net income $ 3,947 $ 1,057
Pro forma data:
Pro forma adjustment to general
and administrative expenses - 220
Pro forma adjustment to reflect interest
on Founding Shareholder Notes - (52)
Pro forma adjustment to reflect
federal income taxes - (483)
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Net income (Pro forma for 1995) $ 3,947 $ 742
--------- ---------
--------- ---------
Net income per share (Pro forma for 1995) $ 0.88 $ 0.20
--------- ---------
--------- ---------
Weighted average shares outstanding
used in the net income per share
calculation (Pro forma for 1995) 4,504,239 3,746,395
Supplemental pro forma net income per share $ 0.19
---------
---------
Weighted average shares used in the
supplemental pro forma net income per
share calculation 3,983,014
---------
---------
The accompanying notes are an integral part of these financial statements.
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STB SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
NINE MONTHS ENDED
JULY 31,
--------------------
1996 1995
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Cash flows from operating activities:
Net income $ 3,947 $ 1,057
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 831 517
Deferred tax asset - 455
Translation gain (loss) (1) 5
Changes in assets and liabilities:
Accounts receivable - trade (1,441) (424)
Inventories 7,410 (10,964)
Other current assets 540 (168)
Other assets (497) (426)
Accounts payable - trade (1,806) 2,773
Accrued wages, commission, and bonuses 403 (410)
Other accrued liabilities 356 (214)
------- --------
Net cash provided by (used in) operating activities 9,742 (7,799)
Cash flows from (used in) investing activities:
------- --------
Purchases of property and equipment (1,940) (2,008)
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Cash flows from (used in) financing activities:
Borrowings (payments) on short-term debt (7,293) 410
Borrowings (payments) on long-term debt (592) 329
Issuance of common stock, net of issue costs 53 19,638
Payment of dividends - (3,367)
------- --------
Net cash provided by (used in) financing
activities (7,832) 17,010
------- --------
Net increase (decrease) in cash and cash equivalents (30) 7,203
Cash and cash equivalents at beginning of period 4,162 277
------- --------
Cash and cash equivalents at end of period $ 4,132 $ 7,480
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The accompanying notes are an integral part of these financial statements.
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STB SYSTEMS, INC.
Notes To Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
STB Systems, Inc. develops, manufactures and sells video graphics adapters
used in IBM-compatible personal computers ("PCs"). STB Assembly, Inc. is a
wholly-owned subsidiary and provides manufacturing services to STB Systems,
Inc.
The accompanying financial statements include the consolidated accounts of
STB Systems, Inc. and STB Assembly, Inc. (collectively referred to as the
"Company"). STB Assembly, Inc. has two majority owned subsidiaries, STB de
Mexico S.A. de C.V. ("STB de Mexico") and Maquilados Continentales de
Ciudad Juarez, S.A. de C.V. ("MCC"). STB de Mexico is a Mexican
corporation operated as a maquiladora and performs assembly services for
STB Systems, Inc. MCC entered into an agreement in January 1990 to provide
subcontract manufacturing services for STB Systems, Inc. As of December
1992, MCC became an inactive entity. All significant intercompany accounts
and transactions have been eliminated in consolidation. Minority interests
in the subsidiaries are insignificant for financial reporting purposes.
The financial information presented herein should be read in conjunction
with the Company's annual consolidated financial statements for the year
ended October 31, 1995. The foregoing unaudited interim consolidated
financial statements reflect all adjustments (all of which are of a normal
recurring nature) which are, in the opinion of management, necessary for a
fair presentation of the results of the interim periods. The results for
the interim periods are not necessarily indicative of the results to be
expected for the year.
2. COMPLETION OF REORGANIZATION AND INITIAL PUBLIC OFFERING
STB Systems, Inc. entered into a Share Exchange Agreement on December 16,
1994 with the shareholders of STB Assembly, Inc. providing for the issuance
of STB Systems, Inc. common stock in exchange for the outstanding common
stock of STB Assembly, Inc. on a 1-for-8,333 basis immediately prior to
consummation of an initial public offering (the "Offering"). For purposes
of these consolidated financial statements, these shares are treated as
outstanding for all periods presented. As STB Systems, Inc. and STB
Assembly, Inc. were under common control, no change in basis resulted for
financial reporting purposes as a result of the Share Exchange Agreement.
On February 21, 1995, STB Systems, Inc. terminated its S Corporation
status, and on February 22, 1995, the Company completed its initial public
offering of 2.0 million shares of Common Stock. Net proceeds from the
Offering totaled $21.7 million, net of underwriters' discounts and other
offering expenses totaling $2.3 million.
3. PRO FORMA NET INCOME AND NET INCOME PER SHARE
Prior to the Offering, STB Systems, Inc. had been treated for federal and
certain state income tax purposes as an S Corporation under Subchapter S of
the Internal Revenue Code of 1986, as amended. As a result, the income of
STB Systems, Inc. for federal and certain state income tax purposes was
included in the income tax returns of the individual shareholders ("Founding
Shareholders"). Accordingly, prior to February 21, 1995, no recognition of
federal and certain state income taxes has been given in the accompanying
financial statements. Prior to the conversion to C Corporation status, in
connection with the Offering, STB Systems, Inc. paid dividends to its
shareholders in an amount equal to the taxable earnings of STB Systems, Inc.
multiplied by the current personal income tax rate.
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3. PRO FORMA NET INCOME AND NET INCOME PER SHARE (CONTINUED)
Pro forma net income and net income per share have been determined assuming
that (1) the Company had adopted a revised profit sharing plan effective
November 1, 1994, (2) the Founding Shareholder Notes in the aggregate
amount of $2,040,000 had been outstanding since November 1, 1994 bearing
interest at 7.75% per annum, and (3) the Company had been taxed as a C
Corporation for federal and certain state income tax purposes since
November 1, 1994.
Pro forma net income per share has been computed using the weighted average
number of common shares outstanding after giving retroactive effect to the
stock split of 8,333 shares for one effective December 20, 1994 referred to
in note 2. above. The common equivalent shares are also increased to
reflect the number of shares which would have been necessary to fund the
$2,040,000 distribution paid to the Founding Shareholders from the proceeds
of the Offering of the Company's common stock.
Supplemental pro forma net income per share is based on the weighted average
number of shares of common stock used in the calculation of pro forma net
income per share, plus the common equivalent shares which were necessary to
repay the $5,500,000 of bank indebtedness outstanding under the Company's
Revolving Credit Facility from the proceeds of the Offering.
4. INVENTORIES
Inventories at July 31, 1996 and October 31, 1995 consist of the following:
(in thousands)
July 31, 1996 October 31, 1995
------------- ----------------
Raw Materials $10,127 $15,599
Work-in-process 7,695 8,156
Finished goods 2,643 4,120
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Totals $20,465 $27,875
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5. SHORT TERM DEBT
On January 5, 1996, the Company increased its existing revolving credit
facility ("Revolving Credit Facility") from $13,000,000 to $23,000,000.
At July 31, 1996, $4,818,000 was outstanding under this credit facility.
All indebtedness under the Revolving Credit Facility matures on November
1, 1999.
Availability under the Revolving Credit Facility is subject to limitations
determined by the Company's borrowing base, which is calculated based upon
eligible accounts receivable and inventory as defined in the Revolving
Credit Facility agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops, manufactures and sells computer subsystems ("graphics
adapters") used primarily in IBM-compatible desktop personal computers to
process and enhance graphics and video images. The Company derives substantially
all of its revenues from the sale of graphics adapters. The Company recognizes
revenue upon shipment of its products.
The Company sells two broad categories of graphics adapters products, which
the Company refers to as "video graphics adapter products" and "multi-monitor
adapter products". Video graphics adapter products are sold both to original
equipment manufacturers ("OEMs") as subsystems for their PC products and to the
retail market. Sales of video graphics adapter products to OEMs are
characterized by higher unit volumes and lower gross profit margins. Sales of
video graphics adapter products to the retail market are characterized by
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modest volumes and higher gross profit margins than the sale of similar products
to OEMs. Although multi-monitor adapter product volumes are relatively low, the
Company realizes higher gross profit margins from the sale of multi-monitor
adapter products than from the sale of video graphic adapter products. The
Company began shipping a new line of multimedia products in the third quarter of
the 1996 fiscal year. Revenues generated from the sale of these multimedia
products have been characterized as OEM channel sales in the discussion below.
The Company is not yet in a position to forecast the effect that the sale of
these products will have upon the Company's results of operations. The
Company's total gross profit margin will likely fluctuate from period to period
as a result of changes in the Company's product mix and sales channels.
The Company focuses on the sale of its products to OEMs, the retail market
and the multi-monitor and specialized technology markets. Primarily as a result
of significant increases in OEM sales volumes, the Company's net sales and
income from operations have increased rapidly in recent periods. Sales of video
graphics adapters to OEMs represented 78% and 75% of total net sales in fiscal
years 1995 and 1994, respectively. Video graphics adapter sales to retail
customers represented 12% and 11% of total net sales in fiscal years 1995 and
1994 respectively, and multi-monitor and specialized technology market sales
represented 7% and 12% of total net sales, respectively, in these periods. The
balance of total net sales in these periods was derived primarily from the
provision of third party assembly services, which accounted for approximately 3%
of total net sales in fiscal year 1995.
STB Systems, Inc. operated as an S Corporation from November 1, 1986 until
February 21, 1995, at which time the Company became fully subject to federal and
state income taxes.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated statements of operations as a percentage of net sales from
continuing operations:
QUARTER ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
---------------- -----------------
1996 1995 1996 1995
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 79.7% 86.2% 81.6% 85.1%
----- ----- ----- -----
Gross profit 20.3% 13.8% 18.4% 14.9%
Operating expenses:
Research and development 2.8% 2.8% 2.3% 2.3%
Sales and marketing 6.7% 7.8% 5.9% 5.9%
General and administrative 5.2% 5.5% 5.0% 5.0%
----- ----- ----- -----
Total Operating Expenses 14.7% 16.1% 13.2% 13.2%
Income (loss) from operations 5.6% (2.3%) 5.2% 1.7%
Interest expense, net 0.6% 0.6% 0.7% 0.6%
Income (loss) before income taxes 5.0% (2.9%) 4.5% 1.1%
Provision (benefit) for income taxes 1.7% (1.0%) 1.5% (0.1%)
----- ----- ----- -----
Net income (loss) 3.3% (1.9%) 3.0% 1.2%
----- ----- ----- -----
----- ----- ----- -----
Pro forma adjustment to general
and administrative expenses 0.0% 0.0% 0.0% 0.2%
Pro forma adjustment to reflect
interest on Founding Shareholder
Notes 0.0% 0.0% 0.0% (0.1%)
Pro forma adjustment to reflect
federal income taxes 0.0% 0.0% 0.0% (0.5%)
----- ----- ----- -----
Pro forma net income (loss) 3.3% (1.9%) 3.0% 0.8%
----- ----- ----- -----
----- ----- ----- -----
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QUARTER ENDED JULY 31, 1996 COMPARED TO QUARTER ENDED JULY 31, 1995.
Net Sales. Net sales increased by $16.9 million, or 65.8%, from $25.6
million in the third quarter of fiscal 1995 to $42.5 million in the third
quarter of fiscal 1996. This increase resulted primarily from continuing growth
in sales of the Company's products to original equipment manufacturers ("OEMs").
For the third quarter of fiscal 1996, OEM channel sales of $32.4 million
represented approximately 76% of total net sales, compared to OEM channel sales
of $18.7 million, representing approximately 73% of total net sales, for the
third quarter of fiscal 1995. Domestic shipments to OEMs remained strong during
the third quarter of fiscal 1996, offsetting continued soft demand in the
international arena, primarily Europe, during this period. The Company's sales
into the retail channel increased by $2.6 million, or 64% from $4.0 million in
the third quarter of fiscal 1995 to $6.6 million in the third quarter of fiscal
1996. Sales of multi-monitor products increased by $428,000, or 21%, from $2.0
million in the third quarter of fiscal 1995 to $2.5 million in the third quarter
of fiscal 1996.
Gross Profit. Gross profit increased by $5.1 million, or 143%, from $3.5
million in the third quarter of fiscal 1995 to $8.6 million in the third quarter
of fiscal 1996. During the period, gross profit as a percentage of net sales
increased from 13.8% to 20.3%. The increase in the amount of gross profit
resulted primarily from significant increases in sales volumes of the Company's
products, offset by decreasing unit prices. The increase in gross profit as a
percentage of net sales resulted primarily from increasing margins on sales of
video graphic adapters to OEMs due to improved DRAM prices and availability and
the economies of scale resulting from higher production volumes. However, as
graphics technology moves toward more exotic types of memory such as MDRAM,
WRAM, High Speed EDO VRAM, SGRAM, and Synchronous DRAM, no assurances can be
given that these conditions will continue. Management believes that
fluctuations in memory pricing and availability could again result in industry
shortages and price pressures on the Company's products. In addition, increased
revenues from the retail and multi-monitor and specialized technology channels
contributed to the higher margin percentage.
Research and Development Expenses. Research and development expenses
increased by $469,000, or 65.8%, from $713,000 in the third quarter of fiscal
1995 to $1.2 million in the third quarter of fiscal 1996. This increase
resulted from increased staffing and equipment requirements associated with the
development of new products as well as the continuing enhancement and support of
the Company's existing products. During the periods, expenses as a percentage
of net sales remained unchanged at 2.8%.
Sales and Marketing Expenses. Sales and marketing expenses increased by
$855,000, or 43.0%, from $2.0 million in the third quarter of fiscal 1995 to
$2.8 million in the third quarter of fiscal 1996. This increase in expenses
resulted primarily from increased commissions paid as a result of higher
sales and increased advertising and trade show expenses. During the periods,
the expenses as a percentage of net sales declined from 7.8% to 6.7%.
General and Administrative Expenses. General and administrative expenses
increased by $785,000, or 55%, from $1.4 million in the third quarter of
fiscal 1995 to $2.2 million in the third quarter of fiscal 1996. This
increase in the amount of general and administrative expenses was due
primarily to expenses associated with the Company's growth, including
increased personnel expenses, facility costs and other operating expenses.
During the periods, these expenses as a percentage of net sales declined from
5.5% to 5.2%.
NINE MONTHS ENDED JULY 31, 1996 COMPARED TO NINE MONTHS ENDED JULY 31, 1995.
Net Sales. Net sales increased by $42.3 million, or 47.1%, from $89.8
million in the first nine months of fiscal 1995 to $132 million in the first
nine months of fiscal 1996. This increase resulted primarily from continuing
growth in sales of the Company's products to original equipment manufacturers
("OEMs").
During the first nine months of fiscal 1996, OEM channel sales of $103.1
million, represented approximately 78% of total net sales, compared to OEM
channel sales of $71.4 million representing approximately 80% of total net
sales, for the first nine months of fiscal 1995. Domestic shipments to OEMs
remained strong during the first nine months of fiscal 1996, offsetting
continued soft demand in the international arena, primarily Europe, during this
period. The Company's sales into the retail channel increased by $4.4 million,
or 48%, from $9.1 million in the first nine months of fiscal 1995 to $13.5
million in the first nine months of fiscal 1996. Sales of multi-monitor
products increased by $2.3 million, or 38%, from $5.8 million in the first nine
months of fiscal 1995 to $8.1 million in the first nine months of fiscal 1996.
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Gross Profit. Gross profit increased by $10.9 million, or 81.8%, from
$13.3 million in the first nine months of fiscal 1995 to $24.2 million in the
first nine months of fiscal 1996. During the periods, gross profit as a
percentage of net sales increased from 14.9% to 18.4%. The increase in the
amount of gross profit resulted primarily from significant increases in sales
volumes of the Company's products, offset by decreasing unit prices. The
increase in gross profit as a percentage of net sales resulted primarily from
increasing margins on sales of video graphic adapters to OEMs due to improved
DRAM prices and availability and the economies of scale resulting from higher
production volumes. In addition, increased revenues from the retail and multi-
monitor and specialized technology channels contributed to the higher margin
percentage. However, as graphics technology moves toward more exotic types of
memory such as MDRAM, WRAM, High Speed EDO VRAM, SGRAM, and Synchronous DRAM, no
assurances can be given that these conditions will continue. Management
believes that fluctuations in memory pricing and availability could again result
in industry shortages and price pressures on the Company's products.
Research and Development Expenses. Research and development expenses
increased by $924,000, or 45%, from $2.0 million in the first nine months of
fiscal 1995 to $2.9 million in the first nine months of fiscal 1996. This
increase resulted from increased staffing and equipment requirements
associated with the development of new products and the continuing
enhancement and support of the Company's products. During the periods,
expenses as a percentage of net sales remained at 2.3%.
Sales and Marketing Expenses. Sales and marketing expenses increased by
$2.5 million, or 48.1%, from $5.3 million in the first nine months of fiscal
1995 to $7.8 million in the first nine months of fiscal 1996. This increase
resulted primarily from additions to the Company's sales staff, increased
commissions paid as a result of higher sales and increased advertising expenses
and trade shows. During the periods, the expenses as a percentage of net sales
remained at 5.9%.
General and Administrative Expenses. General and administrative expenses
increased by $2.1 million, or 45.7%, from $4.5 million in the first nine months
of fiscal 1995 to $6.6 million in the first nine months of fiscal 1996. During
these periods, expenses as a percentage of net sales remained at 5.0%. General
and administrative expenses, exclusive of profit sharing expenses, increased by
$1.8 million, or 44.1%, from $4.1 million in the first nine months of fiscal
1995 to $5.9 million in the first nine months of fiscal 1996, due primarily to
expenses associated with the Company's growth, including increased personnel
expenses and other expenses including insurance premiums, legal expenses, and
facility costs. The Company's profit sharing allocation to employees, which
amounted to 25% of income before taxes (as calculated prior to profit sharing
expenses) in the first quarter of fiscal 1995, was reduced to 10% of income
before taxes for the second quarter of fiscal 1995. As a result of higher
levels of profitability, which offset this reduction, profit sharing expense
increased by $249,000, or 62%, from $400,000 in the first nine months of fiscal
1995 to $649,000 in the first nine months of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital and liquidity needs are its component
purchase and inventory requirements, as well as the need to finance accounts
receivable and, to a lesser degree, manufacturing equipment expenditures. The
Company has financed these requirements, and its operations generally, through a
combination of cash generated from operations, trade credit from vendors, bank
borrowings and the Company's Offering. As a result of the Company's rapid
growth in recent years, its capital resource requirements have increased
substantially. The Company has addressed these increasing requirements through
each of its sources of financing.
Cash generated from continuing operations was $9.7 million in the first
nine months of fiscal 1996 resulting primarily from net income and a reduction
in inventories, offset by increases in accounts receivable and reductions in
accounts payable, compared to $7.8 million used in the first nine months of
fiscal 1995. Working capital was $23.4 million at July 31, 1996, compared to
$21.6 million at October 31, 1995, and cash was $4.1 million at July 31, 1996,
compared to $4.2 million at October 31, 1995.
Amounts invested in equipment totaled $1.9 million in the first nine months
of fiscal 1996, compared with net purchases of equipment of $2.0 million in the
first nine months of fiscal 1995. The amounts invested in equipment are
primarily for manufacturing equipment additions and upgrades of existing
equipment to support the demand for the Company's products from existing as well
as new customers. The Company expects that additional capital expenditures for
similar types of equipment will be required to support continued growth and
demand for the Company's products.
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The Company currently has lines of credit of up to $25 million under a
secured revolving credit facility (the "Revolving Credit Facility") which
includes a $2 million term loan (the "Mezzanine Facility"). During the
current fiscal year, the Company increased the size of its Revolving Credit
Facility by $10 million to its current level. At July 31, 1996, the Company
had outstanding $4.8 million and $1.6 million under the Revolving Credit
Facility and the Mezzanine Facility, respectively. In connection with the
Company's Offering, the Company's bank reduced the interest rate of the
Revolving Credit Facility from prime plus 1.75% to prime plus 0.75% and has
agreed that the minimum monthly interest requirement of $25,000 called for by
the Revolving Credit Facility can be satisfied by interest accrued pursuant
to both the Revolving Credit Facility and the Mezzanine Facility. In return,
the Company agreed to more restrictive standards in its financial covenants
and to pay the bank a $100,000 fee for restructuring the Company's bank
facilities. The interest rate on the Mezzanine Facility was reduced from
prime plus 3% to prime plus 0.75% in the first quarter of fiscal 1996.
On February 22, 1995, the Company completed an initial public offering of
2.0 million shares of Common Stock. Proceeds from the Offering totaled $21.7
million, net of underwriters' discounts and other Offering expenses totalling
$2.3 million. The Company applied a portion of the Offering proceeds to
reduce indebtedness owed under the Revolving Credit Facility by $5.5 million
and to repay $3.0 million in trade debt. In addition, just prior to the
Offering, the Company issued notes to its founding shareholders in the
principal amount of $2.0 million representing a portion of the dividend
distribution of the Company's undistributed S Corporation earnings. These
notes provide for twelve equal monthly payments of principal and interest to
the founding shareholders, the final payment of which was made in February,
1996. The remaining portion of the Company's undistributed S Corporation
earnings in the amount of $2.1 million was paid to the founding shareholders
from the Offering proceeds.
SEASONALITY
The Company's quarterly operating results vary significantly depending on
factors such as the timing of new product introductions, adequacy of
component supply, changes in component costs, variations in the Company's
product mix, seasonal promotions by the Company and its customers and
competitive pricing pressures. Because the timing of these factors may vary,
the results of any particular quarter may not be indicative of results for
the full year or any future period. In addition, the PC market generally
experiences weaker sales during the summer months. Although the Company has
experienced sales growth for each year since fiscal 1990, there can be no
assurance that this growth will continue on a quarterly or annual basis.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was served notice of the filing of a class action lawsuit on
September 6, 1995 in the 134th Judicial District Court of Dallas County,
Texas against it and three executive officers and directors of the Company.
The alleged class of Plaintiffs consists of all persons who purchased shares
of the Company's stock on the open market between February 14, 1995 and May
24, 1995. The Plaintiffs, who seek unspecified damages, allege that the
Company's Registration Statement and Prospectus in its initial public
offering contained false and materially misleading statements. The Company
and the individual defendants deny the Plaintiffs' allegations and are
vigorously defending this action.
ITEM 5. OTHER INFORMATION - BUSINESS RISKS
This report contains 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. These forward-looking statements
involve risks and uncertainties, and the Company's actual results may differ
materially from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below.
-11-
<PAGE>
POTENTIAL FOR FLUCTUATING OPERATING RESULTS
The Company's historical operating results have fluctuated significantly
from period to period, and will likely fluctuate in the future. Fluctuations
result from a wide variety of factors, including the timing and availability
of components, changes in product mix and pricing, the timing of customer
orders, new product developments or introductions, production interruptions
and product reviews and other media coverage. The Company's quarterly
results are also subject to seasonal fluctuations, with generally weaker
fiscal third quarter results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality". In addition, as
all of the Company's products are sold for use in PCs, the Company's sales
and operating results are influenced significantly by fluctuations in the PC
market.
DEPENDENCE ON SUPPLIERS
Several components used in the Company's products are obtained from
single or limited sources and, in instances where the component manufacturer
does not allocate a sufficient supply of components to meet the Company's
needs, the Company must obtain specific components from distributors or on
the spot market at a higher cost. In addition to certain components, certain
software drivers used in the Company's products are also obtained from single
or limited sources. The Company has no guaranteed supply arrangements with
any of its suppliers, and there can be no assurance that current suppliers
will be able to meet its requirements. While the Company believes that with
respect to its single source components it could obtain similar products from
other sources, it likely would be required to pay significantly more for such
products, alter product designs to use alternative products or reduce its
production of the related graphics adapters. As a result of delays in the
delivery of components, lack of available components, or the lack of
available software drivers from component vendors, the Company has in the
past experienced difficulty in meeting certain product shipment dates to
customers, which in some instances has resulted in a loss of business. It is
likely that delays in delivery of components, shortages of components and the
lack of available software drivers will continue to occur in the future, and
such delays, or inconsistencies in the quality or reliability of components
or related software, could materially adversely affect the Company and its
results of operations.
In addition, significant increases in the prices of components, such as
graphics controller chips or memory chips, occur from time to time, and often
the Company is not able to adjust the price of its products accordingly. In
the past, both occasional worldwide shortages of DRAM video memory and
international tariff disputes have resulted in substantial component cost
increases. It is likely that the Company will experience component cost
increases in the future.
DEPENDENCE ON KEY CUSTOMERS
The Company's top six customers accounted for 68.4% and 64.4% of net
sales during fiscal years 1994 and 1995, respectively. Historically, Gateway
2000 has been the Company's most significant customer. The loss or reduction
of the business of Gateway 2000 or one or more of the Company's other major
customers would have a material adverse effect on the Company's results of
operations. In addition, the Company's future success will depend
significantly upon the success of its customers, particularly its OEM
customers.
DEPENDENCE ON GRAPHICS ADAPTER MARKET
Substantially all of the Company's net sales are derived from the sale
of graphics adapters. Graphics adapters generally are used in higher end PCs
offering the latest technology and performance features, while graphics
circuitry usually is included on the motherboard of entry-level PC models.
An increase in the number or percentage of manufactured PCs that incorporate
graphics circuitry on the motherboard, an increase in the number or
percentage of graphics adapters manufactured by OEMs or a decrease in PC
sales volumes would effectively shrink the market for the Company's products
and could materially adversely affect the Company's business. In addition,
it is possible that graphics circuitry could be incorporated into the CPU,
which could materially adversely affect the Company and its results of
operations.
NEW PRODUCTS AND TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by short product
life cycles, rapidly changing technology, evolving industry standards and
frequent introductions of new products. The Company's success
-12-
<PAGE>
depends upon market acceptance of its existing products and its ability to
enhance its existing products and to continually develop and introduce new
products and features to meet changing customer requirements. There can be
no assurance that the Company will be successful in enhancing its existing
products or identifying, developing, manufacturing or marketing new products.
Delays in developing new products or enhancements or the failure of such
products or enhancements to gain market acceptance could materially adversely
affect the Company and its results of operations.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
It is common in the computer industry for companies to assert
intellectual property infringement claims against other companies. As a
consequence, the Company indemnifies some OEM customers in certain respects
against intellectual property claims relating to its products. If an
intellectual property claim were to be brought against the Company and the
Company was found to be infringing upon the rights of others, the Company
could be required to pay infringement damages, pay licensing fees, modify its
products so that they are not infringing or discontinue offering products
that were found to be infringing, any of which could materially adversely
affect the Company and its results of operations.
If an intellectual property claim were to be brought against one or more
of the Company's suppliers and the supplier was found to be infringing upon
the rights of others, the supplier could be enjoined from further shipments
of its products to the Company which could materially adversely affect the
Company and its results of operations.
INTERNATIONAL OPERATIONS
The Company is subject to the general risks of conducting business
internationally, including unexpected changes in regulatory requirements,
fluctuations in currency exchange rates, delays resulting from difficulty in
obtaining export licenses for certain technology, tariffs and other barriers
and restrictions and the burdens of complying with a variety of foreign laws.
In addition, the Company is subject to general geopolitical risks, such as
political instability and changes in diplomatic and trade relationships, in
connection with its international operations. Although the Company has not
to date experienced any material adverse effect on its operations as a result
of such factors, there can be no assurance that such factors will not
materially adversely impact the Company and its results of operations in the
future or require the Company to modify its current business practices. The
Company currently sells its products at prices denominated in U.S. dollars
and an increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products more expensive and potentially
less competitive in foreign markets. The Company expects to sell a portion
of its products in the future at prices denominated in other currencies and
will therefore increase its currency exposure risk.
For further discussion of additional business risks or investment
considerations, see Part I, pages 1 through 15 of the Company's Annual Report
- -Form 10-K for the fiscal year ended October 31, 1995 and "Risk Factors"
contained in the Company's Registration Statement on Form S-1 as filed with
the Securities and Exchange Commission on February 14, 1995 (Registration No.
33-87612).
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER
-------
11.1 Computation of Earnings Per Common Share and Common
Equivalent Share
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K
There were no reports filed on Form 8-K during the quarterly
period ended July 31, 1996.
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STB SYSTEMS, INC.
Dated: September 16, 1996 By: /s/ William E. Ogle
-------------------------------------
President and Chief Executive Officer
Dated: September 16, 1996 By: /s/ Bryan F. Keyes
-------------------------------------
Bryan F. Keyes, Treasurer, Director
of Legal and Finance and Chief
Accounting Officer
-14-
<PAGE>
EXHIBIT 11.1
STB SYSTEMS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(UNAUDITED)
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
PRO FORMA PRO FORMA
Net income (loss) $ 1,380 $ (497) $ 3,947 $ 1,057
Pro forma adjustment to
general and administrative
expenses - 220
Pro forma adjustment to
reflect interest on Founding
Shareholder Notes - (52)
Pro forma adjustment to
reflect federal income taxes - (483)
--------- --------- --------- ---------
Net income (loss), as adjusted $ 1,380 $ (497) $ 3,947 $ 742
--------- --------- --------- ---------
--------- --------- --------- ---------
PRIMARY:
Weighted average number of
shares outstanding 4,502,338 4,500,000 4,500,785 3,672,161
Additional weighted average
shares to reflect pro forma
adjustment for distribution
of S Corp earnings - 74,234
Additional weighted average
shares from assumed exercise
of dilutive stock options,
net of shares assumed to be
repurchased with exercise
proceeds 88,965 - 3,454 -
--------- --------- --------- ---------
Net income (loss) per share $ 0.30 $ (0.11) $ 0.88 $ 0.20
--------- --------- --------- ---------
--------- --------- --------- ---------
FULLY DILUTIVE
Weighted average number of
shares outstanding 4,502,338 4,500,000 4,500,785 3,672,161
Additional weighted average
shares to reflect pro forma
adjustment for distribution
of S Corp earnings - 74,234
Additional weighted average
shares from assumed exercise
of dilutive stock options,
net of shares assumed to be
repurchased with exercise
proceeds 88,965 - 48,779 -
--------- --------- --------- ---------
Net income (loss) per share $ 0.30 $ (0.11) $ 0.87 $ 0.20
--------- --------- --------- ---------
--------- --------- --------- ---------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF STB SYSTEMS, INC. INCLUDED IN ITS QUARTERLY
REPORT ON FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 4,132
<SECURITIES> 0
<RECEIVABLES> 22,540
<ALLOWANCES> (465)
<INVENTORY> 20,465
<CURRENT-ASSETS> 47,001
<PP&E> 7,782
<DEPRECIATION> (3,458)
<TOTAL-ASSETS> 52,606
<CURRENT-LIABILITIES> 23,574
<BONDS> 0
0
0
<COMMON> 45
<OTHER-SE> 27,315
<TOTAL-LIABILITY-AND-EQUITY> 52,606
<SALES> 132,034
<TOTAL-REVENUES> 132,034
<CGS> 107,753
<TOTAL-COSTS> 107,753
<OTHER-EXPENSES> 17,413
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 869
<INCOME-PRETAX> 5,999
<INCOME-TAX> 2,052
<INCOME-CONTINUING> 3,947
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,947
<EPS-PRIMARY> .88
<EPS-DILUTED> .87
</TABLE>
